##### Table of Contents



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

FORM 10-Q

|           |  |                                                                                                                                      
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                                                      
|          
|          
|          
|          
|           |  |                                                                                                                                      
|          
|          
|          
|          
|(X Box)    |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
|          
|          
|          
|          
|           |  |                                                                                                                                      
|          
|          
|          
|          
|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
(State of Incorporation) |  | 33-0618093
(I.R.S. Employer I.D. No.)

201 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92618
(Address of Principal Executive Office, Including Zip Code)

(949) 450-5400
(Registrants Telephone Number, Including Area Code)

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

The number of shares of the Registrants common stock, par value $.001 per
share, outstanding at April 15, 2002 was 23,885,216.





---

TABLE OF CONTENTS



|                               |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | ITEM 1. Financial Statements                                                                 
|                               |                                                                                               | Condensed Consolidated Statements of Operations     
|                               |                                                                                               | Condensed Consolidated Balance Sheets               
|                               |                                                                                               | Condensed Consolidated Statements of Cash Flows     
|                               |                                                                                               | Notes to Condensed Consolidated Financial Statements
|                               | ITEM 2. 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.                                                    
|SIGNATURES                    



---



##### Table of Contents



Endocare, Inc.
Form 10-Q, Quarter Ended March 31, 2001

TABLE OF CONTENTS

|                               |                                                                                               |                                                      |    |      |   | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- | -- | ---- | - | 
|                               |                                                                                               |                                                      |    | Page
|                               |                                                                                               |                                                      |    |     
|                               |                                                                                               |                                                      |    |     
|                              
|                              
|                              
|                              
|PART I  FINANCIAL INFORMATION |                                                                                               |                                                      | 3  |     
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                      |    |     
|                              
|                              
|                              
|                              
|                               | ITEM 1. Financial Statements                                                                  |                                                      |    | 3    |  
|                              
|                              
|                              
|                              
|                               |                                                                                               | Condensed Consolidated Statements of Operations      |    |      | 3 | 
|                              
|                              
|                              
|                              
|                               |                                                                                               | Condensed Consolidated Balance Sheets                |    |      | 4 | 
|                              
|                              
|                              
|                              
|                               |                                                                                               | Condensed Consolidated Statements of Cash Flows      |    |      | 5 | 
|                              
|                              
|                              
|                              
|                               |                                                                                               | Notes to Condensed Consolidated Financial Statements |    |      | 6 | 
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                      |    |     
|                              
|                              
|                              
|                              
|                               | ITEM
2. Managements Discussion and Analysis of Financial Condition and
Results of Operations |                                                      |    | 12   |  
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                      |    |     
|                              
|                              
|                              
|                              
|                               | ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                      |    | 27   |  
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                      |    |     
|                              
|                              
|                              
|                              
|PART II  OTHER INFORMATION    |                                                                                               |                                                      | 28 |     
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                      |    |     
|                              
|                              
|                              
|                              
|                               | ITEM 1. Legal Proceedings                                                                     |                                                      |    | 28   |  
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                      |    |     
|                              
|                              
|                              
|                              
|                               | ITEM 2. Changes in Securities                                                                 |                                                      |    | 28   |  
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                      |    |     
|                              
|                              
|                              
|                              
|                               | ITEM 3. Defaults Upon Senior Securities                                                       |                                                      |    | 28   |  
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                      |    |     
|                              
|                              
|                              
|                              
|                               | ITEM 4. Submission of Matters to a Vote of Security Holders                                   |                                                      |    | 28   |  
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                      |    |     
|                              
|                              
|                              
|                              
|                               | ITEM 5. Other Information                                                                     |                                                      |    | 28   |  
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                      |    |     
|                              
|                              
|                              
|                              
|                               | ITEM 6. Exhibits and Reports on Form 8-K                                                      |                                                      |    | 28   |  
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                      |    |     
|                              
|                              
|                              
|                              
|SIGNATURE PAGE                 |                                                                                               |                                                      | 30 |     

2



---



##### Table of Contents












PART I  FINANCIAL INFORMATION



|ITEM 1. |  | Financial Statements
|------- |  | --------------------

ENDOCARE, INC.
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2002 and 2001
(Unaudited)

|                                                              |                                     |                          |           |                              |            |      |            |           |            | 
|------------------------------------------------------------- | ----------------------------------- | ------------------------ | --------- | ---------------------------- | ---------- | ---- | ---------- | --------- | ---------- | 
|                                                              |                                     |                          |           | Three Months Ended March 31,
|                                                              |                                     |                          |           |                             
|                                                              |                                     |                          |           | 2002                         |            | 2001
|                                                              |                                     |                          |           |                              |            |     
|Revenues                                                      |                                     | $                        | 7,773,064 |                              |            | $    | 2,755,587  |          
|                                                             
|                                                             
|                                                             
|                                                             
|Costs and expenses:                                           |                                     |                          |           |                              |            |      |            |          
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Cost of revenues                    |                          |           | 2,760,755                    |            |      |            | 1,173,890 |           
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Research and development            |                          |           | 947,867                      |            |      |            | 902,819   |           
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Selling, general and administrative |                          |           | 4,214,632                    |            |      |            | 3,024,120 |           
|                                                              |                                     |                          |           |                              |            |      |            |          
|                                                              |                                     | Total costs and expenses |           |                              | 7,923,254  |      |            |           | 5,100,829  | 
|                                                              |                                     |                          |           |                              |            |      |            |          
|Loss from operations                                          |                                     |                          | (150,190  | )                            |            |      | (2,345,242 | )        
|                                                             
|                                                             
|                                                             
|                                                             
|Interest income, net                                          |                                     |                          | 316,163   |                              |            |      | 3,074      |          
|                                                              |                                     |                          |           |                              |            |      |            |          
|Net income (loss)                                             |                                     | $                        | 165,973   |                              |            | $    | (2,342,168 | )        
|                                                              |                                     |                          |           |                              |            |      |            |          
|Net income (loss) per share of common stock-basic and diluted |                                     | $                        | 0.01      |                              |            | $    | (0.15      | )        
|                                                              |                                     |                          |           |                              |            |      |            |          
|Weighted average shares of common stock outstanding:          |                                     |                          |           |                              |            |      |            |          
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                     | Basic                    |           |                              | 22,163,198 |      |            |           | 15,153,761 | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                     | Diluted                  |           |                              | 23,032,028 |      |            |           | 15,153,761 | 
|                                                              |                                     |                          |           |                              |            |      |            |          

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

3



---



##### Table of Contents






ENDOCARE, INC.
Condensed Consolidated Balance Sheets
at March 31, 2002 and December 31, 2001

|                                              |                                                                                                                                                                     |                                            |            |             |             |              |           |             |            | 
|--------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ----------- | ----------- | ------------ | --------- | ----------- | ---------- | 
|                                              |                                                                                                                                                                     |                                            |            | March 31,   |             | December 31,
|                                              |                                                                                                                                                                     |                                            |            | 2002        |             | 2001        
|                                              |                                                                                                                                                                     |                                            |            |             |             |             
|                                              |                                                                                                                                                                     |                                            |            | (unaudited) |             |              |           |            
|ASSETS                                        |                                                                                                                                                                     |                                            |            |             |             |              |           |            
|                                             
|                                             
|                                             
|                                             
|Current assets:                               |                                                                                                                                                                     |                                            |            |             |             |              |           |            
|                                             
|                                             
|                                             
|                                             
|                                              | Cash and cash equivalents                                                                                                                                           |                                            | $          | 70,147,240  |             |              | $         | 83,238,915  |           
|                                             
|                                             
|                                             
|                                             
|                                              | Accounts receivable, net                                                                                                                                            |                                            |            | 9,926,851   |             |              |           | 5,733,563   |           
|                                             
|                                             
|                                             
|                                             
|                                              | Inventories                                                                                                                                                         |                                            |            | 4,275,982   |             |              |           | 2,415,744   |           
|                                             
|                                             
|                                             
|                                             
|                                              | Prepaid expenses and other current assets                                                                                                                           |                                            |            | 1,256,604   |             |              |           | 793,025     |           
|                                              |                                                                                                                                                                     |                                            |            |             |             |              |           |            
|                                              |                                                                                                                                                                     | Total current assets                       |            |             | 85,606,677  |              |           |             | 92,181,247 | 
|                                             
|                                             
|                                             
|                                             
|Property and equipment, net                   |                                                                                                                                                                     |                                            | 3,606,857  |             |             |              | 1,814,714 |            
|                                             
|                                             
|                                             
|                                             
|Goodwill                                      |                                                                                                                                                                     |                                            | 31,827,053 |             |             |              |          |            
|                                             
|                                             
|                                             
|                                             
|Investments, intangible and other assets, net |                                                                                                                                                                     |                                            | 6,793,981  |             |             |              | 4,037,981 |            
|                                              |                                                                                                                                                                     |                                            |            |             |             |              |           |            
|                                              |                                                                                                                                                                     | Total assets                               |            | $           | 127,834,568 |              |           | $           | 98,033,942 | 
|                                              |                                                                                                                                                                     |                                            |            |             |             |              |           |            
|LIABILITIES AND STOCKHOLDERS EQUITY          |                                                                                                                                                                     |                                            |            |             |             |              |           |            
|                                             
|                                             
|                                             
|                                             
|Current liabilities:                          |                                                                                                                                                                     |                                            |            |             |             |              |           |            
|                                             
|                                             
|                                             
|                                             
|                                              | Accounts payable                                                                                                                                                    |                                            | $          | 3,823,608   |             |              | $         | 1,260,214   |           
|                                             
|                                             
|                                             
|                                             
|                                              | Accrued compensation                                                                                                                                                |                                            |            | 1,978,551   |             |              |           | 1,334,168   |           
|                                             
|                                             
|                                             
|                                             
|                                              | Other accrued liabilities                                                                                                                                           |                                            |            | 1,763,451   |             |              |           | 826,119     |           
|                                              |                                                                                                                                                                     |                                            |            |             |             |              |           |            
|                                              |                                                                                                                                                                     | Total current liabilities                  |            |             | 7,565,610   |              |           |             | 3,420,501  | 
|                                              |                                                                                                                                                                     |                                            |            |             |             |              |           |            
|Stockholders equity                          |                                                                                                                                                                     |                                            |            |             |             |              |           |            
|                                             
|                                             
|                                             
|                                             
|                                              | Preferred stock, $.001 par value; 1,000,000 shares authorized; none issued
and outstanding at March 31, 2002 and December 31, 2002, respectively                    |                                            |            |            |             |              |           |            |           
|                                             
|                                             
|                                             
|                                             
|                                              | Common stock, $.001 par value; 50,000,000 shares authorized; 23,607,134
and 22,057,905 issued and outstanding at March 31, 2002 and December 31,
2001, respectively |                                            |            | 23,607      |             |              |           | 22,058      |           
|                                             
|                                             
|                                             
|                                             
|                                              | Additional paid-in capital                                                                                                                                          |                                            |            | 159,454,100 |             |              |           | 133,716,105 |           
|                                             
|                                             
|                                             
|                                             
|                                              | Receivables from stockholders                                                                                                                                       |                                            |            | (1,028,125  | )           |              |           | (1,028,125  | )         
|                                             
|                                             
|                                             
|                                             
|                                              | Accumulated deficit                                                                                                                                                 |                                            |            | (37,930,624 | )           |              |           | (38,096,597 | )         
|                                             
|                                             
|                                             
|                                             
|                                              | Accumulated other comprehensive loss                                                                                                                                |                                            |            | (250,000    | )           |              |           |            |           
|                                              |                                                                                                                                                                     |                                            |            |             |             |              |           |            
|                                              |                                                                                                                                                                     | Total stockholders equity                 |            |             | 120,268,958 |              |           |             | 94,613,441 | 
|                                              |                                                                                                                                                                     |                                            |            |             |             |              |           |            
|                                              |                                                                                                                                                                     | Total liabilities and stockholders equity |            | $           | 127,834,568 |              |           | $           | 98,033,942 | 
|                                              |                                                                                                                                                                     |                                            |            |             |             |              |           |            

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

4



---



##### Table of Contents






ENDOCARE, INC.
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2002 and 2001
(Unaudited)

|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |            |        | 
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------ | ----------- | ------------------ | ------- | ---- | ---------- | ---------- | ------ | 
|                                               |                                                                                                                    |                                                                                      |             | Three Months Ended
|                                               |                                                                                                                    |                                                                                      |             | March 31,         
|                                               |                                                                                                                    |                                                                                      |             |                   
|                                               |                                                                                                                    |                                                                                      |             | 2002               |         | 2001
|                                               |                                                                                                                    |                                                                                      |             |                    |         |     
|Cash flows from operating activities:          |                                                                                                                    |                                                                                      |             |                    |         |      |            |           
|                                              
|                                              
|                                              
|                                              
|                                               | Net income (loss)                                                                                                  |                                                                                      | $           | 165,973            |         |      | $          | (2,342,168 | )     
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                                                    | Adjustments
to reconcile net income (loss) to net cash used in operating activities: |             |                    |         |      |            |            |        | 
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                                                    | Depreciation and amortization                                                        |             |                    | 324,102 |      |            |            | 96,162 | 
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                                                    | Amortization of warrant value                                                        |             |                    | 41,118  |      |            |            | 49,062 | 
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                                                    | Amortization of deferred financing costs                                             |             |                    |        |      |            |            | 60,000 | 
|                                              
|                                              
|                                              
|                                              
|Changes in operating assets and liabilities:   |                                                                                                                    |                                                                                      |             |                    |         |      |            |           
|                                              
|                                              
|                                              
|                                              
|                                               | Accounts receivable                                                                                                |                                                                                      |             | (3,447,271         | )       |      |            | (770,975   | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Inventories                                                                                                        |                                                                                      |             | (146,635           | )       |      |            | (280,303   | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Prepaid expenses and other current assets                                                                          |                                                                                      |             | (488,563           | )       |      |            | 4,524      |       
|                                              
|                                              
|                                              
|                                              
|                                               | Other assets                                                                                                       |                                                                                      |             | 84,680             |         |      |            | (149,800   | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Accounts payable                                                                                                   |                                                                                      |             | 1,565,714          |         |      |            | (642,108   | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Accrued compensation                                                                                               |                                                                                      |             | (873,152           | )       |      |            | (177,989   | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Other accrued liabilities                                                                                          |                                                                                      |             | (357,076           | )       |      |            | 220,611    |       
|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |            |       
|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |           
|                                              
|                                              
|                                              
|                                              
|Net cashed used in operating activities        |                                                                                                                    |                                                                                      | (3,131,110  | )                  |         |      | (3,932,984 | )         
|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |            |       
|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |           
|                                              
|                                              
|                                              
|                                              
|Cash flows from investing activities:          |                                                                                                                    |                                                                                      |             |                    |         |      |            |           
|                                              
|                                              
|                                              
|                                              
|                                               | Acquisitions, net of cash acquired                                                                                 |                                                                                      |             | (9,642,949         | )       |      |            |           |       
|                                              
|                                              
|                                              
|                                              
|                                               | Purchases of property and equipment                                                                                |                                                                                      |             | (829,764           | )       |      |            | (56,902    | )     
|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |            |       
|Net cash used in investing activities          |                                                                                                                    |                                                                                      | (10,472,713 | )                  |         |      | (56,902    | )         
|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |            |       
|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |           
|                                              
|                                              
|                                              
|                                              
|Cash flows from financing activities:          |                                                                                                                    |                                                                                      |             |                    |         |      |            |           
|                                              
|                                              
|                                              
|                                              
|                                               | Issuance of common stock                                                                                           |                                                                                      |             | 512,148            |         |      |            | 276,858    |       
|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |            |       
|Net cash provided by financing activities      |                                                                                                                    |                                                                                      | 512,148     |                    |         |      | 276,858    |           
|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |            |       
|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |           
|                                              
|                                              
|                                              
|                                              
|Net decrease in cash and cash equivalents      |                                                                                                                    |                                                                                      | (13,091,675 | )                  |         |      | (3,713,028 | )         
|                                              
|                                              
|                                              
|                                              
|Cash and cash equivalents, beginning of period |                                                                                                                    |                                                                                      | 83,238,915  |                    |         |      | 22,016,448 |           
|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |            |       
|Cash and cash equivalents, end of period       |                                                                                                                    | $                                                                                    | 70,147,240  |                    |         | $    | 18,303,420 |           
|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |            |       
|Non-cash activities:                           |                                                                                                                    |                                                                                      |             |                    |         |      |            |           
|                                              
|                                              
|                                              
|                                              
|                                               | Convertible debentures and accrued interest converted to common stock, net of
unamortized deferred financing costs |                                                                                      | $           |                   |         |      | $          | 1,000,000  |       
|                                              
|                                              
|                                              
|                                              
|                                               | Transfer of inventory to property and equipment for placement
at customer site                                     |                                                                                      |             |                   |         |      |            | 42,930     |       
|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |            |       
|Total non-cash activities                      |                                                                                                                    | $                                                                                    |            |                    |         | $    | 1,042,930  |           
|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |            |       
|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |           
|                                              
|                                              
|                                              
|                                              
|                                              
|Details
of acquisition:                        |                                                                                                                    |                                                                                      |             |                    |         |      |            |           
|                                              
|                                              
|                                              
|                                              
|                                               | Fair
value of tangible assets                                                                                      |                                                                                      | $           | 5,425,820          |         |      | $          |           |       
|                                              
|                                              
|                                              
|                                              
|                                               | Fair
value of intangible assets                                                                                    |                                                                                      |             | 2,500,000          |         |      |            |           |       
|                                              
|                                              
|                                              
|                                              
|                                               | Liabilities
assumed                                                                                                |                                                                                      |             | (3,796,568         | )       |      |            |           |       
|                                              
|                                              
|                                              
|                                              
|                                               | Costs
in excess of net assets                                                                                      |                                                                                      |             | 31,827,053         |         |      |            |           |       
|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |            |       
|                                              
|                                              
|                                              
|                                              
|                                               | Fair
value of assets                                                                                               |                                                                                      |             | 35,956,305         |         |      |            |           |       
|                                              
|                                              
|                                              
|                                              
|                                               | Common
stock and options issued                                                                                    |                                                                                      |             | (25,186,278        | )       |      |            |           |       
|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |            |       
|                                              
|                                              
|                                              
|                                              
|                                               | Cash
paid                                                                                                          |                                                                                      |             | 10,770,027         |         |      |            |           |       
|                                              
|                                              
|                                              
|                                              
|                                               | Less
cash acquired                                                                                                 |                                                                                      |             | (1,127,078         | )       |      | $          |           |       
|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |            |       
|                                              
|                                              
|                                              
|                                              
|                                               | Net
cash paid for acquisition                                                                                      |                                                                                      | $           | 9,642,949          | )       |      | $          |           |       
|
|                                               |                                                                                                                    |                                                                                      |             |                    |         |      |            |            |       

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

5



---



##### Table of Contents






ENDOCARE, INC.
Notes to Condensed Consolidated Financial Statements



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

Endocare, Inc. (Endocare or the Company) is a medical device company
focused on developing, manufacturing and selling urological healthcare products
with the potential to dramatically improve mens health and quality of life.
The Companys primary focus is on the diagnosis, treatment and monitoring of
the two most common diseases of the prostate, prostate cancer and benign
prostate hyperplasia, or BPH, which is a non-cancerous enlargement of the
innermost part of the prostate. The Companys FDA-cleared Cryocare Surgical
System occupies a leading position in the market for the cryosurgical treatment
of prostate cancer. The Company is currently developing a urologic stent, the
Horizon Prostatic Stent, designed to provide temporary and immediate relief for
BPH patients. In February 2002, the Company expanded its urological product
offerings by acquiring Timm Medical Technologies, Inc., or Timm Medical.
Through this acquisition, the Company now owns or has acquired marketing rights
to an additional product used in the treatment of BPH, five products used in
the diagnosis and treatment of erectile dysfunction, six products used in the
diagnosis and management of urinary incontinence and one product used in the
diagnosis of bladder cancer. The Companys strategy is to increase sales of
its current products through targeted sales and marketing efforts, to continue
to develop and obtain regulatory approval for its Horizon Prostatic Stent, and
to develop and acquire additional products in urology that leverage its
existing sales and marketing organization.



|2. |  | Financial Information
|-- |  | ---------------------

Basis of Presentation

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, 2001. Financial results for this interim period are not
necessarily indicative of results to be expected for the full year 2002.

Accounting Principles

In July 2001, the FASB issued SFAS No. 141, Business Combinations and
No. 142, Goodwill and Other Intangible Assets. SFAS No. 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. SFAS No. 141 also specifies
criteria for 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. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires 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 adopted the provisions of SFAS No. 141, except with regard to
business combinations initiated prior to July 1, 2001, and SFAS No. 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-SFAS No. 142 accounting literature. The adoption of SFAS Nos. 141 and 142
did not have a material effect on the Companys financial position
or results of operations. The Company accounted for the acquisition of Timm
Medical effective in February 2002 in accordance with SFAS Nos. 141 and 142.

6



---



##### Table of Contents



In June 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.
The Company intends to adopt SFAS No. 143 beginning January 1, 2003. This
Statement is not expected to have a material impact on the Companys financial
reporting and related disclosures.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 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 No. 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 adopted the provisions of SFAS No. 144 in the quarter ending March
31, 2002. The implementation of SFAS No. 144 did not have a material effect on
the Companys 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. |  | Net Earnings (Loss) Per Share
|-- |  | -----------------------------

Net earnings (loss) per share (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 dilutive 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. The consolidated loss (numerator), shares (denominator) and per-share
amounts for the three months ended March 31, 2002 and March 31, 2001 were
$165,973, 22,163,198 and $0.01 and $(2,342,168), 15,153,761 and $(0.15),
respectively. Prior to the three months ended March 31, 2002, the Company was
in a consolidated net loss position and the potential dilution from the
conversion of options, warrants and convertible debentures to common stock was
not used to compute diluted loss per share as the effect was antidilutive.
Consequently, diluted EPS equals basic EPS. For the three months ended March
31, 2002, the Company was in a net earnings position. The potential
dilution from conversion of vested options, warrants and convertible debentures to
approximately 869,000 shares of common stock would not change the reported earnings per share. Consequently,
diluted EPS equals basic EPS.



|5. |  | Acquisition of Timm Medical
|-- |  | ---------------------------

On March 25, 2002, the Company completed a merger with Timm Medical under
which Timm Medical became a wholly-owned subsidiary of the Company. In
connection with the merger, all outstanding shares of capital stock of Timm
Medical were exchanged for an aggregate of 1,620,530 shares of the Companys
common stock and approximately $10.8 million in cash. This transaction was
accounted for under the purchase method of accounting and, accordingly, the
consolidated financial statements of the Company for the three months ended
March 31, 2002 include the financial results of Timm Medical from February 21,
2002, the date the purchase transaction was effective, and which
represents the date when the Company effectively took control of Timm Medical.

7



---



##### Table of Contents



The Company recorded goodwill of approximately $31.8 million as a result
of the acquisition. The Company acquired $2.5 million in an
intangible asset representing a trade name.
The name is being amortized over a useful life of 15 years. The Company incurred costs and expenses in connection with the
acquisition, including legal, accounting and other various expenses. Eligible
costs were included as part of the purchase price. The allocation of the purchase price for
the acquisition and other purchase accounting adjustments is as follows:

|                                           |  |   |            |  
|------------------------------------------ |  | - | ---------- | -
|Total
purchase price, net of cash acquired |  | $ | 34,829,227 |  
|                                          
|                                          
|                                          
|                                          
|Net assets acquired                        |  |   | (3,002,174 | )
|                                           |  |   |            |  
|Goodwill                                   |  | $ | 31,827,053 |  
|                                           |  |   |            |  

The following table presents unaudited pro forma results of operations for
the three months ended March 31, 2002 and 2001 assuming the acquisition
occurred as of January 1, 2001:

|                                     |  |                    |            |      |  |   |            |  
|------------------------------------ |  | ------------------ | ---------- | ---- |  | - | ---------- | -
|                                     |  | Three Months Ended
|                                     |  | March 31,         
|                                     |  |                   
|                                     |  | 2002               |            | 2001
|                                     |  |                    |            |     
|Net revenues                         |  | $                  | 9,372,000  |      |  | $ | 6,447,000  |  
|                                     |  |                    |            |      |  |   |            |  
|Net loss                             |  | $                  | (145,000   | )    |  | $ | (2,707,000 | )
|                                     |  |                    |            |      |  |   |            |  
|Net loss per share basic and diluted |  | $                  | (.01       | )    |  | $ | (.16       | )
|                                     |  |                    |            |      |  |   |            |  
|Weighted average shares outstanding  |  |                    | 23,866,602 |      |  |   | 16,778,909 |  
|                                     |  |                    |            |      |  |   |            |  

The pro forma data excludes acquisition related expenses totaling
$1,187,484 during the period ended March 31, 2002. It was assumed that
1,620,530 shares of common stock issued in connection with the acquisition were
outstanding as of January 1, 2001.



|6. |  | Supplemental Financial Statement Data
|-- |  | -------------------------------------

|             |                 |                   |   |           |           |              |   |           |           | 
|------------ | --------------- | ----------------- | - | --------- | --------- | ------------ | - | --------- | --------- | 
|             |                 |                   |   | March 31, |           | December 31,
|             |                 |                   |   | 2002      |           | 2001        
|             |                 |                   |   |           |           |             
|Inventories: |                 |                   |   |           |           |              |   |          
|            
|            
|            
|            
|             | Raw materials   |                   | $ | 2,559,857 |           |              | $ | 1,456,482 |          
|            
|            
|            
|            
|             | Work in process |                   |   | 941,933   |           |              |   | 501,687   |          
|            
|            
|            
|            
|             | Finished goods  |                   |   | 774,192   |           |              |   | 457,575   |          
|             |                 |                   |   |           |           |              |   |           |          
|             |                 | Total inventories |   | $         | 4,275,982 |              |   | $         | 2,415,744 | 
|             |                 |                   |   |           |           |              |   |           |          



|7. |  | Debt
|-- |  | ----

Convertible Debentures

In June and July 1999, the Company 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 the Companys common stock pursuant to
the terms of the debentures. On May 5, 2000, the Company 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 the Companys
common stock during the fourth quarter of 2000, $1 million of these debentures
were converted into 148,148 shares of the Companys common stock during the
first quarter of 2001, $4.2 million of these debentures were converted into
622,222 shares of the Companys common stock during the second quarter of 2001,
and the final $2.3 million of these debentures were converted into 340,741
shares of the Companys common stock in July 2001. Of the

8



---



##### Table of Contents



debentures converted in 2000 and 2001, an additional $549,098 or 38,861
shares and $200,335, or 17,622 shares, respectively, were issued as interest
representing a rate of 7%.

Credit Facility

The Company had a Loan and Security Agreement with a lender which
originally provided for a revolving credit line plus up to an additional amount
based on eligible accounts receivable of the Company (the Loan). The balance
available under the revolving portion of the credit facility was $4,000,000
with an additional $1,000,000 available 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,
and contained certain restrictive covenants. The loan matured on July 31, 2001
and was paid in full on that date.



|8. |  | Stockholder 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. |  | Collaborative Agreements
|-- |  | ------------------------

In October 1999, the Company 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 the Company in
Sanarus totaling $300,000. The Company 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. In June 2001, the
Company 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 the Companys current ownership percentage to 2% and its potential
ownership percentage to approximately 22% on a fully-diluted basis. The
investment is included in Investments, intangible and other assets, net in
the Companys consolidated balance sheets as of March 31, 2002 and December 31,
2001 and is reflected at cost as the Company does not have significant
influence over the operations of Sanarus.

In September 2000, the Company invested $250,000, representing
approximately 833,000 shares of common stock, in Medical Resources Management,
Inc., or MRM. In July 2001, these shares were converted into approximately
308,000 shares of common stock of Emergent Group, Inc., upon its acquisition of
MRM as a wholly owned subsidiary. The investment in MRM is included in
Investments, intangible and other assets, net in our balance sheet as of
March 31, 2002 in accordance with SFAS 115 as an available
for sale investment.

9



---



##### Table of Contents



During the quarter ended March 31,
2002, the Company reflected a temporary decline in value of $250,000 which is included in
Stockholders Equity as Accumulated Other
Comprehensive Loss. We monitor our investments for other than
temporary declines in value which should be written down and included
in earnings as a loss. We will continue to monitor this investment
and should the investment show no signs of market recovery, we will
record a charge to income in the period in which the impairment is
deemed to be other than temporary.

In June 2001, the Company signed an exclusive original equipment
manufacturer agreement with Qualigen, Inc., pursuant to which the Company will
distribute Qualigens 15 minute PSA test known as the FastPack System as part
of the Companys diagnostic workstation for urology which is currently under
development. The agreement has a term of five years and includes one year of
exclusivity with the option of four one-year extensions of exclusivity based
upon minimum purchase commitments. In September 2001, the Company entered into
a new expanded distribution agreement with Qualigen, Inc. Under this new
agreement, the Company will non-exclusively sell Qualigens FDA-cleared 15-minute total
prostate-specific antigen test as a stand alone product directly to urology practices.

In June 2001, the Company issued 213,010 shares of its 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 the Companys Cryocare Surgical System and associated disposable products in
16 states. U.S. Medical Devices (USMD) 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,
net in the accompanying consolidated balance sheet at December 31, 2001 and is
carried using the cost method of accounting. The Company has recognized sales
of $645,000 and $1,849,397 to USMD for the quarters ended
March 31, 2001 and
March 31, 2002, respectively. As of March 31, 2002, USMD
accounted for approximately $2,304,397 of net accounts receivable.

In September 2001, the Company entered into a strategic alliance with
CryoCath Technologies, Inc. pursuant to an exclusive global market access and
supply agreement, whereby CryoCath Technologies, Inc. and the Company 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.



|10. |  | Legal Proceedings
|--- |  | -----------------

The Company, in the normal course of business, is subject to various 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 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. The
Company does
not expect any material adverse effect on its consolidated financial condition
or the results of operations because of such actions.



|11. |  | Major Customers and Concentration of Credit Risk
|--- |  | ------------------------------------------------

The Company currently operates in one industry segment  the design,
manufacture and marketing of surgical devices and related procedures to treat
prostate diseases. The Company markets and sells its devices worldwide to
distributors of medical devices and directly to hospitals and other medical
professional organizations.

10



---



##### Table of Contents



Customer credit may be extended based upon evaluation of the customers
financial condition. The Company maintains reserves for credit losses, and
Company management considers such reserves to be adequate based upon historical
experience. International shipments are billed and collected by the Company in
U.S. dollars.

During the three months ended March 31, 2002, one customer accounted for
24% of the Companys total revenues compared to 23% for the
three months ended March 31, 2001. As of March 31, 2002, one customer
accounted for approximately 23% of net accounts receivable. By significant
geographic area, approximately 6% and 94% and 5% and 95% of revenues were from foreign
countries and the United States, respectively, for the three months ended March
31, 2002 and March 31, 2001 respectively.



|12. |  | Related Party Transactions
|--- |  | --------------------------

Loans to Officers and Employees

In November 1999, the Company received a full recourse promissory note for
$1,028,125 in connection with the sale of 175,000 shares of its common stock at
the fair market value on the date of sale to Jerry W. Anderson, its former
Senior Vice President, Sales and Marketing and current President of Advanced
Medical Procedures, Inc., its wholly owned subsidiary. The note bears interest
at 5.99% per annum, compounded semi-annually. Accrued and unpaid interest is
payable annually each September and the principal is due and payable in one
lump sum in September 2003. The amount outstanding under this note as of March
31, 2002 was $1,185,420, including principal and interest.

In March 2001, the Company received full recourse promissory notes from
other officers and employees totaling $149,800 due March 2003. These notes
bear interest at above market rates, payable in one lump sum in March 2003.
The amount outstanding under these notes as of March 31, 2002 was $157,137,
including principal and interest.







11



---



##### Table of Contents








|ITEM 2. |  | 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
Results of Operations contained in the Annual Report on Form 10-K for the
fiscal year ended December 31, 2001.

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 the Trading Price of our 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; risks associated with integrating the Timm
Medical business into our existing business operations; uncertainty regarding
market acceptance of our current and new products; uncertainty of product
development and the associated risks related to clinical trials; uncertainty
regarding the levels of third-party reimbursement for our products; and our
limited sales, marketing and manufacturing experience. 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.

Overview

We are a medical device company focused on developing, manufacturing and
selling urological healthcare products with the potential to dramatically
improve mens health and quality of life. Our primary focus is on the
diagnosis, management and treatment of the two most common diseases of the
prostate, prostate cancer and benign prostate hyperplasia, or BPH. Our
FDA-cleared Cryocare Surgical System occupies a leading position in the market
for the cryosurgical treatment of prostate cancer. We are currently developing
a urologic stent, the Horizon Prostatic Stent, for the treatment of BPH. In
February 2002, we significantly expanded our urological product offerings by
acquiring Timm Medical Technologies, Inc., or Timm Medical. Through this
acquisition, we now own or have marketing rights for an additional product used
in the treatment of BPH, five products used in the diagnosis and treatment of
erectile dysfunction, six products used in the diagnosis and management of
urinary incontinence and one product used in the diagnosis of bladder cancer.
This acquisition also increased our sales and marketing organization from 26 to
approximately 80 people, including 55 field sales representatives. Our
strategy is to increase sales of our current products through targeted sales
and marketing efforts, to continue to develop and obtain regulatory approval
for our Horizon Prostatic Stent, and to develop and acquire additional products
in urology that leverage our existing sales and marketing organization.

Our 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 direct 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 $9.3 million in 1999,
$12.4 million in 2000 and $5.9 million in 2001. We achieved our first
profitable quarter for the three months ended March 31, 2002 by receiving
approximately $166,000 in net income. As of March 31, 2002, we had an
accumulated deficit of $37.9 million. We expect our operating expenses to
increase as we expand our sales and marketing efforts and continue to develop
new products.

12



---



##### Table of Contents



Critical Accounting Policies

We believe the following critical accounting policies affect our more
significant judgment and estimates used in the preparation of our consolidated
financial statements.

Revenue Recognition. During the quarter ended March 31, 2002, we
generated revenues primarily from sales of our Cryocare Surgical System units
and from the recurring sales of our disposable cryoprobes. We recognize
revenues, including revenues from sales to distributors, upon shipment for
sales of system units and disposable cryoprobes, provided acceptance is assured
and collectibility is probable. 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 a fee relating to each use of the Cryocare
Surgical System unit, which we recognize as revenue 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.

Sales Returns and Warranty Accruals.We generally do not permit returns
except for defective products identified within one year. Accordingly, we
establish a liability for warranty repairs based on historical analysis of the
cost for the repairs. However, our future returns on defective products and
related warranty liability could differ significantly from historical patterns,
which would adversely affect our operating results.

Allowance for Doubtful Accounts.Accounts receivable are presented net of
an allowance for doubtful accounts. The allowance for doubtful accounts is
determined through a specific identification process whereby management
assesses the collectibility of receivables based in part on the financial
condition of the client.

Investments.We have both marketable and non-marketable equity
investments. We classify our marketable equity investments as
available-for-sale securities with net unrealized gains or loss recorded as a
component of accumulated other comprehensive loss. The non-marketable equity
investments represent investments in other medical technologies or strategic
alliances and are recorded at cost and are evaluated periodically for
impairment. Non-marketable equity investments are evaluated
for impairment through a review of the financial position and operating results
of the investee. If it is determined that a decline of a
non-marketable investment is other
than temporary, then the investment basis would be written down to fair value
and the write-down would be included in operations as a loss. If it
is determined that a decline of a marketable investment is other than
temporary, the amount recorded as other comprehensive loss would be
charged to operations as a loss.

Use of Estimates.The preparation of our financial statements in
conformity with accounting principles generally accepted in the United States
of America requires our 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 revenues and expenses during
the reporting period. Our actual results could differ materially from those
estimates as a result of selected factors, including those set forth under
Factors that may Affect Our Future Results and the Trading Price of Our Common
Stock set forth below.

Inventories:Inventories are stated at the lower of cost or market, cost
being determined on the first-in, first-out method. Reserves for slow moving
and obsolete inventories are provided based on historical experience and
product demand. We have only recently begun the commercialization of our
products and have limited experience in assessing obsolescence. We evaluate the
adequacy of these reserves periodically based on forecasted sales and market
trends.

Reimbursement

We
sell our Cryocare Surgical System and related disposable guidewires and
cryoprobes to hospitals and other entities that provide services to hospitals.
Most procedures involving the Cryocare Surgical System are performed in
hospitals on an inpatient basis. While occasional patients pay for cryosurgical
procedures, virtually all patients depend upon third party payors, including
Medicare, Medicaid, Tricare and other federal healthcare programs, as

13



---



##### Table of Contents



well as private insurers to pay for their procedures. Accordingly, our
revenue is dependent upon third party reimbursement.

Reimbursement for cryosurgical procedures using our products as a primary
treatment alternative for localized prostate cancer began July 1999. Effective
July 2001, Medicare coverage was approved for secondary cryosurgical treatment
of prostate cancer patients who have failed radiation therapy.

When Medicare reimbursed services are provided on an inpatient basis, the
hospital is reimbursed under the Medicare prospective payment system, based on
the applicable diagnosis related group, or DRG. A single payment covers all
facility services, including the cost of cryosurgical supplies.

Outpatient reimbursement for cryosurgical procedures for Medicare
beneficiaries is in accordance with the newly effective Hospital Outpatient
Prospective Payment System, or HOPPS. Under HOPPS, reimbursement is made on a
per procedure basis. The physician is paid a professional fee and the hospital
receives payment for the technical portion of the fee. The hospitals technical
fee includes the per procedure share of the cost for any depreciable equipment,
such as our Cryocare Surgical System unit, and the provision of disposable
devices, such as our guidewires and cryoprobes. The reimbursement to the
hospital for the technical portion of the cryosurgical procedure increased 45%
effective April 1, 2002, from $1,900 to $2,750.

Medicare makes additional payments to hospitals when certain qualifying
new medical devices are used to perform a procedure or service on a program
beneficiary on an outpatient basis. As a result, these pass-through payments
help to compensate hospitals for the additional costs of utilizing new
technology in treating Medicare beneficiaries. Our guidewires and cryoprobes
are currently paid on a pass-through basis.

Two statutory expenditure control mechanisms, however, limit overall
program payments that can be made on a pass-through basis for qualifying
medical devices, and, as such, also limit actual item-specific payments to
hospitals using qualifying devices. The more significant among these two
mechanisms caps the aggregate Medicare payments that may be made on a
pass-through basis for eligible items for a given year. The Centers for
Medicare and Medicaid Services, or CMS, did not implement these adjustments in
2000 and 2001, because it could not accurately project overall expenditures
under the pass-through provisions. CMS did implement these adjustments
in April 2002. Commencing April 1, 2002, the pro rata reduction in pass-through
payments for eligible devices is 63.6%. As such, payments to hospitals for
calendar year 2002 have been reduced by this percentage beginning April 1, 2002.
It is possible that the pro rata reduction in pass-through payments for
eligible devices will increase beyond 63.6% beginning in calendar year 2004.

Items qualifying for pass-through payment continue to be eligible for at
least two, but not more than three years. After a temporary payment period
expires for an item, its cost is packaged with the relative procedure code or
medical visit and assigned to the APC group that is clinically related and
comparable in resources used. At such time, the APC groupings, weights and
payments are updated to include costs associated with former pass-through
items. We have no assurance that once pass-through status for our guidewires
and cryoprobes ends and CMS sets an all inclusive technical fee for
cryosurgery, total reimbursement will remain at levels to adequately compensate
hospitals. If overall Medicare reimbursement to hospitals is reduced, it is
likely that we would have to reduce our charges to hospitals for the equipment
and devices. This could have a material adverse effect on our revenues.

We are in discussions currently with CMS to ensure that correct data is
utilized when CMS incorporates the pass-through payments for our guidewires and
cryoprobes into the technical fee paid to the hospital for the cryosurgery
procedure. We have been asked by CMS to submit data demonstrating the
hospitals costs to perform cryosurgery on an outpatient basis. To date, no
resolution has been reached regarding the final technical payment to the
hospital.

The items we acquired through our acquisition of Timm Medical also are
reimbursed by Medicare and other federal healthcare programs, as well as
private insurers. Timm Medical provides certain items pursuant to physicians
orders directly to patients, and bills the patient or payor. Consequently, Timm
Medicals business, unlike the other elements of Endocares business, involves
dealing directly with Medicare and other payors, and would be

14



---



##### Table of Contents



directly impacted by any changes in either coverage policies or
reimbursement amounts adopted by Medicare or other payors. An initial
reimbursement rate for the Thermoflex System was established in January 2002.

Costs and Expenses

Cost of revenues consists primarily of:



| |  |  | costs relating to the manufacture of our products;                        
| | - |  | --------------------------------------------------------------------------
|
| |  |  | 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 and obtaining and maintaining regulatory approval for our products;
|
| |  |  | 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 Months Ended March 31, 2002 Compared to Three Months Ended March 31,
2001

Revenues. Revenues for the quarter ended March 31, 2002 increased 182% to
$7,773,000 compared to $2,756,000 in 2001. The increase in revenues was
attributable to an increase in sales of our Cryocare Surgical System units and
disposable cryoprobes. In addition, products we acquired or obtained a right
to distribute from Timm Medical contributed revenues of $1,789,000 in the
quarter ended March 31, 2002.

Cost of Revenues. Cost of revenues for the quarter ended March 31, 2002
increased 135% to $2,761,000 from $1,174,000 in 2001. The increase in cost of
revenues resulted primarily from an increase in the cost of manufacturing an
increased number of Cryocare Surgical System units and disposable cryoprobes
sold during the first quarter of 2002, partially offset by a reduction in the
per unit production costs of our products due to increased manufacturing
efficiencies. In addition, costs related to the manufacture and sale of the
products we acquired or obtained a right to distribute from Timm Medical
contributed $654,000 to the cost of revenues for the quarter ended March 31,
2002.

Gross
Margins. Gross margins on revenues increased to 65% for the quarter
ended March 31,2002 compared to 57% in 2001. The increase in gross margins on
revenues is due primarily to our shift to sales of our

15



---



##### Table of Contents



Cryocare Surgical System units from our prior placement program, sales of
products we acquired or obtained a right to distribute from Timm Medical and a
reduction in product costs due primarily to increased manufacturing
efficiencies.

Research and Development Expenses. Research and development expenses for
the quarter ended March 31, 2002 increased 5% to $948,000 compared to $903,000
in 2001. The increase was primarily attributable to hiring additional
personnel, increased spending on product development efforts and clinical costs
associated with our Horizon Prostatic Stent and increased product development
costs related to our strategic alliance with CryoCath Technologies Inc. As a
percentage of sales, research and development expenses decreased from 33% in
the year 2001 to 12% in 2002.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the quarter ended March 31, 2002 increased 39% to
$4,215,000 compared to $3,024,000 in 2001. This increase reflects increased
sales and marketing costs and an increase in our direct sales and marketing
personnel and costs associated with our increased sales force following the
Timm Medical acquisition. As a percentage of sales, selling, general and
administrative expenses decreased from 110% in the first quarter of 2001 to 54%
in first quarter of 2002.

Interest Income, Net. Interest income, net for the
quarter ended March 31, 2002 was $316,000 compared to $3,000 in 2001. The
change was due to the reduction of interest expense associated with the
reduction of debt in 2001 and increased cash balances following our secondary
public offering.

Net Income ( Loss). Net income for the quarter ended March 31, 2002 was
$166,000 or $0.01 per share on 22,163,000 weighted average shares outstanding,
compared to a net loss of ($2,342,000), or ($0.15) per share on 15,154,000
weighted average shares outstanding for the same period in 2001. The net income
compared to net loss resulted from higher revenues, improved margins and
increased interest income partially offset by higher selling, general and
administrative expenses and increased research and development expenses.

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 securities, loans that
were subsequently converted into equity securities, the use of short-term and
long-term debt, a public offering of equity securities and sales to customers.
At March 31, 2002, we had cash and cash equivalents of $70,147,000 compared to
$83,239,000 at December 31, 2001.

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. Of the debentures converted in
2000 and 2001, an additional 38,861 and 17,622 shares, respectively, were
issued as interest representing a rate of 7%.

On November 21, 2001, we closed a public offering of 4,000,000 shares of
our common stock at a price of $17.00 per share. On December 4, 2001, we sold
an additional 600,000 shares of our common stock at the public offering price
of $17.00 per share upon exercise of the over-allotment granted to the
underwriters in the public offering. We raised $78.2 million in proceeds
through the public offering before deducting commissions and offering expenses
of $5.6 million.

Cash Used in Operations. Net cash used in operating activities was
$3,131,000 for the three months ended March 31, 2002 compared to
$3,933,000 for the three months ended March 31, 2001. For the period, net cash
used in operating activities resulted primarily from increases in accounts
receivable, inventories and prepaid expenses and decreases in
accrued compensation and accrued liabilities offset by an increase in
trade accounts payable. In conjunction with the increased
sales of our Cryocare Surgical System and related disposable

16



---



##### Table of Contents



cryoprobes and the Timm Medical product line,
inventories increased to
$4,276,000 at March 31, 2002 compared to $2,416,000 at December 31, 2001, and
net accounts receivable increased to $9,927,000 at March 31, 2002 compared to
$5,734,000 at December 31, 2001. The increase in net accounts
receivable was due primarily to increased sales of the Cryocare
Surgical System and related disposable cryoprobes and the Timm
Medical product line. The Companys current liabilities increased to
$7,566,000 at March 31, 2002 compared to $3,421,000 at December 31, 2001.

Investing Activities. Net cash used in investing activities was
approximately $10,473,000 for the three months ended March 31,
2002 compared to $57,000 for the period ended March 31, 2001. The net
cash used in investing activities was due primarily to the Timm Medical
acquisition and additions to property and equipment and leasehold improvements.

Cash Provided by Financing Activities. Net cash provided by financing
activities was approximately $512,000 for the three months ended March 31,
2002 compared to $277,000 for the period ended March 31, 2001. The net cash provided by financing activities was primarily attributable
to exercise of options and warrants.

Working Capital. Our working capital decreased to $78.0 million at March
31, 2002 from $88.8 million at December 31, 2001. The decrease in working
capital was due to cash paid in the Timm Medical acquisition and by our use of
cash in operations and higher current liabilities.

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. 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 current ownership
percentage to 2% and our potential maximum ownership percentage to
approximately 22% on a fully-diluted basis. The investment is included in
investments, intangible and other assets, net in our consolidated balance
sheets as of March 31, 2002 and December 31, 2001, and is reflected at cost as
we do not have significant influence over the operations of Sanarus.

In September 2000, we invested $250,000, representing approximately
833,000 shares of common stock, in Medical Resources Management, Inc., or MRM.
In July 2001, these shares were converted into approximately 308,000 shares of
common stock of Emergent Group, Inc., upon its acquisition of MRM as a wholly
owned subsidiary. The investment in MRM is included in Investments, intangible
and other assets, net in our balance sheets as of March 31, 2002 and December
31, 2001 in accordance with SFAS 115 as an available for sale
investment. During the quarter ended
March 31, 2002, we reflected a temporary decline in the value of $250,000 which is included
in Stockholders Equity as Accumulated Other Comprehensive Loss. We
monitor our investments for other than temporary declines in
value which should
be included in earnings as a loss. We will continue to
monitor this investment and should the investment show no signs of market
recovery, we will record a charge to income in the period in which
the impairment is deemed to be other than temporary.

In June 2001, we signed an exclusive original equipment manufacturer
agreement with Qualigen, Inc., pursuant to which we will distribute Qualigens
15 minute PSA test known as the FastPack System as part of our diagnostic
workstation for urology which is currently under development. The agreement has
a term of five years and includes one year of exclusivity with the option of
four one-year extensions of exclusivity based upon minimum purchase
commitments. In September 2001, we entered into a new expanded distribution
agreement with Qualigen, Inc. Under this new agreement, we will non-exclusively sell Qualigens
FDA-cleared 15-minute total prostate-specific antigen test as a stand alone
product, directly to urology practices.

In June 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. The investment in U.S. Therapies is included in Investments,
intangible and other assets, net in our balance sheet as of March 31, 2002 and
December 31, 2001 using the cost method of

17



---



##### Table of Contents



accounting. Sales to U.S. Medical Devices accounted for approximately 24%
of our revenues for the three-month period ended March 31, 2002.

In March 2002, we completed the acquisition of Timm Medical for a purchase
price of approximately $10.8 million in cash and 1,620,530 shares of our common
stock. Pursuant to the acquisition agreement, we plan to register the shares of
common stock issued in the acquisition in May 2002.

We expect increased sales and marketing expenses related to the promotion
of our Cryocare Surgical System and the urological products we acquired or
obtained a right to market through our acquisition of Timm Medical, increased
expenses related to developing and obtaining regulatory approval for 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, our ability to successfully
integrate the operations of Timm Medical into our business, including its sales
and marketing personnel, market acceptance of the products we acquired from
Timm Medical, 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 potential future
merger and acquisition activity. We believe that our current cash balances,
together with the revenue to be derived from sales of our products, 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 with no
outstanding balance. 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 do raise additional equity financing, our
stockholders will be further diluted. 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.

FACTORS THAT MAY AFFECT OUR FUTURE RESULTS
AND THE TRADING PRICE OF OUR COMMON STOCK

We have a limited operating experience and a history of net losses, and we may
not maintain or increase profitability.

Since our inception, we have engaged primarily in research and development
activities, and have minimal experience in manufacturing, marketing and selling
our Cryocare Surgical System in commercial quantities. In addition, we recently
closed our acquisition of Timm Medical in March 2002. As a result, we have a
short history in marketing and selling the products we acquired or have rights
to commercialize through our acquisition of Timm Medical. Although we recorded
net income of approximately $166,000 for the three months ended March 31, 2002,
we have incurred annual operating losses each year since our inception. For the
fiscal years ended December 31, 1999, 2000 and 2001, we had net operating
losses of approximately $9.3 million, $12.4 million and $5.9 million,
respectively. As of March 31, 2002, our accumulated deficit was approximately
$37.9 million. It is possible that we will not generate sufficient revenues
from product sales to maintain or increase our profitability. Even if we do
achieve significant revenues from our product sales, we expect to incur
increased operating expenses over the next several quarters, as we, among other
things:



| |  |  | expand our selling and marketing activities as we attempt to
gain market share for our Cryocare Surgical System and our other
urology products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | incur costs related to the integration of Timm Medical into
our business;                                                                      

18



---



##### Table of Contents





| |  |  | increase our research and development efforts to improve our
existing products and develop new products such as our development
of the Horizon Prostatic Stent; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | perform clinical research and trials in an effort to obtain
governmental clearance and approval for the commercial sale of our
Horizon Prostatic Stent.            

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

We recently acquired Timm Medical, and face risks associated with integrating
this business into our existing business operations.

We closed the acquisition of Timm Medical in March 2002, and we are in the
process of integrating the operations, personnel and products of Timm Medical
into our business. The integration of Timm Medicals business involves numerous
risks and expenses, including, among others, difficulties and expenses incurred
in assimilating Timm Medicals operations, personnel and products, difficulties
in operating a new business and marketing new products, difficulties in
training sales personnel to effectively sell new products, the diversion of
managements attention from other business concerns and the potential loss of
key employees from both Timm Medical and Endocare. In addition, Timm Medicals
business may suffer as the attention of both its management and employees are
diverted during the integration process. If we do not successfully integrate
and grow the business we acquired from Timm Medical, our business will suffer.

We expect to derive a significant portion of our future revenues from our
Cryocare Surgical System, which could fail to achieve market acceptance or
generate significant revenue.

We introduced our Cryocare Surgical System to the market in July 1999. We
derived a significant portion of our revenues in the fiscal year ended December 31,
2001 and for the three-months ended March 31, 2002 from sales of Cryocare
Surgical Systems and related disposable supplies. We expect that sales of
Cryocare Surgical Systems and related disposable supplies will constitute a
significant portion of our sales for the foreseeable future. Accordingly, our
success is reliant on the acceptance by doctors and patients of the Cryocare
Surgical System as a preferred treatment for prostate cancer. 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 gave cryosurgical
treatment a bad reputation. Now that ultrasound guidance and temperature
sensing are available for more precise monitoring in our Cryocare Surgical
System, we will need to overcome this reputation to obtain market acceptance
for our product. In addition, use of our Cryocare Surgical System requires
significant physician education and training. As a result, we may have
difficulty obtaining recommendations and endorsements of physicians and
patients for our Cryocare Surgical System. We may also have difficulty raising
the brand awareness necessary to generate interest in our Cryocare Surgical
System. Any adverse side effects, including impotence or incontinence,
recurrence of cancer or future reported adverse events or other unfavorable
publicity involving patient outcomes from the use of cryosurgery, whether from
our products or the products of our competitors, could adversely affect
acceptance of cryosurgery. In addition, emerging new technologies and
procedures to treat cancer, prostate enlargement and other prostate disorders
may negatively affect the market acceptance of cryosurgery. If our Cryocare
Surgical System does not achieve market acceptance, we will likely remain
unprofitable.

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

19



---



##### Table of Contents



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 before obtaining necessary regulatory or
reimbursement approvals. In addition, our competitors may succeed in developing
commercially viable products that render our products obsolete or less
attractive. 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, healthcare providers, such as hospitals and
physicians, that purchase our products 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 on reimbursement for our products and procedures in which our
products are used. 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 healthcare 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 cryosurgical 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. For calendar years 2002 and 2003, federal law caps the
total cost of pass-through payments to 2.5% of expenditures for hospital
outpatient services for the year. The cap is set at 2.0% for calendar year 2004
and each year thereafter.

This statutory limit on pass-through payments, first implemented by CMS
for calendar year 2002, will result in a pro rata reduction in pass-through
payments for calendar year 2002 of 63.6%. This means that payments to hospitals
for our disposable products used in outpatient procedures in calendar year 2002
will be reduced by this percentage. It is possible that this pro rata reduction
in pass-through payments for eligible devices will increase beyond 63.6%
beginning in calendar year 2004, when the applicable percentage is reduced from
2.5% to 2.0%. These reductions in Medicare payment will likely affect our
charges to hospitals and resulting revenues.

We have no assurance that once pass-through status for our disposable
guidewires and cryoprobes for cryoblation ends and CMS sets an all inclusive
technical fee, total reimbursement will not be further reduced. Private
healthcare payors are also expected to incorporate the costs of our products
into the overall cost of the procedures in which they are used, meaning that
there will no longer be separate, additional reimbursement for our disposable
products. This too may affect our charges to hospitals and resulting revenues.

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

Furthermore, 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

20



---



##### Table of Contents



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. (Nonetheless, we cannot and do not
promise you that we actually will experience any growth in the future.) We
recently experienced significant growth in our operations and number of
employees as a result of our acquisition of Timm Medical. This growth has
placed and 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 with our Cryocare Surgical
System and any failure to significantly expand sales of this product 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 Cryocare Surgical System in commercial quantities or on a nationwide basis.
We will face significant challenges and risks in training, managing and
retaining our sales and marketing teams, including managing geographically
dispersed efforts and adequately training our people in the use and benefits of
our Cryocare Surgical System. We may not be able to hire significant additional
personnel to create increased demand for our Cryocare Surgical System. In
addition, we have distribution arrangements, some of which are exclusive, for
the sale of our Cryocare Surgical System both domestically and internationally
and are dependent upon the sales and marketing efforts of our third-party
distributors. These distributors may not commit the necessary resources to
effectively market and sell our Cryocare Surgical System. If we are unable to
expand our sales and marketing capabilities, we may not be able to effectively
commercialize our Cryocare Surgical System.

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

During 2001, the United States and other international markets experienced
a significant economic downturn. In addition, the United States and other
countries suffered significant acts of hostility and terror. Such acts may
increase or prolong such negative economic conditions. The economic downturn
may impact our ability to maintain or increase profitability by negatively
affecting growth in demand for our products. There can be no certainty as to
the degree or severity of the duration of this downturn.

If our relationship with U.S.M.D., Ltd. is disrupted, our revenues could be
significantly reduced.

We have an exclusive distribution agreement with U.S.M.D., Ltd. For the
fiscal year ended December 31, 2001 and the three months ended March 31, 2002,
26% and 24% respectively, of our revenues were derived from sales made to
U.S.M.D., Ltd. As a result, our revenues are dependent in large part on
continued sales to this distributor. If sales to this distributor
were to be discontinued, our revenues could be materially and
adversely affected.

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
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

21



---



##### Table of Contents



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 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. 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. Also, even if we prevail in litigation, the litigation would be
costly in terms of management distraction as well as in money. In addition,
confidentiality agreements with our employees, consultants, customers, and key
vendors may not prevent the unauthorized disclosure or use of our technology.
It is possible that these agreements will be breached or that they will not be
enforceable in every instance, and that we will not have adequate remedies for
any such breach. Enforcement of these agreements may be costly and time
consuming. Furthermore, the laws of foreign countries may not protect our
intellectual property rights to the same extent as the laws of the United
States.

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

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

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 maintain profitability, or if we undertake or accelerate
significant research and development projects for new products or pursue
corporate acquisitions, we may need additional outside financing. We may raise
these additional funds by selling 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

22



---



##### Table of Contents



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 regulations and other
regulatory requirements in sufficient quantities and on a timely basis, while
maintaining product quality and acceptable manufacturing costs. We recently
moved our executive offices and manufacturing activities to a new facility in
Irvine, California. This new facility has not been inspected by the FDA or the
California Department of Health Services. We must obtain FDA approval prior to
manufacturing products in our new facility. Any failure or delay in obtaining
the necessary approvals may cause us to be unable to meet customer demand for
our products. If we fail to increase production volumes in a timely or
cost-effective manner or to maintain compliance with the FDAs Quality System
regulations or other regulatory requirements, once obtained, 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 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

23



---



##### Table of Contents



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 cripple 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 or even broader laws prohibiting referrals by any licensed
healthcare 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 have financial relationships with physicians
and physician-owned entities, which in turn have financial relationships with
hospitals and other providers of designated health services. Although we
believe that our financial relationships with physicians and physician-owned
entities, as well as the relationships between physician-owned entities that
purchase or lease our products and hospitals, are not in violation of
applicable laws and regulations, governmental authorities might take a contrary
position. If our financial relationships with physicians or physician-owned
entities or the relationships between those entities and hospitals were found
to be illegal, we and/or the affected physicians and hospitals could be subject
to civil and criminal penalties, including fines, exclusion from participation
in government and private payor programs and requirements to refund amounts
previously received from government and private payors. In addition, expansion
of our operations to new jurisdictions, or new interpretations of laws in our
existing jurisdictions, could require structural and organizational
modifications of our relationships with physicians, physician-owned entities
and others to comply with that jurisdictions laws.

24



---



##### Table of Contents



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. 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;
|
| |  |  | 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 seek to 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.

25



---



##### Table of Contents



As part of our strategy to expand our urology product offerings 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, and in March
2002, we closed the acquisition of Timm Medical. We cannot assure you that we
will be able to identify suitable acquisition opportunities in the future. In
addition, even if we do identify 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. We are not experienced in acquiring businesses or managing
facilities or operations in geographically distant areas. The failure to
successfully 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. 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 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;                                                                                                                            
|
| |  |  | 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
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.

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.

26



---



##### Table of Contents



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.






|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, accounts receivable, investments,
accounts payable and accrued liabilities. At March 31, 2002, the carrying
values of our financial instruments approximated their fair values. Although
there is not a readily available market value for our cost method and
available for sale investments,
in general we do not believe that the fair value of these investments would
significantly differ from the carrying value. We monitor our investments for other than
temporary declines in value which would be written down and included in
earnings as a loss. At March 31, 2002, the fair market value of our investment
in Medical Resources Management, Inc. is below its cost basis of $250,000.
During the quarter ended March 31, 2002, we reflected a temporary decline in
the value which is included in Stockholders Equity as Accumulated Other
Comprehensive Loss. We will continue to monitor this investment and should
the investment show no signs of market recovery, we will record a
charge to earnings.

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.

27



---



##### Table of Contents









PART II  OTHER INFORMATION



|ITEM 1. |  | Legal Proceedings
|------- |  | -----------------

The Company, in the normal course of business, is subject to various 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 its consolidated results of
operations or financial condition.

From time to time, the Company has received 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. The
Company does
not expect any material adverse effect on its consolidated financial condition
or the results of operations because of such actions.






|ITEM 2. |  | Changes in Securities
|------- |  | ---------------------

(c) On
March 25, 2002, the Company completed a merger with Timm Medical
under which Timm Medical became a wholly-owned subsidiary of the
Company. In connection with the merger, all outstanding shares of
capital stock of Timm Medical were exchanged for an aggregate of
1,620,530 shares of the Company's common stock and approximately
$10.8 million in cash. Such issuances were made pursuant to an
exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended. Under the merger documents, the
Company agreed to register these shares pursuant to a Form S-3, which
it intends to file in May 2002.






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

Not applicable.






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

None.






|ITEM 5. |  | Other Information
|------- |  | -----------------

None.






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



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

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|2.1(1)      |  | Agreement and Plan of Reorganization, dated February 21, 2002, by and among the Company,
Timm Medical Technologies, Inc., TMT Acquisition Corporation and certain stockholders of Timm Medical
Technologies, Inc. Certain schedules and other attachments to this exhibit were omitted.
The Company will furnish supplementally a copy of any omitted schedules or attachments to the
Commission upon request.

28



---



##### Table of Contents



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                
|           
|           
|           
|           
|2.2(2)      |  | Agreement and Plan of Merger, dated June 30, 1999, by and among the Company, Advanced
Medical Procedures, Inc., Advanced Medical Procedures, LLC, Gary M. Onik, M.D., Robert F.
Byrnes and Jerry Anderson. Schedules and other attachments to this exhibit were omitted.
The Company will furnish supplementally a copy of any omitted schedules or attachments to the
Commission upon request.
|           
|           
|           
|           
|3.1(2)      |  | Certificate of Amendment of Restated Certificate of Incorporation of the Company.                                                                                                                                                                                                                                                                                                              
|           
|           
|           
|           
|3.2(2)      |  | Certificate of Designation of Series A Junior Participating Preferred Stock of the Company.                                                                                                                                                                                                                                                                                                    
|           
|           
|           
|           
|3.3(2)      |  | Restated Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                         
|           
|           
|           
|           
|3.4(2)      |  | Amended and Restated Bylaws of the Company.                                                                                                                                                                                                                                                                                                                                                    



---

|*   |  | We have requested confidential treatment with respect to certain portions
of these documents.                 
|--- |  | --------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(1) |  | Previously filed on Form 8-K on March 5, 2002.                                                                
|   
|   
|   
|   
|(2) |  | Previously filed with our Registration Statement on Form S-3 filed on
September 20, 2001 and October 31, 2001.



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

The Company filed a Form 8-K on March 4, 2002 to report its execution of
an Agreement and Plan of Reorganization, dated as of February 21, 2002,
pursuant to which the Company acquired Timm Medical Technologies, Inc. The
Agreement and Plan of Reorganization and a press release regarding the
acquisition of Timm Medical were attached as exhibits to the Form 8-K.

29



---



##### Table of Contents






SIGNATURES

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

Date:
May 15, 2002

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







30