##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-Q

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | FOR THE QUARTERLY PERIOD ENDED JUNE 30,
    2004                                            
|          
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | FOR THE TRANSITION PERIOD
    FROM           TO          .                                  

COMMISSION FILE NUMBER: 000-27212

Endocare, Inc.

(Exact name of Registrant as Specified in Its
Charter)


|                         |  |                           
|------------------------ |  | --------------------------
|DELAWARE                 |  | 33-0618093                
|(State of Incorporation) |  | (I.R.S. Employer I.D. No.)

201 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA
92618

(Address of Principal Executive Office,
Including Zip Code)


(949) 450-5400

(Registrants Telephone Number, Including
Area Code)


Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days.

(1) Yes þ     No o;
(2) Yes þ     No o.

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).

Yes þ     No o

The number of shares of the Registrants
common stock, par value $.001 per share, outstanding at
June 30, 2004 was 24,007,482.



---






---










Form 10-Q, Quarter Ended June 30,
2004

TABLE OF CONTENTS

|                                   |  |                                                                                           |    |                                                                 |    |  |   | 
|---------------------------------- |  | ----------------------------------------------------------------------------------------- | -- | --------------------------------------------------------------- | -- |  | - | 
|                                   |  |                                                                                           |    | Page                                                           
|                                   |  |                                                                                           |    |                                                                
|PART I  FINANCIAL
    INFORMATION |  |                                                                                           | 2  |                                                                
|ITEM 1.                            |  | Condensed Consolidated
    Financial Statements                                           |    |                                                                 | 2  | 
|                                   |  |                                                                                           |    | Condensed Consolidated
    Statements of Operations (Unaudited) |    |  | 2 | 
|                                   |  |                                                                                           |    | Condensed Consolidated
    Balance Sheets                       |    |  | 3 | 
|                                   |  |                                                                                           |    | Condensed Consolidated
    Statements of Cash Flows (Unaudited) |    |  | 4 | 
|                                   |  |                                                                                           |    | Notes to Condensed
    Consolidated Financial Statements        |    |  | 5 | 
|ITEM 2.                            |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |    |                                                                 | 14 | 
|ITEM 3.                            |  | Quantitative and Qualitative
    Disclosures About Market Risk                            |    |                                                                 | 31 | 
|ITEM 4.                            |  | Controls and Procedures                                                                   |    |                                                                 | 31 | 
|PART II  OTHER
    INFORMATION    |  |                                                                                           | 32 |                                                                
|ITEM 1.                            |  | Legal Proceedings                                                                         |    |                                                                 | 32 | 
|ITEM 2.                            |  | Changes in Securities and
    Use of Proceeds                                             |    |                                                                 | 33 | 
|ITEM 3.                            |  | Defaults Upon Senior
    Securities                                                       |    |                                                                 | 33 | 
|ITEM 4.                            |  | Submission of Matters to a
    Vote of Security Holders                                   |    |                                                                 | 33 | 
|ITEM 5.                            |  | Other Information                                                                         |    |                                                                 | 33 | 
|ITEM 6.                            |  | Exhibits and Reports on
    Form 8-K                                                      |    |                                                                 | 33 | 
|SIGNATURE PAGE                     |  |                                                                                           | 35 |                                                                
|EXHIBIT INDEX                      |  |                                                                                           | 36 |                                                                
|EXHIBIT 10.1                      
|EXHIBIT 31.1                      
|EXHIBIT 31.2                      
|EXHIBIT 32.1                      
|EXHIBIT 32.2                      



1



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##### Table of Contents






PART I  FINANCIAL
INFORMATION






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

ENDOCARE, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                    |                                     |                             |            |                           |  |      |            |            |  |   |             |            |  |   |             |            | 
|------------------------------------------------------------------- | ----------------------------------- | --------------------------- | ---------- | ------------------------- |  | ---- | ---------- | ---------- |  | - | ----------- | ---------- |  | - | ----------- | ---------- | 
|                                                                    |                                     |                             |            |                          
|                                                                    |                                     | Three Months Ended June 30, |            | Six Months Ended June 30,
|                                                                    |                                     |                             |            |                          
|                                                                    |                                     | 2004                        |            | 2003                      |  | 2004 |            | 2003      
|                                                                    |                                     |                             |            |                           |  |      |            |           
|                                                                    |                                     |                            
|                                                                    |                                     | (Unaudited)                
|Total revenues                                                      |                                     | $                           | 8,312,359  |                           |  | $    | 7,490,367  |            |  | $ | 15,693,983  |            |  | $ | 15,152,151  |           
|                                                                    |                                     |                             |            |                           |  |      |            |            |  |   |             |            |  |   |             |           
|Costs and expenses:                                                 |                                     |                             |            |                           |  |      |            |            |  |   |             |            |  |   |             |           
|                                                                    | Cost of revenues                    |                             |            | 4,313,299                 |  |      |            | 3,469,503  |  |   |             | 8,547,381  |  |   |             | 7,465,548  | 
|                                                                    | Research and development            |                             |            | 451,674                   |  |      |            | 365,437    |  |   |             | 988,055    |  |   |             | 698,250    | 
|                                                                    | Selling, general and administrative |                             |            | 9,089,147                 |  |      |            | 11,979,009 |  |   |             | 20,268,637 |  |   |             | 21,526,866 | 
|                                                                    |                                     |                             |            |                           |  |      |            |            |  |   |             |            |  |   |             |           
|Total costs and expenses                                            |                                     |                             | 13,854,120 |                           |  |      | 15,813,949 |            |  |   | 29,804,073  |            |  |   | 29,690,664  |           
|                                                                    |                                     |                             |            |                           |  |      |            |            |  |   |             |            |  |   |             |           
|Loss from operations                                                |                                     |                             | (5,541,761 | )                         |  |      | (8,323,582 | )          |  |   | (14,110,090 | )          |  |   | (14,538,513 | )         
|Gain on divestitures, net                                           |                                     |                             | 50,523     |                           |  |      | 9,944,424  |            |  |   | 50,523      |            |  |   | 9,944,424   |           
|Interest income                                                     |                                     |                             | 26,973     |                           |  |      | 218,096    |            |  |   | 71,863      |            |  |   | 439,325     |           
|Interest expense                                                    |                                     |                             |           |                           |  |      | (22,521    | )          |  |   |            |            |  |   | (27,298     | )         
|                                                                    |                                     |                             |            |                           |  |      |            |            |  |   |             |            |  |   |             |           
|Income (loss) before minority
    interests                         |                                     |                             | (5,464,265 | )                         |  |      | 1,816,417  |            |  |   | (13,987,704 | )          |  |   | (4,182,062  | )         
|Minority interests                                                  |                                     |                             | (155,392   | )                         |  |      | (154,965   | )          |  |   | (255,428    | )          |  |   | (244,384    | )         
|                                                                    |                                     |                             |            |                           |  |      |            |            |  |   |             |            |  |   |             |           
|Net income (loss)                                                   |                                     | $                           | (5,619,657 | )                         |  | $    | 1,661,452  |            |  | $ | (14,243,132 | )          |  | $ | (4,426,446  | )         
|                                                                    |                                     |                             |            |                           |  |      |            |            |  |   |             |            |  |   |             |           
|Net income (loss) per share of common
    stock  basic and diluted |                                     |                             |            |                           |  |      |            |            |  |   |             |            |  |   |             |           
|Basic                                                               |                                     | $                           | (0.23      | )                         |  | $    | 0.07       |            |  | $ | (0.59       | )          |  | $ | (0.18       | )         
|Diluted                                                             |                                     |                             | (0.23      | )                         |  |      | 0.07       |            |  |   | (0.59       | )          |  |   | (0.18       | )         
|Weighted average shares of common stock
    outstanding:            |                                     |                             |            |                           |  |      |            |            |  |   |             |            |  |   |             |           
|Basic                                                               |                                     |                             | 23,999,882 |                           |  |      | 24,155,740 |            |  |   | 24,095,318  |            |  |   | 24,153,862  |           
|Diluted                                                             |                                     |                             | 23,999,882 |                           |  |      | 25,287,911 |            |  |   | 24,095,318  |            |  |   | 24,153,862  |           

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

2



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                                                                                                                                                               |                                            |               |              |                   |  |   |              |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------------- | ------------ | ----------------- |  | - | ------------ | ---------- | 
|                                                                                                                                                                               |                                            | June 30, 2004 |              | December 31, 2003
|                                                                                                                                                                               |                                            |               |              |                  
|                                                                                                                                                                               |                                            | (Unaudited)   |              |                  
|ASSETS                                                                                                                                                                        
|Current Assets:                                                                                                                                                                |                                            |               |              |                   |  |   |              |           
|Cash and equivalents                                                                                                                                                           |                                            | $             | 11,369,837   |                   |  | $ | 23,976,539   |           
|Accounts receivable, net                                                                                                                                                       |                                            |               | 3,712,392    |                   |  |   | 3,822,570    |           
|Inventories                                                                                                                                                                    |                                            |               | 4,325,914    |                   |  |   | 2,609,046    |           
|Prepaid expenses and other current assets                                                                                                                                      |                                            |               | 3,484,434    |                   |  |   | 4,432,578    |           
|                                                                                                                                                                               |                                            |               |              |                   |  |   |              |           
|                                                                                                                                                                               | Total current assets                       |               |              | 22,892,577        |  |   |              | 34,840,733 | 
|Property and equipment, net                                                                                                                                                    |                                            |               | 4,670,781    |                   |  |   | 5,638,579    |           
|Goodwill                                                                                                                                                                       |                                            |               | 17,538,224   |                   |  |   | 17,538,224   |           
|Intangibles, net                                                                                                                                                               |                                            |               | 11,143,742   |                   |  |   | 11,745,778   |           
|Investments and other assets                                                                                                                                                   |                                            |               | 1,619,156    |                   |  |   | 2,233,601    |           
|                                                                                                                                                                               |                                            |               |              |                   |  |   |              |           
|                                                                                                                                                                               | Total assets                               |               | $            | 57,864,480        |  |   | $            | 71,996,915 | 
|                                                                                                                                                                               |                                            |               |              |                   |  |   |              |           
|                                                                                                                                                                              
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                                                      
|Current Liabilities:                                                                                                                                                           |                                            |               |              |                   |  |   |              |           
|Accounts payable                                                                                                                                                               |                                            | $             | 3,585,996    |                   |  | $ | 3,035,242    |           
|Accrued compensation                                                                                                                                                           |                                            |               | 3,374,973    |                   |  |   | 3,858,527    |           
|Other accrued liabilities                                                                                                                                                      |                                            |               | 9,572,339    |                   |  |   | 8,942,830    |           
|                                                                                                                                                                               |                                            |               |              |                   |  |   |              |           
|                                                                                                                                                                               | Total current liabilities                  |               |              | 16,533,308        |  |   |              | 15,836,599 | 
|Minority interests                                                                                                                                                             |                                            |               | 711,909      |                   |  |   | 839,029      |           
|                                                                                                                                                                               |                                            |               |              |                   |  |   |              |           
|                                                                                                                                                                               | Total liabilities                          |               |              | 17,245,217        |  |   |              | 16,675,628 | 
|                                                                                                                                                                               |                                            |               |              |                   |  |   |              |           
|Commitments and Contingencies                                                                                                                                                  |                                            |               |             |                   |  |   |             |           
|Stockholders equity:                                                                                                                                                          |                                            |               |              |                   |  |   |              |           
|Preferred stock, $.001 par value:
    1,000,000 shares authorized: none issued and outstanding                                                                                 |                                            |               |             |                   |  |   |             |           
|Common stock, $.001 par value;
    50,000,000 shares authorized: 24,007,482 and 24,183,254
    issued and outstanding at June 30, 2004 and
    December 31, 2003, respectively |                                            |               | 24,007       |                   |  |   | 24,390       |           
|Additional paid-in capital                                                                                                                                                     |                                            |               | 169,217,273  |                   |  |   | 171,875,434  |           
|Accumulated deficit                                                                                                                                                            |                                            |               | (128,622,017 | )                 |  |   | (114,378,885 | )         
|Deferred compensation                                                                                                                                                          |                                            |               |             |                   |  |   | (107,271     | )         
|Treasury stock at cost, 206,200 shares at
    December 31, 2003                                                                                                                |                                            |               |             |                   |  |   | (2,092,381   | )         
|                                                                                                                                                                               |                                            |               |              |                   |  |   |              |           
|                                                                                                                                                                               | Total stockholders equity                 |               |              | 40,619,263        |  |   |              | 55,321,287 | 
|                                                                                                                                                                               |                                            |               |              |                   |  |   |              |           
|                                                                                                                                                                               | Total liabilities and stockholders equity |               | $            | 57,864,480        |  |   | $            | 71,996,915 | 
|                                                                                                                                                                               |                                            |               |              |                   |  |   |              |           

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

3



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited)


|                                                         |                                           |                           |             |           |   |   |            |            |  
|-------------------------------------------------------- | ----------------------------------------- | ------------------------- | ----------- | --------- | - | - | ---------- | ---------- | -
|                                                         |                                           |                          
|                                                         |                                           | Six Months Ended June 30,
|                                                         |                                           |                          
|                                                         |                                           | 2004                      |             | 2003     
|                                                         |                                           |                           |             |          
|Net cash used in operating activities                    |                                           | $                         | (14,344,198 | )         |   | $ | (7,856,753 | )         
|Cash flows from investing activities:                    |                                           |                           |             |           |   |   |            |           
|Sales of property and equipment                          |                                           |                           | 219,835     |           |   |   |           |           
|Purchases of property and equipment                      |                                           |                           | (398,107    | )         |   |   | (440,165   | )         
|Proceeds from divestitures                               |                                           |                           | 2,500,000   |           |   |   | 6,980,000  |           
|Intangibles                                              |                                           |                           |            |           |   |   | (61,000    | )         
|Sale of available for sale securities                    |                                           |                           |            |           |   |   | 22,183,160 |           
|Other assets                                             |                                           |                           | 270,445     |           |   |   | (1,259,867 | )         
|                                                         |                                           |                           |             |           |   |   |            |           
|                                                         | Net cash provided by investing activities |                           |             | 2,592,173 |   |   |            | 27,402,128 |  
|                                                         |                                           |                           |             |           |   |   |            |           
|Cash flows from financing activities:                    |                                           |                           |             |           |   |   |            |           
|Stock options and warrants exercised                     |                                           |                           | 31,600      |           |   |   | 20,312     |           
|Partnership distributions to minority interests          |                                           |                           | (382,548    | )         |   |   | (222,202   | )         
|Treasury stock received in settlement                    |                                           |                           | (503,729    | )         |   |   |           |           
|                                                         |                                           |                           |             |           |   |   |            |           
|                                                         | Net cash used in financing activities     |                           |             | (854,677  | ) |   |            | (201,890   | )
|                                                         |                                           |                           |             |           |   |   |            |           
|Net increase (decrease) in cash and cash
    equivalents |                                           |                           | (12,606,702 | )         |   |   | 19,343,485 |           
|Cash and cash equivalents, beginning of period           |                                           |                           | 23,976,539  |           |   |   | 18,177,825 |           
|                                                         |                                           |                           |             |           |   |   |            |           
|Cash and cash equivalents, end of period                 |                                           | $                         | 11,369,837  |           |   | $ | 37,521,310 |           
|                                                         |                                           |                           |             |           |   |   |            |           
|Non-cash activities:                                     |                                           |                           |             |           |   |   |            |           
|Transfer of inventory to property and equipment          |                                           | $                         | 235,936     |           |   | $ | 594,387    |           
|Retirement of treasury shares held                       |                                           |                           | 2,596,110   |           |   |   |           |           
|Deferred compensation on options forfeited               |                                           |                           | 93,905      |           |   |   |           |           
|Unrealized loss on available for sale securities         |                                           |                           |            |           |   |   | 12,466     |           

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

4



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##### Table of Contents



ENDOCARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS




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

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

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

The accompanying condensed consolidated financial
statements reflect all adjustments, consisting solely of normal
recurring accruals, needed to present fairly the financial
results for these interim periods. The condensed consolidated
results of operations presented for the interim periods are not
necessarily indicative of the results for a full year.

All intercompany transactions and accounts have
been eliminated in the consolidation.



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

The Companys operating results for the
second quarter and for the first six months of 2004 reflect the
impact of divestitures in 2003 of certain non-core lines of
business. While these divestitures provided non-recurring
infusions of cash and have allowed the Company to better
concentrate on its core businesses, they have also eliminated
some sources of revenue and gross profit for the Company. In
addition, while the Company has continued to make progress in
lowering its recurring selling, general and administrative costs
throughout 2003 and 2004, the Company expects to record another
loss for fiscal 2004 and has continued to experience significant
non-recurring costs associated with ongoing investigations and
other matters related to its historical accounting and financial
reporting. These non-recurring costs were approximately
$14.3 million during the fiscal year 2003 (including
executive severance charges of $3.6 million) and
$3.5 million and $5.3 million net of insurance
reimbursement for defense-related costs in the first six months
of 2003 and 2004, respectively. The costs in the six months
ended June 30, 2003 and 2004 are primarily legal, audit and
accounting support fees. For the six months ended June 30,
2004 a portion of these costs also related to the Companys
efforts to achieve compliance with section 404 of the
Sarbanes-Oxley Act of 2002 (Sarbanes 404) by the
December 31, 2004 deadline.

Since inception, the Company has incurred losses
from operations and has reported negative cash flows. As of
June 30, 2004, the Company had an accumulated deficit of
$128.6 million and cash and cash equivalents of
$11.4 million. In addition to the cash needed to fund the
Companys ongoing operations, there will continue to be
substantial demands on cash related to ongoing investigations of
the Companys historical accounting and financial
reporting. There may also be material cash payments required in
connection with resolving a class action and a derivative law
suit (see Note 8). The Company may be required to pay
judgments or settlements and to incur expenses in defending
against these claims that could exceed the Companys
directors and officers liability insurance coverage.
Regulators may fine the Company when the investigations are
complete.

5



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##### Table of Contents



ENDOCARE, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company also faces potentially large cash
expenditures in the future related to directors and
officers liability insurance and indemnification
obligations, delinquent state and local tax obligations, as well
as additional investment needed to bring the Company into
compliance with SEC rules and regulations, including with
Sarbanes 404. The Company may also incur costs related to
its efforts to regain listing on a national exchange or market.

While the Company has continued to experience
growth in cryosurgical probe and procedure revenues through the
first six months of 2004 and has significantly reduced its
selling, general and administrative costs before non-recurring
expenses and insurance recoveries, through this period compared
to the same period in 2003, it is not expected to reach
break-even or cash flow positive in 2004. The Company will use
cash reserves to finance its cash flow deficit throughout the
remainder of 2004. In order to continue as a going concern, the
Company will need to raise additional capital to fund operations
through the sale of debt or equity securities to public or
private investors, the sale or licensing of its assets or
incurring debt secured by the Companys assets. Additional
capital may not be available on terms acceptable to the Company,
or at all. If additional capital were raised through the
issuance of equity securities, the percentage of the
Companys stock owned by its then-current stockholders
would be reduced.



|   |                                  
|-- | ---------------------------------
|3. | Restructuring and Cost Reductions

In June 2004, the Company initiated a
cost-reduction program, which includes consolidation of certain
sales functions and territories, streamlining of its corporate
organizational structure, reduction in staffing, and elimination
of less promising research and development, clinical and
marketing activities. In addition, management is reviewing
product design and manufacturing processes in an effort to
identify potential cost efficiencies and is renegotiating the
Companys contracts with third party cryo-service providers
in order to improve gross margins.

As part of this cost-reduction program, the
Company incurred total severance and related costs in June 2004
of $319,000 in connection with the elimination of
19 positions. This reduction in work force is expected to
generate $2.3 million in annualized savings. This action
follows the December 2002 divestiture of a Winter Park, Florida
billing subsidiary and the 2003 downsizing of its Timm Medical
Technologies, Inc. (Timm Medical) operations in Eden
Prairie, Minnesota. These earlier restructurings have
contributed to a $3 million overall improvement in selling,
general and administrative expenses in the first six months of
2004, compared to the same period last year. Combined, cuts in
workforce have resulted in a net headcount reduction from
194 employees at the end of 2002 to 150 employees as of
June 30, 2004.



|   |                         
|-- | ------------------------
|4. | Stock-Based Compensation

At June 30, 2004, Endocare had four
stock-based compensation plans. The Company accounts for the
plans under the recognition and measurement principles (the
intrinsic-value method) prescribed in Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees,and related interpretations. Compensation cost
for stock options granted to employees is reflected in net
income (loss) and is measured as the excess of the market price
of the Companys stock at the date of grant over the amount
an employee must pay to acquire the stock, or the exercise
price. Compensation costs for fixed awards that are subject to
vesting are recognized pro-rata over the vesting period. In
practice, the Company has only awarded stock options to its
employees with exercise prices equal to the fair market value of
the stock at the date of grant.

6



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##### Table of Contents



ENDOCARE, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                |                                                                                                                            |                             |            |                           |   |      |            |            |   |   |             |            |   |   |            |            |  
|----------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ---------- | ------------------------- | - | ---- | ---------- | ---------- | - | - | ----------- | ---------- | - | - | ---------- | ---------- | -
|                                                |                                                                                                                            |                             |            |                          
|                                                |                                                                                                                            | Three Months Ended June 30, |            | Six Months Ended June 30,
|                                                |                                                                                                                            |                             |            |                          
|                                                |                                                                                                                            | 2004                        |            | 2003                      |   | 2004 |            | 2003      
|                                                |                                                                                                                            |                             |            |                           |   |      |            |           
|Net income (loss), as reported(a)               |                                                                                                                            | $                           | (5,619,657 | )                         |   | $    | 1,661,452  |            |   | $ | (14,243,132 | )          |   | $ | (4,426,446 | )         
|Reconciling items (net of related tax effects): |                                                                                                                            |                             |            |                           |   |      |            |            |   |   |             |            |   |   |            |           
|                                                | Add: Stock-based employee compensation expense
    determined under the intrinsic-value-based method for all
    awards(b) |                             |            | 4,383                     |   |      |            | 6,194      |   |   |             | 13,103     |   |   |            | 12,388     |  
|                                                | Less: Stock-based compensation expense determined
    under the fair-value-based method for all awards                     |                             |            | (983,866                  | ) |      |            | (2,183,808 | ) |   |             | (1,804,178 | ) |   |            | (3,658,666 | )
|                                                |                                                                                                                            |                             |            |                           |   |      |            |            |   |   |             |            |   |   |            |           
|Net adjustment                                  |                                                                                                                            |                             | (979,483   | )                         |   |      | (2,177,614 | )          |   |   | (1,791,075  | )          |   |   | (3,646,278 | )         
|                                                |                                                                                                                            |                             |            |                           |   |      |            |            |   |   |             |            |   |   |            |           
|Net loss, as adjusted                           |                                                                                                                            | $                           | (6,599,140 | )                         |   | $    | (516,162   | )          |   | $ | (16,034,207 | )          |   | $ | (8,072,724 | )         
|                                                |                                                                                                                            |                             |            |                           |   |      |            |            |   |   |             |            |   |   |            |           
|Basic and diluted loss per share:               |                                                                                                                            |                             |            |                           |   |      |            |            |   |   |             |            |   |   |            |           
|                                                | As reported                                                                                                                |                             | $          | (0.23                     | ) |      | $          | 0.07       |   |   | $           | (0.67      | ) |   | $          | (0.18      | )
|                                                |                                                                                                                            |                             |            |                           |   |      |            |            |   |   |             |            |   |   |            |           
|                                                | As adjusted                                                                                                                |                             | $          | (0.27                     | ) |      | $          | (0.02      | ) |   | $           | (0.59      | ) |   | $          | (0.33      | )
|                                                |                                                                                                                            |                             |            |                           |   |      |            |            |   |   |             |            |   |   |            |           



---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | In the past, the Company had issued stock options
    and warrants to consultants for services performed. Compensation
    expense for the fair value of these options is determined by the
    Black-Scholes option-pricing model and is charged to operations
    over the service period or as the performance goals are
    achieved. Such expense is included in net loss as reported.                    
|   
|(b) |  | Since the Company issues options with exercise
    prices equal to or exceeding the fair values of the underlying
    common stock, no compensation expense is recorded for options
    issued to employees, except for compensation expense equal to
    the intrinsic value of unvested options assumed in the
    Companys acquisition of Timm Medical and amortized over
    the remaining vesting period.



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

The excess of the purchase price over the fair
value of net assets acquired has been allocated to goodwill and
identifiable intangible assets. The Company had no reported
goodwill prior to January 1, 2002. The Company does not
amortize goodwill, which is consistent with the provisions of
SFAS No. 142, Goodwill and other Intangible Assets,but goodwill is subject to impairment tests on an annual
basis or more frequently if impairment indicators exist. Under
the guidance of SFAS no. 142, the Company uses a discounted cash
flow methodology to assess the fair values of its reporting
units. Impairment is measured by comparing the goodwill derived
from the hypothetical purchase price allocation to the carrying
value of the goodwill balance. No goodwill impairment indicators
existed for the six months ended June 30, 2004 and, as a
result, interim impairment testing was not required.

7



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##### Table of Contents



ENDOCARE, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

Changes in circumstances (for example, changes in
laws or regulations to which the Company is subject,
technological advances or changes in the Companys
strategies) may result in changes to the useful lives from
initial estimates. Factors such as changes in the planned use of
intangibles may result from changes in customer base,
contractual agreements, or regulatory requirements and may
result in shorter useful lives. In such circumstances, the
Company will revise the useful life of the long-lived asset and
amortize the remaining net book value over the adjusted
remaining useful life. There were no changes in estimated useful
lives during 2003 and the first six months of 2004.



|   |                                                                              
|-- | -----------------------------------------------------------------------------
|6. | Amendment to Purchase Agreement of the Mobile
    Prostate Treatment Business

On September 30, 2002, the Company completed
the acquisition of certain general and limited equity interests
in the mobile prostate and benign prostatic hyperplasia
(BPH) treatment businesses (Mobile
Businesses) from a group of affiliated companies
collectively known as USMD. Under the original agreement, the
Company agreed to forgive $7.7 million in loans and an
earnest deposit if the Mobile Businesses achieve
$12 million in gross revenues during the period
October 1, 2002 to December 31, 2005 (the
Forgiveness Period). The purchase agreement was
amended February 2004 to extend the Forgiveness Period to
December 31, 2008. In addition, effective January 1,
2004, the Company reduced the service fee it pays to one of the
partnerships for the use of their Cryocare Surgical Systems from
$2,500 to $2,000 per procedure, representing an adjustment
to market rate. As a result, the reduction in service fee does
not require a reallocation of goodwill.



|   |             
|-- | ------------
|7. | Dispositions

In 2003, the Company refocused its strategy on
its core technological competence and primary market emphasis in
the area of minimally invasive technologies for tissue and
cancer ablation. Part of this strategy entailed divestiture of
certain product lines unrelated to the Companys core
businesses, including the sale of the Dura II penile
implants, the cardiac-related product manufacturing operations
and license of related technology, and the urinary incontinence
and urodynamics product lines.



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

On April 7, 2003, Timm Medical sold certain
assets related to the Dura II positionable urological
prostheses product line to American Medical Systems, Inc. for
approximately $2.15 million in cash. Assets sold include
developed technology, intellectual property, customer lists,
production equipment and Dura II inventory. The sale
resulted in a loss of $35,000 in the second quarter of 2003.



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

On April 14, 2003, the Company sold its
cardiac-related product manufacturing operations and licensed
the related intellectual property to CryoCath Technologies, Inc.
(CryoCath) for $10 million and a nine-year
descending royalty based on net sales of products incorporating
the licensed technology. Upon consummation

8



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##### Table of Contents



ENDOCARE, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of the sale, the Company terminated its
pre-existing distribution agreement with CryoCath. CryoCath was
the exclusive distributor for cryoprobes and consoles in
connection with the SurgiFrost system, a cryoablation system
designed to treat cardiac arrhythmias. The sale resulted in a
gain of $10 million in the second quarter of 2003. The
$10 million was collected in four installments, three in
2003 and one in the first quarter of 2004. The royalty stream
decreases from 10% to 3% of net sales from the SurgiFrost system
during the period from 2004 to 2012. Royalty income from sales
of CryoCath products was $162,000 and $293,000 for the
three-month and six-month periods ended June 30, 2004,
respectively.



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

Subsequent to the acquisition of Timm Medical,
the Company undertook a review of the Companys operational
and financial infrastructure. To maximize operational efficiency
and resource utilization, the Board of Directors approved a plan
in the first quarter of 2003 to downsize Timm Medicals
operations in Minnesota after the sale of the Dura II and
urinary incontinence product lines. With the exception of
certain marketing and financial functions, all operations were
transferred to the Companys Irvine, California,
headquarters in June 2003 or were outsourced. The cost of the
restructuring totaled $386,000, which included $266,000 in
severance payments and $120,000 in lease losses for vacating the
unused leased space. These losses were recorded in the second
quarter of 2003 upon communication of the separation terms to
the affected employees. Since that time, in order to improve
service levels related to its Timm Medical products, the Company
has returned packaging and shipping operations for its ErecAid
products back to the Eden Prairie location.



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

On October 15, 2003, Timm Medical agreed to
sell the manufacturing assets related to its urodynamics and
urinary incontinence product lines to SRS Medical Corp.
(SRS) for a $2,694,000 note. The note bears interest
at 7.5% and is secured by the assets sold. Under the terms of
the original agreement, quarterly payments were to begin on
March 31, 2004, equal to the higher of (a) minimum
quarterly payments as defined or (b) 15% of the net
revenues related to the urinary incontinence assets acquired and
15% of the net revenues related to SRS existing
urodynamics business, including the urodynamics assets acquired.
These minimum quarterly payments were to commence at $112,500
for the quarter ended March 31, 2004, and increase to
$298,000 for the quarter ended March 31, 2007. Amounts
which remain outstanding at March 31, 2007 were to be
payable at $250,000 per quarter thereafter until fully
paid. The carrying values of the urodynamics and urinary
incontinence related assets were $1,314,000 on the date of sale.
Management concluded that collection of the note from SRS was
not reasonably assured. As a result, a loss of $1,314,000 was
recorded in the fourth quarter of 2003 equal to the carrying
value of the assets sold. Collections on the note, if any, are
reported as gain in the period received. In March 2004, the
Company agreed to amend the purchase agreement to reduce the
minimum quarterly payments to $45,000, increasing to $60,000 for
the quarter ended December 31, 2005. Amounts which remain
outstanding at December 31, 2005 will be payable at
$60,000 per quarter until the outstanding principal and
accrued interest are paid in full. On May 14, 2004 the
Company received the first payment from SRS under the note in
the amount of $51,000, which was reported as a gain on
divestitures.



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

In late 2003 and early 2004, the Company
initiated the dissolution of five of the 13 partnerships
acquired from U.S. Medical Development, Inc., and its
affiliates, U.S.M.D., Ltd. and U.S.M.D. I L.L.C. (collectively
USMD), two of which were engaged in BPH treatment
and three of which were engaged in cryosurgical procedures for
prostate cancer. The BPH partnerships discontinued operations
beginning in the first quarter of 2003 due to significant
reduction in payor reimbursements and the Companys desire
to exit the non-core BPH business. The Company elected to
terminate the cryosurgical partnerships due to decisions by
certain of the limited partner physicians to withdraw from these
partnerships. After the dissolution, the Cryocare Surgical

9



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##### Table of Contents



ENDOCARE, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Systems held by these partnerships will be
redeployed to other markets as placement units. The assets held
by the BPH partnerships will be liquidated.



|   |                              
|-- | -----------------------------
|8. | Commitments and Contingencies



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

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



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

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



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

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

In November 2002, the Company was named as a
defendant, together with certain former officers, one of whom is
also a former board member, in a class-action lawsuit filed in
the United States District Court for the Central District of
California. On February 2, 2003, the court issued an order
consolidating this action with various other similar complaints
and ordering plaintiffs to file a consolidated complaint, which
was filed on October 31, 2003. The consolidated complaint
asserts two claims for relief, alleging that the defendants
violated sections of the Securities Exchange Act of 1934 by
purportedly issuing false and misleading statements regarding
the Companys revenues and expenses in press releases and
SEC filings. Plaintiffs seek class certification and unspecified
damages from the Company, as well as forfeiture and
reimbursement of bonus compensation received by two of the
individual defendants. On April 26, 2004, the court issued
an order

10



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##### Table of Contents



ENDOCARE, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

denying the Companys motion to dismiss the
consolidated complaint. The Company intends to defend the case
vigorously, but cannot assure you that it will be resolved in
the Companys favor.

On December 6, 2002, Frederick Venables
filed a purported derivative action against the Company and
certain former officers and certain current and former board
members in the California Superior Court for the County of
Orange alleging breach of fiduciary duty, abuse of control,
gross mismanagement, waste of corporate assets and unjust
enrichment. Pursuant to a stipulation filed on or about
April 23, 2004 and approved by the court, the deadline to
respond to the complaint has been stayed until 2005. The
complaint seeks unspecified monetary damages, equitable relief
and injunctive relief based upon allegations that the defendants
issued false and misleading statements regarding the
Companys revenues and expenses in press releases and SEC
filings. The Company intends to defend the case vigorously, but
cannot assure you that it will be resolved in the Companys
favor.

While the Company carries $20 million of
directors and officers liability insurance coverage, the
three excess carriers, representing $15 million of the
$20 million of coverage, have filed arbitration complaints
seeking rescission of the policies. The primary carrier has
agreed to reimburse the Companys defense costs up to the
limits of its $5 million policy subject to a
$0.5 million deductible. The amount of settlement accruals,
net of reimbursement from the primary carrier for prior
defense-related costs, was not material to selling, general and
administrative expenses and net loss for the three-month and
six-months periods ended June 30, 2004. Managements
evaluation of the likely impact of these actions could change in
the future and an unfavorable outcome, depending upon the amount
and timing, could have a material adverse effect on the
Companys consolidated financial position, results of
operations or cash flows for a future quarter.

On November 26, 2002, BioLife Solutions,
Inc. (BioLife) filed an action against the Company
in the Delaware Court of Chancery seeking damages for alleged
breaches of contract stemming from the Companys
acquisition, pursuant to an asset purchase agreement dated
May 28, 2002, of the tangible and intangible assets related
to BioLifes cryosurgical business. In the action, styled
as BioLife Solutions, Inc. v. Endocare, Inc., Del. Ch.,
C.A. No. 20057-NC, BioLife alleged that the Company failed
to timely register 120,022 shares of its common stock that
were provided to BioLife in connection with the asset purchase
agreement, in violation of a registration rights agreement
relating to the shares that was executed in conjunction with the
asset purchase agreement. On February 20, 2004, the Company
agreed with BioLife to settle all claims for $1,887,000, plus
return by BioLife to the Company of the 120,022 shares of
the Companys common stock referred to above.

The SEC is currently conducting an investigation
to determine whether any federal securities laws were violated
in connection with the filing of the Companys financial
statements for 2001 and the first two quarters of 2002,
including investigation into allegations that the Company and
certain of the Companys current and former officers and
directors issued or caused to be issued false and misleading
statements regarding the Companys revenues and expenses in
those SEC filings. On June 30, 2004, the Company reported
receipt of a Wells Notice from the SEC and the
issuance of Wells Notices to former members of its
senior management, former sales personnel, and its current head
of sales and marketing. On July 23, 2004, the Company
reported the receipt of Wells Notices from the SEC
by two former members and one current member of its board of
directors, all of whom are former members of the audit
committee. The Company is cooperating fully with this
investigation, but can provide no assurance that this matter
will be resolved in its favor.

The Department of Justice (DOJ) is
currently conducting an investigation into allegations that the
Company and certain of its current and former officers and
directors intentionally issued or caused to be issued false and
misleading statements regarding the Companys revenues and
expenses in SEC filings. The Company is cooperating fully with
this investigation but can provide no assurance that this matter
will be resolved in its favor.

11



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##### Table of Contents



ENDOCARE, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                           
|-- | --------------------------
|9. | Related Party Transactions



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

In November 1999, the Company received a full
recourse promissory note for $1,028,000 in connection with the
sale of 175,000 common shares at fair value to the
Companys then Senior Vice President, Sales and Marketing.
The four-year note bore interest at 5.99% per annum,
payable annually, and was recorded as a reduction in
stockholders equity. The Company agreed to forgive the
principal on the note ratably over four years subject to
performance of certain objectives that were to be mutually
agreed upon by the borrower and the Company and subject to the
borrower remaining an employee of the Company. The Company
forgave $64,000 and $129,000 for the three months and six months
ended June 30, 2003, respectively, which was recorded as
compensation expense (included in selling, general and
administrative expense). At December 31, 2003, the full
value of the note had been written off.

In January 2003, the Company extended a $344,000
non-recourse loan to an individual who is a shareholder and
consultant. The Company previously entered into an asset
purchase agreement with the shareholder in February 2002 to
acquire certain patents and a covenant not to compete for
100,000 shares of the Companys common stock valued at
$1,410,000. The Company extended the loan to the shareholder to
assist with the payment of related federal income taxes arising
from the 2002 purchase transaction. The loan is secured by the
shares issued, bears interest at 1.8% and is due at the earlier
of January 2005 or 30 days after the borrower ceases to be
a consultant to the Company.



|    |                                     
|--- | ------------------------------------
|10. | Capital Stock and Earnings Per Share

During the first quarter of 2004, the Company
retired 326,222 of its common shares held in treasury, including
120,022 shares purchased from BioLife for $504,000 in
February 2004, in connection with settlement of its litigation
with this company (see Note 8).

Basic earnings (loss) per share are computed by
dividing net income (loss) by the weighted average number of
common shares outstanding for the respective periods. Diluted
earnings (loss) per share, calculated using the treasury stock
method, gives effect to the potential dilution that could occur
upon the exercise of certain stock options that were outstanding
during the respective periods presented. For periods when the

12



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##### Table of Contents



ENDOCARE, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Company reported a net loss, these potentially
dilutive common shares were excluded from the diluted loss per
share calculation because they were anti-dilutive.

|                                                              |  |                             |            |                           |  |      |            |      |  |   |             |   |  |   |            |  
|------------------------------------------------------------- |  | --------------------------- | ---------- | ------------------------- |  | ---- | ---------- | ---- |  | - | ----------- | - |  | - | ---------- | -
|                                                              |  |                             |            |                          
|                                                              |  | Three Months Ended June 30, |            | Six Months Ended June 30,
|                                                              |  |                             |            |                          
|                                                              |  | 2004                        |            | 2003                      |  | 2004 |            | 2003
|                                                              |  |                             |            |                           |  |      |            |     
|Net loss, as reported                                         |  | $                           | (5,619,657 | )                         |  | $    | 1,661,452  |      |  | $ | (14,243,132 | ) |  | $ | (4,426,446 | )
|Basic and diluted loss per common share                       |  | $                           | (0.23      | )                         |  | $    | 0.07       |      |  | $ | (0.59       | ) |  | $ | (0.18      | )
|Basic weighted average shares                                 |  |                             | 23,999,882 |                           |  |      | 24,155,740 |      |  |   | 24,095,318  |   |  |   | 24,153,862 |  
|Dilutive effect of outstanding stock options and
    warrants |  |                             |           |                           |  |      | 1,132,171  |      |  |   |            |   |  |   |           |  
|Diluted weighted average shares                               |  |                             | 23,999,882 |                           |  |      | 25,287,911 |      |  |   | 24,095,318  |   |  |   | 24,153,862 |  



|    |             
|--- | ------------
|11. | Income Taxes

The Company reported no income tax expense for
each of the six months ended June 30, 2004 and 2003 due to
its operating losses. The continuing operating losses resulted
in an increase in the valuation allowance of $5.7 million
and $1.8 million during the six months ended June 30,
2004 and 2003, respectively. Due to the Companys history
of operating losses, management has determined that it is more
likely than not that the Companys deferred tax assets will
not be realized through future earnings. Accordingly, valuation
allowances were recorded to fully reserve the Companys
deferred tax assets as of June 30, 2004 and 2003.

13



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion and analysis should
be read in conjunction with the unaudited condensed consolidated
financial statements and notes thereto included in
Part IItem 1 of this report, and the audited
consolidated financial statements, and notes thereto, and
Managements Discussion and Analysis of Financial Condition
and Results of Operations contained in the Annual Report on
Form 10-K for the fiscal year ended December 31,
2003.

This discussion contains forward-looking
statements based on our current expectations. There are various
factors  many beyond our control  that
could cause our actual results or the occurrence or timing of
expected events to differ materially from those anticipated in
these forward-looking statements. Some of these factors are
described below and other factors are described elsewhere in
this Quarterly Report on Form 10-Q. In addition, there are
factors not described in this Quarterly Report on Form 10-Q
that could cause our actual results or the occurrence or timing
of expected events to differ materially from those anticipated
in these forward-looking statements. All forward-looking
statements included in this Quarterly Report on Form 10-Q
are based on information available to us as of the date hereof,
and we assume no obligation to update any such forward-looking
statements.

Overview

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

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

We have incurred significant operating losses and
negative cash flows from operations in each full fiscal year
since January 1, 1996. We incurred a net loss of
approximately $14.2 million for the six months ended
June 30, 2004 and a loss of $25.4 million for the year
ended December 31, 2003. As of June 30, 2004, we had
an accumulated deficit of $128.6 million. We expect to
incur additional losses as we continue our sales and marketing
efforts, upgrade our infrastructure, strengthen our financial
reporting processes and controls, and improve our products.

In addition to the cash needed to fund our
ongoing operations, there have been and will continue to be
substantial demands on cash in connection with ongoing
investigations by the SEC and DOJ into our historical accounting
and financial reporting and matters stemming from these
investigations, including expenses related to shareholder
litigation. (See Notes 2 and 8 to the condensed
consolidated financial statements included in this report.)

In June 2004, we adopted a cost-reduction
program, which includes consolidation of certain sales functions
and territories, streamlining of our corporate organizational
structure, reduction in staffing, and elimination of less
promising research and development, clinical and marketing
activities. In addition, we are reviewing our product design and
manufacturing processes in an effort to identify potential cost
efficiencies and are renegotiating our contracts with third
party cryo-service providers in order to improve our gross
margins.

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As part of this cost-reduction program, we
incurred total severance and related costs in June 2004 of
$319,000 in connection with the elimination of
19 positions. This reduction in work force is expected to
generate $2.3 million in annualized savings. This action
follows the December 2002 divestiture of our Winter Park,
Florida billing subsidiary and the 2003 downsizing of our Timm
Medical operations in Eden Prairie, Minnesota. These earlier
restructurings have contributed to a $3 million overall
improvement in selling, general and administrative expenses in
the first six months of 2004, compared to the same period last
year. Combined, these reductions in workforce have resulted in a
net headcount reduction from 194 employees at the end of
2002 to 150 employees as of June 30, 2004.

Results of Operations



| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | Three and Six Months Ended June 30,
    2004 Compared to Three and Six Months Ended June 30,
    2003

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

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

In addition to our cryosurgery products, we sell
other products acquired when we purchased Timm Medical, a
urological device manufacturer, in the first quarter of 2002. We
continue to sell our ErecAid vacuum therapy systems and RigiScan
monitors, although in 2003 we either divested or discontinued
the remaining urological product lines acquired in the Timm
Medical purchase. The reduction in year-over-year sales of our
Timm Medical products is largely attributable to these
divestitures. Sales of divested or discontinued product lines
acquired in the Timm Medical purchase totaled $1,300,000 for the
first six months of 2003.

Revenues for the three months ended June 30,
2004 increased 11.0% to approximately $8,312,000 compared to
$7,490,000 for the three months ended June 30, 2003. The
increase in revenues was primarily attributable to growth in
sales of disposables and procedure fees related to our
cryosurgical business, partially offset by the impact of
divestitures of non-core product lines in 2003.

The number of cryosurgical procedures performed,
and related sales of disposable products used in these
procedures, grew significantly in the three months ended
June 30, 2004 compared to the same period in 2003.
Procedures increased 55.1%, from an estimated 833 in the second
quarter of 2003 to an estimated 1,292 in the second quarter of
2004, while the related revenues increased 44.2%, from
$4,042,000 in the earlier quarter to $5,830,000 in the second
quarter of 2004. Contributing to growth in sales of cryosurgical
products was an increase in sales of these products into the
interventional radiology market. Our average revenue per
cryosurgical procedure declined slightly during the first six
months of 2004 compared to the same period in 2003. This is
partly due to an increase in sales of our cryosurgical
disposables, without the service component, directly to
hospitals or other service providers, and partly due to pricing
pressure from certain of our large hospital customers.

15



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##### Table of Contents



Sales of our Timm Medical product lines decreased
21.8% from $2,643,000 in the three months ended June 30,
2003 to $2,068,000 in the three months ended June 30, 2004.
This was primarily due to the divestiture of the Dura II
line of implantable penile prostheses and the divestiture of the
urinary incontinence product lines in 2003. Divestitures of
these non-core products acquired in the Timm Medical purchase
accounted for a reduction of $411,000 in sales.

Revenues from the sale of our Cryocare Surgical
Systems were down from $392,000 in the second quarter of 2003 to
$116,000 in the second quarter of 2004. This is primarily due to
our strategy of promoting adoption of our technology through an
emphasis on growth in cryosurgical procedures, rather than
through sales of capital equipment.

Revenues for the six months ended June 30,
2004 increased 3.6% to $15,694,000 compared to $15,152,000 in
2003. The increase in revenue is primarily due to growth in
sales of cryosurgical disposables and procedure fees, partially
offset by divestitures of the urinary incontinence products and
the Dura II line. Sales of cryosurgical probes and
procedures grew 38.8% from $7,594,000 for the six months ended
June 30, 2003 to $10,538,000 for the same period in 2004.
Sales of Cryocare Surgical Systems decreased from $508,000 in
the first six months of 2003 to $232,000 for the first six
months of 2004, due to a reduction in the number of units sold.

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

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

Cost of revenues for the three months ended
June 30, 2004 increased 24.3% to $4,313,000 compared to
$3,470,000 for the three months ended June 30, 2003. The
increase in cost of revenues resulted primarily from growth in
sales of cryosurgical probes and procedures, offset by
elimination of costs related to the Dura II and urinary
incontinence product lines that were divested in the second and
fourth quarters of 2003, respectively. Cost of revenues related
to our cryosurgical probes and procedures rose $1,280,000, from
$1,949,000 to $3,229,000 for the second quarter of 2004 compared
to the same period in the prior year. This increase was partly
driven by higher probe and procedure revenues and partly by an
increase in cryosurgical procedure fees paid to third party
service providers.

Cost of revenues for the six months ended
June 30, 2004 increased 14.5% to $8,547,000 compared to
$7,466,000 in the prior-year period. Reasons for the increase
are consistent with the explanations above for the
quarter-over-quarter increase. Cost of revenues for cryosurgical
probes and procedures for the first six months of 2004 was
$6,054,000 compared to $4,182,000 for the first six months of
2003. Cost of revenues related to our Timm Medical product lines
fell $597,000 from the six months ended June 30, 2003 to
the six months ended June 30, 2004 due to product line
divestures.

Gross Margins.Gross
margins on revenues declined to 48.1% for the three months ended
June 30, 2004 compared to 53.7% for the three months ended
June 30, 2003 due primarily to a reduction in gross margins
on disposable cryosurgical probes and procedures and to
divestiture in 2003 of higher margin product lines acquired in
our Purchase of Timm Medical. Margins on cryosurgical
disposables and procedures dropped from 51.8% in the second
quarter of 2003 to 44.6% in the second quarter of 2004 due to a
shift in the composition of our cryosurgical business away from
sales of procedures where we earn a service fee towards sales of
procedures where we pay a third party to provide the service
component or where we sell disposables without a service
component.

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##### Table of Contents



Gross margins on revenues for the six months
ended June 30, 2004 decreased to 45.5% compared to 50.7%
for the same period in 2003 for reasons consistent with those
described above.

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

Research and development expenses for the three
months ended June 30, 2004 increased 23.8% to $452,000
compared to $365,000 for the three months ended June 30,
2003. The increase was primarily attributable to one-time costs
incurred in June 2004 in connection with our reduction in staff
as well as a higher allocation of costs to R&D for
regulatory and quality testing activities. As a percentage of
revenues, research and development expenses increased to 5.4% in
the second quarter of 2004 from 4.9% during the three months
ended June 30, 2003.

Research and development expense for the six
months ended June 30, 2004 increased 41.5% to $988,000
compared to $698,000 for the same period in 2003. As a
percentage of revenues, research and development expenses
increased to 6.3% from 4.6%. The variances are attributable to
the reasons stated above, as well as to higher contract
engineering costs in 2004 related to product improvements.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses primarily consist of salaries,
commissions and related benefits and other overhead costs for
employees and activities in the areas of sales, marketing,
customer service, legal affairs, finance, information
technology, human resources and administration. Fees for
attorneys, independent auditors and certain other outside
consultants and suppliers are included where their services or
products are related to selling, general and administrative
activities. This category also includes reserves for litigation
losses less amounts recoverable under our insurance policies.
Litigation reserves and insurance recoveries are recorded when
such amounts are probable and can be reasonably estimated.
Expenses associated with advertising, trade shows, promotional
and training costs related to marketing our products are also
classified as selling, general and administrative expenses as
are the costs of conducting clinical research studies for the
purpose of collecting clinical data used in promoting our
products.

Selling, general and administrative expenses for
the three months ended June 30, 2004 decreased 24.1% to
$9,089,000 compared to $11,979,000 for the three months ended
June 30, 2003 as a result of our efforts to streamline
operations beginning with the closure of our Florida billing and
contracting subsidiary in December 2002, consolidation of
certain Timm Medical operations in our California headquarters
in June 2003, divestiture of non-core product lines and
elimination of related support costs throughout 2003.
Additionally, non-recurring legal and accounting costs incurred
in connection with investigations into the Companys
historical accounting and financial reporting, as well as for
Sarbanes 404 compliance, declined from approximately
$2.5 million in the quarter ended June 30, 2003 to
approximately $2.0 million in the same period in 2004. As a
percentage of revenues, selling, general and administrative
expenses declined from 159.9% to 109.3% for the second quarters
of 2003 and 2004, respectively.

Selling, general and administrative expenses for
the six months ended June 30, 2004 decreased 5.8% to
$20,269,000 compared to $21,527,000 for the same period in 2003.
Reasons for the decrease in these costs are consistent with
those described above. Legal, audit and accounting support fees
related to regulatory investigations of the Companys
historical accounting and financial reporting and related
litigation, were approximately $5.3 million for the six
months ended June 30, 2004 compared to $3.5 million
for the same period in 2003. Compared to the first six months of
2003, selling, general and administrative costs, before the
impact of these non-recurring charges, declined
$3.1 million, or 17.2% in the six months ended
June 30, 2004.

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Interest Income,
Net.Interest income, net, for the
three months ended June 30, 2004 was $27,000 compared to
$196,000 for the three months ended June 30, 2003. The
decrease in net interest income in 2004 compared to 2003
resulted from continued decline in our cash balances.

Interest income, net for the six months ended
June 30, 2004 was $72,000 compared to $412,000 for the six
months ended June 30, 2003. As for the three month period,
the decrease was due to declining cash balances.

Minority Interest.Minority interests represent earnings attributable to minority
investors in the mobile prostate treatment businesses we
acquired from USMD on September 30, 2002. The amounts
recorded for minority interests were $155,000 and $255,000 for
the three months and six months ended June 30, 2004,
respectively, compared to $155,000 and $244,000 for the three
months and six months ended June 30, 2003, respectively.
Revenues and earnings from these businesses remained consistent
with our overall operations.

Gain on Divestitures,
Net.During the three months ended
June 20, 3003 we recorded a net gain of approximately
$9.9 million related to divestiture of the SurgiFrost and
Dura II product lines. Also, in April 2003, we sold the
intangibles and inventory related to our Dura II products
to American Medical Systems for $2.2 million resulting in a
net loss of approximately $35,000.

Net income (Loss).Net loss for the three months ended June 30, 2004 was
$5,620,000 or $0.23 per diluted share on 24,000,000
weighted average shares outstanding, compared to net income of
$1,661,000, or $0.07 per diluted share on 25,288,000
weighted average shares outstanding for the same period in 2003.
The net income in the 2003 period is primarily a result of the
gain on divestitures, as discussed above.

Our net loss for the six months ended
June 30, 2004 was $14,243,000, or $0.59 per diluted
share, on 24,095,000 weighted average shares outstanding,
compared to a net loss of $4,426,000, or $0.18 per share,
on 24,154,000 weighted average shares outstanding for the same
period in 2003.

Liquidity and Capital Resources

Since inception, we have incurred losses from
operations and have reported negative cash flows. As of
June 30, 2004, we had an accumulated deficit of
$128.6 million and cash and cash equivalents of
$11.4 million. We currently have no long-term debt, and no
long-term financial obligations other than under operating
leases and purchase commitments for raw material used in
manufacturing our products. Although we believe that our
existing cash and cash equivalents will be sufficient to fund
our working capital requirements, capital expenditures and other
obligations through 2004, there are certain risks and
uncertainties that could, in the future, change our opinion
regarding the adequacy of our capital resources. During the
six months ended June 30, 2004, $14.2 million of
our cash was used to fund operating losses. These losses were
partially offset by our efforts to reduce net uses of working
capital through aggressive collections of accounts receivable,
management of vendor payables, and deferral of non-essential
capital expenditures.

In February 2004 we paid approximately
$1.5 million in directors and officers
liability insurance premiums, and we paid approximately
$1.9 million to BioLife to settle litigation, as described
above in Note 8 to our condensed consolidated financial
statements. In addition, during the first six months of 2004 we
incurred approximately $5.3 million in non-recurring legal
and accounting fees associated with the ongoing investigations
into possible irregularities in our accounting and financial
reporting in earlier periods and with our efforts to gain
compliance with Sarbanes 404.

We face the possibility that there will be
additional material cash payments required in connection with
resolving matters related to the investigations into our
historical accounting and financial reporting. We and certain
former officers and certain current and former board members
have been named defendants in a class action and a derivative
lawsuit. In addition, we, current and former members of our
Board of Directors, former members of our senior management,
former sales personnel, and our current head of sales and
marketing have

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received Wells Notices from the SEC
(See Note 8 to our condensed consolidated financial
statements contained in this report). We are generally obliged,
to the extent permitted by law, to indemnify our directors and
officers who are named defendants in litigation related to their
service. At this point in time we are unable to provide a
reasonable estimate of our potential liability in these cases.


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

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

While we have continued to experience growth in
cryosurgical probe and procedure revenues through the first six
months of 2004 and have reduced our selling, general and
administrative costs through this period compared to the same
period in 2003, we are not expected to reach break-even or cash
flow positive in 2004. We will use cash reserves to finance our
cash flow deficit in 2004. In order to continue as a going
concern, we will need to raise additional capital to fund
operations through the sale of equity securities to public or
private investors, incurring debt, or the sale or licensing of
our assets. Additional capital may not be available on terms
acceptable us, or at all. If additional capital were raised
through the issuance of equity securities, the percentage of our
stock owned by our then-current stockholders would be reduced.

Risks Related to Our Business

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



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

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



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

In addition to the challenges of the SEC
investigation, the DOJ investigation, a shareholder class-action
and a derivative lawsuit and other legal proceedings described
below, our new management members have spent considerable time
and effort dealing with internal and external investigations
involving our previous internal controls, accounting policies
and procedures, disclosure controls and procedures and corporate

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governance policies and procedures. The
significant time and effort spent has adversely affected our
operations and may continue to do so in the future.




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

Since the fourth quarter of 2002, we have
incurred significant costs related to, among other things,
legal, accounting and other professional fees associated with
our internal reviews of various accounting and other matters,
the ongoing investigation of us by the SEC and DOJ, various
shareholder class-action and derivative lawsuits and other legal
proceedings described below. We are generally obliged, to the
extent permitted by law, to indemnify our directors and officers
who are named defendants in litigation related to their service.
At this point in time we are unable to provide a reasonable
estimate of our potential liability in these cases.

In addition we are making significant investments
in the development and implementation of sound internal controls
and corporate governance policies and procedures designed to
enhance the accuracy, quality and consistency of our financial
information and reporting. We will continue to incur significant
related expenses in the future.

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

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

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

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



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

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

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We have incurred annual operating losses each
year since our inception. For the six months ended June 30,
2004, and 2003, we had losses from operations of approximately
$14.1 million and $14.5 million, respectively. As of
June 30, 2004, our accumulated deficit was approximately
$128.6 million. It is possible that we will not generate
sufficient revenues from product sales and service revenues to
achieve or sustain profitability. Even if we do achieve
significant revenues from our product sales and service
revenues, we expect that increased operating expenses will
result in significant operating losses over the next several
quarters, as we, among other things:



| |   |                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | expand our infrastructure to support more robust
    internal controls, including policies and procedures related to
    our accounting practices, disclosure controls and corporate
    governance;
|
| |  | incur costs related to legal proceedings,
    including ongoing government investigations;                                                                                                          
|
| |  | expand our sales and marketing activities as we
    attempt to gain market share for our Cryocare Surgical
    System; and                                                                          
|
| |  | continue our research and development efforts to
    improve our existing products and develop new products.                                                                                        

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



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

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



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

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



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

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

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regulations, we may face sanctions, including,
but not limited to, significant monetary penalties and
injunctive relief.


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

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



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

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



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

Our common stock was de-listed from The Nasdaq
Stock Market on January 16, 2003. One result of this action
is a limited public market for our common stock. Trading is now
conducted in the over-the-counter market in the so-called
Pink Sheets. Consequently, selling our common stock
is more difficult because smaller quantities of shares can be
bought and sold, transactions can be delayed and security
analyst and news media coverage of us may be reduced. These
factors could result in lower prices and larger spreads in the
bid and ask prices for shares of our common stock as well as
lower trading volume. Although we will seek to have our common
stock re-listed on a national stock exchange or market, we can
provide no assurance that we will be re-listed.

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

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

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

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



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

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



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

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

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

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

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

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

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

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



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

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

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commit the necessary resources to effectively
market and sell our Cryocare Surgical System. If we are unable
to expand our sales and marketing capabilities or if our senior
sales and marketing personnel are not retained, we may not be
able to effectively commercialize our Cryocare Surgical System.




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

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



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

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



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

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



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

Our success will depend to a significant degree
on our ability to secure and protect intellectual property
rights and to enforce patent and trademark protections relating
to our technology. From time to time, litigation may be
advisable to protect our intellectual property position.
However, these legal means afford only limited protection and
may not adequately protect our rights or permit us to gain or
keep any competitive advantage. Any litigation in this regard
could be costly, and it is possible that we will not have
sufficient resources to fully pursue this litigation or to
protect our other intellectual property rights. It could result
in the rejection or invalidation of our existing and future
patents. Any adverse outcome in litigation relating to the
validity of our patents, or any failure to pursue litigation or
otherwise to protect our patent position, could have a material
adverse effect on our business, financial condition, results of
operations and cash flows. Also, even if we prevail

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




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

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

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

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

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



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

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

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



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

We depend upon a number of unaffiliated
third-party suppliers for components and materials used in the
manufacture of our products and, as such, our business would be
seriously harmed if we were unable to develop and maintain
relationships with suppliers that allow us to obtain sufficient
quantities and quality materials and components on acceptable
terms. If our principal suppliers cease to supply the materials
and

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components we need to manufacture our products,
the qualification of additional or replacement suppliers could
be a lengthy process and there may not be adequate alternatives
to meet our needs, which will have a material adverse effect on
our business, financial condition, results of operations and
cash flows. We may not be able to obtain the necessary
components and materials used in our products in the future on a
timely basis, if at all.




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

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

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



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

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



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

The federal Stark law prohibits a physician from
referring medical patients for certain services to an entity
with which the physician has a financial relationship. A
financial relationship includes both investment interests in an
entity and compensation arrangements with an entity. Many states
have similar and often broader laws prohibiting referrals by any
licensed health care provider to entities with which they have a
financial relationship. These state laws generally apply to
services reimbursed by both governmental and private payors.
Violation of these federal and state laws may result in
prohibition of payment for services rendered, loss of licenses,
fines, criminal penalties and exclusion from governmental and
private payor programs, among other things. We have financial
relationships with physicians and physician-owned entities,
which in turn have financial relationships with hospitals and
other providers of designated health services.

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




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

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

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



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

The medical device industry generally, and the
urological disease treatment market in particular, are
characterized by rapid technological change, changing customer
needs, and frequent new product introductions. If our
competitors existing products or new products are more
effective than or considered superior to our products, the
commercial opportunity for our products will be reduced or
eliminated. We face intense competition from companies in the
cryosurgical marketplace as well as companies offering other
treatment options, including radical surgery, radiation therapy
and hormone therapy. If we are successful in penetrating the
market for treatment of prostate cancer with our cryosurgical
treatment, other medical device companies may be attracted to
the marketplace. Many of our potential competitors are
significantly larger than we are and have greater financial,
technical, research, marketing, sales, distribution and other
resources than we do. We believe there will be intense price
competition for products developed in our markets. Our
competitors may develop or market technologies and products,
including drug-based treatments, that are more effective or
commercially attractive than any that we are developing or
marketing. Our competitors may obtain regulatory approval, and
introduce and commercialize products before we do. These
developments could have a material adverse effect on our
business, financial condition, results of operations and cash
flows. Even if we are able to compete successfully, we may not
be able to do so in a profitable manner.

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

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



| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | impact of legal proceedings;                                                                                                                 
|
| |  | costs of expanding our infrastructure to support
    more robust internal controls, including more effective policies
    and procedures;    
|
| |  | costs to strengthen our accounting practices,
    disclosure controls and corporate governance;                                              
|
| |  | market acceptance of our existing products, as
    well as products in development;                                                          
|
| |  | timing of payments received and the recognition
    of such payments as revenue under collaborative arrangements and
    strategic alliances;
|
| |  | ability to manufacture products efficiently;                                                                                                 
|
| |  | timing of our research and development
    expenditures;                                                                                     
|
| |  | timing of customer orders;                                                                                                                   
|
| |  | changes in reimbursement rates for our products
    and procedures by Medicare and other third-party payors;                                 
|
| |  | potential impact of acquisitions;                                                                                                            
|
| |  | timing of regulatory approvals for new products;                                                                                             
|
| |  | outcomes of clinical studies by us or our
    competitors;                                                                                   
|
| |  | competition from other treatment
    modalities; and                                                                                         
|
| |  | physician and patient acceptance of cryosurgery.                                                                                             

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



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

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



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | actual or anticipated variations in our operating
    results;                                                             
|
| |  | developments regarding government and third-party
    reimbursement;                                                       
|
| |  | changes in government regulation of our products
    and business practices;                                               
|
| |  | developments concerning government investigation
    of us;                                                                
|
| |  | developments concerning proprietary rights;                                                                                
|
| |  | developments concerning litigation or public
    concern as to the safety of our products or our
    competitors products;
|
| |  | technological innovations or introduction of new
    products by us or our competitors;                                    
|
| |  | investor and analyst perception of us and our
    industry;                                                                

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| |   |                                                 
| | - | ------------------------------------------------
| |  | general economic and market conditions; and     
|
| |  | physician and patient acceptance of cryosurgery.

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



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

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



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

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

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



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

During the past several years, the United States
and other international markets experienced a significant
economic downturn. In addition, the United States and other
countries suffered significant acts of hostility, terror and
war. Such acts may increase or prolong such negative economic
conditions. The economic downturn may impact our ability to
maintain or increase profitability by negatively affecting
growth in demand for our products. There can be no certainty as
to the degree or severity of the duration of this downturn. We
also cannot predict the extent and timing of the impact of the
economic downturn in the United States and in other countries
and geographic regions in which we conduct our business.



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

Our headquarters, cryosurgical products
manufacturing facilities, research facilities and much of our
infrastructure, including computer servers, are located in
California, an area that is susceptible to earthquakes

30



---



##### Table of Contents



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







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

The primary objective of our investment
activities is to preserve principal while at the same time
maximizing the income we receive from our invested cash without
significantly increasing risk of loss. Our financial instruments
include cash, cash equivalents, short-term investments, accounts
receivable, investments, accounts payable and accrued
liabilities. At June 30, 2004, the carrying values of our
financial instruments approximated their fair values. Our policy
is not to enter into derivative financial instruments. In
addition, we do not enter into any futures or forward contracts
and therefore, we do not have significant market risk exposure
with respect to commodity prices.

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






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

(a) Evaluation of Disclosure Controls and
Procedures. We maintain disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in our reports pursuant to the Securities Exchange Act
of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commissions rules and forms and that such
information is accumulated and communicated to our management,
including our chief executive officer and chief financial
officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible
controls and procedures.

As required by Rule 13a-15(b) of the
Securities Exchange of 1934, as amended, we carried out an
evaluation, under the supervision and with the participation of
our management, including our chief executive officer and chief
financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the
end of the quarter covered by this report. Based on the
foregoing, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures
were not yet effective at the reasonable assurance level.

Since March 2003, management has implemented and
continues to implement significant changes in organization,
policies and procedures designed to enhance our disclosure
controls and procedures and the related internal controls.
Nevertheless, during much of 2003, many of these enhancements to
our disclosure controls and procedures and the related internal
controls were not yet in place, or were only partially in place.
In addition, until the recent filing of our past due reports on
Form 10-Q, we have not been current in our reporting under
Section 15(d) of the Securities Exchange Act of 1934. For
this reason, management has undertaken an extensive and
substantive review and evaluation of all financial transactions
that, individually or collectively, could have a material impact
on the information contained in this Form 10-Q. These review

31



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##### Table of Contents



procedures, in combination with the changes in
internal control that have been implemented as of the end of the
period covered by this report, form the basis for our
determination that the financial statements and other
information contained in this report fairly present, in all
material respects, our financial condition, results of
operations and cash flows for the six months ended June 30,
2003 and 2004.


(b) Changes in Internal Controls.
Except as described above in subsection (a) of this
Item 4, there was no change in our internal control over
financial reporting during our second fiscal quarter for 2004
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




PART II  OTHER
INFORMATION






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

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

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

On December 6, 2002, Frederick Venables
filed a purported derivative action against us and certain
former officers and certain current and former board members in
the California Superior Court for the County of Orange alleging
breach of fiduciary duty, abuse of control, gross mismanagement,
waste of corporate assets and unjust enrichment. Pursuant to a
stipulation filed on or about April 23, 2004 and approved
by the court, the deadline to respond to the complaint has been
stayed until 2005. The complaint seeks unspecified monetary
damages, equitable relief and injunctive relief based upon
allegations that the defendants issued false and misleading
statements regarding our revenues and expenses in press releases
and SEC filings. We intend to defend the case vigorously, but
cannot assure you that it will be resolved in our favor.

The SEC is currently conducting an investigation
to determine whether any federal securities laws were violated
in connection with the filing of our financial statements for
2001 and the first two quarters of 2002, including investigation
into allegations that we and certain of our current and former
officers and directors issued or caused to be issued false and
misleading statements regarding our revenues and expenses in
those SEC filings. On June 30, 2004, we reported our
receipt of a Wells Notice from the SEC and the
issuance of Wells Notices to our former senior
management, former sales personnel, and our current head of
sales and marketing. On July 23, 2004, we reported the
receipt of Wells Notices from the SEC by two former
members and one current member of our board of directors, all of
whom are former members of our audit committee. We are
cooperating fully with this investigation. We cannot assure you
that this matter will be resolved in our favor.

The DOJ is currently conducting an investigation
into allegations that we and certain of our current and former
officers and directors intentionally issued or caused to be
issued false and misleading statements

32



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##### Table of Contents



regarding our revenues and expenses in SEC
filings. We are cooperating fully with this investigation. We
cannot assure you that this matter will be resolved in our favor.







|        |                                              
|------- | ---------------------------------------------
|Item 2. | Changes in Securities and Use of
    Proceeds

In May 2004 we issued 15,000 shares to a
former director upon his exercise of stock options granted to
him while he was a director. The exercise price of these options
ranged from $2.06 to $2.13 per share, for an aggregate exercise
price of $31,612. We issued these shares in reliance on the
exemption from registration provided by Section 4(2) of the
Securities Act of 1933, in that the issuance did not involve a
public offering. The issuee represented to us his intention to
acquire the shares for investment only and not with a view to or
for sale in connection with any distribution thereof and
appropriate legends were affixed to the certificate evidencing
the shares.






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

Not applicable.






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

None.






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

None.






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

(a) Exhibits

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

33



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                          
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 2  | .7(6)       |  | Agreement of Purchase and Sale, dated as of
    April 7, 2003, by and among American Medical Systems, Inc.,
    the Company and Timm Medical Technologies, Inc.                                                                                          
|        | 2  | .8(7)       |  | Asset Purchase and Technology License Agreement,
    dated as of April 29, 2003, by and between the Company and
    CryoCathTechnologies Inc.                                                                                                            
|        | 2  | .9(8)       |  | Agreement of Purchase and Sale, dated as of
    October 15, 2003, by and between SRS Medical Corp. and Timm
    Medical Technologies, Inc.                                                                                                               
|        | 2  | .10(9)      |  | Amendment No. 2 to Partnership and Limited
    Liability Company Membership Interest Purchase Agreement, dated
    as of February 27, 2004, by and among Endocare, Inc. and
    U.S. Medical Development, Inc., U.S.M.D., Ltd. and
    U.S.M.D. I, L.L.C.
|        | 2  | .11(9)      |  | Service Fee Agreement, dated as of
    February 26, 2004, by and among Endocare, Inc. and the
    Limited Partners of Mid-America Cryotherapy, L.P.                                                                                                      
|        | 2  | .12(9)      |  | First Amendment to Agreement of Purchase and
    Sale, dated as of March 25, 2004, by and between SRS
    Medical Corp. and Timm Medical Technologies, Inc.                                                                                              
|        | 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(10)      |  | Amended and Restated Bylaws of the Company.                                                                                                                                                                                                              
|        | 10 | .1          |  | Letter Agreement, dated as of June 9, 2004,
    by and between the Company and Katherine Greenberg.                                                                                                                                                      
|        | 31 | .1          |  | Certification under Section 302 of the
    Sarbanes-Oxley Act of 2002 for Craig T. Davenport.                                                                                                                                                            
|        | 31 | .2          |  | Certification under Section 302 of the
    Sarbanes-Oxley Act of 2002 for Katherine Greenberg.                                                                                                                                                           
|        | 32 | .1          |  | Certification under Section 906 of the
    Sarbanes-Oxley Act of 2002 for Craig T. Davenport.                                                                                                                                                            
|        | 32 | .2          |  | Certification under Section 906 of the
    Sarbanes-Oxley Act of 2002 for Katherine Greenberg.                                                                                                                                                           



---



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



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



| |     |                                                                                                                                 
| | --- | --------------------------------------------------------------------------------------------------------------------------------
| | (1) | Previously filed as exhibits to our Form 8-K
    filed on March 5, 2002.                                                        
|
| | (2) | Previously filed as exhibits to our Registration
    Statement on Form S-3 filed on September 20, 2001 and
    October 31, 2001.
|
| | (3) | Previously filed as exhibits to our
    Form 10-Q filed on August 14, 2002.                                                     
|
| | (4) | Previously filed as exhibits to our Form 8-K
    filed on August 16, 2002.                                                      
|
| | (5) | Previously filed as an exhibit to our
    Form 8-K filed on October 15, 2002.                                                   
|
| | (6) | Previously filed as an exhibit to our
    Form 8-K filed on April 22, 2003.                                                     
|
| | (7) | Previously filed as an exhibit to our
    Form 8-K filed on April 29, 2003.                                                     
|
| | (8) | Previously filed as an exhibit to our
    Form 8-K filed on October 20, 2003.                                                   
|
| | (9) | Previously filed as an exhibit to our
    Form 10-Q filed on May 10, 2004.                                                      



|     |                                                                             
|---- | ----------------------------------------------------------------------------
|(10) | Previously filed as an exhibit to our
    Form 10-K filed on March 15, 2004.

(b) Reports on Form 8-K

We furnished a Form 8-K under Item 12
on May 11, 2004 to report the release of our unaudited
financial results for the quarter ended March 31, 2004.

We filed a Form 8-K under Item 5 on
June 30, 2004 to report our receipt of a Wells
Notice from the SEC and the issuance of Wells
Notices to our former senior management, former sales
personnel and our current head of sales and marketing.

34



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##### Table of Contents






SIGNATURES

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



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



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

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



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

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

Date: August 9, 2004

35



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##### Table of Contents






EXHIBIT INDEX

|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 2  | .1(1)       |  | Agreement and Plan of Reorganization dated
    February 21, 2002, by and among the Company, Technologies,
    Inc., TMT Acquisition Corporation and certain stockholders of
    Timm Medical Technologies, Inc. Certain schedules and other
    attachments to this exhibit were omitted. We agree to furnish
    supplementally a copy of any omitted schedules or attachments to
    the Commission upon request.                            
|        | 2  | .2(2)       |  | Agreement and Plan of Merger dated June 30,
    1999, by and among the Company, Advanced Medical Procedures,
    Inc., Advanced Medical Procedures, LLC, Gary M. Onik, M.D.,
    Robert F. Byrnes and Jerry Anderson. Certain schedules and other
    attachments to this exhibit were omitted. We agree to furnish
    supplementally a copy of any omitted schedules or attachments to
    the Commission upon request.                      
|        | 2  | .3(3)       |  | Asset Purchase Agreement, dated February 6,
    2002, by and between the Company and Gary M. Onik, M.D.
    Certain schedules and other attachments to this exhibit were
    omitted. We agree to furnish supplementally a copy of any
    omitted schedules or attachments to the Commission upon request.                                                                                                                                    
|        | 2  | .4(3)       |  | Asset Purchase Agreement dated May 28, 2002,
    by and among the Company and Cryomedical Sciences, Inc. Certain
    schedules and other attachments to this exhibit were omitted. We
    agree to furnish supplementally a copy of any omitted schedules
    or attachments to the Commission upon request.                                                                                                                                   
|        | 2  | .5(4)       |  | Partnership and Limited Liability Company
    Membership Interest Purchase Agreement, dated as of
    August 12, 2002, by and among Endocare, Inc. and
    U.S. Medical Development, Inc., U.S.M.D., Ltd. and
    U.S.M.D. I, L.L.C. Certain schedules and exhibits
    referenced in this exhibit have been omitted. We agree to
    furnish supplementally a copy of any omitted schedules or
    attachments to the Commission upon request.
|        | 2  | .6(5)       |  | Amendment No. 1 to Partnership and Limited
    Liability Company Membership Interest Purchase Agreement, dated
    as of August 12, 2002, by and among Endocare, Inc. and
    U.S. Medical Development, Inc., U.S.M.D., Ltd. and
    U.S.M.D. I, L.L.C.                                                                                                                                                                                        
|        | 2  | .7(6)       |  | Agreement of Purchase and Sale, dated as of
    April 7, 2003, by and among American Medical Systems, Inc.,
    the Company and Timm Medical Technologies, Inc.                                                                                                                                                                                                                                                                                
|        | 2  | .8(7)       |  | Asset Purchase and Technology License Agreement,
    dated as of April 29, 2003, by and between the Company and
    CryoCathTechnologies Inc.                                                                                                                                                                                                                                                                                                  
|        | 2  | .9(8)       |  | Agreement of Purchase and Sale, dated as of
    October 15, 2003, by and between SRS Medical Corp. and Timm
    Medical Technologies, Inc.                                                                                                                                                                                                                                                                                                     
|        | 2  | .10(9)      |  | Amendment No. 2 to Partnership and Limited
    Liability Company Membership Interest Purchase Agreement, dated
    as of February 27, 2004, by and among Endocare, Inc. and
    U.S. Medical Development, Inc., U.S.M.D., Ltd. and
    U.S.M.D. I, L.L.C.                                                                                                                                                                                      
|        | 2  | .11(9)      |  | Service Fee Agreement, dated as of
    February 26, 2004, by and among Endocare, Inc. and the
    Limited Partners of Mid-America Cryotherapy, L.P.                                                                                                                                                                                                                                                                                            
|        | 2  | .12(9)      |  | First Amendment to Agreement of Purchase and
    Sale, dated as of March 25, 2004, by and between SRS
    Medical Corp. and Timm Medical Technologies, Inc.                                                                                                                                                                                                                                                                                    
|        | 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(10)      |  | Amended and Restated Bylaws of the Company.                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .1          |  | Letter Agreement, dated as of June 9, 2004,
    by and between the Company and Katherine Greenberg.                                                                                                                                                                                                                                                                                                                                            
|        | 31 | .1          |  | Certification under Section 302 of the
    Sarbanes-Oxley Act of 2002 for Craig T. Davenport.                                                                                                                                                                                                                                                                                                                                                  
|        | 31 | .2          |  | Certification under Section 302 of the
    Sarbanes-Oxley Act of 2002 for Katherine Greenberg.                                                                                                                                                                                                                                                                                                                                                 
|        | 32 | .1          |  | Certification under Section 906 of the
    Sarbanes-Oxley Act of 2002 for Craig T. Davenport.                                                                                                                                                                                                                                                                                                                                                  

36



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##### Table of Contents



|        |    |             |  |                                                                                               
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 32 | .2          |  | Certification under Section 906 of the
    Sarbanes-Oxley Act of 2002 for Katherine Greenberg.



---



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



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



| |     |                                                                                                                                 
| | --- | --------------------------------------------------------------------------------------------------------------------------------
| | (1) | Previously filed as exhibits to our Form 8-K
    filed on March 5, 2002.                                                        
|
| | (2) | Previously filed as exhibits to our Registration
    Statement on Form S-3 filed on September 20, 2001 and
    October 31, 2001.
|
| | (3) | Previously filed as exhibits to our
    Form 10-Q filed on August 14, 2002.                                                     
|
| | (4) | Previously filed as exhibits to our Form 8-K
    filed on August 16, 2002.                                                      
|
| | (5) | Previously filed as an exhibit to our
    Form 8-K filed on October 15, 2002.                                                   
|
| | (6) | Previously filed as an exhibit to our
    Form 8-K filed on April 22, 2003.                                                     
|
| | (7) | Previously filed as an exhibit to our
    Form 8-K filed on April 29, 2003.                                                     
|
| | (8) | Previously filed as an exhibit to our
    Form 8-K filed on October 20, 2003.                                                   
|
| | (9) | Previously filed as an exhibit to our
    Form 10-Q filed on May 10, 2004.                                                      



|     |                                                                             
|---- | ----------------------------------------------------------------------------
|(10) | Previously filed as an exhibit to our
    Form 10-K filed on March 15, 2004.

37