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

FORM 10-Q

(Mark One)

|   |                                                                                                                                                 
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------
|x  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002            
|  
|OR
|  
|o  | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM
          TO
          .

COMMISSION FILE NUMBER: 000-27212

ENDOCARE, INC.
(Exact Name of Registrant as Specified in Its Charter)

|                                  |  |                                      
|--------------------------------- |  | -------------------------------------
|DELAWARE
(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 No o; (2) Yes x No o.

The number of shares of the Registrants common stock, par value $.001 per
share, outstanding at August 1,
2002 was 24,279,229.





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TABLE OF CONTENTS



|                               |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | ITEM 1. Consolidated 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                    
|EXHIBIT INDEX                 
|Exhibit 2.3                   
|Exhibit 2.4                   
|Exhibit 99.1                  



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##### Table of Contents



Endocare, Inc.
Form 10-Q, Quarter Ended June 30, 2002

TABLE OF CONTENTS

|                               |                                                                                               |  |      |    | 
|------------------------------ | --------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                               |                                                                                               |  | Page
|                               |                                                                                               |  |     
|PART I  FINANCIAL INFORMATION |                                                                                               |  | 3    |   
|                               | ITEM 1. Consolidated Financial Statements                                                     |  |      | 3  | 
|                               | Condensed Consolidated Statements of Operations (Unaudited)                                   |  |      | 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 |  |      | 11 | 
|                               | ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                            |  |      | 26 | 
|PART II  OTHER INFORMATION    |                                                                                               |  | 27   |   
|                               | ITEM 1. Legal Proceedings                                                                     |  |      | 27 | 
|                               | ITEM 2. Changes in Securities                                                                 |  |      | 27 | 
|                               | ITEM 3. Defaults Upon Senior Securities                                                       |  |      | 27 | 
|                               | ITEM 4. Submission of Matters to a Vote of Security Holders                                   |  |      | 27 | 
|                               | ITEM 5. Other Information                                                                     |  |      | 28 | 
|                               | ITEM 6. Exhibits and Reports on Form 8-K                                                      |  |      | 28 | 
|SIGNATURE PAGE                 |                                                                                               |  | 30   |   

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PART I  FINANCIAL INFORMATION




ITEM 1. Consolidated Financial Statements




ENDOCARE, INC.Condensed Consolidated Statements of Operations
(Unaudited)

|                                    |                      |                                     |                          |                    |           |                    |            |                  |           |           |            |            |            |            |            |            |           |            |        | 
|----------------------------------- | -------------------- | ----------------------------------- | ------------------------ | ------------------ | --------- | ------------------ | ---------- | ---------------- | --------- | --------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | --------- | ---------- | ------ | 
|                                    |                      |                                     |                          |                    |           | Three Months Ended |            | Six Months Ended
|                                    |                      |                                     |                          |                    |           | June 30,           |            | June 30,        
|                                    |                      |                                     |                          |                    |           |                    |            |                 
|                                    |                      |                                     |                          |                    |           | 2002               |            | 2001             |           | 2002      |            | 2001      
|                                    |                      |                                     |                          |                    |           |                    |            |                  |           |           |            |           
|Revenues                            |                      | $                                   | 11,378,006               |                    |           | $                  | 3,537,849  |                  |           | $         | 19,151,070 |            |            | $          | 6,293,436  |           
|Costs and expenses:                 |                      |                                     |                          |                    |           |                    |            |                  |           |           |            |            |            |            |            |           
|                                    |                      | Cost of revenues                    |                          |                    | 3,437,194 |                    |            |                  | 1,272,403 |           |            |            | 6,197,949  |            |            |            | 2,446,293 |           
|                                    |                      | Research and development            |                          |                    | 1,041,191 |                    |            |                  | 923,445   |           |            |            | 1,989,058  |            |            |            | 1,826,264 |           
|                                    |                      | Selling, general and administrative |                          |                    | 5,808,809 |                    |            |                  | 3,440,374 |           |            |            | 10,023,441 |            |            |            | 6,464,494 |           
|                                    |                      |                                     |                          |                    |           |                    |            |                  |           |           |            |            |            |            |            |           
|                                    |                      |                                     | Total costs and expenses |                    |           | 10,287,194         |            |                  |           | 5,636,222 |            |            |            | 18,210,448 |            |            |           | 10,737,051 |       
|                                    |                      |                                     |                          |                    |           |                    |            |                  |           |           |            |            |            |            |            |           
|Income (loss) from operations       |                      |                                     | 1,090,812                |                    |           |                    | (2,098,373 | )                |           |           | 940,622    |            |            |            | (4,443,615 | )         
|Other income (expense):             |                      |                                     |                          |                    |           |                    |            |                  |           |           |            |            |            |            |            |           
|                                    | Interest income, net |                                     |                          | 327,244            |           |                    |            | 34,467           |           |           |            | 643,407    |            |            |            | 37,541     |          
|                                    | Loss on investment   |                                     |                          | (250,000           | )         |                    |            |                 |           |           |            | (250,000   | )          |            |            |           |          
|                                    |                      |                                     |                          |                    |           |                    |            |                  |           |           |            |            |            |            |            |           
|                                    |                      |                                     |                          | Total other income |           |                    | 77,244     |                  |           |           | 34,467     |            |            |            | 393,407    |            |           |            | 37,541 | 
|Income (loss) before taxes          |                      |                                     | 1,168,056                |                    |           |                    | (2,063,906 | )                |           |           | 1,334,029  |            |            |            | (4,406,074 | )         
|Provision for income taxes          |                      |                                     | (33,500                  | )                  |           |                    |           |                  |           |           | (33,500    | )          |            |            |           |           
|                                    |                      |                                     |                          |                    |           |                    |            |                  |           |           |            |            |            |            |            |           
|Net income (loss)                   |                      | $                                   | 1,134,556                |                    |           | $                  | (2,063,906 | )                |           | $         | 1,300,529  |            |            | $          | (4,406,074 | )         
|                                    |                      |                                     |                          |                    |           |                    |            |                  |           |           |            |            |            |            |            |           
|Net loss per share of common stock: |                      |                                     |                          |                    |           |                    |            |                  |           |           |            |            |            |            |            |           
|                                    |                      | Basic                               |                          | $                  | .05       |                    |            | $                | (.13      | )         |            | $          | .06        |            |            | $          | (.29      | )         
|                                    |                      | Diluted                             |                          | $                  | .05       |                    |            | $                | (.13      | )         |            | $          | .05        |            |            | $          | (.29      | )         
|Weighted average common shares:     |                      |                                     |                          |                    |           |                    |            |                  |           |           |            |            |            |            |            |           
|                                    |                      | Basic                               |                          | 24,000,348         |           |                    |            | 15,601,688       |           |           |            | 23,081,773 |            |            |            | 15,379,381 |           |           
|                                    |                      | Diluted                             |                          | 25,177,964         |           |                    |            | 15,601,688       |           |           |            | 24,399,150 |            |            |            | 15,379,381 |           |           

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

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ENDOCARE, INC.
Condensed Consolidated Balance Sheets
(unaudited)

|                                              |                                                                                                                                                                    |                                            |            |             |             |              |           |             |            | 
|--------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ---------- | ----------- | ----------- | ------------ | --------- | ----------- | ---------- | 
|                                              |                                                                                                                                                                    |                                            |            | June 30,    |             | December 31,
|                                              |                                                                                                                                                                    |                                            |            | 2002        |             | 2001        
|                                              |                                                                                                                                                                    |                                            |            |             |             |             
|ASSETS                                       
|Current assets:                               |                                                                                                                                                                    |                                            |            |             |             |              |           |            
|                                              | Cash and cash equivalents                                                                                                                                          |                                            | $          | 45,723,372  |             |              | $         | 83,238,915  |           
|                                              | Short-term investments                                                                                                                                             |                                            |            | 17,267,875  |             |              |           | 35,928      |           
|                                              | Accounts receivable, net                                                                                                                                           |                                            |            | 11,347,866  |             |              |           | 5,733,563   |           
|                                              | Inventories                                                                                                                                                        |                                            |            | 5,285,229   |             |              |           | 2,415,744   |           
|                                              | Prepaid expenses and other current assets                                                                                                                          |                                            |            | 1,690,797   |             |              |           | 757,097     |           
|                                              |                                                                                                                                                                    |                                            |            |             |             |              |           |            
|                                              |                                                                                                                                                                    | Total current assets                       |            |             | 81,315,139  |              |           |             | 92,181,247 | 
|Property and equipment, net                   |                                                                                                                                                                    |                                            | 5,284,864  |             |             |              | 1,814,714 |            
|Goodwill                                      |                                                                                                                                                                    |                                            | 32,619,810 |             |             |              |          |            
|Investments, intangible and other assets, net |                                                                                                                                                                    |                                            | 12,677,410 |             |             |              | 4,037,981 |            
|                                              |                                                                                                                                                                    |                                            |            |             |             |              |           |            
|                                              |                                                                                                                                                                    | Total assets                               |            | $           | 131,897,223 |              |           | $           | 98,033,942 | 
|                                              |                                                                                                                                                                    |                                            |            |             |             |              |           |            
|LIABILITIES AND STOCKHOLDERS EQUITY         
|Current liabilities:                          |                                                                                                                                                                    |                                            |            |             |             |              |           |            
|                                              | Accounts payable                                                                                                                                                   |                                            | $          | 3,376,458   |             |              | $         | 1,260,214   |           
|                                              | Accrued compensation                                                                                                                                               |                                            |            | 1,332,957   |             |              |           | 1,334,168   |           
|                                              | Other accrued liabilities                                                                                                                                          |                                            |            | 1,209,901   |             |              |           | 826,119     |           
|                                              |                                                                                                                                                                    |                                            |            |             |             |              |           |            
|                                              |                                                                                                                                                                    | Total current liabilities                  |            |             | 5,919,316   |              |           |             | 3,420,501  | 
|                                              |                                                                                                                                                                    |                                            |            |             |             |              |           |            
|Stockholders equity                          |                                                                                                                                                                    |                                            |            |             |             |              |           |            
|                                              | Preferred stock, $.001 par value; 1,000,000 shares authorized; none issued
and outstanding at June 30, 2002 and December 31, 2001, respectively                    |                                            |            |            |             |              |           |            |           
|                                              | Common stock, $.001 par value; 50,000,000 shares authorized; 24,277,289
and 22,057,905 issued and outstanding at June 30, 2002 and December 31,
2001, respectively |                                            |            | 24,277      |             |              |           | 22,058      |           
|                                              | Additional paid-in capital                                                                                                                                         |                                            |            | 163,777,812 |             |              |           | 133,716,105 |           
|                                              | Receivables from stockholders                                                                                                                                      |                                            |            | (1,028,125  | )           |              |           | (1,028,125  | )         
|                                              | Accumulated deficit                                                                                                                                                |                                            |            | (36,796,057 | )           |              |           | (38,096,597 | )         
|                                              |                                                                                                                                                                    |                                            |            |             |             |              |           |            
|                                              |                                                                                                                                                                    | Total stockholders equity                 |            |             | 125,977,907 |              |           |             | 94,613,441 | 
|                                              |                                                                                                                                                                    |                                            |            |             |             |              |           |            
|                                              |                                                                                                                                                                    | Total liabilities and stockholders equity |            | $           | 131,897,223 |              |           | $           | 98,033,942 | 
|                                              |                                                                                                                                                                    |                                            |            |             |             |              |           |            

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

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ENDOCARE, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

|                                               |                                                                                                                    |                                                                                      |             |                  |         |      |            |            |         | 
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------ | ----------- | ---------------- | ------- | ---- | ---------- | ---------- | ------- | 
|                                               |                                                                                                                    |                                                                                      |             | Six Months Ended
|                                               |                                                                                                                    |                                                                                      |             | June 30,        
|                                               |                                                                                                                    |                                                                                      |             |                 
|                                               |                                                                                                                    |                                                                                      |             | 2002             |         | 2001
|                                               |                                                                                                                    |                                                                                      |             |                  |         |     
|Cash flows from operating activities:          |                                                                                                                    |                                                                                      |             |                  |         |      |            |           
|                                               | Net income (loss)                                                                                                  |                                                                                      | $           | 1,300,529        |         |      | $          | (4,406,074 | )      
|                                               |                                                                                                                    | Adjustments to reconcile net income (loss) to net cash
used in operating activities: |             |                  |         |      |            |            |         | 
|                                               |                                                                                                                    | Depreciation and amortization                                                        |             |                  | 615,089 |      |            |            | 196,460 | 
|                                               |                                                                                                                    | Amortization of warrant value                                                        |             |                  | 81,280  |      |            |            | 98,124  | 
|                                               |                                                                                                                    | Amortization of deferred financing costs                                             |             |                  |        |      |            |            | 89,937  | 
|Changes in operating assets and liabilities:   |                                                                                                                    |                                                                                      |             |                  |         |      |            |           
|                                               | Accounts receivable                                                                                                |                                                                                      |             | (4,868,287       | )       |      |            | (1,556,863 | )      
|                                               | Inventories                                                                                                        |                                                                                      |             | (1,155,882       | )       |      |            | (617,172   | )      
|                                               | Prepaid expenses and other current assets                                                                          |                                                                                      |             | (888,351         | )       |      |            | 38,656     |        
|                                               | Other assets                                                                                                       |                                                                                      |             | (203,070         | )       |      |            | (118,053   | )      
|                                               | Accounts payable                                                                                                   |                                                                                      |             | 1,154,035        |         |      |            | (233,861   | )      
|                                               | Accrued compensation                                                                                               |                                                                                      |             | (785,236         | )       |      |            | 176,119    |        
|                                               | Other accrued liabilities                                                                                          |                                                                                      |             | (846,373         | )       |      |            | (92,939    | )      
|                                               |                                                                                                                    |                                                                                      |             |                  |         |      |            |           
|Net cash used in operating activities          |                                                                                                                    |                                                                                      | (5,596,266  | )                |         |      | (6,425,666 | )         
|                                               |                                                                                                                    |                                                                                      |             |                  |         |      |            |           
|Cash flows from investing activities:          |                                                                                                                    |                                                                                      |             |                  |         |      |            |           
|                                               | Purchase of investment securities                                                                                  |                                                                                      |             | (17,231,947      | )       |      |            |           |        
|                                               | Acquisitions, net of cash acquired                                                                                 |                                                                                      |             | (12,970,027      | )       |      |            | (458,850   | )      
|                                               | Deposit for USMD acquisition                                                                                       |                                                                                      |             | (900,000)        |         |      |            |           |        
|                                               | Purchases of property and equipment (including assets for
placement of $1.4 million in 2002)                       |                                                                                      |             | (2,709,683       | )       |      |            | (117,054   | )      
|                                               |                                                                                                                    |                                                                                      |             |                  |         |      |            |           
|Net cash used in investing activities          |                                                                                                                    |                                                                                      | (33,811,657 | )                |         |      | (575,904   | )         
|                                               |                                                                                                                    |                                                                                      |             |                  |         |      |            |           
|Cash flows from financing activities:          |                                                                                                                    |                                                                                      |             |                  |         |      |            |           
|                                               | Borrowings under credit facility                                                                                   |                                                                                      |             |                 |         |      |            | 558,011    |        
|                                               | Issuance of common stock                                                                                           |                                                                                      |             | 1,892,380        |         |      |            | 354,805    |        
|                                               |                                                                                                                    |                                                                                      |             |                  |         |      |            |           
|Net cash provided by financing activities      |                                                                                                                    |                                                                                      | 1,892,380   |                  |         |      | 912,816    |           
|                                               |                                                                                                                    |                                                                                      |             |                  |         |      |            |           
|Net decrease in cash and cash equivalents      |                                                                                                                    |                                                                                      | (37,515,543 | )                |         |      | (6,088,754 | )         
|Cash and cash equivalents, beginning of period |                                                                                                                    |                                                                                      | 83,238,915  |                  |         |      | 22,016,448 |           
|                                               |                                                                                                                    |                                                                                      |             |                  |         |      |            |           
|Cash and cash equivalents, end of period       |                                                                                                                    | $                                                                                    | 45,723,372  |                  |         | $    | 15,927,694 |           
|                                               |                                                                                                                    |                                                                                      |             |                  |         |      |            |           
|Non-cash activities:                           |                                                                                                                    |                                                                                      |             |                  |         |      |            |           
|                                               | Convertible debentures and accrued interest converted to
common stock, net of unamortized deferred financing costs |                                                                                      | $           |                 |         |      | $          | 2,837,293  |        
|                                               | Common stock issued for the purchase of patents                                                                    |                                                                                      |             | 1,410,000        |         |      |            |           |        
|                                               | Forgiveness of recourse loan and compensation to employees                                                         |                                                                                      |             |                 |         |      |            | 81,747     |        
|                                               | Transfer of inventory to property and equipment for
placement
at customer site                                     |                                                                                      |             |                 |         |      |            | 42,930     |        
|                                               |                                                                                                                    |                                                                                      |             |                  |         |      |            |           
|Total non-cash activities                      |                                                                                                                    | $                                                                                    | 1,410,000   |                  |         | $    | 2,961,970  |           
|                                               |                                                                                                                    |                                                                                      |             |                  |         |      |            |           
|Fair value of net assets acquired:             |                                                                                                                    |                                                                                      |             |                  |         |      |            |           
|                                               | Intangible assets acquired                                                                                         |                                                                                      | $           | 5,694,000        |         |      | $          |           |        
|                                               | Tangible assets acquired, net                                                                                      |                                                                                      |             | 2,463,572        |         |      |            |           |        
|                                               | Costs in excess of net assets (goodwill)                                                                           |                                                                                      |             | 32,619,810       |         |      |            |           |        
|                                               |                                                                                                                    |                                                                                      |             |                  |         |      |            |           
|                                               | Fair value of assets acquired, net                                                                                 |                                                                                      | $           | 40,777,382       |         |      | $          |           |        
|                                               | Common stock and options issued                                                                                    |                                                                                      |             | (26,680,277      | )       |      |            |           |        
|                                               |                                                                                                                    |                                                                                      |             |                  |         |      |            |           
|                                               | Cash paid                                                                                                          |                                                                                      |             | 14,097,105       |         |      |            |           |        
|Less cash acquired                             |                                                                                                                    |                                                                                      | (1,127,078  | )                |         |      |           |           
|                                               |                                                                                                                    |                                                                                      |             |                  |         |      |            |           
|Net cash paid for acquisition                  |                                                                                                                    | $                                                                                    | 12,970,027  |                  |         | $    |           |           
|                                               |                                                                                                                    |                                                                                      |             |                  |         |      |            |           

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

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ENDOCARE, INC.
Notes to Condensed Consolidated Financial Statements

1. 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 and
effective in February 2002 and Cryomedical, Inc. in June 2002 in accordance
with SFAS Nos. 141 and 142.

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.

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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.

In July 2002, Statement of Financial Accounting Standards No. 146,
Accounting for Costs Associated with Exit or Disposal Activities, (SFAS No.
146) was issued and is effective for periods beginning after December 31, 2002.
SFAS No. 146 requires, among other things, that costs associated with an exit
activity (including restructuring and employee and contract termination costs)
or with a disposal of long-lived assets be recognized when the liability has
been incurred and can be measured at fair value. Companies must record in
income from continuing operations costs associated with an exit or disposal
activity that does not involve a discontinued operation. Costs associated with
an activity that involves a discontinued operation would be included in the
results of discontinued operations. The Company believes that the
implementation of the provisions of SFAS No. 146 will not have a material
effect on the Companys financial statements.

2. 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.

3. 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 1,620,530 shares of the Companys common stock with
an aggregate value of $23.8 million and approximately $10.8 million in cash.
The Company also issued stock options to purchase 168,172 shares of the
Companys common stock to employees of Timm Medical who accepted employment
with the Company, with an aggregate value of $1.4 million. The value of the options issued by
the Company was computed using an option pricing model. The primary purpose of the merger was to gain
access to Timm Medicals products, sales personnel and operations capacity. This transaction
was accounted for under the purchase method of accounting and, accordingly, the
consolidated financial statements of the Company for the three month and six
month periods ended June 30, 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.

The Company recorded goodwill of approximately $32.1 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 |  | $ | 37,083,382 |  
|Net assets acquired       |  |   | (4,963,572 | )
|                          |  |   |            |  
|Goodwill                  |  | $ | 32,119,810 |  
|                          |  |   |            |  

The following table presents unaudited pro forma results of operations for
the three month and six month periods ended June 30, 2002 and 2001 assuming the
acquisition occurred as of January 1, 2001:

|                                          |               |   |                             |            |                           |   |            |            |      |   |            |            |  |   |            |            | 
|----------------------------------------- | ------------- | - | --------------------------- | ---------- | ------------------------- | - | ---------- | ---------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                          |               |   | Three Months Ended June 30, |            | Six Months Ended June 30,
|                                          |               |   |                             |            |                          
|                                          |               |   | 2002                        |            | 2001                      |   | 2002       |            | 2001
|                                          |               |   |                             |            |                           |   |            |            |     
|Net revenues                              |               | $ | 11,378,000                  |            |                           | $ | 7,245,000  |            |      | $ | 20,750,000 |            |  | $ | 13,692,000 |           
|Net loss                                  |               | $ | 1,135,000                   |            |                           | $ | (2,532,000 | )          |      | $ | 990,000    |            |  | $ | (5,239,000 | )         
|Net loss per share, basic and diluted     |               | $ | 0.05                        |            |                           | $ | (0.15      | )          |      | $ | 0.04       |            |  | $ | (0.31      | )         
|Weighted average shares outstanding
Basic |               |   | 24,000,348                  |            |                           |   | 17,222,218 |            |      |   | 23,933,475 |            |  |   | 16,999,911 |           
|                                          | Fully diluted |   |                             | 25,177,964 |                           |   |            | 17,222,218 |      |   |            | 24,785,177 |  |   |            | 16,999,911 | 

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It was assumed, for the purposes of the pro forma results above, that 1,620,530
shares of common stock issued in connection with the acquisition were
outstanding as of January 1, 2001.

4. Other Acquisitions of Assets

On June 27, 2002, the Company completed the acquisition of the
cryosurgical business line and assets of Cryomedical Sciences, Inc. (OTC BB:
CRYM.OB) for $2.2 million in cash and 120,022 shares of common stock valued at
$1.5 million. This transaction was accounted for under the purchase method of
accounting. Due to the closing of the acquisition in late June, none of the
revenue, expenses or installed base metrics of the cryosurgical business
acquired from Cryomedical Sciences, Inc. will be included in the Companys
results for its second quarter ending June 30, 2002. The Companys is still
reviewing the allocation of the purchase price, but has, for the purposes of
these interim financial statements, allocated $3.2 million to intangible assets
consisting primarily of patents and customer lists, and $0.5 million to
goodwill.

In April, 2002, the Company acquired certain patents and a
consulting
arrangement related to its cryosurgical business by issuing 100,000 shares of
common stock valued at $1.4 million. The value of the acquired assets, which
are included in intangible assets, is being amortized over a useful life of 10
years.

5. Supplemental Financial Statement Data

|             |                 |                   |   |           |           |              |   |           |           | 
|------------ | --------------- | ----------------- | - | --------- | --------- | ------------ | - | --------- | --------- | 
|             |                 |                   |   | June 30,  |           | December 31,
|             |                 |                   |   | 2002      |           | 2001        
|             |                 |                   |   |           |           |             
|Inventories: |                 |                   |   |           |           |              |   |          
|             | Raw materials   |                   | $ | 2,479,883 |           |              | $ | 1,456,482 |          
|             | Work in process |                   |   | 404,879   |           |              |   | 501,687   |          
|             | Finished goods  |                   |   | 2,400,467 |           |              |   | 457,575   |          
|             |                 |                   |   |           |           |              |   |          
|             |                 | Total inventories |   | $         | 5,285,229 |              |   | $         | 2,415,744 | 
|             |                 |                   |   |           |           |              |   |          

6. 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 June 30, 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 was included in
Investments, intangible and other assets, net in our balance sheet as of
December 31, 2001 in accordance with SFAS 115 as an available for sale
investment. During the quarter ended June 30, 2002, the Company reflected a
decline in value of $250,000 which is included in the statement of operations
as a loss on investment, as we determined that the decline in value on this
investment was other than temporary. We monitor our investments for other than
temporary declines in value which should be written down and included in
earnings as a loss.

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

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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. Medical Development, Inc. (formerly, U.S. Therapies, LLC), equal to approximately 9% of the total
issued and outstanding Class A Units of U.S. Medical Development and approximately 5% of
the Class A Units on a fully-diluted basis. U.S. Medical Development is a national
urology group representing more than 150 urologists across the nation. In a
related Distributor Agreement, U.S.M.D. Ltd.,(formerly, U.S. Medical Devices, Ltd.), a subsidiary of U.S.
Medical Development, 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.M.D., Ltd. (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 U.S. Medical Development is included in Investments, intangible and other assets,
net in the accompanying consolidated balance sheet at June 30, 2002 and
December 31, 2001 and is carried using the cost method of accounting. The
Company has recognized sales of $1,000,000 and $1,310,000 to USMD for the
quarters ended June 30, 2002 and June 30, 2001, and $2,849,397 and $1,955,000
for the six months ended June 30, 2002 and June 30, 2001, respectively. As of
June 30, 2002, USMD accounted for approximately $1,275,000 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 would
co-develop a new, advanced line of surgical probe systems to surgically treat
cardiac arrhythmias. CryoCath will purchases the systems from Endocare and is
marketing them on a global basis under the CryoCath trademark, Surgifrost.

7. 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.

8. 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
urological disorders. The Company markets and sells its devices worldwide to
distributors of medical devices and directly to hospitals and other medical
professional organizations.

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 June 30, 2002, no customer accounted for
more than 10% of the Companys total revenues compared to one customer that
accounted for 37% for the three months ended June 30, 2001. During the six
months ended June 30, 2002, one customer accounted for 15% of the Companys
total revenues compared to

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31% for the six months ended June 30, 2001. As of June 30, 2002, one
customer accounted for approximately 11% of net accounts receivable. By
significant geographic area, approximately 95% of the Companys revenues were
from the United States for both the three month and six month periods ended
June 30, 2002 and June 30, 2001.

9. 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 June 30, 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 June 30, 2002 was $136,301,
including principal and interest.

10. Common Stock Repurchase Program

In June 2002, the Companys Board of Directors authorized a stock
repurchase program. Under the program, the Company may repurchase up to one
million shares of its common stock in the open market at then prevailing
prices. As of June 30, 2002, the Company had not repurchased any shares of
common stock under the program.

11. Net Earnings (Loss) Per Share

For the three and six
month periods ended June 30, 2001, the Company was in a
consolidated net loss position. Accordingly, the potential dilution
during these periods from the conversion of options, warrants and
convertible debentures to common stock of approximately 3,435,000 was
not used to compute diluted loss per share as the effect was
antidilutive. Consequently, diluted EPS equals basic EPS for the
fiscal 2001 periods.

12. Subsequent Events

The Company and
U.S. Medical Development, Inc., a privately held urology services company
based in Dallas, Texas, began discussions in March 2002 regarding the
Companys acquisition of the business of U.S. Medical
Development, Inc. and U.S.M.D., Ltd. and U.S.M.D. I, L.L.C., two
affiliates of U.S. Medical Development, Inc. (collectively, the
USMD Entities). U.S.M.D., Ltd. has been an exclusive
distributor of the Companys Cryocare Surgical System and
related disposable products to urologists located in 16 western
states and to HealthTronics Surgical Services, Inc. (Nasdaq: HTRN)
and its affiliates. Sales to U.S.M.D., Ltd. represented 9% and 37% of
the Companys revenues for the three months ended June 30, 2002
and 2001, respectively, and 15% and 31% of the Companys
revenues for the six months ended June 30, 2002 and 2001,
respectively.

During the course of
negotiations in July 2002, the Company loaned U.S. Medical
Development, Inc. $6.8 million, bearing interest at the prime
rate plus one percent and fully secured by partnership, limited
liability membership and other equity ownership interests in the
mobile prostate treatment businesses of the USMD Entities. The loan was
to be credited against the final purchase price paid by the Company
for the mobile prostate treatment businesses of the USMD Entities.
U.S. Medical Development, Inc. contemporaneously transferred the
entire $6.8 million of loan proceeds to acquire the general and
limited partnership interests in U.S. Lithotripsy, L.P., an
affiliate of USMD, owned by Litho Management, Inc., a wholly-owned
subsidiary of HealthTronics Surgical Services, Inc.

On August 12,
2002, the Company and the USMD Entities signed a definitive
Partnership and Limited Liability Company Membership Interest
Purchase Agreement (the Purchase Agreement), pursuant to
which the USMD Entities agreed to sell their mobile prostate
treatment businesses to the Company. Pursuant to the Purchase
Agreement, the Company will pay a total of approximately $11,210,000
in the form of cash of $3,330,000, assumption of debt of $180,000, forgiveness of the above described
debt of $6,800,000 and
application of a $900,000 earnest money deposit previously made by
the Company on April 2002. Upon closing, the exclusive distribution agreement
between the Company and U.S.M.D., Ltd. will terminate and the Company
will market its products directly to urologists previously served by
the USMD Entities. The Company will retain its approximately 5%
fully-diluted ownership interest in U.S. Medical Development,
Inc. (the parent company of the USMD Entities), which will continue
to independently operate its lithotripsy and orthotripsy businesses.
The transaction is expected to close within 30 days, and is
subject to customary closing conditions. The purchase price will be
funded from the Companys working capital. The consideration for
and the other terms and conditions of the asset purchase transaction
were determined by arms-length negotiations between the Company and
the USMD Entities. The Company has engaged a financial advisor to
provide a fairness opinion at closing. The description of the
transaction set forth above is qualified in its entirety by reference
to the Purchase Agreement and related documents that the Company
intends to file on Form 8-K.

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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with
the unaudited condensed consolidated financial statements and notes thereto
included in Part IItem 1 of this report, and the audited consolidated
financial statements, and notes thereto, and Managements Discussion and
Analysis of Financial Condition and Results of Operations contained in the
Annual Report on Form 10-K for the fiscal year ended December 31, 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 newly
acquired businesses 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. We also
acquired additional intellectual property assets related to our cryosurgical
business from Gary M. Onik, M.D. in April 2002 and Cryomedical Sciences in June
2002. 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 earning
approximately $166,000 in net income followed by approximately $1,135,000 for
the second quarter ended June 30, 2002. As of June 30, 2002, we had an
accumulated deficit of $36.8 million. We expect our operating expenses to
increase as we expand our sales and marketing efforts and continue to develop
new products.

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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 June 30, 2002, we generated
revenues primarily from sales of our Cryocare Surgical System units and from
the recurring sales of our disposable cryoprobes and erectile dysfunction
products. We recognize revenues, including revenues from sales to distributors,
upon shipment for sales of system units and disposable products, provided
acceptance is assured and collectibility is probable. In the second quarter, we
placed 21 of 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 placed Cryocare
Surgical System units are depreciated into cost of revenues over an estimated
useful life of three years. The Company periodically reviews the value of
these placed units for recoverability, based on projected cash flows
from the placed units.

Allowance for Doubtful Accounts and Warranty Claims. 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. For all other accounts receivable, we
record an allowance for doubtful accounts based on a combination of factors
including the age of receivable balances, historical bad debt experience,
general customer creditworthiness, and current economic trends. The
Company sells products to certain customers on payment terms of up to
180 days. At June 30, 2002 and December 31, 2001, approximately 32%
and 42%, respectively, of the Company's accounts receivable was aged
greater than 90 days since the date of sale. Based on its review of
these accounts, management believes its existing allowance for
doubtful accounts is adequate to cover any exposure on its existing
accounts receivable.

We accrue a liability for estimated warranty claims. The amount of the
accrual is based on historical claims by product group and other factors.
Claims could be materially different from actual results for a variety of
reasons, including a change in our warranty policy, competition or other
external forces, manufacturing changes that could impact product quality, or as
yet unrecognized defects in products sold. If future product quality standards
or policies are less favorable than current analyses, additional warranty
accruals may be required and would be reflected in cost of sales in the period
the revision is made.

Investments. We have both marketable and non-marketable equity
investments. We classify our marketable equity investments as
available-for-sale securities. 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 as an investment 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.

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\

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 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. In August 2002,
CMS proposed an increase in the technical component of 31% from
$2,750 to $3,601, effective January 1, 2003.

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. Commencing April 1, 2002, CMS
implemented a pro-rata reduction of 63.6% related to the pass-through payments
for eligible devices for the 2002. To date, no impact has been observed in
procedure volume as a result of this reduction. In August 2002, CMS
proposed to eliminate all, or a significant portion, of the April
2002 reduction, effective January 1, 2003.

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.

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                                              

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| |  |  | utilities and other facility expenses related to product development.
| | - |  | ---------------------------------------------------------------------

We expense research and development expenses when incurred. Our research
and development efforts are periodically subject to significant non-recurring
expenses and fees that can cause significant variability in our quarterly
research and development expenses.

Selling, general and administrative expenses primarily consist of:



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

Results of Operations

Three and Six Months Ended June 30, 2002 Compared to Three and Six Months
Ended June 30, 2001

Revenues. Revenues for the three months ended June 30, 2002 increased 222%
to $11,378,000 compared to $3,538,000 for the three months ended June 30, 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 approximately $4,000,000 in the quarter ended June 30,
2002.

Revenues for the six months ended June 30, 2002 increased 204% to
$19,151,000 compared to $6,293,000 in 2001. The increase is attributed to the
reasons stated above. In addition, products we acquired or obtained a right to
distribute from Timm Medical contributed revenues of approximately $5,835,000
for the six months ended June 30, 2002.

Cost of Revenues. Cost of revenues for the three months ended June 30,
2002 increased 170% to $3,437,000 compared to $1,272,000 for the three months
ended June 30, 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 second 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 approximately $1,448,000 to
the cost of revenues for the quarter ended June 30, 2002.

Cost of revenues for the six months ended June 30, 2002 increased 153% to
$6,198,000 compared to $2,446,000 in 2001. The increase is attributed to the
reasons stated above. In addition, costs related to the manufacture and sale
of the products we acquired or obtained a right to distribute from Timm medical
contributed approximately, $2,103,000 to the cost of revenues for the six
months ended June 30, 2002.

Gross Margins. Gross margins on revenues increased to 70% for the three
months ended June 30,2002 compared to 64% for the three months ended June 30,
2001. The increase in gross margins on revenues is due primarily to the company
reaching critical mass, operating in a new manufacturing facility as well as
reducing raw material costs and overall manufacturing efficiencies.

Gross margins on revenues for the six months ended June 30, 2002 increased
to 68% compared to 61% for the same period in 2001. The increase is due to the
reasons described above.

Research and Development Expenses. Research and development expenses for
the three months ended June 30, 2002 increased 13% to $1,041,000 compared to
$923,000 for the three months ended June 30, 2001. The increase was primarily
attributable to hiring additional personnel, increased spending on product
development

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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 revenues, research and
development expenses decreased from 26% in the year 2001 to 9% in 2002, due to
the combination of fairly consistent spending levels and a significant increase
in revenues.

Research and development expense for the six months ended June 30, 2002
increased 9% to $1,989,000 compared to $1,826,000 for the same period in 2001.
As a percentage of revenues, research and development expenses decreased from
29% to 10%. The variances are attributable to the reasons stated above.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 30, 2002 increased 69%
to $5,809,000 compared to $3,440,000 for the three months ended June 30, 2001.
This increase reflects increased sales and marketing costs, 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 revenues, selling, general and administrative expenses decreased from 97% in
the second quarter of 2001 to 51% in the second quarter of 2002, reflecting the
Companys ability to leverage its existing administrative infrastructure.

Selling, general and administrative expenses for the six months ended June
30, 2002 increased 55% to $10,023,000 compared to $6,464,000 for the same
period in 2001. The increase is primarily attributable to the reasons stated
above. As a percentage of sales, selling general, and administrative expenses
decreased from 103% in the six months ended June 30, 2001 compared to 52% for
the six months ended June 30, 2002, for the reasons stated above.

Interest Income, Net. Interest income, net for the three months ended June
30, 2002 was $327,000 compared to $34,000 for the three months ended June 30,
2001. The change was due to the reduction of interest expense associated with
the reduction of debt in 2001 and increased cash and investment balances
following our secondary public offering in 2001.

Interest income, net for the six months ended June 30, 2002 was $643,000
compared to $38,000 for the six months ended June 30, 2001. The increase is
primarily due to reasons stated above.

Provision for Income Taxes. Provision for income taxes for the quarter
ended June 30, 2002 relates primarily to state taxes payable in some states for
which the company conducts business. We have deferred tax assets of
approximately $20 million that we review for recoverability and then value
accordingly. We evaluate the realizability of our deferred tax assets on a
quarterly basis and assess the need for valuation allowances. These deferred
tax assets are evaluated by considering historical levels of income, estimates
of future taxable income, and the impact of tax planning strategies. Given our
limited history of positive earnings, we maintain a valuation allowance that is
equal to our deferred tax assets. If we later determine that is more likely
than not that we would realize all or part of the deferred tax assets, we would
adjust the deferred tax asset valuation allowance and record the adjustment to
income in the period we made the determination.

Loss on Investment. Loss on investment for the quarter ended June 30,
2002, relates to the charge taken to reflect a decline, other then temporary,
for the Companys investment in Medical Resources Management.

Net Income ( Loss). Net income for the three months ended June 30, 2002
was $1,135,000 or $0.05 per diluted share on 25,178,000 weighted average shares
outstanding, compared to a net loss of ($2,064,000), or ($0.13) per share on
15,602,000 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.

Our net income for the six months ended June 30, 2002 was $1,301,000 or
$0.05 per diluted share on 24,399,000 weighted average shares outstanding,
compared to a net loss of ($4,406,000) or ($0.29) per share on 15,379,000
weighted average shares outstanding for the same period in 2001. The net
income compared to net loss resulted from the reasons stated above.

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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 June 30, 2002, we had cash and cash equivalents of $45.7 million compared to
$83.2 million at December 31, 2001. In addition, as of June 30, 2002 the
company invested $17.3 million in short-term marketable securities. At June 30,
2002, our working capital was $75.4 million and the ratio of current assets to
current liabilities was 14 to 1.

On November 21, 2001, we closed a public offering of 4 million 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 $5.6
million for the six months ended June 30, 2002 compared to $6.4 million for the
six months ended June 30, 2001. Net income plus non-cash operating expenses
totaled $2.0 for the first six months of 2002, and was offset by increases in
accounts receivable, inventories and prepaid expenses, aggregating
$6.9 million, commensurate with the
growth in revenues. Accrued liabilities decreased $1.6
million, reflecting payment of compensation and consulting related expenses,
and accounts payable increased $1.2 million during 2002, due primarily to
increases in inventory purchase obligations.

Investing Activities. Net cash used in investing activities was
approximately $33.8 million for the six months ended June 30, 2002 compared to
$576,000 for the six months ended June 30, 2001. The net cash used in investing
activities was due primarily to the purchase of $17.2 million in short-term
marketable securities, cash used in the acquisitions of Timm Medical and
Cryomedical Sciences, Inc. totaling $13.0 million, payment of $900,000 earnest money deposit to U.S. Medical Development, Inc., additions to property,
equipment and leasehold improvements related to the new facility, and costs
associated with placed Cryocare Surgical Systems.

Cash Provided by Financing Activities. Net cash provided by financing
activities was approximately $1.9 million for the six months ended June 30,
2002 compared to $0.9 million for the six months ended June 30, 2001. The net
cash provided by financing activities was primarily attributable to exercise of
stock options and warrants.

Working Capital. Our working capital decreased to $75.4 million at June
30, 2002 from $88.8 million at December 31, 2001. The decrease in working
capital was due to cash paid in the Timm Medical and Cryomedical acquisitions,
investments in fixed assets for the new facility, and costs associated with
placed Cryocare Surgical Systems.

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 June 30, 2002 and December 31, 2001, and is reflected at cost as
we do not have significant influence over the operations of Sanarus.

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,

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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 $2.8 million in consideration for a membership interest, in
the form of Class A units of U.S. Medical Development, Inc (formerly, U.S. Therapies, LLC), equal to approximately 5% of
the total issued and outstanding Class A units of U.S. Medical Development on a
fully-diluted basis. We simultaneously entered into a distribution agreement
with U.S.M.D. Ltd. (USMD), a subsidiary of U.S. Medical Development, under which
USMD 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. Medical Development is included in Investments,
intangible and other assets, net in our balance sheet as of June 30, 2002 and
December 31, 2001 using the cost method of accounting. During
the three and six months ended June 30, 2002, the Company recognized sales
of $1.0 million and $2.8 million, respectively, to USMD. All of these sales were made under
normal business conditions, are expected to be used or resold by USMD in the ordinary course of
business, and are not expected to be returned to the Company as a result of a concession or due to the
potential acquisition of a portion of U.S. Medical Developments operations.

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 registered the shares of
common stock issued in the acquisition in May 2002. In April 2002, we acquired
intellectual property assets and contract services related to our cryosurgical
business from Gary M. Onik, M.D. by issuing 100,000 shares of common stock
valued at $1.41 million. In June 2002, we completed the acquisition of the
cryosurgical business line and assets of Cryomedical Sciences, Inc. for $2.2
million in cash and 120,022 shares of common stock valued at $1.5 million.

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, including the costs associated with placed units, 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 closed
our acquisition of Timm Medical in March 2002 and the acquisition of the
cryosurgical business line and assets of Cryomedical Sciences, Inc. in June
2002. As a result, we have a short history in marketing and selling the
products we acquired or have rights to commercialize through these
acquisitions. Although we recorded

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net income of approximately $1.1 million for the three months ended June
30, 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 June 30, 2002, our accumulated deficit was
approximately $36.8 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 acquired
businesses;                                                                                     
|
| |  |  | increase our research and development efforts to improve our
existing products and develop new products, including our Horizon
Prostatic Stent; and
|
| |  |  | perform clinical research and trials in an effort to obtain
governmental clearance and approval for the commercial sale of our
developed products. 

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 the assets of Cryomedical Sciences, Inc.,
and face risks associated with integrating these businesses into our existing
business operations.

We are in the process of integrating the operations, personnel and
products of the businesses we acquired from Timm Medical and Cryomedical
Sciences. The integration involves numerous risks and expenses, including,
among others, difficulties and expenses incurred in assimilating 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. In addition, the acquired businesses
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 acquired businesses, 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 three and six month
periods ended June 30, 2002 and 2001 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

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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 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.

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

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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 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 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 and 2002, 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. We
also cannot predict the extent and timing of the impact of the economic
downturn in the United States and in other countries and geographic regions in
which we conduct our business.

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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
six months ended June 30, 2002 and 2001, 15% and 31%, 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 an insurance policy of which we are the
beneficiary. Competition for such personnel is intense, particularly in
southern California where we are located.

Introduction of alternative therapies may affect our revenues.

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

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

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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 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 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
suppliers could be a lengthy process and there may not be adequate alternatives
to meet our needs, which will have a material adverse effect on our business.
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.

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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 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

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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.

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;

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

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

If we 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.

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, in March 2002,
we closed the acquisition of Timm Medical, and in June 2002, we closed the
acquisition of the cryosurgical business of Cryomedical Sciences. 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.                                                               

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.

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

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

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

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




ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we receive from our
invested cash without significantly increasing risk of loss. Our financial
instruments include cash, cash equivalents, short-term investments, accounts
receivable, investments, accounts payable and accrued liabilities. At June 30,
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.

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.

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PART II  OTHER INFORMATION




ITEM 1. Legal Proceedings

In the normal course of business, we are subject to various legal matters.
While the results of litigation and claims cannot be predicted with certainty,
we believe that the final outcome of these matters will not have a material
adverse effect on our consolidated results of operations or financial
condition.

From time to time, we receive correspondence alleging infringement of
proprietary rights of third parties. We cannot assure you that any relevant
claims of third parties would not be upheld as valid and enforceable, and
therefore we 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. We do not expect any material adverse effect on
our consolidated results of operations or financial condition because of such
actions.




ITEM 2. Changes in Securities

During the period from April 1, 2002 through June 30, 2002, we granted
stock options to eleven individuals covering an aggregate of 58,500 shares of
our common stock, pursuant to our 1995 Stock Plan. All such options were
granted at exercise prices equaling the fair market value on the date of grant,
vest over a four-year period, and are exercisable over a ten-year period. No
consideration was paid for any of the option grants. Such grants were exempt
from the registration requirement of the Securities Act as not involving the
sale of a security.




ITEM 3. Defaults Upon Senior Securities

Not applicable.




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

We held our Annual Meeting of Stockholders on Tuesday, June 11, 2002. Our
stockholders adopted the following matters at the Annual Meeting by the votes
indicated:

1. The stockholders elected the following five directors to our Board of
Directors to serve during the ensuing year or until their respective successors
are duly elected and qualified:

|                         |  |                   |            |          |  |  |           | 
|------------------------ |  | ----------------- | ---------- | -------- |  |  | --------- | 
|                         |  | Number of Shares:
|                         |  |                  
|                         |  | For               |            | Withheld
|                         |  |                   |            |         
|Name of Director Elected |  |                   |            |          |  |  |           | 
|Paul W. Mikus            |  |                   | 17,103,895 |          |  |  | 1,602,752 | 
|Peter F. Bernardoni      |  |                   | 18,411,422 |          |  |  | 295,225   | 
|Robert F. Byrnes         |  |                   | 18,411,422 |          |  |  | 295,225   | 
|Benjamin Gerson, M.D.    |  |                   | 18,411,422 |          |  |  | 295,225   | 
|Michael J. Strauss, M.D. |  |                   | 18,411,422 |          |  |  | 295,225   | 

2. The stockholders approved an amendment to our 1995 Stock Plan to modify
the automatic share increase feature under the Plan by increasing the maximum
yearly increase cap from 500,000 shares to 1,000,000 shares, beginning with the
2003 calendar year.

|           |  |                  |            | 
|---------- |  | ---------------- | ---------- | 
|           |  | Number of Shares
|           |  |                 
|For:       |  |                  | 12,441,150 | 
|Against:   |  |                  | 2,007,241  | 
|Abstained: |  |                  | 49,104     | 

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3. The stockholders ratified the selection of KPMG LLP as our independent
auditors for the fiscal year ending December 31, 2002.

|           |  |                  |            | 
|---------- |  | ---------------- | ---------- | 
|           |  | Number of Shares
|           |  |                 
|For:       |  |                  | 18,298,881 | 
|Against:   |  |                  | 398,115    | 
|Abstained: |  |                  | 9,651      | 




ITEM 5. Other Information

In accordance with SEC Rule 10b5-1, three of our stockholders, Technology
Funding Partners III, L.P., Technology Funding Venture Partners IV, an
Aggressive Growth Fund, L.P. and Technology Funding Venture Partners V, an
Aggressive Growth Fund, L.P. (collectively, the Funds), jointly established a
written plan for gradually liquidating a portion of their holdings of our
common stock. Under the plan, the Funds intend to sell an aggregate of 300,000
shares of our common stock in four equal installments upon our common stock
reaching specific trading price levels, with no more than 25,000 shares being
sold on any single trading day. Peter F. Bernardoni, one of our directors, is
an officer of Technology Funding, Inc. and a partner of Technology Funding,
Ltd., each a general partner of the Funds. Mr. Bernardoni has sole voting and
shares investment power with respect to all shares owned by the Funds.




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

(a)  Exhibits

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                   
|2.1(1)      |  | Agreement and Plan of Reorganization, dated February 21, 2002, by and among the Company,
Technologies, Inc., TMT Acquisition Corporation and certain stockholders of Timm Medical
Technologies, Inc. Certain schedules and other attachments to this exhibit were omitted.
We agree to furnish supplementally a copy of any omitted schedules or attachments to the
Commission upon request.      
|2.2(2)      |  | Agreement and Plan of Merger, dated June 30, 1999, by and among the Company, Advanced
Medical Procedures, Inc., Advanced Medical Procedures, LLC, Gary M. Onik, M.D., Robert F.
Byrnes and Jerry Anderson. Certain schedules and other attachments to this exhibit were
omitted. We agree to furnish supplementally a copy of any omitted schedules or
attachments to the Commission upon request.
|2.3         |  | Asset Purchase Agreement, dated February 6, 2002, by and between the Company and Gary M.
Onik, M.D. Certain schedules and other attachments to this exhibit were omitted. We agree
to furnish supplementally a copy of any omitted schedules or attachments to the Commission
upon request.                                                                                                       
|2.4         |  | Asset Purchase Agreement, dated May 28, 2002, by and among the Company and Cryomedical
Sciences, Inc. Certain schedules and other attachments to this exhibit were omitted. We
agree to furnish supplementally a copy of any omitted schedules or attachments to the
Commission upon request.                                                                                                     
|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.                                                                                                                                                                                                                                                                                                                                                       
|99.1        |  | Certification under Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                



---

|(1) |  | Previously filed on Form 8-K on March 5, 2002.
|--- |  | ----------------------------------------------

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|(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

On April 9, 2002, we filed a Form 8-K regarding our acquisition of Timm
Medical Technologies, Inc., which we consummated on March 25, 2002. On June 7,
2002, we filed a Form 8-K/A in which we amended Item 7 of the Form 8-K filed on
April 9, 2002 to include financial statements of Timm Medical Technologies,
Inc. and pro forma financial information of the combined companies in
accordance with Item 7(a)(4) and Item 7(b)(2) of Form 8-K.

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SIGNATURES

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

Date: August 14, 2002

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

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EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                   
|2.1(1)      |  | Agreement and Plan of Reorganization, dated February 21, 2002, by and among the Company,
Technologies, Inc., TMT Acquisition Corporation and certain stockholders of Timm Medical
Technologies, Inc. Certain schedules and other attachments to this exhibit were omitted.
We agree to furnish supplementally a copy of any omitted schedules or attachments to the
Commission upon request.      
|2.2(2)      |  | Agreement and Plan of Merger, dated June 30, 1999, by and among the Company, Advanced
Medical Procedures, Inc., Advanced Medical Procedures, LLC, Gary M. Onik, M.D., Robert F.
Byrnes and Jerry Anderson. Certain schedules and other attachments to this exhibit were
omitted. We agree to furnish supplementally a copy of any omitted schedules or
attachments to the Commission upon request.
|2.3         |  | Asset Purchase Agreement, dated February 6, 2002, by and between the Company and Gary M.
Onik, M.D. Certain schedules and other attachments to this exhibit were omitted. We agree
to furnish supplementally a copy of any omitted schedules or attachments to the Commission
upon request.                                                                                                       
|2.4         |  | Asset Purchase Agreement, dated May 28, 2002, by and among the Company and Cryomedical
Sciences, Inc. Certain schedules and other attachments to this exhibit were omitted. We
agree to furnish supplementally a copy of any omitted schedules or attachments to the
Commission upon request.                                                                                                     
|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.                                                                                                                                                                                                                                                                                                                                                       
|99.1        |  | Certification under Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                



---

|(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.
|--- |  | --------------------------------------------------------------------------------------------------------------