10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO

SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2005; 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 001-15063

Endocare, Inc.

(Exact name of registrant as specified in its charter)

Delaware	33-0618093
(State of incorporation)	(I.R.S. Employer Identification No.)
201 Technology, Irvine, CA	92618
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (949) 450-5400

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value

Rights to Purchase Shares of Series A Junior Participating Preferred Stock

(Title of Class)

    Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes o  No þ

    Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o  No þ

    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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ

    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o       Accelerated Filer þ       Non-Accelerated Filer o

    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o  No þ

    The aggregate market value of the common stock of the Registrant held by non-affiliates as of June 30, 2005 was approximately $106,443,528 (based on the last sale price for shares of the Registrant’s common stock as reported in the Pink Sheets for that date). Shares of common stock held by each executive officer, director and holder of 10 percent or more of the outstanding common stock have been excluded in that such persons may be deemed affiliates. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of management or policies of the Registrant, or that such person is controlled by or under common control with the Registrant.

    There were 30,147,894 shares of the Registrant’s common stock issued and outstanding as of February 28, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

    Certain portions of the Definitive Proxy Statement related to our 2006 Annual Meeting of Stockholders, which Definitive Proxy Statement we expect to file under the Securities Exchange Act of 1934, as amended, within 120 days of the end of our fiscal year ended December 31, 2005, are incorporated by reference into Part III of this Annual Report on Form 10-K.

    Certain exhibits filed with our prior registration statements and Forms 10-K, 8-K and 10-Q are incorporated herein by reference into Part IV of this Annual Report on Form 10-K.

Endocare, Inc.

Form 10-K

For the Fiscal Year Ended December 31, 2005

TABLE OF CONTENTS

		Page
Part I
Item 1.	Business	1
Item 1A.	Risk Factors	14
Item 1B.	Unresolved Staff Comments	23
Item 2.	Properties	23
Item 3.	Legal Proceedings	23
Item 4.	Submission of Matters to a Vote of Security Holders	24
Part II
Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	25
Item 6.	Selected Consolidated Financial Data	26
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 8.	Financial Statements and Supplementary Data	36
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	36
Item 9A.	Controls and Procedures	36
Item 9B.	Other Information	39
Part III
Item 10.	Directors and Executive Officers of the Registrant	39
Item 11.	Executive Compensation	39
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	39
Item 13.	Certain Relationships and Related Transactions	39
Item 14.	Principal Accountant Fees and Services	39
Part IV
Item 15.	Exhibits and Financial Statement Schedules	40
	Signatures	43
	Financial Statements	F-1 to F-34
EXHIBIT 2.3
EXHIBIT 10.28
EXHIBIT 10.29
EXHIBIT 10.30
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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PART I

      This Annual Report on Form 10-K may contain forward-looking statements that involve risks and uncertainties. Such statements typically include, but are not limited to, statements containing the words “believes,” “intends,” “anticipates,” “expects,” “hopes,” “estimates,” “should,” “could,” “may,” “plans,” “planned” and words of similar import. Our actual results could differ materially from any such forward-looking statements as a result of the risks and uncertainties, including but not limited to those set forth below in “Risks Factors” and in other documents we file from time to time with the Securities and Exchange Commission, including our Quarterly Reports on Form 10-Q. Any such forward-looking statements reflect our management’s opinions only as of the date of this Annual Report on Form 10-K, and we undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements. Readers should carefully review the risk factors set forth below in “Risks Factors” and in other documents we file from time to time with the Securities and Exchange Commission, including our Quarterly Reports on Form 10-Q.

      AutoFreeze™, CGC™, Cryocare^®, Cryocare CS™, Cryocare Surgical System^®, CryoDisc^®, CryoGrid™, CryoGuide^®, Direct Access™, Endocare^®, FastTrac^®, Integrated Ultrasound™, SmartTemp™, Targeted Ablation™, Targeted Ablation of the Prostate TAP^®, Targeted Ablation Therapy TAT^®, Targeted Cryoablation of the Prostate TCAP^®, Targeted Cryoablation Therapy TCAT^®, TEMPprobe^®, and Urethral Warmer™ are our trademarks. This Annual Report on Form 10-K may also include trademarks and trade names owned by other parties, and all other trademarks and trade names mentioned in this Annual Report on Form 10-K are the property of their respective owners.

Item 1. Business

Overview

      We are a specialty medical device company focused on improving patients’ lives through the development, manufacturing and distribution of health care products for cryoablation. Our strategy is to achieve a dominant position in the prostate and renal cancer markets, further developing and increasing the acceptance of our technology in the interventional radiology and oncology markets for treatment of liver and lung cancers and management of pain from bone metastases, while achieving penetration across additional markets with our proprietary cryosurgical technology. The term “cryoablation” refers to the use of ice to destroy tissue, such as tumors, for therapeutic purposes. The term “cryosurgical technology” refers to technology relating to the use of ice in surgical procedures, including cryoablation procedures.

      Today, our FDA-cleared Cryocare Surgical System occupies a growing position in the urological market for treatment of prostate and renal cancer. Because of our initial concentration on prostate and renal cancer, the majority of our sales and marketing resources are directed toward the promotion of our technology to urologists. In addition to selling our cryosurgical disposal products to hospitals and mobile service companies, we contract directly with hospitals and health care payors for the use of our Cryocare Surgical System and disposable products on a fee-for-service basis. We believe our proprietary cryosurgical technologies have broad applications across a number of surgical markets, including for the treatment of tumors in the lung and liver, and the management of bone pain caused by tumors. To that end, we employ a dedicated sales team focused on selling percutaneous cryoablation procedures related to kidney, liver, lung and bone cancer to interventional radiology physicians throughout the United States. We intend to continue to invest in resources to continue to penetrate the interventional radiology and oncology markets and develop new markets for our cryosurgical products and technologies, particularly in the area of tumor ablation.

      We were incorporated under the laws of the State of Delaware in May 1994. We maintain our executive offices at 201 Technology Drive, Irvine, California 92618, and our telephone number at that address is (949) 450-5400. Financial information regarding our financial condition and results of operations can be found in a separate section of this Annual Report on Form 10-K, beginning on page F-1.

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Prostate Cancer/ Urology Market Background

      The prostate is a walnut-size gland surrounding the male urethra, located below the bladder and adjacent to the rectum. Prostate cancer is one or more malignant tumors that begin most often in the periphery of the gland and, like other forms of cancer, may spread beyond the prostate to other parts of the body. If left untreated, prostate cancer can metastasize to the lung or bone and potentially other sites, resulting in death.

      The number of men diagnosed with prostate cancer has risen steadily since 1980 and it is now the second most common cause of cancer-related deaths among men in the United States. The American Cancer Society estimated there would be 234,000 new cases of prostate cancer diagnosed and 27,000 deaths associated with the disease in the United States during 2006. Prostate cancer incidence and mortality increase with age. Prostate cancer is found most often in men who are over the age of 50. According to the American Cancer Society, more than 65 percent of men diagnosed with prostate cancer are over the age of 65. Incidence rates are higher in African American men. In addition to age and race, other risk factors are linked to prostate cancer, such as genetics, diet and exposure to environmental toxins such as Agent Orange.

      The dramatic increase in prostate cancer diagnoses has led to heightened awareness of the disease, which in turn has led to increased rates of testing and improved diagnostic methods. The American Cancer Society recommends that men without symptoms, risk factors and a life expectancy of at least 10 years should begin regular annual medical exams at the age of 50, and believes that physicians should offer, as a part of the exam, the prostate-specific antigen, or PSA, blood test and a digital rectal examination to detect any lumps in the prostate. The PSA blood test determines the amount of prostate specific antigen present in the blood. PSA is found in a protein secreted by the prostate, and elevated levels of PSA can be associated with, among other things, prostatitis, a non-cancerous inflammatory condition, or a proliferation of cancer cells in the prostate. Transrectal ultrasound tests and biopsies are typically performed on patients with elevated PSA readings to confirm the existence of cancer.

      Approximately 90 percent of all prostate cancers diagnosed in the United States are local or regional. Thus, approximately 211,000 patients are candidates for definitive local therapies including cryoablation. In addition it is estimated that approximately 18,000 patients in the United States each year are diagnosed with recurrent prostate cancer following previous radiation therapy. With the increasing utilization of radiation therapy, primarily brachytherapy, for initial treatment in prostate cancer, we believe that this number will increase. For recurrent tumors that are detected while still localized, we believe cryoablation is an appropriate procedure with fewer side effects than salvage radical prostatectomy and can be performed at a substantially lower cost to the medical facility.

Non-Cryosurgical Treatment Options

      Therapeutic alternatives for patients with prostate cancer have been limited and these treatments can significantly impact the patient’s quality of life. Current treatment options include radical prostatectomy, radiation therapy, hormone or other therapies, “watchful waiting,” and cryosurgery. These options are evaluated using a number of criteria, including the patient’s age, physical condition and stage of the disease. Due to the slow progression of the disease, however, the decision for treatment is typically based upon the severity of the condition and the resulting quality of life.

      Radical prostatectomy has been used for over 30 years and is most often the therapy of choice due to the surgeon’s high degree of confidence in surgically removing the cancerous tissue. The procedure is dependent on the skill of the surgeon and is often associated with relatively high incidence of post-operative impotence and incontinence and can even result in operative mortality. Radical prostatectomy often requires a three- to five-day hospital stay for patient recovery and therefore a higher cost to the medical facility than cryoablation.

      Radiation therapy for prostate cancer includes both external radiation beam and interstitial radioactive seed therapies. External beam radiation therapy emerged as one of the first alternatives to radical prostatectomy; however, studies have shown that the success rate of this procedure is not comparable to that of radical prostatectomy. Interstitial radioactive seed therapy, also referred to as brachytherapy, is the permanent

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placement of radioactive seeds in the prostate. Brachytherapy has been shown to be most effective for localized tumors caught in the early stage of disease development.

      Other therapies, primarily consisting of hormone therapy and chemotherapy, are used to slow the growth of cancer and reduce tumor size, but are generally not intended to be curative. These therapies are often used during advanced stages of the disease to extend life and to relieve symptoms. Side effects of hormonal drug therapy include increased development of breasts and other feminine physical characteristics, hot flashes, impotence and decreased libido. In addition, many hormone pharmaceuticals artificially lower PSA levels in patients, which can interfere with the staging of the disease and monitoring its progress. Side effects of chemotherapy include nausea, hair loss and fatigue. Drug therapy and chemotherapy require long-term, repeated administration of medication on an outpatient basis.

      “Watchful waiting” is recommended by physicians in certain circumstances based upon the severity and growth rate of the disease, as well as the age and life expectancy of the patient. The aim of watchful waiting is to monitor the patient, treat some of the attendant symptoms and determine when more active intervention is required. Watchful waiting has gained popularity among those patients refusing treatment due to side effects associated with radical prostatectomy. Watchful waiting requires periodic physician visits and PSA monitoring.

The History of Cryosurgery

      Cryosurgery, freezing tissue to destroy tumor cells, was first developed in the 1960’s. During this period, the use of “cold probes,” or cryoprobes, was explored as a method to kill prostate tissue without resorting to radical prostatectomy. Although effective in killing cancer cells, the inability to control the amount of tissue frozen during the procedure prevented broad use and development of cryosurgery for prostate cancer. These initial limitations in the application of cryosurgery continue to contribute to a lack of widespread acceptance of the procedure today.

      In the late 1980’s, progress in ultrasound imaging allowed for a revival in the use of cryosurgery. Using ultrasound, the cryoprobe may be guided to the targeted tissue from outside the body through a small incision. The physician activates the cryoprobe and uses ultrasound to monitor the growth of ice in the prostate as it is occurring. When the ice encompasses the entire prostate, the probe is turned off. This feedback mechanism of watching the therapy as it is administered allows the physician more precise control during application.

      Long term data suggest that prostate cryosurgery may be able to deliver disease-free rates comparable to radical surgery and radiation, but with the benefit of lower rates of incontinence and mortality, shorter recovery periods and relatively minimal complications.

Endocare Cryosurgery Technology Development

      We have sought to continually develop our technology to increase the safety and efficacy of our products. In 1996, we developed our first generation eight-probe argon-based cryosurgical system. Argon allows for room temperature gas to safely pass through the cryoprobe to create a highly sculpted repeatable ice ball. In 1997, we incorporated temperature-monitoring software to allow for continual feedback from the thermocouple tips. In 1998, we launched our CryoGuide intraoperative planning software, which allowed physicians better planning and targeting technology for use during a procedure. In 2000, we launched our 2.4mm Direct Access cryoprobe and CryoGrid which we believe shortened the time necessary to perform a procedure and added to the safety and ease of the procedure. In 2002 we developed and launched AutoFreeze, our innovative software technology that provides computer-controlled automated freeze/thaw cycles. In 2003, we launched our second generation Cryocare Surgical System, which we refer to as “Cryocare CS,” which integrated all the past and latest technology, including an on-board, integrated ultrasound device, into one complete system.

Our System Solution: Cryocare CS

      We believe Cryocare CS is the most sophisticated cryosurgery system currently available and combines the latest technology to enhance the speed and effectiveness of our FDA-cleared procedure. Exclusive features

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of the Cryocare CS include an on-board training module, integrated color Doppler ultrasound designed specifically for the needs of prostate cryosurgery, CryoGuide our patented intraoperative planning module, and AutoFreeze our patented treatment software that provides computer-controlled automated freeze/thaw cycles based upon target endpoint temperatures and continual feedback from the thermocouple tips.

      The argon gas-based Cryocare CS accommodates up to eight independently operated cryoprobes and six thermocouples to allow physicians to monitor temperatures of tissue adjacent to the prostate in real-time. Our proprietary suite of cryoprobes is engineered to consistently produce sculpted ice conforming to the unique anatomy of the prostate. Our vacuum-insulated DirectAccess CryoProbes help deliver lethal ice in a controllable and repeatable fashion. Our CryoGrid, which is similar to a brachytherapy grid, is affixed to the ultrasound stepper and aids the physician with placement of the cryoprobes ensuring that ice formation and lethal temperatures occur where necessary to destroy cancerous tissue but do not affect areas where tissue damage could cause harm.

      We believe cryosurgery is the first minimally invasive procedure that urologists can perform independently. With radiation therapies, urologists must refer the patient for treatment to a radiation oncologist. Cryosurgery offers the urologist both the opportunity to maintain continuity of patient care and to generate additional revenue.

Key Clinical Advantages of Our Cryocare CS System

      Cryocare CS provides the following significant clinical advantages relative to other principal treatment options for prostate cancer:

•  High quality of life following treatment. Our minimally invasive procedure offers patients a short recovery period for prostate cancer therapy and may result in a lower incidence of certain side effects, including incontinence.

•  Treatment of patients who have failed radiation therapy. Patients who have failed radiation therapy have limited options. Cryosurgery is an option that can be used to treat these patients effectively with significantly fewer side effects than radical surgery.

•  Treatment can be performed more than once. Regardless of what therapy is chosen there is always a chance that the cancer will recur. Unlike radiation therapy or surgery, cryosurgery can be repeated without increased morbidity.

•  Focal or partial gland treatment. Focal cryoablation is a prostate cancer treatment in which the ablation is confined to the known tumor location, thereby sparing surrounding tissue.

Marketing and Strategy

Cryosurgical Products

      Our objective in urology is to establish cryosurgery as a primary treatment option for prostate and renal cancers. Our earlier commercial efforts were focused on direct-sales to hospitals and distributor sales of these systems to third party service providers who would provide systems and technicians to hospitals where cryosurgical procedures were performed.

      In 2003, we redirected our urology strategy away from attempting to drive acceptance of cryoablation through sales of capital equipment into the urology market. Our primary objective for the urology portion of our business is now to grow market share, measured in terms of procedures, by establishing cryosurgery as a primary treatment option for prostate and renal cancers. In 2003, 2004 and 2005, we derived a significant percentage of our revenues from recurring sales of disposable supplies used with the Cryocare Surgical System.

      A cryoablation procedure requires the necessary disposable devices usually provided in the form of a kit. In addition to the disposable devices, there is a service component. Transportation and provision of equipment used in the procedure, plus the services of a technician to assist the urologist with use and monitoring of this

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equipment, comprise the service component of a cryosurgical procedure. In addition to the use of a Cryocare Surgical System, an ultrasound device is needed for visual monitoring of the prostate and ice formation, unless our new Cryocare CS unit is used, since it includes an on-board, integrated ultrasound unit. Tanks of argon and helium gas are needed for freezing and warming during the procedure. Frequently, this equipment is not stored on site but is mobilized and brought into the hospital for procedures by an independent third party.

      For urology we typically sell the disposable devices to hospitals either as part of a procedure fee or separately, that is, without the service component. We also continue to sell our Cryocare Surgical Systems both to hospitals and service partners. For interventional radiology we will often place a system with a new customer under our placement program for purposes of generating additional procedure fees.

      An important challenge we face in the prostate cancer market is to overcome initial reluctance on the part of urologists to embrace cryosurgery and to educate physicians so that they are able to incorporate cryosurgery into their primary treatment regimen. Part of this reluctance is due to clinical failures experienced during earlier efforts to introduce the technology by other companies. See above under “The History of Cryosurgery.” In addition, we compete with other therapies that have proven effective in treating prostate cancer. Over 30 years of clinical data exist documenting the safety and efficacy of radical prostatectomy for prostate cancer. There are 20 years of clinical data supporting use of various forms of radiation treatment options such as brachytherapy and beam radiation treatments, which are used to treat over one third of all prostate cancer cases each year in the United States.

      We believe we have clinical advantages for many patients over both the current most popular forms of treatment. While there are long-term clinical data available on radical prostatectomy, this treatment approach, typical of surgery in general, is characterized by a long recovery period combined with a relatively high incidence of side effects, including impotence and urinary incontinence. The appeal of radiation as a treatment alternative, particularly to patients, is that it is less invasive than surgery. Like radiation, cryosurgery is less invasive and therefore has potentially fewer side effects than radical prostatectomy. Unlike radiation treatments, however, cryosurgical treatments can be repeated on the same patient. In fact, our initial clinical successes in prostate cancer treatment were in treating patients who had failed radiation therapy. We also believe that cryosurgery has significant economic benefits for payers. These benefits include shorter hospital stays for recovery and the reduced expense to a payer for the cryosurgery procedure takes to perform as compared to radical prostatectomy and many forms of nuclear medicine, long term hormone treatment or radiation therapies.

      Key elements in our strategy for overcoming the challenges we face in establishing cryosurgery as a primary treatment option for prostate cancer are:

•  Increasing awareness in the urological community regarding the clinical benefits of cryosurgery through our presence at major technical meetings and trade shows, publication of numerous scientific papers and articles on cryosurgery and formation of a scientific advisory board to provide guidance and counsel to us regarding clinical matters and physician education;

•  Conducting ongoing clinical studies to further demonstrate the safety and efficacy of cryosurgery as a primary treatment of cancer of the prostate, as well as its value in treating prostate cancer patients who have failed radiation;

•  Conducting clinical studies to further demonstrate the safety and efficacy of cryosurgery as a treatment for renal tumors which is another important component of the urology market for cryosurgery;

•  Creating a significant number of new practicing cryosurgeons each year through our physician education program;

•  Ensuring that reimbursement for cryosurgery by Medicare and other payors is appropriate given the costs and benefits of the treatment;

•  Driving patient awareness through our direct-to-consumer advertising programs; and

•  Marketing our products to physicians and hospitals through our direct sales force.

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      Because of our initial concentration on prostate cancer, the majority of our sales and marketing resources are directed towards the promotion of cryoablation technology to urologists for the treatment of prostate and renal cancer. We are also, however, expanding the reach of our technology across a number of other markets, including for ablation of tumors in the lung and liver, as well as for managing pain related to metastatic bone cancer. Procedures for treatment of these cancers are typically performed percutaneously, using CT scanning technology, and are done by interventional radiologists. In order to better understand and address the distinct needs of this new market, we have formed a dedicated sales team to work in developing these opportunities for application of our cryosurgical technology.

      Key elements in our strategy to establish new markets for cryosurgical treatment of tumors, specifically in the interventional radiology and radiation oncology markets, are:

•  Conducting numerous clinical studies to demonstrate the safety and efficacy of cryosurgery as a primary treatment for lung and liver tumors as well as for pain management of bone metastases;

•  Formation of a dedicated sales group focused on the opportunities for cryosurgical treatment approaches in these new markets; and

•  Continuing to enhance our Cryocare Surgical System to improve its ease of use across a broad range of tissue ablation applications.

      Consistent with the focus of our cryosurgical business on tumor ablation in 2003, we made the decision to divest or discontinue certain product lines unrelated to this strategy. In April 2003 we sold the manufacturing rights to SurgiFrost, a product we had developed for treatment of cardiac arrhythmia, to CryoCath. Part of this transaction included licensing our technology and intellectual property rights related to cryosurgical applications in the cardiology market. As part of this transaction, we sold all inventory and fixed assets related to the SurgiFrost line. In addition, we made the decision in early 2003 to discontinue development and clinical testing of our Horizon Prostatic Stent, designed for treatment of benign prostate hyperplasia, also known as BPH or prostate enlargement. Lastly, in February 2006 we disposed of our Timm Medical Technologies, Inc. subsidiary to Plethora Solutions Holdings plc.

Products

      We currently market the following products:

      Prostate and Renal Cancer:

•  Cryocare Surgical System — A cryosurgical system with eight cryoprobe capability.

•  Cryocare CS System — A Cryocare Surgical System with onboard ultrasound.

•  CryoGuide — A computerized cryoprobe placement, simulation and guidance system for cryosurgery.

•  Cryoprobes — Disposable probes used with the Cryocare Surgical System.

•  FasTrac — Percutaneous access device that allows one step insertion of cryoprobes.

      Additional Cryosurgical Markets:

•  Cryocare Surgical System — A cryosurgical system with eight cryoprobe capability specially configured for interventional radiology and oncology.

Raw Materials

      We rely on third party suppliers to provide certain critical components for all of our product lines. In certain cases, the suppliers are our sole source of supply for these components. Our policy is to enter into long-term supply agreements that require suppliers to maintain adequate inventory levels and which contain other terms and conditions protecting us against unforeseen interruptions in their production. We maintain adequate stock levels at our own locations to ensure an uninterrupted source of supply. Wherever possible, we seek to establish secondary sources of supply or other manufacturing alternatives. Nevertheless, despite these efforts,

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it is possible that we may experience an interruption in supply of one or more of our critical components resulting in backorders to our customers. However, we believe that we could locate alternative sources of supply upon such terms and within such a timeframe as would not result in a material adverse effect on our business.

Patents and Intellectual Property

      As of the end of December 2005, we have rights to 39 issued United States patents relating to cryosurgical ablative technology. Included within these 39 issued United States patents are 4 patents in which we have licensed-in rights. The remainder of the patents are assigned to us. Most of these patents relate to our cryoprobe technology for creating the freeze zone and precisely controlling the shape of the freeze zone produced by the cryoprobes. Additionally, our patents relate to our computer guided system for assisting surgeons in properly placing cryoprobes in a patient, a computer controlled cryosurgery apparatus and method, a cryosurgical integrated control and monitoring system and urethral warming technology. We also have 14 pending Unites States patent applications relative to cryosurgical ablative technology. Additionally, we have 35 foreign patents and pending foreign patent applications in this technology area. The earliest of our patents do not expire until 2011. Most of the earliest patents in our core technology area do not expire until about 2016.

      Our policy is to secure and protect intellectual property rights relating to our technology through patenting inventions and licensing others when necessary. While we believe that the protection of patents and licenses is important to our business, we also rely on trade secrets, know-how and continuing technological innovation to maintain our competitive position. Given our technology and patent portfolio, we do not consider the operation of our business to be materially dependent upon any one patent, group of patents or single technological innovation.

      Our policy is to sell our products under trademarks and to secure trademark protection in the United States and worldwide where possible. We believe the protection of our trademarks is important to our business.

      No assurance can be given that our processes or products will not infringe patents or other intellectual property rights of others or that any license required would be made available under any such patents or intellectual property rights, on terms acceptable to us or at all. In the past, we have received correspondence alleging infringement of intellectual property rights of third parties. No assurance can be given that any relevant claims of third parties would not be upheld as valid and enforceable, and therefore we could be prevented from practicing the subject matter claimed or could be required to obtain licenses from the owners of any such intellectual property rights to avoid infringement.

      We seek to preserve the confidentiality of our technology by entering into confidentiality agreements with our employees, consultants, customers and key vendors and by other means. No assurance can be given, however, that these measures will prevent the unauthorized disclosure or use of such technology.

Research Strategy

      Our research goal is to develop innovative cryoablation technology that dramatically improves patient outcomes. Our primary focus is on developing devices for the treatment of prostate, kidney, lung and liver tumors and the pain associated with bone metastases. To that end, we plan to develop innovations that improve the speed and efficacy of our Cryocare Surgical System, as well as to explore new applications for use of our technology platform in the body.

      We spent approximately $1.1 million, $1.9 million and $2.3 million for the years ended 2003, 2004 and 2005 respectively, on research and development activities from continuing operations.

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Sales

      We sell our products primarily to physicians, hospitals and third party service providers and have both domestic and international customers. None of our customers accounted for in excess of 10 percent of our net revenues in 2004. The following products and services account for 15 percent or more of total revenues from continuing operations for each of the years ended December 31:

		2003			2004			2005
Cryoablation and urological products:
	Cryocare Surgical Systems		*			*			*
	Cryoprobes, disposables and procedures		91	%		91	%		94	%
	Cardiac products (CryoCath)		*			*			*

*  These products account for less than 15 percent of total revenues.

      We currently sell our cryosurgical products domestically through our direct sales force, which, as of December 31, 2005 consisted of 31 people, including 25 sales representatives and sales managers and 6 cryosurgical field technicians. Our strategy is to continue to introduce the clinical benefits of cryosurgery to new physicians as well as educating physicians already performing cryosurgery so that they are able to increasingly incorporate cryosurgery into their primary treatment plans. We also intend to create patient demand by providing education regarding the benefits of cryosurgical therapy versus alternative treatment options and by using national advertising and other programs targeted directly at prostate cancer patients.

      Internationally, our cryosurgical products are sold primarily through independent distributors. Our international sales from continuing operations represented approximately 7.2 percent, 8.1 percent and 6.9 percent of our consolidated revenue in 2003, 2004 and 2005, respectively.

      We derive our revenues from continuing operations from the following geographic regions for each of the years ended December 31:

		2003		2004		2005
		(In thousands)
United States		$	18,184	$	22,234	$	26,322
International:
	China		511		556		567
	Canada		30		760		1,015
	Other		879		631		370
Total international			1,420		1,947		1,952
Total revenues		$	19,604	$	24,181	$	28,274

Reimbursement

      We sell our Cryocare Surgical System and related disposable temperature probes and cryoprobes to hospitals and third party service companies that provide services to hospitals. A majority of procedures involving the Cryocare Surgical System are performed in hospitals on an inpatient basis. While patients occasionally pay for cryosurgical procedures directly, most patients depend upon third-party payors, including Medicare, Medicaid, Tricare and other federal health care programs, as well as private insurers to pay for their procedures.

      Accordingly, our revenue is dependent upon third-party reimbursement, particularly Medicare, since an estimated 70 percent of patients receiving cryosurgical treatments using our proprietary technology are Medicare beneficiaries.

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

      When Medicare-reimbursed services are provided on an inpatient basis, the hospital is reimbursed under the Medicare prospective payment system, based on the applicable diagnosis related group. A single payment covers all facility services.

      Outpatient reimbursement for cryosurgical procedures for Medicare beneficiaries is in accordance with the Hospital Outpatient Prospective Payment System, or HOPPS. Under HOPPS, the hospital is paid on a per procedure basis, based on the ambulatory payment classification for the procedure. The payment to the hospital includes the per procedure share of the cost for any depreciable equipment, such as our Cryocare Surgical System unit, and the provision of disposable devices, such as our temperature probes and cryoprobes.

      We are exploring percutaneous ablation of cancerous tissue in bone, kidney, lung and liver. Clinical studies are underway and as soon as studies are complete coverage decisions and unique reimbursement codes will be sought from Medicare and private payors. As of December 31, 2005, no such codes were in place except for a “tracking code established for percutaneous renal cryoablation. This tracking code is a significant step towards assignment of a Category I CPT code and wider acceptance for payment.

      Clearance to market a new device or technology by the FDA does not guarantee payment by Medicare or other payors. Future devices and technology that we develop would have to be approved for coverage by Medicare after we obtain FDA approval or clearance. The Medicare approval process is lengthy and there is no assurance that Medicare approval would be granted. Each private insurer makes its own determination whether to cover a device or procedure and sets its own reimbursement rate.

Backlog

      As of December 31, 2005, we had no backlog for our cryosurgical products. Our policy is to carry enough inventory to be able to ship most orders within a few days of receipt of order. Historically, most of our orders have been for shipment within 30 days of the placement of the order. Therefore, we rely on orders placed during a given period for sales during that period. Backlog information as of the end of a particular period is not necessarily indicative of future levels of our revenue.

Manufacturing

      We manufacture our Cryocare Surgical System and related disposables at our facilities in Irvine, California. Our facility has been inspected by the California Department of Health Services and has been issued a Device Manufacturing License.

      Our current manufacturing facility was subjected to Quality System Regulation compliance inspections by the FDA most recently in June 2004, and also in February and March 2003 and September 2002. These audits have been closed by the FDA. We have received ISO 9001, ISO 13485, and CE Marking certifications, indicating compliance with European standards for quality assurance and manufacturing process control.

Government Regulation

      Governmental regulation in the United States and other countries is a significant factor affecting the research and development, manufacture and marketing of medical devices, including our products. In the United States, the FDA has broad authority under the Federal Food, Drug and Cosmetic Act, the FD&C Act, to regulate the distribution, manufacture, marketing and sale of medical devices. Foreign sales of medical devices are subject to foreign governmental regulation and restrictions that vary from country to country.

      Medical devices intended for human use in the United States are classified into one of three categories, depending upon the degree of regulatory control to which they will be subject. Such devices are classified by regulation into either Class I general controls, Class II special standards or Class III pre-market approval

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depending upon the level of regulatory control required to provide reasonable assurance of the safety and effectiveness of the device.

      Most Class I devices are exempt from premarket notification or approval. Class II devices are subject to the premarket notification requirements under Section 510(k) of the FD&C Act. For a 510(k) to be cleared by the FDA, the manufacturer must demonstrate to the FDA that a device is substantially equivalent to another legally marketed device that was either cleared through the 510(k) process or on the market prior to 1976. It generally takes four to twelve months from the date of submission to obtain 510(k) clearance although it may take longer, in particular if clinical trials are required. Class III devices generally include the most risky devices as well as devices that are not substantially equivalent to other legally marketed devices. To obtain approval to market a Class III device, a manufacturer must obtain FDA approval of a premarket approval application, or PMA. The PMA process requires more data, takes longer and is more expensive than the 510(k) procedure.

      Our Cryocare Surgical Systems have been cleared for marketing through the 510(k) process.

      We can provide no assurance that we will be able to obtain clearances or approvals for clinical testing or for manufacturing and sales of our existing products for all applications in all targeted markets, or that we will be able to obtain clearances or approvals needed to introduce new products and technologies. After a device is placed on the market, numerous regulatory requirements apply. These include:

•  quality system regulation, which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures during the manufacturing process;

•  labeling regulations, which prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling; and

•  medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur.

      Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:

•  fines, injunctions, and civil penalties;

•  recall or seizure of our products;

•  operating restrictions, partial suspension or total shutdown of production;

•  refusing our request for 510(k) clearance or premarket approval of new products;

•  withdrawing 510(k) clearance or premarket approvals that are already granted; and

•  criminal prosecution.

      Medical device laws are also in effect in many of the countries outside of the United States in which we do business. These laws range from comprehensive device approval and quality system requirements for some or all of our medical device products to simple requests for product data or certifications. The number and scope of these requirements are increasing. In June 1998, the European Union Medical Device Directive became effective, and all medical devices must meet the Medical Device Directive standards and receive CE mark certification. CE mark certification involves a comprehensive Quality System program, and submission of data on a product to the Notified Body in Europe.

      We have obtained CE Mark for distribution of our Cryocare Surgical System in Europe and approval for distribution in Australia, Canada, New Zealand, China, Taiwan, and Mexico.

Health Care Regulatory Issues

      The health care industry is highly regulated and the regulatory environment in which we operate may change significantly in the future. In general, regulation of health care-related companies is increasing. We

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anticipate that Congress and state legislatures will continue to review and assess alternative health care delivery and payment systems. We cannot predict what impact the adoption of any federal or state health care reform measures may have on our business.

      We regularly monitor developments in statutes and regulations relating to our business. We may be required to modify our agreements, operations, marketing and expansion strategies from time to time in response to changes in the statutory and regulatory environment. We plan to structure all of our agreements, operations, marketing and strategies in accordance with applicable law, although we can provide no assurance that our arrangements will not be challenged successfully or that required changes may not have a material adverse effect on our business, financial condition, results of operations and cash flows.

      We believe that the following discussion summarizes all of the material health care regulatory requirements to which we currently are subject. Complying with these regulatory requirements may involve expense to us, delay in our operations, and/or restructuring of our business relationships. Violations could potentially result in the imposition upon us of civil and/or criminal penalties.

Anti-Kickback Laws

      The federal health care program “anti-kickback” law prohibits the knowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for, or in order to induce, (i) the referral of a person for services, (ii) the furnishing or arranging for the furnishing of items or services or (iii) the purchase, lease, or order or arranging or recommending purchasing, leasing or ordering any item or service, in each case, reimbursable under any federal health care program. Because our products are reimbursable under Medicare, Medicaid and other federal health care programs, the anti-kickback law applies. Many states have similar anti-referral laws, and in many cases these laws apply to all patients, not just federal health care program beneficiaries. Noncompliance with, or violation of, the federal anti-kickback law can result in exclusion from federal health care programs and civil and criminal penalties. Similar penalties are provided for violation of state anti-kickback laws. Several federal courts have held that the anti-kickback law is violated if just one purpose of payment is to induce the referral of patients. To the extent that we are deemed to be subject to these federal or similar state laws, we believe that our activities and contemplated activities comply in all material respects with such statutes and regulations.

      Regulations to the federal anti-kickback law specify payment practices that will not be subject to prosecution under the anti-kickback law. These are known as the “safe-harbors.” Failure to comply fully with a safe-harbor does not mean the practice is per se illegal, and many common arrangements in the health care industry do not fit a safe harbor, yet are not violations of the anti-kickback law. Rather, if a practice does not fit within a “safe harbor,” no guarantee can be given that the practice will be exempt from prosecution; it will be viewed under the totality of the facts and circumstances.

      Many of our relationships with customers, such as volume and other discounts, fit within a safe harbor. However, our service agreements with physician-owned entities do not fit completely within a safe harbor. For example, the safe harbor for equipment leases and the safe harbor for personal services both require that the aggregate amount of the rental or service payment be fixed in advance for the term of the arrangement, which must be at least one year. However, where the need for medical procedures is not known in advance, it is sometimes more appropriate to arrange for payment on a per procedure basis, rather than determining a year’s total compensation in advance. For the reasons described below, certain of our arrangements with physician-owned entities provide for payment on a per procedure basis.

      In the case of cryosurgery, as well as other procedures that involve new or expensive technology, hospitals often do not want to invest in the required capital equipment (for example, the Cryocare CS System, at a cost of approximately $150,000 to $200,000 per unit). Rather, hospitals enter into arrangements with specialty mobile service providers or equipment manufacturers to obtain the use of the necessary equipment and disposable products (such as cryoprobes), as well as technician services, where applicable, on a per procedure basis. In the case of cryosurgical equipment and disposables, some physicians have formed or invested in mobile service providers that provide cryosurgical equipment, disposables and services directly to hospitals. In such cases, our relationship to the physician-owned entities is only as a seller of our products, where discounts

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are provided in accordance with the discount safe harbor. However, in some cases, we contract directly with hospitals to provide the necessary equipment, disposables and technical support. These contracts generally provide for the hospital to pay for the equipment/disposables/support package on a per procedure basis. Since we are primarily in the business of selling our equipment and disposable products, not providing services, when we contract to provide equipment to hospitals, whenever possible, we subcontract with a mobile service provider or other equipment owner to furnish the equipment as our subcontractor. A significant number of these businesses are owned entirely or in part by urologists who purchase the equipment in order to make cryosurgery available in their communities. Since the hospitals pay us on a per procedure basis, we in turn pay our subcontractors on a per procedure basis pursuant to service agreements. These service agreements do not meet a safe harbor since, as noted above, the safe harbors for equipment leases and service arrangements require that the aggregate payment for the term of the arrangement must be set in advance. Although the service agreements do not meet a safe harbor, our service agreements with physician-owned entities include the following elements intended to address anti-kickback law concerns:

•  Physician-owned subcontractors are not compensated or otherwise treated differently than non-physician-owned entities;

•  The per procedure payments under the subcontracts are intended to reflect fair market value for the products and services provided by the subcontractors;

•  Subcontracts are in writing and include a number of representations regarding health care regulatory compliance issues, including requiring the subcontractor to represent that distributions to physician owners of the subcontractor are not based on referrals; and

•  Physicians must make significant investments in order to purchase our equipment. The fact that the physicians have assumed bona fide business risk is an important factor in demonstrating that the arrangement is not simply a way for physicians to profit from their referrals.

Patient Referral Laws

      The Stark law prohibits a physician from referring a Medicare patient for “designated health services,” or DHS, to an entity with which the physician has a direct or indirect financial relationship, whether in the nature of an ownership interest or a compensation arrangement, subject only to limited exceptions. The Stark law also prohibits the recipient of a prohibited referral from billing for the DHS provided pursuant thereto. DHS include inpatient and outpatient hospital services, durable medical equipment and prosthetic devices. The entity that bills Medicare for the DHS is considered to be the provider of the DHS for Stark law purposes. Therefore, we are not providers of DHS. Rather, the hospitals where the procedures are performed are the providers of DHS, because they bill Medicare for the cryosurgery procedures, and inpatient and outpatient hospital services are DHS.

      Physicians who have an ownership or compensation relationship with the entities (such as mobile vendors) that furnish our equipment to hospitals, and the hospitals that obtain equipment and services directly or indirectly from such entities, are considered to have an “indirect compensation arrangement,” and therefore that relationship must meet a Stark law exception in order for the physicians to make DHS referrals to the hospital. There is a Stark law exception for indirect compensation arrangements that applies if:

      (1) Fair Market Value Compensation. The compensation to the physician under the arrangement (or, if the first link in the chain of arrangements between the parties is an ownership or investment interest by the referring physician, the first entity up the chain that has a direct compensation arrangement with next link in the chain) represents fair market value, and is not determined in a manner that takes into account the volume or value of referrals or other business generated by the physician for the DHS entity;

      (2) Written Contract. The arrangement is set out in writing, signed by the parties, and specifies the services covered by the arrangement; and

      (3) Anti-Kickback Law Compliance. The arrangement does not violate the anti-kickback law.

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      Here, as noted above in connection with discussion of the anti-kickback law, our service agreements are in writing, the per procedure payments are intended to reflect fair market value and are not determined in a manner that takes into account referrals by owner-physicians to the hospital, and we believe that the arrangements do not violate the anti-kickback law.

HIPAA and Other Privacy Laws

      As of April 14, 2003, the privacy regulations developed under the Health Insurance Portability and Accountability Act of 1996, referred to as “HIPAA,” took effect. The privacy regulations place limitations on a “covered entity’s” use and disclosure of identifiable patient information, including research data. While Endocare is not a “covered entity” under HIPAA, Endocare’s relationships with covered entities, such as hospitals and physicians, sometimes implicate HIPAA. Accordingly, Endocare has adopted policies and procedures regarding confidentiality and each employee who comes into contact with Protected Health Information (PHI or patient data) is trained in the proper handling of such information. Endocare has also established procedures to determine when Endocare is required to sign a “business associate agreement” with a covered entity in connection with receipt of PHI and when such measures are not required.

      We believe that we have implemented appropriate measures to ensure that our relationships with covered entities are appropriate and consistent with HIPAA. However, there are many uncertainties remaining about how HIPAA applies to the medical device business, and no assurance can be made that HIPAA will not be interpreted in a manner that will hamper our ability to conduct medical research and receive medical information for other purposes as well.

Other United States Regulatory Requirements

      In addition to the regulatory framework for product approvals, we are and may be subject to regulation under federal and state laws, including requirements regarding occupational health and safety, laboratory practices and the use, handling, and disposing of toxic or hazardous substances. We may also be subject to other present and future local, state, federal and foreign regulations.

Seasonality

      We believe that holidays, major medical conventions and vacations taken by physicians, patients and patient families may have a seasonal impact on our sales of cryosurgical products since cryosurgical procedures can be scheduled in advance. We are continuing to monitor and assess the impact seasonality may have on demand for our products.

Competition

      The medical device industry is subject to intense competition. Significant competitors in the area of prostate cancer therapies include ONCURA, CR Bard, Inc., Mentor Corporation, Theragenics Corporation and North American Scientific, Inc. We believe that currently only ONCURA provides cryoablation products that compete with our cryoablation products. However, we believe that our cryoablation products provide superior technology and greater functionality, at a price that is competitive. In addition, other companies are developing urological products that could compete with our Cryocare Surgical System. Many of these competitors have significantly greater financial and human resources than we do.

      We believe the principal competitive factors in the cryoablation product market include:

•  the safety and efficacy of treatment alternatives;

•  acceptance of a procedure by physicians and patients;

•  technology leadership and superiority;

•  price;

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•  availability of government or private insurance reimbursement; and

•  speed to market.

Employees

      As of December 31, 2005, we had a total of 152 employees. Of these employees, 9 are engaged directly in research and development activities, 8 in regulatory affairs/quality assurance, 22 in manufacturing, 77 in sales, marketing, clinical support and customer service and 36 in general and administrative positions. Of this total, we had a total of 35 employees at Timm Medical. As a result of our sale of Timm Medical on February 10, 2006, these employees are no longer employed by us. We expect to increase the number of people employed in sales and marketing to increase revenue and grow market share, measured in terms of cryoablation procedures. We have never experienced a work stoppage, none of our employees are represented by a labor organization, and we consider our employee relations to be good.

      Although we conduct most of our research and development using our own employees, we occasionally have funded and plan to continue to fund research using consultants. Consultants provide services under written agreements and typically are paid based on the amount of time spent on our matters. Under their consulting agreements, such consultants typically are required to disclose and assign to us any ideas, discoveries and inventions created or developed by them in the course of providing consulting services.

Available Information

      Our website address is www.endocare.com. All filings we make with the SEC, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, and our current reports on Form 8-K, and any amendments thereto, are available at no charge through links displayed on our website as soon as reasonably practicable after they are filed or furnished to the SEC. The reference to our website address does not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.

Item 1A. Risk Factors

      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.

We face risks related to investigations by the SEC and DOJ.

      As previously reported, 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 financial results for 2001 and 2002 and related matters, including whether we prematurely recognized revenue from the sale of Cryocare Surgical Systems and improperly delayed posting of expenses. Although we have fully cooperated with these governmental agencies in these matters and intend to continue to fully cooperate, these agencies may determine we have violated federal securities laws. We cannot predict when these investigations will be completed or their outcomes. If it is determined that we have violated federal securities laws or other laws or regulations, we may face sanctions, including, but not limited to, significant monetary penalties and injunctive relief. In addition, we are generally obliged, to the extent permitted by law, to indemnify our directors and officers who are named defendants in legal proceedings related to their service.

Our management members have spent considerable time and effort dealing with external investigations.

      Our management members continue to spend considerable time and effort dealing with the SEC and DOJ investigations involving our previous internal controls, accounting policies and procedures, disclosure

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

We face risks relating to our liquidity and we may never reach or maintain profitability.

      We have incurred annual operating losses each year since our inception. As of December 31, 2005, our accumulated deficit was approximately $165.7 million and cash equivalents of $8.1 million. It is possible that we will not generate sufficient revenues from product sales and service revenues to achieve profitability. Even if we do achieve significant revenues from our products sales and service revenues, we expect that operating expenses will result in significant operating losses over the next several quarters, as we, among other things:

•  incur costs related to legal proceedings, including ongoing government investigations;

•  attempt to get our stock relisted on a national exchange;

•  comply with changes in generally accepted accounting principles and include employee based stock option charges in our consolidated statement of operations in 2006;

•  comply with the increasing complexities and costs of being a public company, such as Sarbanes-Oxley compliance;

•  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 newer products.

      We will need to significantly increase the revenues we receive from sales of cryoablation disposable products and procedure fees as a result of these 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 do not generate positive cash flows from operations we may need to raise additional capital which may not be available on terms acceptable to us, or at all. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve interest expense and restrictive covenants.

      We have incurred significant expenses related to legal, audit and accounting support fees, including expenses related to our efforts to achieve compliance with the internal control reporting requirements of Section 404 of the Sarbanes-Oxley Act. We face large cash expenditures in the future related to past due state and local tax obligations. We also expect to pay $750,000 upon the finalization of the proposed settlement with the SEC.

      For a further description of the nature of the risks relating to our liquidity see, “Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

We may be required to make state and local tax payments that exceed our settlement estimates.

      As of December 31, 2004 and 2005 we estimated that we owed $2.9 million as of each balance sheet date in state and local taxes, primarily sales and use taxes in various jurisdictions in the United States. We are in the process of negotiating resolutions of the past due state and local tax obligations with the applicable tax authorities. While we hope that these obligations can be settled for less than the amounts accrued, we cannot predict whether we will obtain favorable settlement terms from the various tax authorities, or that, after settling, we will satisfy the conditions necessary to avoid violating the settlements. Our failure to obtain favorable settlement terms or to satisfy the settlement conditions may result in a material adverse effect on our business, financial condition, results of operations and cash flows.

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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, Michael R. Rodriguez, our Senior Vice President, Finance and Chief Financial Officer, and Clint B. Davis, our Senior Vice President, Legal Affairs and General Counsel. None of our key management personnel is covered by an insurance policy of which we are the beneficiary.

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

      Future sales of our common stock, including shares issued upon the exercise of outstanding options and warrants or hedging or other derivative transactions with respect to our stock, could have a significant negative effect on the market price of our common stock. These sales also might make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that we would deem appropriate. We had an aggregate of 30,147,894 shares of common stock outstanding as of February 28, 2006, which included 5,635,378 shares of our common stock that we issued on March 11, 2005 in connection with the financing described in the Form 8-K that we filed on March 16, 2005. Investors in that financing also received warrants to purchase an aggregate of 1,972,374 shares of our common stock at an exercise price of $3.50 per share and 1,972,374 shares of our common stock at an exercise price of $4.00 per share. We entered into a registration rights agreement in connection with the financing pursuant to which we agreed to register for resale by the investors the shares of common stock issued. The registration statement became effective on September 28, 2005. Sales of shares covered by the registration statement could have a significant negative effect on the market price of our stock.

Our common stock was delisted from the NASDAQ Stock Market and, as a result, trading of our common stock has become more difficult.

      Our common stock was delisted from The NASDAQ Stock Market (“NASDAQ”) on January 16, 2003 because of our failure to keep current in filing our periodic reports with the SEC. Trading is now conducted in the over-the-counter market on the so-called “bulletin board.” 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. We have been in discussions with the American Stock Exchange (“AMEX”) and NASDAQ regarding the relisting of our common stock. We hope that our common stock will be relisted with either AMEX, the NASDAQ Capital Market or the NASDAQ Global Market by the end of 2006, but we cannot assure you that our common stock will be relisted within any particular time period, or at all. As noted below, we may effectuate a reverse stock split in order to qualify our stock for relisting.

      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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In order to qualify our stock for relisting, we may effectuate a reverse stock split, which could adversely affect our stockholders.

      In order to qualify our stock for relisting, we may effectuate a reverse stock split. AMEX requires a minimum bid price of $3.00, the NASDAQ Capital Market requires a minimum bid price of $4.00 and the NASDAQ Global Market requires a minimum bid price of $5.00. As of February 28, 2006, the closing price for our common stock as reported on the “bulletin board” was $3.25 per share. Of course, we cannot predict whether this share price will be maintained or increased in the future.

      Any reverse stock split requires the prior approval of our stockholders at a stockholders meeting, because our charter prohibits stockholder action by written consent. On August 30, 2005, our stockholders held a Special Meeting and by a vote of more than 70 percent authorized our board of directors to effectuate a reserve stock split. The approval allowed for the combination of any whole number of shares of common stock between and including two and five into one share of common stock, i.e., each of the following combination ratios: one for two, one for three, one for four and one for five. If our board decides to proceed with the reverse stock split, then the board will determine the exact ratio within the range described in the previous sentence. If the board does not implement a reverse stock split prior to the one-year anniversary of the special stockholders meeting, then stockholder approval again would be required prior to implementing any reverse stock split. We expect to ask our stockholders to reauthorize the reverse stock split for an additional year at our 2006 annual stockholders meeting.

      In many instances historically the markets have reacted negatively to the effectuation of a reverse stock split. The trading price of our stock may be negatively affected if our board decides to proceed with a reverse stock split. However, we believe that our circumstances and rationale for the reverse stock split differentiate us from many other companies that have effectuated reverse stock splits. Among other things, we would be effectuating a reverse stock split to qualify our common stock for listing, whereas many other companies have effectuated reverse stock splits to avoid delisting in the face of dire financial or operational circumstances.

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.

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 cancer 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,

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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 prostatectomy, 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 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.

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

      Our growth depends in part on 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.

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 using our products.

      International market acceptance of our products may depend, in part, upon the availability of reimbursement within prevailing health care payment systems. Reimbursement and health care payment systems in international markets vary significantly by country, and include both government sponsored health care and private insurance. We may not obtain international reimbursement approvals in a timely 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.

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

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      We believe that our current structure and business and our contemplated future operations comply and will comply with the federal anti-kickback law. However, certain of our business practices do not fit or will not fit within a “safe harbor” and there is no assurance that if viewed under the totality of the facts and circumstances, our structure and business would not be challenged, perhaps even successfully, as a violation of the anti-kickback law. Mere challenge, even if we ultimately prevail, could have a material adverse effect on our business.

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

      Provisions of our certificate of incorporation and bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire control of our company. In addition, our board of directors has 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. These provisions also could deter or prevent transactions that stockholders deem to be in their interests. In addition, 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 our company. The foregoing factors could reduce 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 litigation or to protect our other intellectual property rights. It could result in the rejection or invalidation of our existing and future patents. Any adverse outcome in litigation relating to the validity of our patents, or any failure to pursue litigation or otherwise to protect our patent position, could have a material adverse effect on our business, financial condition, results of operations and cash flows. Also, even if we prevail in litigation, the litigation would be costly in terms of management distraction as well as in terms of 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 could be breached or that they might not be enforceable in every instance, and that we might 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 United States 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

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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.

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

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

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

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

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

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

      The federal Stark law prohibits a physician from referring medical patients for certain services to an entity with which the physician has a financial relationship. A financial relationship includes both investment interests in an entity and compensation arrangements with an entity. Many states have similar and often broader laws prohibiting referrals by any licensed health care provider to entities with which they have a financial relationship. These state laws generally apply to services reimbursed by both governmental and private payors. Violation of these federal and state laws may result in prohibition of payment for services rendered, loss of licenses, fines, criminal penalties and exclusion from governmental and private payor programs, among other things. We have financial relationships with physicians and physician-owned entities, which in turn have financial relationships with hospitals and other providers of designated health services. Although we believe that our financial relationships with physicians and physician-owned entities, as well as the relationships between physician-owned entities that purchase or lease our products and hospitals, are not in violation of applicable laws and regulations, governmental authorities might take a contrary position. If our financial relationships with physicians or physician-owned entities or the relationships between those entities and hospitals were found to be illegal, we and/or the affected physicians and hospitals could be subject to civil and criminal penalties, including fines, exclusion from participation in government and private payor programs and requirements to refund amounts previously received from government and private payors. In addition, expansion of our operations to new jurisdictions, or new interpretations of laws in our existing jurisdictions, could require structural and organizational modifications of our relationships with physicians, physician-owned entities and others to comply with that jurisdiction’s laws. For a further description of the federal Stark law see above under “Item 1 — Health Care Regulatory Issues.”

      We believe that the arrangements we have established with physician-owned entities and hospitals comply with applicable Stark law exceptions. However, if any of the relationships between physicians and hospitals involving our services do not meet a Stark law exception, neither the hospital nor we would be able to bill for any procedure resulting from a referral that violated the Stark law. Although, in most cases we are not the direct provider and do not bill Medicare for the designated health services, any Stark law problem with our business arrangements with physicians and hospitals would adversely affect us as well as the referring physician and the hospital receiving the referral.

      Many states also have patient referral laws, some of which are more restrictive than the Stark law and regulate referrals by all licensed health care practitioners for any health care service to an entity with which the licensee has a financial relationship unless an exception applies. Such laws in particular states may prohibit us from entering into relationships with physicians and physician-owned entities, which may limit business development.

      We believe that our business practices comply with the Stark law and applicable state referral laws. No assurance can be made, however, that these practices would not be successfully challenged and penalties, such as civil money penalties and exclusion from Medicare and Medicaid, and/or state penalties, imposed. And again, mere challenge, even if we ultimately prevail, could have a material adverse effect on us.

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

      Our business exposes us to potential product liability claims that are inherent in the testing, production, marketing and sale of medical devices. While we believe that we are reasonably insured against these risks, we may not be able to maintain insurance in amounts or scope sufficient to provide us with adequate coverage. 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.

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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:

•  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;

•  timing of regulatory approvals for new products;

•  outcomes of clinical studies by us or our competitors;

•  competition from other treatment modalities;

•  physician and patient acceptance of cryosurgery; and

•  ability to obtain reimbursement for procedures in lung and liver cancer, and pain related to bone metastases.

      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 and cash flows;

•  developments regarding government and third-party reimbursement;

•  changes in government regulation of our products and business practices;

•  developments concerning government investigations of us;

•  developments concerning proprietary rights;

•  developments concerning litigation or public concern as to the safety of our products or our competitor’s products;

•  technological innovations or introduction of new products by us or our competitors;

•  investor and analyst perception of us and our industry;

•  introduction of new competing technologies;

•  general economic and market conditions; and

•  physician and patient acceptance of cryosurgery.

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      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.

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. 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 and intangible assets. These estimates and assumptions may differ materially from actual outcomes and occurrences.

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

      Our headquarters, cryosurgical products manufacturing facilities, research facilities and much of our infrastructure, including computer servers, are located in California, an area that is susceptible to earthquakes and other natural disasters. 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. 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 1B. Unresolved Staff Comments

      Not applicable.

Item 2. Properties

      In April 2002, we moved our executive offices, as well as our principal manufacturing and research facilities, to a 28,000 square foot facility in Irvine, California. The lease for this facility expires in 2007, with an option to extend the lease for an additional five years. We believe that our property and equipment are generally well maintained, in good operating condition and are sufficient to meet our current needs.

Item 3. 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. Significant judgments or settlements in connection with the legal proceedings described below may have a material adverse effect on our business, financial condition, results of operations and cash flows. See “Item 7 — 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.

      We have been in settlement discussions with the staff of the SEC regarding the terms of a settlement of the previously announced investigation commenced by the SEC in January 2003 related to allegations that we and certain of our current and former officers and directors issued, or caused to be issued, false and misleading financial statements in prior periods. The proposed settlement, which has been agreed upon by the staff of the SEC and remains subject both to final approval by the SEC and court, includes the following principal terms: (i) we would pay a total of $750,000 in civil penalties (accrued during the year ended December 31, 2004);

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(ii) we would agree to a stipulated judgment enjoining future violations of securities laws; and (iii) we would agree to maintain various improvements in our internal controls that have previously been implemented. If approved, the proposed settlement would resolve all claims against us relating to the formal investigation that the SEC commenced in January 2003.

      As previously announced, the Department of Justice (DOJ) is conducting an investigation into allegations that we and certain of our former officers, a former director and one current employee intentionally issued, or caused to be issued, false and misleading statements regarding our financial results and related matters. The DOJ’s investigation is ongoing and is not affected by the proposed settlement with the SEC described above.

      We previously reported that we were involved in arbitration with our first excess directors’ and officers’ liability insurance carrier. The carrier was seeking rescission of its policy and return of up to $5 million that the carrier paid, subject to reservation of rights, in connection with our settlement of a securities class-action lawsuit in November 2004. On December 1, 2005, we entered into a settlement agreement with the carrier pursuant to which paid the carrier $1 million in full settlement of any claims. Under the settlement agreement, we also granted a mutual release to the carrier.

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

      Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

      On January 16, 2003, our common stock was delisted from the NASDAQ National Market and began to trade on the Pink Sheets. On October 21, 2005, our stock began to trade on the Over-the-Counter Bulletin Board, or “OTCBB.” There currently is no established public trading market for our common stock. The symbol under which we trade on the OTCBB is ENDO.

      The following table sets forth for the fiscal quarters indicated, the high and low bid prices for our common stock as reflected on the Pink Sheets or OTCBB, as applicable. Such prices represent inter-dealer prices without retail mark up, mark down or commission and may not necessarily represent actual transactions.

		High		Low
Year Ended December 31, 2005:
	First Quarter	$	3.70	$	2.25
	Second Quarter		4.40		2.98
	Third Quarter		5.15		2.89
	Fourth Quarter		3.29		2.35
Year Ended December 31, 2004:
	First Quarter	$	4.40	$	2.95
	Second Quarter		4.00		2.49
	Third Quarter		3.24		2.10
	Fourth Quarter		2.95		2.25

Holders

      As of February 28, 2006, there were 269 holders of record of our common stock. This number was derived from our stockholder records and does not include beneficial owners of our common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers, and other fiduciaries.

Dividends

      We have never paid any cash dividends on our capital stock. We anticipate that we will retain any future earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend on existing conditions, including our financial condition, contractual restrictions, capital requirements and business prospects.

Recent Sales of Unregistered Securities

      None, except as previously reported in a Quarterly Report on Form 10-Q or Current Report on Form 8-K.

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Issuer Purchases of Equity Securities

      Not applicable.

Item 6. Selected Consolidated Financial Data

      The selected financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The selected financial data as of and for the years ended December 31, 2001, 2003 and 2004 were previously restated. Detailed information regarding these restatements is disclosed in Notes 3 and 16 to our consolidated financial statements filed in our annual report on Form 10-K for the year ended December 31, 2002 and Note 2 to our consolidated financial statements filed in our annual report on Form 10-K (as amended) for the year ended December 31, 2004. Our historical results are not necessarily indicative of operating results to be expected in the future.

	2001			2002			2003			2004			2005
Revenues from continuing operations	$	13,037		$	17,901		$	19,604		$	24,181		$	28,274
Loss from continuing operations	$	(11,452	)	$	(26,492	)	$	(24,963	)	$	(31,901	)	$	(14,838	)
Net loss per share of common stock  — basic and diluted (continuing operations)	$	(0.68	)	$	(1.11	)	$	(1.03	)	$	(1.31	)	$	(0.51	)
Weighted-average shares of common stock outstanding		16,741			23,822			24,162			24,263			28,978
Balance Sheet Data:
Total assets	$	95,094		$	92,628		$	71,997		$	34,374		$	32,237
Common stock warrants	$	—		$	—		$	—		$	—		$	5,023

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

      The following discussion should be read in conjunction with “Item 1 — Business,” “Item 1A — Risk Factors,” “Item 6 — Selected Consolidated Financial Data” and “Item 8 — Financial Statements and Supplementary Data,” as well as our consolidated financial statements and related notes contained elsewhere in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K, including above under “Risks Factors” in Item 1A of this Annual Report on Form 10-K. In addition, there are factors not described in this Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 an innovative medical device company focused on the development of minimally invasive technologies for tissue and tumor ablation through cryoablation, which is the use of ice to destroy tissue, such as tumors, for therapeutic purposes. We develop and manufacture devices for the treatment of prostate and renal cancer and we believe that our proprietary technologies have broad applications across a number of markets, including the ablation of tumors in the lung and liver and pain resulting from bone metastases.

      Today, our FDA-cleared Cryocare Surgical System occupies a growing position in the urological market for treatment of prostate and renal cancers. Because of our initial concentration on prostate and renal cancers, the majority of our sales and marketing resources are directed toward the promotion of our technology to urologists. In addition to selling our cryosurgical disposable products to hospitals and mobile service companies, we contract directly with hospitals and health care payors for the use of our Cryocare Surgical

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System and disposable products on a fee-for-service basis. Since 2003, we maintain a dedicated sales team focused on selling percutaneous cryoablation procedures related to liver and lung cancer and pain resulting from bone metastases to interventional radiology physicians throughout the United States. We intend to continue to identify and develop new markets for our cryosurgical products and technologies, particularly in the area of tumor ablation.

      We previously owned Timm Medical Technologies, Inc. (“Timm Medical”), a company focused on erectile dysfunction products. We sold Timm Medical to UK-based Plethora Solutions Holdings plc on February 10, 2006.

Strategy and Key Metrics

      Our strategy is to achieve a dominant position in the prostate and renal cancer markets, and further develop and increase the acceptance of our technology in the interventional radiology and oncology markets for treatment of liver and lung cancers and management of pain from bone metastases. At the same time, we seek to achieve penetration across additional markets with our proprietary cryosurgical technology.

      Our primary objective is to grow market share, measured in terms of the number of procedures performed with our Cryocare Surgical System. Accordingly, procedure growth is an important metric to which we refer in order to measure the success of our strategy. In the past several years, we have been successful in increasing the number of procedures on a year-over-year basis. Most recently, in 2005 procedures increased 35.9 percent to 6,407 from 4,713 in 2004. In 2006, our objective is to increase the number of procedures at a significant rate which is comparable to growth rates we have achieved historically.

      In addition to being a key business metric, procedure growth is an important driver of revenue growth, because a significant percentage of our revenues consists of sales of the disposable supplies used in procedures performed with the Cryocare Surgical System, as shown below under “Results of Operations.” In 2003 we redirected our strategy for our cryosurgical business away from emphasizing sales of Cryocare Surgical Systems and instead towards seeking to increase recurring sales of our disposable products.

      The factors driving interest in and utilization of cryoablation by urologists include increased awareness and acceptance of cryoablation by industry thought leaders, continued publication of clinical follow up data on the effectiveness of cryoablation, including 10-year data published in 2005, increased awareness among patients of cryoablation and its preferred outcomes as compared to other modalities, the efforts of our dedicated cryoablation sales force and our continued expenditure of funds on patient education and advocacy.

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Results of Operations

      Revenues and cost of revenues from continuing operations related to the following products and services for the three-year period ended December 31, 2005 are as follows:

			Year Ended December 31,
			2003		2004		2005
			(In thousands)
Revenues:
	Product sales:
		Cryoablation disposable products	$	3,552	$	4,584	$	6,790
		Cryocare surgical systems		1,283		1,403		743
		Cardiac products (CryoCath)		331		—		—
		Other (Urohealth)		60		49		72
				5,226		6,036		7,605
	Cryoablation procedure fees			14,378		17,516		19,780
	Cardiac royalties (CryoCath)			—		629		889
			$	19,604	$	24,181	$	28,274
Cost of revenues:
	Cryoablation disposable products and procedure fees		$	10,626	$	13,330	$	15,278
	Cryocare surgical systems			466		255		460
	Cardiac products (CryoCath)			399		—		—
			$	11,491	$	13,585	$	15,738

      Cost of revenues for cryoablation disposable products and procedure fees are combined for reporting purposes. Sales of cryoablation disposable products and procedure fees incorporate similar inventory when sold and we do not separately track the cost of disposable products sold directly to customers and those consumed in cryoablation procedures. Procedure fees relate to services which are provided to medical facilities upon request to facilitate the overall delivery of the Company’s technology into the marketplace.

      We recognize revenues from sales of Cryocare Surgical Systems and disposable cryoprobes when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable, and collectibility is reasonably assured. We also contract with medical facilities for the use of the Cryocare Surgical Systems in cryoablation treatments for which we charge a per-procedure fee. Cryoablation services generally consist 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.

      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 system owned by an unrelated service provider. The fee paid to the third-party service provider is charged to cost of revenues when the procedure is performed and billed.

      Research and development expenses include expenses associated with the design and development of new products as well as significant enhancements to existing products. We expense research and development expenses when incurred. Our research and development efforts are occasionally subject to significant non-recurring expenses and fees that can cause some variability in our quarterly research and development expenses.

      Sales and marketing expenses primarily consist of salaries, commissions and related benefits and overhead costs for employees and activities in the areas of sales, marketing and customer service. Expenses

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associated with advertising, trade shows, promotional and training costs related to marketing our products are also classified as sales and marketing expenses.

      General and administrative expenses primarily consist of salaries and related benefits and overhead costs for employees and activities in the areas of legal affairs, finance, information technology, human resources and administration. Fees for attorneys, independent auditors and certain other outside consultants are also included where their services are related to general and administrative activities. This category also includes reserves for bad debt, and litigation losses less amounts recoverable under our insurance policies. Litigation reserves and insurance recoveries are recorded when such amounts are probable and can reasonably be estimated.

      Costs, expenses and other results of operations from continuing operations for the three-year period ended December 31, 2005 are as follows:

		Year Ended December 31,
		2003			2004			2005
		(In thousands)
Cost of revenues		$	11,491		$	13,585		$	15,738
Research and development			1,096			1,856			2,283
Sales and marketing			16,097			13,354			13,001
General and administrative			25,791			16,379			13,858
Goodwill impairment and other charges			—			9,900			26
(Gain) loss on divestitures, net			(9,979	)		711			—
	Total costs and expenses	$	44,496		$	55,785		$	44,906
Interest income		$	587		$	293		$	308
Interest expense		$	(39	)	$	(7	)	$	657
Minority interests		$	(619	)	$	(583	)	$	—

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

      Revenues. Revenues for the year ended December 31, 2005 increased $4.1 million to $28.3 million from $24.1 million in 2004 representing an increase of 16.9 percent. The increase in revenues was primarily attributable to growth in sales of disposables and procedure fees.

      The number of cryosurgical procedures performed, and related sales of disposable products used in these procedures, increased 35.9 percent to 6,407 in 2005 from 4,713 in 2004, while the related revenues increased 20.2 percent to $26.6 million in 2005 from $22.1 million in 2004. Contributing to growth in sales of cryosurgical products was an increase in direct sales both in urology and interventional radiology. Since the revenue for a sale of cryoablation disposable products is less on average than a cryoablation procedure fee, as the percentage of cases derived from sales of cryosurgical disposable products increases relative to cases derived from cryoablation procedure fees (where we are responsible for providing the service element of the procedure), our incremental revenues grow at a slower rate than our overall procedure growth. However, the gross profit realized is equivalent since we do not incur fees to third party service providers for a sale of cryoablation disposable products.

      CryoCath royalty revenues also increased 41.3 percent or $0.3 million compared to 2004 while revenues from Cryocare Surgical Systems decreased by 47.0 percent or $0.7 million due to our strategy of promoting adoption of our technology through emphasis on growth in cryoablation procedures, rather than through sales of capital equipment.

      Cost of Revenues. Cost of revenues for 2005 increased 15.9 percent to $15.7 million compared to $13.6 million for 2004. Cost of revenues related to our cryosurgical probes and procedures increased 14.7 percent to $15.3 million for 2005 from $13.3 million in 2004. The increase in cost of revenues resulted primarily from growth in sales of cryosurgical probes and procedures. In addition, this increase was driven by an increase in the number of cryoablation procedures for which we bill a procedure fee and subcontract the

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service to third party service providers at an additional cost. While the frequency of fees paid to third party service providers increased, the percentage of total cryoablation procedures requiring these services declined and the average service fee per procedure was reduced by 15.3 percent. Cost of revenues increases were also partially offset by the continued reductions in manufacturing costs for our cryoablation disposable products.

      Gross Margins. Gross margins on revenues increased to 44.2 percent for 2005 compared to 43.7 percent for 2004 as a result of the cost of revenues factors outlined above.

      Research and Development Expenses. Research and development expenses for 2005 increased 23.0 percent to $2.3 million compared to $1.9 million for 2004. The increase was primarily attributable to increased costs associated with several new development projects that we have undertaken in our efforts to reduce the manufacturing costs of the disposable components used in cryoablation surgical procedures as well as efforts to broaden the application of cryoablation outside of our current markets in urology and interventional radiology. As a percentage of revenues, research and development expenses increased to 8.1 percent in 2005 from 7.7 percent for 2004.

      Selling and Marketing Expenses. Selling and marketing expenses for 2005 decreased 2.6 percent to $13.0 million compared to $13.4 million for 2004. The decrease in sales and marketing expenses were primarily due to improved management of our proctoring program which reduced expenses by $0.3 million by being more selective in the physicians we allow to be proctored as well as reducing the cost of each individual proctoring event. The decrease in selling and marketing expenses was also due to reduced severance expense in the amount of $0.2 million, offset by an increase in commissions expense of $0.2 million.

      General and Administrative Expenses. General and administrative expenses for 2005 decreased 15.4 percent to $13.9 million compared to $16.4 million for 2004. Legal and accounting costs incurred during 2005 in connection with our historical accounting and financial reporting declined to $3.6 million from $7.1 million. Included in the $3.6 million were $1.3 million of costs related to our efforts to comply with Section 404 of Sarbanes-Oxley. Included in the $7.1 million from 2004 were $2.3 million of costs related to our Sarbanes-Oxley compliance efforts. The reductions in legal and accounting expenses were partially offset by $0.6 million of liquidated damages related to the delay in the SEC declaring effective our Form S-2 registration statement related to our March 2005 private placement.

      Goodwill Impairment and Other Charges. During the year ended 2005, we recorded $26,000 to write down a partnership interest in the mobile prostate treatment business to fair value. During 2004, we had recorded $9.9 million in impairment charges to write down the goodwill and amortizable intangibles in conjunction with our ownership interests in certain mobile prostate treatment businesses. We also recorded a charge of $5.9 million to write down the goodwill and intangible assets of Timm Medical in 2004, which is included in loss from discontinued operations.

      Interest Income. Interest income for 2005 was unchanged at $0.3 million compared to 2004, and represents interest income on interest-bearing cash accounts as well as interest received on the promissory note from SRS Medical Corp. in connection with the sale of the urodynamics and urinary incontinence products lines by Timm Medical in 2003.

      Interest Expense. Interest expense was negative for 2005 in the amount of $0.7 million and relates to the net decrease in the fair market value of common stock warrants issued in connection with our March 2005 private placement.

      Loss from Continuing Operations. Loss from continuing operations for 2005 was $14.8 million or $0.51 per basic and diluted share on 28,977,822 weighted average shares outstanding, compared to a loss of $31.9 million, or $1.31 per basic and diluted share on 24,262,868 weighted average shares outstanding for 2004.

      Income (Loss) from Discontinued Operations. On February 10, 2006, we closed the sale of our wholly-owned subsidiary, Timm Medical, to UK-based Plethora Solutions Holdings plc. Proceeds from the sale were $9.5 million, consisting of $8.1 million in cash and a 24-month convertible promissory note of $1.4 million. Revenues for Timm Medical for the year ended December 31, 2005 were $9.3 million. Income before taxes

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was $2.0 million and net income was $1.2 million for 2005. In 2004, Timm Medical reported a loss of $5.7 million, after the $5.9 million impairment charge.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

      Revenues. Revenues for the year ended December 31, 2004 increased $4.6 million to $24.2 million from $19.6 million in 2003 representing an increase of 23.4 percent. The increase in revenues was primarily attributable to growth in sales of disposables and procedure fees related to our cryosurgical business.

      The number of cryosurgical procedures performed, and related sales of disposable products used in these procedures, increased 34.5 percent to 4,713 in 2004 from 3,504 in 2003, while the related revenues increased 23.5 percent to $22.1 million in 2004 from $17.9 million in 2003. Contributing to growth in sales of cryosurgical products was an increase in procedures performed by interventional radiologists, treating tumors in lung and liver cancers and pain resulting from bone metastases. These procedures generally have a lower average selling price than procedures performed by urologists on prostate and renal cancer, although cost of revenues are also lower.

      Cost of Revenues. Cost of revenues for 2004 increased 18.2 percent to $13.6 million compared to $11.5 million for 2003. The increase in cost of revenues resulted primarily from growth in sales of cryosurgical probes and procedures, offset by the elimination of costs related to CryoCath revenue. Cost of revenues related to our cryosurgical probes and procedures increased 25.5 percent to $13.3 million for 2004 from $10.6 million in 2003. The cost of revenues increase was also partly driven by an increase in the percentage of total cryosurgical procedures for which we subcontract a portion of the service to third party service providers at an additional cost.

      Gross Margins. Gross margins on revenues increased to 43.8 percent for 2004 compared to 41.4 percent for 2003 due to the elimination of costs on revenue from CryoCath and higher margins on our sales of Cryocare Surgical Systems. Gross margin from sales of Cryocare Surgical Systems increased in 2004, primarily resulting from payments received during 2004 for systems which had been excluded from revenues in prior years under our revenue recognition policies and due to amortization of deferred systems revenues. The associated cost of revenues from these prior year sales were recorded at the time of sale.

      Research and Development Expenses. Research and development expenses for 2004 increased 69.4 percent to $1.9 million compared to $1.1 million for 2003. The increase was primarily attributable to increased costs associated with several new development projects that we have undertaken in our efforts to reduce the manufacturing costs of the disposable components used in cryoablation surgical procedures. As a percentage of revenues, research and development expenses increased to 7.7 percent in 2004 from 5.6 percent for 2003.

      Selling and Marketing Expenses. Selling and marketing expenses for 2004 decreased 17.0 percent to $13.4 million compared to $16.1 million for 2003. The decrease reflects a $2.4 million reduction due to our June 2004 cost reduction program. We consolidated certain sales functions and territories, streamlined our corporate organizational structure, reduced staff, eliminated certain marketing activities and restructured our sales and marketing programs.

      General and Administrative Expenses. General and administrative expenses for 2004 decreased 36.5 percent to $16.4 million compared to $25.8 million for 2003. Legal and accounting costs incurred during 2004 in connection with investigations into our historical accounting and financial reporting declined to $7.1 million from $14.3 million in 2003. Included in the $7.1 million in 2004 were $2.3 million of costs related to our efforts to comply with section 404 of Sarbanes-Oxley. Included in the $14.3 million from 2003 was $3.6 million for severance and stock compensation expense (of which $1.8 million was a non-cash charge for equity based compensation) related primarily to the termination of our then chief executive officer and chief financial officer. The remaining decrease includes a $1.1 million reduction in bad debt expense.

      Goodwill Impairment and Other Charges. During the year ended 2004, we recorded $9.9 million in impairment charges to write down the goodwill and amortizable intangibles in conjunction with our ownership interests in certain mobile prostate treatment businesses. The charge represents the excess of the carrying value of these entities compared to their fair value, less estimated costs to sell. Fair value for the mobile

31

prostate treatment businesses was based on a proposed purchase offer. We also recorded an impairment charge of $5.9 million in 2004 to reduce the goodwill and intangibles of Timm Medical (included in discontinued operations).

      Gain (Loss) on Divestitures, Net. In 2004 we recorded a net loss of $0.7 million related to the divestiture of our ownership interests in certain mobile prostate businesses. In 2003 we recorded a net gain of $10.0 million related to the licensing of our intellectual property and manufacturing rights for our SurgiFrost line, and sale of inventory and other assets to CryoCath. We also recorded losses of $1.3 million related to the divestiture of several non-core product lines of Timm Medical (included in discontinued operations).

      Interest Income. Interest income for 2004 was $0.3 million compared to $0.6 million for 2003. The decrease in interest income in 2004 compared to 2003 resulted from a decline in our average cash balance.

      Minority Interests. Minority interests represent earnings attributable to minority investors in the mobile prostate treatment businesses we acquired in 2002. The amounts recorded for minority interests were $0.6 million for 2004 and 2003. Revenues and earnings from these businesses remained consistent with our overall operations. We sold our interests in these mobile prostate treatment businesses effective December 31, 2004.

      Loss from Continuing Operations. Net loss from continuing operations for 2004 was $31.9 million or $1.31 per basic and diluted share on 24,262,868 weighted average shares outstanding, compared to a loss of $25.0 million, or $1.03 per basic and diluted share on 24,162,090 weighted average shares outstanding for 2003.

      Income (Loss) from Discontinued Operations. Revenues for Timm Medical for the year ended December 31, 2004 were $8.5 million. Timm Medical reported a loss of $0.5 million in 2003 and $5.7 million for 2004. The 2004 loss includes a $5.9 million impairment charge.

Liquidity and Capital Resources

      Since inception, we have incurred losses from operations and have reported negative cash flows. As of December 31, 2005, we had an accumulated deficit of approximately $165.7 million and cash and cash equivalents of approximately $8.1 million.

      We do not expect to reach break-even or cash flow positive in 2006, and we expect to continue to generate losses from operations for the foreseeable future. These losses, which are expected to decline, have resulted in part from our continued investment to gain acceptance of our technology. Sales of cryoablation disposable products and cryoablation procedure fees represented 94.0 percent of total revenues in 2005 compared to 91.5 percent of total revenues in 2003, and increased 48.2 percent from $17.9 million in 2003 to $26.6 million in 2005, providing evidence that our strategy is working. We also continue to incur significant costs associated with ongoing investigations and other matters related to historical accounting and financial reporting, including obligations to indemnify our former officers and directors in connection with those investigations. These costs, primarily legal, audit and accounting support fees, totaled $3.6 million, $7.1 million and $14.3 million (net of insurance reimbursement) for the years 2005, 2004 and 2003, respectively. For the years ended December 31, 2005 and 2004, $1.3 million and $2.3 million of these costs, respectively, also related to our efforts to achieve compliance with Section 404 of Sarbanes-Oxley. We also face large cash expenditures in the future related to past due sales and use tax obligations, which we estimate amounted to $2.9 million and which was accrued as of December 31, 2005. We are in the process of negotiating resolutions of the past due state and local tax obligations with the applicable tax authorities.

      On March 11, 2005, we issued 5,635,378 shares of our common stock, warrants to purchase an additional 1,972,374 shares of common stock at $3.50 per share and warrants to purchase an additional 1,972,374 shares of common stock at $4.00 per share for an aggregate cash purchase price of $15.6 million ($2.77 per share), in a private placement to a syndicate of institutional investors as well as our chief executive officer, our president and a non-employee director.

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      On February 10, 2006, we closed the sale to Plethora Solutions Holdings plc of all of the stock of our wholly-owned subsidiary, Timm Medical, in exchange for:

•  $8,075,000 in cash paid to us on February 10, 2006; and

•  $1,425,000 in the form of a secured convertible promissory note due and payable in full, together with all accrued interest, on the date 24 months or, under certain circumstances, 15 months following the closing date of the transaction, bearing interest at 5 percent per annum.

      The proceeds from our sale of Timm Medical provide an important cash infusion in the short term. However, Timm Medical’s operations were profitable and generated cash. Accordingly, we expect that, as a result of the sale, we will incur greater losses and experience greater cash use until our ongoing operations are able to offset the effects of the sale.

      We intend to continue investing in our sales and marketing efforts to physicians in order to raise awareness and gain further acceptance of our technology. This investment is required in order to increase the physician’s usage of our technology in the treatment of prostate and renal cancers, lung and liver cancers and in the management of pain from bone metastases. Such costs will be reported as current period charges under generally accepted accounting principles.

      We will use existing cash reserves, the net proceeds from the private placement and the sale of Timm Medical described above to finance our projected operating and cash flow needs, along with continued expense management efforts. In addition, we may borrow funds under our line of credit with Silicon Valley Bank. This line of credit permits us to borrow up to the lesser of $4.0 million or amounts available under the Borrowing Base. The “Borrowing Base” is (i) 80 percent of our eligible accounts receivable, plus (ii) the lesser of 30 percent of the value of our eligible inventory or $500,000. To date, we have not borrowed any amounts under this line of credit.

Contractual Obligations

      In the table below, we set forth our contractual obligations as of December 31, 2005. Some of the figures we include in this table are based on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, the contractual obligations we will actually pay in future periods may vary from those reflected in the table.

	Payments Due by Period
	Total		2006		2007-2008		2009-2010
	(In thousands)
Non-cancelable operating leases(1)	$	686	$	553	$	133	$	—
Purchase commitments(2)		225		225		—		—
	$	911	$	778	$	133	$	—

(1)

We enter into operating leases in the normal course of business. We lease office space as well as other property and equipment under operating leases. Some lease agreements provide us with the option to renew the lease at the end of the original term. Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional operating lease agreements. For more information, see Note 13 to our Consolidated Financial Statements.

(2)

These purchase commitments relate to agreements to purchase goods or services. These obligations are not recorded in our consolidated financial statements until contract payment terms take effect. We expect to fund these commitments with cash flows from operations and from cash balances on hand. The obligations shown in the above table are subject to change based on, among other things, our manufacturing operations not operating in the normal course of business, the demand for our products, and the ability of our suppliers to deliver the products or services as promised.

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Critical Accounting Policies

      The foregoing discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of the financial statements requires management to make estimates and assumptions in applying certain critical accounting policies. Certain accounting estimates are particularly sensitive because of their significance to our consolidated financial statements and because of the possibility that future events affecting the estimates could differ significantly from current expectations. Factors that could possibly cause actual amounts to differ from current estimates relate to various risks and uncertainties inherent in our business, including those set forth under “Risks Factors” in Item 1A of this Annual Report on Form 10-K. Management believes that the following are some of the more critical judgment areas in the application of accounting policies that affect our financial statements.

      Revenue Recognition. We follow the provisions of Staff Accounting Bulletin 104, “Revenue Recognition in Financial Statements” (“SAB 104”) and Emerging Issues Task Force (EITF) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” for revenue recognition. Under SAB 104, four conditions must be met before revenue can be recognized: (i) there is persuasive evidence that an arrangement exists, (ii) delivery has occurred or service has been rendered, (iii) the price is fixed or determinable and (iv) collection is reasonably assured.

      We reduce our revenues for customer concessions, and defer revenue recognition for minimum procedure guarantees, contingent payment arrangements and when we have continuing performance obligations until a future date when the contingencies are resolved and obligations met.

      Where we own the equipment used in the procedure, we bill the medical facility and retain the entire procedure fee. In many instances, however, the equipment is owned by a third-party who contracts with us to perform the service component of the procedure. Third-party service providers are at times entities owned or controlled by urologists who perform cryosurgical procedures. In the latter case, we still invoice the medical facility but we pay a fee to the third-party service provider. The procedure fee is recorded as revenue in the period when the procedure is performed and, where applicable, the fee paid to a third-party service provider is included in cost of revenues for the same period.

      From time to time we provide loaner equipment to customers as part of a strategy aimed at promoting broader acceptance of our technology and driving sales of disposable products faster than would be possible if we restricted use of the device only to customers willing to make a significant capital investment in a Cryocare Surgical System. In these situations, we either loan a mobile Cryocare Surgical System to a hospital or consign a stationary Cryocare Surgical System with the hospital under our placement program and charge a fee for each procedure in which the equipment is used. Cost of revenues includes depreciation on the Cryocare Surgical Systems we own over an estimated useful life of three years.

      We routinely assess the financial strength of our customers and, as a consequence, believe that our accounts receivable credit risk exposure is limited. Accounts receivable are carried at original invoice amount less all discounts and allowances, and less an estimate for doubtful accounts and sales returns based on a periodic review of outstanding receivables. Allowances are provided for known and anticipated credit losses as determined by management in the course of regularly evaluating individual customer receivables. This evaluation takes into consideration a customer’s financial condition and credit history as well as current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received.

      Goodwill Impairment. We test for goodwill impairment in the fourth fiscal quarter of each year, or sooner if events or changes in circumstances indicate that the carrying amount may exceed the fair value. The goodwill impairment test is a two-step process, which requires management to make judgments in determining what assumptions to use in the calculation. In 2003, we concluded that the estimated fair value of each reporting unit exceeded the carrying amount, so goodwill was not impaired. In 2004, we recognized impairment charges of $3.1 million and $9.9 million to reduce the carrying value of the goodwill acquired in the Timm Medical acquisition and equity interests in the mobile prostate treatment businesses, respectively.

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Included in the 2004 impairment charge was $0.7 million of estimated costs to sell these entities. In 2005, the only remaining goodwill was related to Timm Medical. The Company reviewed the purchase price of the Timm Medical divestiture from which management concluded that goodwill was not impaired. At December 31, 2005 the carrying value of the goodwill related to Timm Medical was $4.6 million and is included in assets of discontinued operations.

      Impairment of Long-Lived Assets. We have a significant amount of property, equipment and amortizable intangible assets primarily consisting of purchased patents and acquired technology. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long Lived Assets, we review our long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of long-lived and amortizable intangible assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted future operating cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying value of the assets exceeds their fair value. At December 31, 2003, we concluded that a write down for impairment of any of our long-lived assets was not required. In 2004, we recognized impairment charges of $2.1 million and $80,000 to reduce the carrying value of intangible assets acquired in the Timm Medical acquisition and equity interests in the mobile prostate treatment businesses, respectively.

      Legal and Other Loss Contingencies. In the normal course of business, we are subject to contingencies, such as legal proceedings and claims arising out of our business that cover a wide range of matters, including tax matters, product liability and workers’ compensation. In accordance with SFAS No. 5, Accounting for Contingencies, we record accruals for such contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. A significant amount of management estimation is required in determining when, or if, an accrual should be recorded for a contingent matter and the amount of such accrual, if any. Due to the uncertainty of determining the likelihood of a future event occurring and the potential financial statement impact of such an event, it is possible that upon further development or resolution of a contingent matter, a charge could be recorded in a future period that would be material to our consolidated results of operations, financial position or cash flows.

      Other Investments. We review our equity investments for impairment based on our determination of whether a decline in market value of the investment below our carrying value is other than temporary. In making this determination, we consider Accounting Principles Board Opinion (APB) No. 18, The Equity Method of Accounting of Investments in Common Stock, which set forth factors to be evaluated in determining whether a loss in value should be recognized. Factors include the investee’s operational performance, indicators of continued viability, financing status, liquidity prospects and cash flow forecasts. We also consider our ability to hold the investment until we recover our cost, the market price and market price fluctuations of the investment’s publicly traded shares and the ability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment.

      Income Taxes. In the preparation of our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate, including estimating both actual current tax exposure and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. Assessment of actual current tax exposure includes assessing tax strategies, the status of tax audits and open audit periods with the taxing authorities. To the extent that we have deferred tax assets, we must assess the likelihood that our deferred tax assets will be recovered from taxable temporary differences, tax strategies or future taxable income and to the extent that we believe that recovery is not likely, we must establish a valuation allowance. As of December 31, 2005 we have established a valuation allowance of $63.5 million against our deferred tax assets. In the future, we may adjust our estimates of the amount of valuation allowance needed and such adjustment would impact our provision for income taxes in the period of such change.

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Inflation

      The impact of inflation on our business has not been significant to date.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our invested cash without significantly increasing risk of loss. Our financial instruments include cash, cash equivalents, accounts and notes receivable, investments, accounts payable and accrued liabilities. As of December 31, 2005, the carrying values of these 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 8. Financial Statements and Supplementary Data

      Our financial statements and schedules, as listed under Item 15, appear in a separate section of this Annual Report on Form 10-K beginning on page F-1.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

      Not applicable.

Item 9A. 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 SEC’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 Act 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 period covered by this report. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level.

      (b) Management’s Annual Report on Internal Control Over Financial Reporting. Management of the company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally

36

accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

      (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

      (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

      (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework.

      Based on our assessment and those criteria, management believes that the company maintained effective internal control over financial reporting as of December 31, 2005.

      The company’s independent registered public accounting firm has issued an attestation report on management’s assessment of the company’s internal control over financial reporting. That report appears below in this Item 9A.

      (c) Changes in Internal Controls. There was no change in our internal control over financial reporting during our fourth fiscal quarter for 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors

Endocare, Inc.

      We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that Endocare, Inc. (Endocare) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Endocare’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of Endocare’s internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      In our opinion, management’s assessment that Endocare maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Endocare maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

      We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Endocare as of December 31, 2004 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005 of Endocare, Inc. and our report dated March 8, 2006, expressed an unqualified opinion thereon.

/s/ Ernst & Young llp

Los Angeles, California

March 8, 2006

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Item 9B.      Other Information

      Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant

      The information required by this Item 10 is incorporated by reference to the Definitive Proxy Statement relating to our 2006 Annual Meeting of Stockholders, which we expect to file within 120 days after the end of our fiscal year ended December 31, 2005.

Item 11. Executive Compensation

      The information required by this Item 11 is incorporated by reference to the Definitive Proxy Statement relating to our 2006 Annual Meeting of Stockholders, which we expect to file within 120 days after the end of our fiscal year ended December 31, 2005.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

      The information required by this Item 12 is incorporated by reference to the Definitive Proxy Statement relating to our 2006 Annual Meeting of Stockholders, which we expect to file within 120 days after the end of our fiscal year ended December 31, 2005.

Item 13. Certain Relationships and Related Transactions

      The information required by this Item 13 is incorporated by reference to the Definitive Proxy Statement relating to our 2006 Annual Meeting of Stockholders, which we expect to file within 120 days after the end of our fiscal year ended December 31, 2005.

Item 14. Principal Accountant Fees and Services

      The information required by this Item 14 is incorporated by reference to the Definitive Proxy Statement relating to our 2006 Annual Meeting of Stockholders, which we expect to file within 120 days after the end of our fiscal year ended December 31, 2005.

39

PART IV

Item 15. Exhibits and Financial Statement Schedules

      (a)(1) Financial Statements:

      The Consolidated Financial Statements of the Company are included in a separate section of this Annual Report on Form 10-K commencing on the pages referenced below:

	Page
Consolidated Financial Statements of the Company:
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Statements of Operations for the Years Ended December 31, 2003, 2004 and 2005	F-2
Consolidated Balance Sheets as of December 31, 2004 and 2005	F-3
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2003, 2004 and 2005	F-4 to F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2004 and 2005	F-6
Notes to the Consolidated Financial Statements	F-7 to F-34

      (2) Financial Statement Schedules:

      Schedule II — Valuation and Qualifying Accounts for the years ended December 31, 2003, 2004 and 2005 is included in the Consolidated Financial Statements at page F-35. All other schedules have been omitted because they are not applicable, not required or the information is included in the consolidated financial statements or the notes thereto.

      (3) Exhibit:

Exhibit No.			Description
	2	.1(1)	Partnership Interest Purchase Agreement, dated as of December 30, 2004, by and between the Company and Advanced Medical Partners, Inc.
	2	.2(2)	Stock Purchase Agreement, dated as of January 13, 2006, by and among Plethora Solutions Holdings plc, Endocare, Inc. and Timm Medical Technologies, Inc. The schedules and other attachments to this exhibit were omitted. The Company agrees to furnish a copy of any omitted schedules or attachments to the Securities and Exchange Commission upon request.
	2	.3	$1,425,000 Secured Convertible Promissory Note, dated as of February 10, 2006, from Plethora Solutions Holdings plc to Endocare, Inc.
	3	.1(3)	Certificate of Amendment of Restated Certificate of Incorporation of the Company.
	3	.2(3)	Certificate of Designation of Series A Junior Participating Preferred Stock of the Company.
	3	.3(3)	Restated Certificate of Incorporation.
	3	.4(4)	Amended and Restated Bylaws of the Company.
	4	.1(5)	Form of Stock Certificate.
	4	.2(6)	Form of Series A Warrant.
	4	.3(6)	Form of Series B Warrant.
	4	.4(7)	Rights Agreement, dated as of March 31, 1999, between the Company and U.S. Stock Transfer Corporation, which includes the form of Certificate of Designation for the Series A Junior Participating Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Series A Preferred Shares as Exhibit C.
	4	.5(8)	Amendment No. 1 to Rights Agreement, dated as of September 24, 2005, between the Company and U.S. Stock Transfer Corporation.

40

Exhibit No.			Description
	10	.1(9)	Lease Agreement, dated November 26, 2001 by and between the Company and the Irvine Company.
	†10	.2(9)	Form of Indemnification Agreement by and between the Company and its directors.
	†10	.3(9)	Form of Indemnification Agreement by and between the Company and its executive officers.
	†10	.4(10)	1995 Director Option Plan (as amended and restated through March 2, 1999).
	†10	.5(11)	1995 Stock Plan (as amended and restated through December 30, 2003).
	†10	.6(12)	2002 Supplemental Stock Plan.
	†10	.7(12)	2002 Executive Separation Benefits Plan.
	†10	.8(13)	Employment Agreement, dated as of March 3, 2003, by and between the Company and William J. Nydam.
	10	.9(14)	Consulting Agreement, dated as of August 27, 2003, by and between the Company and Craig T. Davenport.
	†10	.10(15)	Employment Agreement, dated as of December 15, 2003, by and between the Company and Craig T. Davenport.
	†10	.11(16)	Employment Agreement, dated as of August 11, 2004, by and between the Company and Michael R. Rodriguez.
	†10	.12(17)	2004 Stock Incentive Plan.
	†10	.13(18)	2004 Non-Employee Director Option Program under 2004 Stock Incentive Plan.
	†10	.14(18)	Form of Award Agreement Under 2004 Stock Incentive Plan.
	10	.15(18)	Stipulation of Settlement, dated as of November 1, 2004, relating to securities class action lawsuit.
	†10	.16(18)	Description of Craig Davenport salary adjustment, effective December 2004.
	10	.17(18)	Confidential Settlement Agreement and Release, dated as of December 14, 2004, by and between the Company and certain Underwriters at Lloyd’s, London.
	10	.18(18)	Release and Settlement Agreement, dated as of December 16, 2004, by and between the Company and National Union Fire Insurance Company.
	†10	.19(19)	Description of William J. Nydam salary adjustment, effective February 2005.
	†10	.20(19)	Description of Michael R. Rodriguez salary adjustment, effective February 2005.
	10	.21(19)	Confidential Settlement Agreement and Release, dated as of February 18, 2005, by and between the Company and Great American E&S Insurance Company.
	†10	.22(20)	2004 Management Incentive Compensation Program.
	†10	.23(20)	2005 Management Incentive Compensation Program.
	10	.24(6)	Purchase Agreement, dated as of March 10, 2005, by and between the Company and the Investors (as defined therein).
	10	.25(6)	Registration Rights Agreement, dated as of March 10, 2005, by and between Endocare and the Investors (as defined therein).
	†10	.26(21)	First Amendment to Employment Agreement with Craig T. Davenport, dated as of April 28, 2005.
	†10	.27(22)	Description of director compensation, as amended on September 14, 2005.
	10	.28	Loan and Security Agreement, dated as of October 26, 2005, by and among Endocare, Inc., Timm Medical Technologies, Inc. and Silicon Valley Bank.
	10	.29	Commercialization Agreement, dated as of November 8, 2005, by and between Endocare, Inc. and CryoDynamics, LLC.
	10	.30	Confidential Settlement Agreement and Release, dated as of December 1, 2005, by and between Endocare, Inc. and Liberty Mutual Insurance Company.
	21	.1(23)	Subsidiaries of Registrant.
	23	.1	Consent of Independent Registered Public Accounting Firm.

41

Exhibit No.			Description
	24	.1	Power of Attorney, included on signature page.
	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 Michael R. Rodriguez.
	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 Michael R. Rodriguez.

† Management contract or compensatory plan or arrangement.

(1)	Previously filed as an exhibit to our Form 8-K filed on January 6, 2005.
(2)	Previously filed as an exhibit to our Form 8-K filed on January 18, 2006.
(3)	Previously filed as an exhibit to our Registration Statement on Form S-3 filed on September 20, 2001.
(4)	Previously filed as an exhibit to our Form 10-K filed on March 15, 2004.
(5)	Previously filed as an exhibit to our Form 10-K for the year ended December 31, 1995.
(6)	Previously filed as an exhibit to our Form 8-K filed on March 16, 2005.
(7)	Previously filed as an exhibit to our Form 8-K filed on June 3, 1999.
(8)	Previously filed as an exhibit to our Form 8-K filed on June 28, 2005.
(9)	Previously filed as an exhibit to our Form 10-K filed on March 29, 2002.

(10)	Previously filed as an exhibit to our Registration Statement on Form S-8 filed on June 2, 1999.
(11)	Previously filed as an appendix to our Definitive Proxy Statement filed on December 3, 2003.
(12)	Previously filed as an exhibit to our Form 10-K filed on December 3, 2003.
(13)	Previously filed as an exhibit to our Form 8-K filed on March 27, 2003.
(14)	Previously filed as an exhibit to our Form 10-K filed on March 15, 2004.
(15)	Previously filed as an exhibit to our Form 8-K filed on December 16, 2003.
(16)	Previously filed as an exhibit to our Form 8-K filed on August 12, 2004.
(17)	Previously filed as an appendix to our Definitive Proxy Statement filed on August 6, 2004.
(18)	Previously filed as an exhibit to our Form 10-K filed on March 16, 2005.
(19)	Previously filed as an exhibit to our Form 10-Q filed on May 10, 2005.
(20)	Previously filed as an exhibit to our Form 8-K filed on March 1, 2005.
(21)	Previously filed as an exhibit to our Form 8-K filed on May 3, 2005.
(22)	Previously filed as an exhibit to our Form 8-K filed on September 16, 2005. Our director compensation program was subsequently amended on February 23, 2006, as described in our Form 8-K filed on March 1, 2006.
(23)	Not applicable because, as a result of our sale of Timm Medical on February 10, 2006, we do not have any subsidiaries that constitute “significant subsidiaries” under Rule 1-02(w) of Regulation S-X.

Supplemental Information

      We have not sent an annual report or proxy materials to our stockholders as of the date of this Annual Report on Form 10-K. We intend to provide our stockholders with an annual report and proxy materials after the filing of this Annual Report on Form 10-K, and we will furnish the annual report to the SEC at that time.

42

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) 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.

Date: March 16, 2006

By:  /s/ Craig T. Davenport

Craig T. Davenport

Chairman and Chief Executive Officer

POWER OF ATTORNEY

      Know all men by these presents, that each person whose signature appears below constitutes and appoints Craig T. Davenport and Michael R. Rodriguez, and each or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Craig T. Davenport Craig T. Davenport	Chairman and Chief Executive Officer (principal executive officer)	March 16, 2006
/s/ Michael R. Rodriguez Michael R. Rodriguez	Senior Vice President, Finance and Chief Financial Officer (principal financial and accounting officer)	March 16, 2006
/s/ John R. Daniels, M.D. John R. Daniels, M.D.	Director	March 16, 2006
/s/ David L. Goldsmith David L. Goldsmith	Director	March 16, 2006
/s/ Eric S. Kentor Eric S. Kentor	Director	March 16, 2006
/s/ Terrence A. Noonan Terrence A. Noonan	Director	March 16, 2006
/s/ Michael J. Strauss, M.D. Michael J. Strauss, M.D.	Director	March 16, 2006
/s/ Thomas R. Testman Thomas R. Testman	Director	March 16, 2006

43

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Endocare, Inc.

      We have audited the accompanying consolidated balance sheets of Endocare, Inc. (the Company) and subsidiaries as of December 31, 2004 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Endocare, Inc. and subsidiaries at December 31, 2004 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Endocare, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young llp

Los Angeles, California

March 8, 2006

F-1

ENDOCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

			Years Ended December 31
			2003			2004			2005
			(In thousands, except per share data)
Product sales			$	5,226		$	6,036		$	7,605
Service revenues				14,378			17,516			19,780
Other				—			629			889
				19,604			24,181			28,274
Costs and expenses:
	Cost of revenues			11,491			13,585			15,738
	Research and development			1,096			1,856			2,283
	Selling and marketing			16,097			13,354			13,001
	General and administrative			25,791			16,379			13,858
	Goodwill impairment and other charges			—			9,900			26
	(Gain) loss on divestitures, net			(9,979	)		711			—
		Total costs and expenses		44,496			55,785			44,906
Loss from operations				(24,892	)		(31,604	)		(16,632	)
Interest income				587			293			308
Interest expense				(39	)		(7	)		657
Loss from continuing operations before minority interests				(24,344	)		(31,318	)		(15,667	)
Minority interests				(619	)		(583	)		—
Loss from continuing operations before taxes				(24,963	)		(31,901	)		(15,667	)
Tax benefit on continuing operations				—			—			829
Loss from continuing operations				(24,963	)		(31,901	)		(14,838	)
Income (loss) from discontinued operations, net of taxes				(485	)		(5,718	)		1,159
Net loss			$	(25,448	)	$	(37,619	)	$	(13,679	)
Net income (loss) per share of common stock — basic and diluted
	Continuing operations		$	(1.03	)	$	(1.31	)	$	(0.51	)
	Discontinued operations		$	(0.02	)	$	(0.24	)	$	0.04
Weighted-average shares of common stock outstanding				24,162			24,263			28,978

The accompanying notes are an integral part of these Consolidated Financial Statements.

F-2

ENDOCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

			December 31
			2004			2005
			(In thousands, except share
			and per share data)
ASSETS
Current assets:
	Cash and cash equivalents		$	7,830		$	8,108
	Accounts receivable less allowances for doubtful accounts and sales returns of $74 and $70 at December 31, 2004 and 2005, respectively			3,337			3,549
	Inventories			2,828			2,462
	Prepaid expenses and other current assets			1,533			1,213
	Assets of discontinued operations			1,185			9,624
		Total current assets		16,713			24,956
Property and equipment, net				2,672			1,794
Intangibles, net				4,390			4,167
Investments and other assets				1,343			1,320
Assets of discontinued operations				9,256			—
		Total assets	$	34,374		$	32,237
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	2,279		$	2,680
	Accrued compensation			3,413			3,614
	Other accrued liabilities			9,187			6,629
	Liabilities of discontinued operations			1,855			1,461
		Total current liabilities		16,734			14,384
Minority interests				214			—
Common stock warrants				—			5,023
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; 24,342,482 and 30,089,144 shares issued and outstanding at December 31, 2004 and 2005, respectively			24			30
	Additional paid-in capital			169,400			178,477
	Accumulated deficit			(151,998	)		(165,677	)
		Total stockholders’ equity		17,426			12,830
		Total liabilities and stockholders’ equity	$	34,374		$	32,237

The accompanying notes are an integral part of these Consolidated Financial Statements.

F-3

ENDOCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)

(In thousands)

																Accumulated
																Other
		Common Stock														Comprehensive									Total
							Additional			Accumulated			Receivable From			Income, Net			Deferred						Stockholders’
		Shares			Amount		Paid-In Capital			Deficit			Stockholder			of Tax			Compensation			Treasury Stock			Equity
Balance at December 31, 2002			24,148			24	$	169,935		$	(88,932	)	$	(214	)	$	13		$	(132	)	$	(2,071	)	$	78,623
Comprehensive loss:
	Net loss		—			—		—			(25,447	)		—			—			—			—			(25,447	)
	Unrealized gain on available for-sale securities, net		—			—		—			—			—			(13	)		—			—			(13	)
Comprehensive loss:											(25,447	)		—			(13	)		—			—			(25,460	)
Stock options exercised			35			—		23			—			—			—			—			—			23
Issuance of restricted stock			5			—		20			—			—			—			—			—			20
Compensation related to issuance of options to employees			—			—		1,780			—			—			—			25			—			1,805
Compensation related to issuance of options and warrants to consultants for services			—			—		117			—			—			—			—			—			117
Treasury stock received as repayment of loan previously forgiven			(5	)		—		—			—			—			—			—			(21	)		(21	)
Forgiveness of receivable from stockholder			—			—		—			—			214			—			—			—			214
Balance at December 31, 2003			24,183		$	24	$	171,875		$	(114,379	)	$	—		$	—		$	(107	)	$	(2,092	)	$	55,321
Net loss:			—			—		—			(37,619	)		—			—			—			—			(37,619	)
Stock options exercised			350			—		92			—			—			—			—			—			92
Compensation related to issuance of options and warrants			—			—		123			—			—			—			13			—			136
Treasury stock retired			—			—		(2,596	)		—			—			—			—			2,596			—
Purchase of treasury stock			(191	)		—		—			—			—			—			—			(504	)		(504	)
Deferred compensation on options forfeited			—			—		(94	)		—			—			—			94			—			—
Balance at December 31, 2004			24,342		$	24	$	169,400		$	(151,998	)	$	—		$	—		$	—		$	—		$	17,426

F-4

ENDOCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY) —(Continued)

(In thousands)

												Accumulated
												Other
	Common Stock											Comprehensive						Total
					Additional		Accumulated			Receivable From		Income, Net		Deferred				Stockholders’
	Shares		Amount		Paid-In Capital		Deficit			Stockholder		of Tax		Compensation		Treasury Stock		Equity
Net loss		—		—		—		(13,679	)		—		—		—		—		(13,679	)
Stock options exercised		112		—		116		—			—		—		—		—		116
Compensation expense		—		—		51		—			—		—		—		—		51
Sale of common stock		5,635		6		8,910		—			—		—		—		—		8,916
Balance at December 31, 2005		30,089	$	30	$	178,477	$	(165,677	)	$	—	$	—	$	—	$	—	$	12,830

The accompanying notes are an integral part of these Consolidated Financial Statements.

F-5

ENDOCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

			For the Years Ended December 31,
			2003			2004			2005
			(In thousands)
Cash flows from operating activities:
	Net loss		$	(25,448	)	$	(37,619	)	$	(13,679	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization		4,669			3,481			3,054
		Gain on sale of marketable securities		(12	)		—			—
		(Gain) loss on divestitures, net		(8,631	)		711			(609	)
		Compensation expense related to issuance of options, warrants and restricted stock		1,942			136			51
		Treasury stock received as repayment of loan previously forgiven		(21	)		—			—
		Goodwill impairment and other charges		—			15,810			26
		Loss on disposal of fixed assets		—			139			107
		Minority interests		619			584			(214	)
		Interest expense on common stock warrants		—			—			(657	)
Changes in operating assets and liabilities, net of effects from purchases and divestitures:
		Accounts receivable		932			(248	)		(354	)
		Inventories		644			(1,516	)		(318	)
		Prepaid expenses and other current assets		(1,292	)		1,132			(454	)
		Accounts payable		104			(394	)		644
		Accrued compensation		1,042			(150	)		247
		Other accrued liabilities		1,615			846			(2,562	)
Net cash used in operating activities				(23,623	)		(17,088	)		(14,718	)
Cash flows from investing activities:
	Purchases of property and equipment			(276	)		(456	)		(423	)
	Purchases of intangibles			(29	)		—			(330	)
	Partnership distributions to minority interests			(709	)		(739	)		—
	Sale of available-for-sale securities			22,183			—			—
	Proceeds from divestitures			9,480			2,388			850
	Other assets			(1,250	)		315			—
Net cash provided by investing activities				29,399			1,508			97
Cash flows from financing activities:
	Stock options and warrants exercised			23			92			116
	Proceeds from sale of stock and warrants, net			—			—			14,596
	Repurchase of treasury stock			—			(504	)		—
Net cash provided by (used in) financing activities				23			(412	)		14,712
Net increase (decrease) in cash and cash equivalents				5,799			(15,992	)		91
Cash and cash equivalents, beginning of year				18,178			23,977			7,985
Less: Cash of discontinued operations				(602	)		(155	)		32
Cash and cash equivalents, end of year			$	23,375		$	7,830		$	8,108
Non cash activities:
	Transfer of inventory to property and equipment for placement at customer sites		$	505		$	951		$	532
Other supplemental information:
	Interest paid			40			8			36
	Income taxes paid			2			2			22

The accompanying notes are an integral part of these Consolidated Financial Statements.

F-6

ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular numbers in thousands, except per share data)

1. Organization and Operations of the Company

      Endocare, Inc. (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. The Company was formed in 1990 as a research and development division of Medstone International, Inc. (“Medstone”), 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.

      Through January 31, 2006, the Company also offered vacuum therapy systems for non-pharmaceutical treatment of erectile dysfunction through its wholly-owned subsidiary (Timm Medical), which was sold to a third party effective February 2006 (see Note 8). The operating results of Timm Medical are included in discontinued operations.

2. Recent Operating Results and Liquidity

      Since inception, the Company has incurred losses from operations and has reported negative cash flows. As of December 31, 2005, the Company had an accumulated deficit of approximately $165.7 million and cash and cash equivalents of approximately $8.1 million.

      The Company expects to continue to generate losses from operations for the foreseeable future. These losses are expected to decline. Sales of cryoablation disposable products and cryoablation procedure fees, representing 94 percent of total revenues in 2005 compared to 91.5 percent of total revenues in 2003, increased 48.2 percent from $17.9 million in 2003 to $26.6 million in 2005. The Company continues to incur significant costs associated with ongoing investigations and other matters related to historical accounting and financial reporting, including obligations to indemnify former officers and directors in connection with such investigations. These costs, primarily legal, audit and accounting support fees, totaled $3.6 million, $7.1 million and $14.3 million (net of insurance reimbursement) for the years ended 2005, 2004 and 2003, respectively. For the year ended December 31, 2005 and 2004, $1.3 million and $2.3 million 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”). The Company also faces large cash expenditures in the future related to delinquent state and local tax obligations.

      On March 11, 2005, the Company issued 5,635,378 shares of common stock, warrants to purchase an additional 1,972,374 shares of common stock at $3.50 per share and warrants to purchase an additional 1,972,374 shares of common stock at $4.00 per share for an aggregate cash purchase price of $15.6 million ($2.77 per share) in a private placement to a syndicate of institutional investors as well as the Company’s Chief Executive Officer, President and Chief Operating Officer and a non-employee director. See Note 7.

      The Company intends to continue investing in its sales and marketing efforts to physicians in order to raise awareness and acceptance of the Company’s technology. Such investment is required in order to increase the physician’s usage of the Company’s technology in the treatment of prostate and renal cancers, lung and liver cancers and in the management of pain from bone metastases. The Company will use existing cash reserves, the net proceeds from the $15.6 million private placement of common stock described above and the $7.5 million net cash proceeds from the sale of Timm Medical (see Note 8) to finance its projected operating and cash flow needs along with continued expense management efforts. The $4 million credit facility (see Note 14) will also provide short-term funds for working capital needs. Although the Company expects the aforementioned reserves and sources of capital are sufficient to fund operations until the Company can achieve cash flow break even operations, in order to continue as a going concern, the Company may need to reduce expenses, defer or eliminate lower priority research and clinical activities, and/or raise additional capital to

F-7

ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

fund operations through the sale of equity securities to public or private investors, debt, or the sale or licensing of its 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. Summary of Significant Accounting Policies

Principles of Consolidation

      The consolidated financial statements include the accounts of the parent and all majority owned and controlled subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

      The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Principal areas requiring the use of estimates include: determination of allowances for uncollectible accounts and sales returns, warranty obligations, reserves for excess and obsolete inventory, valuation allowances for investments and deferred tax assets, impairment of long-lived and intangible assets, determination of stock-based compensation to employees and consultants, valuation of the warrants and reserves for litigation and other legal and regulatory matters, among others.

Revenue Recognition

      Revenues from sales of Cryocare Surgical Systems and cryoablation disposable products are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable, and collectibility is reasonably assured. The Company also contracts with medical facilities to provide cryoablation disposable products and services for which the Company charges a per-procedure fee. The cryoablation services provided generally consist 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 and include the necessary disposable products and supplies. The medical facilities are billed for procedures performed using Cryocare Surgical Systems owned either by the Company or by third parties who perform the service component of the procedure. The Company receives procedure fee revenue from the medical facility and, where a third-party service provider is involved, pays a fee to the service provider. The fee billed to the medical facility is recorded as revenue in the period when the procedure is performed. Cost of revenues includes the cost of the procedure kit and, if applicable, third party service provider fees are recorded at the time of the procedure. Cost of revenues also includes depreciation related to Company-owned Cryocare Surgical Systems over an estimated useful life of three years.

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ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Revenues and the related cost of revenues from continuing operations consist of the following for the three years ended December 31, 2005:

			Year Ended December 31,
			2003		2004		2005
Revenues:
	Product sales:
		Cryoablation disposable products	$	3,552	$	4,584	$	6,790
		Cryocare surgical systems		1,283		1,403		743
		Cardiac products (CryoCath)		331		—		—
		Other (Urohealth)		60		49		72
				5,226		6,036		7,605
	Cryoablation procedure fees			14,378		17,516		19,780
	Cardiac royalties (CryoCath)			—		629		889
			$	19,604	$	24,181	$	28,274
Cost of revenues:
	Cryoablation disposable products and procedure fees		$	10,626	$	13,330	$	15,278
	Cryocare surgical systems			466		255		460
	Cardiac products (CryoCath)			399		—		—
			$	11,491	$	13,585	$	15,738

      Cost of revenues for cryoablation disposable products and procedure fees are combined for reporting purposes. Sales of cryoablation disposable products and procedure fees incorporate similar inventory when sold and the Company does not separately track the cost of disposable products sold directly to customers and those consumed in cryoablation procedures. Procedure fees relate to services which are provided to medical facilities upon request to facilitate the overall delivery of the Company’s technology into the marketplace.

      The Company provides customary sales incentives to customers and distributors in the ordinary course of business. These arrangements include volume discounts, equipment upgrades, rent-to-own programs and minimum revenue guarantees. These transactions are not significant and are accounted for in accordance with Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. The Company defers the recognition of certain Cryocare Surgical System revenues where it has granted future minimum procedure fee guarantees or where it has continuing performance obligations. Deferred revenues are adjusted in future periods when the minimum procedure fee guarantees or remaining obligations have been met. Deferred revenue as of December 31, 2003, 2004, and 2005, totaled $0.4 million, $0.1 million and $0.1 million, respectively (included in other accrued liabilities). The Company settled all minimum guarantee obligations during 2004.

      No individual customer accounted for more than 10 percent of total revenues in 2003, 2004 and 2005. The Company derived 92.8 percent, 91.9 percent and 93.1 percent of revenues from sales in the United States during this three-year period.

      The Company routinely assesses the financial strength of its customers and believes that its accounts receivable credit risk exposure is limited. Accounts receivable are carried at original invoice amount less an estimate for doubtful accounts and sales returns based on a periodic review of outstanding receivables. International shipments are billed and collected by the Company in U.S. dollars. Allowances are provided for known and anticipated credit losses as determined by management in the course of regularly evaluating individual customer receivables. This evaluation takes into consideration a customer’s financial condition and

F-9

ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

credit history as well as current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received.

Inventories

      Inventories, consisting of raw materials, work-in-process and finished goods, are stated at the lower of cost or market, with cost determined by the first-in, first-out method. Reserves for slow-moving and obsolete inventories are provided based on historical experience and product demand. The Company evaluates the adequacy of these reserves periodically.

      The following is a summary of inventory (excluding assets of discontinued operations):

		December 31,
		2004			2005
		(In thousands)
Raw materials		$	1,727		$	1,646
Work in process			443			275
Finished goods			1,036			911
	Total inventories		3,206			2,832
Less inventory reserve			(378	)		(370	)
	Inventories, net	$	2,828		$	2,462

Property and Equipment

      Property and equipment are stated at cost and are depreciated on a straight-line basis over the estimated useful lives of the respective assets, which range from three to seven years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the related lease term. Cryosurgical equipment placed at customer sites for use with the Company’s disposable cryoprobes is depreciated into cost of revenues over estimated useful lives of three years. Repair and maintenance costs are expensed as incurred. Depreciation expense from continuing operations was $2.4 million, $2.0 million and $1.7 million in 2003, 2004 and 2005, respectively.

      The following is a summary of property and equipment (excluding assets of discontinued operations):

		December 31,
		2004			2005
		(In thousands)
Equipment and computers		$	1,504		$	1,697
Cryosurgical systems placed at customer sites			5,778			5,746
Furniture and fixtures			834			905
Leasehold improvements			321			321
	Total property and equipment, at cost		8,437			8,669
Accumulated depreciation and amortization			(5,765	)		(6,875	)
	Property and equipment, net	$	2,672		$	1,794

Long-Lived Assets, Goodwill and Intangible Assets Subject to Amortization

      The Company acquires goodwill and amortizable intangible assets in business combinations and asset purchases. The excess of the purchase price over the fair value of net assets acquired are allocated to goodwill and identifiable intangibles. The Company does not amortize goodwill which is consistent with the provisions

F-10

ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and other Intangible Assets as more fully described in Note 6. Goodwill and indefinite lived assets are reviewed annually for impairment and on an interim basis if events or changes in circumstances indicate that the asset might be impaired.

      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, as follows:

Trade names (discontinued operations)	15 years
Domain names	5 years
Covenants not to compete	3 to 5 years
Developed technology (discontinued operations)	15 years
Patents	3 to 15  years

      In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The Company considers assets to be impaired and write them down to fair value if estimated undiscounted cash flows associated with those assets are less than their carrying amounts. Fair value is based upon the present value of the associated cash flows. Changes in circumstances (for example, changes in laws or regulations, technological advances or changes in the Company’s strategies) may also reduce the useful lives from initial estimates. Changes in the planned use of intangibles may result from changes in customer base, contractual agreements, or regulatory requirements. 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, 2004 and 2005. In the third quarter of 2004, the Company recorded a $9.9 million impairment charge relating to the mobile prostate treatment partnerships (included in continuing operations) and an impairment charge of $5.9 million related to Timm Medical (included in discontinued operations) (see Notes 6 and 8). No impairment charge was recorded in 2003 or 2005.

      Amortization expense for each of the years ending December 31 will consist of the following amounts (excluding discontinued operations):

2006	$	537
2007		467
2008		467
2009		467
2010		467
Thereafter		1,762
	$	4,167

      Amortization expense from continuing operations totaled $0.6 million, $0.7 million and $0.6 million in 2003, 2004 and 2005, respectively.

F-11

ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following is a summary of intangible assets (excluding discontinued operations):

		December 31,
		2004			2005
		(In thousands)
Domain name		$	435		$	435
Covenant not to compete			352			352
Patents			5,875			6,205
	Total intangibles		6,662			6,992
Accumulated amortization			(2,272	)		(2,825	)
	Intangibles, net	$	4,390		$	4,167

Investments

      During 2003, the Company invested in a diversified portfolio of marketable debt securities, including corporate bonds, government agency securities and commercial papers. These securities were sold in 2003 for an insignificant gain. The Company also holds other investments which primarily consist of strategic investments of less than 20 percent equity interest in certain companies acquired in conjunction with various strategic alliances. These represent minority interests in start-up technology companies. The Company does not have the ability to exercise significant influence over the financial or operational policies or administration of any of these companies; therefore, they are accounted for under the cost method. Realized gains and losses are recorded when related investments are sold. Investments in privately-held companies are regularly assessed for impairment through review of operations and indicators of continued viability, including operating performance, financing status, liquidity prospects and cash flow forecasts. Impairment losses are recorded when events and circumstances indicate that such assets might be impaired and the decline in value is other-than-temporary. These investments are included in investments and other assets.

Product Warranties

      Certain of the Company’s products are covered by warranties against defects in material and workmanship for periods up to two years after the sale date. The estimated warranty cost is recorded at the time of sale and is adjusted periodically to reflect actual experience. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims, and cost per claim. The Company’s warranty costs and liability (included in other accrued liabilities) were not significant.

Research and Development

      Research and development expenditures primarily include personnel, clinical studies, and material expenses incurred to design, create, and test prototypes. These expenditures are charged to operations as incurred until technological feasibility has been established.

Advertising

      Amounts incurred for advertising costs are included in selling and marketing expenses as incurred and totaled $0.3 million, $0.5 million and $0.3 million for 2003, 2004 and 2005, respectively.

Cash and Cash Equivalents

      All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. Cash and cash equivalents include money market funds and various deposit accounts.

F-12

ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Concentrations of Credit Risk

      Financial instruments, which potentially subject the Company to concentrations of credit risk, primarily consist of cash and cash equivalents, and accounts receivable. The Company from time to time may be exposed to credit risk with its bank deposits in excess of the FDIC insurance limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. The Company’s receivables are derived primarily from sales of Cryocare Surgical Systems and cryoablation disposable products to medical facilities, medical groups and urologists. Cryoablation procedure fees are generated from medical facilities. The Company has a diversified customer base and no single payor is considered a high credit risk. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Reserves are maintained for potential credit losses.

Fair Value of Financial Instruments

      The primary objective of the Company’s investment activities is to preserve principal while at the same time maximize the income the Company receives from its invested cash without significantly increasing the risk of loss. The Company’s consolidated balance sheets include the following financial instruments: cash and cash equivalents, accounts receivable, minority investments, accounts payable, accrued liabilities and common stock warrants. The carrying amounts of current assets and liabilities approximate their fair values because of the relatively short period of time between the origination of these instruments and their expected realization. The common stock warrants are recorded at fair value, which is adjusted each quarter using a modified Black-Scholes pricing model.

Risks and Uncertainties

      The Company’s profitability depends in large part on increasing its revenue base and effectively managing costs of sales, customer acquisition costs and administrative overhead. The Company continually reviews its pricing and cost structure in an effort to select the optimal revenue and distribution models. Several factors could adversely affect revenues and costs, such as changes in health care practices, payor reimbursement, inflation, new technologies, competition and product liability litigation, which are beyond the Company’s control and could adversely affect the Company’s ability to accurately predict revenues and effectively control costs. Many purchasers of the Company’s products and services rely upon reimbursement from third-party payors, including Medicare, Medicaid and other government or private organizations. These factors could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Reclassification

      Certain previously reported amounts have been reclassified to conform with the current presentation.

Off-Balance Sheet Financings and Liabilities

      Other than lease commitments, legal contingencies incurred in the normal course of business, and employment contracts, the Company does not have any off-balance sheet financing arrangements or liabilities. In addition, the Company’s policy is not to enter into derivative instruments, futures or forward contracts. The Company’s business is transacted solely in U.S. dollars and, while future fluctuations of the U.S. dollar may affect the price competitiveness of the Company’s products, there is no known significant direct foreign currency exchange rate risk. Finally, the Company does not have any majority-owned subsidiaries or any interests in, or relationships with, any material special-purpose entities that are not included in the consolidated financial statements.

F-13

ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Other Accrued Liabilities

      Other accrued liabilities as of December 31, 2004 and 2005 includes $3.3 million and $3.4 million in state and local taxes, primarily sales and use taxes in various jurisdictions in the United States. Also included in other accrued liabilities is accrued professional fees which total $2.7 million and $1.7 million as of December 31, 2004 and 2005, respectively.

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 Solutions, Inc. (“BioLife”) for approximately $0.5 million in February 2004, in connection with settlement of its litigation with BioLife (See Note 13 — Commitments and Contingencies — Legal Matters).

      Basic net income or loss per share is computed by dividing net income or loss by the weighted average number of common shares outstanding for the respective periods. Diluted loss per share, calculated using the treasury stock method, gives effect to the potential dilution that could occur upon the exercise of certain stock options and warrants that were outstanding during the respective periods presented. For periods when the Company reported a net loss from continuing operations, these potentially dilutive common shares were excluded from the diluted income or loss per share calculation because they were antidilutive.

Taxes

      The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities along with net operating loss and credit carryforwards, if it is more likely than not that the tax benefits will be realized. To the extent a deferred tax asset cannot be recognized under the preceding criteria, allowances must be established. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and reflected in the financial statements in the period of enactment.

Stock-Based Compensation

      As of December 31, 2005, the Company had four stock-based compensation plans, including the 2004 Stock Incentive Plan approved by the Company’s shareholders on September 10, 2004. 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 expense for stock options granted to employees is reflected in net loss and is measured as the excess of the market price of the Company’s stock at the date of grant over the exercise price. Compensation expense for fixed awards that are subject to vesting are recognized 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.

F-14

ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The Company has adopted the disclosure provisions required by 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. The amounts in the table below include stock-based compensation expense related to Timm Medical which was not significant.

		Year Ended December 31,
		2003			2004			2005
		(In thousands)
Net loss, as reported(a)(c)		$	(25,448	)	$	(37,619	)	$	(13,679	)
Reconciling items:
	Add: Stock-based employee compensation expense determined under the intrinsic-value-based method for all awards(b)		25			136			43
	Less: Stock-based compensation expense determined under the fair-value-based method for all awards expense(c)		(2,313	)		(3,875	)		(3,696	)
Net adjustment			(2,288	)		(3,739	)		(3,653	)
Net loss, as adjusted		$	(27,736	)	$	(41,358	)	$	(17,332	)
Basic and diluted loss per share:
	As reported	$	(1.05	)	$	(1.55	)	$	(0.47	)
	As adjusted	$	(1.15	)	$	(1.70	)	$	(0.60	)

      The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, with the following assumptions:

	2003			2004			2005
Stock volatility		1.57			0.89			0.90
Risk-free interest rate		3.4	%		3.6	%		4.0	%
Expected life in years		5  years			5  years			5  years
Stock dividend yield		—			—			—

(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 was determined by the Black-Scholes option-pricing model and was charged to operations over the service period or as performance goals were achieved. Such expense was 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. The recorded expense generally relates to compensation charges upon modification of vesting terms, cashless exercises, and other non-routine transactions.
(c)	Pursuant to APB No. 25, the reported net loss for 2003 included $1.8 million in compensation expense relating to option settlements with two former executives in conjunction with their separation agreements (including a $1.7 million charge for replacement options recorded upon termination of the former CFO/COO on July 31, 2003). Pursuant to SFAS Nos. 123 and 148, the fair value of the replacement options would have been recorded between the option modification date of March 3, 2003 and termination date. The $2.3 million expense for 2003 represents stock-based compensation determined under SFAS Nos. 123 and 148, less the $1.8 million recorded charge.

F-15

ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5. New Accounting Pronouncements

      In December 2004, SFAS No. 123R, Share-Based Payment, was issued. SFAS No. 123R is a revision of SFAS No. 123, Accounting for Stock Based Compensation, and supersedes APB No. 25. Among other items, SFAS 123R eliminates the use of APB No. 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. The effective date of SFAS 123R is the first quarter 2006 for calendar year companies. SFAS 123R permits companies to adopt its requirements using either a “modified prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted, modified or settled after that date, and based on the requirements of SFAS 123 for all unvested awards granted prior to the effective date. Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, but also permits entities to restate financial statements of previous periods based on pro forma disclosures made in accordance with SFAS 123. The Company will adopt the modified prospective method.

      The Company currently utilizes the Black-Scholes standard option pricing model to measure the fair value of stock options granted to employees. While SFAS 123R permits us to continue to use this model, the standard also permits the use of a “lattice” model. Upon adoption the Company will continue to use the Black-Scholes standard option pricing model to measure the fair value of employee stock options upon the adoption of SFAS 123R.

      SFAS 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated, because they depend on, among other things, when employees exercise stock options. Also, the Company has not recognized the benefits for excess tax deductions in our operating cash flows in prior periods due to the uncertainty of when the Company will generate taxable income to realize such benefits. The adoption of SFAS No. 123R’s fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position and cash flows. The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the pro forma net loss and loss per share disclosed in the table above. See Note 10 for further information on our stock-based compensation plans.

      In November 2004, SFAS 151, Inventory Costs — an amendment of ARB No. 43, Chapter 4, was issued. This Statement amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect adoption of this standard to have a material impact on its consolidated financial statements.

      In May 2005, SFAS No. 154, Accounting Changes and Error Corrections, which replaced APB No. 20, Accounting Changes, and SFAS No. 3, Reporting Changes in Interim Financial Statements, was issued. SFAS No. 154 requires retrospective application to prior periods’ financial statements of voluntary changes in accounting principles and changes required by a new accounting standard when the standard does not include specific transition provisions. Previous guidance required most voluntary changes in accounting principle to be recognized by including in net income of the period in which the change was made the cumulative effect of changing to the new accounting principle. SFAS No. 154 carries forward existing guidance regarding the reporting of the correction of an error and a change in accounting estimate. SFAS No. 154 is effective for

F-16

ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Adoption of SFAS No. 154 as of January 1, 2006 is not expected to have a material effect on the Company’s consolidated financial position or results of operations.

6. Asset Impairment

      Under SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and indefinite-lived intangible assets are not amortized but instead are reviewed annually for impairment and on an interim basis if events or changes in circumstances between annual tests indicate that an asset might be impaired. Goodwill is tested for impairment by comparing its fair value to its carrying value under a two-step process. The first step requires the Company to compare the fair value of its reporting units to the carrying value of the net assets of the respective reporting units, including goodwill. The Company’s management is primarily responsible for estimating fair value for impairment purposes. Management may consider a number of factors, including valuations or appraisals, when estimating fair value. If the fair value of the reporting unit is less than the carrying value, goodwill of the reporting unit is potentially impaired and the Company then completes step two to measure the impairment loss, if any. The second step requires the calculation of 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 equaled to the difference.

      In accordance with SFAS No. 142, the Company completed its annual goodwill impairment test on October 1 of each year for all of its reporting units. The Company assessed the fair values of each reporting unit based on a weighted combination of (i) the guideline company method that utilizes revenue multiples for comparable publicly-traded companies, and (ii) a discounted cash flow model that utilizes future net cash flows, the timing of these cash flows, and a discount rate (or weighted average cost of capital which considers the cost of equity and cost of debt financing expected by a typical market participant) representing the time value of money and the inherent risk and uncertainty of the future cash flows. The Company then determined the “implied fair value” of the goodwill and amortizable intangibles. Based on this analysis, the Company recorded:

      a) A third quarter of 2004 impairment charge of $5.9 million to reduce the carrying value of Timm Medical’s goodwill ($3.1 million) and developed technology ($2.1 million) to fair value and an additional charge of approximately $0.7 million for the estimated cost to sell Timm Medical. The charge is included in the net loss from discontinued operations. The interim impairment analysis in the third quarter of 2004 was required based on the Company’s decision to actively market Timm Medical to potential buyers in July 2004, as well as declining revenues, turnover in sales force, and below average growth as compared to general industry trends. Based on the purchase price received by the Company from the sale of Timm Medical completed in February 2006 (see Note 8), there was no further impairment as of December 31, 2005.

      b) A third quarter of 2004 impairment charge of $9.9 million to write-off the carrying value of goodwill ($9.8 million) and covenant not to compete ($0.1 million) with respect to the pending divestiture of the mobile prostate treatment businesses (the Partnerships). We originally acquired the Partnerships in September 2002. The goodwill primarily related to the distribution network provided by the Partnerships, which allowed the Company to further penetrate desired markets. Since investors in the mobile treatment businesses are comprised of urologists, the Partnerships facilitated the continued promotion of cryosurgery as the preferred treatment for prostate cancer. In addition, upon the Company’s purchase of the Partnerships, the seller (USMD) exited the cryosurgical operations and terminated its exclusive distribution agreement with the Company, allowing the Company to access a previously restricted market. After the Company sold the Partnerships in December 2004, the Company still expected to, and did, retain access to the service and distribution network through the Company’s existing

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

contracts and continue to benefit from the strategic value of a non-exclusive distribution arrangement with the buyer. However, since this economic benefit could not be quantified with reasonable accuracy, the Company recorded the $9.9 million charge to write off the excess of the carrying value of the Partnerships’ net assets over the preliminary purchase offer, less selling costs. See Note 8 for the loss recorded upon final sale in the fourth quarter of 2004.

7. Private Placement of Common Stock and Warrants

      On March 11, 2005, the Company completed a private placement of 5,635,378 shares of our common stock and detachable warrants to purchase 3,944,748 common shares at an offering price of $2.77 per share, for aggregate gross proceeds of $15.6 million. Transaction costs were $1.0 million, resulting in net proceeds of $14.6 million. Of the total warrants, 1,972,374 have an initial exercise price of $3.50 (Series A warrants) per share and 1,972,374 have an initial exercise price of $4.00 (Series B warrants) per share.

      The warrants initially are exercisable at any time during the next five years for cash only. The warrants may be exercised on a cashless exercise basis in limited circumstances after the first anniversary of the closing date if there is not an effective registration statement covering the resale of the shares underlying the warrants. Each warrant is callable by the Company at a price of $0.01 per share underlying such warrant if the Company’s stock trades above certain dollar thresholds ($6.50 for the Series A warrants and $7.50 for Series B warrants) for 20 consecutive days commencing on any date after the effectiveness of the registration statement, provided that (a) the Company provides 30-day advanced written notice (Notice Period), (b) the Company simultaneously calls all warrants on the same terms and (c) all common shares issuable are registered. Holders may exercise their warrants during the Notice Period and warrants which remain unexercised will be redeemed at $0.01 per share.

      Upon exercise, the Company will pay transaction fees equal to six percent of the warrant proceeds under an existing capital advisory agreement.

      Pursuant to the terms of the registration rights agreement, the Company filed with the SEC a registration statement on Form S-2 under the Securities Act of 1933, as amended, covering the resale of all of the common stock purchased and the common stock underlying the issued warrants. The S-2 registration statement was declared effective September 28, 2005.

      The registration rights agreement further provides that if a registration statement is not filed within 30 days of closing or does not become effective within 90 days thereafter, then in addition to any other rights the holders may have, the Company will be required to pay each holder an amount in cash, as liquidated damages, equal to one percent per month of the aggregate purchase price paid by such holder. The Company incurred liquidated damages through September 28, 2005, when the S-2 registration statement was declared effective. For the year ended December 31, 2005, the Company incurred $0.6 million of liquidated damages which are included in general and administrative expenses.

      Since the liquidated damages under the registration rights agreement could in some cases exceed a reasonable discount for delivering unregistered shares, the warrants have been classified as a liability until the earlier of the date the warrants are exercised in full or expire. In accordance with EITF 00-19, Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In, a Company’s Own Stock, the Company has allocated a portion of the offering proceeds to the warrants based on their fair value. EITF 00-19 also requires that the Company revalue the warrants as a derivative instrument periodically to compute the value in connection with changes in the underlying stock price and other assumptions, with the change in value recorded as interest expense. The Company determined the fair value of the warrants as follows as of December 31, 2005:

•  First, the Black-Scholes option-pricing model was used with the following assumptions: an expected life equal to the remaining contractual term of the warrants (4.25 years); no dividends; a risk free rate

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ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	of 4.35 percent, which equals the yield on Treasury bonds at constant (or fixed) maturity equal to the remaining contractual term of the warrants; and volatility of 89.46 percent. Under these assumptions, the Black-Scholes option-pricing model yielded a value of $1.73 for each of the Series A warrants and $1.67 for each of the Series B warrants, for an aggregate value of $6.7 million;
•	Second, since the warrants are limited in the amount of realizable profit to the holders as a result of the call provision described above, the Company reduced the value of the warrants to account for the probability that the stock price will reach or exceed $6.50 and $7.50, respectively (i.e., the prices above which the Company has the right to call the Series A and Series B warrants, effectively compelling the holders to exercise their warrants). The Company used a statistical formula to calculate the probability that the Company’s stock price will reach or exceed $6.50 and $7.50, respectively. Based on this formula, the Company calculated that, for the Series A warrants, the probability that the stock price of $6.50 will be reached or exceeded is approximately 22.8 percent. Similarly, the Company calculated that, for the Series B warrants, the probability that the stock price of $7.50 will be reached or exceeded is approximately 17.3 percent. Based on these probabilities, the Company reduced the valuation of each of the Series A warrants to $1.34 (which equals one minus 22.8 percent, multiplied by $1.73) and reduced the valuation of each of the Series B warrants to $1.38 (which equals one minus 17.3 percent, multiplied by $1.67). This yields an aggregate value of the warrants equal to $5.4 million; and
•	Third, the Company further reduced the value of the warrants on the assumption that its stock price on the day that the warrants are exercised will be affected by dilution as a result of the additional stock introduced into the market. Given that there are approximately 30 million shares outstanding, the Company calculated that the exercise of the warrants will result in dilution of approximately 6.2 percent. Using the dilution figure of 6.2 percent, the Company reduced the value of each of the Series A warrants to $1.25 and the Series B warrants to $1.29. This yields an aggregate value of the warrants equal to $5.0 million.

      As a result of this fair value calculation, the Company recorded negative interest expense of $0.7 million for the year ended December 31, 2005, which represents the change in the fair value of the warrants from $5.6 million on March 11, 2005, the date of issuance. This change was primarily due to a decrease in the fair value of the underlying common stock from $3.00 as of March 11, 2005 to $2.74 as of December 31, 2005.

      Upon the earlier of the warrant exercise or expiration date, the warrant liability will be reclassified into stockholders’ equity. Until that time, the warrant liability will be recorded at fair value based on the methodology described above. The Company does not expect that the warrants will be exercised within the next 12 months based on the current trading prices of our common stock and has classified the warrants as a non-current liability at December 31, 2005. Changes in fair value during each period will be recorded as interest expense.

      Two members of the Company’s management team made personal investments totaling $0.7 million in the aggregate, and a member of the board of directors invested $0.3 million.

Other Warrants Issued (expired as of December 31, 2005)

      The Company had issued warrants in conjunction with previous debt financing transactions, underwriting agreements, patent licenses and service contracts. Warrants generally have a contractual term of five years and vest over a one- to five-year period. The Company had issued warrants to purchase 25,000 shares of the Company’s common stock at an exercise price of $9.00 per share. These warrants expired on January 3, 2005, and none were exercised prior to their expiration.

      The Company also issued detachable warrants to investors to purchase 188,680 shares of the Company’s common stock in conjunction with a November 2000 private placement. These warrants have a five-year term

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ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and were immediately exercisable at $13.91 per share. As of December 31, 2005, all warrants issued were expired.

      The Company estimates the fair value of each warrant on the date of grant using the Black-Scholes option pricing model, with the assumptions similar to option grants above. Warrants granted in connection with the issuance of equity and debt and asset purchase transactions are recorded to additional paid-in capital. Warrants issued for services are amortized to expense over the related service periods.

8. Dispositions and Discontinued Operations

Timm Medical — 2005

      The Company acquired Timm Medical in February 2002. During 2003 certain non-core product lines of Timm Medical were divested (see below). In July 2004, the Company began to actively market Timm Medical for sale in conjunction with a fund-raising initiative. The Company reported Timm Medical as an asset held for sale and recorded an impairment charge totaling $5.9 million to reduce the carrying value of Timm Medical to fair value, less costs to sell. Following the completion of the $15.6 million private placement in March 2005 (see Note 7 — “Private Placement of Common Stock and Warrants”) the Company reclassified Timm Medical as held and used in the first quarter of 2005 as the Company no longer was seeking a buyer and had ceased all marketing efforts. As a result of this change in plan, included in net income from discontinued operations for the year ended December 31, 2005 is $0.4 million in depreciation and amortization expense for fixed assets and intangibles for the period from July 31, 2004 to March 31, 2005 and $0.6 million income as a result of the elimination of the estimated costs to sell, which were previously reported as a component of the 2004 impairment charge.

      In late 2005 the Company received substantive expression of interest from Plethora Solutions Holdings plc (Plethora), a company listed on the London Stock Exchange, to acquire Timm Medical and the parties entered into a Stock Purchase Agreement on January 13, 2006. The transaction closed on February 10, 2006. The Company will not receive significant direct cash flows from Timm Medical or have significant continuing involvement in its operations after the sale. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the assets and liabilities of Timm Medical were classified as discontinued operations in the consolidated financial statements for each year presented. The assets and liabilities of Timm Medical as of December 31, 2005 have been classified as current. Sale proceeds (net of $0.6 million of transaction costs) totaled $8.9 million and will result in a gain on sale of $0.7 million to be recorded in the first quarter of 2006. Gross proceeds of $9.5 million includes cash of $8.1 million and a two-year, five percent promissory note secured by the assets of Timm Medical. The note is convertible into Plethora’s ordinary shares at any time by the Company. If Plethora’s shares trade above a specified amount for 20 consecutive days, Plethora has the option to require conversion.

      The Company agreed to retain certain assets and liabilities of Timm Medical, including all tax liabilities ($1.1 million), obligations and rights to a $2.7 million note receivable from the sale of the urinary incontinence product line (see below), certain litigation to which Timm Medical is a party and Urohealth BV (Timm Medical’s wholly-owned subsidiary with insignificant operations). Assets and liabilities retained and their related revenues and expenses are excluded from discontinued operations. The Stock Purchase Agreement contains an indemnification escrow of $1.4 million (proceeds from the note receivable) to indemnify the buyer against certain claims and liabilities.

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ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Assets and liabilities of discontinued operations as of December 31, include the following:

	2004		2005
	(In thousands)
Assets:
Cash, inventories and other current assets	$	1,185	$	1,216
Property and equipment, net		467		75
Goodwill, net		4,552		4,552
Intangibles, net		4,170		3,716
Other assets		66		65
Total assets	$	10,440	$	9,624
Liabilities:
Accounts payable and other current liabilities	$	651	$	942
Other accrued liabilities		524		519
Costs to sell		680		—
Total liabilities		1,855		1,461
Net assets	$	8,585	$	8,163

      Revenues for Timm Medical were $11.0 million, $8.5 million and $9.3 million in 2003, 2004 and 2005, respectively. The operations of Timm Medical are classified as discontinued operations as a result of the sale of Timm Medical in 2006 (See “Subsequent Events”). The 2004 loss from Timm Medical included a $5.9 million impairment charge to write down the goodwill and intangible assets.

Divestitures of Non-Core Product Lines — 2003

      In 2003, the Company embarked on a strategy to refocus the Company’s core technological competence and primary market emphasis on the development of minimally invasive technologies for tissue and cancer ablation. Part of this strategy entails divestiture of certain non core product lines including the cardiac-related product manufacturing operations and license of related technology. Included in the 2003 loss from discontinued operations is a $35,000 gain on the sale of the Dura II penile implants and a $1.3 million loss on the sale of the Timm Medical urinary incontinence and urodynamics product lines, which is further discussed below.

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 $10.0 million. CryoCath was the exclusive distributor for cryoprobes and consoles in connection with the SurgiFrost^tm system, a cryoablation system designed to treat cardiac arrhythmias. The Company transferred all of the Company’s manufacturing assets and inventory related to the cardiac product line to CryoCath, including technical know-how, vendor lists, production equipment and inventory. In addition, CryoCath received an exclusive worldwide perpetual license for cardiac uses to the Company’s proprietary argon gas based technology associated with the product and will make payments to the Company under a nine-year descending royalty stream based on net sales of products incorporating the licensed technology. The Company also agreed to a 12-year worldwide covenant not to compete in the cardiac field. Upon the consummation of the sale, the Company terminated its pre-existing distribution agreement with CryoCath. The Company is required to attend quarterly and annual technical update meetings through 2014. Since the technology was internally developed and the tangible assets sold had minimal value, the sale resulted in a 2003 second quarter gain of $10.0 million. The royalty stream

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ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

decreases from 10 percent to 3 percent of net sales from the SurgiFrost^tm system during the period 2004 to 2012. The royalty payments will be recorded in the periods earned. The Company had collected $7.5 million of the total sale proceeds in 2003 and the remaining $2.5 million in January 2004. Royalty income was $0.6 million and $0.9 in 2004 and 2005, respectively.

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 $2.7 million note. These assets include certain patents and trademarks related to the urodynamics and urinary incontinence products, inventory, customer lists and technical know-how. The note bears interest at 7.5 percent and is secured by the assets sold. As amended in March 2004, the note requires quarterly payments of $45,000 beginning March 31, 2004, increasing to $60,000 for the quarter ended December 31, 2005. Amounts which remain outstanding at December 31, 2005 will be payable at least $60,000 per quarter until the outstanding principal and accrued interest are paid in full. The carrying values of the urodynamics and urinary incontinence related assets were $1.3 million on the date of sale. Management concluded that collection of the note from SRS was not reasonably assured. As a result, a loss of $1.3 million was recorded in the fourth quarter of 2003 equal to the carrying value of the assets sold and collections on the note, if any, will be reported as gain in the period received. Collections during 2004 and 2005 were $0.2 million and $0.3 million and have been applied to accrued interest. As of December 31, 2005 the note was transferred from Timm Medical to Endocare prior to the sale of Timm Medical.

      The combined revenues, costs of revenues and gross profit related to the divested product lines were $2.0 million, $1.0 million and $1.0 million, respectively, for 2003, and $5.4 million, $2.3 million and $3.1 million, respectively, for 2004 and are included in income (loss) from discontinued operations.

      Incremental selling, general and administrative expenses attributable to these product lines were not significant.

Mobile Prostate Treatment Businesses (Partnerships)

      On December 30, 2004, the Company entered into a Partnership Interest Purchase Agreement (the “Purchase Agreement”) with Advanced Medical Partners, Inc. (“AMPI”), a customer of and third-party service provider to the Company. Pursuant to the Purchase Agreement, the Company agreed to sell to AMPI the Company’s interests in nine partnerships and the Company’s minority investment in U.S. Therapies, LLC (a national urology services company) acquired in June 2001 for $0.9 million. As a result of the sale, the Company recorded a loss on divestiture of $0.7 million in the 2004 fourth quarter. The loss comprises $0.9 million in proceeds less selling costs of approximately $63,000 and $1.5 million of the net tangible assets sold. The proceeds were received in February 2005 and were included in prepaid expenses and other current assets as of December 31, 2004. After the sale, the Company continues to pay the Partnerships, similar to other service providers, the contracted fee for mobile support services. As such, the Partnerships are not presented as discontinued operations. The four remaining mobile treatment businesses have ceased operations or are pending dissolution.

9. Stock-Based Compensation Plans

      As of December 31, 2005, the Company had four stock-based compensation plans. On September 10, 2004, the Company’s stockholders approved the 2004 Stock Incentive Plan. The Company accounts for the plans under the recognition and measurement principles (the intrinsic-value method) prescribed in APB No. 25, Accounting for Stock Issued to Employees, and related interpretations. Compensation cost for stock options granted to employees is reflected in net loss and is measured as the excess of the market price of the Company’s stock at the date of grant over the exercise price. Compensation costs for fixed awards that are

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ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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. Amounts below include options granted to employees of Timm Medical, which are not significant.

      The following tables summarize the Company’s option activities:

	Year Ended December 31,
	2003					2004					2005
				Weighted-Avg.					Weighted-Avg.					Weighted-Avg.
	Number of			Exercise Price		Number of			Exercise Price		Number of			Exercise Price
	Options			Per Option		Options			Per Option		Options			Per Option
Outstanding, beginning of year		3,153,427		$	8.50		5,118,752		$	5.06		5,361,682		$	4.72
Granted		2,893,000			3.42		1,397,500			2.94		1,549,250			3.19
Cancelled		(892,675	)		11.96		(804,570	)		5.32		(709,463	)		5.80
Exercised		(35,000	)		3.73		(350,000	)		0.26		(195,229	)		2.10
Outstanding, end of year		5,118,752			5.06		5,361,682			4.72		6,006,240			4.27

		Options Outstanding
								Options Exercisable
				Weighted-Avg.
		Number		Remaining				Number
Range Of		Outstanding at		Contractual Life		Weighted-Avg.		Exercisable at		Weighted-Avg.
Exercise Price		December 31, 2005		(Number of Years)		Exercise Price		December 31, 2005		Exercise Price
$ 0.18 -  2.03			124,500		1.80	$	1.29		124,500	$	1.29
2.06 -  2.85			2,345,365		8.26		2.48		877,333		2.36
2.88 -  3.25			451,945		8.60		3.02		52,778		3.15
3.26 -  4.00			421,500		8.99		3.54		74,375		3.57
4.01 -  5.06			1,819,209		7.99		4.31		1,059,021		4.34
5.13 -  7.44			278,942		5.18		5.27		278,942		5.27
9.00 - 12.98			293,708		5.61		10.93		272,051		10.90
	13.42 - 15.00		126,500		5.92		13.99		123,083		13.99
	15.42 - 21.23		144,571		5.88		17.42		144,430		17.42
			6,006,240		7.74	$	4.27		3,006,513	$	5.30

      The weighted average fair value of the Company’s options at the grant date was approximately $3.02 in 2003, $2.22 in 2004, and $2.25 in 2005.

      Employment related taxes payable associated with the exercise of employee stock options and loan forgiveness at December 31, 2004 and 2005 were $1.2 million and $1.0 million, respectively (included in accrued compensation).

10. Equity Incentive Plans

Stock Options

      As of December 31, 2005, the Company had options outstanding under four stock-based compensation plans, as follows:

      2004 Stock Incentive Plan. The 2004 Stock Incentive Plan adopted in September 2004 authorizes the Board or one or more committees designated by the Board (the “Plan Administrator”) to grant options and rights to purchase common stock to employees, directors and consultants. Options may be either “incentive

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ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

stock options” as defined in Section 422 of the Internal Revenue Code of 1986, as amended, non-statutory stock options or other equity instruments. The 2004 Stock Incentive Plan replaced the 1995 Stock Plan and 1995 Director Plan described below. The exercise price is equal to the fair market value of the Company’s common stock on the date of grant (or 110 percent of such fair market value, in the case of options granted to any participant who owns stock representing more than 10 percent of the Company’s combined voting power). Options generally vest 25 percent on the one-year anniversary date, with the remaining 75 percent vesting monthly over the following three years and are exercisable for 10 years. On the first trading day of each calendar year beginning in 2005, shares available for issuance will automatically increase by three percent of the total number of outstanding common shares at the end of the preceding calendar year, up to a maximum of 1,000,000 shares. In addition, the maximum aggregate number of shares which may be issued under the 2004 Stock Incentive Plan will be increased by any shares (up to a maximum of 2,800,000 shares) awarded under the 1995 Stock Plan and 1995 Director Plan that are forfeited, expire or are cancelled. Options become fully vested if an employee is terminated without cause within 12 months of a change in control as defined. Upon a corporate transaction as defined, options not assumed or replaced will vest immediately. Options assumed or replaced will vest if the employee is terminated without cause within 12 months. As of December 31, 2005, there were outstanding under the 2004 Stock Incentive Plan options to purchase 1,970,000 shares of the Company’s common stock, 854,077 options were available for grant, and 2,093,803 shares reserved for issuance.

      1995 Stock Plan. The 1995 Stock Plan authorized the Board or one or more committees designated by the Board (such committee, the “Committee”) to grant options and rights to purchase common stock to employees and certain consultants and distributors. Options granted under the 1995 Stock Plan may be either “incentive stock options” as defined in Section 422 of the Internal Revenue Code of 1986, as amended, non-statutory stock options or other equity instruments, as determined by the Board or the Committee. The exercise price of options granted under the 1995 Stock Plan was required to equal the fair market value of the Company’s common stock on the date of grant. Options generally vest 25 percent on the one-year anniversary date, with the remaining 75 percent vesting monthly over the following three years. Options are exercisable for 10 years. The 1995 Stock Plan was replaced by the 2004 Stock Incentive Plan on September 10, 2004. As of December 31, 2005, there were outstanding under the 1995 Stock Plan options to purchase 2,036,240 shares of the Company’s common stock and no options were available for grant.

      1995 Director Option Plan. The 1995 Director Option Plan (the “Director Plan”) provided automatic, non-discretionary grants of options to the Company’s non-employee directors (“Outside Directors”). Upon election, each director receives an initial option grant to purchase 20,000 shares of common stock which vest over two years and an annual option grant to purchase 5,000 common shares which becomes exercisable after one year. The exercise price of options granted to Outside Directors was required to be the fair market value of the Company’s common stock on the date of grant. Options granted to Outside Directors have 10-year terms, subject to an Outside Director’s continued service as a director. The 1995 Director Option Plan was replaced by the 2004 Stock Incentive Plan on September 10, 2004. As of December 31, 2005, there were outstanding under the 1995 Director Option Plan options to purchase 110,000 shares of the Company’s common stock and no options were available for grant.

      2002 Supplemental Stock Plan. The Company adopted the 2002 Supplemental Stock Plan (“2002 Plan”) effective June 25, 2002. Under the 2002 Plan, non-statutory options may be granted to employees, consultants and outside directors with an exercise price equal to at least 85 percent of the fair market value per share of the Company’s common stock on the date of grant. The 2002 Plan expires June 24, 2012, unless earlier terminated in accordance with plan provisions. The 2002 Plan also terminates automatically upon certain extraordinary events, such as the sale of substantially all of the Company’s assets, a merger in which the Company is not the surviving entity or acquisition of 50 percent or more of the beneficial ownership in the Company’s common stock by other parties. Upon such an event, all options become fully exercisable. Through

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ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

December 31, 2005, there were options to purchase 140,000 shares of the Company’s common stock outstanding under the 2002 Plan and options to purchase 295,000 shares were available for grant.

      Option Arrangements Outside of Plans. In addition to the option plans described above, on March 3, 2003, the Company granted options to purchase 750,000 shares of common stock to the current President and Chief Operating Officer. The options were granted at $2.25 per share; 250,000 of the options are available for accelerated vesting based on the attainment of certain milestones and objectives or five years, whichever comes first. Twenty-five percent of the remaining 750,000 options vest on the first anniversary with the balance ratably over three years.

      On December 15, 2003, the Company granted 1,000,000 options to purchase common stock to the Chief Executive Officer. The options were granted at $4.27 per share; 100,000 of these options are available for accelerated vesting based on the attainment of certain milestones and objectives or five years, whichever comes first. Twenty-five percent of the remaining options vest immediately with the balance vesting ratably over three years.

      All options granted pursuant to the Company’s stock-based compensation plans are subject to immediate vesting upon a change in control as defined in the respective plan, except for special provisions in the case of the 2004 Stock Incentive Plan as described above.

Stockholder Rights Plan

      In April 1999, the Company adopted a stockholder rights plan (the Plan) in which preferred stock purchase rights were distributed as a dividend at the rate of one right for each share of common stock held as of the close of business on April 15, 1999. The rights are designed to guard against partial tender offers and other abusive and coercive tactics that might be used in an attempt to gain control of the Company or to deprive the Company’s stockholders of their interest in the long-term value of the Company. The rights will be exercisable only if a person or group acquires 15 percent or more of the Company’s common stock (subject to certain exceptions stated in the Plan) or announces a tender offer the consummation of which would result in ownership by a person or group of 15 percent or more of the Company’s common stock. At any time on or prior to the close of business on the first date of a public announcement that a person or group has acquired beneficial ownership of 15 percent or more of the Company’s common stock (subject to certain exceptions stated in the Plan), the rights are redeemable for $0.01 per right at the option of the Board of Directors. The rights will expire at the close of business on April 15, 2009 (the “Final Expiration Date”), unless the Final Expiration Date is extended or unless the rights are earlier redeemed or exchanged by the Company.

11. Income Taxes

      The composition of the federal and state income tax provision (benefit) from continuing operations is as follows:

		Years Ended
		December 31,
		2003		2004		2005
		(In thousands)
Federal		$	—	$	—	$	(705	)
State			—		—		(124	)
	Total	$	—	$	—	$	(829	)

      The 2005 tax benefit is the result of current year pre-tax book losses being utilized against pre-tax book income from discontinued operations. There is an offsetting tax provision within discontinued operations.

F-25

ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table summarizes the tax effects of temporary differences, which give rise to significant portions of the deferred tax assets at December 31:

			2004			2005
			(In thousands)
Deferred tax assets (liabilities):
	Depreciation and amortization			(27	)		468
	Nondeductible reserves and accruals			2,899			2,280
	Investment in stock of discontinued operation			—			10,468
	Research and experimentation tax credit carryforwards			1,000			1,000
	Net operating loss carryforwards			38,468			42,578
	Capital loss carryforwards			5,279			5,279
	Other			752			1,417
				48,371			63,490
	Valuation allowance			(48,371	)		(63,490	)
		Net deferred tax assets	$	—		$	—

      During 2005, in connection with the presentation of Timm Medical Technologies, Inc. (“Timm Medical”) as a discontinued operation (see Note 8), the Company recorded a deferred tax asset of $10.5 million for the tax in excess of financial statement basis in the stock of Timm Medical. As a result of continued operating losses and, in 2005, the recording of a deferred tax asset for the tax in excess of financial statement basis in the stock of Timm Medical, the valuation allowance increased by $13.0 million and $15.1 million during the years ended December 31, 2004 and 2005, respectively. Due to the Company’s history of operating losses, management has not determined that it is more likely than not that the Company’s deferred tax assets will be realized through future earnings. Accordingly, valuation allowances have been recorded to fully reserve the Company’s deferred tax assets as of December 31, 2004 and 2005.

      Actual income tax expense differs from amounts computed by applying the United States federal income tax rate of 34 percent to pretax loss as a result of the following:

		Years Ended December 31,
		2003			2004			2005
		(In thousands)
Computed expected tax benefit		$	(8,487	)	$	(10,846	)	$	(5,327	)
Nondeductible expenses			287			78			89
Increase in valuation allowance			9,572			12,950			4,490
State taxes			(1,372	)		(1,861	)		(81	)
Other			—			(321	)		—
	Actual tax expense (benefit)	$	—		$	—		$	(829	)

      As of December 31, 2005, the Company has federal and California net operating loss carryforwards of $108.5 million and $33.6 million, respectively. The Company also has approximately $60.8 million in net operating loss carryforwards in various other states. The federal net operating loss carryforwards begin to expire in 2011 and the state net operating loss carryforwards begin to expire in 2006. In addition, the Company has federal and state research and experimentation credit carryforwards of $0.7 million and $0.3 million, respectively. The federal research and experimentation credit carryforwards begin to expire in 2011 and the state research and experimentation credit carryforwards do not expire.

F-26

ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      IRC Sections 382 and 383 limit the annual utilization of net operating loss and tax credit carryforwards existing prior to a change in control. Based upon prior equity transaction activity, some or all of the Company’s existing net operating loss and tax credit carryforwards may be subject to annual limitations under IRC Sections 382 and 383. The Company has not performed an analysis to determine whether such change in control has occurred for tax reporting purposes and if so, the specific limitations that may result.

12. Collaborative and Other Agreements

Sanarus Medical Inc.

      In October 1999, the Company entered into a strategic alliance with Sanarus Medical, Inc. (Sanarus), a privately held medical device company. The Company received 200,041 Series A voting convertible preferred shares for $0.3 million and a warrant to acquire 3,166,000 common shares for $0.01 per share in consideration for entering into a manufacturing, supply and license agreement (the “1999 Agreement”). The 1999 Agreement provided Sanarus an exclusive, royalty-free, worldwide non-sublicenseable right to develop, manufacture and sell products using cryoablation technology developed by the Company for use in the field of gynecology and breast diseases. The warrant is exercisable at any time through October 12, 2009. In June 2001, the 1999 Agreement was amended (the 2001 Agreement) to provide for (i) the termination of Sanarus’s exclusive, royalty-free, worldwide non-sublicenseable right under the 1999 Agreement; (ii) Sanarus’s grant to the Company of an exclusive (even as to Sanarus), worldwide, irrevocable, fully paid-up right to develop, manufacture and sell products using certain Sanarus technology for use in the diagnosis, prevention and treatment of prostate, kidney and liver diseases, disorders and conditions; and (iii) the Company’s grant to Sanarus of an exclusive (even as to the Company), worldwide, irrevocable, fully paid-up right to develop, manufacture and sell products using certain of the Company’s technology for use in the diagnosis, prevention and treatment of gynecological and breast diseases, disorders and conditions.

      In June 2001, the Company provided a bridge loan to Sanarus in the amount of $0.3 million and received a warrant to purchase 36,210 shares of Series B voting preferred stock. The loan was repaid in July 2001. In April 2003, the Company and other investors entered into a second bridge loan financing in which Sanarus issued to the Company a convertible promissory note in the aggregate amount of $0.6 million and a warrant to purchase equity shares in Sanarus with an aggregate exercise price of up to $0.3 million. Upon completion of an equity financing by Sanarus in October 2003, the bridge loan and warrant were canceled in exchange for 908,025 shares of Series C voting preferred stock and a warrant to purchase 308,823 Series C shares at $0.68 per share. As of December 31, 2005 and 2004, the Company’s voting interest in Sanarus was approximately 5.2 percent.

      The Company’s former Chief Executive Officer and Chairman of the Board was a member of Sanarus’s Board of Directors through October 22, 2003. A former member of the Company’s Board of Directors is also a member of Sanarus’s Board of Directors, and is an officer and partner in a venture fund that in the aggregate beneficially owns more than 10 percent of the outstanding Series A preferred stock of Sanarus. The total investment in Sanarus of $0.9 million as of December 31, 2004 and 2005 is included in investments and other assets. The investment is recorded at cost since the Company does not exercise significant influence over the operations of Sanarus.

CryoFluor Therapeutics

      Effective December 21, 2004, the Company and CryoFluor Therapeutics, LLC (“CryoFluor”) entered into a Services Agreement and First Amendment to CryoFluor’s Operating Agreement. Under the Services Agreement, the Company will provide to CryoFluor certain product design and development services, which consist of both preclinical stage services and clinical stage services.

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ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      In exchange for the preclinical stage services, CryoFluor issued 500,000 ownership units to the Company on December 21, 2004, which are subject to vesting as described below. In exchange for the clinical stage services, the Services Agreement provides that on an agreed upon date (the “Second Tranche Date”), CryoFluor shall issue to the Company an additional 445,000 ownership units subject to completion of the preclinical services and compliance with all of the Company’s obligations to be performed by the Second Tranche Date. Each ownership unit has an ascribed value of $1.00.

      The ownership units are subject to vesting as follows: (i) 50,000 of the units vested on December 21, 2004; (ii) 44,500 units upon the Second Tranche Date; (iii) 450,000 units upon completion of the preclinical services and CryoFluor’s acceptance of the Company’s report relating to the preclinical services; and (iv) the remaining 400,500 units upon completion of the clinical services and CryoFluor’s acceptance of the Company’s report relating to the clinical services. In the event of a termination of the Services Agreement for any reason, all ownership units that have not vested as of the termination date will be forfeited. As of December 31, 2005, the Company completed the preclinical services and has vested in 500,000 units constituting 13 percent of CryoFluor’s outstanding ownership interests as of such date.

      Pursuant to the First Amendment to the Operating Agreement, the Company was admitted as a member of CryoFluor on December 21, 2004. Each other member of CryoFluor granted to the Company a limited right of first negotiation with respect to the sale of ownership units held by such member. In addition, CryoFluor granted to the Company a limited right of first negotiation with respect to the sale, assignment, license or other transfer of the technology owned by CryoFluor that is the subject of the development program under the Services Agreement.

      Since CryoFluor is a development stage company and the fair value of the Company’s contracted services could not be accurately determined, the Company has recorded a valuation allowance against the ascribed value of its minority interest investment in CryoFluor. The Company accounted for its investment in CryoFluor using the cost method.

CryoDynamics, LLC — Research & Development Agreement

      On November 8, 2005, the Company entered into a commercialization agreement (the “Agreement”) with CryoDynamics, LLC to design and develop a cryosurgical system utilizing nitrogen gas. The parties will jointly own all rights relating to the technology (Development Inventions). To assist CryoDynamics in its research and development efforts, the Company will advance CryoDynamics $42,500 per month, effective October 1, 2005 until such time as either party enters into a license agreement based upon the nitrogen system with an independent third party that results in CryoDynamics receiving an amount sufficient to repay the advances.

      Under the Agreement, CryoDynamics grants to the Company an exclusive, worldwide license (with the right to sublicense) to the Development Inventions and pre-existing technology in all medical fields of use. The Company will also grant to CryoDynamics an exclusive, worldwide license (with the right to sublicense) to such Development Inventions in specified fields of use. Royalties and license fees will be determined in accordance with the Agreement. The Agreement also provides for a right of first refusal should CryoDynamics intend to accept an offer from any potential buyer for the sale of all or part of CryoDynamics’s business.

      The Agreement will continue until the later of (a) December 31, 2015, or (b) expiration of the parties’ obligations to pay royalties, or until the Agreement is terminated because of breach, insolvency or bankruptcy.

      Since repayment of amounts advanced under the agreement is contingent upon the successful development, commercialization and licensing of the technology and is not reasonably assured, these advances will be expensed as incurred. The Company recorded $0.1 million of research and development costs for the year ended December 31, 2005 in connection with the Agreement.

F-28

ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Patent, Licensing, Royalty and Distribution Agreements

      The Company has entered into other patent, licensing and royalty agreements with third parties, some of whom also have consulting agreements with the Company and are owners of or affiliated with entities which have purchased products from the Company. These agreements historically generally provide for purchase consideration in the form of cash, common shares, warrants or options and royalties based on a percentage of sales related to the licensed technology, subject to minimum amounts per year. The patents and licensing rights acquired are recorded based on the fair value of the consideration paid. Options and warrants issued are valued using the Black-Scholes option pricing model. These assets are amortized over their respective estimated useful lives. Royalty payments are expensed as incurred.

      The Company has entered into additional distribution agreements with third parties. These agreements govern all terms of sale, including shipping terms, pricing, discounts and minimum purchase quotas, if applicable. Pricing is fixed and determinable and the distributor’s contractual obligation to pay is not contingent on other events, such as final sale to an end-user. The Company generally does not grant a right of return except for defective products in accordance with its warranty policy, and in some cases for unsold inventory within a limited time period upon the termination of the distribution agreement.

13. Commitments and Contingencies

Leases

      The Company leases office space and equipment under operating leases, which expire at various dates through 2007. Some of these leases contain renewal options and rent escalation clauses. Future minimum lease payments by year and in the aggregate under all non-cancelable operating leases consist of the following (in thousands):

Year ending December 31, 2006	$	553
2007		120
2008		13
	$	686

Employment and Severance Agreements

      The Company has entered into employment agreements with certain executives which provide for annual base salaries and cash incentive payments of up to 85 percent of base salary subject to attainment of corporate goals and objectives pursuant to incentive compensation programs approved by the Company’s board of directors, and stock options. The agreements provide for severance payments if the executive is terminated other than for cause or terminates for good reason as defined. The options vest over specified time periods with accelerated vesting upon attainment of performance targets in certain instances.

Former Officers

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 $0.4 million severance payment, in addition to accrued and unpaid wages and unused vacation time. The former CEO waived all rights to which he is or may be entitled under the Company’s 2002 Separation Benefits Plan. In exchange for an additional $0.4 million upfront payment, under the provisions of the Consulting Agreement, as amended, the former CEO agreed to a one-year covenant not to compete and during its term, he was

F-29

ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

required to provide consulting services at the direction of management for a minimum of eight hours per quarter. The former CEO continued to participate in the Company’s benefit plans for 24 months. Of the former CEO’s outstanding vested stock options, 565,000 will continue to remain outstanding as permitted under the 1995 Stock Plan, and 200,000 of his outstanding stock options were terminated. The Company recorded a charge of $0.8 million in the third quarter of 2003 for the severance and related benefits. The Separation Agreement and Consulting Agreement further provide that the former CEO is required to repay the severance payment and consulting fees received upon either (i) his conviction in a court of law, or entering into a plea of guilt or no contest to, any crime directly relating to his activities on behalf of the Company during his employment, or (ii) successful prosecution of an enforcement action by the SEC against him. The total severance payment due of $0.8 million was deposited into an escrow account and was released from the escrow account in March 2004. In the third quarter of 2004, the former CEO exercised options to purchase 325,000 shares at $0.18 per share. Options for the remaining 240,000 shares expired unexercised.

Former Chief Financial Officer and Chief Operating Officer

      The Company entered into an employment agreement, dated March 3, 2003 (the “Employment Agreement”), with the Company’s former Chief Financial Officer and Chief Operating Officer (the “former CFO/COO”). Under the agreement, the Company was required to pay the former CFO/COO a base salary of $0.2 million and cash bonus of up to $88,000 per year. The Employment Agreement also provided that all of the former CFO/COO’s options to purchase 385,000 shares of common stock would be cancelled and replaced by immediately exercisable options to be granted between September 4, 2003 and November 3, 2003. The replacement options were issued on October 30, 2003 at an exercise price of $4.50 per share, which is equal to the fair market value of the common stock on the date of grant.

      The Employment Agreement also provided that upon any Qualified Termination (as defined), the former CFO/COO would be entitled to a cash payment of $0.6 million, 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. Effective July 31, 2003, the Company terminated the former CFO/COO’s employment other than for cause. The Company recorded a third quarter charge for $0.7 million for severance, medical, and relocation benefits due under the Qualified Termination provisions. In addition, the Company recorded a third quarter charge for $1.7 million for the fair value of the 385,000 replacement options determined using the Black-Scholes option pricing model.

      Under the Employment Agreement, the former CFO/COO is required to repay all amounts received in a Qualified Termination upon (i) the former CFO/COO’s conviction in a court of law, or entering into a plea of guilt or no contest to, any crime directly relating to his activities on behalf of the Company during his employment, or (ii) successful prosecution of an enforcement action by the SEC against the former CFO/COO. The total severance payments due of $0.6 million were deposited into an escrow account and were released from the escrow account in March 2004.

Former Chief Financial Officer

      On August 27, 2004, the Company executed a General Release of All Claims (the “General Release”) with its then Chief Financial Officer (the “former CFO”), which was effective as of August 10, 2004. Pursuant to the terms of the General Release, the Company agreed to continue to pay the former CFO her current base salary of $0.2 million per year via semi-monthly salary continuation payments for a period of 12 months and continuation of her health benefits pursuant to COBRA for one year. Finally, the Company agreed to permit the former CFO to continue to vest in all stock options previously granted by the Company through July 31, 2005 and recorded stock-based compensation expense of $0.1 million. In 2005 and 2004, the former CFO exercised options for the purchase of 130,208 and 15,625 common shares, respectively. The remaining vested options expired unexercised.

F-30

ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2002 Executive Separation Benefits Plan

      Effective July 17, 2002, the Company adopted the 2002 Executive Separation Benefits Plan (“Separation Plan”) to provide separation benefits to certain designated employees. The Separation Plan provided that, in the case of any “Covered Termination,” the participants would receive from six months to two years of their base salary plus the maximum bonus, as defined. Covered Terminations included termination by the employee for good reason after a change in control, by the employee for any or no reason during the 30-day period immediately following the six-month anniversary of a change in control, or voluntarily by the Company or its successor after a change in control for a reason other than cause, death or disability. Participants were also entitled to continued eligibility for the Company’s benefit program for a period equal to the number of months of base pay to be received. Effective July 2004, the Company terminated the Separation Plan.

Employee Benefit Plans

      The Company has a 401(k) savings plan covering substantially all employees. The Plan currently provides for a discretionary match of amounts contributed by each participant as approved by the Compensation Committee of the Board of Directors. No matching contributions were made in 2003, 2004 or 2005.

Legal Matters

      The Company has been in settlement discussions with the staff of the SEC regarding the terms of a settlement of the previously announced investigation commenced by the SEC in January 2003 related to allegations that the Company and certain of its current and former officers and directors issued, or caused to be issued, false and misleading financial statements in prior periods. The proposed settlement, which has been agreed upon by the staff of the SEC and remains subject both to final approval by the SEC and court, includes the following principal terms: (i) the Company would pay a total of $750,000 in civil penalties (accrued during the year ended December 31, 2004); (ii) the Company would agree to a stipulated judgment enjoining future violations of securities laws; and (iii) the Company would agree to maintain various improvements in the Company’s internal controls that have previously been implemented. If approved, the proposed settlement would resolve all claims against the Company relating to the formal investigation that the SEC commenced in January 2003.

      The Department of Justice (DOJ) is conducting an investigation into allegations that the Company and certain of its former officers, a former director and one current employee intentionally issued, or caused to be issued, false and misleading statements regarding the Company’s financial results and related matters. The DOJ’s investigation is ongoing and is not affected by the proposed settlement with the SEC described above.

      The Company carries $20 million of directors’ and officers’ liability insurance coverage under four policies with limits of $5 million each. The primary carrier reimbursed the Company’s defense costs up to the limits of its $5 million policy. However, the three excess carriers, representing $15 million of the $20 million of coverage, filed arbitration complaints seeking rescission of the policies. In December 2004 and February 2005, the Company reached settlement with two of the three excess carriers to reimburse the Company for current and future legal defense and litigation settlement costs totaling $6.3 million. On December 1, 2005, the Company entered into a settlement agreement with the third excess carrier pursuant to which the Company returned $1.0 million of the $5.0 million previously funded by the carrier toward litigation settlement costs. Under the settlement agreements, the Company also granted mutual releases to each of the carriers.

      In November 2002, the Company was sued in an action filed by BioLife in the Delaware Court of Chancery. BioLife sought damages for alleged breaches of contract stemming from the Company’s acquisition of the tangible and intangible assets related to BioLife’s cryosurgical business. BioLife alleged that the Company failed to timely register 120,022 shares of the Company’s common stock provided to BioLife as partial consideration for the asset acquisition, in violation of a registration rights agreement relating to the

F-31

ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

shares issued to BioLife. On October 1, 2003, BioLife was awarded $1.6 million plus prejudgment interest and costs (including legal fees) and BioLife was required to surrender the 120,022 shares to the Company. As a result of this decision, the Company recorded a 2002 fourth quarter charge of $1.5 million, representing the difference between the court’s award to BioLife and the estimated fair value of the shares to be surrendered. On October 10, 2003 the Company filed a notice of appeal. On February 20, 2004, the Company agreed to abandon the appeal in exchange for a cash payment of $1.9 million to BioLife and return of the 120,022 common shares. The shares were recorded as treasury stock in March 2004 based on the fair value of $0.5 million at that date and the balance of $1.4 million was applied against a litigation accrual previously recorded in 2002 and included in other accrued liabilities at December 31, 2003.

      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 asserted 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 sought class certification and unspecified damages from the Company, as well as forfeiture and reimbursement of bonus compensation received by two of the individual defendants. On April 26, 2004, the court issued an order denying the Company’s motion to dismiss the consolidated complaint. On November 8, 2004, the Company executed a settlement agreement with the lead plaintiffs and their counsel. The court has granted preliminary approval of this agreement and authorized the parties to provide notice of its terms to class members. Under the agreement, in exchange for a release of all claims, the Company and certain individuals would pay a total of $8.95 million in cash. The Company’s directors and officers’ liability insurance carriers funded the total amount of $8.95 million prior to December 31, 2004, subject to reservations of rights by the carriers. On February 7, 2005, the Court issued a final order approving the agreement and dismissing the class-action lawsuit.

      On December 6, 2002, Frederick Venables filed a purported derivative action against the Company and certain former officers, certain former board members and one current board member 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 was stayed until 2005. The complaint sought 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. On December 6, 2004, the Company executed a settlement agreement with the plaintiff and his counsel. On December 8, 2004, the Court issued a final order approving the agreement and dismissing the derivative lawsuit. Under the agreement, in exchange for the plaintiff’s release of all claims, the Company paid a total of $0.5 million in cash prior to December 31, 2004 to cover the fees and expenses of the plaintiff’s counsel. The agreement also requires the Company to maintain various corporate governance measures for a period of at least two years, unless a modification is necessary in the good faith business judgment of the Company’s Board of Directors.

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

F-32

ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Pursuant to the settlement, the employee withdrew his letter of complaint, and the Department of Labor has indicated that it considers this matter closed.

      In addition, the Company, in the normal course of business, is subject to various other legal matters, which management believes will not individually or collectively have a material adverse effect on the Company’s results of operations or cash flows of a future period. The results of litigation and claims cannot be predicted with certainty, and the Company cannot provide assurance that the outcome of various legal matters will not have a material adverse effect on its consolidated financial condition, results of operations or cash flows. As of December 31, 2005, except for the matters indicated above for which the Company has accrued $0.8 million, the Company has not established a liability for contingencies in the consolidated balance sheets since the likelihood of loss and the potential liability cannot be reasonably estimated at this time. Management’s evaluation of the likelihood of an unfavorable outcome with respect to these actions could change in the future. The Company has purchased directors’ and officers’ liability and other insurance which may fund certain losses, including defense costs, related to the above litigation matters. These recoveries will be recorded when the amounts are determined to be recoverable from the insurance carriers.

      From time to time, the Company has received other correspondence alleging infringement of proprietary rights of third parties. No assurance can be given that any relevant claims of third parties would not be upheld as valid and enforceable, and therefore that the Company could be prevented from practicing the subject matter claimed or would be required to obtain licenses from the owners of any such proprietary rights to avoid infringement. Management does not expect any material adverse effect on the consolidated financial condition, the results of operations, or cash flows because of such actions.

14. Line of Credit

      On October 26, 2005, the Company entered into a one year Loan and Security Agreement with a bank which provides up to $4 million on a revolving line of credit for working capital purposes. Borrowings under the revolving line of credit are subject to a borrowing base formula based upon eligible accounts receivable and inventories. The Company has not incurred any borrowing under this arrangement as of and subsequent to December 31, 2005.

      Under the Loan and Security Agreement, the outstanding balance bears interest payable monthly at a variable rate based on the Prime Rate plus a loan margin based on the Company’s quick ratio, as defined. The revolving line of credit is collateralized by substantially all of the Company’s assets.

      The Loan and Security Agreement contains various financial and operating covenants that impose limitations on the Company’s ability, among other things, to incur additional indebtedness, merge or consolidate, sell assets except in the ordinary course of business, make certain investments, enter into leases and pay dividends without the consent of the bank.

15. Related Party Transactions

      In February 2002, the Company purchased the patents to certain cryosurgical technologies and a covenant not to compete from a cryosurgeon inventor for 100,000 shares of the Company’s common stock valued at $1.4 million, of which $1.1 million (75,000 shares) was allocated to the patent to be amortized over 15 years and the remaining $0.3 million (25,000 shares) was allocated to the covenant to be amortized over five years.

      The agreement also requires the seller to perform certain consulting services over 15 years for the consideration received. No consideration was allocated to the consulting agreement since its value could not be accurately measured. In January 2003, the Company extended a $344,000 loan to the seller to assist with the payment of related federal income taxes arising from the 2002 asset sale. The loan is secured by the shares issued, bears interest at 1.8 percent and is due in January 2007.

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ENDOCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

16. Quarterly Results of Operations (Unaudited)

      The following is a summary of the quarterly results of operations for the years ended December 31, 2005 and 2004 (in thousands, except per share data).

	Quarter Ended			Quarter Ended			Quarter Ended			Quarter Ended
	March 31,			June 30,			September 30,			December 31,
	2005			2005			2005			2005
Revenues from continuing operations	$	6,867		$	6,919		$	7,008		$	7,481
Cost of revenues from continuing operations	$	4,186		$	3,924		$	3,809		$	3,819
Loss from continuing operations	$	(5,219	)	$	(4,522	)	$	(2,997	)	$	(2,101	)
Net loss	$	(4,506	)	$	(4,196	)	$	(2,460	)	$	(2,517	)
Loss from continuing operations per share of common stock — basic and diluted	$	(0.17	)	$	(0.15	)	$	(0.10	)	$	(0.07	)
Net loss per share of common stock — basic and diluted	$	(0.15	)	$	(0.14	)	$	(0.08	)	$	(0.08	)
Weighted average shares of common stock outstanding — basic and diluted		29,988			30,060			30,069			30,081

	Quarter Ended			Quarter Ended			Quarter Ended			Quarter Ended
	March 31,			June 30,			September 30,			December 31,
	2004			2004			2004			2004
Revenues from continuing operations	$	5,325		$	6,244		$	6,223		$	6,389
Cost of revenues from continuing operations	$	3,302		$	3,355		$	3,485		$	3,443
Loss on divestitures, net	$	—		$	—		$	—		$	(711	)
Loss from continuing operations	$	(8,441	)	$	(5,414	)	$	(13,467	)	$	(4,579	)
Net loss	$	(8,623	)	$	(5,620	)	$	(19,257	)	$	(4,118	)
Loss from continuing operations per share of common stock — basic and diluted	$	(0.35	)	$	(0.23	)	$	(0.56	)	$	(0.19	)
Net loss per share of common stock — basic and diluted	$	(0.36	)	$	(0.23	)	$	(0.80	)	$	(0.17	)
Weighted average shares of common stock outstanding — basic and diluted		24,088			24,000			24,175			24,342

F-34

ENDOCARE, INC. AND SUBSIDIARIES

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

			Additions
	Balance at the										Balance at
	Beginning of		Charges to								the End of
	the Period		Operations			Other		Deductions			the Period
	(In thousands)
2003
Allowance for Doubtful Receivables and Sales Returns	$	1,624	$	658		$	—	$	(296	)	$	1,986
2004
Allowance for Doubtful Receivables and Sales Returns	$	1,986	$	(726	)	$	—	$	(1,186	)	$	74
2005
Allowance for Doubtful Receivables and Sales Returns	$	74	$	10		$	—	$	(14	)	$	70

Amounts exclude discontinued operations.

F-35

EXHIBIT INDEX

Exhibit No.			Description
	2	.1(1)	Partnership Interest Purchase Agreement, dated as of December 30, 2004, by and between the Company and Advanced Medical Partners, Inc.
	2	.2(2)	Stock Purchase Agreement, dated as of January 13, 2006, by and among Plethora Solutions Holdings plc, Endocare, Inc. and Timm Medical Technologies, Inc. The schedules and other attachments to this exhibit were omitted. The Company agrees to furnish a copy of any omitted schedules or attachments to the Securities and Exchange Commission upon request.
	2	.3	$1,425,000 Secured Convertible Promissory Note, dated as of February 10, 2006, from Plethora Solutions Holdings plc to Endocare, Inc.
	3	.1(3)	Certificate of Amendment of Restated Certificate of Incorporation of the Company.
	3	.2(3)	Certificate of Designation of Series A Junior Participating Preferred Stock of the Company.
	3	.3(3)	Restated Certificate of Incorporation.
	3	.4(4)	Amended and Restated Bylaws of the Company.
	4	.1(5)	Form of Stock Certificate.
	4	.2(6)	Form of Series A Warrant.
	4	.3(6)	Form of Series B Warrant.
	4	.4(7)	Rights Agreement, dated as of March 31, 1999, between the Company and U.S. Stock Transfer Corporation, which includes the form of Certificate of Designation for the Series A Junior Participating Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Series A Preferred Shares as Exhibit C.
	4	.5(8)	Amendment No. 1 to Rights Agreement, dated as of September 24, 2005, between the Company and U.S. Stock Transfer Corporation.
	10	.1(9)	Lease Agreement, dated November 26, 2001 by and between the Company and the Irvine Company.
	†10	.2(9)	Form of Indemnification Agreement by and between the Company and its directors.
	†10	.3(9)	Form of Indemnification Agreement by and between the Company and its executive officers.
	†10	.4(10)	1995 Director Option Plan (as amended and restated through March 2, 1999).
	†10	.5(11)	1995 Stock Plan (as amended and restated through December 30, 2003).
	†10	.6(12)	2002 Supplemental Stock Plan.
	†10	.7(12)	2002 Executive Separation Benefits Plan.
	†10	.8(13)	Employment Agreement, dated as of March 3, 2003, by and between the Company and William J. Nydam.
	10	.9(14)	Consulting Agreement, dated as of August 27, 2003, by and between the Company and Craig T. Davenport.
	†10	.10(15)	Employment Agreement, dated as of December 15, 2003, by and between the Company and Craig T. Davenport.
	†10	.11(16)	Employment Agreement, dated as of August 11, 2004, by and between the Company and Michael R. Rodriguez.
	†10	.12(17)	2004 Stock Incentive Plan.
	†10	.13(18)	2004 Non-Employee Director Option Program under 2004 Stock Incentive Plan.
	†10	.14(18)	Form of Award Agreement Under 2004 Stock Incentive Plan.
	10	.15(18)	Stipulation of Settlement, dated as of November 1, 2004, relating to securities class action lawsuit.
	†10	.16(18)	Description of Craig Davenport salary adjustment, effective December 2004.
	10	.17(18)	Confidential Settlement Agreement and Release, dated as of December 14, 2004, by and between the Company and certain Underwriters at Lloyd’s, London.
	10	.18(18)	Release and Settlement Agreement, dated as of December 16, 2004, by and between the Company and National Union Fire Insurance Company.

Exhibit No.			Description
	†10	.19(19)	Description of William J. Nydam salary adjustment, effective February 2005.
	†10	.20(19)	Description of Michael R. Rodriguez salary adjustment, effective February 2005.
	10	.21(19)	Confidential Settlement Agreement and Release, dated as of February 18, 2005, by and between the Company and Great American E&S Insurance Company.
	†10	.22(20)	2004 Management Incentive Compensation Program.
	†10	.23(20)	2005 Management Incentive Compensation Program.
	10	.24(6)	Purchase Agreement, dated as of March 10, 2005, by and between the Company and the Investors (as defined therein).
	10	.25(6)	Registration Rights Agreement, dated as of March 10, 2005, by and between Endocare and the Investors (as defined therein).
	†10	.26(21)	First Amendment to Employment Agreement with Craig T. Davenport, dated as of April 28, 2005.
	†10	.27(22)	Description of director compensation, as amended on September 14, 2005.
	10	.28	Loan and Security Agreement, dated as of October 26, 2005, by and among Endocare, Inc., Timm Medical Technologies, Inc. and Silicon Valley Bank.
	10	.29	Commercialization Agreement, dated as of November 8, 2005, by and between Endocare, Inc. and CryoDynamics, LLC.
	10	.30	Confidential Settlement Agreement and Release, dated as of December 1, 2005, by and between Endocare, Inc. and Liberty Mutual Insurance Company.
	21	.1(23)	Subsidiaries of Registrant.
	23	.1	Consent of Independent Registered Public Accounting Firm.
	24	.1	Power of Attorney, included on signature page.
	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 Michael R. Rodriguez.
	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 Michael R. Rodriguez.

† Management contract or compensatory plan or arrangement.

(1)	Previously filed as an exhibit to our Form 8-K filed on January 6, 2005.
(2)	Previously filed as an exhibit to our Form 8-K filed on January 18, 2006.
(3)	Previously filed as an exhibit to our Registration Statement on Form S-3 filed on September 20, 2001.
(4)	Previously filed as an exhibit to our Form 10-K filed on March 15, 2004.
(5)	Previously filed as an exhibit to our Form 10-K for the year ended December 31, 1995.
(6)	Previously filed as an exhibit to our Form 8-K filed on March 16, 2005.
(7)	Previously filed as an exhibit to our Form 8-K filed on June 3, 1999.
(8)	Previously filed as an exhibit to our Form 8-K filed on June 28, 2005.
(9)	Previously filed as an exhibit to our Form 10-K filed on March 29, 2002.

(10)	Previously filed as an exhibit to our Registration Statement on Form S-8 filed on June 2, 1999.
(11)	Previously filed as an appendix to our Definitive Proxy Statement filed on December 3, 2003.
(12)	Previously filed as an exhibit to our Form 10-K filed on December 3, 2003.
(13)	Previously filed as an exhibit to our Form 8-K filed on March 27, 2003.
(14)	Previously filed as an exhibit to our Form 10-K filed on March 15, 2004.
(15)	Previously filed as an exhibit to our Form 8-K filed on December 16, 2003.
(16)	Previously filed as an exhibit to our Form 8-K filed on August 12, 2004.
(17)	Previously filed as an appendix to our Definitive Proxy Statement filed on August 6, 2004.

(18)	Previously filed as an exhibit to our Form 10-K filed on March 16, 2005.
(19)	Previously filed as an exhibit to our Form 10-Q filed on May 10, 2005.
(20)	Previously filed as an exhibit to our Form 8-K filed on March 1, 2005.
(21)	Previously filed as an exhibit to our Form 8-K filed on May 3, 2005.
(22)	Previously filed as an exhibit to our Form 8-K filed on September 16, 2005. Our director compensation program was subsequently amended on February 23, 2006, as described in our Form 8-K filed on March 1, 2006.
(23)	Not applicable because, as a result of our sale of Timm Medical on February 10, 2006, we do not have any subsidiaries that constitute “significant subsidiaries” under Rule 1-02(w) of Regulation S-X.

EX-2.3

                                                                     Exhibit 2.3

                       SECURED CONVERTIBLE PROMISSORY NOTE

$1,425,000                                              Dated: February 10, 2006

FOR VALUE RECEIVED, the undersigned, Plethora Solutions Holdings plc
("Borrower"), HEREBY UNCONDITIONALLY PROMISES TO PAY to the order of Endocare,
Inc. ("Lender"), on the earlier of (a) the date twenty-four (24) months
following the date above written (the "Closing Date") or (b) the date fifteen
(15) months from the Closing Date, pursuant to Section 5 of this Note (such
earlier date, the "Note Term"): (i) the principal sum of One Million Four
Hundred Twenty-Five Thousand Dollars ($1,425,000) plus (ii) interest calculated
pursuant to Section 1 below.

     1. Interest. Borrower promises to pay Lender interest on the outstanding
principal amount of this Secured Convertible Promissory Note (this "Note") from
the Closing Date until maturity, in arrears, payable, unless otherwise converted
into Ordinary Shares pursuant to Section 2, within thirty (30) days of: (a) the
date on which all amounts due and payable on this Note are converted into freely
transferable Ordinary Shares of Borrower which have been admitted to trading on
the Alternative Investment Market of the London Stock Exchange plc ("Aim") in
the name of Lender pursuant to the terms of this Note or (b) the Note Term (the
earlier of such dates, the "Payoff Date"), at the rate of 5% per annum,
compounded quarterly or, if less, at the highest rate of interest then permitted
by applicable law. In the event that any amount of principal or interest, or any
other amount payable hereunder, is not paid in full when due (whether at stated
maturity, by acceleration or otherwise), Borrower agrees to pay interest on such
unpaid principal or other amount, from the date such amount becomes due until
the date such amount is paid in full, payable on demand, an 8% per annum rate,
compounded quarterly or, if less, at the highest rate then permitted by
applicable law. All computations of interest shall be made on the basis of a
year of 365 or 366 days, as the case may be, for the actual number of days
(including the first day but excluding the last day) occurring in the period for
which such interest is payable. In no event shall Borrower be obligated to pay
Lender interest, charges or fees at a rate in excess of the highest rate then
permitted by applicable law.

     2. Conversion.

          (a) Lender shall have the option to convert, in full or in part, up to
the entire amount outstanding under this Note (including the accrued but unpaid
interest) into shares of Borrower's Ordinary Shares (the "Ordinary Shares") at
any time or from time to time prior to the Payoff Date. The number of Ordinary
Shares to be issued upon such conversion shall be equal to the quotient obtained
by dividing (i) the amount outstanding under the Note that Lender elects to
convert, by (ii) 222.4 pence sterling (the "Conversion Price").

          (b) Beginning one (1) year following the Closing Date, the entire
amount outstanding under this Note (including accrued but unpaid interest) may
be converted into Ordinary Shares at the option of Borrower by written notice to
Lender, and without further action by Lender, if the average mid market closing
price of the Ordinary Shares as reported on AIM equals or exceeds one hundred
fifty percent (150%) of the Conversion Price for twenty (20) consecutive trading
days.



          (c) No fractional share of Ordinary Shares shall be issued upon
conversion of this Note. In lieu of any fractional share to which Lender is
entitled (after aggregating all fractional shares of such series to be issued at
such time to Lender), Borrower shall pay to Lender the amount of outstanding
principal and interest that is not so converted.

          (d) Ordinary Shares allotted pursuant to the conversion of the Note
will not rank for any dividends or other distribution declared, made or paid on
or by reference to a record date prior to the date such shares are converted
(the "Exercise Date") but, subject thereto, will rank pari passu in all other
respects with the Ordinary Shares in issue at the relevant Exercise Date
provided that on any allotment falling to be made pursuant to Section 4(d) the
Ordinary Shares to be so allotted shall not rank for any dividends or other
distributions declared, made or paid by reference to a record date prior to the
date of allotment.

          (e) Borrower shall make applications to the London Stock Exchange plc
for the Ordinary Shares allotted pursuant to any exercise of conversion rights
to be admitted to trading on AIM as soon as possible. Borrower will use all
commercially reasonable endeavors to obtain the admission thereof as soon as
reasonably practicable after the relevant exercise date, but in no case later
than five (5) business days after the relevant exercise date. The Lender shall
not transfer or otherwise dispose of any Ordinary Shares otherwise than through
the Borrower's broker and with the intention of ensuring an orderly market in
the Lender's shares or by the acceptance of a general offer to all of the
Lender's shareholders.

     3. Other provisions. So long as the Note remains exercisable:

          (a) Borrower shall notify the Lender of the creation of any new class
of share capital or securities convertible into share capital except for
Ordinary Shares which carry, as compared with the existing Ordinary Shares, no
more advantageous rights as regards voting, dividends and return of capital or
deferred shares which at all times carry no voting rights and rank behind all
the Ordinary Shares as regards dividends and return of capital, or modify the
rights attaching to all or any of its Ordinary Shares or such deferred shares;

          (b) Borrower shall keep available for issue sufficient authorized but
unissued share capital to satisfy in full (without the need for the passing of
any resolution by its shareholders) Lender's exercise of all remaining
unexercised amounts under this Note;

          (c) Borrower shall notify the Lender of the creation of any Ordinary
Shares credited as fully paid by way of capitalization of profits or reserves if
as a result Borrower would on any subsequent exercise of any Notes be obliged to
issue Ordinary Shares at a discount;

          (d) If at any time an offer is made to all holders of Ordinary Shares
(or all holders of Ordinary Shares other than the offeror and/or any company
controlled by the offeror and/or persons acting in concert with the offeror) to
acquire the whole or any part of the issued share capital of Borrower and
Borrower becomes aware that as a result of such offer the right to cast a
majority of the votes which may ordinarily be cast on a poll at a general
meeting of Borrower has or will become vested in the offeror and/or such persons
or companies as aforesaid, Borrower shall give notice to Lender of such vesting
within 14 days of the date of announcement of such offer, and Lender shall be
entitled, at any time within the period of 30


                                      -2-



days immediately following the date of such notice, to exercise this Note. On
expiry of such 30 day period all the amounts under this Note then unexercised
shall automatically expire and have no further effect. Publication of a scheme
of arrangement under the Companies Act 1985 (as from time to time amended or
re-enacted) providing for the acquisition by any person of the whole or any part
of the issued share capital of Borrower shall be deemed to be the making of an
offer for the purposes of this paragraph;

          (e) If Borrower commences liquidation, whether voluntary or compulsory
(except for the purpose of reconstruction, amalgamation or unitization on terms
sanctioned by an extraordinary resolution of Lender), it shall forthwith give
notice thereof to Lender; thereupon Lender will (if in such winding-up there
shall be a surplus available for distribution amongst the holders of the
Ordinary Shares (including for this purpose the Ordinary Shares which would
arise on the exercise of the amount unexercised under this Note) which, taking
into account the amounts payable on the exercise of the Note, exceeds in respect
of each Ordinary Share a sum equal to the Conversion Price) be treated as if
immediately before the date of such order or resolution the Note had been
exercised in full and shall accordingly be entitled to receive out of the assets
available on liquidation pari passu with the holders of the Ordinary Shares such
a sum as Lender would have received had Lender been the holder of the Ordinary
Shares to which Lender would have become entitled by virtue of such subscription
after deducting a sum per share equal to the Conversion Price per share; subject
to the foregoing, the Note shall lapse on liquidation of Borrower;

          (f) Borrower shall notify the Lender of any allotment of fully paid
Ordinary Shares by way of capitalization of profits or reserves unless at the
date of such allotment Borrower's Directors have authority to grant the
additional rights to subscribe to which Lender will by virtue of Section 3(a) be
entitled in consequence of such capitalization.

          (g) Borrower shall not reduce by payment or distribution of assets to
its shareholders its share capital or any share premium or capital redemption
reserve; and

          (h) If an offer or invitation is made by Borrower to the holders of
the Ordinary Shares to purchase any of their Ordinary Shares Borrower shall at
the same time give notice of the offer to Lender. Should Lender exercise this
Note at any time whilst such offer or invitation remains open for acceptance,
such exercise shall be deemed to have taken effect and the Ordinary Shares
falling to be issued in consequence thereof shall be deemed to have been issued,
immediately prior to the record date applicable to such offer or invitation in
order that Lender may accept the same.

          (i) If the value of the Collateral (as defined in the Security
Agreement) is less than the Threshold Value (as defined in the Security
Agreement), within 10 days of the occurrence of such event Borrower shall
provide additional collateral to secure this Note (the "Borrower Additional
Collateral") such that the value of the Collateral (as defined in the Security
Agreement) plus the Buyer Additional Collateral shall equal or exceed the
Threshold Value (as defined in the Security Agreement).




                                       -3-



     4. Payments.

          (a) All payments hereunder shall be made in lawful money of the United
States of America and in same day or immediately available funds, to Lender, in
accordance with Lender's payment instructions.

          (b) Whenever any payment hereunder shall be stated to be due, on a day
other than a Business Day (as defined below), then such payment shall be made,
and such interest payment date or other date shall occur, on the next succeeding
Business Day, and such extension of time shall in such case be included in the
computation of payment of interest hereunder. As used herein, "Business Day"
means a day (i) other than Saturday or Sunday and (ii) on which commercial banks
are open for business in California and London.

     5. Accelerated Repayment.

          (a) In the event that Timm Medical Technologies, Inc. ("Target") meets
or exceeds the financial targets identified in Exhibit A hereto by the end of
the fiscal year ending December 31, 2006, the Note Term shall be the date
fifteen (15) months from the Closing Date.

          (b) Borrower may, without the prior consent of Lender, prepay the
outstanding amount hereof in whole, or in part, at any time, without premium or
penalty. Together with any such prepayment Borrower shall pay accrued interest
on the amount prepaid.

     6. Default.

          (a) The occurrence of any of the following shall constitute an "Event
of Default" under this Note:

               (i) the failure to make any payment of principal when due or
fails to pay within 14 days after the due date for payment any interest or any
other amount payable hereunder when due under this Note;

               (ii) the breach of any provision (other than any payment
provision described in paragraph (i) above) of this Note for more than 21 days
and such default is materially prejudicial to the interests of the Lender;

               (iii) the commencement of liquidation, whether voluntary or
compulsory (except for the purposes of reconstruction, amalgamation or
unitization);

               (iv) the suspension of Borrower's operations;

               (v) the breach of any provision of or the occurrence of any
default under the Stock Purchase Agreement (as defined below) for more than 21
days or upon any Event of Default (as defined in the Security Agreement) under
the Security Agreement (as defined below);

               (vi) the Security Agreement or any of the other documents
relating to the Collateral (as defined therein) after delivery thereof shall for
any reason be revoked or invalidated, or otherwise cease to be in full force and
effect; or


                                      -4-



               (vii) the Security Agreement or any of the other documents
relating to the Collateral for any reason, except to the extent permitted by the
terms thereof, shall cease to create a valid and perfected first priority lien
in any of the Collateral purported to be covered thereby.

          (b) Upon the occurrence and continuance of any Event of Default,
Lender, at its option, may (i) by notice to Borrower, declare the unpaid
principal amount of this Note, all interest accrued and unpaid hereon and all
other amounts payable hereunder to be immediately due and payable, whereupon the
unpaid principal amount of this Note, all such interest and all such other
amounts shall become immediately due and payable on demand; and (ii) whether or
not the actions referred to in clause (i) have been taken, exercise or enforce
any or all of Lender's rights and remedies under the Security Agreement and any
or all of Lender's other rights and remedies under applicable law.

          (c) Borrower agrees to pay on demand all the losses, costs, and
expenses (including, without limitation, reasonable attorneys' fees and
disbursements) which Lender incurs in connection with enforcement or attempted
enforcement of this Note, or the protection or preservation of Lender's rights
under this Note, whether by judicial proceedings or otherwise. Such costs and
expenses include, without limitation, those incurred in connection with any
workout or refinancing, or any bankruptcy, insolvency, liquidation or similar
proceedings.

     7. Security Interest. This Note is secured by certain collateral (the
"Collateral") more specifically described in the Security Agreement of even date
herewith between Borrower and Lender (the "Security Agreement").

     8. Certain Waivers. Borrower hereby waives diligence, demand, presentment,
protest or further notice of any kind.

     9. No Setoff. Borrower agrees to make all payments under this Note without
setoff or deduction and regardless of any counterclaim, defense or other right
of Borrower, except for any claims made by the Borrower under the Stock Purchase
Agreement by and among Borrower, Lender and Timm Medical Technologies, Inc.,
dated as of January 13, 2006 (the "Stock Purchase Agreement"); provided,
however, that no payment hereunder shall be deemed to be a waiver of any right
or claim that Borrower may have under the Agreement.

     10. Modification of Rights. All or any of the rights for the time being
attached to this Note may from time to time (whether or not Borrower is being
wound up) be altered or abrogated with the prior written approval of Lender and
with the consent of Borrower and of the holders of any class of shares in the
capital of Borrower whose rights may be altered or modified as a result of the
proposed alteration or abrogation of the rights of Lender, such consent being
given by such procedure as is required for an alteration of class rights under
the Articles of Association of Borrower for the time being in force. Such
alteration or abrogation approved as aforesaid shall be effected by deed poll
executed by Borrower and expressed to be supplemental to this Note.
Modifications to this Note which are of a formal, minor or technical nature, or
made to correct a manifest error, may be effected by deed poll executed by
Borrower and expressed to be supplemental to this Note and notice of such
alteration or abrogation or modification shall be given by Borrower to Lender.


                                      -5-



     11. Accounts. Borrower will concurrently with the issue of the same to
holders of Ordinary Shares send to Lender a copy of each published annual report
and accounts of Borrower and unaudited interim report of Borrower together with
all documents required by law to be annexed thereto, and copies of every
statement, notice or circular issued to holders of Ordinary Shares. Borrower
shall on the request of Lender provide Lender with a copy of the Note.

     12. Shareholders' Meetings. Lender shall be entitled to receive notice of
and may attend all meetings of shareholders of Borrower but may not vote or be
counted in the quorum at such meetings by virtue of or in respect solely of its
holding of this Note.

     13. Partial Exercise of Power. No single or partial exercise of any power
under this Note shall preclude any other or further exercise of such power or
exercise of any other power. No delay or omission on the part of Lender in
exercising any right under this Note shall operate as a waiver of such right or
any other right hereunder.

     14. Assignment. This Note may not be transferred, assigned, pledged or
hypothecated by Lender in whole or in part at any time except with the consent
of the Borrower provided always that this Note may be assigned by the Lender to
any of its subsidiaries. Borrower shall not be entitled to assign or transfer
this Note or any of its obligations hereunder, except with the prior written
consent of Lender. This Note shall be binding on Borrower and its successors and
assigns, and shall be binding upon and inure to the benefit of Lender, and its
successors and assigns.

     15. Governing Law. This Agreement shall be construed in accordance with and
governed by the laws of England and Wales, without giving effect to any choice
of law rule that would cause the application of the laws of any jurisdiction
other than the laws of England and Wales to the rights and duties of Borrower.

     16. Notice. Any notice of other communications required or permitted
hereunder shall be governed by Section 11.4 of the Stock Purchase Agreement.

     17. Entire Agreement. Except for (i) the Mutual Non-Disclosure Agreement
dated January 21, 2005 by and between Borrower, Lender and Target, (ii) the
Stock Purchase Agreement and (iii) the Security Agreement (including any
exhibits, schedules, certificates and other documents referred to therein), this
Note contains the entire understanding of Borrower and Lender with respect to
the subject matter contained herein and supersedes all prior agreements and
understandings (oral or written) among Borrower and Lender with respect to such
subject matter.

     18. Severability. In case any provision in this Note shall be held invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions hereof will not in any way be affected or impaired thereby.
Any provision held invalid, illegal or unenforceable in part will remain in full
force and effect to the extent not held invalid, illegal or unenforceable.

     19. Suretyship Defense Waivers by Borrower. With respect to the Obligations
and the Collateral (as those terms are defined in the Security Agreement),
Borrower assents to any


                                      -6-



extension or postponement of the time of payment or any other indulgence, to any
substitution, exchange or release of or failure to perfect any security interest
in the Collateral, to the addition or release of any party or person primarily
or secondarily liable, to the acceptance of partial payment thereon and the
settlement, compromising or adjusting of any thereof, all in such manner and at
such time or times as Lender may deem advisable. Borrower further waives any and
all other suretyship defenses.

     20. Headings. The descriptive headings of the several sections and
paragraphs of this Note are inserted for convenience only and do not constitute
a part of this Note.

     21. Counterparts. This Note may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


                                      -7-



IN WITNESS WHEREOF, Borrower has duly executed this Note, as of the date first
above written.

                                        PLETHORA SOLUTIONS HOLDINGS PLC


                                        By: /s/ Bradley Hoy
                                            ------------------------------------
                                        Name: Bradley Hoy
                                        Title: Director

                                        Address:

                                        Plethora Solutions Holdings plc
                                        11 - 13 Macklin Street
                                        Covent Garden
                                        London, England
                                        WC2B 5NH

             [SIGNATURE PAGE TO SECURED CONVERTIBLE PROMISSORY NOTE]



                                    EXHIBIT A

                                FINANCIAL TARGETS

     Target's gross profit for fiscal year 2006 equals or exceeds $7,252,723,
determined in accordance with Target's past practices and generally accepted
accounting principles in effect in the United States consistently applied.

EX-10.28

                                                                   Exhibit 10.28

                           LOAN AND SECURITY AGREEMENT

     THIS LOAN AND SECURITY AGREEMENT (this "AGREEMENT") dated as of the
Effective Date between, on the one hand, SILICON VALLEY BANK, a California
corporation ("BANK"), and, on the other hand, ENDOCARE, INC., a Delaware
corporation ("ENDOCARE"), and TIMM MEDICAL TECHNOLOGIES, INC., a Delaware
corporation ("TIMM") (individually and collectively, and jointly and severally,
"BORROWER"), provides the terms and conditions on which Bank shall lend to
Borrower and Borrower shall repay Bank. The parties agree as follows:

     1 ACCOUNTING AND OTHER TERMS

     Accounting terms not defined in this Agreement shall be construed following
GAAP. Calculations and determinations must be made following GAAP. Capitalized
terms not otherwise defined in this Agreement shall have the meanings set forth
in Section 13. All other terms contained in this Agreement, unless otherwise
indicated, shall have the meaning provided by the Code to the extent such terms
are defined therein.

     1A. PHASE I AND PHASE II

     As used herein, the term "PHASE I" means: (a) the period commencing on the
Effective Date and ending on the day immediately preceding (if ever) the first
date after the Effective Date on which Bank receives the most recent monthly
financial statements (or most recent Compliance Certificate) under Section
6.2(a) (each such date, a "Quick Ratio Determination Date") indicating that
Borrower's Quick Ratio is less than 1.00 TO 1.00 (the "QUICK RATIO THRESHHOLD");
and (b) with respect to any Phase I Reset Date, the period commencing on such
Phase I Reset Date and ending on the day immediately preceding (if ever) the
first Quick Ratio Determination Date after such Phase I Reset Date that
Borrower's Quick Ratio is less than the Quick Ratio Threshhold.

     As used herein, the term "PHASE II" means: (a) the period commencing on the
first Quick Ratio Determination Date (if ever) after the Effective Date that
Borrower's Quick Ratio is less than the Quick Ratio Threshhold (the "INITIAL
PHASE II TRIGGER DATE") and ending on the first Quick Ratio Determination Date
(if ever) following 3 consecutive months after the Initial Phase II Trigger Date
during which Borrower's Quick Ratio is at all times not less than the Quick
Ratio Threshhold (such first Quick Ratio Determination Date, the "INITIAL PHASE
I RESET DATE"); and (b) with respect to any Phase I Reset Date, the period
commencing on the first Quick Ratio Determination Date (if ever) after such
Phase I Reset Date that Borrower's Quick Ratio is again less than the Quick
Ratio Threshhold (such first Quick Ratio Determination Date, a "SUBSEQUENT PHASE
II TRIGGER DATE") and ending on the first Quick Ratio Determination Date (if
ever) following 3 consecutive months after such Subsequent Phase II Trigger Date
during which Borrower's Quick Ratio is at all times not less than the Quick
Ratio Threshhold (such first Quick Ratio Determination Date, a "SUBSEQUENT PHASE
I RESET DATE").

     As used herein, the term "PHASE I RESET DATE" means, individually and
collectively, the Initial Phase I Reset Date and any Subsequent Phase I Reset
Date.

     As used herein, the term "PHASE II TRIGGER DATE" means, individually and
collectively, the Initial Phase II Trigger Date and any Subsequent Phase II
Trigger Date.

     2 LOAN AND TERMS OF PAYMENT

     2.1 PROMISE TO PAY. Borrower hereby unconditionally promises to pay Bank
the outstanding principal amount of all Credit Extensions, and all accrued but
unpaid interest thereon, as and when due in accordance with this Agreement.

     2.1.1 REVOLVING ADVANCES.

          (a) Availability. Subject to the terms and conditions of this
Agreement and to deduction of Reserves, Bank will make Advances to Borrower up
to an amount ("NET BORROWING AVAILABILITY") not to exceed the lesser of: (a) the
Maximum Revolver Amount; or (b) amounts available under the Borrowing Base;
provided,


                                      -1-



however, that Bank shall have no obligation to make, or permit to remain
outstanding, Advances based on Borrower's Eligible Inventory ("INVENTORY
ADVANCES") if and to the extent the Inventory Advances exceed, or would exceed,
50% of the aggregate outstanding amount of Advances based on Borrower's Eligible
Accounts. Advances and other Credit Extensions will be made to each Borrower
based on the Eligible Accounts and Eligible Inventory of such Borrower, subject
to the Maximum Revolver Amount for all Advances and other Credit Extensions to
all Borrowers combined. Advances borrowed pursuant to this Section may be repaid
and, subject to the terms and conditions hereof, reborrowed during the term of
this Agreement.

          (b) [intentionally omitted]

          (c) Termination; Repayment. The Revolving Line terminates on the
Maturity Date, when the principal amount of all Advances, the unpaid interest
thereon, and all other Obligations shall be immediately due and payable.

     2.1.2 [intentionally omitted].

     2.1.3 [intentionally omitted]

     2.1.4 [intentionally omitted]

     2.2 OVERADVANCES. If at any time or for any reason the total of all
outstanding Advances and all other monetary Obligations exceeds Net Borrowing
Availability (an "OVERADVANCE"), Borrower shall immediately pay the amount of
the excess to Bank, without notice or demand. Without limiting Borrower's
obligation to repay to Bank the amount of any Overadvance, Borrower agrees to
pay Bank interest on the outstanding amount of any Overadvance, on demand, at
the Default Rate.

     2.3 PAYMENT OF INTEREST ON THE CREDIT EXTENSIONS.

          (a) Interest Rate; Advances. Subject to Section 2.3(b), the amounts
outstanding under the Revolving Line shall accrue interest at a per annum rate
equal to the Loan Margin above the Prime Rate, which interest shall be payable
monthly. As used herein, the term "LOAN MARGIN" means, as of any date of
determination: (a) at all times during the period that Phase I is in effect,
1.00 percentage points; and (b) at all times during the period that Phase II is
in effect, 1.50 percentage points.

          (b) Default Rate. Immediately upon the occurrence and during the
continuance of an Event of Default, Obligations shall bear interest at a rate
per annum which is five percentage points above the rate effective immediately
before such Event of Default (the "DEFAULT RATE"). Payment or acceptance of the
increased interest rate provided in this Section 2.3(b) is not a permitted
alternative to timely payment and shall not constitute a waiver of any Event of
Default or otherwise prejudice or limit any rights or remedies of Bank.

          (c) Adjustment to Interest Rate. Changes to the interest rate of any
Credit Extension based on changes to the Prime Rate shall be effective on the
effective date of any change to the Prime Rate and to the extent of any such
change.

          (d) 360-Day Year. Interest shall be computed on the basis of a 360-day
year for the actual number of days elapsed.

          (e) Debit of Accounts. Bank may debit any of Borrower's deposit
accounts, including the Designated Deposit Account, for principal and interest
payments or any other amounts Borrower owes Bank when due. These debits shall
not constitute a set-off.

          (f) [intentionally omitted]

          (g) Payment; Interest Computation; Float Charge. Interest is payable
monthly on the last calendar day of each month. In computing interest on the
Obligations, all Payments received after 12:00 p.m. Pacific time on any day
shall be deemed received on the next Business Day. In addition, at all times
while Phase II (if ever) is in effect, Bank shall be entitled to charge Borrower
a "float" charge in an amount equal to two (2)


                                      -2-



Business Days interest, at the interest rate applicable to the Advances, on all
Payments received by Bank (except for Payments made directly by Borrower to Bank
from Borrower's unrestricted cash on deposit in any deposit account or
securities account of Borrower). Said float charge is not included in interest
for purposes of computing Minimum Monthly Interest (if any) under this
Agreement. The float charge for each month shall be payable on the last day of
the month. Bank shall not, however, be required to credit Borrower's account for
the amount of any item of payment which is unsatisfactory to Bank in its good
faith business judgment, and Bank may charge Borrower's Designated Deposit
Account for the amount of any item of payment which is returned to Bank unpaid.

     2.4 FEES. Borrower shall pay to Bank:

          (a) Commitment Fee. A fully earned, non-refundable commitment fee of
$40,000, on the Effective Date.

          (b) [intentionally omitted]

          (c) Termination Fee. The termination fee set forth in, and subject to
the terms of, Section 4.1 hereof.

          (d) Unused Revolving Line Facility Fee. A fee (the "UNUSED REVOLVING
LINE FACILITY FEE"), which fee shall be paid monthly, in arrears on the last
Business Day of each month with respect to such month, on a calendar year basis,
in an amount equal to one-half of one percent (0.50%) per annum multiplied by
the amount by which the Maximum Revolver Amount exceeds the average daily
principal balance of the outstanding Advances during the immediately preceding
month (or part thereof). Borrower shall not be entitled to any credit, rebate or
repayment of any Unused Revolving Line Facility Fee previously earned by Bank
pursuant to this Section notwithstanding any termination of this Agreement, or
suspension or termination of Bank's obligation to make loans and advances
hereunder.

          (e) Collateral Monitoring Fee. While Phase II (if ever) is in effect,
a monthly collateral monitoring fee of $2,000, payable in arrears on the last
day of each month (prorated for any partial month at the beginning and upon
termination of the Phase II period).

          (f) Bank Expenses. All Bank Expenses (including reasonable attorneys'
fees and expenses) incurred through and after the Effective Date, when due.

     3 CONDITIONS OF LOANS

     3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE. Bank's obligation to make the
initial Advance is subject to the condition precedent that Bank shall have
received, in form and substance satisfactory to Bank, such documents, and
evidence of completion of such other matters, as Bank may reasonably deem
necessary or appropriate, including, without limitation:

          (a) Borrower shall have delivered duly executed original signatures to
the Loan Documents to which it is a party, including this Agreement, the IP
Security Agreement, the Cross-Guaranty, and one or more Control Agreements, with
respect to each Borrower, relative to all Collateral Accounts maintained by such
Borrower with any affiliate of Bank;

          (b) Borrower shall have delivered its Operating Documents and a good
standing certificate of Borrower certified by the Secretary of State of the
State of Delaware as of a date prior to the Effective Date satisfactory to Bank;

          (c) Borrower shall have delivered duly executed original signatures to
the completed Borrowing Resolutions for Borrower;

          (d) Bank shall have received certified copies, dated as of a recent
date, of financing statement searches, as Bank shall request, accompanied by
written evidence (including any UCC termination statements) that the Liens
indicated in any such financing statements either constitute Permitted Liens or
have been or, in connection with the initial Advance, will be terminated or
released;


                                      -3-



          (e) Borrower shall have delivered the Perfection Certificate executed
by Borrower;

          (f) Borrower shall have delivered evidence satisfactory to Bank that
the insurance policies required by Section 6.7 hereof are in full force and
effect, together with appropriate evidence showing lender loss payable and/or
additional insured clauses or endorsements in favor of Bank;

          (g) Pursuant to the second sentence of Section 5.2A below, Borrower
shall have delivered to Bank evidence (satisfactory to Bank in its good faith
business judgment) of the satisfaction of all such obligations relative to the
Delaware Biolife Judgment and the California Biolife Judgment; and

          (h) Borrower shall have paid the fees and Bank Expenses then due as
specified in Section 2.4 hereof.

     3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. Bank's obligations to
make each Credit Extension, including the initial Credit Extension, is subject
to the following:

          (a) the representations and warranties in Section 5 shall be true in
all material respects on the date of the request for, and on the Funding Date
of, each Credit Extension; provided, however, that such materiality qualifier
shall not be applicable to any representations and warranties that already are
qualified or modified by materiality in the text thereof; and provided, further
that those representations and warranties expressly referring to a specific date
shall be true, accurate and complete in all material respects as of such date,
and no Default or Event of Default shall have occurred and be continuing or
result from the Credit Extension. Each Credit Extension is Borrower's
representation and warranty on that date that the representations and warranties
in Section 5 remain true in all material respects; provided, however, that such
materiality qualifier shall not be applicable to any representations and
warranties that already are qualified or modified by materiality in the text
thereof; and provided, further that those representations and warranties
expressly referring to a specific date shall be true, accurate and complete in
all material respects as of such date; and

          (b) in Bank's good faith business judgment, there has not been a
Material Adverse Change.

     3.3 COVENANT TO DELIVER.

     Borrower agrees to deliver to Bank each item required to be delivered to
Bank under this Agreement as a condition to any Credit Extension. Borrower
expressly agrees that the extension of a Credit Extension prior to the receipt
by Bank of any such item shall not constitute a waiver by Bank of Borrower's
obligation to deliver such item, and any such extension in the absence of a
required item shall be in Bank's sole discretion.

     3.4 PROCEDURES FOR BORROWING. Subject to the prior satisfaction of all
other applicable conditions to the making of an Advance set forth in this
Agreement, in order for any Borrower to obtain an Advance, Endocare, as agent
for all Borrowers, shall notify Bank (which notice shall be irrevocable) by
electronic mail, facsimile, or telephone by 12:00 p.m. Pacific time on the
Funding Date of the request for such Advance, which notice shall specify on
behalf of which Borrower Endocare is so requesting such Advance. Together with
such notification, Borrower must promptly deliver to Bank by electronic mail or
facsimile a completed Transaction Report executed by a Responsible Officer or
his or her designee. Bank shall credit Advances to the Designated Deposit
Account. Bank may make Advances under this Agreement based on instructions from
a Responsible Officer or his or her designee or without instructions if the
Advances are necessary to meet Obligations which have become due. Bank may rely
on any telephone notice given by a person whom Bank believes is a Responsible
Officer or designee.

     4 CREATION OF SECURITY INTEREST; EARLY TERMINATION OF THIS AGREEMENT

     4.1 GRANT OF SECURITY INTEREST. Each Borrower hereby grants Bank, to secure
the payment and performance in full of all of the Obligations, continuing
security interests in, and pledges to Bank, all right, title, and interest of
such Borrower in and to the Collateral, wherever located, whether now owned or
hereafter acquired or arising, and all proceeds and products thereof. Borrower
represents, warrants, and covenants that the security interests granted herein
are and shall at all times continue to be first priority perfected security
interests in the Collateral (subject in lien priority only to those Permitted
Liens that are expressly entitled to such priority over the


                                      -4-



security interests of Bank by operation of law or by written subordination
agreement duly executed and delivered by Bank in favor of the holders of such
Permitted Liens). If Borrower shall acquire a commercial tort claim, Borrower
shall promptly notify Bank in a writing signed by Borrower of the general
details thereof. Such notification to Bank shall constitute an additional grant,
hereunder, of a continuing security interest in the commercial tort claim and
all proceeds thereof to Bank, and Borrower shall execute and deliver all such
documents and take all such actions as Bank in its good faith business judgment
may request in connection therewith.

     4.2 EARLY TERMINATION OF THIS AGREEMENT. This Agreement may be terminated
prior to the Maturity Date by Borrower, effective three (3) Business Days after
written notice of termination is given to Bank or if Bank's obligation to fund
Credit Extensions terminates pursuant to the terms of Section 2.1.1(c).
Notwithstanding any such termination, Bank's liens and security interests in the
Collateral shall continue until Borrower pays in full in cash, and otherwise
performs in full, its Obligations. If such termination is at Borrower's election
or at Bank's election due to the occurrence and continuance of an Event of
Default, Borrower shall pay to Bank, in addition to the payment of any other
expenses or fees then-owing, a termination fee in an amount equal to one percent
(1.00%) of the Maximum Revolver Amount; provided that no termination fee shall
be charged if the credit facility hereunder is replaced with a new facility from
another division of Silicon Valley Bank.

     4.3 RELEASE OF BANK'S SECURITY INTERESTS. Upon payment in full in cash, and
otherwise full performance, of the Obligations and at such time as Bank's
obligation to make Credit Extensions has irrevocably terminated, Bank shall
release its liens and security interests in the Collateral and all rights
therein shall revert to Borrower.

     4.4 AUTHORIZATION TO FILE FINANCING STATEMENTS. Borrower hereby authorizes
Bank to file financing statements, without notice to Borrower, with all
appropriate jurisdictions to perfect or protect Bank's interest or rights
hereunder, including a notice that any disposition of the Collateral, by either
Borrower or any other Person, shall be deemed to violate the rights of Bank
under the Code.

     5 REPRESENTATIONS AND WARRANTIES

          Borrower represents and warrants as follows:

     5.1 DUE ORGANIZATION AND AUTHORIZATION. Borrower and each of its
Subsidiaries (subject to the applicable provisions of Section 5.1A below with
respect to any Inactive Subsidiaries) are duly existing and in good standing in
their respective jurisdictions of formation and are qualified and licensed to do
business and are in good standing in any jurisdiction in which the conduct of
their business or their ownership of property requires that they be qualified
except where the failure to do so could not reasonably be expected to have a
material adverse effect on Borrower's business. In connection with this
Agreement, Borrower has delivered to Bank the completed Representations and
Warranties Certificate, dated March 3, 2005, signed by Borrower (as updated in
writing by Borrower to Bank from time to time prior to the Effective Date, the
"PERFECTION CERTIFICATE"). Borrower represents and warrants to Bank that (a)
Borrower's exact legal name is that indicated on the Perfection Certificate and
on the signature page hereof; (b) Borrower is an organization of the type and is
organized in the jurisdiction set forth in the Perfection Certificate; (c) the
Perfection Certificate accurately sets forth Borrower's federal employer
identification number or accurately states that Borrower has none; (d) the
Perfection Certificate accurately sets forth Borrower's place of business, or,
if more than one, its chief executive office as well as Borrower's mailing
address (if different than its chief executive office); (e) Borrower (and each
of its predecessors) has not, in the past five (5) years, changed its state of
formation, organizational structure or type, or any organizational number
assigned by its jurisdiction; and (f) all other information set forth on the
Perfection Certificate pertaining to Borrower and each of its Subsidiaries is
accurate and complete. If Borrower is not now a Registered Organization but
later becomes one, Borrower shall promptly notify Bank of such occurrence and
provide Bank with Borrower's organizational identification number.

     The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's organizational documents,
nor constitute an event of default under any material agreement by which
Borrower is bound. Borrower is not in default under any agreement to which it is
a party or by which it is bound in which the default could reasonably be
expected to have a material adverse effect on Borrower's business.


                                      -5-



     5.1A ADDITIONAL PROVISIONS RELATIVE TO INACTIVE SUBSIDIARIES. Borrower
hereby represents and warrants that each of Advanced Medical Procedures, Inc., a
Delaware corporation, U.S. Microwave, LLC, a Texas limited liability company,
and Tri-States Cryotherapy, LLC, a Texas limited liability company (individually
and collectively, the "INACTIVE SUBSIDIARIES"): (a) is a wholly-owned Subsidiary
of Endocare; (b) does not have any assets (other than assets that, individually
or in the aggregate, are not material); (c) does not engage in any material
business activity; and (d) currently is in the process of being wound up and
dissolved in accordance with applicable law. Borrower hereby covenants and
agrees, with respect to each Inactive Subsidiary, that, until such Inactive
Subsidiary is wound up and dissolved in accordance with applicable law, Borrower
will not cause, suffer, or permit such Inactive Subsidiary to: (y) have any
assets (other than assets that, individually or in the aggregate, are not
material); or (z) engage in any material business activity. Borrower hereby
further agrees that, with respect to any Inactive Subsidiary as to which Bank
has not received, on or before March 31, 2006, evidence (reasonably satisfactory
to Bank) of the legally effective dissolution thereof, Bank may (in its good
faith business judgment) at any time thereafter require such Inactive Subsidiary
to become a secured Guarantor or an additional co-Borrower under the Loan
Documents, and Borrower agrees to promptly execute and deliver such additional
Loan Documents and take such additional actions (and cause such Inactive
Subsidiary to promptly execute and deliver such additional Loan Documents and
take such additional actions) as Bank may require in its good faith business
judgment to effectuate same.

     5.2 COLLATERAL. Each Borrower has good title to its Collateral, free and
clear of any and all Liens except Permitted Liens. Borrower has no deposit
account other than the deposit accounts with Bank and deposit accounts described
in the Perfection Certificate delivered to Bank in connection herewith.

     The Collateral is not in the possession of any third party bailee (such as
a warehouse), except as expressly identified in the Perfection Certificate.
Except as hereafter disclosed to Bank in writing by Borrower, none of the
components of the Collateral shall be maintained at locations other than as
provided in the Perfection Certificate. In the event that Borrower, after the
date hereof, intends to store or otherwise deliver any portion of the Collateral
to a bailee not otherwise expressly identified (as such a bailee) in the
Perfection Certificate, then Borrower will first notify Bank in writing of such
new bailee. With respect to any bailee of Collateral, Borrower shall, promptly
upon Bank's request therefor, use commercially reasonable efforts to deliver to
Bank a bailee agreement (in form and substance satisfactory to Bank) duly
executed by such bailee. In the event that Bank requests such a bailee agreement
and Borrower uses such efforts but does not succeed in delivering such a bailee
agreement, Bank may (in its good faith business judgment) maintain a Reserve
with respect to such bailee.

     With respect to any leased premises of Borrower, Borrower shall, promptly
upon Bank's request therefor, use commercially reasonable efforts to deliver to
Bank a landlord agreement (in form and substance satisfactory to Bank) duly
executed by the lessor of such leased premises. In the event that Bank requests
such a landlord agreement and Borrower uses such efforts but does not succeed in
delivering such a landlord agreement, Bank may (in its good faith business
judgment) maintain a Reserve with respect to such leased premises.

     All Inventory is in all material respects of good and marketable quality,
free from material defects.

     Borrower is the sole owner of its Intellectual Property, except for
non-exclusive licenses granted to its customers in the ordinary course of
business, and except such other licenses and shared Intellectual Property rights
as expressly described in the Exhibits referred to in the most recent 10K and
10Q reports of Endocare filed with the Securities and Exchange Commission. To
the best of Borrower's knowledge, each Patent is valid and enforceable. No part
of the material Intellectual Property has been judged invalid or unenforceable,
in whole or in part. To the best of Borrower's knowledge, no claim has been made
that any part of the Intellectual Property violates, in any material respect,
the rights of any third party.

     5.2A ADDITIONAL PROVISIONS RELATIVE TO BIOLIFE JUDGMENT. Borrower hereby
represents and warrants that, as of the Effective Date, Borrower has fully
satisfied all obligations of Borrower owing to Biolife Solutions, Inc., a
Delaware corporation ("Biolife") relative to that certain judgment, entered on
October 10, 2003 in the Court of Chancery of the State of Delaware, New Castle
County, in favor of Biolife relative to Case #03J-11-371 E-21-238 and styled
"Biolife Solutions Inc. vs Endocare Inc. (the "Delaware Biolife Judgment") and
filed on January 05, 2004 in the Superior Court of California, Orange County, as
a judgment on sister-state judgment in favor of Biolife with respect to the
Delaware Biolife Judgment (the "California Biolife Judgment"). Concurrently
herewith, Borrower shall deliver to Bank evidence (satisfactory to Bank in its
good faith business judgment) of the satisfaction of all


                                      -6-



such obligations relative to the Delaware Biolife Judgment and the California
Biolife Judgment. Borrower hereby further covenants and agrees to deliver, on or
before December 31, 2005, evidence (satisfactory to Bank in its good faith
business judgment) of the filing of record of Biolife's acknowledgement of
satisfaction of judgment relative to each of the Delaware Biolife Judgment and
the California Biolife Judgment.

     5.3 ACCOUNTS RECEIVABLE.

          (a) For each Account with respect to which Advances are requested, on
the date each Advance is requested and made, such Account shall meet the Minimum
Eligibility Requirements set forth in Section 13 below.

          (b) All statements made and all unpaid balances appearing in all
invoices, instruments and other documents evidencing the Accounts are and shall
be true and correct in all material respects, and all such invoices, instruments
and other documents, and all of Borrower's Books are genuine and in all respects
what they purport to be. All sales and other transactions underlying or giving
rise to each Account shall comply in all material respects with all applicable
laws and governmental rules and regulations. Borrower has no knowledge of any
actual or imminent Insolvency Proceeding of any Account Debtor whose accounts
include an Eligible Account in any Borrowing Base Certificate. To the best of
Borrower's knowledge, all signatures and endorsements on all documents,
instruments, and agreements relating to all Accounts are genuine, and all such
documents, instruments and agreements are legally enforceable in accordance with
their terms.

     5.4 LITIGATION. There are no actions or proceedings pending or, to the
knowledge of the Responsible Officers, threatened in writing by or against
Borrower or any of its Subsidiaries involving more than $50,000 individually or
$100,000 in the aggregate, other than as expressly disclosed in the most recent
10K and 10Q reports of Endocare filed with the Securities and Exchange
Commission.

     5.5 NO MATERIAL DEVIATION IN FINANCIAL STATEMENTS. All consolidated
financial statements for Endocare and any of its Subsidiaries delivered to Bank
fairly present in all material respects Endocare's consolidated financial
condition and Endocare's consolidated results of operations. There has not been
any material deterioration in Endocare's consolidated financial condition since
the date of the most recent financial statements submitted to Bank.

     5.6 SOLVENCY. The fair salable value of Borrower's assets (including
goodwill minus disposition costs) exceeds the fair value of its liabilities;
Borrower is not left with unreasonably small capital after the transactions in
this Agreement; and Borrower is able to pay its debts (including trade debts) as
they mature.

     5.7 REGULATORY COMPLIANCE. Borrower is not an "investment company" or a
company "controlled" by an "investment company" under the Investment Company Act
of 1940, as amended. Borrower is not engaged as one of its important activities
in extending credit for margin stock (under Regulations T and U of the Federal
Reserve Board of Governors). Borrower has complied in all material respects with
the Federal Fair Labor Standards Act. Borrower has not violated any laws,
ordinances or rules, the violation of which could reasonably be expected to have
a material adverse effect on its business. None of Borrower's or any of its
Subsidiaries' properties or assets has been used by Borrower or any Subsidiary
or, to the best of Borrower's knowledge, by previous Persons, in disposing,
producing, storing, treating, or transporting any hazardous substance other than
legally. Borrower and each of its Subsidiaries have obtained all consents,
approvals and authorizations of, made all declarations or filings with, and
given all notices to, all government authorities that are necessary in all
material respects to continue its business as currently conducted.

     5.8 SUBSIDIARIES; INVESTMENTS. Borrower does not own any stock, partnership
interest or other equity securities except for Permitted Investments.

     5.9 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Except as expressly
disclosed in the most recent 10K and 10Q reports of Endocare filed with the
Securities and Exchange Commission, Borrower has timely filed all required tax
returns and reports, and Borrower has timely paid all foreign, federal, state
and local taxes, assessments, deposits and contributions owed by Borrower.
Borrower may defer payment of any contested taxes, provided that Borrower (a) in
good faith contests its obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (b) notifies Bank in writing
of the commencement of, and any material development in, the proceedings, (c)
posts bonds or takes any other steps required to prevent the governmental


                                      -7-



authority levying such contested taxes from obtaining a Lien upon any of the
Collateral that is other than a "Permitted Lien". Except as expressly disclosed
in the most recent 10K and 10Q reports of Endocare filed with the Securities and
Exchange Commission, Borrower is unaware of any claims or adjustments proposed
for any of Borrower's prior tax years which could result in additional taxes
becoming due and payable by Borrower. Borrower has paid all amounts necessary to
fund all present pension, profit sharing and deferred compensation plans in
accordance with their terms, and Borrower has not withdrawn from participation
in, and has not permitted partial or complete termination of, or permitted the
occurrence of any other event with respect to, any such plan which could
reasonably be expected to result in any liability of Borrower, including any
liability to the Pension Benefit Guaranty Corporation or its successors or any
other governmental agency.

     5.10 USE OF PROCEEDS. Borrower shall use the proceeds of the Credit
Extensions solely as working capital, and to fund its general business
requirements and not for personal, family, household or agricultural purposes.

     5.11 FULL DISCLOSURE. No written representation, warranty or other
statement of Borrower in any certificate or written statement given to Bank, as
of the date such representations, warranties, or other statements were made,
taken together with (i) all such written certificates and written statements
given to Bank and (ii) all periodic filings of Endocare with the Securities and
Exchange Commission, contains any untrue statement of a material fact or omits
to state a material fact necessary to make the statements contained in the
certificates or statements not misleading (it being recognized by Bank that the
projections and forecasts provided by Borrower in good faith and based upon
reasonable assumptions are not viewed as facts and that actual results during
the period or periods covered by such projections and forecasts may differ from
the projected or forecasted results).

     6 AFFIRMATIVE COVENANTS

          Borrower shall do all of the following:

     6.1 GOVERNMENT COMPLIANCE. Subject to the applicable provisions of Section
5.1A above with respect to any Inactive Subsidiary: (a) maintain its and all its
Subsidiaries' legal existence and good standing in their respective
jurisdictions of formation and maintain qualification in each jurisdiction in
which the failure to so qualify would reasonably be expected to have a material
adverse effect on Borrower's business or operations; and (b) comply, and cause
each Subsidiary to comply, with all laws, ordinances and regulations to which it
is subject, noncompliance with which could have a material adverse effect on
Borrower's business.

     6.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.

          (a) Borrower shall provide Bank with the following:

          (i) a Transaction Report, within fifteen (15) days after the end of
each month and at the time of each Advance request; provided, however, that
while Phase II is in effect, Transaction Reports shall be provided each week as
well as at the time of each Advance request;

          (ii) within fifteen (15) days after the end of each month, (A) monthly
accounts receivable agings, aged by invoice date, (B) monthly accounts payable
agings, aged by invoice date, and outstanding or held check registers, if any,
(C) monthly reconciliations of accounts receivable agings (aged by invoice
date), Transaction Reports, and general ledger, (D) monthly perpetual inventory
reports for Inventory valued on a first-in, first-out basis at the lower of cost
or market (in accordance with GAAP) or such other inventory reports as are
requested by Bank in its good faith business judgment, and (E) monthly Deferred
Revenue reports;

          (iii) as soon as available, and in any event within thirty (30) days
after the end of each month, monthly unaudited financial statements;

          (iv) within thirty (30) days after the end of each month a monthly
Compliance Certificate signed by a Responsible Officer, and such other
information as Bank shall reasonably request; and

          (v) within thirty (30) days prior to the end of each fiscal year of
Borrower, (A) annual operating budgets (including income statements, balance
sheets and cash flow statements, by month) for the upcoming fiscal year of
Borrower, and (B) annual financial projections for the following fiscal year (on
a quarterly basis) as


                                      -8-



approved by Borrower's board of directors, together with any related business
forecasts used in the preparation of such annual financial projections.

          (b) Borrower shall deliver to Bank: (i) as soon as available, but no
later than five (5) days after filing with the Securities Exchange Commission,
Endocare's 10K, 10Q, and 8K reports; (ii) a Compliance Certificate together with
delivery of the 10K and 10Q reports; (iii) a prompt report of any legal actions
pending or threatened against Borrower or any Subsidiary that could result in
damages or costs to Borrower or any Subsidiary of more than $50,000 individually
or $100,000 in the aggregate; and (iv) budgets, sales projections, operating
plans or other financial information Bank reasonably requests. Endocare's 10K,
10Q, and 8K reports required to be delivered pursuant to Section 6.2(b)(i) shall
be deemed to have been delivered on the date on which Endocare posts such report
or provides a link thereto on Borrower's or another website on the Internet;
provided, that Endocare shall provide paper copies to Bank of the Compliance
Certificates required by Section 6.2(b)(ii).

          (c) Borrower shall provide Bank: (i) prompt written notice (as soon as
reasonably practicable and in any event within 30 days) of any material change
in the composition of the Intellectual Property, (ii) prior written notice (in
accordance with Section 6.10) of the registration (or filed application for
registration) of any Copyright, including any subsequent ownership right of
Borrower in or to any Copyright, Patent or Trademark not previously disclosed in
writing to Bank, or (iii) prompt written notice (as soon as reasonably
practicable and in any event within 30 days) of Borrower's knowledge of an event
that materially adversely affects the value of the Intellectual Property.

          (d) With respect to the financial statements referred to above,
Borrower agrees to deliver financial statements prepared on both a consolidated
and consolidating basis and agrees that no Borrower or subsidiary of Borrower
will have a fiscal year different from that of Endocare. Endocare's fiscal year
ends on December 31 of each year.

     6.3 Accounts Receivable.

          (a) Schedules and Documents Relating to Accounts. Borrower shall
deliver to Bank Transaction Reports and schedules of collections, as provided in
Section 6.2, on Bank's standard forms; provided, however, that Borrower's
failure to execute and deliver the same shall not affect or limit Bank's Liens
and other rights in all of Borrower's Accounts, nor shall Bank's failure to
advance or lend against a specific Account affect or limit Bank's Lien and other
rights therein. If requested by Bank, Borrower shall furnish Bank with copies
(or, at Bank's request, originals) of all contracts, orders, invoices, and other
similar documents, and all shipping instructions, delivery receipts, bills of
lading, and other evidence of delivery, for any goods the sale or disposition of
which gave rise to such Accounts. In addition, Borrower shall deliver to Bank,
on its request, the originals of all instruments, chattel paper, security
agreements, guarantees and other documents and property evidencing or securing
any Accounts, in the same form as received, with all necessary indorsements, and
copies of all credit memos.

          (b) Disputes. Borrower shall promptly notify Bank of all disputes or
claims, in excess of $50,000 individually or in the aggregate at any one time,
relating to Accounts. Borrower may forgive (completely or partially),
compromise, or settle any Account for less than payment in full, or agree to do
any of the foregoing so long as (i) Borrower does so in good faith, in a
commercially reasonable manner, in the ordinary course of business, in
arm's-length transactions, and reports the same to Bank in the regular reports
provided to Bank; (ii) no Default or Event of Default has occurred and is
continuing; and (iii) after taking into account all such discounts, settlements
and forgiveness, the total outstanding Advances will not exceed the lesser of
the Maximum Revolver Amount or the Borrowing Base.

          (c) Collection of Accounts. Borrower shall have the right to collect
all Accounts, unless and until a Default or an Event of Default has occurred and
is continuing. Whether or not an Event of Default has occurred and is
continuing, Borrower shall hold all payments on, and proceeds of, Accounts in
trust for Bank, and Borrower shall immediately deliver all such payments and
proceeds to Bank in their original form, duly endorsed, to be applied to the
Obligations pursuant to the terms of Section 9.4 hereof. Bank may, in its good
faith business judgment, require that all proceeds of Accounts be deposited by
Borrower into a lockbox account, or such other "blocked account" as Bank may
specify, pursuant to a blocked account agreement in such form as Bank may
specify in its good faith business judgment.


                                      -9-



          (d) Returns. Provided no Event of Default has occurred and is
continuing, if any Account Debtor returns any Inventory to Borrower, Borrower
shall promptly (i) determine the reason for such return, (ii) issue a credit
memorandum to the Account Debtor in the appropriate amount, and (iii) provide a
copy of such credit memorandum to Bank, upon request from Bank. In the event any
attempted return occurs after the occurrence and during the continuance of any
Event of Default, Borrower shall hold the returned Inventory in trust for Bank,
and immediately notify Bank of the return of the Inventory.

          (e) Verification. Bank may, from time to time, verify directly with
the respective Account Debtors the validity, amount and other matters relating
to the Accounts, either in the name of Borrower or Bank or such other name as
Bank may choose.

          (f) No Liability. Bank shall not be responsible or liable for any
shortage or discrepancy in, damage to, or loss or destruction of, any goods, the
sale or other disposition of which gives rise to an Account, or for any error,
act, omission, or delay of any kind occurring in the settlement, failure to
settle, collection or failure to collect any Account, or for settling any
Account in good faith for less than the full amount thereof, nor shall Bank be
deemed to be responsible for any of Borrower's obligations under any contract or
agreement giving rise to an Account. Nothing herein shall, however, relieve Bank
from liability for its own gross negligence or willful misconduct.

     6.4 REMITTANCE OF PROCEEDS. Except as otherwise provided in Section 6.3(c),
deliver, in kind, all proceeds arising from the disposition of any Collateral to
Bank in the original form in which received by Borrower not later than the
following Business Day after receipt by Borrower, to be applied to the
Obligations pursuant to the terms of Section 9.4 hereof; provided that, if no
Default or Event of Default has occurred and is continuing, Borrower shall not
be obligated to remit to Bank the proceeds of the sale of worn out or obsolete
Equipment disposed of by Borrower in good faith in an arm's length transaction
for an aggregate purchase price of $100,000 or less (for all such transactions
in any fiscal year). Borrower agrees that it will not commingle proceeds of
Collateral with any of Borrower's other funds or property, but will hold such
proceeds separate and apart from such other funds and property and in an express
trust for Bank. Nothing in this Section limits the restrictions on disposition
of Collateral set forth elsewhere in this Agreement.

     6.5 TAXES; PENSIONS. (a) Timely file all required tax returns and reports
and timely pay all material foreign, federal, state and local taxes,
assessments, deposits and contributions owed by Borrower except (i) for deferred
payment of any taxes contested pursuant to the terms of Section 5.9 hereof, and
(ii) as expressly disclosed in the most recent 10K and 10Q reports of Endocare
filed with the Securities and Exchange Commission. (b) Pay all amounts necessary
to fund all present pension, profit sharing and deferred compensation plans in
accordance with their terms.

     6.6 ACCESS TO COLLATERAL; BOOKS AND RECORDS. At reasonable times, on at
least one (1) Business Day's notice (provided no notice is required if a Default
or Event of Default has occurred and is continuing), Bank, or its agents, shall
have the right to inspect the Collateral and the right to audit and copy
Borrower's Books, subject to Bank's applicable confidentiality obligations in
Section 12.9. The foregoing inspections and audits shall be at Borrower's
expense, and the charge therefor shall be $750 per person per day (or such
higher amount as shall represent Bank's then-current standard charge for the
same), plus reasonable out-of-pocket expenses. In the event Borrower and Bank
schedule an audit more than five (5) days in advance, and Borrower cancels or
seeks to reschedules the audit with less than five (5) days written notice to
Bank, then (without limiting any of Bank's rights or remedies), Borrower shall
pay Bank a fee of $1,000 plus any out-of-pocket expenses incurred by Bank to
compensate Bank for the anticipated costs and expenses of the cancellation or
rescheduling.

     6.7 INSURANCE. Keep its business and the Collateral insured for risks and
in amounts standard for companies in Borrower's industry and location and as
Bank may reasonably request. Insurance policies shall be in a form, with
companies that are satisfactory to Bank. All property policies shall have a
lender's loss payable endorsement showing Bank as lender loss payee and waive
subrogation against Bank, and all liability policies shall show, or have
endorsements showing, Bank as an additional insured. All policies (or the lender
loss payable and additional insured endorsements) shall provide that the insurer
must give Bank at least twenty (20) days notice before canceling, amending, or
declining to renew its policy. At Bank's request, Borrower shall deliver
certified copies of policies and evidence of all premium payments. Proceeds
payable under any policy shall, at Bank's option, be payable to Bank on account
of the Obligations. Notwithstanding the foregoing, (a) so long as no Event of


                                      -10-



Default has occurred and is continuing, Borrower shall have the option of
applying the proceeds of any casualty policy up to $100,000, in the aggregate,
toward the replacement or repair of destroyed or damaged property; provided that
any such replaced or repaired property (i) shall be of equal or like value as
the replaced or repaired Collateral and (ii) shall be deemed Collateral in which
Bank has been granted a first priority security interest (subject in lien
priority only to those Permitted Liens that are expressly entitled to such
priority over the security interests of Bank by operation of law or by written
subordination agreement duly executed and delivered by Bank in favor of the
holders of such Permitted Liens), and (b) after the occurrence and during the
continuance of an Event of Default, all proceeds payable under such casualty
policy shall, at the option of Bank, be payable to Bank on account of the
Obligations. If Borrower fails to obtain insurance as required under this
Section 6.7 or to pay any amount or furnish any required proof of payment to
third persons and Bank, Bank may make all or part of such payment or obtain such
insurance policies required in this Section 6.7, and take any action under the
policies Bank deems prudent.

     6.8 OPERATING ACCOUNTS.

          (a) Maintain its primary depository and operating accounts and
securities accounts with Bank and Bank's affiliates, which accounts shall
represent at least 85% of the dollar value of Borrower's accounts at all
financial institutions. For each Collateral Account that Borrower at any time
maintains with Bank's affiliates, Borrower, Bank, and such affiliate of Bank
shall enter into a Control Agreement or other appropriate instrument with
respect to such Collateral Account to perfect Bank's Lien in such Collateral
Account in accordance with the terms hereunder.

          (b) Provide Bank five (5) days prior written notice before
establishing any Collateral Account at or with any bank or financial institution
other than Bank or its Affiliates. Upon the occurrence and during the
continuation of an Event of Default, if Bank so requests, for each Collateral
Account that Borrower at any time maintains (other than Collateral Accounts
maintained with Bank or Bank's affiliates), Borrower shall cause such applicable
bank or financial institution at or with which such Collateral Account is
maintained to execute and deliver a Control Agreement or other appropriate
instrument with respect to such Collateral Account to perfect Bank's Lien in
such Collateral Account in accordance with the terms hereunder. The provisions
of the previous sentence shall not apply to deposit accounts exclusively used
for payroll, payroll taxes and other employee wage and benefit payments to or
for the benefit of Borrower's employees and identified to Bank by Borrower as
such.

     6.9 FINANCIAL COVENANTS.

          Endocare shall maintain at all times, compliance to be determined as
of the last day of each month (unless otherwise expressly noted below), on a
consolidated basis with respect to Endocare and its Subsidiaries:

          (a) Tangible Net Worth. A Tangible Net Worth of at least the sum of
the following (the "REQUIRED TNW AMOUNT"): (a) the TNW Base Amount (as defined
below), plus (b) 25% of all consideration received after the Effective Date for
issuances of Endocare's equity securities and the principal amount of
Subordinated Debt of the Borrower, plus (c) 25% of the Endocare's positive
consolidated Net Income in each fiscal quarter ending after the Effective Date.

As used herein, the term "TNW BASE AMOUNT" means, as of any date of
determination: (a) $2,000,000 at all times during the period commencing on the
Effective Date and ending on December 31, 2005; and (b) $1,000,000 at all times
from and after January 1, 2006.

Increases in the Required TNW Amount based on consideration received for equity
securities and Subordinated Debt of the Borrower shall be effective as of the
end of the month in which such consideration is received, and shall continue
effective thereafter. Increases in the Required TNW Amount based on Net Income
shall be effective on the last day of the fiscal quarter in which such Net
Income is realized, and shall continue effective thereafter. In no event (except
for step-downs in the TNW Base Amount as expressly set forth in the definition
thereof) shall the Required TNW Amount be decreased from one fiscal period to
another subsequent fiscal period.

     6.10 PROTECTION AND REGISTRATION OF INTELLECTUAL PROPERTY RIGHTS. Borrower
shall: (a) protect, defend and maintain the validity and enforceability of its
Intellectual Property; (b) promptly advise Bank in writing of material
infringements of its material Intellectual Property; and (c) not allow any
Intellectual Property material to


                                      -11-


Borrower's business to be abandoned, forfeited or dedicated to the public
without Bank's written consent (which consent shall not be unreasonable withheld
if no Event of Default has occurred and is continuing or would result from such
abandonment, forfeiture, or dedication to the public). Concurrently herewith,
Borrower shall execute and deliver to Bank the IP Security Agreement. Exhibit A
attached to the IP Security Agreement identifies, as of the Effective Date, any
and all of Borrower's maskworks, computer software, or other copyrights of
Borrower that are registered (or the subject of an application for registration)
with the United States Copyright Office (collectively, the "Existing Registered
Copyrights"). Except for the Existing Copyright Registrations, Borrower will NOT
register with the United States Copyright Office (or apply for such registration
of) any of Borrower's maskworks, computer software, or other copyrights, unless
Borrower: (x) provides Bank with at least fifteen (15) days prior written notice
of its intent to register such copyrights or mask works together with a copy of
the application it intends to file with the United States Copyright Office
(excluding exhibits thereto); (y) executes an intellectual property security
agreement or such other documents as Bank may reasonably request to maintain the
perfection and priority of Bank's security interest in the copyrights or mask
works intended to be registered with the United States Copyright Office; and (z)
record such intellectual property security agreement with the United States
Copyright Office contemporaneously with filing the copyright or mask work
application(s) with the United States Copyright Office. Borrower shall promptly
provide to Bank a copy of the application(s) filed with the United States
Copyright Office together with evidence of the recording of the intellectual
property security agreement necessary for Bank to maintain the perfection and
priority of its security interest in such copyrights or mask works. Borrower
shall provide written notice to Bank of any application filed by Borrower in the
United States Patent and Trademark Office for a patent or to register a
trademark or service mark within 30 days after any such filing.

     6.11 LITIGATION COOPERATION. From the date hereof and continuing through
the termination of this Agreement, make available to Bank, without expense to
Bank, Borrower and its officers, employees and agents and Borrower's books and
records, to the extent that Bank may deem them reasonably necessary to prosecute
or defend any third-party suit or proceeding instituted by or against Bank with
respect to any Collateral or relating to Borrower.

     6.12 [INTENTIONALLY OMITTED]

     6.13 [INTENTIONALLY OMITTED]

     6.14 FURTHER ASSURANCES. Borrower shall execute any further instruments and
take further action as Bank reasonably requests to perfect or continue Bank's
Lien in the Collateral or to effect the purposes of this Agreement.

     7 NEGATIVE COVENANTS

     Borrower shall not do any of the following without Bank's prior written
consent:

     7.1 DISPOSITIONS. (a) Convey, sell, lease, transfer or otherwise dispose of
(collectively, "TRANSFER"), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, except for Transfers (i) of Inventory
in the ordinary course of business; (ii) of worn-out or obsolete Equipment;
(iii) constituting Permitted Liens or Permitted Investments; (iv) of
non-exclusive licenses (or similar non-exclusive arrangements) for the use of
the property of Borrower or its Subsidiaries in the ordinary course of business;
and (v) constituting Permitted Exclusive Licensing Transactions.

          (b) (i) Anything herein or in the other Loan Documents to the contrary
notwithstanding, Bank agrees that, subject to the terms and conditions of this
Section 7.1(b), Bank shall not unreasonably withhold its consent to a sale by
Endocare of all of the issued and outstanding capital stock of TIMM to a bona
fide third-party purchaser that is not affiliated with any Borrower or
Subsidiary thereof (a "TIMM Stock Sale"), or a sale by TIMM of all or
substantially all of TIMM's assets to a bona fide third-party purchaser that is
not affiliated with any Borrower or Subsidiary thereof (a "TIMM Asset Sale"). As
used herein, the term "TIMM Sale" means a TIMM Stock Sale or a TIMM Asset Sale,
as the case may be.

               (ii) Borrower agrees to provide Bank with (y) prior written
notice of any proposed TIMM Sale, which notice shall be reasonably detailed as
to the terms and conditions of such proposed TIMM Sale (including a detailed
description of the consideration to be received by Borrower in respect thereof
and, if such


                                      -12-



proposed TIMM Sale is a proposed TIMM Asset Sale, a detailed list of the assets
of TIMM to be sold pursuant thereto), and (z) such other information regarding
such proposed TIMM Sale as Bank may reasonably request, as promptly as
practicable and in any event not less that 10 Business Days prior to the
proposed consummation of such proposed TIMM Sale. Bank agrees to respond, to
Borrower's written request for Bank's consent to a proposed TIMM Sale, not later
than 10 Business Days following Bank's receipt of the notice and information
described in clauses (y) and (z) above. Borrower and Bank expressly acknowledge
that Bank need not consent to any proposed TIMM Sale, if an Event of Default has
occurred and is continuing at the time of Borrower's request therefore or at the
proposed time of consummation thereof, or would result from the consummation
thereof.

               (iii) All consideration, consisting of net cash proceeds, paid or
payable to Borrower in respect of the proposed TIMM Sale shall be promptly
delivered to Bank for application to the Obligations (with the excess, if any,
to be deposited into one or more Deposit Accounts of Borrower maintained at
Bank). All consideration, other than cash proceeds, paid or payable to Borrower
in respect of the proposed TIMM Sale shall constitute additional Collateral
subject to Bank's first priority perfected security interests therein (subject
in lien priority only to those Permitted Liens that are expressly entitled to
such priority over the security interests of Bank by operation of law or by
written subordination agreement duly executed and delivered by Bank in favor of
the holders of such Permitted Liens) and, upon request of Bank, shall be
promptly delivered to Bank.

               (iv) With respect to any proposed TIMM Asset Sale to which Bank
consents in writing (an "Approved TIMM Asset Sale"), Bank agrees, concurrently
with the consummation thereof and the satisfaction of the applicable
requirements set forth in this Section 7.1(b) relating thereto, to release
Bank's security interests (without recourse, representation, or warranty) in the
assets sold pursuant to the Approved TIMM Asset Sale (but not the proceeds of
such assets paid or payable pursuant to the terms of the Approved TIMM Asset
Sale), to authenticate and authorize (at Borrower's expense) the filing of
applicable UCC Releases (in form and substance satisfactory to Bank) relative to
such sold assets, and to execute and deliver (at Borrower's expenses) such other
similar documents (in form and substance satisfactory to Bank), or to take such
other actions, as Borrower may reasonable request in writing in order to effect
or reflect such release of Bank's security interests in such assets.

               (v) With respect to any proposed TIMM Stock Sale to which Bank
consents in writing (an "Approved TIMM Stock Sale"), Bank agrees, concurrently
with the consummation thereof and the satisfaction of the applicable
requirements set forth in this Section 7.1(b) relating thereto, to release
Bank's security interests (without recourse, representation, or warranty) in the
capital stock of TIMM sold by Endocare pursuant to the Approved TIMM Stock Sale
and in the assets of TIMM (but not the proceeds of such capital stock paid or
payable pursuant to the terms of the Approved TIMM Stock Sale), to authenticate
and authorize (at Borrower's expense) the filing of applicable UCC Releases (in
form and substance satisfactory to Bank) relative to such sold capital stock and
the assets of TIMM, and to execute and deliver (at Borrower's expenses) such
other similar documents, or to take such other actions, as Borrower may
reasonable request in writing in order to effect or reflect such release of
Bank's security interests in such sold capital stock and such assets of TIMM.
Concurrently with the consummation of the Approved TIMM Stock Sale and the
satisfaction of the applicable requirements set forth in this Section 7.1(b)
relating thereto, TIMM thereafter shall no longer be a co-Borrower (or guarantor
relative to any other Borrower) and shall be released from its Obligations owing
to Bank under the Loan Documents (except for indemnification obligations
pursuant to the Loan Documents, which shall survive the Approved TIMM Stock
Sale), and Bank agrees to execute and deliver (at Borrower's expenses) such Loan
Documents (in form and substance satisfactory to Bank), or to take such other
actions, as Borrower may reasonable request in writing in order to effect or
reflect same.

     7.2 CHANGES IN BUSINESS; CHANGE IN CONTROL; BUSINESS LOCATIONS. Engage in
any material line of business other than those lines of business conducted by
Borrower and its Subsidiaries on the date hereof and any businesses reasonably
related, complementary or incidental thereto or reasonable extensions thereof.
Borrower shall not cause, permit or suffer any Change in Control. Borrower shall
not, without at least fifteen (15) days prior written notice to Bank: (1) add
any new offices or business locations, including warehouses (unless Borrower's
assets or property located at such new offices or business locations have a
value less than One Hundred Thousand Dollars ($100,000) in the aggregate), (2)
change its jurisdiction of organization, (3) change its organizational structure
or type, (4) change its legal name, or (5) change any organizational number (if
any) assigned by its jurisdiction of organization.

     7.3 MERGERS OR ACQUISITIONS. (a) Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with any other Person, or acquire, or
permit any of its Subsidiaries to acquire, all or substantially all of


                                      -13-



the capital stock or property of another Person. A Subsidiary (that is not a
Borrower) may merge or consolidate into another Subsidiary (that is not a
Borrower).

          (b) Anything in Section 7.3(a) to the contrary notwithstanding, a
Borrower (other than Endocare) or a Subsidiary of Borrower may merge with and
into another Borrower, if the following conditions are satisfied: (i) no Default
or Event of Default has occurred and is continuing at the time of such merger,
or would result after giving effect to such merger; (ii) a Borrower is the
surviving entity of such merger; (iii) the transactions permitted under this
Section 7.3(b) do not exceed $100,000 in the aggregate in any fiscal year; (iv)
Bank shall have received lien searches listing all effective financing
statements which name the disappearing entity of such merger as debtor that are
filed in the applicable filing offices, none of which financing statements shall
cover any of the assets of such disappearing entity, except (x) Permitted Liens,
(y) financing statements as to which Bank has received evidence satisfactory to
Bank of the confirmed termination thereof (or Bank has received duly executed
written authorization, in form and substance satisfactory to Bank, from the
appropriate parties to terminate such financing statements), or (z) as otherwise
agreed in writing by Bank; and (v) Bank shall have received such other
information (if any) as Bank may reasonably request relative to such proposed
merger.

     7.4  INDEBTEDNESS.

          (a) Create, incur, assume, or be liable for any Indebtedness, or
permit any Subsidiary to do so, other than Permitted Indebtedness.

          (b) Without limiting the generality of Section 7.4(a), all present and
future indebtedness of Borrower to its officers, directors, and equityholders
("Inside Debt") shall, at all times, be subordinated to the Obligations pursuant
to a subordination agreement on Bank's standard form. Borrower represents and
warrants that there is no Inside Debt presently outstanding, except for the
following: NONE. Prior to incurring any Inside Debt in the future, Borrower
shall cause the person to whom such Inside Debt will be owed to execute and
deliver to Bank a subordination agreement on Bank's standard form.

     7.5 ENCUMBRANCE. Create, incur, or allow any Lien on any of the Collateral,
or assign or convey any right to receive income, including the sale of any
Accounts, or permit any of its Subsidiaries to do so, except for Permitted
Liens, permit any Collateral not to be subject to the first priority security
interests of Bank therein (subject in lien priority only to those Permitted
Liens that are expressly entitled to such priority over the security interests
of Bank by operation of law or by written subordination agreement duly executed
and delivered by Bank in favor of the holders of such Permitted Liens), or enter
into any agreement, document, instrument or other arrangement (except with or in
favor of Bank) with any Person which directly or indirectly prohibits or has the
effect of prohibiting Borrower or any Subsidiary from assigning, mortgaging,
pledging, granting a security interest in or upon, or encumbering any of
Borrower's or any Subsidiary's Intellectual Property, except as is otherwise
permitted in Section 7.1 hereof and the definition of "Permitted Lien" herein.

     7.6 MAINTENANCE OF COLLATERAL ACCOUNTS. Maintain any Collateral Account
except pursuant to the terms of Section 6.8.(b) hereof.

     7.7 INVESTMENTS; DISTRIBUTIONS.

          (a) Directly or indirectly make any Investment other than Permitted
Investments, or permit any of its Subsidiaries to do so.

          (b) Pay any dividends or make any distribution or payment or redeem,
retire or purchase any capital stock; provided that: (i) Borrower may convert
any of its convertible securities into other securities pursuant to the terms of
such convertible securities or otherwise in exchange thereof, (ii) Borrower may
pay dividends solely in common stock; (iii) one Borrower may pay dividends to
another Borrower; and (iv) Borrower may repurchase the stock of former
employees, directors, or consultants pursuant to stock repurchase agreements so
long as an Event of Default does not exist at the time of such repurchase and
would not exist after giving effect to such repurchase, provided such repurchase
does not exceed in the aggregate of $50,000 per fiscal year.


                                      -14-



     7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of Borrower, except
for transactions that are in the ordinary course of Borrower's business, upon
fair and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm's length transaction with a non-affiliated Person.

     7.9 SUBORDINATED DEBT. (a) Make or permit any payment on any Subordinated
Debt, except under the terms of the subordination, intercreditor, or other
similar agreement to which such Subordinated Debt is subject, or (b) amend any
provision in any document relating to the Subordinated Debt which would increase
the amount thereof or adversely affect the subordination thereof to Obligations
owed to Bank.

     7.10 COMPLIANCE. Become an "investment company" or a company controlled by
an "investment company", under the Investment Company Act of 1940 or undertake
as one of its important activities extending credit to purchase or carry margin
stock (as defined in Regulation U of the Board of Governors of the Federal
Reserve System), or use the proceeds of any Credit Extension for that purpose;
fail to meet the minimum funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply
with the Federal Fair Labor Standards Act or violate any other law or
regulation, if the violation could reasonably be expected to have a material
adverse effect on Borrower's business, or permit any of its Subsidiaries to do
so; withdraw or permit any Subsidiary to withdraw from participation in, permit
partial or complete termination of, or permit the occurrence of any other event
with respect to, any present pension, profit sharing and deferred compensation
plan which could reasonably be expected to result in any liability of Borrower,
including any liability to the Pension Benefit Guaranty Corporation or its
successors or any other governmental agency.

     8 EVENTS OF DEFAULT

     Any one of the following shall constitute an event of default (an "EVENT OF
DEFAULT") under this Agreement:

     8.1 PAYMENT DEFAULT. Borrower fails to (a) make any payment of principal or
interest on any Credit Extension on its due date, or (b) pay any other
Obligations within five (5) Business Days after such Obligations are due and
payable. During the cure period, the failure to cure the payment default is not
an Event of Default (but no Credit Extension will be made during the cure
period);

     8.2 COVENANT DEFAULT.

          (a) Borrower fails or neglects to perform any obligation in one or
more of Sections 6.2, 6.3, 6.8, or 6.9, or violates any covenant in Section 7;
or

          (b) Borrower fails or neglects to perform, keep, or observe any other
term, provision, condition, covenant or agreement contained in this Agreement or
any Loan Documents, and as to any default (other than those specified in Section
8 below) under such other term, provision, condition, covenant or agreement that
can be cured, has failed to cure the default within ten (10) days after the
occurrence thereof; provided, however, that if the default cannot by its nature
be cured within the ten (10) day period or cannot after diligent attempts by
Borrower be cured within such ten (10) day period, and such default is likely to
be cured within a reasonable time, then Borrower shall have an additional period
(which shall not in any case exceed thirty (30) days) to attempt to cure such
default, and within such reasonable time period the failure to cure the default
shall not be deemed an Event of Default (but no Credit Extensions shall be made
during such cure period). Grace periods provided under this section shall not
apply, among other things, to financial covenants or any other covenants set
forth in subsection (a) above;

     8.3 MATERIAL ADVERSE CHANGE. A Material Adverse Change occurs;

     8.4 ATTACHMENT. (a) Any material portion of Borrower's assets is attached,
seized, levied on, or comes into possession of a trustee or receiver and the
attachment, seizure or levy is not removed in ten (10) days; (b) the service of
process upon Borrower seeking to attach, by trustee or similar process, any
funds of Borrower on deposit with Bank, or any entity under control of Bank
(including a subsidiary); (c) Borrower is enjoined, restrained, or prevented by
court order from conducting a material part of its business; (d) a judgment or
other claim in excess of $50,000 becomes a Lien on any of Borrower's assets; or
(e) a notice of lien, levy, or assessment is filed against any of Borrower's
assets by any government agency and not paid within ten (10) days after Borrower
receives


                                      -15-



notice. These are not Events of Default if stayed or if a bond is posted pending
contest by Borrower (but Bank shall have no obligation to make any Credit
Extensions during such cure period);

     8.5 INSOLVENCY. (a) Borrower is unable to pay its debts (including trade
debts) as they become due or otherwise becomes insolvent; (b) Borrower begins an
Insolvency Proceeding; or (c) an Insolvency Proceeding is begun against Borrower
and not dismissed or stayed within thirty (30) days (but no Credit Extensions
shall be made while of any of the conditions described in clause (a) exist
and/or until any Insolvency Proceeding is dismissed);

     8.6 OTHER AGREEMENTS. There is a default in any agreement to which Borrower
or any Guarantor is a party with a third party or parties resulting in a right
by such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of Fifty Thousand Dollars
($50,000) or that could have a material adverse effect on Borrower's or any
Guarantor's business;

     8.7 JUDGMENTS. A judgment or judgments for the payment of money in an
amount, individually or in the aggregate, of at least Fifty Thousand Dollars
($50,000) (not covered by independent third-party insurance) shall be rendered
against Borrower and shall remain unsatisfied and unstayed for a period of ten
(10) days after the entry thereof (provided that no Credit Extensions will be
made prior to the satisfaction or stay of such judgment);

     8.8 MISREPRESENTATIONS. Borrower or any Person acting for Borrower makes
any representation, warranty, or other statement now or later in this Agreement,
any Loan Document or in any writing delivered to Bank or to induce Bank to enter
this Agreement or any Loan Document, and such representation, warranty, or other
statement is incorrect in any material respect when made;

     8.9 SUBORDINATED DEBT. A default or breach in any material respect occurs
under any agreement between Borrower and any creditor of Borrower that signed a
subordination, intercreditor, or other similar agreement with Bank, or any
creditor that has signed such an agreement with Bank breaches in any material
respect any terms of such agreement; or

     8.10 GUARANTY. (a) Any guaranty of any Obligations terminates or ceases for
any reason to be in full force and effect; (b) any Guarantor does not perform
any obligation or covenant under any guaranty of the Obligations; (c) any
circumstance described in Sections 8.3, 8.4, 8.5, 8.7, or 8.8. occurs with
respect to any Guarantor, (d) the liquidation, winding up, or termination of
existence of any Guarantor; or (e) (i) a material impairment in the perfection
or priority of Bank's Lien in the collateral provided by Guarantor or in the
value of such collateral or (ii) a material adverse change in the general
affairs, management, results of operation, condition (financial or otherwise) or
the prospect of repayment of the Obligations occurs with respect to any
Guarantor.

     9    BANK'S RIGHTS AND REMEDIES

     9.1 RIGHTS AND REMEDIES. While an Event of Default occurs and continues
Bank may, without notice or demand, do any or all of the following:

          (a) declare all Obligations immediately due and payable (but if an
Event of Default described in Section 8.5 occurs all Obligations are immediately
due and payable without any action by Bank);

          (b) stop advancing money or extending credit for Borrower's benefit
under this Agreement or under any other agreement between Borrower and Bank;

          (c) demand that Borrower (i) deposits cash with Bank in an amount
equal to the aggregate amount of any Letters of Credit remaining undrawn, as
collateral security for the repayment of any future drawings under such Letters
of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii)
pay in advance all Letter of Credit fees scheduled to be paid or payable over
the remaining term of any Letters of Credit;

          (d) [intentionally omitted];

          (e) settle or adjust disputes and claims directly with Account Debtors
for amounts on terms and in any order that Bank considers advisable, notify any
Person owing Borrower money of Bank's security interest in such funds, and
verify the amount of such account;


                                      -16-



          (f) make any payments and do any acts it considers necessary or
reasonable to protect the Collateral and/or its security interest in the
Collateral. Borrower shall assemble the Collateral if Bank requests and make it
available as Bank designates. Bank may enter premises where the Collateral is
located, take and maintain possession of any part of the Collateral, and pay,
purchase, contest, or compromise any Lien which appears to be prior or superior
to its security interest and pay all expenses incurred. Borrower grants Bank a
license to enter and occupy any of its premises, without charge, to exercise any
of Bank's rights or remedies;

          (g) apply to the Obligations any (i) balances and deposits of Borrower
it holds, or (ii) any amount held by Bank owing to or for the credit or the
account of Borrower;

          (h) ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell the Collateral. Bank is hereby granted a
non-exclusive, royalty-free license or other right to use, without charge,
Borrower's labels, patents, copyrights, mask works, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and advertising matter,
or any similar property as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section, Borrower's
rights under all licenses and all franchise agreements inure to Bank's benefit;

          (i) place a "hold" on any account maintained with Bank and/or deliver
a notice of exclusive control, any entitlement order, or other directions or
instructions pursuant to any Control Agreement or similar agreements providing
control of any Collateral;

          (j) demand and receive possession of Borrower's Books; and

          (k) exercise all rights and remedies available to Bank under the Loan
Documents or at law or equity, including all remedies provided under the Code
(including disposal of the Collateral pursuant to the terms thereof).

     9.2 POWER OF ATTORNEY. Borrower hereby irrevocably appoints Bank as its
lawful attorney-in-fact, exercisable upon the occurrence and during the
continuance of an Event of Default, to: (a) endorse Borrower's name on any
checks or other forms of payment or security; (b) sign Borrower's name on any
invoice or bill of lading for any Account or drafts against Account Debtors; (c)
settle and adjust disputes and claims about the Accounts directly with Account
Debtors, for amounts and on terms Bank determines reasonable; (d) make, settle,
and adjust all claims under Borrower's insurance policies; (e) pay, contest or
settle any Lien, charge, encumbrance, security interest, and adverse claim in or
to the Collateral, or any judgment based thereon, or otherwise take any action
to terminate or discharge the same; and (f) transfer the Collateral into the
name of Bank or a third party as the Code permits. Borrower hereby appoints Bank
as its lawful attorney-in-fact to sign Borrower's name on any documents
necessary to perfect or continue the perfection of any security interest
regardless of whether an Event of Default has occurred until all Obligations
have been satisfied in full and Bank is under no further obligation to make
Credit Extensions hereunder. Bank's foregoing appointment as Borrower's attorney
in fact, and all of Bank's rights and powers, coupled with an interest, are
irrevocable until all Obligations have been fully repaid and performed and
Bank's obligation to provide Credit Extensions terminates.

     9.3 PROTECTIVE PAYMENTS. If Borrower fails to obtain the insurance called
for by Section 6.7 or fails to pay any premium thereon or fails to pay any other
amount which Borrower is obligated to pay under this Agreement or any other Loan
Document, Bank may obtain such insurance or make such payment, and all amounts
so paid by Bank are Bank Expenses and immediately due and payable, bearing
interest at the then highest applicable rate, and secured by the Collateral.
Bank will make reasonable efforts to provide Borrower with notice of Bank
obtaining such insurance at the time it is obtained or within a reasonable time
thereafter. No payments by Bank are deemed an agreement to make similar payments
in the future or Bank's waiver of any Event of Default.

     9.4 APPLICATION OF PAYMENTS AND PROCEEDS. Unless an Event of Default has
occurred and is continuing, Bank shall apply any funds in its possession,
whether from Borrower account balances, payments, or proceeds realized as the
result of any collection of Accounts or other disposition of the Collateral,
first, to Bank Expenses then due, including without limitation, the reasonable
costs, expenses, liabilities, obligations and attorneys' fees incurred by Bank
in the exercise of its rights under this Agreement; second, to the interest due
upon any of the Obligations; and third, to the principal of the Obligations and
any applicable fees and other charges then


                                      -17-



due, in such order as Bank shall determine in its sole discretion. Any surplus
shall be paid to Borrower or other Persons legally entitled thereto; Borrower
shall remain liable to Bank for any deficiency. If an Event of Default has
occurred and is continuing, Bank may apply any funds in its possession, whether
from Borrower account balances, payments, proceeds realized as the result of any
collection of Accounts or other disposition of the Collateral, or otherwise, to
the Obligations in such order as Bank shall determine in its sole discretion.
Any surplus shall be paid to Borrower or other Persons legally entitled thereto;
Borrower shall remain liable to Bank for any deficiency. If Bank, in its good
faith business judgment, directly or indirectly enters into a deferred payment
or other credit transaction with any purchaser at any sale of Collateral, Bank
shall have the option, exercisable at any time, of either reducing the
Obligations by the principal amount of the purchase price or deferring the
reduction of the Obligations until the actual receipt by Bank of cash therefor.

     9.5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies with
reasonable banking practices regarding the safekeeping of the Collateral in the
possession or under the control of Bank, Bank shall not be liable or responsible
for: (a) the safekeeping of the Collateral; (b) any loss or damage to the
Collateral; (c) any diminution in the value of the Collateral; or (d) any act or
default of any carrier, warehouseman, bailee, or other Person. Borrower bears
all risk of loss, damage or destruction of the Collateral.

     9.6 NO WAIVER; REMEDIES CUMULATIVE. Bank's failure, at any time or times,
to require strict performance by Borrower of any provision of this Agreement or
any other Loan Document shall not waive, affect, or diminish any right of Bank
thereafter to demand strict performance and compliance herewith or therewith. No
waiver hereunder shall be effective unless signed by Bank and then is only
effective for the specific instance and purpose for which it is given. Bank's
rights and remedies under this Agreement and the other Loan Documents are
cumulative. Bank has all rights and remedies provided under the Code, by law, or
in equity. Bank's exercise of one right or remedy is not an election, and Bank's
waiver of any Event of Default is not a continuing waiver. Bank's delay in
exercising any remedy is not a waiver, election, or acquiescence.

     9.7 DEMAND WAIVER. Except if and to the extent expressly otherwise provided
herein or in any other Loan Document, Borrower waives demand, notice of default
or dishonor, notice of payment and nonpayment, notice of any default, nonpayment
at maturity, release, compromise, settlement, extension, or renewal of accounts,
documents, instruments, chattel paper, and guarantees held by Bank on which
Borrower is liable.

     10 NOTICES

     All notices, consents, requests, approvals, demands, or other communication
(collectively, "COMMUNICATION"), other than Advance requests made pursuant to
Section 3.4, by any party to this Agreement or any other Loan Document must be
in writing and be delivered or sent by facsimile at the addresses or facsimile
numbers listed below. Each such Communication shall be deemed to have been
validly served, given, or delivered: (a) upon the earlier of actual receipt and
three (3) Business Days after deposit in the U.S. mail, registered or certified
mail, return receipt requested, with proper postage prepaid; (b) upon
transmission, when sent by facsimile transmission (with such facsimile promptly
confirmed by delivery of a copy by personal delivery or United States mail as
otherwise provided in this Section 10); (c) one (1) Business Day after deposit
with a reputable overnight courier with all charges prepaid; or (d) when
delivered, if hand-delivered by messenger, all of which shall be addressed to
the party to be notified and sent to the address or facsimile number indicated
below. Advance requests made pursuant to Section 3.4 must be confirmed in
writing and may be in the form of electronic mail, delivered to Bank by Borrower
at the e-mail address of Bank provided below and shall be deemed to have been
validly served, given, or delivered when sent (with such electronic mail
promptly confirmed by delivery of a copy by personal delivery or United States
mail as otherwise provided in this Section 10). Bank or Borrower may change its
notice address, facsimile number, or electronic mail address by giving the other
party written notice thereof in accordance with the terms of this Section 10.
All notices to Borrower shall be sent, as provided herein, in care of Endocare
with respect to any and all Borrowers.


                                      -18-



     If to Borrower: c/o Endocare, Inc.
                     201 Technology Drive
                     Irvine, California 92618
                     Attn: Michael Rodriguez, CFO
                     Fax: 949.450.5309
                     Email: mrodriguez@endocare.com

     If to Bank:     Silicon Valley Bank
                     38 Technology Drive
                     Irvine, California 92618
                     Attn: Kurt Miklinski, VP
                     Fax: 949.789.1930
                     Email: kmiklins@svbank.com

     11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER

     California law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of
the State and Federal courts in Santa Clara County, California; provided,
however, that nothing in this Agreement shall be deemed to operate to preclude
Bank from bringing suit or taking other legal action in any other jurisdiction
to realize on the Collateral or any other security for the Obligations, or to
enforce a judgment or other court order in favor of Bank. Borrower expressly
submits and consents in advance to such jurisdiction in any action or suit
commenced in any such court, and Borrower hereby waives any objection that it
may have based upon lack of personal jurisdiction, improper venue, or forum non
conveniens and hereby consents to the granting of such legal or equitable relief
as is deemed appropriate by such court. Borrower hereby waives personal service
of the summons, complaints, and other process issued in such action or suit and
agrees that service of such summons, complaints, and other process may be made
by registered or certified mail addressed to Borrower at the address set forth
in Section 10 of this Agreement and that service so made shall be deemed
completed upon the earlier to occur of Borrower's actual receipt thereof or
three (3) Business Days after deposit in the U.S. mails, proper postage prepaid.

BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY
CONTEMPLATED TRANSACTION HEREUNDER OR THEREUNDER, INCLUDING CONTRACT, TORT,
BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR
BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER
WITH ITS COUNSEL.

     12 GENERAL PROVISIONS

     12.1 SUCCESSORS AND ASSIGNS. This Agreement binds and is for the benefit of
the successors and permitted assigns of each party. Borrower may not assign this
Agreement or any rights or obligations under it without Bank's prior written
consent (which may be granted or withheld in Bank's discretion). Bank has the
right, without the consent of or notice to Borrower, to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank's obligations, rights, and benefits under this Agreement and the other Loan
Documents.

     12.2 INDEMNIFICATION. Borrower agrees to indemnify, defend and hold Bank
and its directors, officers, employees, agents, attorneys, or any other Person
affiliated with or representing Bank harmless against: (a) all obligations,
demands, claims, and liabilities (collectively, "Claims") asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Bank Expenses incurred, or paid by Bank from, following,
or arising from transactions between Bank and Borrower in connection with the
Loan Documents (including reasonable attorneys' fees and expenses), except for
Claims and/or losses directly caused by Bank's gross negligence or willful
misconduct. This Section 12.2 shall survive any termination of this Agreement or
any other Loan Document.

     12.3 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower
against Bank, its directors, officers, employees, agents, accountants,
attorneys, or any other Person affiliated with or representing Bank based upon,
arising from, or relating to this Agreement or any other Loan Document, or any
other transaction


                                      -19-



contemplated hereby or thereby or relating hereto or thereto, or any other
matter, cause or thing whatsoever, occurred, done, omitted or suffered to be
done by Bank, its directors, officers, employees, agents, accountants or
attorneys, relating hereto or thereto, shall be barred unless asserted by
Borrower by the commencement of an action or proceeding in a court of competent
jurisdiction by the filing of a complaint within two years after the first act,
occurrence or omission upon which such claim or cause of action, or any part
thereof, is based, and the service of a summons and complaint on an officer of
Bank, or on any other person authorized to accept service on behalf of Bank,
within thirty (30) days thereafter. Borrower agrees that such two-year period is
a reasonable and sufficient time for Borrower to investigate and act upon any
such claim or cause of action. The two-year period provided herein shall not be
waived, tolled, or extended except by the written consent of Bank in its sole
discretion. This provision shall survive any termination of this Agreement or
any other Loan Document.

     12.4 TIME OF ESSENCE. Time is of the essence for the performance of all
Obligations in this Agreement.

     12.5 SEVERABILITY OF PROVISIONS. Each provision of this Agreement is
severable from every other provision in determining the enforceability of any
provision.

     12.6 AMENDMENTS IN WRITING; INTEGRATION. All amendments to this Agreement
must be in writing signed by both Bank and Borrower. This Agreement and the Loan
Documents represent the entire agreement about this subject matter and supersede
prior negotiations or agreements. All prior agreements, understandings,
representations, warranties, and negotiations between the parties about the
subject matter of this Agreement and the Loan Documents merge into this
Agreement and the Loan Documents.

     12.7 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, are an original, and all taken together, constitute
one Agreement.

     12.8 SURVIVAL. All covenants, representations and warranties made in this
Agreement continue in full force until this Agreement has terminated pursuant to
its terms and all Obligations (other than inchoate indemnity obligations and any
other obligations which, by their terms, are to survive the termination of this
Agreement) have been satisfied. The obligation of Borrower in Section 12.2 to
indemnify Bank shall survive until the statute of limitations with respect to
such claim or cause of action shall have run.

     12.9 CONFIDENTIALITY. In handling any confidential information, Bank shall
exercise the same degree of care that it exercises for its own proprietary
information, but disclosure of information may be made: (a) to Bank's
Subsidiaries or Affiliates in connection with their business relating to
Borrower; (b) to prospective transferees or purchasers of any interest in the
Credit Extensions (provided, however, Bank shall use commercially reasonable
efforts to obtain such prospective transferee's or purchaser's agreement to the
terms of this provision); (c) as required by law, regulation, subpoena, or other
order; (d) to Bank's regulators or as otherwise required in connection with
Bank's examination or audit; and (e) as Bank considers appropriate in exercising
remedies under this Agreement and the other Loan Documents. Confidential
information does not include information that either: (i) is in the public
domain or in Bank's possession when disclosed to Bank, or becomes part of the
public domain after disclosure to Bank; or (ii) is disclosed to Bank by a third
party, if Bank does not know that the third party is prohibited from disclosing
the information.

     12.10 ATTORNEYS' FEES, COSTS AND EXPENSES. In any action or proceeding
between Borrower and Bank arising out of or relating to the Loan Documents, the
prevailing party shall be entitled to recover its reasonable attorneys' fees and
other costs and expenses incurred, in addition to any other relief to which it
may be entitled.

     13 DEFINITIONS

     13.1 DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:

     "ACCOUNT" is any "account" as defined in the Code with such additions to
such term as may hereafter be made, and includes, without limitation, all
accounts receivable and other sums owing to Borrower.


                                      -20-



     "ACCOUNT DEBTOR" is any "account debtor" as defined in the Code with such
additions to such term as may hereafter be made.

     "ADVANCE" or "ADVANCES" means an advance (or advances) under the Revolving
Line.

     "AFFILIATE" of any Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.

     "AGREEMENT" is defined in the preamble hereof.

     "BANK" is defined in the preamble hereof.

     "BANK EXPENSES" are all audit fees and expenses, costs, and expenses
(including reasonable attorneys' fees and expenses) for preparing, negotiating,
administering, defending and enforcing the Loan Documents (including, without
limitation, those incurred in connection with appeals or Insolvency Proceedings)
or otherwise incurred with respect to Borrower.

     "BORROWER" is defined in the preamble hereof

     "BORROWER'S BOOKS" are all Borrower's books and records including ledgers,
federal and state tax returns, records regarding Borrower's assets or
liabilities, the Collateral, business operations or financial condition, and all
computer programs or storage or any equipment containing such information.

     "BORROWING BASE" is (a) 80% of Eligible Accounts plus (b) the lesser of 30%
of the value of Borrower's Eligible Inventory (valued at the lower of cost or
wholesale fair market value) or $500,000, as determined by Bank from Borrower's
most recent Borrowing Base Certificate; provided, however, that Bank may
decrease the foregoing percentages in its good faith business judgment based on
events, conditions, contingencies, or risks which, as determined by Bank, may
adversely affect Collateral.

     "BORROWING BASE CERTIFICATE" is a borrowing base certificate in form and
substance satisfactory to Bank.

     "BORROWING RESOLUTIONS" are, with respect to any Person, those resolutions
adopted by such Person's Board of Directors and delivered by such Person to Bank
approving the Loan Documents to which such Person is a party and the
transactions contemplated thereby, together with a certificate executed by its
secretary on behalf of such Person certifying that (a) such Person has the
authority to execute, deliver, and perform its obligations under each of the
Loan Documents to which it is a party, (b) that attached as Exhibit A to such
certificate is a true, correct, and complete copy of the resolutions then in
full force and effect authorizing and ratifying the execution, delivery, and
performance by such Person of the Loan Documents to which it is a party, (c) the
name(s) of the Person(s) authorized to execute the Loan Documents on behalf of
such Person, together with a sample of the true signature(s) of such Person(s),
and (d) that Bank may conclusively rely on such certificate unless and until
such Person shall have delivered to Bank a further certificate canceling or
amending such prior certificate.

     "BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on which
Bank is closed.

     "CASH EQUIVALENTS" means (a) marketable direct obligations issued or
unconditionally guaranteed by the United States or any agency or any State
thereof having maturities of not more than one (1) year from the date of
acquisition; (b) commercial paper maturing no more than one (1) year after its
creation and having the highest rating from either Standard & Poor's Ratings
Group or Moody's Investors Service, Inc., (c) Bank's certificates of deposit
issued maturing no more than one (1) year after issue; and (d) money market
funds at least ninety-five percent (95%) of the assets of which constitute Cash
Equivalents of the kinds described in clauses (a) through (c) of this
definition.

     "CHANGE IN CONTROL" means any event, transaction, or occurrence as a result
of which any one or more of the following occurs: (a) any "person" (as such term
is defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of
1934, as an amended (the "EXCHANGE ACT")), other than a trustee or other
fiduciary holding securities under an employee benefit plan of Endocare, is or
becomes a beneficial owner (within the meaning Rule


                                      -21-


13d-3 promulgated under the Exchange Act), directly or indirectly, of securities
of Endocare, representing twenty-five percent (25%) or more of the combined
voting power of Endocare's then outstanding securities; or (b) during any period
of twelve consecutive calendar months, individuals who at the beginning of such
period constituted the Board of Directors of Endocare (together with any new
directors whose election by the Board of Directors of Endocare was approved by a
vote of at least two-thirds of the directors then still in office who either
were directions at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason other than death
or disability to constitute a majority of the directors then in office; or (c)
Endocare ceases to own and control 100% of the issued and outstanding capital
stock of each other Borrower.

     "CODE" is the Uniform Commercial Code, as the same may, from time to time,
be enacted and in effect in the State of California; provided, that, to the
extent that the Code is used to define any term herein or in any Loan Document
and such term is defined differently in different Articles or Divisions of the
Code, the definition of such term contained in Article or Division 9 shall
govern; provided further, that in the event that, by reason of mandatory
provisions of law, any or all of the attachment, perfection, or priority of, or
remedies with respect to, Bank's Lien on any Collateral is governed by the
Uniform Commercial Code in effect in a jurisdiction other than the State of
California, the term "CODE" shall mean the Uniform Commercial Code as enacted
and in effect in such other jurisdiction solely for purposes on the provisions
thereof relating to such attachment, perfection, priority, or remedies and for
purposes of definitions relating to such provisions.

     "COLLATERAL" is any and all properties, rights and assets of Borrower
described on Exhibit A.

     "COLLATERAL ACCOUNT" is any Deposit Account, Securities Account, or
Commodity Account.

     "COMMODITY ACCOUNT" is any "commodity account" as defined in the Code with
such additions to such term as may hereafter be made.

     "COMMUNICATION" is defined in Section 10.

     "COMPLIANCE CERTIFICATE" is that certain certificate in the form attached
hereto as Exhibit E.

     "CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (a) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (b) any obligations for undrawn letters of credit for the account of
that Person; and (c) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under any guarantee or other support arrangement.

     "CONTROL AGREEMENT" is any control agreement entered into among the
depository institution at which Borrower maintains a Deposit Account or the
securities intermediary or commodity intermediary at which Borrower maintains a
Securities Account or a Commodity account, Borrower, and Bank pursuant to which
Bank obtains control (within the meaning of the Code) over such Deposit Account,
Securities Account, or Commodity Account.

     "CREDIT EXTENSION" is any Advance or any other extension of credit by Bank
for Borrower's benefit.

     "CROSS-GUARANTY" is that certain Cross-Corporate Continuing Guaranty, dated
on or about the Effective Date, executed and delivered by each Borrower in favor
of Bank relative to each other Borrower.

     "CURRENT LIABILITIES" are the aggregate amount of Endocare's consolidated
Total Liabilities (including, without duplication, all obligations and
liabilities of Borrower to Bank) that mature within one (1) year.

     "DEFAULT" means any event which with notice or passage of time or both,
would constitute an Event of Default.


                                      -22-



     "DEFAULT RATE" is defined in Section 2.3(b).

     "DEFERRED REVENUE" is all amounts received or invoiced in advance of
performance under contracts and not yet recognized as revenue.

     "DEPOSIT ACCOUNT" is any "deposit account" as defined in the Code with such
additions to such term as may hereafter be made.

     "DESIGNATED DEPOSIT ACCOUNT" is Borrower's deposit account, account number
0600801170, maintained with Bank.

     "DOLLARS," "DOLLARS" and "$" each mean lawful money of the United States.

     "EFFECTIVE DATE" is the date Bank executes this Agreement and as indicated
on the signature page hereof.

     "ELIGIBLE ACCOUNTS" are Accounts which arise, and have been billed, in the
ordinary course of Borrower's business and that meet all of Borrower's
representations and warranties in Section 5.3. Bank reserves the right, by
giving prior notice to Borrower, at any time and from time to time after the
Effective Date, to adjust any of the criteria set forth below and to establish
new criteria in its good faith business judgment (collectively, the "MINIMUM
ELIGIBILITY REQUIREMENTS"). Unless Bank agrees otherwise in writing, Eligible
Accounts shall not include:

     (a) Accounts that the Account Debtor has not paid within ninety (90) days
of invoice date;

     (b) Accounts owing from an Account Debtor, fifty percent (50%) or more of
whose Accounts have not been paid within ninety (90) days of invoice date;

     (c) Credit balances over ninety (90) days from invoice date;

     (d) Accounts owing from an Account Debtor, including Affiliates, whose
total obligations to Borrower exceed twenty-five (25%) of all Accounts, for the
amounts that exceed that percentage, unless Bank approves in writing;

     (e) Accounts owing from an Account Debtor which does not have its principal
place of business in the United States (unless pre-approved by Bank in its
discretion in writing, or backed by a letter of credit satisfactory to Bank, or
FCIA insured satisfactory to Bank);

     (f) Accounts owing from the United States or any department, agency or
instrumentality thereof (unless there has been compliance, to Bank's
satisfaction, with the United States Assignment of Claims Act);

     (g) Accounts owing from an Account Debtor to the extent that Borrower is
indebted or obligated in any manner to the Account Debtor (as creditor, lessor,
supplier or otherwise - sometimes called "contra" accounts, accounts payable,
customer deposits or credit accounts), with the exception of customary credits,
adjustments and/or discounts given to an Account Debtor by Borrower in the
ordinary course of its business;

     (h) Accounts for demonstration or promotional equipment, or in which goods
are consigned, or sold on a "sale guaranteed", "sale or return", "sale on
approval", "bill and hold", or other terms if Account Debtor's payment may be
conditional;

     (i) Accounts for which the Account Debtor is Borrower's Affiliate, officer,
employee, or agent;

     (j) Accounts in which the Account Debtor disputes liability or makes any
claim (but only up to the disputed or claimed amount), or if the Account Debtor
is subject to an Insolvency Proceeding, or becomes insolvent, or goes out of
business;

     (k) Accounts owing from an Account Debtor with respect to which Borrower
has received deferred revenue (but only to the extent of such deferred revenue);


                                      -23-



     (l) Accounts for which Bank in its good faith business judgment determines
collection to be doubtful;

     (m) Accounts that arise from the sale, lease, licensing, assignment, or
other disposition of any copyright, maskwork, or other work of authorship of
Borrower that is registered (or the subject of an application for registration)
with the United States Copyright Office (a "Registered Copyright"), unless
Borrower is in full compliance with Section 6.10 with respect to such Account
and such Registered Copyright;

     and

     (n) other Accounts Bank deems ineligible in the exercise of its good faith
business judgment.

     "ELIGIBLE INVENTORY" means, at any time, the aggregate of Borrower's
Inventory that: (a) consists of raw materials and finished goods, in good, new,
and salable condition, which is not perishable, returned, consigned, obsolete,
not sellable, damaged, or defective, and is not comprised of demonstrative or
custom inventory, works in progress, packaging or shipping materials, or
supplies; (b) meets all applicable governmental standards; (c) has been
manufactured in compliance with the Fair Labor Standards Act; (d) is not subject
to any Liens, except the first priority Liens granted in favor of Bank under
this Agreement or any of the other Loan Documents (subject in lien priority only
to those Permitted Liens that are expressly entitled to such priority over the
security interests of Bank by operation of law or by written subordination
agreement duly executed and delivered by Bank in favor of the holders of such
Permitted Liens); (e) is located at Endocare's principal place of business, 201
Technology Drive, Irvine, California 92618; and (f) is otherwise acceptable to
Bank in its good faith business judgment.

     "ENDOCARE" is defined in the preamble of this Agreement.

     "EQUIPMENT" is all "equipment" as defined in the Code with such additions
to such term as may hereafter be made, and includes without limitation all
machinery, fixtures, goods, vehicles (including motor vehicles and trailers),
and any interest in any of the foregoing.

     "ERISA" is the Employment Retirement Income Security Act of 1974, and its
regulations.

     "EVENT OF DEFAULT" is defined in Section 8.

     "FUNDING DATE" is any date on which a Credit Extension is made to or on
account of Borrower which shall be a Business Day.

     "GAAP" is generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other Person as may be approved by a significant segment of the accounting
profession, which are applicable to the circumstances as of the date of
determination.

     "GENERAL INTANGIBLES" is all "general intangibles" as defined in the Code
in effect on the date hereof with such additions to such term as may hereafter
be made, and includes without limitation, all copyright rights, copyright
applications, copyright registrations and like protections in each work of
authorship and derivative work, whether published or unpublished, any patents,
trademarks, service marks and, to the extent permitted under applicable law, any
applications therefor, whether registered or not, any trade secret rights,
including any rights to unpatented inventions, payment intangibles, royalties,
contract rights, goodwill, franchise agreements, purchase orders, customer
lists, route lists, telephone numbers, domain names, claims, income and other
tax refunds, security and other deposits, options to purchase or sell real or
personal property, rights in all litigation presently or hereafter pending
(whether in contract, tort or otherwise), insurance policies (including without
limitation key man, property damage, and business interruption insurance),
payments of insurance and rights to payment of any kind.

     "GUARANTOR" is any present or future guarantor of the Obligations.

     "INACTIVE SUBSIDIARIES" has the meaning ascribed to such term in Section
5.1A.


                                      -24-



     "INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred price
of property or services, such as reimbursement and other obligations for surety
bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations, and (d)
Contingent Obligations.

     "INSOLVENCY PROCEEDING" is any proceeding by or against any Person under
the United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.

     "INTELLECTUAL PROPERTY" means all present and future (a) copyrights,
copyright rights, copyright applications, copyright registrations and like
protections in each work of authorship and derivative work thereof, whether
published or unpublished, (b) trade secret rights, including all rights to
unpatented inventions and know how, and confidential information; (c) mask work
or similar rights available for the protection of semiconductor chips; (d)
patents, patent applications and like protections including without limitation
improvements, divisions, continuations, renewals, reissues, extensions and
continuations-in-part of the same (individually and collectively, "PATENT"); (e)
trademarks, servicemarks, trade styles, and trade names, whether or not any of
the foregoing are registered, and all applications to register and registrations
of the same and like protections, and the entire goodwill of the business of
Borrower connected with and symbolized by any such trademarks; (f) computer
software and computer software products; (g) designs and design rights; (h)
technology; (i) all claims for damages by way of past, present and future
infringement of any of the rights included above; (j) all licenses or other
rights to use any property or rights of a type described above.

     "INVENTORY" is all "inventory" as defined in the Code in effect on the date
hereof with such additions to such term as may hereafter be made, and includes
without limitation all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products, including without
limitation such inventory as is temporarily out of Borrower's custody or
possession or in transit and including any returned goods and any documents of
title representing any of the above.

     "INVESTMENT" is any beneficial ownership interest in any Person (including
stock, partnership interest or other securities), and any loan, advance or
capital contribution to any Person.

     "IP SECURITY AGREEMENT" is that certain Intellectual Property Security
Agreement executed and delivered by Borrower to Bank dated as of the Effective
Date.

     "LIEN" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.

     "LOAN DOCUMENTS" are, collectively, this Agreement, the Perfection
Certificate, the IP Security Agreement, any note, or notes or guaranties
executed by Borrower or any Guarantor, and any other present or future agreement
between Borrower or any Guarantor, on the one hand, and/or for the benefit of
Bank, on the other hand, in connection with this Agreement, all as amended,
restated, or otherwise modified.

     "LOAN MARGIN" has the meaning ascribed to such term in Section 2.3(a).

     "MATERIAL ADVERSE CHANGE" is (a) a material impairment in the perfection or
priority of Bank's Lien in the Collateral or in the value of such Collateral;
(b) a material adverse change in the business, operations, or condition
(financial or otherwise) of Endocare and its Subsidiaries, taken as a whole; (c)
a material impairment of the prospect of repayment of any portion of the
Obligations; or (d) Bank determines, based upon information available to it and
in its good faith reasonable judgment, that there is a reasonable likelihood
that Borrower shall fail to comply with one or more of the financial covenants
in Section 6 during the next succeeding financial reporting period.

     "MATURITY DATE" is the earliest of (a) the date 364 days following the
Effective Date, or (b) if Bank so elects in its good faith business judgment,
the occurrence and continuation of any Event of Default.

     "MAXIMUM REVOLVER AMOUNT" means $4,000,000.

     "MINIMUM ELIGIBILITY REQUIREMENTS" has the meaning ascribed to such term
within the definition of "Eligible Accounts".


                                      -25-



     "NET INCOME" means, as calculated on a consolidated basis for Endocare and
its Subsidiaries for any period as at any date of determination, the net profit
(or loss), after provision for taxes, of Endocare and its Subsidiaries for such
period taken as a single accounting period.

     "OBLIGATIONS" are Borrower's obligation to pay when due any debts,
principal, interest, Bank Expenses and other amounts Borrower owes Bank now or
later, whether under this Agreement, the Loan Documents, or otherwise,
including, without limitation, all obligations relating to letters of credit,
cash management services, and foreign exchange contracts, if any, and including
interest, and other amounts, accruing after Insolvency Proceedings begin and
debts, liabilities, or obligations of Borrower assigned to Bank, and the
performance of Borrower's duties under the Loan Documents. It is expressly
acknowledged and agreed that each and all of the Borrowers are, and at all times
shall be, jointly and severally liable for all Obligations, regardless of which
Borrower or Borrowers requested, received, used, or directly enjoyed the benefit
of, the Obligations.

     "OPERATING DOCUMENTS" are, for any Person, such Person's formation
documents, as certified with the Secretary of State of such Person's state of
formation on a date that is no earlier than 30 days prior to the Effective Date,
and, (a) if such Person is a corporation, its bylaws in current form, (b) if
such Person is a limited liability company, its limited liability company
agreement (or similar agreement), and (c) if such Person is a partnership, its
partnership agreement (or similar agreement), each of the foregoing with all
current amendments or modifications thereto.

     "PATENT" has the meaning ascribed to such term in within the definition of
"Intellectual Property".

     "PAYMENT" means all checks, wire transfers and other items of payment
received by Bank (including proceeds of Accounts and payment of the Obligations
in full) for credit to Borrower's outstanding Credit Extensions or, if the
balance of the Credit Extensions have been reduced to zero, for credit to its
Deposit Accounts.

     "PERFECTION CERTIFICATE" is defined in Section 5.1.

     "PERMITTED EXCLUSIVE LICENSING TRANSACTIONS" means, individually and
collectively, one or more exclusive licenses granted by Borrower, in the
ordinary course of business, pursuant to which Borrower and one or more
third-party co-developers develop technology based on certain core proprietary
Intellectual Property of Borrower, and exploit such co-developed technology;
provided, however that no Permitted Exclusive Licensing Transaction shall effect
or result in: (a) (i) a "transfer of copyright ownership" (within the meaning of
17 U.S.C. Section 101, as amended) with respect to any material portion, or any
significant economic value, of Borrower's core proprietary Intellectual Property
relating to copyrights, maskworks, and other works of authorship, or (ii) the
functional equivalent of the immediately preceding clause (i) as applied to
Borrower's Patent-related Intellectual Property; or (b) a transfer of any
non-immaterial amount of cash of Borrower (other than the sharing between
Borrower and such third-party co-developers of revenue from the exploitation of
such co-developed technology in the ordinary course of business).

     "PERMITTED INDEBTEDNESS" is:

     (a) Borrower's Indebtedness to Bank under this Agreement and the other Loan
Documents;

     (b) Indebtedness existing on the Effective Date and shown on the Perfection
Certificate;

     (c) unsecured Subordinated Debt;

     (d) unsecured Indebtedness to trade creditors incurred in the ordinary
course of business;

     (e) Indebtedness incurred as a result of endorsing negotiable instruments
received in the ordinary course of business;

     (f) Indebtedness, in an aggregate principal amount not to exceed $100,000,
secured by Permitted Liens described in clause (c) of the definition of
"Permitted Liens";


                                      -26-



     (g) unsecured intercompany Indebtedness among the Borrowers or among
Borrower and its Subsidiaries, in an aggregate amount not to exceed $100,000 at
any one time outstanding; and

     (h) extensions, refinancings, modifications, amendments and restatements of
any items of Permitted Indebtedness (a) through (f) above, provided that the
principal amount thereof is not increased or the terms thereof are not modified
to impose more burdensome terms upon Borrower or its Subsidiary, as the case may
be.

     "PERMITTED INVESTMENTS" are:

     (a) Investments shown on the Perfection Certificate and existing on the
Effective Date;

     (b) (i) Cash Equivalents, and (ii) any Investments permitted by Borrower's
investment policy, as amended from time to time, provided that such investment
policy (and any such amendment thereto) has been approved in writing by Bank
(such approval not to be unreasonably withheld);

     (c) Investments consisting of the endorsement of negotiable instruments for
deposit or collection or similar transactions in the ordinary course of
Borrower;

     (d) Investments consisting of deposit accounts in which Bank has a
perfected security interest (to the extent required hereunder);

     (e) (i) Investments accepted in connection with Transfers permitted by
Section 7.1, or (ii) Transfers permitted by Section 7.3 (if and to the extent
such Transfers constitute Investments);

     (f) (i) Investments by one Borrower in another Borrower; (ii) additional
equity Investments by Borrower in Subsidiaries not to exceed $100,000 in the
aggregate in any fiscal year; and (iii) Investments of Subsidiaries (not a
Borrower) made in or to other Subsidiaries or Borrower;

     (g) Investments consisting of (i) travel advances and employee relocation
loans and other employee loans and advances in the ordinary course of business,
and (ii) loans to employees, officers or directors relating to the purchase of
equity securities of Borrower or its Subsidiaries pursuant to employee stock
purchase plans or agreements approved by Borrower's Board of Directors;

     (h) Investments (including debt obligations) received in connection with
the bankruptcy or reorganization of customers or suppliers and in settlement of
delinquent obligations of, and other disputes with, customers or suppliers
arising in the ordinary course of business;

     (i) Investments consisting of notes receivable of, or prepaid royalties and
other credit extensions, to customers and suppliers who are not Affiliates, in
the ordinary course of business; provided that this paragraph (i) shall not
apply to Investments of Borrower in any Subsidiary; and

     (j) joint ventures or strategic alliances in the ordinary course of
Borrower's business consisting of Permitted Exclusive Licensing Transactions,
the non-exclusive licensing of technology, the development of technology or the
providing of technical support, provided that any cash investments by Borrower
do not exceed $250,000 in the aggregate in any fiscal year.

     "PERMITTED LIENS" are:

     (a) Liens existing on the Effective Date and shown on the Perfection
Certificate or arising under this Agreement and the other Loan Documents;

     (b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority over
any of Bank's Liens;

     (c) purchase money Liens (i) on Equipment acquired or held by Borrower
incurred for financing the acquisition of the Equipment securing no more than
$100,000 in the aggregate amount outstanding, or (ii) existing


                                      -27-



on Equipment when acquired, if the Lien is confined to the property and
improvements and the proceeds of the Equipment;

     (d) statutory Liens securing claims or demands of materialmen, mechanics,
carriers, warehousemen, landlords and other Persons imposed without action of
such parties, provided, they have no priority over any of Bank's Lien and the
aggregate amount of such Liens does not at any time exceed $25,000;

     (e) Liens to secure payment of workers' compensation, employment insurance,
old-age pensions, social security and other like obligations incurred in the
ordinary course of business, provided, they have no priority over any of Bank's
Liens and the aggregate amount of the Indebtedness secured by such Liens does
not at any time exceed $25,000;

     (f) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase;

     (g) leases or subleases of real property granted in the ordinary course of
business, and leases, subleases, non-exclusive licenses or sublicenses of
property (other than real property or Intellectual Property) granted in the
ordinary course of Borrower's business, if the leases, subleases, licenses and
sublicenses do not prohibit granting Bank a security interest;

     (h) Permitted Exclusive Licensing Transactions and non-exclusive licenses
of Intellectual Property granted to third parties in the ordinary course of
business;

     (i) Liens arising from judgments, decrees or attachments in circumstances
not constituting an Event of Default under Section 8.4 or 8.7; and

     (j) Liens in favor of other financial institutions arising in connection
with Borrower's deposit and/or securities accounts permitted hereunder held at
such institutions, provided that Bank has a perfected security interest in the
amounts held in such deposit and/or securities accounts.

     "PERSON" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or government agency.

     "PHASE I" has the meaning ascribed in Section 1A hereof.

     "PHASE I RESET DATE" has the meaning ascribed in Section 1A hereof.

     "PHASE II" has the meaning ascribed in Section 1A hereof.

     "PHASE II TRIGGER DATE" has the meaning ascribed in Section 1A hereof.

     "PRIME RATE" is Bank's most recently announced "prime rate," even if it is
not Bank's lowest rate.

     "QUICK ASSETS" is, on any date, Endocare's and its Subsidiaries'
consolidated unrestricted cash, Cash Equivalents, net billed accounts receivable
and investments with maturities of fewer than 12 months determined according to
GAAP.

     "QUICK RATIO" means, as of any date of determination and with respect to
any Person, the ratio of such Person's Quick Assets to such Person's Current
Liabilities.

     "QUICK RATIO THRESHHOLD" has the meaning ascribed in Section 1A hereof.

     "REGISTERED ORGANIZATION" is any "registered organization" as defined in
the Code with such additions to such term as may hereafter be made


                                      -28-



     "RESERVES" means, as of any date of determination, such amounts as Bank may
from time to time establish and revise in its good faith business judgment,
reducing the amount of Credit Extensions and other financial accommodations
which would otherwise be available to Borrower under the lending formula(s)
provided in this Agreement: (a) to reflect events, conditions, contingencies or
risks which, as determined by Bank in its good faith business judgment, do or
may adversely affect (i) the Collateral or any other property which is security
for the Obligations or its value (including without limitation any increase in
delinquencies of Accounts), (ii) the assets, business or prospects of Borrower
or any Guarantor, or (iii) the security interests and other rights of Bank in
the Collateral (including the enforceability, perfection and priority thereof);
or (b) to reflect Bank's good faith belief that any collateral report or
financial information furnished by or on behalf of Borrower or any Guarantor to
Bank is or may have been incomplete, inaccurate or misleading in any material
respect; or (c) in respect of any state of facts which Bank determines in good
faith constitutes an Event of Default or may, with notice or passage of time or
both, constitute an Event of Default.

     "RESPONSIBLE OFFICER" is any of the Chief Executive Officer, President,
Chief Financial Officer and Controller of Borrower.

     "REVOLVING LINE" is the revolving line of credit (and sublines thereof, if
any), set forth in Section 2.1.1, pursuant to which one or more Advances (or
other Credit Extensions, if any, pursuant to such sublines), in an aggregate
outstanding amount of up to the Maximum Revolver Amount at any one time, may be
requested by Borrower and made by Bank subject to the terms and conditions of
this Agreement.

     "SECURITIES ACCOUNT" is any "securities account" as defined in the Code
with such additions to such term as may hereafter be made.

     "SUBORDINATED DEBT" is indebtedness incurred by Borrower subordinated to
all of Borrower's now or hereafter indebtedness to Bank (pursuant to a
subordination, intercreditor, or other similar agreement in form and substance
satisfactory to Bank entered into between Bank and the other creditor), on terms
acceptable to Bank.

     "SUBSIDIARY" means, with respect to any Person, any Person of which more
than 50% of the voting stock or other equity interests is owned or controlled,
directly or indirectly, by such Person or one or more Affiliates of such Person.

     "TANGIBLE NET WORTH" is, on any date, the consolidated total assets of
Endocare and its Subsidiaries minus (a) any amounts attributable to (i)
goodwill, (ii) intangible items including unamortized debt discount and expense,
patents, trade and service marks and names, copyrights and research and
development expenses except prepaid expenses, (iii) notes, accounts receivable
and other obligations owing to Borrower from its officers or other Affiliates,
and (iv) reserves not already deducted from assets, minus (b) Total Liabilities.
Solely for purposes of calculating Tangible Net Worth, there shall be excluded
from Total Liabilities any liabilities for Endocare's warrants issued on March
11, 2005.

     "TIMM" is defined in the preamble of this Agreement.

     "TOTAL LIABILITIES" is on any day, obligations that should, under GAAP, be
classified as liabilities on Endocare's consolidated balance sheet, including
all Indebtedness, but excluding all Subordinated Debt.

     "TRANSACTION REPORT" is a Borrowing Base Certificate.

     "TRANSFER" is defined in Section 7.1.

     "UNUSED REVOLVING LINE FACILITY FEE" is defined in Section 2.4(d).

                            [Signature page follows.]


                                      -29-



     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the Effective Date.

BORROWER:

ENDOCARE, INC.


By /s/ Michael Rodriguez
   ----------------------------------
Name: Michael Rodriguez
Title: SVP, Finance & CFO


TIMM MEDICAL TECHNOLOGIES, INC.


By /s/ Michael Rodriguez
   ----------------------------------
Name: Michael Rodriguez
Title: CFO


BANK:

SILICON VALLEY BANK


By /s/ Kurt Miklinski
   ----------------------------------
Name: Kurt Miklinski
Title: Vice President

TO BE COMPLETED ONLY BY BANK:

Effective Date: 10/26/05

                 [Signature page to Loan and Security Agreement]



                                    EXHIBIT A

The Collateral consists of all of Borrower's right, title and interest in and to
the following personal property:

     All goods, Accounts (including health-care receivables), Equipment,
Inventory, contract rights or rights to payment of money, leases, license
agreements, franchise agreements, General Intangibles, commercial tort claims,
documents, instruments (including any promissory notes), chattel paper (whether
tangible or electronic), cash, deposit accounts, fixtures, letters of credit
rights (whether or not the letter of credit is evidenced by a writing),
securities, and all other investment property, supporting obligations, and
financial assets, whether now owned or hereafter acquired, wherever located; and

     all Borrower's Books relating to the foregoing, and any and all claims,
rights and interests in any of the above and all substitutions for, additions,
attachments, accessories, accessions and improvements to and replacements,
products, proceeds and insurance proceeds of any or all of the foregoing.


                                   Exhibit A


                                    EXHIBIT B

                                   [reserved]

                                    EXHIBIT C

                                   [reserved]

                                    EXHIBIT D

                                   [reserved]



                                    EXHIBIT E

                             COMPLIANCE CERTIFICATE

TO: SILICON VALLEY BANK                                          Date: _________

FROM: ________________

     The undersigned authorized officer of each of ENDOCARE, INC., a Delaware
corporation ("Endocare"), and TIMM MEDICAL TECHNOLOGIES, INC., a Delaware
corporation ("TIMM") (individually and collectively, and jointly and severally,
"Borrower"), certifies that under the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (as amended, restated,
supplemented, or otherwise modified from time to time, the "Agreement"), (1)
Borrower is in complete compliance for the period ending _______________ with
all required covenants except as noted below, (2) there are no Events of
Default, (3) all representations and warranties in the Agreement are true and
correct in all material respects on this date except as noted below; provided,
however, that such materiality qualifier shall not be applicable to any
representations and warranties that already are qualified or modified by
materiality in the text thereof; and provided, further that those
representations and warranties expressly referring to a specific date shall be
true, accurate and complete in all material respects as of such date, (4)
Borrower, and each of its Subsidiaries, has timely filed all required tax
returns and reports, and Borrower has timely paid all material foreign, federal,
state and local taxes, assessments, deposits and contributions owed by Borrower
except as otherwise permitted pursuant to the terms of Section 5.9 of the
Agreement, (5) at the end of the month most recently ended there were no held
checks, and (6) no Liens have been levied or claims made against Borrower or any
of its Subsidiaries relating to unpaid employee payroll or benefits of which
Borrower has not previously provided written notification to Bank. Attached are
the required documents supporting the certification. The undersigned certifies
that these are prepared in accordance with generally GAAP consistently applied
from one period to the next except as explained in an accompanying letter or
footnotes. The undersigned acknowledges that no borrowings may be requested at
any time or date of determination that Borrower is not in compliance with any of
the terms of the Agreement, and that compliance is determined not just at the
date this certificate is delivered. Capitalized terms used but not otherwise
defined herein shall have the meanings given them in the Agreement.

PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.



          REPORTING COVENANT                      REQUIRED            COMPLIES
          ------------------                      --------            --------
                                                                
Monthly financial statements with        Monthly within 30 days        Yes No
Compliance Certificate

10-Q, 10-K and 8-K (and Compliance       Within 5 days after filing    Yes No
Certificate with each 10-Q and 10K)      with SEC (subject to
                                         Section 6.2(b) of the
                                         Agreement)

Borrowing Base Certificate/Transaction   Monthly within 15 days        Yes No
Report, A/R & A/P Agings, Inventory
Report, Deferred Revenue Report


The following Intellectual Property was registered after the Effective Date (if
no registrations, state "None")

- --------------------------------------------------------------------------------



        FINANCIAL COVENANT            REQUIRED    ACTUAL    COMPLIES
        ------------------            --------    ------    --------
                                                   
Maintain on a MONTHLY Basis:
Minimum Tangible Net Worth            $_______   $_______    Yes No




PHASE I STATUS AND PHASE II STATUS    REQUIRED    ACTUAL    COMPLIES
- ----------------------------------    --------    ------    --------
                                                   
Maintain on a MONTHLY Basis:
Minimum Quick Ratio                  1.00:1.00   __:1.00     Yes No



                                       1



     The following financial covenant analysis and information set forth in
Schedule 1 attached hereto are true and accurate as of the date of this
Certificate.

     The following are the exceptions with respect to the certification above:
(If no exceptions exist, state "No exceptions to note.")

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

ENDOCARE, INC., a Delaware corporation   BANK USE ONLY


                                         Received by:
                                                      --------------------------
                                                      AUTHORIZED SIGNER


By:
    ----------------------------------   Date:
Name:                                          ---------------------------------
      --------------------------------
Title:                                   Verified:
       -------------------------------             -----------------------------
                                                   AUTHORIZED SIGNER


TIMM MEDICAL TECHNOLOGIES, INC., a       Date:
Delaware corporation                           ---------------------------------

                                         Compliance Status: Yes No


By:
    ----------------------------------
Name:
      --------------------------------
Title:
       -------------------------------


                                       2



                      SCHEDULE 1 TO COMPLIANCE CERTIFICATE

         FINANCIAL COVENANTS OF BORROWER/PHASE I & PHASE II CALCULATIONS

Dated: ____________________

I.   TANGIBLE NET WORTH (Section 6.9(a))

Required: $____

Actual:

A. Aggregate value of total consolidated assets of Endocare and its
   Subsidiaries                                                         $_______

B. Aggregate value of consolidated goodwill of Endocare and its
   Subsidiaries                                                         $_______

C. Aggregate value of consolidated intangible assets of Endocare and
   its Subsidiaries                                                     $_______

D. Aggregate value of any reserves not already deducted from assets     $_______

E. Aggregate value of consolidated liabilities of Endocare and its
   Subsidiaries (including all Indebtedness)
   (but excluding Subordinated Debt)                                    $_______

F. Tangible Net Worth (line A minus line B minus line C minus line
   D minus line E)                                                      $_______

Is line F. equal to or greater than $_____?

   _________ No, not in compliance                  _________ Yes, in compliance


                                       3



II.  QUICK RATIO (Section 1A)

Required "Quick Ratio Threshhold": 1.00:1.00

Actual:

A. Aggregate value of the unrestricted cash and cash equivalents of
   Endocare and its Subsidiaries, on a consolidated basis              $ _______

B. Aggregate value of the net billed accounts receivable of Endocare
   and its Subsidiaries, on a consolidated basis                       $ _______

C. Aggregate value of the Investments with maturities of fewer than 12
   months of Endocare and it Subsidiaries, on a consolidated basis     $ _______

D. Quick Assets (the sum of lines A through C)                         $ _______

E. Current Liabilities, i.e., the portion of Total Liabilities
   (including all Indebtedness) of Endocare and its Subsidiaries, on
   a consolidated basis that matures within one (1) year               $ _______
   [remember that Total Liabilities is defined to exclude
   Subordinated Debt.]

F. Quick Ratio (line D divided by line E)                              $ _______

Is line F equal to or greater than 1.00:1:00?

     ________ No                                               ________ Yes


                                       4

EX-10.29

                                                                   Exhibit 10.29

                           COMMERCIALIZATION AGREEMENT

     THIS COMMERCIALIZATION AGREEMENT (this "Agreement") is executed and
delivered as of November 8, 2005 (the "Effective Date"), by and between
Endocare, Inc., a Delaware corporation ("Endocare"), and CryoDynamics, LLC, a
Michigan limited liability company ("CryoDynamics"). Each of Endocare and
CryoDynamics is referred to herein as a "Party," and, collectively, the
"Parties."

                                    RECITALS

     WHEREAS, Endocare and MediPhysics, LLC, a Michigan limited liability
company ("MediPhysics"), executed and delivered that certain Design and
Development Contract, dated as of March 28, 2005 (the "Development Contract");

     WHEREAS, following the execution and delivery of the Development Contract
MediPhysics assigned all of its rights and obligations under the Development
Contract (and all of its other assets and liabilities) to CryoDynamics;

     WHEREAS, the Development Contract set forth the intention of the Parties to
develop and commercialize medical applications based upon both Parties patents
and know how;

     WHEREAS, the parties desire to supersede and replace the Development
Contract with this Agreement; and

     WHEREAS, this Agreement sets forth the terms and conditions regarding the
commercialization of existing inventions that arose out of the Development
Contract and future inventions arising out of this Agreement.

     NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises contained herein, the receipt and sufficiency of which are hereby
acknowledged, the Parties hereby agree as follows:

                                    AGREEMENT

1. DEFINITIONS. The following capitalized terms shall have the meanings as
defined below:

     1.1 "AFFILIATE" shall mean any Person (whether now existing or hereafter
arising) which, directly or indirectly, controls, is controlled by or is under
common control with another Person (whether now existing or hereafter arising);
for purposes of the foregoing, "control," "controlled by" and "under common
control with" with respect to any Person shall mean the possession, directly or
indirectly, of the power (i) to vote 10% or more of the securities having
ordinary voting power for the election of directors of such Person, or (ii) to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities or by contract or otherwise.

     1.2 "CONFIDENTIAL INFORMATION" shall mean any and all information and
materials disclosed by one Party to another Party pursuant to this Agreement
(whether in writing or in oral,



graphic, electronic or any other form) that are marked or described as,
identified in writing as, or provided under circumstances indicating that such
information and materials are confidential or proprietary. Information or
materials shall not be considered Confidential Information to the extent such
information or materials can be shown to have been: (a) available to the public
prior to the date of disclosure to the other party or to have become available
to the public; (b) rightfully in possession of the other party prior to the date
of disclosure and not otherwise restricted as to disclosure; (c) independently
developed by the other Party without use of or reference to the Confidential
Information of the other Party; or (d) disclosed to other Party without
restriction by a third party who had a right to disclose and was not otherwise
under an obligation of confidence.

     1.3 "COPYRIGHTS" shall mean all copyrights, including, without limitation,
in and to works of authorship and all other rights corresponding thereto
throughout the world, whether published or unpublished, including, without
limitation, rights to prepare, reproduce, perform, display and distribute
copyrighted works and copies, compilations and derivative works thereof.

     1.4 "DEVELOPMENT INVENTION" shall have the meaning set forth in Section 3.1
below.

     1.5 "ENDOCARE EXISTING PRODUCT" any product that is in Endocare's existing
product line that is sold by Endocare, its (sub)licensees (other than
CryoDynamics) or their respective Affiliates and that incorporates, uses or
includes an Endocare Invention.

     1.6 "ENDOCARE INVENTION" shall have the meaning set forth in Section 3.2
below.

     1.7 "INTELLECTUAL PROPERTY RIGHTS" shall mean any and all rights in and to
intellectual property and intangible industrial property rights, including,
without limitation: (i) Patents, Trade Secrets, Copyrights and Trademarks; and
(ii) any rights similar, corresponding or equivalent to any of the foregoing
anywhere in the world.

     1.8 "NET CRYODYNAMICS REVENUES" shall mean all amounts received by
CryoDynamics from the (sub)licensing or commercialization of the Development
Inventions that were the subject of a notification letter approved by Endocare
pursuant to Section 4.3, but excluding amounts received to reimburse
CryoDynamics' cost to perform research, development or similar services, in
reimbursement of patent or other out-of-pocket expenses, or in consideration for
the purchase of any securities of CryoDynamics (at a price up to one hundred
percent (100%) of the then fair market value of such securities).

     1.9 "NET ENDOCARE REVENUES" shall mean:

          (A) all amounts received by Endocare from the (sub)licensing of
Development Inventions (other than royalties received from CryoDynamics for Net
CryoDynamics Revenues), but excluding amounts received to reimburse Endocare's
cost to perform research, development or similar services, in reimbursement of
patent or other out-of-pocket expenses, or in consideration for the purchase of
any securities of Endocare (at a price up to one hundred percent (100%) of the
then fair market value of such securities).

          (B) Five percent (5%) of all amounts received by Endocare for the
sales of products sold by Endocare that are solely based upon a Development
Invention less (i) credits,


                                       2



allowances, discounts and rebates to, and chargebacks from the account of, such
customers for damaged and returned products; (ii) freight and insurance costs
incurred in transporting such products to customers; (iii) cash, quantity and
trade discounts, rebates and other price reductions for such products given to
such customers under price reduction programs that are consistent with industry
practices; (iv) sales, use, value-added and other direct taxes incurred on the
sale of products to customers; and (v) customs duties, surcharges and other
governmental charges incurred in exporting or importing such products to
customers. To the extent Endocare incorporates a Development Invention into an
Endocare Existing Product, CryoDynamics will be compensated based upon Section
5.2.

     1.10 "NITROGEN SYSTEM AND APPARATUS" shall mean the nitrogen system that is
developed, modified and/or improved by CryoDynamics pursuant to the Development
Contract and/or this Agreement.

     1.11 "PATENTS" shall mean all United States and foreign patents and utility
models and applications therefore and all reissues, divisions, re-examinations,
renewals, extensions, provisionals, continuations and continuations-in-part
thereof, and equivalent or similar rights anywhere in the world in inventions
and discoveries.

     1.12 "PERSON" shall include any individual and any corporation, limited
liability company, limited or general partnership or other entity.

     1.13 "PRE-EXISTING TECHNOLOGY" shall mean all technology in or to the
Nitrogen System and Apparatus (other than Development Inventions) that are
reasonably necessary for Endocare to use, access or incorporate in order to
exercise its rights under this Agreement with respect to the research,
development, making, using, offering for sale or importing of Endocare Existing
Products or Development Inventions.

     1.14 "TRADEMARKS" shall mean any and all trademarks, service marks, logos,
trade names, corporate names, Internet domain names and addresses and
general-use e-mail addresses, and all goodwill associated therewith throughout
the world.

     1.15 "TRADE SECRETS" shall mean all trade secrets under applicable law and
other rights in know-how and confidential or proprietary information,
processing, manufacturing or marketing information, including, without
limitation, new developments, inventions, processes, ideas or other proprietary
information that provide a Person with advantages over competitors who do not
know or use such information and documentation thereof (including, without
limitation, related papers, blueprints, drawings, chemical compositions,
formulae, diaries, notebooks, specifications, designs, methods of manufacture
and data processing software, compilations of information) and all claims and
rights related thereto.

2. PROJECTS.

     2.1 NITROGEN SYSTEM AND APPARATUS. CryoDynamics will design and develop a
Nitrogen System and Apparatus, using CryoDynamics' technology. CryoDynamics will
provide Endocare with one or more prototypes of the Nitrogen System and
Apparatus and documentation and information sufficient to enable Endocare to
evaluate and perform developmental testing on the Nitrogen System and Apparatus.


                                       3



          (A) DELIVERY. CryoDynamics will use its best efforts to deliver the
Nitrogen System and Apparatus to Endocare. CryoDynamics will deliver the
Nitrogen System and Apparatus to Endocare at Endocare's Irvine, California
facility.

          (B) DEVELOPMENT TESTING. Endocare will have the right to evaluate and
test the Nitrogen System and Apparatus. CryoDynamics will provide technical
support to Endocare during Endocare's evaluation and testing of the Nitrogen
System and Apparatus.

     2.2 DEVELOPMENT OF ENHANCEMENTS TO ENDOCARE EXISTING PRODUCTS OR
TECHNOLOGY. CryoDynamics will provide developmental assistance on the Endocare
Existing Products. CryoDynamics will apply its Intellectual Property, as was set
forth on Exhibit B to the Development Contract, to accomplish these enhancements
of the Endocare product line.

3. INVENTIONS. The parties acknowledge and agree that:

     3.1 DEVELOPMENT INVENTIONS. Except as set forth in Section 3.2, below, the
Parties jointly own all right, title and interest in and to all inventions,
discoveries, compositions, enhancements, technologies, data or information
(whether or not patentable) made or conceived by CryoDynamics in the performance
of, and during the term of, the Development Contract or this Agreement
(collectively, the "DEVELOPMENT INVENTIONS").

     3.2 ENDOCARE INVENTIONS. Endocare solely owns all right, title and interest
in and to all inventions, discoveries, compositions, enhancements, technologies,
data or information (whether or not patentable) in each case that are related to
Endocare's current product line and that are made or conceived by CryoDynamics
in the performance of, and during the term of, the Development Contract or this
Agreement (collectively, the "ENDOCARE INVENTIONS"). CryoDynamics hereby sells,
assigns and transfers to Endocare all of CryoDynamics' right, title and interest
therein and thereto.

     3.3 ONGOING RESEARCH AND DEVELOPMENT. CryoDynamics and Endocare desire to
conduct further research and development of the Nitrogen System and Apparatus to
demonstrate that the technology can be used as the basis for commercial products
in the medical field to provide clinical benefits to patients. To assist
CryoDynamics in its continued research and development efforts, Endocare will
advance CryoDynamics $42,500 per month beginning October 1, 2005. This monthly
advance by Endocare will continue until such time as either Endocare or
CryoDynamics enters into a license agreement based upon the Nitrogen Systems and
Apparatus with an independent third party that results in CryoDynamics receiving
an amount sufficient to repay any funds advanced by Endocare and fund their
monthly operating expenses of $42,500.

4. LICENSE GRANTS.

     4.1 TO ENDOCARE. Subject to the terms and conditions of this Agreement,
CryoDynamics hereby grants to Endocare under all of CryoDynamics' Intellectual
Property Rights an exclusive, worldwide license (with the right to sublicense)
to research, develop, make, use, sell, offer for sale, import or practice the
Development Inventions and Pre-Existing Technology in all medical fields of use.


                                       4



     4.2 TO CRYODYNAMICS. Subject to the terms and conditions of this Agreement,
with respect to those Development Inventions that were the subject of a
notification letter approved by Endocare pursuant to Section 4.3, Endocare
hereby grants to CryoDynamics under all of Endocare's Intellectual Property
Rights an exclusive, worldwide license (with the right to sublicense) to
research, develop, make, use, sell, offer for sale, import or practice such
Development Invention in the field of use specified in such notification letter.

     4.3 OPPORTUNITIES. During the term of this Agreement, if CryoDynamics
provides to Endocare a notification letter that sets forth a proposed business
opportunity involving a Development Invention in a field of use and Endocare
notifies CryoDynamics in writing that Endocare does not desire to commercialize
such opportunity, then (a) CryoDynamics shall have the right to commercialize
such opportunity, subject to the payment of royalties set forth below, and (b)
Endocare shall grant to CryoDynamics the license set forth in Section 4.2 above
with respect to the applicable Development Invention and field of use.
Notwithstanding the foregoing, CryoDynamics acknowledges and agrees that
Endocare shall not be obligated to participate, carry on, authorize, assist or
finance CryoDynamics in any way with respect to any such opportunity that
Endocare has notified CryoDynamics that Endocare does not desire to
commercialize such opportunity. In those situations in which Endocare provides
written notification to CryoDynamics that it does not desire to commercialize a
particular business opportunity, CryoDynamics will pay Endocare twenty-five
percent (25%) of all amounts received by CryoDynamics from the (sub)licensing
related to the specific opportunity. Furthermore, should the situation arise in
which CryoDynamics deems it to be in their best interest to commercialize a
particular opportunity that Endocare has declined to commercialize, the parties
agree that CryoDynamics will pay Endocare twenty-five percent (25%) of five
percent (5%) of all amounts received by CryoDynamics on a basis consistent with
section 1.9(b).

5. FINANCIAL CONSIDERATIONS.

     5.1 DEVELOPMENT INVENTION ROYALTIES. The Parties agree that all royalties
or license fees related to one parties commercialization of a Development
Invention will be handled on the following basis:

          (A) First, all amounts paid/advanced by either Party (including
without limitation, any and all funds advanced to CryoDynamics by Endocare for
development work, patent legal costs and other such expenses of CryoDynamics)
will be reimbursed to such Party from any revenues received by a Party for the
licensing or commercialization of a Development Invention before calculating the
Net CryoDynamics Revenues or Net Endocare Revenues (as applicable).

          (B) Second, an amount will be paid to each of the Parties, from any
revenues received by a Party for the licensing or commercialization of a
Development Invention before calculating the Net CryoDynamics Revenues or Net
Endocare Revenues (as applicable), to reimburse each of them at a reasonable,
mutually agreed upon rate for any services required under this Agreement that
has not been advanced/paid for separately in the agreement.

          (C) Finally, Endocare shall pay to CryoDynamics twenty-five percent
(25%) of remaining Net Endocare Revenues and CryoDynamics shall pay to Endocare
seventy-five


                                       5



percent (75%) of remaining Net CryoDynamics Revenues, subject to Section 4.3,
such that the seventy-five percent (75%) refers only to situations in which
CryoDynamics has taken the lead on licensing agreements in a field of use
specified as an area of interest by Endocare.

     5.2 ENDOCARE EXISTING PRODUCTS. For any Endocare Existing Products that a
Development Invention is incorporated by Endocare, Endocare will pay to
CryoDynamics five percent (5%) of (i) the net reduction in the total costs of
the materials used to manufacture the product associated with the Develop
Invention, less any increase in labor costs, if any, less (ii) reimbursement to
Endocare by CryoDynamics for any payments made by Endocare to CryoDynamics
during the development of the Development Invention, if any, that has not been
separately reimbursed pursuant to Section 5.1 above ("Net Endocare Existing
Products Revenue"). Should the situation arise that Endocare wants to implement
a Development Invention, but there is no cost savings, the Parties will mutually
agree upon an appropriate payment to CryoDynamics.

     5.3 PAYMENT REPORTS.

          (A) Within sixty (60) days after the end of each calendar quarter
during the term of this Agreement, and within sixty (60) days following the
expiration or termination of this Agreement, Endocare shall furnish to
CryoDynamics a written report showing in reasonably specific detail all Net
Endocare Revenues and Net Endocare Existing Product Revenues and the calculation
of the royalties, if any, that shall have accrued based upon such amounts.

          (B) Within sixty (60) days after the end of each calendar quarter
during the term of this Agreement, and within sixty (60) days following the
expiration or termination of this Agreement, CryoDynamics shall furnish to
Endocare a written report showing in reasonably specific detail all Net
CryoDynamics Revenues and the calculation of the royalties, if any, that shall
have accrued based upon such amounts.

          (C) With respect to amounts received in a currency other than United
States dollars, all such amounts shall be expressed both in the currency in
which such amounts were received and in the United States dollar equivalent. The
United States dollar equivalent shall be calculated using the average of the
exchange rate (local currency per US$1) published in The Wall Street Journal,
Western Edition, under the heading "Currency Trading" on the last business day
of each month during the applicable calendar quarter.

          (D) Each party shall keep complete and accurate records in sufficient
detail to enable the amounts payable hereunder to be determined.

          5.4 AUDITS.

          (A) Upon the written request of a party (the "Payee") and not more
than once in each calendar year, the other party (the "Payor") shall permit an
independent certified public accounting firm of nationally recognized standing,
selected by the Payee and reasonably acceptable to the Payor, at the Payee's
expense, to have access during normal business hours to such of the records of
the Payor as may be reasonably necessary to verify the accuracy of the payment
reports hereunder for the eight (8) calendar quarters immediately prior to the
date of


                                       6



such request (other than records for which the Payee has already conducted an
audit under this Section).

          (B) If such accounting firm concludes that additional amounts were
owed during the audited period, the Payor shall pay such additional amounts
within thirty (30) days of the date the Payee delivers to the Payor such
accounting firm's written report so concluding. The fees charged by such
accounting firm shall be paid by the Payee; provided, however, if the audit
discloses that the royalties payable by the Payor for such period are more than
one hundred ten percent (110%) of the royalties actually paid for such period,
then the Payor shall pay the reasonable fees and expenses charged by such
accounting firm.

          (C) The Payee shall cause its accounting firm to retain all financial
information subject to review under this Section 5.2 in strict confidence;
provided, however, that the Payor shall have the right to require that such
accounting firm, prior to conducting such audit, enter into an appropriate
non-disclosure agreement with the Payor regarding such financial information.
The accounting firm shall disclose to the Payee only whether the reports are
correct or not and the amount of any discrepancy. No other information shall be
shared. The Payee shall treat all such financial information as Payor's
Confidential Information.

     5.5 PAYMENT TERMS. All amounts shown to have accrued by each payment report
provided for under Section 5.2 above shall be payable on the date such payment
report is due. Payment of amounts in whole or in part may be made in advance of
such due date.

     5.6 PAYMENT METHOD. All payments by the Payor to the Payee under this
Agreement shall be paid in United States dollars and all such payments shall be
originated from a United States bank located in the United States and made by
bank wire transfer in immediately available funds to such account as the Payee
shall designate before such payment is due.

     5.7 EXCHANGE CONTROL. If at any time legal restrictions prevent the prompt
remittance of part or all royalties with respect to any country where amounts
are received by the Payor, the Payor shall have the right, at its option, to
make such payments by depositing the amount thereof in local currency to the
Payee's account in a bank or other depository in such country. If the royalty
rate specified in this Agreement should exceed the permissible rate established
in any country, the royalty rate for sales in such country shall be adjusted to
the highest legally permissible or government-approved rate.

     5.8 WITHHOLDING TAXES. The Payor shall be entitled to deduct the amount of
any withholding taxes, value-added taxes or other taxes, levies or charges with
respect to such amounts, other than United States taxes, payable by the Payor,
or any taxes required to be withheld by the Payor, to the extent the Payor pays
to the appropriate governmental authority on behalf of the Payee such taxes,
levies or charges. The Payor shall use reasonable efforts to minimize any such
taxes, levies or charges required to be withheld on behalf of the Payee by the
Payor. The Payor promptly shall deliver to the Payee proof of payment of all
such taxes, levies and other charges, together with copies of all communications
from or with such governmental authority with respect thereto.


                                       7



6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF CRYODYNAMICS; INDEMNIFICATION.

     6.1 PRODUCTS AND SERVICES. CryoDynamics represents, warrants and covenants
that: (a) CryoDynamics shall comply with all applicable laws and regulations
with respect to its performance under this Agreement; (b) the Nitrogen System
and Apparatus delivered to Endocare hereunder shall be satisfactory for the
purposes of developmental testing; and (c) any services performed hereunder
shall be performed in a professional and competent manner.

     6.2 INTELLECTUAL PROPERTY RIGHTS OF OTHERS. In connection with its
performance of this Agreement, neither party infringe or otherwise violate any
third party's intellectual property rights, nor shall either Party and shall not
directly or indirectly cause the other to do so. The indemnification provisions
contained in the following section apply to these obligations.

     6.3 INDEMNIFICATION.

          (A) CryoDynamics shall indemnify, defend and hold harmless, Endocare
and its Affiliates, and their respective officers, directors, employees,
consultants, customers, successors and assigns, from and against any and all
claims of third parties for losses, liabilities, costs, damages, claims, fines,
penalties and expenses (including, without limitation, costs of defense or
settlement and reasonable attorneys', consultants' and experts' fees) that arise
out of or result from: (a) injuries or death to persons or damage to property,
in any way arising out of or caused or alleged to have been caused by the work
or services performed by, or the Nitrogen System and Apparatus provided by,
CryoDynamics before the date of delivery of the Nitrogen System and Apparatus to
Endocare; (b) assertions under workers' compensation or similar acts made by
persons employed by or otherwise associated with CryoDynamics; (c) any breach of
any representation, warranty or covenant by CryoDynamics or failure of
CryoDynamics to perform any of its obligations under this Agreement; or (d)
violation of any applicable law or regulation in any way arising out of or
caused or alleged to have been caused by CryoDynamics' work or services under
this Contract or by the Nitrogen System and Apparatus provided by CryoDynamics.

          (B) Endocare shall indemnify, defend and hold harmless, CryoDynamics
and its Affiliates, and their respective officers, directors, employees,
consultants, customers, successors and assigns, from and against any and all
claims of third parties for losses, liabilities, costs, damages, claims, fines,
penalties and expenses (including, without limitation, costs of defense or
settlement and reasonable attorneys', consultants' and experts' fees) that arise
out of or result from: (a) injuries or death to persons or damage to property,
in any way arising out of or caused or alleged to have been caused by the work
or services performed by, or the Nitrogen System and Apparatus provided by,
CryoDynamics after the date of delivery of the Nitrogen System and Apparatus to
Endocare; (b) assertions under workers' compensation or similar acts made by
persons employed by or otherwise associated with Endocare; (c) any breach of any
representation, warranty or covenant by Endocare or failure of Endocare to
perform any of its obligations under this Agreement; or (d) violation of any
applicable law or regulation in any way arising out of or caused or alleged to
have been caused by Endocare's developmental testing of the Nitrogen System and
Apparatus provided by CryoDynamics.


                                       8



7. RIGHT OF FIRST REFUSAL. During the term of this Agreement, should
CryoDynamics intend to accept an offer from any potential buyer for the sale of
all or part of CryoDynamics' business (whether by asset sale, merger,
reorganization, change of control, operation of law or otherwise) (a "Third
Party Offer"), CryoDynamics shall first notify Endocare in writing and provide
to Endocare a written copy of the terms and conditions of such Third Party
Offer. For a period of sixty (60) days following the receipt of such notice and
a copy of such Third Party Offer (the "Review Period"), Endocare shall have the
right to acquire CryoDynamics on substantially the same terms and conditions set
forth in such Third Party Offer. If, during such sixty (60) days, the applicable
third party alters the terms of the applicable Third Party Offer in a negative
manner (with respect to CryoDynamics), then CryoDynamics shall provide Endocare
with a written copy of such revised Third Party Offer, and (i) Endocare shall
have the right to acquire CryoDynamics on substantially the same terms and
conditions set forth in such revised Third Party Offer, and (ii) the Review
Period for such revised Third Party Offer shall be extended by an additional
thirty (30) days.

8. TERM AND TERMINATION.

     8.1 TERM. The term of this Agreement shall commence on the Effective Date
and shall continue until the later of (a) December 31, 2015, and (b) the parties
obligations to pay royalties pursuant to Section 5 above, or until terminated
pursuant to Section 8.2.

     8.2 TERMINATION FOR BREACH, ETC. Either Party may terminate this Agreement
in the event that: (a) the other Party breaches any provision of this Agreement
and such breach continues for a period of thirty (30) days following the receipt
by the breaching Party of written notice of such breach; or (b) the other Party
becomes insolvent, is adjudicated bankrupt, voluntarily or involuntarily files a
petition for bankruptcy, makes an assignment for the benefit of creditors, seeks
any other similar relief under any bankruptcy law or related statues or
otherwise becomes financially incapable of performing its obligations in
accordance with the terms of this Agreement, and such judgment, assignment or
incapacity is not revoked within sixty (60) days.

9. CONFIDENTIALITY.

     9.1 RESTRICTIONS ON DISCLOSURE AND USE OF CONFIDENTIAL INFORMATION. Neither
Party shall use the Confidential Information of the other Party except for the
purpose of performing its obligations under this Agreement. Each party shall
maintain the Confidential Information of the other Party with at least the same
degree of care it uses to protect its own confidential information of a similar
nature or sensitivity, but no less than reasonable care under the circumstances.
Unless a Party grants specific, written, advance permission to do so, the other
Party shall not disclose any Confidential Information to any third party except
as provided in Section 9.2. Each Party shall limit access to the Confidential
Information of other Party to their employees and independent contractors who
have a need to know such information in order to perform the Party's obligations
and exercise its rights under this Agreement and who are bound by
confidentiality and non-use obligations to the Party at least equivalent to the
Party's obligations to the other Party under this Agreement.


                                       9



     9.2 EXCEPTIONS. Either Party may disclose Confidential Information of the
other Party to the extent required by Law or order of a court of competent
jurisdiction, provided that, in such event, the disclosing party shall provide
the other party prompt, advance written notice of such requirement.

     9.3 RETURN OF CONFIDENTIAL INFORMATION. Upon any termination of this
Agreement both Parties shall return or destroy all Confidential Information of
Discloser and any copies thereof.

     9.4 NO PUBLIC STATEMENTS. CryoDynamics will not issue any press release or
otherwise make any public statements with respect to the transactions
contemplated by this Agreement without the prior written consent of Endocare,
except as may be required by applicable law.

10. MISCELLANEOUS.

     10.1 ASSIGNMENT. Neither Party shall assign, transfer, delegate or
otherwise dispose of, any rights or obligations under this Agreement without the
prior written consent of the other Party; provided, however, that the foregoing
limitation shall not apply to any acquisition involving a Party (whether
structured as a merger or sale of stock or assets) or to an assignment by
CryoDynamics to another limited liability company composed of the same members
as CryoDynamics. Except as provided herein, any purported assignment, transfer,
delegation or other disposition by either Party shall be null and void. Subject
to the foregoing, this Agreement shall be binding upon and shall inure to the
benefit of the Parties and their respective successors and permitted assigns.

     10.2 GOVERNING LAW; JURISDICTION AND VENUE. This Agreement is to be
construed in accordance with and governed by the laws of the State of California
without giving effect to any choice of law rule that would cause the application
of the laws of any jurisdiction other than the laws of the State of California
to the rights and duties of the Parties. The exclusive jurisdiction and venue
for any dispute arising out of this Agreement shall be (1) in the federal or
state courts located in Irvine, California, if CryoDynamics institutes the
action, or (2) in the federal or state courts located in Detroit, Michigan, if
Endocare institutes the action.

     10.3 FURTHER ASSURANCES. At any time or from time to time on and after the
date of this Agreement, CryoDynamics shall, at the request of Endocare, promptly
(a) deliver to Endocare such records, data or other documents consistent with
the provisions of this Agreement, (b) execute and deliver or cause to be
delivered all such assignments, consents, documents or further instruments of
transfer or license, and (c) take or cause to be taken all such other actions as
Endocare may reasonably deem necessary or desirable in order for Endocare to
obtain the full benefits of this Agreement and the transactions contemplated
hereby.

     10.4 NON-WAIVER. Failure by any Party to insist upon strict performance of
any of the terms and conditions hereof, or delay in exercising any rights or
remedies provided herein, shall not release the other Party from any of the
obligations of this Agreement and shall not be deemed a waiver of any rights of
any Party to insist upon strict performance thereof.


                                       10



     10.5 ATTORNEYS' FEES. In the event either Party brings legal action to
enforce any provision herein, the prevailing Party shall be entitled to collect
from the losing Party reasonable attorneys' fees and costs incurred.

     10.6 ENTIRE AGREEMENT AND MODIFICATION. No other agreement or
understanding, including the Development Contract which is hereby expressly
superseded and replaced, in any way modifying these terms and conditions, either
before or after the execution hereof, shall be binding upon either Party unless
in writing and signed by all of the Parties. This Agreement constitutes the
entire Agreement between the Parties. In the event of any conflict between the
terms and conditions of this Agreement and those of any purchase order or any
other document, the terms and conditions of this Agreement shall control.

     10.7 STATUS OF THE PARTIES. Each Party hereby represents and warrants that
it is engaged in an independent business and shall perform its obligations under
this Agreement as an independent contractor and not as an agent or employee of
or a joint venturer of the other Party; that the Persons performing the services
hereunder on behalf of such Party are not agents or employees of the other
Party; that it has and hereby retains, except as set forth herein, the right to
exercise full control with respect to the means of its performance hereunder and
full control over the employment, direction, compensation and discharge of all
employees, agents and subcontractors assisting in such performance; that it
shall be solely responsible for all matters relating to payment of such
employees, including compliance with worker's compensation, unemployment and
disability insurance, social security withholding, and all such matters; and
that it shall be responsible for its acts and the acts of all agents, employees
and contractors employed by it during its performance under this Agreement.

     10.8 SEVERABILITY. If any one or more of the provisions contained in this
Agreement shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
any other provision hereof, and this Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.

     10.9 NOTICE. All notices required hereunder shall be in writing and shall
be sent by a recognized courier service (e.g., UPS, DHL, Federal Express) or
certified mail, with all postage or delivery charges prepaid, and shall be
addressed to the Parties at their addresses set forth on the signature page of
this Agreement or to such other address (es) as may be furnished by written
notice in the manner set forth herein. Notice is effective upon receipt.

     10.10 HEADINGS. The headings of the Sections in this Agreement are for
convenience only and shall not be deemed to affect, qualify, simplify, add to or
subtract from the contents of the clauses that they reference.

     10.11 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.

     IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed by its duly authorized representative.


                                       11



ENDOCARE, INC.                          CRYODYNAMICS, LLC


By: /s/ William J. Nydam                By: /s/ Peter J. Littrup, M.D.
    ---------------------------------       ------------------------------------
Name: William Nydam                     Name: Peter J. Littrup, M.D.
Title: President/COO                    Title: Managing Partner

Address for Notices:                    Address for Notices:

201 Technology Drive                    951 Timberlake
Irvine, California  92618               Bloomfield Hills, MI 48302
Attention: Jay Eum                      Attention: Peter J. Littrup


                                       12

EX-10.30

                                                                   Exhibit 10.30

           CONFIDENTIAL MUTUAL SETTLEMENT AGREEMENT AND POLICY RELEASE

        This Confidential Mutual Settlement Agreement and Policy Release
("AGREEMENT") is entered into by and between Liberty Mutual Insurance Company
("LIBERTY"), on the one hand, and Endocare, Inc. ("ENDOCARE") on its own behalf
and on behalf of its indemnified directors and officers, John Cracchiolo, Paul
Mikus and Kevin Quilty (collectively, the "ENDOCARE INSUREDS"), on the other
hand. LIBERTY and the ENDOCARE INSUREDS are sometimes referred to herein
individually as the "PARTY," and collectively as the "PARTIES."

                                    RECITALS

        A. WHEREAS, ENDOCARE was issued an Excess Directors and Officers
Liability insurance policy by LIBERTY, policy number 190222-012 (the "POLICY);
and,

        B. WHEREAS, pursuant to its terms and conditions the POLICY provided
first layer excess coverage to the ENDOCARE INSUREDS subject to an aggregate
limit of liability of Five Million Dollars ($5,000,000) in excess of (a) a Five
Million Dollars ($5,000,000) primary insurance policy issued by National Union
Fire Insurance Company of Pittsburgh, Pa. ("NATIONAL UNION") Number 511-72-42
(the "PRIMARY POLICY"); and,

        C. WHEREAS, the ENDOCARE INSUREDS were named or targeted in various
investigations, proceedings, arbitrations and lawsuits arising out of, based
upon or attributable to ENDOCARE's revenue recognition policies and restatements
of 2000, 2001 and 2002 financial statements, some of which are continuing as of
the date of this AGREEMENT, including without limitation the following:

        1.      the various shareholder litigation commenced against the
                Respondents, including, but not limited to, a consolidated class
                action entitled, In re Endocare, Inc. Securities Litigation,
                United States District Court for the Central District of
                California, Civil Action No. 02-CV-8429, and a derivative
                lawsuit entitled, Venables v. Mikus, etc., et al., Orange County
                (Cal.) Superior Court, Case No. 02 CC 0036 (collectively, the
                "SHAREHOLDER LITIGATION"); and,

        2.      the various regulatory investigations presently being conducted
                with respect to ENDOCARE by the Securities and Exchange
                Commission and the Department of Justice (collectively, the
                "REGULATORY INVESTIGATIONS");

(collectively, the "REPORTED MATTERS").

        D. WHEREAS, the INSUREDS tendered the REPORTED MATTERS to LIBERTY for



coverage under the POLICY, with LIBERTY initially reserving all rights and
defenses including, without limitation, the right to assert rescission of the
POLICY;

        E. WHEREAS, the parties to the SHAREHOLDER LITIGATION settled for the
sum of Eight Million Nine Hundred Fifty Thousand Dollars ($8,950,000) (the
"UNDERLYING SETTLEMENT AMOUNT"), with the INSUREDS requesting that all of their
directors and officers liability insurers, including LIBERTY, consent and/or
contribute to the UNDERLYING SETTLEMENT AMOUNT;

        F. WHEREAS, ENDOCARE has tentatively settled one or more of the
REGULATORY INVESTIGATIONS without the consent of LIBERTY;

        G. WHEREAS, the ENDOCARE INSUREDS incurred costs and expenses in
connection with the defense and settlement of the REPORTED MATTERS ("DEFENSE
COSTS"), with the INSUREDS requesting that NATIONAL UNION and LIBERTY consent
and pay the DEFENSE COSTS incurred;

        H. WHEREAS, LIBRTY subsequently denied coverage under its POLICY for any
of the REPORTED MATTERSE, rescinded the POLICY, and in compliance with the
POLICY's Alternative Dispute Resolution provisions, initiated binding
arbitration proceedings against the ENDOCARE INSUREDS before the American
Arbitration Association, captioned as Liberty Mutual Insurance Company, et al.
v. Endocare, Inc., et al., case number 74 195 00402 04 SAT (the "RESCISSION
ARBITRATION");

        I. WHEREAS, the INSUREDS filed a cross-claim against LIBERTY in the
RESCISSION ARBITRATION alleging claims for breach of contract and breach of the
implied covenant of good faith and fair dealing;

        J. WHEREAS, the entire NATIONAL UNION primary policy's limit of
liability has been exhausted by the payment of DEFENSE COSTS and of a portion of
the UNDERLYING SETTLEMENT AMOUNT;

        K. WHEREAS, LIBERTY paid the POLICY'S entire $5,000,000 limit of
liability towards the UNDERLYING SETTLEMENT AMOUNT under a full reservation of
rights, including the right to recoup, while proceeding with the RESCISSION
ARBITRATION; and,

        L. WHEREAS, the PARTIES now wish to compromise, settle and resolve all
disputes, claims, potential claims, actions, suits, demands, causes of action,
debts, liabilities, agreements, contracts or promises between them arising out
of or relating to the POLICY and the RESCISSION


                                       2



ARBITRATION on the terms set forth in this AGREEMENT.

                                    AGREEMENT

        NOW, THEREFORE, in consideration of the mutual promises herein
exchanged, and for good and valuable consideration, the sufficiency and receipt
of which is hereby acknowledged, intending to be legally bound hereby, the
PARTIES agree as follows:

        1. Within ten (10) calendar days of the execution of this AGREEMENT,
ENDOCARE will pay to LIBERTY the sum of One Million Dollars ($1,000,000), in
partial reimbursement of the amount paid by LIBERTY towards the UNDERLYING
SETTLEMENT AMOUNT (the "SETTLEMENT AMOUNT"). Within ten (10) calendar days of
ENDOCARE's payment, the PARTIES will jointly dismiss the RESCISSION ARBITRATION,
including all cross-claims, in its entirety and with prejudice.

        2. In consideration of ENDOCARE's payment of the SETTLEMENT AMOUNT and
the mutual release set forth herein, LIBERTY, on the one hand, and the ENDOCARE
INSUREDS, on the other hand, forever release, discharge, and acquit each other
and each of their respective present and former directors, partners, principals,
officers, employees, agents, trustees, attorneys, reinsurers, parents,
subsidiaries, affiliates, divisions, representatives, predecessors, heirs,
executors, administrators, successors and assigns, from any and all rights,
demands, claims, potential claims, suits, debts, obligations, actions, and
causes of action of whatever nature, character, or description, which have been
or could be or could have been asserted or brought against each other, in any
way related to or connected with:

        (a)     the REPORTED MATTERS and the subject matter of each such
                REPORTED MATTER;

        (b)     any claim made against the ENDOCARE INSUREDS after the June 10,
                2002, effective date of the POLICY;

        (c)     any fees or costs billed by any attorney and/or consultant on
                behalf of the ENDOCARE INSUREDS in connection with the REPORTED
                MATTERS, the RESCISSION ARBITRATION and/or any claim made
                against the ENDOCARE INSUREDS after the June 10, 2002, effective
                date of the POLICY;

        (d)     the RESCISSION ARBITRATION, including all cross-claims, and the
                subject matter of the RESCISSION ARBITRATION, inclusive of all
                cross-claims;

        (e)     LIBERTY's coverage position(s) in connection with the REPORTED
                MATTERS, any claim made against the ENDOCARE INSUREDS after the
                June


                                       3



                10, 2002, effective date of the POLICY, including all claims of
                entitlement to recoupment of policy proceeds;

        (f)     the INSURED's demands for payment of DEFENSE COSTS; and,

        (g)     the POLICY, including but not limited to all claims for bad
                faith or other violations under any statute, common law claims
                for bad faith insurance practices or breach of the implied
                covenant of good faith and fair dealing,

(collectively, the "RELEASED MATTERS"); provided, however, that the foregoing
releases shall not become effective until the SETTLEMENT AMOUNT is paid in full
and the RESCISSION ARBITRATION has been dismissed in its entirety and with
prejudice.

        3. Payment of the SETTLEMENT AMOUNT by ENDOCARE shall be in compromise
and in full settlement of any and all claims of the ENDOCARE INSUREDS against
LIBERTY, as well as any and all claims of LIBERTY against the ENDOCARE INSUREDS,
relating to the RELEASED MATTERS, and shall result in the unconditional
surrender and release of the POLICY by the ENDOCARE INSUREDS.

        4. Except as set forth in paragraph 1 above, LIBERTY will not seek any
payment or reimbursement from the ENDOCARE INSUREDS of any additional amounts
spent in defense or settlement of the REPORTED MATTERS, and LIBERTY shall not be
responsible for any additional administrative fees or other costs and expenses
associated with the REPORTED MTTERS.

        5. ENDOCARE shall reimburse, defend, indemnify and hold LIBERTY
harmless, from and against any liability and all loss, costs, damages, expenses,
including attorneys' fees, LIBERTY, its present and former directors, partners,
principals, officers, employees, agents, trustees, attorneys, reinsurers,
parents, subsidiaries, affiliates, divisions, representatives, predecessors,
heirs, executors, administrators, successors and assigns, incur on account of or
for any and all demands, claims, potential claims, suits, debts, obligations,
actions, and causes of action of whatever nature, character, or description,
that are asserted or might be asserted by or on behalf of any third party or
parties, including any non-signatory insured, arising out of the POLICY or the
policy releases provided for herein, including, but not limited to, any claim
that the release of the POLICY was improper.

        6. The PARTIES acknowledge that this AGREEMENT constitutes a compromise
to terminate all controversy or claims or causes of action for damages of any
nature, known or unknown, suspected or unsuspected, accrued or unaccrued,
foreseen or unforeseen with respect to the RELEASED MATTERS, including those
claims with respect to the RELEASED MATTERS which the PARTIES do


                                       4



not know or suspect to exist in their favor at the time of execution of this
AGREEMENT but which, if known to them, might have affected their decisioi to
enter into this AGREEMENT, and to release the remaining PARTIES herein. The
PARTIES and their respective directors, partners, principals, officers,
trustees, attorneys, parents, subsidiaries, affiliates, divisions,
representatives, predecessors, heirs, executors, administrators, successors and
assigns, expressly waive any and all rights they may have under statute or
common law principle that would limit the effect of the foregoing releases to
those claims actually known or suspected to exist at the time of execution of
this AGREEMENT, including but not necessarily limited to, the provisions of
Section 1542 of the California Civil Code, whict provides as follows:

                A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
                DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE
                TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST
                HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.

        Each PARTY agrees to assume the risk of any and all unknown,
unanticipated or misunderstood defenses, claims, causes of action, contracts,
liabilities, indentures and obligations, and hereby waives, releases and forever
discharges all rights and benefits which such PARTY might otherwise have under
section 1542 of the California Civil Code regarding such unknown, unanticipated
or misunderstood defenses, claims, causes of action, contracts, liabilities,
indentures and obligations as to the matters released in this AGREEMENT.

        7. The releases and waivers set forth above shall not restrict, impinge
upon, or nullify any right or claim that the PARTIES have or may have in the
future because of, arising from, or attributable to any breach of the covenants
or warranties set forth in this AGREEMENT.

        8. It is understood and agreed that this AGREEMENT constitutes a
compromise and settlement, and is not intended, nor to be construed, as an
admission by any PARTY of liability as to the REPORTED MATTERS, nor of coverage
for the same under the POLICY. This AGREEMENT therefore shall not be taken or
used, nor be deemed admissible in evidence, in any action, cause of action or
proceeding, except to enforce the terms of this AGREEMENT.

        9. The PARTIES and their counsel agree to maintain the confidentiality
of the terms of this AGREEMENT and of the negotiations leading to this
AGREEMENT, except (and only) to the extent that such terms are required to be
disclosed for accounting, insurance (including reinsurance) or tax


                                       5



purposes, or for purposes of effecting a settlement of any of the REPORTED
MATTERS, or pursuant to regulatory obligations, an order of a court of competent
jurisdiction or other legal process. In the event that a formal request is made
to any PARTY to compel the dissemination of information regarding the terms and
conditions of this AGREEMENT, said PARTY shall promptly notify, in writing, all
other PARTIES of such request so as to afford the other PARTIES the ability (but
not the obligation) to object to and oppose the dissemination of such
information.

        10. This AGREEMENT is made and entered into for the sole protection and
benefit of the PARTIES, and no third parties shall be direct or indirect
beneficiaries of, or base any direct or indirect claim or cause of action in
connection with, this AGREEMENT, except that the releases set forth herein shall
inure to the benefit of and be enforceable by the respective released persons
described therein.

        11. Each PARTY represents and warrants that he and/or it has been
represented by, and consulted with, counsel of his and/or its own choosing
regarding the provisions, obligations, rights, risks and legal effects of this
AGREEMENT, that such PARTY voluntarily accepts the terms of this AGREEMENT, and
that such PARTY enters into this AGREEMENT without any inducement or
consideration other than that described herein.

        12. The PARTIES further acknowledge that after consulting with counsel
of their own choosing and after having performed due diligence with respect to
LIBERTY's rescission claims and alleged coverage defenses, each PARTY
acknowledges that the settlement reflected in this AGREEMENT is fair and in the
best interests of each PARTY and that each PARTY is receiving fair and
equivalent value for the payments, rights and other consideration which each
will surrender under this AGREEMENT.

        13. All payments and deliveries required under this AGREEMENT by the
PARTIES shall be made as specified herein and in no event shall any of the
payments described be made on account of an antecedent debt.

        14. Each person executing this AGREEMENT on behalf of a PARTY represents
and warrants that he or she is duly authorized and empowered to enter into this
AGREEMENT and has the authority and approval to bind the PARTY so represented to
the terms and representations of this AGREEMENT.

        15. This AGREEMENT and any uncertainty or ambiguity later discovered
herein shall not be construed against any one PARTY or several PARTIES but shall
be construed as if all the PARTIES jointly prepared this AGREEMENT.


                                       6



        16. In the event that any one or more of the provisions of this
AGREEMENT are deemed, for any reason, to be invalid, illegal or unenforceable,
such determination shall not affect any other provision of this AGREEMENT.

        17. This AGREEMENT and the POLICY constitutes the entire agreement
between the PARTIES regarding the subject matter hereof and supersedes all prior
oral and written agreements with respect to the matters provided for herein.

        18. Any claim to enforce this AGREEMENT and any dispute arising under
this AGREEMENT or the subject matter contained herein shall be submitted to
binding arbitration pursuant to the terms and conditions set forth in the
POLICY, which includes incorporation of the relevant arbitration provisions
contained in the PRIMARY POLICY.

        19. This AGREEMENT may be modified or terminated only by a written
agreement signed by all of the PARTIES.

        20. This AGREEMENT may be executed by facsimile and in any number of
counterparts, each of which, so executed, shall be deemed to be an original, and
such counterparts shall together constitute one and the same AGREEMENT.


                                       7



        IN WITNESS WHEREOF, the PARTIES have executed this AGREEMENT as of the
dates set forth below.

Date: 11/2/05                         ENDOCARE, INC.

(Signatures continue.)

                                      By:    /s/ William Nydam
                                             ----------------------------------
                                      Name:  William Nydam
                                      Title:

Date:  12/22/05                       /s/ John Cracchiolo
                                      ---------------------
                                      JOHN CRACCHIOLO

Date:  11/4/05                        /s/ Paul Mikus
                                      -----------------------
                                      PAUL MIKUS

Date:  11/8/05                        /s/ Kevin Quilty
                                      -----------------
                                      KEVIN QUILTY

Date:  11/3/05                        LIBERTY MUTUAL INSURANCE COMPANY

                                      By:    /s/ Alexander D. Rosati
                                             ----------------------------------
                                      Name:  Alexander D. Rosati
                                      Title: Claims Manager - FI/SPEC CAS CLAIMS


                                       8

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

      We consent to the incorporation by reference in the Registration Statements of Endocare, Inc. pertaining to the Endocare, Inc. 2004 Stock Incentive Plan, Option Grants to Craig T. Davenport Pursuant to Written Compensation Agreements, Option Grants to William J. Nydam Pursuant to Written Compensation Agreements, Option Grants to Michael R. Rodriguez Pursuant to Written Compensation Agreements and Option Grant to Katherine Greenberg Pursuant to Written Compensation Agreement (Form S-8 No. 333-119825), the Endocare, Inc. Amended and Restated 1995 Stock Plan, the Endocare, Inc. Amended and Restated 1995 Director Option Plan, the Endocare, Inc. 2002 Supplemental Stock Plan and Option Grant to John V. Cracchiolo Pursuant to Written Compensation Agreement (Form S-8 No. 333-121702), of our report dated March 8, 2006, with respect to the consolidated financial statements and schedule of Endocare, Inc., and our report dated March 8, 2006, with respect to Endocare, Inc.’s management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Endocare, Inc., as of December 31, 2005, included in this Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission.

/s/ Ernst & Young LLP

Los Angeles, California

March 13, 2006

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULES 13a-14 AND 15d-14

OF THE SECURITIES EXCHANGE ACT OF 1934

      I, Craig T. Davenport, certify that:

      1. I have reviewed this annual report on Form 10-K of Endocare, Inc.;

      2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

      3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

      4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

      (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

      (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

      (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

      (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

      5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

      (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

      (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Craig T. Davenport

Craig T. Davenport

Chief Executive Officer

(principal executive officer)

Date: March 16, 2006

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULES 13a-14 AND 15d-14

OF THE SECURITIES EXCHANGE ACT OF 1934

      I, Michael R. Rodriguez, certify that:

      1. I have reviewed this annual report on Form 10-K of Endocare, Inc.;

      2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

      3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

      4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

      (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

      (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

      (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

      (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

      5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

      (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

      (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Michael R. Rodriguez

Michael R. Rodriguez

Senior Vice President, Finance and

Chief Financial Officer

(principal accounting officer)

Date: March 16, 2006

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

      In connection with the periodic report of Endocare, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission (the “Report”), I, Craig T. Davenport, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

      (1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

      (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

      A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

      This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

/s/ Craig T. Davenport

Craig T. Davenport

Chief Executive Officer

(Principal Executive Officer)

Date: March 16, 2006

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

      In connection with the periodic report of Endocare, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission (the “Report”), I, Michael R. Rodriguez, Senior Vice President, Finance and Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

      (1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

      (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

      A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

      This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

/s/ Michael R. Rodriguez

Michael R. Rodriguez

Senior Vice President, Finance and

Chief Financial Officer

(Principal Financial Officer)

Date: March 16, 2006