##### Table of Contents





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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

|       |  |                                                                                        
|------ |  | ---------------------------------------------------------------------------------------
|(XBOX) |  | Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2001

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|      |  | or                                                                                      
|     
|     
|     
|     
|      |  |                                                                                         
|     
|     
|     
|     
|(BOX) |  | 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: 0-27212

ENDOCARE, INC.(Exact name of Registrant as specified in its
charter)

|                                                                       |  |                           
|---------------------------------------------------------------------- |  | --------------------------
|DELAWARE                                                               |  | 33-0618093                
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|(State or other jurisdiction of
        incorporation or organization) |  | (I.R.S. Employer I.D. No.)

7 STUDEBAKER, IRVINE, CALIFORNIA
92618(Address of principal executive office) (Zip Code)

(949) 595-4770(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.

Yes(XBOX)    No   (BOX)

The number of shares of the Registrants Common Stock, par value $.001 per
share, outstanding at October 31, 2001 was 17,224,243.





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TABLE OF CONTENTS



|                               |                                                                                                                |                                                          |  |  |  |  |  | 
|------------------------------ | -------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)                                                                      
|                               |                                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS         
|                               |                                                                                                                | CONDENSED CONSOLIDATED BALANCE SHEETS                   
|                               |                                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS         
|                               |                                                                                                                | NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                               | ITEM 2. ENDOCARE, INC.S MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                               | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                            
|PART II OTHER INFORMATION     
|                               | ITEM 1. Legal Proceedings                                                                                     
|                               | ITEM 2. Changes in Securities                                                                                 
|                               | ITEM 3. Defaults Upon Senior Securities                                                                       
|                               | ITEM 4. Submission of Matters to a Vote of Security Holders                                                   
|                               | ITEM 5. Other Information                                                                                     
|                               | ITEM 6. Exhibits and Reports on Form 8-K.                                                                     
|EXHIBIT 10.45                 
|EXHIBIT 10.46                 



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##### Table of Contents



ENDOCARE, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2001

INDEX

|                               |                                                                                               |                                                                                                                 |    |    |   | 
|------------------------------ | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | -- | -- | - | 
|PART I  FINANCIAL INFORMATION |                                                                                               |                                                                                                                 | 3  |   
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                                                                                 |    |   
|                              
|                              
|                              
|                              
|                               | ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)                                                      |                                                                                                                 |    | 3  |  
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                                                                                 |    |   
|                              
|                              
|                              
|                              
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 |    |    | 3 | 
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                                                                                 |    |   
|                              
|                              
|                              
|                              
|                               |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2001 AND DECEMBER 31, 2000                               |    |    | 4 | 
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                                                                                 |    |   
|                              
|                              
|                              
|                              
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000           |    |    | 5 | 
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                                                                                 |    |   
|                              
|                              
|                              
|                              
|                               |                                                                                               | NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                                        |    |    | 6 | 
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                                                                                 |    |   
|                              
|                              
|                              
|                              
|                               | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |                                                                                                                 |    | 9  |  
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                                                                                 |    |   
|                              
|                              
|                              
|                              
|                               | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |                                                                                                                 |    | 25 |  
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                                                                                 |    |   
|                              
|                              
|                              
|                              
|PART II OTHER INFORMATION      |                                                                                               |                                                                                                                 | 25 |   
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                                                                                 |    |   
|                              
|                              
|                              
|                              
|                               | ITEM 1. Legal Proceedings                                                                     |                                                                                                                 |    | 25 |  
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                                                                                 |    |   
|                              
|                              
|                              
|                              
|                               | ITEM 2. Changes in Securities                                                                 |                                                                                                                 |    | 25 |  
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                                                                                 |    |   
|                              
|                              
|                              
|                              
|                               | ITEM 3. Defaults Upon Senior Securities                                                       |                                                                                                                 |    | 25 |  
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                                                                                 |    |   
|                              
|                              
|                              
|                              
|                               | ITEM 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                                 |    | 25 |  
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                                                                                 |    |   
|                              
|                              
|                              
|                              
|                               | ITEM 5. Other Information                                                                     |                                                                                                                 |    | 26 |  
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                                                                                 |    |   
|                              
|                              
|                              
|                              
|                               | ITEM 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                 |    | 26 |  





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PART I  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

ENDOCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(Unaudited)

|                                                      |                                     |                          |            |                    |           |                   |            |           |           |      |            |           |            |   |            |           |            | 
|----------------------------------------------------- | ----------------------------------- | ------------------------ | ---------- | ------------------ | --------- | ----------------- | ---------- | --------- | --------- | ---- | ---------- | --------- | ---------- | - | ---------- | --------- | ---------- | 
|                                                      |                                     |                          |            | Three Months Ended |           | Nine Months Ended
|                                                      |                                     |                          |            | September 30,      |           | September 30,    
|                                                      |                                     |                          |            |                    |           |                  
|                                                      |                                     |                          |            | 2001               |           | 2000              |            | 2001      |           | 2000
|                                                      |                                     |                          |            |                    |           |                   |            |           |           |     
|Revenues                                              |                                     |                          | 4,214,766  |                    |           |                   | 1,759,878  |           |           |      | 10,508,202 |           |            |   | 4,636,120  |          
|                                                     
|                                                     
|                                                     
|                                                     
|Costs and expenses                                    |                                     |                          |            |                    |           |                   |            |           |           |      |            |           |            |   |            |          
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Cost of revenues                    |                          |            | 1,289,414          |           |                   |            | 853,375   |           |      |            | 3,735,707 |            |   |            | 2,223,391 |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Research and development            |                          |            | 766,417            |           |                   |            | 831,514   |           |      |            | 2,592,681 |            |   |            | 2,376,167 |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Selling, general and administrative |                          |            | 3,527,527          |           |                   |            | 2,821,454 |           |      |            | 9,992,021 |            |   |            | 8,676,788 |           
|                                                      |                                     |                          |            |                    |           |                   |            |           |           |      |            |           |            |   |            |          
|                                                      |                                     | Total costs and expenses |            |                    | 5,583,358 |                   |            |           | 4,506,343 |      |            |           | 16,320,409 |   |            |           | 13,276,346 | 
|                                                      |                                     |                          |            |                    |           |                   |            |           |           |      |            |           |            |   |            |          
|Loss from operations                                  |                                     |                          | (1,368,592 | )                  |           |                   | (2,746,465 | )         |           |      | (5,812,207 | )         |            |   | (8,640,226 | )        
|                                                     
|                                                     
|                                                     
|                                                     
|Interest income (expense), net                        |                                     |                          | 110,546    |                    |           |                   | (106,189   | )         |           |      | 148,087    |           |            |   | (577,488   | )        
|                                                      |                                     |                          |            |                    |           |                   |            |           |           |      |            |           |            |   |            |          
|Net loss                                              |                                     | $                        | (1,258,046 | )                  |           | $                 | (2,852,654 | )         |           | $    | (5,664,120 | )         |            | $ | (9,217,714 | )        
|                                                      |                                     |                          |            |                    |           |                   |            |           |           |      |            |           |            |   |            |          
|Net loss per share of common stock
basic and diluted |                                     | $                        | (.07       | )                  |           | $                 | (.22       | )         |           | $    | (.36       | )         |            | $ | (.75       | )        
|                                                      |                                     |                          |            |                    |           |                   |            |           |           |      |            |           |            |   |            |          
|Weighted average shares of common stock
outstanding   |                                     |                          | 16,920,505 |                    |           |                   | 13,228,000 |           |           |      | 15,899,541 |           |            |   | 12,358,000 |          
|                                                      |                                     |                          |            |                    |           |                   |            |           |           |      |            |           |            |   |            |          

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

3



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##### Table of Contents






ENDOCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)

|                                              |  |                                                                                                                                                                         |                           |   |             |               |            |              |             |            |  | 
|--------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | - | ----------- | ------------- | ---------- | ------------ | ----------- | ---------- |  | 
|                                              |  |                                                                                                                                                                         |                           |   |             | September 30, |            | December 31,
|                                              |  |                                                                                                                                                                         |                           |   |             | 2001          |            | 2000        
|                                              |  |                                                                                                                                                                         |                           |   |             |               |            |             
|ASSETS                                        |  |                                                                                                                                                                         |                           |   |             |               |            |             
|                                             
|                                             
|                                             
|                                             
|Current assets                                |  |                                                                                                                                                                         |                           |   |             |               |            |             
|                                             
|                                             
|                                             
|                                             
|                                              |  | Cash and cash equivalents                                                                                                                                               |                           | $ | 13,482,114  |               |            | $            | 22,016,448  |           
|                                             
|                                             
|                                             
|                                             
|                                              |  | Accounts receivable, net                                                                                                                                                |                           |   | 4,483,472   |               |            |              | 2,113,766   |           
|                                             
|                                             
|                                             
|                                             
|                                              |  | Inventories                                                                                                                                                             |                           |   | 2,507,451   |               |            |              | 1,543,733   |           
|                                             
|                                             
|                                             
|                                             
|                                              |  | Prepaid expenses and other current assets                                                                                                                               |                           |   | 219,249     |               |            |              | 178,972     |           
|                                              |  |                                                                                                                                                                         |                           |   |             |               |            |              |             |           
|                                              |  |                                                                                                                                                                         | Total current assets      |   |             | 20,692,286    |            |              |             | 25,852,919 | 
|                                             
|                                             
|                                             
|                                             
|Property and equipment, net                   |  |                                                                                                                                                                         | 1,514,273                 |   |             |               | 1,496,153  |             
|                                             
|                                             
|                                             
|                                             
|Investments, intangible and other assets, net |  |                                                                                                                                                                         | 4,091,971                 |   |             |               | 1,495,718  |             
|                                              |  |                                                                                                                                                                         |                           |   |             |               |            |              |             |           
|                                              |  |                                                                                                                                                                         | Total assets              |   | $           | 26,298,530    |            |              | $           | 28,844,790 | 
|                                              |  |                                                                                                                                                                         |                           |   |             |               |            |              |             |           
|LIABILITIES AND STOCKHOLDERS EQUITY          |  |                                                                                                                                                                         |                           |   |             |               |            |             
|                                             
|                                             
|                                             
|                                             
|Current liabilities                           |  |                                                                                                                                                                         |                           |   |             |               |            |             
|                                             
|                                             
|                                             
|                                             
|                                              |  | Accounts payable                                                                                                                                                        |                           | $ | 1,738,465   |               |            | $            | 2,231,344   |           
|                                             
|                                             
|                                             
|                                             
|                                              |  | Accrued compensation                                                                                                                                                    |                           |   | 2,090,533   |               |            |              | 1,646,079   |           
|                                             
|                                             
|                                             
|                                             
|                                              |  | Other accrued liabilities                                                                                                                                               |                           |   | 1,046,094   |               |            |              | 1,523,602   |           
|                                             
|                                             
|                                             
|                                             
|                                              |  | Credit facility                                                                                                                                                         |                           |   |            |               |            |              | 1,000,000   |           
|                                              |  |                                                                                                                                                                         |                           |   |             |               |            |              |             |           
|                                              |  |                                                                                                                                                                         | Total current liabilities |   |             | 4,875,092     |            |              |             | 6,401,025  | 
|                                             
|                                             
|                                             
|                                             
|Convertible debentures                        |  |                                                                                                                                                                         |                          |   |             |               | 7,500,000  |             
|                                             
|                                             
|                                             
|                                             
|Note payable and other liabilities            |  |                                                                                                                                                                         | 41,665                    |   |             |               | 74,268     |             
|                                              |  |                                                                                                                                                                         |                           |   |             |               |            |              |             |           
|                                              |  |                                                                                                                                                                         | Total liabilities         |   |             | 4,916,757     |            |              |             | 13,975,293 | 
|                                             
|                                             
|                                             
|                                             
|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; 17,182,847
and 15,018,649 issued and outstanding at
September 30, 2001 and December 31,
2000, respectively |                           |   | 17,183      |               |            |              | 15,019      |           
|                                             
|                                             
|                                             
|                                             
|                                              |  | Additional paid-in capital                                                                                                                                              |                           |   | 60,230,086  |               |            |              | 48,163,186  |           
|                                             
|                                             
|                                             
|                                             
|                                              |  | Note receivable from stock sale                                                                                                                                         |                           |   | (1,028,125  | )             |            |              | (1,135,457  | )         
|                                             
|                                             
|                                             
|                                             
|                                              |  | Accumulated deficit                                                                                                                                                     |                           |   | (37,837,371 | )             |            |              | (32,173,251 | )         
|                                              |  |                                                                                                                                                                         |                           |   |             |               |            |              |             |           
|Total stockholders equity                    |  |                                                                                                                                                                         | 21,381,773                |   |             |               | 14,869,497 |             
|                                              |  |                                                                                                                                                                         |                           |   |             |               |            |              |             |           
|Total liabilities and stockholders equity    |  | $                                                                                                                                                                       | 26,298,530                |   |             | $             | 28,844,790 |             
|                                              |  |                                                                                                                                                                         |                           |   |             |               |            |              |             |           

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

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##### Table of Contents






ENDOCARE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)

|                                                     |                                                                                                                    |   |                   |            |      |   |            |            |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | - | ----------------- | ---------- | ---- | - | ---------- | ---------- | -
|                                                     |                                                                                                                    |   | Nine Months Ended
|                                                     |                                                                                                                    |   | September 30,    
|                                                     |                                                                                                                    |   |                  
|                                                     |                                                                                                                    |   | 2001              |            | 2000
|                                                     |                                                                                                                    |   |                   |            |     
|Cash flows from operating activities:                |                                                                                                                    |   |                   |            |      |   |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net loss                                                                                                           |   | $                 | (5,664,120 | )    |   | $          | (9,217,714 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net loss to net cash used in
operating activities:                                        |   |                   |            |      |   |            |            |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Depreciation and amortization                                                                                      |   |                   | 330,549    |      |   |            | 455,081    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Amortization of warrant value                                                                                      |   |                   | 147,186    |      |   |            | 242,911    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Amortization of deferred financing costs                                                                           |   |                   | 833        |      |   |            | 336,614    |  
|                                                    
|                                                    
|                                                    
|                                                    
|Changes in operating assets and liabilities:         |                                                                                                                    |   |                   |            |      |   |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Accounts receivable                                                                                                |   |                   | (2,369,706 | )    |   |            | (326,764   | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Inventories                                                                                                        |   |                   | (998,998   | )    |   |            | (955,994   | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Prepaid expenses and other assets                                                                                  |   |                   | (64,441    | )    |   |            | (303,363   | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Accounts payable                                                                                                   |   |                   | (492,879   | )    |   |            | 1,004,848  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Accrued liabilities                                                                                                |   |                   | 155,107    |      |   |            | 1,289,274  |  
|                                                     |                                                                                                                    |   |                   |            |      |   |            |            |  
|Net cashed used in operating activities              |                                                                                                                    |   | (8,956,469        | )          |      |   | (7,475,107 | )         
|                                                     |                                                                                                                    |   |                   |            |      |   |            |            |  
|Cash flows for investing activities                  |                                                                                                                    |   |                   |            |      |   |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of property and equipment                                                                                |   |                   | (270,778   | )    |   |            | (188,125   | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Investment in alliances                                                                                            |   |                   | (158,850   | )    |   |            |           |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Advance to affiliate                                                                                               |   |                   | (250,000   | )    |   |            |           |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayment of advance to affiliate                                                                                  |   |                   | 250,000    |      |   |            |           |  
|                                                     |                                                                                                                    |   |                   |            |      |   |            |            |  
|Net cash used in investing activities                |                                                                                                                    |   | (429,628          | )          |      |   | (188,125   | )         
|                                                     |                                                                                                                    |   |                   |            |      |   |            |            |  
|Cash flows from financing activities                 |                                                                                                                    |   |                   |            |      |   |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Issuance of common stock                                                                                           |   |                   | 1,894,366  |      |   |            | 908,175    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Issuance of convertible debentures                                                                                 |   |                   |           |      |   |            | 8,000,000  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from credit facility                                                                                      |   |                   |           |      |   |            | 2,000,000  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payments on credit facility and note payable                                                                       |   |                   | (1,032,603 | )    |   |            |           |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Financing costs                                                                                                    |   |                   | (10,000    | )    |   |            | (585,000   | )
|                                                     |                                                                                                                    |   |                   |            |      |   |            |            |  
|Net cash provided by financing activities            |                                                                                                                    |   | 851,763           |            |      |   | 10,323,175 |           
|                                                     |                                                                                                                    |   |                   |            |      |   |            |            |  
|Net increase (decrease) in cash and cash equivalents |                                                                                                                    |   | (8,534,334        | )          |      |   | 2,659,943  |           
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents, beginning of period       |                                                                                                                    |   | 22,016,448        |            |      |   | 7,364,951  |           
|                                                     |                                                                                                                    |   |                   |            |      |   |            |            |  
|Cash and cash equivalents, end of period             |                                                                                                                    | $ | 13,482,114        |            |      | $ | 10,024,895 |           
|                                                     |                                                                                                                    |   |                   |            |      |   |            |            |  
|Non-cash activities                                  |                                                                                                                    |   |                   |            |      |   |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Convertible debentures and accrued interest converted to
common stock, net of unamortized deferred financing costs |   | $                 | 7,309,726  |      |   | $          | 6,606,164  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Acquisition of trademark and domain name through issuance
of 20,000 shares of common stock                         |   |                   |           |      |   |            | 435,000    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Transfer of inventory to property and equipment for
placement at customer sites                                    |   |                   | 35,280     |      |   |            | 702,254    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Issuance of Common Stock as investment                                                                             |   |                   | 2,837,293  |      |   |            |           |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Forgiveness of recourse loan and compensation to employees                                                         |   |                   | 81,747     |      |   |            |           |  

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

5



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##### Table of Contents






ENDOCARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



|1. |  | Organization and Operations of the Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Endocare, Inc. (Endocare or the Company) is a medical device company
focused on the development of urological healthcare technologies with the
potential to dramatically improve mens health and quality of life. The
Company currently focuses on the diagnosis, monitoring and treatment of
prostate disease. Its first product, the Cryocare Surgical System, is a
minimally invasive cryosurgical system for the targeted treatment of
prostate cancer. The Company plans to partner with third parties to
develop cryosurgical technologies for treating tumors in other organs,
including the kidney, lung, breast, liver and bones as well as the
treatment of cardiac arrhythmia, including atrial fibrillation.
Additionally, the Company is developing stent technologies for urological
disorders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|2. |  | Financial Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | The accompanying unaudited condensed consolidated financial statements
contain all adjustments necessary (consisting only of normal recurring
accruals) to present fairly the financial information contained therein.
These statements do not include all disclosures required by accounting
principles generally accepted in the United States of America and should
be read in conjunction with the audited consolidated financial statements
and other information included in the Companys Annual Report on Form
10-K for the year ended December 31, 2000. Financial results for this
interim period are not necessarily indicative of results to be expected
for the full year 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | Accounting Principles                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | Effective January 1, 2001, we adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The adoption of SFAS No. 133
did not have a material effect on our financial position or results of
operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations and No. 142, Goodwill and Other Intangible Assets.
Statement 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001 as well as all
purchase method business combinations completed after June 30, 2001.
Statement 141 also specifies criteria which intangible assets acquired in
a purchase method business combination must meet to be recognized and
reported apart from goodwill, noting that any purchase price allocable to
an assembled workforce may not be accounted for separately. Statement
142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at
least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
|  
|   |  | The Company is required to adopt the provisions of Statement 141
immediately, except with regards to business combinations initiated prior
to July 1, 2001 and Statement 142 effective January 1, 2002.
Furthermore, any goodwill and any intangible asset determined to have an
indefinite useful life that are acquired in a purchase business
combination completed after June 30, 2001 will not be amortized, but will
continue to be evaluated for impairment in accordance with the
appropriate pre-Statement 142 accounting literature. Goodwill and
intangible assets acquired in business combinations completed before July
1, 2001 will continue to be amortized prior to the adoption of Statement
142. These statements are not expected to have material impact on the
Companys financial reporting and related disclosure.                                                                                                                                                                                                                                                                                                                                                                                                                                                               

6



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##### Table of Contents





|   |  | In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This statement requires an enterprise to record
the fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the
retirement of tangible long-lived assets. Since the requirement is to
recognize the obligation when incurred, approaches that have been used in
the past to accrue the asset retirement obligation over the life of the
asset are no longer acceptable. SFAS No. 143 also requires the
enterprise to record the contra to the initial obligation as an increase
to the carrying amount of the related long-lived asset, i.e., the
associated asset retirement costs, and to depreciate that cost over the
life of the asset. The liability is increased at the end of each period
to reflect the passage of time, i.e., accretion expense, and changes in
the estimated future cash flows underlying the initial fair value
measurement. We will adopt SFAS No. 143 in 2003. This statement is not
expected to have a material impact on the Companys financial reporting
and related disclosures.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets(SFAS 144), which addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS 144 supersedes Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, and the accounting and reporting provisions of APB Opinion
No. 30, Reporting the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business. SFAS 144 retains the requirement in Opinion No.
30 to report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed of or
is classified as held for sale.                                                                                                                                                                                                                                                                              
|  
|   |  | The Company is required and plans to adopt the provisions of SFAS 144 for
the quarter ending March 31, 2002. The Company has not determined the
impact that SFAS 144 will have on its financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|3. |  | Use of Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|4. |  | Supplemental Financial Statement Data                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                 |                   |   |               |           |              |   |         |           | 
|---------------- | ----------------- | - | ------------- | --------- | ------------ | - | ------- | --------- | 
|                 |                   |   | SEPTEMBER 30, |           | DECEMBER 31,
|                 |                   |   | 2001          |           | 2000        
|                 |                   |   |               |           |             
|Inventories:     |                   |   |               |           |              |   |         |          
|                
|                
|                
|                
|Raw materials    |                   | $ | 1,221,396     |           |              | $ | 763,389 |          
|                
|                
|                
|                
|Work in progress |                   |   | 765,391       |           |              |   | 288,480 |          
|                
|                
|                
|                
|Finished goods   |                   |   | 520,664       |           |              |   | 491,864 |          
|                 |                   |   |               |           |              |   |         |          
|                 | Total inventories |   | $             | 2,507,451 |              |   | $       | 1,543,733 | 
|                 |                   |   |               |           |              |   |         |          



|5. |  | Net Loss Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Under SFAS No. 128, Earnings Per Share, basic EPS is calculated by
dividing net earnings (loss) by the weighted-average common shares
outstanding during the period. Diluted EPS reflects the potential
dilution to basic EPS that could occur upon conversion or exercise of
securities, options, convertible debentures, or other such items, to
common shares using the treasury stock method based upon the
weighted-average fair value of the Companys common shares during the
period. In accordance with Statement 128, the consolidated net loss
(numerator), shares (denominator) and per-share amounts for the three
months ended September 30, 2001 and September 30, 2000 are $(1,258,046),
16,920,505 and $(0.07), and $(2,852,654), 13,228,000 and (0.22),
respectively. The consolidated net loss (numerator), shares
(denominator) and per share amount for the nine months ended September
30, 2001 and 2000 are $(5,664,120), 15,899,541 and $(0.36), and
$(9,217,714), 12,358,000 and $(0.75), respectively. As the Company has
been in a consolidated net loss position for the periods presented, the
potential dilution from the conversion of

7



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##### Table of Contents





|   |  | options, warrants and convertible debentures to common stock of
approximately 3,883,000 and 4,306,000 for the three months ended
September 30, 2001 and 2000, respectively, and 3,883,000 and 4,551,000
for the nine months ended September 30, 2001 and 2000, respectively, were
not used to compute diluted loss per share as the effect was
antidilutive. Consequently, diluted EPS equals basic EPS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Companys revenues are derived from cryosurgical product sales and
cryosurgery procedures. The Companys revenues from cryosurgical
procedures for the three and nine month periods ended September 30, 2001
were $436,989 and $1,191,396, as compared to $237,160 and $582,440 for
the same period in 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|6. |  | Collaborative Agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | On June 30, 2001, we issued 213,010 shares of our common stock with a
fair value of $2,837,293 as consideration for a membership interest in
the form of Class A Units of U.S. Therapies, LLC, equal to approximately
9% of the total issued and outstanding Class A Units of U.S. Therapies
and approximately 5% of the Class A Units on a fully-diluted basis. U.S.
Therapies is a national urology group representing more than 150
urologists across the nation. In a related Distributor Agreement, U.S.
Medical Devices, Ltd., a subsidiary of U.S. Therapies, was appointed a
distributor and given exclusive distribution rights to our Cryocare
Surgical System and associated disposable products in 16 states. U.S.
Medical Devices also has the exclusive right to distribute the Cryocare
Surgical System to HealthTronics Surgical Services, Inc. (Nasdaq: HTRN)
and its affiliates, a company that provides urologic and orthopedic
services to patients in 35 states through physician partnerships. The
investment in UST is included in investments, intangible and other assets
in the accompanying consolidated balance sheet for September 30, 2001 and
is carried using the cost method of accounting. The Company has
recognized sales of $1,465,000 and $3,420,000 to USMD for the three
months and nine months ended September 30, 2001, respectively.
|  
|   |  | In October 1999, we entered into a strategic alliance with Sanarus
Medical, Inc., a privately held medical device company. The terms of the
related agreements included a 5% equity investment by our company in
Sanarus totaling $300,000. We also received a warrant to acquire at that
time approximately 79% of Sanarus common stock in consideration for
entering into a manufacturing, supply and license agreement. The
investment is included in other assets in our consolidated balance sheets
as of December 31, 2000 and September 30, 2001 and is reflected at cost
as we do not have significant influence over the operations of Sanarus.
In June 2001, we provided a bridge loan to Sanarus in the amount of
$250,000. This amount was subsequently repaid in July 2001 upon Sanarus
receipt of additional equity financing, which financing along with other
financings by Sanarus reduced our potential ownership percentage to
approximately 22% on a fully-diluted basis.                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | In September 2001, we entered into a strategic alliance with CryoCath
Technologies, Inc. pursuant to an exclusive global market access and
supply agreement, whereby CryoCath Technologies, Inc. and Endocare will
co-develop a new, advanced line of surgical probe systems to surgically
treat cardiac arrhythmias. CryoCath will purchase the newly developed
systems from Endocare and market them on a global basis under the
CryoCath trademark, Surgifrost. The Company recognized $125,000 in
license revenue from CryoCath Technologies, Inc. during the three-month
period ending September 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | Also, in September 2001, we entered into a new expanded distribution
agreement with Qualigen, Inc. Under this new agreement, we will sell
Qualigens FDA-cleared 15-minute total prostate specific antigen test as
a stand alone product, non-exclusively directly to urology practices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|7. |  | Debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Convertible Debentures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | In June and July 1999, we received a total of $8 million from the sale to
institutional investors of 7% convertible debentures due in three years
from the date of issuance. During the second quarter of 2000, these
debentures were converted into 1,475,610 shares of common stock pursuant
to the terms of the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

8



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|   |  | debentures. On May 5, 2000, we received a total of $8 million from the
sale of additional 7% convertible debentures, of which $0.5 million of
these debentures were converted into 74,074 shares of common stock during
the fourth quarter of 2000, $1 million of these debentures were converted
into 148,148 shares of common stock during the first quarter of 2001,
$4.2 million of these debentures were converted into 622,222 shares of
common stock during the second quarter of 2001, and the final $2.3
million of these debentures were converted into 340,741 shares of common
stock in July 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Credit Facility                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | On July 29, 1999, the Company entered into a Loan and Security Agreement
with a lender which originally provided for a revolving credit line in
the amount of $2,000,000 plus up to an additional $1,000,000 based on
eligible accounts receivable of the Company (the Loan). In April 2000,
the Company increased the revolving portion of its credit facility from
$2,000,000 to $4,000,000 in addition to the $1,000,000 based on eligible
accounts receivable of the Company. The Loan accrued interest at the
highest prime or equivalent rate announced by certain designated banks,
plus 2% for the portion of the loan based on eligible accounts receivable
or 3.5%. The Loan was secured by a first priority lien on all of the
assets of the Company, except for intellectual property, was fully
guaranteed by Advanced Medical Procedures, LLC, a Florida limited
liability company, or AMP, a wholly-owned subsidiary of the Company,
contained certain restrictive covenants. The loan matured on July 31,
2001 and was paid in full on that date.                                                                                                                                    
|  
|8. |  | Stockholders Rights Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | In April 1999, the Company adopted a stockholder rights plan (the Plan)
in which preferred stock purchase rights were distributed as a dividend
at the rate of one right for each share of common stock held as of the
close of business on April 15, 1999. The rights are designed to guard
against partial tender offers and other abusive and coercive tactics that
might be used in an attempt to gain control of the Company or to deprive
the Companys stockholders of their interest in the long-term value of
the Company. The rights will be exercisable only if a person or group
acquires 15% or more of the Companys common stock (subject to certain
exceptions stated in the Plan) or announces a tender offer the
consummation of which would result in ownership by a person or group of
15% or more of the Companys common stock. At any time on or prior to
the close of business on the first date of a public announcement that a
person or group has acquired beneficial ownership of 15% or more of the
Companys common stock (subject to certain exceptions stated in the
Plan), the rights are redeemable for one cent per right at the option of
the Board of Directors.
|  
|9. |  | Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | In the normal course of business, the Company is subject to various legal
matters. While the result of litigation and claims cannot be predicted
with certainty, the Company believes that the final outcome of these
matters will not have a material effect on the Companys consolidated
results of operations or financial condition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | From time to time, the Company has received other correspondence alleging
infringement of proprietary rights of third parties. No assurance can be
given that any relevant claims of third parties would not be upheld as
valid and enforceable, and therefore that the Company could be prevented
from practicing the subject matter claimed or would be required to obtain
licenses from the owners of any such proprietary rights to avoid
infringement. Management does not expect any material adverse effect on
the consolidated financial condition or the results of operations because
of such actions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       






|ITEM 2. |  | ENDOCARE, INC.S MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS                                                                                                                                                                                                          
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       
|        |  | The following 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

9



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| |  | Results of Operations contained in the Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following Managements Discussion and Analysis of Financial Condition
and Results of Operations may contain forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended and are subject to the Safe Harbor provisions created by that
statute. Our business and results of operations are subject to various
risks and uncertainties including, but not limited to, those discussed
under the caption Factors That May Affect Our Future Results and Trading
Price of Common Stock included elsewhere in this report, and in risk
factors contained in our other periodic reports filed with the Securities
and Exchange Commission. Such risk factors include, but are not limited
to, limited operating history of our business with a history of losses;
fluctuations in our order levels; uncertainty regarding market acceptance
of our current and new products; uncertainty of product development and
the associated risks related to clinical trials; the rapid pace of
technological change in our industry; our limited sales, marketing and
manufacturing experience, and the ability to convince health care
professionals and third-party payors of the medical and economic benefits
of our Cryocare System. The actual results that we achieve may differ
materially from any forward-looking statements due to such risks and
uncertainties and we undertake no obligation to update any such
forward-looking statements.
|
| |  | General                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | We are a medical device company focused on the development of urological
healthcare technologies with the potential to dramatically improve mens
health and quality of life. We are currently concentrating on the
diagnosis, monitoring and treatment of prostate disease. Our goal is to
develop or acquire a full suite of diagnostic and therapeutic products
and services addressing the urology market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Our first product, the Cryocare Surgical System, is a minimally invasive
cryosurgical system for the targeted treatment of prostate cancer. We
commenced commercial sales of our FDA cleared Cryocare Surgical System in
the United States in July 1999. We obtained the CE Mark for the Cryocare
Surgical System, and have registered the Cryocare Surgical System for
distribution in Canada, Australia and New Zealand. We sell the Cryocare
Surgical System to urology groups and urologists through our sales force
and through distribution arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | We were formed in 1990 as a research and development division of Medstone
International, Inc. (Nasdaq: MEDS), a manufacturer of shockwave
lythotripsy equipment for the treatment of kidney stones. On January 1,
1996, we became an independent, publicly-owned corporation upon
Medstones distribution of our stock to their existing stockholders. We
have incurred significant operating losses and negative cash flows from
operations in each full fiscal year since January 1, 1996. We incurred
net losses of approximately $4.9 million in 1998, $9.3 million in 1999,
$12.4 million in 2000 and $5.7 million for the nine months ended
September 30, 2001. As of September 30, 2001, we had an accumulated
deficit of $37.8 million. We expect to incur additional losses as we
expand our sales and marketing efforts and continue to develop new
products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | We generate revenues primarily from sales of our Cryocare Surgical System
units and from the recurring sales of our disposable cryoprobes. We
recognize revenues upon shipment for sales of system units and disposable
cryoprobes. In the past, we placed our Cryocare Surgical System units
with urology groups on a per-use basis to expand our installed base, and
thus increase the market for our disposable cryoprobes. Under this
placement program, we receive revenue from each use of the Cryocare
Surgical System unit, which we recognize upon completion of the
procedure. The cost of the Cryocare Surgical System unit is depreciated
into cost of revenues over an estimated useful life of three years.
Prior to Medicares initiation of national reimbursement coverage for our
Cryocare Surgical System in July 1999, we focused on generating revenues
from a mobile cryosurgery business in which we provided cryosurgical
equipment for the treatment of prostate and liver cancer on a procedural
basis. Revenues from mobile cryosurgical procedures, as a percentage of
total revenues have declined over the nine month period ended September
30, 2001 and are expected to continue to decline due to our increased
strategic focus on system, probe and procedural sales.                                                                                                                                                                                             

10



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| |  | The initial product mix of Cryocare Surgical System units when compared
to disposable cryoprobes will negatively impact our gross margins until
we have established a sufficiently large installed base of users. In the
event we establish an installed base of Cryocare Surgical System units,
we expect to generate an increasing portion of our revenues through
recurring sales of our disposable cryoprobes.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Cost of revenues consists primarily of:                                                                                                                                                                                                                                                                                                                                                                           



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



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



| |  |  | Salaries and related personnel expenses,                             
| | - |  | ---------------------------------------------------------------------
|
| |  |  | fees paid to outside service providers,                              
|
| |  |  | expenditures for clinical trials,                                    
|
| |  |  | expenditures for purchases of laboratory supplies, and               
|
| |  |  | utilities and other facility expenses related to product development.



| |  | We expense research and development expenses when incurred. Our research
and development efforts are periodically subject to significant
non-recurring expenses and fees that can cause significant variability in
our quarterly research and development expenses.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Selling, general and administrative expenses primarily consist of:                                                                                                                                                                                                 



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



| |  | Results of Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Three and Nine Months ended September 20, 2001 and 2000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Revenues.Revenue for the three months ended September 30, 2001
increased 139% to $4,215,000 compared to $1,760,000 for the same period
in 2000. The increase was attributable primarily to continued
commercialization of the Companys cryosurgical technology and related
cryoprobes. On June 30, 2001, we entered into a distribution agreement
with U.S. Medical Devices, a subsidiary of U.S. Therapies, LLC, in which
we hold an approximate 5% membership interest in the form of Class A
Units. Sales to U.S. Medical Dev., Ltd., accounted for approximately 35%
and 33% of our revenue for the three-month and

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| |  | nine-month periods ending September 30, 2001, respectively. Revenues for
the nine months ended September 30, 2001 increased 127% to $10,508,000
compared to $4,636,000 for the same period in 2000. The increase is due
to the reasons described above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Cost of Revenues. Cost of Revenues for the nine months ended September
30, 2001 increased 68% to $3,735,600 compared to $ 2,223,000 for the same
period in 2000. The increase resulted primarily from increased system
and probe sales. Cost of Revenues for the three months ended September
30, 2001 increased 51% to $1,289,000 compared to $854,000 for the same
period in 2000. The increase was due primarily to the increased system
and probe sales.                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Gross Margin.Gross margin on revenues increased to 69% for the three
months ended September 30, 2001, compared to 52% for the same period in
2000. The increase is due to a mix of higher margin cryosurgical system
and probe sales in 2001 coupled with a reduction in product costs due to
increased manufacturing efficiencies. Gross margin on revenues increased
to 64% for the nine months ended September 30, 2001 compared to 52% for
the same period in 2000. The increase is due to higher margin system and
related probe sales as a percentage of total revenue.                                                                                                                                                                                                                                                                             
|
| |  | Research and Development.Research and development expense for the three
months ended September 30, 2001 decreased 8% to $766,000 compared to
$832,000 for the same period in 2000. The decrease can be attributed to
the leveraging of previous research and development across current
products. Research and development expense for the nine months ended
September 30, 2001 increased 9% to $2,593,000 compared to $2,376,000 for
the same period in 2000. The increase is attributable to the increase in
product offerings.                                                                                                                                                                                                                                                                                                                         
|
| |  | Selling, General and Administrative Expenses.Selling, general and
administrative expense for the three months ended September 30, 2001
increased 25% to $3,528,000 compared to $2,821,000 for the same period in
2000. The increase reflects increased sales and marketing costs
associated with the commercialization of Endocares cryosurgical product
for prostate cancer, including increased sales commissions and an
increase in Endocares direct sales and marketing personnel between
periods. Selling, general and administrative expense for the nine months
ended September 30, 2001 increased 15% to $9,992,000 compared to
$8,677,000 for the same period in 2000. The increase is attributable to
the increase in sales and marketing expenditures along with increased
sales commission expense associated with the greater revenues.    
|
| |  | Interest Income (Expense), Net.Interest income (expense), net for the
three months ended September 30, 2001 was $111,000 compared to ($106,000)
for the same period in 2000. The change was due primarily to a reduction
in interest expense as a result of the conversion of the remaining
$2,300,000 in convertible debentures, net of related deferred financing
cost, in July 2000 and the extinguishment of the $1 million credit
facility on July 31, 2001. Interest income (expense), net for the nine
months ended September 30, 2001 was $148,000 compared to ($577,000) in
the same period in 2000. The change was due to the elimination of the
interest expense associated with the credit facility that was paid in
full upon Maturity and the conversion of all remaining debentures.                                                       
|
| |  | Net Loss.Endocares net loss for the three months ended September 30,
2001 was $1,258,000, or 7 cents per share on 16,920,505 weighted average
shares outstanding, compared to a net loss of $2,853,000, or 22 cents per
share on 13,228,000 weighted average shares outstanding for the same
period in 2000. The decrease in net loss resulted from increased
revenues and related higher gross margins and lower interest expense.
Endocares net loss for the nine months ended September 30, 2001 was
$5,664,000 or 36 cents per share on 15,900,000 weighted average shares
outstanding, compared to a net loss of $9,218,000 or 75 cents per share
on 12,358,000 weighted average shares outstanding for the same period in
2000. The decrease in net loss resulted from increased revenue, related
higher gross margins and lower interest expense.
|
| |  | Liquidity and Capital Resources                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Since our inception we have funded our operations primarily through
private placements of equity securities, private placements of
convertible debentures that were subsequently converted into equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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| |  | securities, loans that were subsequently converted into equity
securities, the use of short-term and long-term debt and sales to
customers. At September 30, 2001, we had cash and cash equivalents of
$13,482,000, compared to $22,016,000 at December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In June and July 1999, we received a total of $8 million from the sale to
institutional investors of 7% convertible debentures due in three years
from the date of issuance. During the second quarter of 2000, these
debentures were converted into 1,475,610 shares of common stock pursuant
to the terms of the debentures. On May 5, 2000, we received a total of
$8 million from the sale of additional 7% convertible debentures, of
which $0.5 million of these debentures were converted into 74,074 shares
of common stock during the fourth quarter of 2000, $1 million of these
debentures were converted into 148,148 shares of common stock during the
first quarter of 2001, $4.2 million of these debentures were converted
into 622,222 shares of common stock during the second quarter of 2001,
and the final $2.3 million of these debentures were converted into
340,741 shares of common stock in July 2001. As of September 30, 2001,
the Company had no long term debt and no debentures.
|
| |  | Cash Used in Operations. Net cash used in operating activities was
approximately $4.3 million, $8.4 million, $10.7 million and $9 million
for the years ended December 31, 1998, 1999, 2000 and for nine months
ended September 30, 2001, respectively. For these periods, net cash used
in operating activities resulted primarily from net losses. In
conjunction with the increased sales of our Cryocare Surgical System and
related disposable cryoprobes, inventory increased to $2,507,000 at
September 30, 2001 compared to $1,544,000 at December 31, 2000 and net
accounts receivable increased to $4,483,000 at September 30, 2001
compared to $2,114,000 at December 31, 2000. Our current liabilities
declined to $4,875,000 at September 30, 2001 compared to $6,401,000 at
December 31,2000. The decrease in our current liabilities can be
attributed primarily to the extinguishment of the credit facility and
related interest.                                                              
|
| |  | Investing Activities. Net cash used in investing activities was
approximately $0.35 million, $0.64 million, $0.48 million and $0.43
million for the years ended December 31, 1998, 1999, 2000 and for the
nine months ended September 30, 2001, respectively. The net cash used in
investing activities primarily included additions to property and
equipment as well as investments in alliances and patents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Cash Provided by Financing Activities. Net cash provided by financing
activities was approximately $7.0 million, $10.1 million, $25.9 million
and $0.85 million for the years ended December 31, 1998, 1999, 2000 and
the nine months ended September 30, 2001, respectively. The net cash
provided by financing activities was primarily attributable to the net
proceeds from private placements of equity securities, exercise of
outstanding convertible debentures, options and warrants and borrowings
under our credit facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Working Capital. Our working capital decreased to $15.8 million at
September 30, 2001 from $19.5 million at December 31, 2000. The decrease
in working capital was due to our use of cash in operations, higher
accounts receivable, increased inventory and an increase in current
liabilities. At September 30, 2001, the ratio of current assets to
current liabilities was 4.2 to 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | On June 30, 1999, we acquired all of the outstanding membership interests
of Advanced Medical Procedures, LLC, a Florida limited liability company,
or AMP. The AMP unit holders received an aggregate of 260,000 shares of
our common stock in exchange for all of their AMP units. AMP operated a
mobile cryosurgery business which provided cryosurgical equipment for the
treatment of prostate and liver cancer on a per procedure basis. The
merger was accounted for as a pooling-of-interests for financial
reporting purposes. The historical financial statements for the periods
prior to the merger are restated as though our businesses had been
combined during such periods.                                                                                                                                                                                                                                                                                                                    
|
| |  | In October 1999, we entered into a strategic alliance with Sanarus
Medical, Inc., a privately held medical device company. The terms of the
related agreements included a 5% equity investment by our company in
Sanarus totaling $300,000. We also received a warrant to acquire at that
time approximately 79% of Sanarus common stock in consideration for
entering into a manufacturing, supply and license agreement. The
investment is included in other assets in our consolidated balance sheets
as of December 31, 2000 and September 30, 2001 and is reflected at cost
as we do not have significant influence over the operations of Sanarus.
In June 2001, we provided a bridge loan to Sanarus in the amount of
$250,000. This amount was                                                                                                                                                                                                                                                         

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| |  | subsequently repaid in July 2001 upon Sanarus receipt of additional
equity financing, which financing along with other financings by Sanarus
reduced our potential maximum ownership percentage to approximately 22%
on a fully-diluted basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In June 2001, we entered into a five year distribution agreement with
Qualigen, Inc. pursuant to which we will distribute Qualigens 15-minute
prostate cancer screening test as an integral part of our developmental
diagnostic workstation. We have an exclusive distribution right in the
United States for one-year, which exclusivity period may be extended for
additional one-year periods over the term of the agreement if we satisfy
minimum purchase commitments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | On June 30, 2001, we issued 213,010 shares of our common stock valued at
its fair market value of $2,837,293 in consideration for a membership
interest, in the form of Class A units of U.S. Therapies, LLC, equal to
approximately 5% of the total issued and outstanding Class A units of
U.S. Therapies on a fully-diluted basis. We simultaneously entered into
a distribution agreement with U.S. Medical Devices Ltd., a subsidiary of
U.S. Therapies, under which U.S. Medical Devices received exclusive sales
rights to our Cryocare Surgical System and related disposable products in
16 states and the exclusive right to sell to HealthTronics Surgical
Services, Inc. (Nasdaq: HTRN) and its affiliates. We recorded the
investment in U.S. Therapies in investments, intangible and other assets
in our balance sheet as of September 30, 2001 using the cost method of
accounting. Sales to U.S. Medical Devices accounted for approximately
33% and 35% of our revenues for the nine-month and three-month periods
ended September 30, 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Although there can be no certainty, we believe that we can be cash flow
positive in 2002. We also expect increased sales and marketing expenses
related to the promotion of our Cryocare Surgical System, increased
expenses related to our Horizon Prostatic Stent, increased research and
development expenses, as well as expenses for additional personnel and
product enhancement efforts. Our future capital requirements will depend
on a number of factors, including market acceptance of our Cryocare
Surgical System, the resources we devote to developing and supporting our
products, continued progress of our research and development of potential
products, the need to acquire licenses to technology and the availability
of other financing. We believe that our current cash balances together
with revenue to be derived from sales of our Cryocare Surgical System
will be sufficient to fund our operations for at least the next 12
months. If we elect to undertake or accelerate significant research and
development projects for new products or pursue corporate acquisitions,
we may require additional outside financing sooner than anticipated. We
expect that to meet our long-term needs we may need to raise substantial
additional funds through the sale of our equity securities, the
incurrence of indebtedness or through funds derived through entering into
collaborative agreements with third parties. We also expect to replace
our credit line which matured in July 2001. Additional equity or debt
financing may not be available on acceptable terms, or at all. If we are
unable to obtain additional capital, we may be required to reduce our
selling and marketing activities, reduce the scope of or eliminate our
research and development programs, or relinquish rights to technologies
or products that we might otherwise seek to develop or commercialize. In
the event that we incur additional indebtedness to fund our operations,
we may have to grant the lender a security interest in our assets.
|
| |  | We believe that holidays, major medical conventions and vacations taken
by physicians, patients and patient families may have a seasonal impact
on our sales. We are continuing to monitor and assess the impact
seasonality may have on demand of our products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Inflation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | The impact of inflation on our business has not been material to date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | FACTORS THAT MAY AFFECT FUTURE RESULTS AND TRADING PRICE OF COMMON STOCK                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Before deciding to invest in our common stock, or to maintain or increase
your investment, you should carefully consider the risks described below,
in addition to the other information in this quarterly report our
quarterly report for the quarters ended March 31, 2001 and June 30, 2001,
our annual report on Form 10-K                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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| |  | for the year ended December 31, 2000, and our other filings with the SEC.
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 affect our operations. The
occurrence of any of the following risks could harm our business. In
that case, the trading price of our common stock could decline and you
may lose all or part of your investment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | WE HAVE A LIMITED OPERATING HISTORY AND WE EXPECT TO CONTINUE TO GENERATE
LOSSES.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Since our inception, we have engaged primarily in research and
development and have minimal experience in manufacturing, marketing and
selling our products in commercial quantities. We have incurred annual
operating losses since inception. For the fiscal years ended December
31, 1998, 1999, 2000 and the nine-month period ended September 30, 2001,
we had net losses of approximately $4.9 million, $9.3 million, $12.4
million and $5.7 million, respectively. As of September 30, 2001, our
accumulated deficit was approximately $37.8 million.                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | We may not be able to successfully develop or commercialize our current
or future products, achieve significant revenues from sales or procedures
or achieve or sustain profitability. We expect to continue to incur
operating losses because our products will require substantial
expenditures relating to, among other matters, development, clinical
testing, regulatory compliance, manufacturing and marketing. If we do
achieve profitability, we cannot be certain that we will be able to
sustain or increase profitability on a quarterly or annual basis.                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | WE RELY ON A SINGLE PRODUCT, THE CRYOCARE SURGICAL SYSTEM, WHICH COULD
FAIL TO ACHIEVE MARKET ACCEPTANCE OR GENERATE SIGNIFICANT REVENUE.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | We introduced our sole product, the Cryocare Surgical System, to the
market in July 1999. We derive substantially all of our revenues from
sales of Cryocare Surgical Systems and related disposable supplies and
expect that sales of Cryocare Surgical Systems and related disposable
supplies will continue to constitute the majority of our sales for the
foreseeable future. Accordingly, our success is entirely reliant on our
ability to market the Cryocare Surgical System commercially in the United
States and other countries. However, the Cryocare Surgical System and
any future products may not be accepted by potential customers. We
believe that recommendations and endorsements of physicians and patients
will be essential for market acceptance of our Cryocare Surgical System
and other products, and these recommendations and endorsements may not be
obtained.                                                                                
|
| |  | Cryosurgery has existed for many years, but has not been widely accepted
primarily due to concerns regarding safety and efficacy and widespread
use of alternative therapies. Because of a lack of precise monitoring,
cryosurgical procedures performed in the 1970s resulted in high cancer
recurrence and negative side effects, such as rectal fistula and
incontinence, and attached a stigma to cryosurgical treatment. Now that
ultrasound guidance and temperature sensing are available for more
precise monitoring, we will need to overcome this stigma to obtain market
acceptance for our product. Use of our Cryocare Surgical System requires
significant physician education and training.                                                                                                                                                                                                                                                                    
|
| |  | Our ability to successfully market our Cryocare Surgical System is
dependent, among other things, upon acceptance of cryosurgical procedures
both in the United States and international markets. 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. Emerging new technologies and procedures to treat cancer,
prostate enlargement and other prostate disorders also may negatively
affect the market acceptance of cryosurgery. Our Cryocare Surgical
System and our other products may not gain any significant degree of
market acceptance among physicians, patients and health care payors. If
our cryosurgical products do not achieve market acceptance, we will
likely remain unprofitable.

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| |  | IF WE ARE UNABLE TO CONTINUE TO DEVELOP INNOVATIVE PRODUCTS IN THE
PROSTATE AND OTHER UROLOGICAL MARKETS, OUR BUSINESS WILL SUFFER.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Our growth depends in large part on continued ability to successfully
develop and commercialize our current products under development and any
new products in the prostate and other urological markets. Several of
our products are in varying stages of development. Our Horizon Prostatic
Stent is in clinical trials and has not been approved for marketing in
the United States. We also are developing enhancements to our Cryocare
Surgical System. We may experience difficulties that could delay or
prevent the successful development and commercialization of our current
products under development or any new products. Our products in
development may not prove safe and effective in clinical trials.
Clinical trials may identify significant technical or other obstacles
that must be overcome prior to obtaining necessary regulatory or
reimbursement approvals. In addition, our competitors may succeed in
developing commercially viable products that render our products obsolete
or less attractive. Our failure to successfully develop and
commercialize new products will likely have a significant negative effect
on our financial prospects.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | THERE IS UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT, WHICH IS
CRITICAL TO MARKET ACCEPTANCE OF OUR PRODUCTS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | In the United States, health care providers, such as hospitals and
physicians, that purchase our products and use our mobile services
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of
the cost of medical procedures involving our products and services and on
reimbursement for our products and procedures. While some private health
insurance companies pay for the procedures in which our products are used
in some areas of the United States, private insurance reimbursement may
not be adopted nationally or by additional insurers and may be terminated
by those private insurance companies currently paying for procedures in
which our products are used. If reimbursement levels from Medicare,
Medicaid, other governmental health care programs or private insurers are
not sufficient, physicians may choose not to recommend, and patients may
not choose, procedures utilizing our products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Currently, reimbursement under Medicare for our disposable products used
in outpatient procedures is provided under a pass through system in
which Medicare pays the cost we charge the hospital for our products.
Pass through reimbursement status only remains for a period of two to
three years, dependent upon the time period in which the Centers for
Medicare and Medicaid Services, or CMS, formerly the Healthcare Financing
Administration, or HCFA, obtains sufficient data to establish a cost. We
obtained pass through status for disposable products related to the
Cryocare Surgical System on April 1, 2001. Thus, pass through status for
those products will terminate no later than April 1, 2004. After pass
through status terminates, the cost of our disposable products will be
incorporated into the hospital outpatient prospective payment system and
there will be no separate reimbursement for our disposable products.
Federal law limits the total cost for pass through payments to 2.5% of
expenditures for all hospital outpatient services in a given year. On
November 2, 2001, CMS published a final rule indicating that significant
pro rata reductions will be required for 2002 in order to meet the
statutory limit on the amount of the pass through payments, but did not
provide the specific amount of the pro rata reduction. In a subsequent
final rule to be published by December 1, 2001, CMS will include the
tables necessary to calculate the 2002 pass through payment rates. The
impact on our revenues of the pass through payment reduction is unclear
at this time. In addition, if proposed regulations for hospital
outpatient services are finalized as written, pass through status may be
shortened to as little as one year if CMS develops sufficient data to
establish a cost. Further, we anticipate that, under the prospective
payment system used by private health care payors, the cost of our
products will be incorporated into the overall cost of the procedures in
which they are used and that there will be no separate, additional
reimbursement for our disposable products. This may discourage the use of
our products.
|
| |  | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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| |  | manner, if at all. Our failure to receive international reimbursement
approvals may negatively impact market acceptance of our products in the
international markets in which those approvals are sought.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Furthermore, significant attention is focused on reforming the healthcare
system in the United States and other countries. Any changes in
Medicare, Medicaid or third-party medical expense reimbursement, which
may arise from healthcare reform, may have a material adverse effect on
reimbursement for our products or procedures in which our products are
used and may reduce the price we are able to charge for our products. In
addition, changes to the healthcare system may also affect the commercial
acceptance of products we are currently developing and products we may
develop in the future. Potential approaches that have been considered
include controls on healthcare spending through limitations on the growth
of private purchasing groups and price controls. Several proposals have
been made in the United States Congress and various state legislatures
recently that, if adopted, would potentially reduce healthcare spending
which may result in a material adverse effect on our business.                                                                                                                                                                                                  
|
| |  | WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | We expect to continue to experience significant growth in the scope of
our operations and the number of our employees. This growth will likely
continue to place a significant strain on our management and operations.
Our ability to manage this growth will depend upon our ability to
attract, hire and retain skilled employees. Our success will also depend
on the ability of our officers and key employees to continue to implement
and improve our operational and other systems, to manage multiple,
concurrent development projects and to hire, train and manage our
employees. Our future success is heavily dependent upon growth and
acceptance of new products. If we cannot scale our business
appropriately or otherwise adapt to anticipated growth and new product
introduction, our business, financial condition and results of operations
will be adversely affected.                                                                                                                                                                                                                                                                                                                                    
|
| |  | WE HAVE LIMITED SALES AND MARKETING EXPERIENCE AND ANY FAILURE TO
SIGNIFICANTLY EXPAND SALES OF OUR PRODUCTS WILL NEGATIVELY IMPACT FUTURE
REVENUE.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | We currently handle a majority of the marketing, distribution and sales
of our Cryocare Surgical Systems. We have limited experience marketing
and selling our products, and have limited experience marketing and
selling our products 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 products. We may not be able to hire
significant additional personnel to create increased demand for our
products. In addition, we have distribution arrangements, some of which
are exclusive, for the sale of our products both domestically and
internationally and are dependent upon the sales and marketing efforts of
our third-party distributors. These distributors may not commit the
necessary resources to effectively market and sell our products.
Further, they may not be successful in selling our products. If we are
unable to expand our sales and marketing capabilities, we may not be able
to effectively commercialize our Cryocare Surgical System or other
products.
|
| |  | IF OUR RELATIONSHIP WITH U.S. MEDICAL DEVICES IS DISRUPTED, OUR REVENUES
COULD BE SIGNIFICANTLY REDUCED.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | We have an exclusive distribution agreement with U.S. Medical Devices
Ltd. For the nine months ended September 30, 2001, 33% of our revenues
were derived from sales made to U.S. Medical Devices. As a result, our
revenues are dependent in large part on continued sales to this
distributor.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | OUR SUCCESS WILL DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN KEY
PERSONNEL.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | In order to execute our business plan, we need to attract, retain and
motivate a significant number of highly qualified managerial, technical
and sales personnel. If we fail to attract and retain skilled scientific
and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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| |  | marketing personnel, our research and development and sales and marketing
efforts will be hindered. Our future success depends to a significant
degree upon the continued services of key management personnel, including
Paul W. Mikus, our Chief Executive Officer. None of these individuals is
bound by an employment agreement or covered by an insurance policy of
which we are the beneficiary. Competition for such personnel is intense,
particularly in southern California where we are located. If we do not
attract and retain qualified personnel we will not be able to achieve our
growth objectives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITORS
MAY TAKE ADVANTAGE OF OUR IDEAS AND COMPETE DIRECTLY AGAINST US.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Our success will depend to a significant degree on our ability to secure
and protect intellectual proprietary rights and enforce patent and
trademark protections relating to our technology. While we believe that
the protection of patents and trademarks is important to our business, we
also rely on a combination of copyright, trade secret, nondisclosure and
confidentiality agreements, know-how and continuing technological
innovation to maintain our competitive position. From time to time,
litigation may be advisable to protect our intellectual property
position. However, these legal means afford only limited protection and
may not adequately protect our rights or permit us to gain or keep any
competitive advantage. Any litigation in this regard could be costly,
and it is possible that we will not have sufficient resources to fully
pursue this litigation or to protect our other intellectual property
rights. It could result in the rejection or invalidation of our existing
and future patents. Any adverse outcome in litigation relating to the
validity of our patents, or any failure to pursue litigation or otherwise
to protect our patent position, could materially harm our business and
financial condition. In addition, confidentiality agreements with our
employees, consultants, customers, and key vendors may not prevent the
unauthorized disclosure or use of our technology. It is possible that
these agreements will be breached or that they will not be enforceable in
every instance, and that we will not have adequate remedies for any such
breach. Enforcement of these agreements may be costly and time
consuming. Furthermore, the laws of foreign countries may not protect
our intellectual property rights to the same extent as the laws of the
United States.
|
| |  | BECAUSE THE MEDICAL DEVICE INDUSTRY IS LITIGIOUS, WE MAY BE SUED FOR
ALLEGEDLY VIOLATING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | The medical technology industry has in the past been characterized by a
substantial amount of litigation and related administrative proceedings
regarding patents and intellectual property rights. In addition, major
medical device companies have used litigation against emerging growth
companies as a means of gaining a competitive advantage.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Should third parties file patent applications or be issued patents
claiming technology also claimed by us in pending applications, we may be
required to participate in interference proceedings in the U.S. Patent
and Trademark Office to determine the relative priorities of our
inventions and the third parties inventions. We could also be required
to participate in interference proceedings involving our issued patents
and pending applications of another entity. An adverse outcome in an
interference proceeding could require us to cease using the technology or
to license rights from prevailing third parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Third parties may claim we are using their patented inventions and may go
to court to stop us from engaging in our normal operations and
activities. These lawsuits are expensive to defend and conduct and would
also consume and divert the time and attention of our management. A
court may decide that we are infringing a third-partys patents and may
order us to cease the infringing activity. The court could also order us
to pay damages for the infringement. These damages could be substantial
and could harm our business, financial condition and operating results.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | If we are unable to obtain any necessary license following an adverse
determination in litigation or in interference or other administrative
proceedings, we would have to redesign our products to avoid infringing a
third-partys patent and could temporarily or permanently have to
discontinue manufacturing and selling some of our products. If this were
to occur, it would negatively impact future sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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| |  | IF WE REQUIRE FUTURE CAPITAL, WE MAY NOT BE ABLE TO SECURE ADDITIONAL
FUNDING IN ORDER TO EXPAND OUR OPERATIONS AND DEVELOP NEW PRODUCTS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | If we fail to reach profitability, undertake or accelerate significant
research and development projects for new products or pursue corporate
acquisitions, we may need additional outside financing. We may raise
these additional funds by selling our equity securities, incurring
additional debt or entering into collaborative arrangements. Any
additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve interest expense and restrictive
covenants. Collaborative arrangements, if necessary to raise additional
funds, may require us to relinquish rights to some of our technologies,
products or marketing territories. Our failure to raise capital when
needed could harm our business.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | WE HAVE LIMITED EXPERIENCE MANUFACTURING OUR PRODUCTS AND IF WE ARE
UNABLE TO MEET CUSTOMER DEMAND, WE MAY NOT BECOME PROFITABLE.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | We use solely internal manufacturing capacity to manufacture our
products. We have limited experience in producing our products in
commercial quantities. We may encounter difficulties in scaling up
production of new products, including problems involving production
yields, quality control and assurance, component supply and shortages of
qualified personnel. Our failure to overcome these manufacturing
problems could negatively impact our business and financial condition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Our success will depend in part upon our ability to manufacture our
products in compliance with the FDAs Quality System Regulation and other
regulatory requirements in sufficient quantities and on a timely basis,
while maintaining product quality and acceptable manufacturing costs.
Our manufacturing facility is subject to periodic inspection by the FDA,
state agencies and foreign regulatory agencies. If we fail to increase
production volumes in a timely or cost-effective manner or to maintain
compliance with the FDAs Quality System Regulation or other regulatory
requirements, our business will suffer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | WE ARE DEPENDENT UPON A LIMITED NUMBER OF THIRD-PARTY SUPPLIERS TO
MANUFACTURE OUR PRODUCTS AND THE LOSS OF ANY OF THESE SUPPLIERS COULD
HARM OUR BUSINESS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | We depend upon a limited number of unaffiliated third-party suppliers for
components and materials used in the manufacture of our products and, as
such, our business would be seriously harmed if we were unable to develop
and maintain relationships with suppliers that allow us to obtain
sufficient quantities and quality materials and components on acceptable
terms. If our principal suppliers cease to supply the materials and
components we need to manufacture our products, the qualification of
additional or replacement supplies could be a lengthy process and there
may not be adequate alternatives to meet our needs, which will have a
material adverse effect on our business. We may not be able to obtain
the necessary components and materials used in our products in the future
on a timely basis, if at all.                                                                                                                                                                                                                                                                                                                                                    
|
| |  | IF WE FAIL TO OBTAIN OR MAINTAIN NECESSARY REGULATORY CLEARANCES OR
APPROVALS FOR PRODUCTS, OR IF APPROVALS ARE DELAYED OR WITHDRAWN, WE WILL
BE UNABLE TO COMMERCIALLY DISTRIBUTE AND MARKET OUR PRODUCTS OR ANY
PRODUCT MODIFICATIONS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Government regulation has a significant impact on our business.
Government regulation in the United States and other countries is a
significant factor affecting the research and development, manufacture
and marketing of our products. In the United States, the FDA has broad
authority under the Federal Food, Drug and Cosmetic Act to regulate the
distribution, manufacture and sale of medical devices. Foreign sales of
drugs and medical devices are subject to foreign governmental regulation
and restrictions, which vary from country to country. The process of
obtaining FDA and other required regulatory clearances and approvals is
lengthy and expensive. We may not be able to obtain or maintain
necessary approvals for clinical testing or for the manufacturing or
marketing of our products. Failure to comply with applicable regulatory
approvals can, among other things, result in fines, suspension or
withdrawal of regulatory approvals, product recalls, operating
restrictions, and criminal prosecution. In addition, governmental
regulations may be established which could prevent, delay, modify or
rescind regulatory approval of our products. Any of

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| |  | these actions by the FDA, or change in FDA regulations, may adversely
impact our business and financial condition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Regulatory approvals, if granted, may include significant limitations on
the indicated uses for which our products may be marketed. In addition,
to obtain such approvals, the FDA and foreign regulatory authorities may
impose numerous other requirements on us. FDA enforcement policy
prohibits the marketing of approved medical devices for unapproved uses.
In addition, product approvals can be withdrawn for failure to comply
with regulatory standards or unforeseen problems following initial
marketing. We may not be able to obtain or maintain regulatory approvals
for our products on a timely basis, or at all, and delays in receipt of
or failure to receive such approvals, the loss of previously obtained
approvals, or failure to comply with existing or future regulatory
requirements would have a significant negative effect on our financial
condition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | OUR PRODUCTS MAY BE SUBJECT TO PRODUCT RECALLS EVEN AFTER RECEIVING FDA
CLEARANCE OR APPROVAL, WHICH WOULD HARM OUR REPUTATION AND OUR BUSINESS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The FDA and similar governmental authorities in other countries have the
authority to request and, in some cases, require the recall of our
products in the event of material deficiencies or defects in design or
manufacture. A governmental mandated or voluntary recall by us could
occur as a result of component failures, manufacturing errors or design
defects. Any recall of product would divert managerial and financial
resources and harm our reputation with customers and our business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | WE COULD BE NEGATIVELY IMPACTED BY FUTURE INTERPRETATION OR
IMPLEMENTATION OF FEDERAL AND STATE FRAUD AND ABUSE LAWS, INCLUDING
ANTI-KICKBACK LAWS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Federal anti-kickback laws and regulations prohibit the knowing and
willful offer, payment, solicitation and receipt of any form of
remuneration in exchange for the referral of an individual to a person
for the furnishing or arranging for the furnishing of any item or service
for which payment may be made by Medicare, Medicaid and other federal
healthcare programs. Violations of federal anti-kickback laws are
punishable by monetary fines, civil and criminal penalties and exclusion
from participation in Medicare, Medicaid and other federal healthcare
programs. Several states have similar laws. While we believe our
operations are in material compliance with the applicable Medicare and
Medicaid fraud and abuse laws, including the anti-kickback laws, there is
a risk that the federal government might investigate our arrangements
with physicians and other third parties. Such investigations, regardless
of their outcome, could damage our reputation and adversely affect
important business relationships that we have with third parties,
including physicians, hospitals and others. If our arrangements with
physicians and other third parties were found to be illegal, we could be
subject to civil and criminal penalties, including fines and possible
exclusion from participation in governmental payor programs. Significant
fines could cause liquidity problems and adversely affect our results of
operations. Exclusion from participation from government payor programs
would eliminate a major source of revenue and adversely affect our
business.
|
| |  | WE COULD BE NEGATIVELY IMPACTED BY FUTURE INTERPRETATION OR
IMPLEMENTATION OF THE FEDERAL STARK LAW AND OTHER FEDERAL AND STATE
ANTI-REFERRAL LAWS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | We are also subject to federal and state statutes and regulations banning
payments for referrals of patients and referrals by physicians to
healthcare providers with whom the physicians have a financial
relationship. The federal Stark law applies to Medicare and Medicaid and
prohibits a physician from referring patients for services to an entity
with which the physician has a financial relationship. A financial
relationship includes both investment interests in an entity and
compensation arrangements with an entity. Many states have similar laws,
often broader laws prohibiting referrals by any licensed health care
provider. These state laws generally apply to services reimbursed by
both governmental and private payors. Violation of these federal and
state laws may result in prohibition of payment for services rendered,
loss of licenses, fines, criminal penalties and exclusion from
governmental and private payor programs, among other things. We                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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| |  | have financial relationships with physicians and physician-owned
entities. Although we believe that our financial relationships with
physicians and physician-owned entities 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 were found to be illegal, we 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. Such structural and organizational modifications
could result in lower profitability and failure to achieve our growth
objectives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | IF WE BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS, WE MAY BE REQUIRED TO
PAY DAMAGES THAT EXCEED OUR INSURANCE COVERAGE.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Our business exposes us to potential product liability claims that are
inherent in the testing, production, marketing and sale of medical
devices. While we believe that we are reasonably insured against these
risks, we may not be able to obtain insurance in amounts or scope
sufficient to provide us with adequate coverage against all potential
liabilities. Currently, we maintain product liability insurance in
amounts we deem to be reasonable. A product liability claim in excess of
our insurance coverage would have to be paid out of cash reserves and
would harm our reputation in the industry and our business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | WE ARE FACED WITH INTENSE COMPETITION AND RAPID TECHNOLOGICAL AND
INDUSTRY CHANGE, WHICH MAY MAKE IT MORE DIFFICULT FOR US TO ACHIEVE
SIGNIFICANT MARKET PENETRATION.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | The medical device industry generally, and the urological disease
treatment market in particular, are characterized by rapid technological
change, changing customer needs, and frequent new product introductions.
If our competitors existing products or new products are more effective
than or considered superior to our products, the commercial opportunity
for our products will be reduced or eliminated. We face intense
competition from companies in the cryosurgical marketplace as well as
companies offering other treatment options, including radical surgery,
radiation therapy and hormone therapy. If we are successful in
penetrating the market for treatment of prostate cancer with our
cryosurgical treatment, other medical device companies may be attracted
to the marketplace. Many of our potential competitors are significantly
larger than us and have greater financial, technical, research,
marketing, sales, distribution and other resources than us. We believe
there will be intense price competition for products developed in our
markets. Our competitors may develop or market technologies and
products, including drug-based treatments, that are more effective or
commercially attractive than any that we are developing or marketing.
Our competitors may obtain regulatory approval, and introduce and
commercialize products before we do. These developments could have a
significant negative effect on our financial condition. Even if we are
able to compete successfully, we may not be able to do so in a profitable
manner.
|
| |  | FLUCTUATIONS IN OUR FUTURE OPERATING RESULTS MAY NEGATIVELY IMPACT THE
MARKET PRICE OF OUR COMMON STOCK.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Our operating results have fluctuated in the past and can be expected to
fluctuate from time to time in the future. Some of the factors that may
cause these fluctuations include:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



| |  |  | the impact of acquisitions,                                                                                                              
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | market acceptance of our existing products, as well as products in development,                                                          
|
| |  |  | the timing of regulatory approvals,                                                                                                      
|
| |  |  | the timing of payments received and the recognition of
such payments as revenue under collaborative arrangements and
strategic alliances,

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| |  |  | our ability to manufacture products efficiently,            
| | - |  | ------------------------------------------------------------
|
| |  |  | the timing of our research and development expenditures, and
|
| |  |  | the timing of customer orders.                              



| |  | If our operating results are below the expectations of securities
analysts or investors, the market price of our common stock may fall
abruptly and significantly.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | IF WE ACQUIRE NEW AND COMPLEMENTARY BUSINESSES, PRODUCTS OR TECHNOLOGIES
INSTEAD OF DEVELOPING THEM OURSELVES, WE MAY BE UNABLE TO COMPLETE THESE
ACQUISITIONS OR TO SUCCESSFULLY INTEGRATE AN ACQUIRED BUSINESS OR
TECHNOLOGY IN A COST-EFFECTIVE AND NON-DISRUPTIVE MANNER.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | As part of our strategy to acquire complementary urological products and
technologies, we may acquire one or more businesses or lines of business.
In June 1999, we consummated a business combination with Advanced
Medical Procedures, LLC, a regional mobile cryosurgery service company
that provides our cryosurgical equipment for the treatment of prostate
and liver cancer on a procedural basis. We cannot assure you that we
will be able to identify suitable acquisition opportunities. We may not
be able to effectively integrate our business with any other business we
may acquire or merge with or effectively utilize the business acquired to
develop and market our products. The failure to integrate an acquired
company or acquired assets into our operations may cause a drain on our
financial and managerial resources, and have a significant negative
effect on our business and financial results.                                                                                                                       
|
| |  | These difficulties could disrupt our ongoing business, distract our
management and employees or increase our expenses. Furthermore, any
physical expansion in facilities due to an acquisition may result in
disruptions that seriously impair our business. We are not experienced
in acquiring businesses or managing facilities or operations in
geographically distant areas. In addition, our profitability may suffer
because of acquisition-related costs, amortization costs, restructuring
or impairment of acquired goodwill and other intangible assets. There is
also a risk of loss of key employees, customers and vendors of recently
acquired businesses. Finally, in connection with any future
acquisitions, we may incur debt or issue equity securities as part or all
of the consideration for the acquired companys assets or capital stock.
We may be unable to obtain sufficient additional acquisition financing on
favorable terms or at all. In addition, any equity issuances will be
dilutive to our existing stockholders.
|
| |  | OUR STOCK PRICE MAY BE VOLATILE AND YOUR INVESTMENT COULD DECLINE IN
VALUE.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Our stock price has in the past fluctuated and is likely to continue to
fluctuate significantly, making it difficult to resell shares when an
investor wants to at prices they find attractive. The market prices for
securities of emerging companies have historically been highly volatile.
Future events concerning us or our competitors could cause such
volatility including:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     



| |  |  | actual or anticipated variations in our operating results,       
| | - |  | -----------------------------------------------------------------
|
| |  |  | developments regarding government and third-party reimbursement, 
|
| |  |  | changes in government regulation,                                
|
| |  |  | government investigation of us or our products,                  
|
| |  |  | changes in reimbursement rates or methods affecting our products,
|
| |  |  | developments concerning proprietary rights,                      

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| |  |  | litigation or public concern as to the safety of our products or our competitors products,                                                                                          
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | technological innovations or new commercial products by us or our competitors,                                                                                                       
|
| |  |  | investor perception of us and our industry, and                                                                                                                                      
|
| |  |  | general economic and market conditions including market
uncertainty related to the September 11, 2001 terrorist attacks
and any potential military action resulting from the attacks.



| |  | In addition, the stock market is subject to price and volume fluctuations
that affect the market prices for companies in general, and
small-capitalization, high technology companies in particular, which are
often unrelated to the operating performance of these companies. Any
failure by us to meet or exceed estimates of financial analysts is likely
to cause a decline in our common stock price.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | OUR COMMON STOCK HAS A LIMITED MARKET AND TRADING HISTORY AND THERE MAY
NOT BE AN ACTIVE, LIQUID TRADING MARKET FOR OUR COMMON STOCK.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | If we fail to satisfy the continued listing requirements of the Nasdaq
National Market or Nasdaq SmallCap Market, our stock could become subject
to the SECs penny stock rules, making the stock difficult to sell. Our
common stock began trading on the Nasdaq SmallCap Market in February 1997
and in May 2000 was listed and is currently traded on the Nasdaq National
Market. If we are unable to maintain the standards for quotation on the
Nasdaq National Market or the Nasdaq SmallCap Market, the ability of our
investors to resell their shares may be limited. In addition, our
securities may be subjected to penny stock rules that impose additional
sales practice and market making requirements on broker-dealers who sell
or make a market in such securities. This could affect the ability or
willingness of broker-dealers to sell or make a market in our securities
and the ability of holders of our securities to sell their securities in
the secondary market.                                                                                                                                                                
|
| |  | FUTURE SALES OF SHARES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR
STOCK PRICE.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Future sales of our common stock, including shares issued upon the
exercise of outstanding options and warrants or hedging or other
derivative transactions with respect to our stock, could have a
significant negative effect on the market price of our common stock.
These sales also might make it more difficult for us to sell equity
securities or equity-related securities in the future at a time and price
that we would deem appropriate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | WE COULD BE DIFFICULT TO ACQUIRE DUE TO ANTI-TAKEOVER PROVISIONS IN OUR
CHARTER, OUR STOCKHOLDERS RIGHTS PLAN AND DELAWARE LAW.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Provisions of our Certificate of Incorporation and Bylaws may have the
effect of making it more difficult for a third-party to acquire, or of
discouraging a third-party from attempting to acquire, control of us. In
addition, in April 1999, our board of directors adopted a stockholder
rights plan in which preferred stock purchase rights were distributed as
a dividend. These provisions may make it more difficult for stockholders
to take corporate actions and may have the effect of delaying or
preventing a change in control. We are subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law.
Subject to specified exceptions, this section provides that a corporation
may not engage in any business combination with any interested
stockholder during the three-year period following the time that such
stockholder becomes an interested stockholder. This provision could have
the effect of delaying or preventing a change of control of us. The
foregoing factors could limit the price that investors or an acquiror
might be willing to pay in the future for shares of our common stock.

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS



| |  | Some of the information in this report and in the documents we have filed
with the Securities and Exchange Commission, may contain forward-looking
statements within the meaning of the federal securities laws.
Forward-looking statements include, but are not limited to, statements
about our plans, objectives, expectations and intentions and other
statements contained in this prospectus and the accompanying prospectus
supplement that are not historical facts. You may find these statements
under Factors That May Affect Future Results and Trading Price of Common
Stock, Managements Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this report and in the other
documents filed with the SEC.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | We typically use terms such as may, will, expect, anticipate,
intend, plan, believe, seek and estimate and similar words to
identify forward-looking statements, although we express some
forward-looking statements differently. You should be aware that these
statements are not guarantees of future performance and are subject to
risks and uncertainties, some of which are beyond our control and are
difficult to predict, and that our actual results could differ materially
from those expressed or forecasted in the forward-looking statements due
to a number of factors, including:                                                                                                                                           



| |  |  | failure to successfully commercialize our products,                                                                                                                               
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | failure to develop new products,                                                                                                                                                  
|
| |  |  | competitive factors,                                                                                                                                                              
|
| |  |  | general economic conditions,                                                                                                                                                      
|
| |  |  | failure to achieve positive results in clinical trials,                                                                                                                           
|
| |  |  | uncertainty regarding our patents and patent rights and
costs of patent litigation, including the material harm to us if
there were an unfavorable outcome of any such litigation,
|
| |  |  | government regulation,                                                                                                                                                            
|
| |  |  | government investigation,                                                                                                                                                         
|
| |  |  | changes in reimbursement rates or methods, or                                                                                                                                     
|
| |  |  | technological change.                                                                                                                                                             



| |  | You should also consider carefully the statements under Factors That May
Affect Future Results and Trading Price of Common Stock and other
sections of this report and in the other documents filed with the SEC,
which address additional factors that could cause our actual results to
differ from those set forth in the forward-looking statements. You
should not place undue reliance on any forward-looking statements, which
reflect our managements view only as of the date of this report. We
have no plans to update these forward-looking statements.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | We use market data and industry forecasts throughout this report, which
we have obtained from internal surveys, market research, publicly
available information and industry publications. Industry publications
generally state that the information they provide has been obtained from
sources believed to be reliable, but that the accuracy and completeness
of such information is not guaranteed. Similarly, we believe that the
surveys and market research we or others have performed are reliable, but
we have not independently verified this information.

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##### Table of Contents








|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 and notes
receivable. At September 30, 2001, the carrying values of our financial
instruments approximated their fair values. We do not believe that an
increase in market rates would have any significant negative impact on
our consolidated financial statements.
|       
|        |  | 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.                                                                                                                                                
|       
|        |  | The Company maintained a $5,000,000 credit facility that accrued interest
at the highest prime rate or equivalent rate announced by certain
designated banks, plus 2% or 3.5%. This was the Companys only debt
which did not have a fixed-rate of interest. The credit facility expired
in July 2001.                                                                                                                                                                                                                                  









|PART II |  | OTHER INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       
|ITEM 1. |  | Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       
|        |  | The Company, in the normal course of business, is subject to various
other legal matters. While the results of litigation and claims cannot
be predicted with certainty, the Company believes that the final outcome
of these matters will not have a material adverse effect on the Companys
consolidated results of operations or financial condition.                                                                                                                                                                                                                                                       
|       
|        |  | From time to time, the Company has received other correspondence alleging
infringement of proprietary rights of third parties. No assurance can be
given that any relevant claims of third parties would not be upheld as
valid and enforceable, and therefore that the Company could be prevented
from practicing the subject matter claimed or would be required to obtain
licenses from the owners of any such proprietary rights to avoid
infringement. Management does not expect any material adverse effect on
the consolidated financial condition or the results of operations because
of such actions.






|ITEM 2. |  | Changes in Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       
|        |  | During the period from July 1, 2001 through September 30, 2001, the
Company granted stock options to 11 individuals covering an aggregate of
76,500 shares of its common stock, pursuant to the Companys 1995 Stock
Plan. All such options were granted at exercise prices equaling fair
market value on the date of grant, vest over a four-year period, and are
exercisable over a ten-year period. No consideration was paid for any of
such options. Such grants were exempt from the registration requirement
of the Securities Act as not involving the sale of a security.






|ITEM 3. |  | Defaults Upon Senior Securities
|------- |  | -------------------------------
|       
|        |  | Not applicable.                






|ITEM 4. |  | Submission of Matters to a Vote of Security Holders
|------- |  | ---------------------------------------------------
|       
|        |  | Not applicable.                                    

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|ITEM 5. |  | Other Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       
|        |  | Most prostate procedures using our Cryocare Surgical System currently are
performed in hospitals on an inpatient basis and are reimbursed under
Medicare's hospital prospective payment system. We also have
established reimbursement for outpatient procedures under the
Medicare program. Currently, reimbursement
under Medicare for our disposable products used in outpatient procedures is provided under a pass through system in which Medicare
pays the costs we charge the hospital for our products. Federal law
limits the total cost for pass through payments to 2.5% of expenditures
for all hospital outpatient services in a given year. On August 24,
2001, the Centers for Medicare and Medicaid Services, or CMS, published a
proposed rule indicating that significant pro rata reductions might be
required for 2002 in order to meet the statutory limit on the amount of
the pass through payments. On November 2, 2001, CMS published a final
rule with information and estimates regarding a uniform reduction in the
pass through payments for 2002, but did not provide the specific amount
of the pro rata reduction. In a subsequent final rule to be published by
December 1, 2001, CMS will include the tables necessary to calculate the
2002 pass through payment rates. The impact on our revenues of the pass
through payment reduction is unclear at this time.






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



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

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Title                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               
|2.1(1)      |  | Agreement and Plan of Merger dated June 30, 1999 by and among the Company,
Advanced Medical Procedures, Inc., a Delaware corporation, Advanced Medical
Procedures, LLC, a Florida limited liability company, Gary M. Onik, M.D., Robert
F. Byrnes and Jerry Anderson. Schedules and other attachments to this exhibit
were omitted. We agree to furnish supplementally a copy of any omitted
schedules or attachments to the SEC upon request.
|           
|           
|           
|           
|3.3(2)      |  | Restated Certificate of Incorporation                                                                                                                                                                                                                                                                                                                                                                                                         
|           
|           
|           
|           
|3.4(3)      |  | Certificate of Designation of Series A Junior Participating Preferred Stock of
the Company.                                                                                                                                                                                                                                                                                                                                                   
|           
|           
|           
|           
|3.5(4)      |  | Certificate of Amendment of Restated Certificate of Incorporation of the Company.                                                                                                                                                                                                                                                                                                                                                             
|           
|           
|           
|           
|3.6(5)      |  | Amended and Restated Bylaws of the Company                                                                                                                                                                                                                                                                                                                                                                                                    
|           
|           
|           
|           
|10.30(6)    |  | Promissory Notes dated August 8, 2001 and July 24, 2001, as subsequently
amended, by Paul Mikus in favor of the Company.                                                                                                                                                                                                                                                                                                                      
|           
|           
|           
|           
|10.31(7)    |  | Change in Employment Status and Settlement Agreement and Release effective as of
June 25, 2001 by and between the Company and William Hughes.                                                                                                                                                                                                                                                                                                 
|           
|           
|           
|           
|10.32(8)    |  | Consulting and Confidentiality Agreement dated as of June 1, 2001 by and between
the Company and Michael Strauss, M.D.                                                                                                                                                                                                                                                                                                                        
|           
|           
|           
|           
|10.33(9)    |  | Note and Warrant Purchase Agreement dated as of April 1, 2001 by and among the
Company, Sanarus Medical, Inc. and specified purchasers and related Convertible
Promissory Note and Warrant to Purchase Series B Preferred Stock dated April 1,
2001.                                                                                                                                                                                          
|           
|           
|           
|           
|10.34(10)   |  | Offer of Employment effective as of February 16, 2001 by and between the Company
and Kevin Quilty.                                                                                                                                                                                                                                                                                                                                            
|           
|           
|           
|           
|10.35(11)   |  | Offer of Employment effective as of September 22, 2000 by and between the
Company and David Battles.                                                                                                                                                                                                                                                                                                                                          
|           
|           
|           
|           
|10.36(12)   |  | Offer of Employment effective as of August 14, 2000 by and between the Company
and Holly Williams.                                                                                                                                                                                                                                                                                                                                            
|           
|           
|           
|           
|10.37(13)   |  | Promissory Note dated November 2, 1999 by Jerry Anderson in favor of the Company.                                                                                                                                                                                                                                                                                                                                                             

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|            |  |                                                                                                                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Title                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                   
|           
|           
|           
|           
|10.38(14)   |  | Promissory Note cancellations between the Company and each of Paul Mikus,
Vincent Cutarelli, Jay Eum and William Hughes.                                                                                          
|           
|           
|           
|           
|10.39(15)   |  | Consulting Agreement dated as of January 6, 1999 by and between the Company and
Robert Byrnes.                                                                                                                    
|           
|           
|           
|           
|10.40(16)   |  | Consulting Agreement dated as of January 6, 1999 by and between the Company and
Alan Kaganov.                                                                                                                     
|           
|           
|           
|           
|10.41(17)   |  | Loan and Security Agreement dated as of October 1, 1998 between the Company and
Advanced Medical Procedures, LLC, a Florida limited liability company and
related Revolving Promissory Note dated October 1, 1998.
|           
|           
|           
|           
|10.42(18)   |  | Guarantor Security Agreement dated as of October 1, 1998 by and between the
Company and Robert Byrnes.                                                                                                            
|           
|           
|           
|           
|10.43(19)   |  | Scientific Advisory Board Agreement dated as of December 2, 1997 by and between
the Company and Foundation Research, Inc.                                                                                         
|           
|           
|           
|           
|10.44(20)   |  | Consulting Agreement dated as of May 27, 1997 by and between the Company and Bob
Byrnes.                                                                                                                          
|           
|           
|           
|           
|10.45(***)  |  | Global Supply and Market Access Agreement by and between Endocare, Inc. and
CryoCath Technologies, Inc., dated September 21, 2001.                                                                                
|           
|           
|           
|           
|10.46(***)  |  | Distribution Agreement by and between Endocare, Inc. and Qualigen, Inc., dated
September 25, 2001.                                                                                                                



---

|(1)  |  | Incorporated by reference to Exhibit 2.1 to the S-3 as filed
with the Commission on September 20, 2001.  
|---- |  | ---------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(2)  |  | Incorporated by reference to Exhibit 3.3 to the S-3 as filed
with the Commission on September 20, 2001.  
|    
|    
|    
|    
|(3)  |  | Incorporated by reference to Exhibit 3.2 to the S-3 as filed
with the Commission on September 20, 2001.  
|    
|    
|    
|    
|(4)  |  | Incorporated by reference to Exhibit 3.1 to the S-3 as filed
with the Commission on September 20, 2001.  
|    
|    
|    
|    
|(5)  |  | Incorporated by reference to Exhibit 3.4 to the S-3 as filed
with the Commission on September 20, 2001.  
|    
|    
|    
|    
|(6)  |  | Incorporated by reference to Exhibit 10.1 to the S-3/A as
filed with the Commission on October 31, 2001. 
|    
|    
|    
|    
|(7)  |  | Incorporated by reference to Exhibit 10.2 to the S-3/A as
filed with the Commission on October 31, 2001. 
|    
|    
|    
|    
|(8)  |  | Incorporated by reference to Exhibit 10.3 to the S-3 as filed
with the Commission on September 20, 2001. 
|    
|    
|    
|    
|(9)  |  | Incorporated by reference to Exhibit 10.4 to the S-3 as filed
with the Commission on September 20, 2001. 
|    
|    
|    
|    
|(10) |  | Incorporated by reference to Exhibit 10.5 to the S-3 as filed
with the Commission on September 20, 2001. 
|    
|    
|    
|    
|(11) |  | Incorporated by reference to Exhibit 10.6 to the S-3 as filed
with the Commission on September 20, 2001. 
|    
|    
|    
|    
|(12) |  | Incorporated by reference to Exhibit 10.7 to the S-3 as filed
with the Commission on September 20, 2001. 
|    
|    
|    
|    
|(13) |  | Incorporated by reference to Exhibit 10.8 to the S-3 as filed
with the Commission on September 20, 2001. 
|    
|    
|    
|    
|(14) |  | Incorporated by reference to Exhibit 10.9 to the S-3/A as
filed with the Commission on October 31, 2001. 
|    
|    
|    
|    
|(15) |  | Incorporated by reference to Exhibit 10.10 to the S-3/A as
filed with the Commission on October 31, 2001.

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|(16)  |  | Incorporated by reference to Exhibit 10.11 to the S-3 as
filed with the Commission on September 20, 2001.                                                                                                                                                                                                                                             
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|     
|     
|     
|(17)  |  | Incorporated by reference to Exhibit 10.12 to the S-3 as
filed with the Commission on September 20, 2001.                                                                                                                                                                                                                                             
|     
|     
|     
|     
|(18)  |  | Incorporated by reference to Exhibit 10.13 to the S-3 as
filed with the Commission on September 20, 2001.                                                                                                                                                                                                                                             
|     
|     
|     
|     
|(19)  |  | Incorporated by reference to Exhibit 10.14 to the S-3 as
filed with the Commission on September 20, 2001.                                                                                                                                                                                                                                             
|     
|     
|     
|     
|(20)  |  | Incorporated by reference to Exhibit 10.15 to the S-3 as
filed with the Commission on September 20, 2001.                                                                                                                                                                                                                                             
|     
|     
|     
|     
|(***) |  | Certain confidential portions of the exhibits were omitted
by means of marking such portions with an asterisk (the Mark).
This exhibit has been filed separately with the Secretary of the
Securities and Exchange Commission (SEC) without the Mark pursuant
to the Companys Application Requesting Confidential Treatment under
SEC Rule 24b-2.



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



| |  |  | Endocare filed a current report on Form 8-K on September 26,
2001 regarding the strategic alliance entered into by and
between the Company and CryoCath Technologies, Inc. with the
signing of a five-year exclusive global supply and market
access agreement.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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: |  | November 9, 2001 |  | ENDOCARE, INC.                                                                                                                                                                
|     
|      |  |                  |  |                                                                                                                                                                               
|     
|      |  |                  |  | By: /s/ Paul W. Mikus
        Paul W. Mikus
        Chief Executive Officer and President
        (Duly Authorized Officer)                                                   
|     
|      |  |                  |  |                                                                                                                                                                               
|     
|      |  |                  |  | By: /s/ John V. Cracchiolo
        John V. Cracchiolo
        Chief Operating Officer and
        Chief Financial Officer
        (Principal Financial and Accounting Officer)

29