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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

COMMISSION FILE NUMBER: 000-27212

Endocare, Inc.

201 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92618

(949) 450-5400

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

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

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

      Yes þ     No o

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

Form 10-Q, Quarter Ended June 30, 2004

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PART I — FINANCIAL INFORMATION

ENDOCARE, INC. AND SUBSIDIARIES

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

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ENDOCARE, INC. AND SUBSIDIARIES

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

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ENDOCARE, INC. AND SUBSIDIARIES

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

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ENDOCARE, INC.

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

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

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

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

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

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

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

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

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

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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