**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

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**FORM 10-KSB**
| **(Mark One)**                                                                                                                                                                                                                                                                                                                                                                                                              |
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| **x**                                                                                                                                                                                                                                                                                                                                                                                                                       | **ANNUAL REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** |
| **For the  Fiscal Year Ended June 30, 2006**                                                                                                                                                                                                                                                                                                                                                                                |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                  |   |
| **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 0-50442**

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**MEDICOR LTD.******(Name ofSmall Business Issuer in Its Charter) 
| **Delaware**(State or Other Jurisdiction  of Incorporation or Organization)          |   | **14-1871462**(I.R.S. Employer  Identification No.) |
|--------------------------------------------------------------------------------------|--------|-----------------------------------------------------|
| **4560 S. Decatur Blvd.  Las Vegas, Nevada**(Address of Principal Executive Offices) |   | **89103**(Zip Code)                                 |
| **(702) 932-4560**(Issuer’s Telephone Number, Including Area Code)         |

**Securities registered under Section 12(b) of theExchange Act:**None

**Securities registered under Section 12(g) of theExchange Act:**Common Stock, Par value $0.001 per share

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Check whether the issuer:  (1)  filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x   No o

Check if there is no disclosure ofdelinquent filers in response to Item 405 of Regulation S-B contained inthis form, and no disclosure will be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to thisForm 10-KSB. o

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

The issuer’s revenues for the mostrecent fiscal year: $31,364,242

The aggregate market value of votingand non-voting common equity held by non-affiliates as of September 22, 2006was approximately $26,847,312, based on the average bid and asked prices on theOTC Bulletin Board on that date.

On September 26, 2006, there were23,746,162 shares of common stock outstanding.

Transitional Small Business Disclosure Format (Check one) Yes o   No x

 

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**MEDICOR LTD.Annual Report on Form 10-KSBFor the Fiscal Year Ended June 30, 2006TABLE OF CONTENTS**
|                                                                                                                                      | ** **                                                                                                        | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------|------------|
| **PART I**                                                                                                                           |
| ** **                                                                                                                           |
| Item 1.                                                                                                                              | Business                                                                                                          |       |
| Item 2.                                                                                                                              | Properties                                                                                                        |       |
| Item 3.                                                                                                                              | Legal Proceedings                                                                                                 |       |
| Item  4.                                                                                                                             | Submission  of Matters to a Vote of Security Holders                                                              |       |
|                                                                                                                                 |                                                                                                              |       |
| **PART II**                                                                                                                          |
| ** **                                                                                                                           |
| Item  5.                                                                                                                             | Market for  Common Equity and Related Stockholder Matters                                                         |       |
| Item  6.                                                                                                                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                       |       |
| Item 7.                                                                                                                              | Financial  Statements                                                                                             |       |
| Item  8.                                                                                                                             | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                             |       |
| Item  8A.                                                                                                                            | Controls and  Procedures                                                                                          |       |
|                                                                                                                                 |                                                                                                              |       |
| **PART III**                                                                                                                         |
| ** **                                                                                                                           |
| Item  9.                                                                                                                             | Directors,  Executive Officers, Promoters and Control Persons; Compliance with Section  16(a) of the Exchange Act |       |
| Item  10.                                                                                                                            | Executive  Compensation                                                                                           |       |
| Item  11.                                                                                                                            | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                  |       |
| Item  12.                                                                                                                            | Certain  Relationships and Related Transactions                                                                   |       |
| Item 13.                                                                                                                             | Exhibits                                                                                                          |       |
| Item  14.                                                                                                                            | Principal  Accountant Fees and Services                                                                           |       |
|                                                                                                                                 |                                                                                                              |
| Supplemental  Information to be Furnished with Reports Filed Pursuant to Section 15(d) of  the Exchange Act by Non-Reporting Issuers |                                                                                                              |
|                                                                                                                                 |                                                                                                              |
| Signatures                                                                                                                           |                                                                                                              |
|                                                                                                                                 |                                                                                                              |
| Financial Statements                                                                                                                 |                                                                                                              |

This report contains trademarks andtrade names that are the property of MediCor Ltd. and its subsidiaries, and ofother companies, as indicated.

In this document, the words “we,” “our,”“ours,” “us”, “the Company” and “MediCor” refer only to MediCor Ltd. and itssubsidiaries, not any other person or entity.

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**PART I**

This Annual Report onForm 10-KSB (including the section regarding Management’s Discussion andAnalysis of Financial Condition and Results of Operations containsforward-looking statements regarding our business, financial condition, resultsof operations and prospects. Words such as “expects,” “anticipates,” “intends,”“plans,” “believes,” “seeks,” “estimates” and similar expressions or variationsof such words are intended to identify forward-looking statements, but are notthe exclusive means of identifying forward-looking statements in this report onForm 10-KSB. Additionally, statements concerning future matters areforward-looking statements.

Although forward-looking statementsin this Annual Report on Form 10-KSB reflect the good faith judgment ofour management, such statements can only be based on facts and factors currentlyknown by us. Consequently, forward-looking statements are inherently subject torisks and uncertainties and actual results and outcomes may differ materiallyfrom the results and outcomes discussed in or anticipated by theforward-looking statements. Factors that could cause or contribute to suchdifferences in results and outcomes include without limitation those discussedunder the heading “Risks and Uncertainties” below, as well as those discussedelsewhere in this report on Form 10-KSB. Readers are urged not to placeundue reliance on these forward-looking statements, which speak only as of thedate of this report on Form 10-KSB. We undertake no obligation to reviseor update any forward-looking statements in order to reflect any event or circumstancethat may arise after the date of this report on Form 10-KSB. Readersare urged to carefully review and consider the various disclosures made in thisreport, which attempt to advise interested parties of the risks and factorsthat may affect our business, financial condition, results of operations andprospects.

We file reports with the Securitiesand Exchange Commission (“SEC”). We electronically file our Annual Reports onForm 10-KSB, quarterly reports on Form 10-QSB, currentreports on Form 8-K and amendments to those reports with the SEC. You canread and copy any materials we file with the SEC at its Public Reference Roomat 450 Fifth Street, NW, Washington, DC 20549. You can obtain additionalinformation about the operation of the Public Reference Room by calling the SECat 1-800-SEC-0330. In addition, the SEC maintains an Internet site(http://www.sec.gov) that contains reports, proxy and information statements,and other information regarding issuers that file electronically with the SEC,including us.

***ITEM1.  BUSINESS***

We are a global health care companythat acquires, develops, manufactures and markets products primarily for theaesthetic, plastic and reconstructive surgery and dermatology markets. Ourcurrent products include breast implant products and scar management products.Our products are sold primarily in foreign (non-U.S.) countries and foreignsales are currently approximately 95% of total sales, with Import Medic inBrazil and Corporación Recimédica in Venezuela together accounting for approximately22% of sales. Breast implant and other implant products account forapproximately 94% of our total sales, while scar management products contributeapproximately 6% of total sales. We sell our products to hospitals, surgicalcenters and physicians primarily through distributors, as well as throughdirect sales personnel.

**CompanyHistory and Business Strategy**

MediCor was founded in 1999 bychairman of the board Donald K. McGhan, the founder and former Chairman andChief Executive Officer of Inamed Corporation, McGhan Medical Corporation andMcGhan Limited. Our objective is to be a leading supplier of selectedinternational medical devices and technologies. To achieve this strategy, weintend to build upon and expand our business lines, primarily in the aesthetic,plastic and reconstructive surgery and dermatology markets. We intend toaccomplish this growth through the expansion of existing product lines andofferings and through the acquisition of companies and other assets, includingintellectual property rights and distribution rights. We believe that ourrecent acquisitions of Eurosilicone SAS, Biosil Limited and Nagor Limited willhave material, positive impacts on our historical sales and cash flow (asfurther detailed in the accompanying financial statements).

**Products**

Currently, MediCorhas two main product lines:

·                  breast implants and other implants for aestheticplastic and reconstructive surgery; and

·                  scar management products.

***Breast implant and other implant products***

Our primary product line is breastimplants and other implants, which accounted for approximately 94% of totalsales for the fiscal year ended June 30, 2006. We acquired breast implantmanufacturer Eurosilicone in July 2004 and Biosil and Nagor, two relatedbreast implant companies, in April 2006. Sales in foreign (non-U.S.) countriesare currently 

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approximately 95% of total sales,with the largest country, Brazil, accounting for approximately 14% of sales.Eurosilicone also manufactures a broad line of other implant products targetedfor the aesthetic, plastic and reconstructive surgery markets, includinggluteal, calf, pectoral, malar and testicular implants, as well as externalbreast prosthesis, which collectively account for approximately 4% of totalsales. The financing for the Eurosilicone acquisition was primarily providedthrough additional loans from International Integrated Industries, LLC, anaffiliate of MediCor’s chairman. The financing for the acquisition of Biosiland Nagor was primarily provided through our private placement of the seniorsecured convertible notes (“Notes”) and warrants (“Warrants”) to purchasecommon stock. The terms of these financings are described in the financialstatements and related notes.

Our strategy to gain entry into theUnited States saline-filled breast implant market relies, in part, upon ourrecent acquisition of Biosil, the saline-filled breast implants of which arethe subject of a pre-market approval (“PMA”) application in process with theUnited States Food and Drug Administration (“FDA”), and on a distributionagreement with Poly Implant Protheses, S.A. (“PIP”), an independentmanufacturer of breast implants with whom we are working to prepare and submita separate PMA application. The PMA application for the Biosil saline-filledbreast implant has been submitted in a format in which separate components, ormodules, of the application are submitted for review by the FDA. We areaddressing or have addressed observations arising from the FDA’s review ofthose modules of the application that have been submitted. The four-yearinterval clinical trial data that comprise a significant part of one modulehave been analyzed, and we intend to submit that module soon as a PMAamendment. Although we had anticipated submitting the completed Biosil PMA in2006, the timing of the data analysis has made determining the timing forsubmission uncertain, and there can be similarly no assurance as to timing,review or decision concerning the completed PMA application. We are alsocontinuing to work with PIP in furtherance of the PMA application for PIP’spre-filled saline breast implant. We are currently working to collectappropriate data through the ongoing clinical trial. We intend to submit thePIP PMA application to the FDA upon satisfactory completion of data collectionand analysis. Although we had anticipated submission of the completed PMAapplication as early as 2006, there can be no assurance of the completion ofdata collection and analysis or of the timing, review or decision concerning thePMA application. Although we are not the manufacturer of the PIP pre-filledsaline breast implant, consistent with the terms of our distribution agreementwith PIP, we are performing substantially all of the work to support theclinical trials, data collection and regulatory efforts. Similar to ourclinical and regulatory work on the Biosil PMA, we fund this work from ourgeneral working capital as part of our ongoing research and development efforts

***Scar Management Products***

HPL Biomedical, Inc., one of oursubsidiaries, which does business under the name Biodermis, competes in thescar management market and distributes products used in the prevention andmanagement of visible scar tissue known as keloid and hypertrophic scars. Salesfrom these products contributed approximately 6% of total sales for the fiscalyear ended June 30, 2006. The Biodermis products achieve therapeutic results byencapsulating the scar tissue with a soft, malleable, semi-occlusive polymer inthe form of sheets and ointments that are believed to mimic the natural barrierfunction of the skin, improving the condition and appearance of scars. In theUnited States, the products are marketed under the names EpiDermTM silicone gelsheeting and XeragelTM silicone ointment. Internationally, the same products arealso marketed under the names TopiGelTM and DermaSofTM.

Biodermis’ secondary product linesconsist mainly of two products, EPIfoamTM and HydroGOLDTM. EPIfoam issilicone-backed, polyurethane foam utilized post-lipectomy to assist in recoveryand enhance the overall aesthetic appearance following liposuction. HydroGOLDis a hydrogel-based product for use in reducing the pain, discomfort andburning sensation frequently associated with skin procedures typically aimed atreducing fine lines and wrinkles and eliminating or reducing the signs ofaging, such as laser resurfacing, chemical peels and micro-dermabrasion.Additionally, a portion of Biodermis’ revenue is derived from the sale of scarmanagement and post-operative care products to other medical device companieswho then sell the products under their own brand names. Biodermis is alsopursuing a manufacturing relationship with a distribution company thatspecializes in selling to retail consumer outlets and drug stores. To assurequality control and proper regulatory compliance, Biodermis retains allresponsibilities related to the FDA and European CE-mark, which includes ISO9001, 13485 and 14607 Certifications, certification and regulatory compliancerelated to manufacturing activities of these products. Some of these medicaldevice customers are allowed to compete for sales in similar markets and forsimilar customers against Biodermis’ distributors and direct sales staff.

***Sales and Marketing***

We sell our products primarilythrough independent distributors worldwide, as well as through small directsales forces in Mexico and select European countries. We reinforce our salesand marketing program with telemarketing, which is designed to increase salesthrough follow-up on leads and the distribution of product information topotential customers. We supplement our marketing efforts with appearances attrade shows, advertisements in trade journals and sales brochures.

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***Breast Implants***

We sell our Eurosilicone and ourBiosil-manufactured and Nagor-branded breast implant and other products inapproximately 85 countries (other than the United States and Canada), primarilythrough three independent groups of up to approximately 70 third-partydistributors each. We also sell these products through our direct sales forces,which we are developing and have established in Mexico and select Europeancountries. A key component of our marketing strategy is to have multipleproduct offerings in each market, a strategic component that was enabled by thecompletion of the Biosil/Nagor acquisition. Historically, two distributors,Import Medic in Brazil and Corporación Recimédica in Venezuela have togethermade up approximately 22% of our consolidated revenue. We are currentlyfinancially dependent on their sales. For our distributors, as well as for ourown direct sales force, the customer is each doctor that implants or uses ourproducts. If either of these distributors were to decide to no longer sell ourproducts or were unable to sell our products, we would have to seek either toreplace them, as we have done in some markets from time to time, or beginselling direct in those markets, as we have done in various markets and as weare currently doing in additional targeted markets. Nonetheless, losing either distributorwould have an adverse effect on our business.

Currently, we are awaiting therequired FDA approval to sell saline-filled breast implants in the UnitedStates. The FDA approved PMA applications for saline-filled products in May2000 for two competitors—Inamed Corporation (now a division of AllerganCorporation) and Mentor Corporation. We believe that the FDA will approve otherPMA applications for saline-filled breast implants in the future followingtheir review of complete PMA applications.

Following their review of Inamed’sPMA application for silicone-filled breast implants in late 2003, the FDAissued *Draft Guidance for Industry and FDA Staff: Saline,Silicone Gel, and Alternative Breast Implants* in January 2004.While this guidance applies to all types of breast implants, it is mostsignificant for understanding the new requirements for silicone-filled breastimplants. We anticipate that this guidance will be the basis for the FDA’sreview of all PMA applications going forward. Although, as discussed below,advisory panels in April 2005 made recommendations concerning approval anddisapproval of each of our two competitors’ PMAs for silicone-filled breastimplants, the FDA’s interpretation and understanding of the new guidance hasyet to be demonstrated through their formal decisions concerning acceptabilityof these two competitors’ applications.

Our strategy to gain entry into theUnited States saline-filled breast implant market with the PIP pre-filledimplant relies upon our contractual agreements with PIP with whom we areworking to obtain FDA approval of a PMA application. The PMA application forthe Biosil saline-filled breast implant has been submitted in a format whereseparate components, or modules, of the application are submitted for review bythe FDA. We are addressing or have addressed observations arising from the FDAreview of modules of the application that have been submitted. The four-yearinterval clinical trial data which comprise part of one module have beenanalyzed, and we intend to submit that module soon as a PMA amendment. Althoughwe had anticipated submitting the completed Biosil PMA in 2006, the dataanalysis is ongoing, and there can be no assurance as to timing, review ordecision concerning the completed PMA application. We are also continuing towork with PIP in furtherance of the PMA application for PIP’s pre-filled salinebreast implant. We are currently assisting in the collection of appropriatedata through the ongoing clinical trial. We intend to submit the PMAapplication to the FDA upon completion of data collection and analysis.Although we had anticipated submission of the completed PMA application asearly as 2006, there can be no assurance of the completion of data collectionand analysis or of the timing, review or decision concerning the PMAapplication. Although we are not the manufacturer of the PIP pre-filled salinebreast implant, consistent with the terms of our distribution agreement withPIP, we do and will continue to provide significant assistance with theclinical trials and related regulatory efforts.

Our United .States market entrystrategy for silicone-filled breast implants is based upon our productscurrently marketed outside the United States. In April 2005, an FDAadvisory panel reviewed the PMA application for each of our two competitors andrecommended approval for one and disapproval for the other. Consistent with thepanel recommendation, in July 2005, the FDA issued a letter to one ofthese competitors indicating that its application was in approvable form.Contrary to the panel recommendation, in late 2005 the FDA issued an approvalletter to the other manufacturer. Customarily, within a few months followingissuance of such a letter, the FDA approves the PMA application. At an appropriatetime in the future, we intend to initiate clinical trials and PMA applicationsin the United States in accordance with applicable FDA guidance and based onour existing or new product lines marketed internationally. The FDA evaluateseach PMA application on its own merits and independent of any otherapplications. Although we will endeavor to prepare our future PMA applicationfor silicone-filled breast implants consistent with applicable FDA guidance,there can be no assurance that these efforts will lead to FDA approval of thatapplication.

Our earlier distribution ofsaline-filled products in the United States was based upon the manufacturershaving obtained what is known as 510(k) regulatory clearance for the devices.This type of clearance refers to a section of FDA regulations that permits themarketing of medical devices without a PMA. Following the approval in 2000 oftwo competitors’ PMA applications for saline-filled breast implants, we werenotified that any further direct shipments of PIP implants to customers 

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would be suspended until the specificproducts we were distributing received a PMA clearance. The private companysponsors for both the PIP and Biosil PMA applications were pursuing their PMAapplications from 1999 to 2000 but, unlike the large United States.-basedmanufacturers, neither had a domestic clinical trial sufficiently advanced atthe time of the FDA’s call for PMA applications for saline-filled breastimplants. In addition, neither sponsor had extensive FDA or PMA experience. Asa result of these factors, neither PMA application advanced as quickly as mayhave occurred if it had more significant funding and expertise. We have sinceinvested and continue to invest substantial financial, technical and otherresources in preparing or prosecuting these two PMA applications as well as topreparation for other PMA applications. The passage of time has facilitated thecollection of longer term data for both the Biosil and PIP breast implantproducts. Because of these prior resource and expertise constraints, theprocess of preparing and prosecuting each PMA application has taken longer thanis optimal. In each case, we have recently become substantially more involvedin providing assistance and expertise to enhance the prospects for the successand timing of the PMA applications. As is customary in the PMA applicationprocess, through ongoing dialogue with the FDA, the sponsor for each PMAapplication continues to amend and refine its regulatory submissions, includingclinical study data, and each continues an ongoing dialogue with the FDAconcerning its application. The FDA’s approval of either or both of these PMAapplications is necessary to provide regulatory clearance to market theapproved saline-filled breast implants in the United States.

***Scar ManagementProducts***

In the United States, Biodermis distributes itsproducts to dermatologists, dermatological surgeons, aesthetic, plastic andreconstructive surgeons and obstetricians/gynecologists through a combinationof a direct sales force and one distributor. Internationally, Biodermisdistributes to the same fields of medicine through approximately 70distributors in approximately 50 countries, including Canada and Mexico.

**Competition**

***BreastImplants***

We face competition in every aspectof our business, and particularly from other companies that acquire, develop,manufacture or market breast implants and breast implant related products.Currently, we consider our primary competitors in the United States breastimplant market to be Allergan Corporation and Mentor Corporation. In the nearterm, as we seek to bring products for distribution to the domestic market, wewill only be able to offer saline-filled implants, while Allergan and Mentorwill offer saline- and silicone-filled implants. In the future, wemay bring a full line of implant types to the domestic market. ThroughEurosilicone and Nagor, we compete internationally with several manufacturersand distributors, including Allergan Corporation, Mentor Corporation, Silimed, S.A.,Poly Implant Prothèses, S.A., Laboratoires Arion S.A., Laboratoires SebbinS.A., and Laboratoire Pérouse Implant S.A. In addition, in the Asian market wecurrently compete with a number of Chinese manufacturers. In theseinternational markets, we offer a broad line of saline and silicone-filledimplants, including various sizes, shapes, textures and cohesiveness, tocompete across the various available product offerings of our competition.

We believe that the principal factorsthat will allow our products to compete effectively are high-quality productconsistency, product design, a broad product array, management’s knowledge ofand sensitivity to market demands, plastic surgeons’ familiarity with ourmanagement and products, and our ability to identify and develop or licensepatented products embodying new technologies.

***Scar Management Products***

Currently, we estimate there areapproximately 15 companies in the United States and international marketscompeting for market share among dermatologists and aesthetic, plastic andreconstructive surgeons for products that are competitive with those ofBiodermis. EpiDerm, also sold as DermaSof and TopiGel, and Xeragel compriseBiodermis’ principal product line and compete against such product lines as “CicaCare” by Smith and Nephew, “ReJuveness” by ReJuveness Pharmaceuticals, “Kelo-Cote”by Advanced Bio-Technologies, Inc., “New Beginnings” by PMT Corporation, andothers.

EPIfoam post-operative compressionfoam has no direct product-type competition. However, it competes to someextent with a product known as “Reston” foam, manufactured by 3M, a piping andinsulation product which we believe is occasionally used off-label by surgeonsin a similar fashion as EPIfoam. HydroGOLD hydrogel sheeting competes againstsuch products as “2nd Skin” by Spenco Corp. and “HydraSkin” by HydraSkin Corp.

**Researchand Development**

We use employee and independent consultantscientists, engineers, and technicians to work on material technology andproduct design as part of our research and development efforts. Currently, ourresearch and development expense is primarily directed towards supporting theclinical trials of our manufactured products or products that we seek todistribute for third 

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parties. In addition, our researchand development is focused on the development or acquisition of new andimproved products based on scientific advances in technology and medicalknowledge, together with input from the surgical profession. We do thisdirectly and in collaboration with third parties. We incurred expenses of$3,482,371 and $2,691,333 for the years ended June 30, 2006 and 2005,respectively, for research and development. The $791,038 increase for the yearended June 30, 2006 over the prior year was driven by higher spendingassociated with the saline-filled breast implant clinical trials. Costsassociated with the PIP product increased $174,360 and costs relating to thedevelopment of other product lines increased $616,678. We expect that researchand development expenses will continue to remain substantial and grow as weaggressively move to bring products to market. While these expenses willdecrease with respect to a particular product once we receive requiredgovernment approval for it, they will continue to increase overall as we bringnew products to market or existing products to new markets.

**Patents, Licenses, and RelatedAgreements**

We currently own or have exclusivelicense rights to numerous patents, patent applications, trademarks andtrademark applications throughout the world. Although we believe our patentsand patent rights are valuable, our technical knowledge with respect tomanufacturing processes, materials, and product design are also valuable. As acondition of employment or consulting, we require that all employees andconsultants execute a proprietary information and inventions agreement relatingto our proprietary information and intellectual property rights.

Our intellectual property includestrademarks, patents and trade secret information. Our trademarks cover a largepercentage of our commercial products. Most marks are registered in the UnitedStates, some are registered outside the United States and we are pursuingadditional registrations. Our current commercial breast implant line ismanufactured and distributed completely outside the United States. This line’sdesign technology and manufacturing technology are considered trade secrets.United States patents to which we have acquired ownership and the correspondingforeign patents protect technology under investigation in the research anddevelopment of a new generation of breast implant fillers, shell material andcomponent design. While we are hopeful that this research will produceproprietary products, we cannot assure that any developments will becommercialized or that any of our current patents will be material. AnotherUnited States patent protects a minor product in our dermatology and wound careofferings.

All patents mentioned in thepreceding discussion (except that covering dermatology) were acquired throughthe acquisition of Intellectual Property International, Inc. in 2002. Thepatents currently expire at various dates from January 2009 to May 2024.Additional patents are pending in the United States and in Europe based on newimprovements to the specific technology portfolio so acquired.

**Manufacturingand Raw Materials**

***Breast implants***

Prior to our acquisition ofEurosilicone, we did not manufacture any of the breast implant products wesold. All of the saline-filled breast implant products we distributed, prior tothe acquisition, were manufactured in France by PIP. PIP is responsible forensuring that these products were produced in controlled environments utilizingspecialized equipment for precision measurement, quality control, packaging,and sterilization. The manufacturing activities for products sold in the UnitedStates are subject to FDA regulations and guidelines. The PIP products andtheir manufacturing procedures were reviewed by the FDA prior to the FDA’s callfor a PMA for saline-filled breast implants in 2000. Before any Biosil or PIPproducts can be imported into the United States, there manufacturing procedureswill be subject to FDA review. As is the case with other Europeanmanufacturers, PIP’s manufacturing activities are also subject to regulatoryrequirements and periodic inspections by European regulatory agencies.

Our Eurosilicone products aremanufactured at the Eurosilicone facility in Apt, France. Our Biosil productscurrently marketed under the Nagor brand are manufactured at facilities locatednear Birmingham, England and Glasgow, Scotland. Each of these facilities andtheir operations are subject to similar European standards and governmentregulation and inspection for manufacturing facilities.

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There are very fewqualified suppliers of long-term implantable grade silicone raw materials inthe world. To the extent we build or acquire manufacturing capability, eachsingle manufacturing operation will most likely be required to purchase itssilicone raw material supplies for production of breast implants from asingle-source supplier. Eurosilicone relies upon one manufacturer for itssilicone raw material supplies, the same supplier used by our largestcompetitors. Biosil relies on a different supplier, which also supplies some ofour other competitors.

***Scar Management Products***

Biodermis has developed product linesthough its vendors. These vendors are single-source suppliers due to the highlyspecialized nature of the products and the regulatory requirements for themanufacturing of the products. Biodermis is responsible for the governmentalregulatory submissions for the products they distribute, as well as a requiredvendor audit program and internal controls for all aspects of product flowthrough the facility.

In the event we build or acquire ourown manufacturing facilities for scar management products, we will be subjectto appropriate standards and government regulation and inspection required forClass I and Class II medical devices.

There are very few qualifiedsuppliers of the raw materials required for the Biodermis products in theworld. To the extent we build or acquire scar management product manufacturingcapability, we will most likely be required to purchase our raw materialsupplies for our products from one of these suppliers.

Our manufacturing facilities areregulated by various federal, state, regional and local laws. We believe thatour operations are in compliance with all applicable laws and we received nocitations or notices of violations in 2005 or 2006. In fiscal 2006, we did notincur any material expense to maintain our compliance level.

**Government Regulation**

Medical devices are subject toregulation by the FDA, state agencies and, in varying degrees, by foreigngovernment health agencies. These regulations, as well as various United Statesfederal and state laws, govern the development, clinical testing,manufacturing, labeling, record keeping and marketing of these products. Themajority of our product candidates must undergo rigorous testing and anextensive government regulatory approval process prior to sale in the UnitedStates and other countries. The lengthy process of seeking required approvalsand the continuing need for compliance with applicable laws and regulationsrequire the expenditure of substantial resources. Regulatory approval, when andif obtained, may be limited in scope, and may significantly limit the indicateduses for which a product may be marketed. Approved products and theirmanufacturers are subject to ongoing review, and discovery of previouslyunknown problems with products may result in restrictions on their manufacture,sale, or use or their withdrawal from the market.

***Regulation of Medical Devices***

Our current products are medicaldevices intended for human use and are subject to regulation by FDA in theUnited States. Unless an exemption applies, each medical device we market inthe United States must have a 510(k) clearance or a PMA in accordance with thefederal Food, Drug, and Cosmetic Act of 1976, as amended. FDA regulationsgenerally require reasonable assurance of safety and effectiveness prior tomarketing, including safety data obtained under approved clinical protocols.FDA regulation divides medical devices into three classes. Class I devicesare subject to general controls that require compliance with deviceestablishment registration, product listing, labeling, good manufacturingpractices and other general requirements. Class II devices are subject tospecial controls in addition to general controls. Class III devices aresubject to the most extensive regulation and in most cases require submissionto the FDA of a PMA application that includes data, including clinical data,supporting the safety and effectiveness of the device. Manufacturing mustcomply with the FDA’s Quality System Requirements for “good manufacturingpractices” (“GMP”), and the compliance is verified by detailed FDA inspectionsof manufacturing facilities. These regulations also require reporting ofproduct defects to the FDA. Periodic reports must be submitted to the FDA,including descriptions of any adverse events reported. The advertising,promotion and distribution of medical devices are regulated by the FDA and theFederal Trade Commission (“FTC”) in the United States.

The majority of our products areregulated as Class III medical devices. Our Class I and Class IIscar management products marketed in the United States have receivedappropriate regulatory clearances by the FDA. Our Eurosilicone and Biosil andNagor products are not currently approved for sale in the United States, and wehave yet to file an application for a PMA for those products. The breastimplant lines which we manufacture or for which we own distribution rights inthe United States are or will be the subject of separate, ongoing PMAapplications that will be submitted to the FDA in their final form and thenfinally reviewed by the FDA.

Products marketed in the EuropeanUnion must comply with the requirements of the European Medical DeviceDirective, or MDD, and must be CE-marked. Medical device laws and regulationssimilar to those described above are also 

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in effect in many of the othercountries to which we export our products. These range from comprehensivedevice approval requirements for some or all of our medical device products torequests for product data or certifications. Our Eurosilicone and Nagor breastimplant lines marketed outside the United States have received the European CEmark, which includes ISO 9001, 13485 and 14607 Certifications, and have beenregistered or approved for sale in other markets. In the European Union, the CEmark provides sufficient regulatory status for the products to be marketedthroughout most of the European and eastern European countries. In Central andSouth America, Eurosilicone and Biosil have received regulatory approval fortheir breast implant lines in several countries, including Brazil, Argentinaand Australia. Regulatory registrations have also been achieved in China.Russian authorities have authorized registration for Eurosilicone’s breastimplants and a variety of Eurosilicone’s other implantable silicone devices.Eurosilicone and Nagor also distribute the Eurosilicone and Biosil breastimplant product lines in several countries that do not require additionalregulatory approval.

Failure to comply with these domesticand international regulatory standards and requirements could affect ourability to market and sell our products in these countries. The currentregulatory status of our Biodermis products is discussed in the Manufacturingand Raw Materials section above. The current regulatory statuses of theEurosilicone and Biosil manufactured products and the other breast implantproducts we distribute are discussed above and in the Company History andBusiness Strategy section above. Failure to comply with FDA regulations couldresult in requirements by the FDA to correct such conditions while allowing theaffected products to remain on the market. In more serious situations, failureto comply with FDA regulations could result in products being recalled and/orproducts being prevented from sale in the United States or prevented fromexportation abroad.

***Regulation of Manufacturing***

For medical devices the manufacturingprocesses and facilities are subject to continuing review by the FDA andvarious state and other national agencies. These agencies inspect qualitysystems and facilities from time to time to determine whether they are incompliance with various regulations relating to manufacturing practices andother requirements. Facilities that manufacture products sold in the UnitedStates must comply with the FDA’s Quality System Regulation requirements forGMP. For products sold in Europe, we must demonstrate compliance with ISO 9001,13485 and 14607 and EN 46000 international quality system standards. OurEurosilicone and Biosil products are manufactured outside the United States andare not distributed in the United States. As such, the manufacture of ourEurosilicone and Biosil products are not subject to FDA regulation at thistime. Our Eurosilicone and Biosil manufacturing facilities have achievedrequisite ISO 9001, 13485 and 14607 and EN 46000 compliance, and we expect ourBiosil manufacturing facility manufacturing product for the United Statesmarket to timely meet GMP requirements.

***Foreign Corrupt Practices Act***

The U.S. Foreign Corrupt PracticesAct, to which we are subject, prohibits corporations and individuals fromengaging in certain activities to obtain or retain business or to influence aperson working in an official capacity. It is illegal to pay, offer to pay, orauthorize the payment of anything of value to any foreign government official,government staff member, political party, or political candidate in an attemptto obtain or retain business or to otherwise influence a person working in anofficial capacity. Because many of our competitors internationally are notsubject to such restrictions, our adherence to these laws may place us at acompetitive disadvantage.

***OtherRegulation***

We are subject to federal, state, local and foreign environmental lawsand regulations, including the U.S. Occupational Safety and Health Act, theU.S. Toxic Substances Control Act, the U.S. Resource Conservation and RecoveryAct, and other current and potential future federal, state, or localregulations. Our manufacturing and research and development activities involvethe controlled use of hazardous materials, chemicals, and biological materials,which require compliance with various laws and regulations regarding the use,storage, and disposal of such materials.

We are also subject to variousfederal and state laws pertaining to health care “fraud and abuse,” includinganti-kickback laws and false claims laws. Anti-kickback laws make it illegal tosolicit, offer, receive, or pay any remuneration in exchange for, or to induce,the referral of business, including the purchase or prescription of aparticular product. The U.S. federal government has published regulations thatidentify “safe harbors” or exemptions for certain payment arrangements that donot violate the anti-kickback statutes. In the event it became necessary in theconduct of our business, we would seek to comply with any safe harbors wherepossible. False claims laws prohibit anyone from knowingly and willinglypresenting, or causing to be presented for payment to third-party payers(including Medicare and Medicaid), claims for reimbursed products or servicesthat are false or fraudulent, claims for items or services not provided asclaimed, or claims for medically unnecessary items or services. Because we maysell products that are used in a Medicare or Medicaid reimbursed procedure(such as a breast reconstruction following a mastectomy), our activitiesrelating to the sale and marketing of our products may be subject to scrutinyunder these laws. Violations of fraud and abuse laws may be punishable bycriminal and/or civil 

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sanctions, including fines and civilmonetary penalties, as well as the possibility of exclusion from federal healthcare programs (including Medicare and Medicaid).

Our present and future business hasbeen and will continue to be subject to various other laws and regulations.

**Third-Party Coverage and Reimbursement**

Purchases of breast implant productsfor augmentation and facial aesthetics products are generally not reimbursed bygovernment or private insurance carriers. However, since 1998, U.S. federal lawhas mandated nationwide insurance coverage of reconstructive surgery followinga mastectomy, which includes coverage for breast implants. Outside the UnitedStates, reimbursement for breast implants used in reconstructive surgeryfollowing a mastectomy may be available, but the programs vary on acountry-by-country basis.

In some countries, both the procedureand product are fully reimbursed by the government healthcare systems for allcitizens who need it, and there is no limit on the number of procedures thatcan be performed. In other countries, there is complete reimbursement but thenumber of procedures that can be performed at each hospital is limited eitherby the hospital’s overall budget or by the budget for the type of product.Historically, less than 5% of our sales have been the subject of insurancereimbursement.

**Product Replacement Programs**

We have always conducted our productservice and support activities with careful regard for the consequences topatients. As with any medical device manufacturer, however, we occasionallyreceive communications from surgeons with respect to various products claimingthe products were defective, lost volume, or have otherwise failed. In the caseof a deflation of a saline-filled breast implant product sold by us, in mostcases our product replacement program provides for a free replacement implantand limited financial assistance paid to the surgeon to help reduce the cost ofa replacement surgical procedure if the deflation occurred within ten years ofthe original implantation. For Nagor products in the U.K., we also provide afree replacement implant in cases of capsular contracture within one year ofthe original implantation. For surgeons that participate in our Eurosiliconemarketing alliance program, we also provide free product replacement for thelife of the patient, including for competitive implants, and for aestheticdissatisfaction as well as deflation. In follow-on clinical studies, we mayextend the period in which free replacement implants can be claimed for capsularcontracture or deflation.

We deal with the surgeon directly inour product replacement programs because we can only sell our regulated medicaldevices to licensed medical professionals. As required by governmentregulation, we make extensive disclosure concerning the risks of our productsand implantation surgery. Anticipated estimated financial liabilities for ourproduct replacement programs are periodically reviewed and reflected in ourfinancial statements.

**Financial Information About Geographic Areas**

A majority of our historic sales andsubstantially all of our long-lived assets are outside the United States. Weexpect that our financial assets will continue to be primarily outside of theUnited States, including our manufacturing assets in France and the UnitedKingdom, and we expect sales will continue to be significantly outside theUnited States, with sales into over 80 countries.

**Working Capital and Product Inventories**

When in the past we have sold breastimplant products, we have maintained significant breast implant consignmentinventories, consistent with industry practice. We expect this practice tocontinue as we reintroduce products to the market. Since a doctor may not besure of the exact size of breast implant required for implantation and cannotbe sure that no accidental damage will occur to an implant, the doctor islikely to order extra quantities and sizes beyond the quantity and sizeultimately used in surgery. By carrying a consignment inventory of typicalsizes at certain hospitals and other medical offices, we reduce the level ofproduct return subsequent to surgery. To address customer desires forjust-in-time deliveries of product, we may also maintain more localized storesof inventories, which would also tend to increase our inventory levels. Weattempt to manage inventories at levels that permit good customer service butthat do not unnecessarily increase our working capital. Additionally, there areinventory builds prior to launching new products.

Our accounts receivable payment termshave been and we anticipate them to continue to be consistent with normalindustry practice for each of our market segments.

For the fiscal year ended June 30,2006, we experienced no material changes or fluctuations in Eurosilicone’shistorical working capital or inventories. In the future, working capital andproduct inventories may change materially, including in connection withpurchase accounting adjustments related to the Biosil/Nagor acquisition. Weanticipate that inventory and 

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accounts receivable will beconsistent with norms in the industry and consistent with Eurosilicone’s,Biosil’s and Nagor’s histories.

**Employees**

As of September 1, 2006, we hadapproximately 410 employees—30 in the United States, 215 in France, 135 in theBritish Isles and 30 in other countries. From time to time, we also engageconsultants pursuant to short- or long-term contracts, primarily in connectionwith research and development projects. None of our employees is represented bya labor union. The employees at our Eurosilicone subsidiary are represented bya statutory workers’ council.

We recognize the importance ofenvironmental responsibility and the need to provide a safe and healthyworkplace for our employees by complying with all federal, state, and local laws,rules, and regulations. During the past fiscal year, we have received nocitations, notices of violations or other censures from public agenciesregulating environmental compliance or our employees’ health and safety. Weexpect to make planned capital expenditures of approximately $500,000 in fiscal2007 to comply with environmental, health, or safety regulations. Otherwise, webelieve that our current systems and processes are adequate for current needs.

**Risks and Uncertainties**

***If clinical trials or pre-marketapproval applications for our products are unsuccessful or delayed, we will beunable to meet our anticipated development, commercialization and revenuetimelines.***

Before obtaining regulatory approvalsfor the commercial sale of any products in the United States, we must firstdemonstrate through pre-clinical testing and clinical trials that our productsare safe and effective for use in humans. We must also prepare and submitinvestigational device exemption and pre-market approval applications, based ondata from this testing and these trials, to appropriate regulatory authorities.Conducting pre-clinical testing and clinical trials and preparing andsubmitting investigational device exemption and pre-market approvalapplications are lengthy, time-consuming and expensive processes.

Completion of pre-clinical testingand clinical trials may take several years or more. Our commencement and rateof completion of pre-clinical testing and clinical trials and our submission ofinvestigational device exemption and pre-market approval applications may bedelayed or prevented by many factors, including:

·                  complex chemical and other scientificissues;

·                  design and implementation of detailedtesting and trial protocols;

·                  lack of efficacy during clinicaltrials;

·                  unforeseen safety issues;

·                  uncertainties with or actions of ourcollaborative partners or suppliers;

·                  slower than expected patientrecruitment;

·                  difficulties in recognizing technicalor laboratory data and clinical data;

·                  inability to adhere to protocolsduring clinical trials, including collection of data;

·                  difficulties in patient recruitmentor retention;

·                  issues in acceptance of clinical databy regulatory authorities;

·                  inability to follow patients aftertreatment in clinical trials;

·                  inconsistencies between earlyclinical trial results and results obtained in later clinical trials;

·                  varying interpretations or criticismsof data generated by clinical trials;

·                  changes in regulatory policy duringthe period of product development in the United States and abroad; and

·                  government or regulatory delays.

The results from pre-clinical testingand early clinical trials are often not predictive of results obtained in laterclinical trials. A number of new products have shown promising results in clinicaltrials, but subsequently failed to establish sufficient safety and efficacydata to obtain necessary regulatory approvals. Data obtained from pre-clinicaland clinical activities are susceptible to varying interpretations, orcriticisms which may delay, limit or prevent regulatory approval. In addition,regulatory delays or rejections may be encountered as a result of many factors,including perceived defects in the design of the pre-clinical testing orclinical trials, questions about data integrity and changes in regulatorypolicy during the period of product development. We have invested and intend tocontinue to invest heavily in all aspects of pre-clinical testing, clinicaltrials, and preparing and prosecuting regulatory submissions. If these effortsare not successful, we will not recover that expense and we will not achievetargeted revenue. This will adversely affect our business. Any delays in, ortermination of, our pre-clinical testing or clinical trials or the pre-clinicaltesting or clinical trials of our collaborative partners or suppliers willsimilarly adversely affect our development and commercialization timelines,which would adversely affect our future sales and profitability.

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***If we are unable to develop, gainregulatory approval for and market new products and technologies, we will notachieve meaningful revenue and may experience a decrease in demand for ourproducts or our products could become obsolete.***

The medical device industry is highlycompetitive and is subject to significant and rapid technological change. Webelieve that our ability to respond quickly to consumer needs or advances inmedical technologies, without compromising product quality, will be crucial toour success. We are continually engaged in product development and improvementprograms to establish and improve our competitive position. This includessubstantial pre-clinical testing, clinical trials and regulatory submissions.We cannot, however, guarantee that we will be successful in enhancing ourexisting products or products we have in development or clinical trials. Norcan we guarantee that we will be successful in developing new products ortechnologies that will timely or ever achieve regulatory approval or receivemarket acceptance. Once developed, we must also timely obtain regulatoryapproval for our products including products currently in the late stages ofthe regulatory process. The success in gaining approval for our products iscritical to our business and viability, and delays may cause our products to beobsolete once regulatory approval is granted. Two of our competitors are in theadvanced stage of obtaining regulatory approval for their silicone-filledbreast implants, while we have not started the formal regulatory process forthose products in the United States. This could put us at a significantdisadvantage in the U.S. market. The lack of U.S. regulatory approval for ourproducts, in the face of our competitors’ approvals, may also adversely affectus in foreign markets.

***Ifwe are unable to maintain satisfactory agreements with a third-partymanufacturer to distribute saline-filled breast implants in the UnitedStates, we may not be able to distribute those products in the United States.***

We currently are dependent onmaintaining rights to distribute in the United States pre-filled saline breastimplant products manufactured by a third party. We may not be able to maintainthese rights on acceptable terms or at all. If we fail to maintain theserights, we may not be able to sell these breast implant products in the UnitedStates for a number of years, if at all.

***Ifchanges in the economy and consumer spending reduce consumer demand for ourproducts or our products in development, our sales and profitability willsuffer.***

Breast augmentation and reconstructionand other aesthetics procedures are elective procedures. Other than U.S.federally mandated insurance reimbursement for post-mastectomy reconstructivesurgery that is available in some cases, breast augmentations and othercosmetic procedures are not typically covered by insurance. Adverse changes inthe economy may cause consumers to reassess their spending choices and reducethe demand for cosmetic surgery. This shift could have an adverse effect on ourprojected future sales and profitability.

***Our business may be significantly limitedif we cannot obtain additional financing.***

To accomplish our plans to conductour current operations, including expensive pre-clinical testing, clinicaltrials and regulatory submissions, to expand our current product lines andmarkets and to purchase new companies, products and intellectual property, weneed substantial additional capital, which we may or may not be able to obtainwhen and as it is needed. Critical to our financing needs are costs associatedwith bringing products to market and delays or risks in ever getting productsto market. We currently have significant debt that must be serviced. Prior toour recent third-party financing involving the sale of the Notes and Warrants,we had been funded in substantial part by International Integrated Industries,LLC, an affiliate of our chairman. We do not anticipate this funding sourcewill provide significant additional capital in the future, and we expect thatwe will need to rely on external financing sources for most future financingneeds. We have in the past and will likely in the future negotiate withpotential equity and debt providers to obtain additional financing, but thisadditional financing may not be available on terms that are acceptable to us, orat all. In addition, the terms of the Notes contain restrictions on our abilityto incur indebtedness and issue convertible securities and options, and providethe Note holders with rights of first refusal with respect to most issuances ofnew securities. If adequate funds are not available, or are not available onacceptable terms, our ability to operate our business or implement ourexpansion and growth plans may be significantly impaired. In addition, thefinancial terms of any such financing, if obtainable, may be dilutive toexisting stockholders.

***We rely on our chairmanfor continued capital funding, management direction and strategic planning andwe do not presently have any alternative funding or a management transitionplan in place.***

We rely on our chairman, Donald K.McGhan, for capital funding, management direction and strategic planning.Mr. McGhan, through certain of his affiliates, is a significant lender tous, and he is our principal stockholder, chairman of our board of directors anda member of our four-person executive committee. Consequently, Mr. McGhanhas substantial influence over significant corporate transactions, includingacquisitions that we may pursue. Although we have no written charter, ourexecutive committee generally functions on the basis of consensus, thoughMr. McGhan’s multiple roles and 

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significant financial and stockholderstake are typically considered. To date, we have not had any event whereMr. McGhan has sought to or exercised any type of unilateral control over us,though there can be no assurance that this will not happen in the future. Theloss of Mr. McGhan’s financial support or services to our company couldmaterially and adversely affect our operations. We do not presently have awritten or other well-established management or financing transition plan inthe event we were to lose the services or financial support of Mr. McGhan.

***Because we have only alimited operating history and our business strategy calls for significantgrowth through new products and acquisitions, there is significant uncertaintyabout our business and prospects.***

MediCor and its subsidiaries haveonly been in existence since 1999. Although our Biodermis, Eurosilicone andBiosil/Nagor operations have been in existence for longer periods of time,Biodermis has only operated under our management since its acquisition in 2001and Eurosilicone and Biosil/Nagor have only operated under MediCor’s managementsince their acquisitions in July 2004 and April 2006, respectively.Significantly, during much of our history we have also been prevented fromselling our primary existing product, breast implants, in the U.S. market dueto the FDA’s call for a PMA by 2000 for those products. As a result of thisregulatory situation, all of our revenues prior to the Eurosilicone acquisitionin 2004 were derived primarily from our scar management products, both insideand outside the United States, and with respect with the recent acquisitions ofEurosilicone and Biosil and Nagor, more than 95% of our revenues are sourcedoutside the United States. This revenue mix is expected to change if and whenproducts are approved for sale in the United States. However, revenue generatedby our Biodermis subsidiary has not been significant, and we do not expect morethan modest internal growth in that segment. For all these reasons, ourhistoric business platform is not necessarily indicative of our future businessor prospects.

***MediCor and its prospectsmust be considered in light of the risks, expenses and difficulties frequentlyencountered by companies in an early stage of development, particularlycompanies in rapidly changing and highly regulated markets such as the medicaldevice market.***

Risks for our business include theuncertainties associated with developing and implementing our business strategyas described in this annual report as we grow and the management of bothinternal and acquisition-based growth. This is particularly acute in the rapidgrowth phase of a business, such as we are currently experiencing, and in arapidly changing and highly regulated market such as the market for medicaldevices. To address these risks, we must continue to develop the strength andquality of our operations, expend heavily on regulatory applications andcompliance, improve and maintain product quality, maximize the value deliveredto customers, respond to competitive developments and continue to attract,retain and motivate qualified employees. We may not be successful in addressingthese challenges.

***If we suffer negativepublicity concerning the safety of our products, our sales may be harmed and wemay be forced to withdraw products.***

Physicians and potential patients mayhave a number of concerns about the safety of our products and proposedproducts, whether or not such concerns have a basis in generally acceptedscience or peer-reviewed scientific research. Negative publicity—whetheraccurate or inaccurate—about our products, based on, for example, news aboutbreast implant litigation or regulatory actions, could materially reduce marketacceptance of our products and could result in product withdrawals. Inaddition, significant negative publicity could result in an increased number ofproduct liability claims, whether or not these claims have a basis in fact.

***Because our strategy isbased on successfully making acquisitions and otherwise diversifying orexpanding our product offerings, we are exposed to numerous risks associatedwith acquisitions, diversification and rapid growth.***

Our present growth strategy is basedin significant part on the acquisition of other companies, products andtechnologies that meet our criteria for strategic fit, geographic presence,revenues, profitability, growth potential and operating strategy. Thesuccessful implementation of this strategy depends on our ability to identifysuitable acquisition candidates, finance acquisitions, acquire companies andassets on acceptable terms and integrate those operations successfully.

We may not be able to identifysuitable acquisition candidates in our desired product areas or we may not beable to acquire identified candidates on acceptable terms. Moreover, inpursuing acquisition opportunities, we will likely compete with other companieswith greater financial and other resources. Competition for these acquisitiontargets likely could also result in increased prices of acquisition targets anda diminished pool of companies and assets available for acquisition.

Acquisitions also involve a number ofother risks, including the risks of acquiring undisclosed or undesiredliabilities, acquired in-process technology, stock compensation expense andincreased compensation expense resulting from newly hired employees, thediversion of management attention, potential disputes with the sellers of oneor more acquired entities and the possible failure to retain key acquiredpersonnel. Client satisfaction or performance problems with an acquiredbusiness or 

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product line could also have anegative impact on our reputation as a whole, and any acquired entity or assetscould significantly under-perform relative to our expectations. Our ability tomeet these challenges has not been established through repeated acquisitions.

Although we were able to use some ofour common stock in our Biosil/Nagor acquisition in April 2006, we expect that,at least for the foreseeable future, we may be required to use primarily cashconsideration for acquisitions. In addition, we likely will be required toobtain significant third-party financing to accomplish these acquisitions. Thisfinancing may not be available on acceptable terms, if at all. In addition, theterms of our Notes contain restrictions on our ability to incur indebtednesssubject to a limited exception for indebtedness that is subordinated to theNotes, is not repayable on or prior to the one-year anniversary of the maturitydate of the Notes, is unsecured and is not in excess of $10 million,, issuecapital stock that is redeemable on or prior to the one-year anniversary of thematurity date of the Notes and issue options or convertible securities that areconvertible into or exchangeable or exercisable for shares of our common stockother than certain permitted issuances. In addition, our Note holders have aright of first refusal with respect to new security issuances other than theissuance of common stock in an underwritten public offering of $75 million ormore in which the net sale price per share (after deduction of underwritingdiscounts and commissions) is at or above $8.00. The terms of any futurefinancing may also be restrictive and may be dilutive to existing stockholders.

***Acquisitions, distribution agreement terms, product research anddevelopment, and regulatory approvals and compliance can result in significantallowances, write-offs and litigation.***

Some aspects of our business, such asacquisitions, distribution agreements with third parties and product researchand development, including regulatory approvals and compliance, havesignificant and sometimes unpredictable events that can result in materialfinancial and accounting events, including allowances, write-offs andlitigation. For example, in our Eurosilicone acquisition, we made an aggregateof $941,257 in negative purchase accounting adjustments, we have incurred atotal of $7,626,288 in provisions and write-offs in connection with ourPIP.America subsidiary’s distribution agreement with PIP because of pastuncertainties regarding PIP’s ability to pay its portion of the productreplacement program for its products distributed in the United States, andEurosilicone is party to litigation commenced by the holder of patents relatingto texturing of breast implant surfaces in which damages in excess of €3 millionare alleged. Failure to timely achieve regulatory approvals and bring a productor products to market delays revenue and may result in not achieving anyrevenue for those products. Those delays, in addition to resulting inwrite-offs, would mean that historic expense will not have hoped for futureassociated revenue. These aspects of our business, such as acquiring companiesand technologies, establishing and administering distributor relationships anddeveloping new products, are part of our business strategy. As a result of thesignificance of these events, their unpredictable timing and frequency and thevariance in structure and outcome, these events and their financial impact areunpredictable and can create material fluctuations in our financial results andprospects.

***If our intellectualproperty rights do not adequately protect our products or technologies, otherscould compete against us more directly.***

Our success depends in part on ourability to obtain and retain patents or trademarks or rights to patents ortrademarks, protect trade secrets, operate without infringing upon theproprietary rights of others, and prevent others from acquiring or infringingon our patents, trademarks and other intellectual property rights. Eurosiliconeis party to litigation commenced by the holder of patents relating to texturingof breast implant surfaces in which damages in excess of €3 million arealleged. We will be able to protect our intellectual property from unauthorizeduse by third parties only to the extent that it is covered by valid andenforceable patents, trademarks and licenses and we own and are able to enforcethose rights. Patent protection generally involves complex legal and factualquestions and, therefore, enforceability and enforcement of patent rightscannot be predicted with certainty. Patents, if issued, may be challenged,invalidated or circumvented. Thus, any patents that we own or license fromothers may not provide adequate protection against competitors. In addition,our pending and future patent applications may fail to result in patents beingissued. Also, those patents that are issued may not provide us with adequateproprietary protection or competitive advantages against competitors withsimilar technologies. Moreover, the laws of certain foreign countries do notprotect our intellectual property rights to the same extent as do the laws ofthe United States.

In addition to patents andtrademarks, our intellectual property includes trade secrets and proprietaryknow-how. We seek protection of this intellectual property primarily throughconfidentiality and proprietary information agreements with our employees andconsultants. These agreements may not provide meaningful protection or adequateremedies for violation of our rights in the event of unauthorized use ordisclosure of confidential and proprietary information. Failure to protect ourproprietary rights could seriously impair our competitive position.

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***We depend on distributors in two countriesfor a significant part of our Eurosilicone revenue and the loss of either ofthese distributors could adversely affect our ability to sell our products inthose countries and our revenues.***

Historically, two distributors—ImportMedic in Brazil and Corporación Recimédica in Venezuela —have comprisedapproximately 22% of our consolidated revenue. Currently, we are financiallydependent on the sales of these two distributors and the acquisition of Biosiland Nagor has not added any further customer concentration. For ourdistributors, as well as for our own direct sales force, the customer is eachdoctor that implants or uses our products. If either of these distributors wereto decide to no longer sell our products or were unable to sell our products,we would have to seek either to replace them, as we have done in some marketsfrom time to time, or begin selling directly in those markets, as we have donein various markets and as we are currently doing in additional targetedmarkets. However, we may or may not be able to timely replace a distributor orsell directly in that territory.

***We depend on a limitednumber of suppliers for certain raw materials and the loss of any suppliercould adversely affect our ability to manufacture many of our products.***

We currently rely on one supplier forsilicone raw materials used by our Eurosilicone subsidiary and one differentsilicone supplier for our Biosil/Nagor subsidiaries. We only have oral supplyagreements with these two suppliers, which include understandings that thesuppliers will transfer the necessary formulations to us in the event that theycannot meet our requirements. We cannot guarantee that these agreements will beenforceable or that we would be able to produce a sufficient amount of qualitysilicone raw materials in a timely manner.

***Our international businessexposes us to a number of risks.***

Substantially all of our currentsales are and a significant part of our projected future sales will be derivedfrom international operations. In addition, we have and anticipate having inthe future material international suppliers and operations, includingmanufacturing operations. Accordingly, we are exposed to risks associated withinternational operations, including risks associated with re-valuation of thelocal currencies of countries where we purchase or sell our products or conductbusiness, which may result in our purchased products becoming more expensive tous in U.S. dollar terms or sold products becoming more expensive in localcurrency terms, thus reducing demand and sales of our products or increasedcosts to us. Our operations and financial results also may be significantlyaffected by other international factors, including:

·                  foreign government regulation ofmedical devices;

·                  product liability claims;

·                  new export license requirements;

·                  political or economic instability inour target markets;

·                  trade restrictions;

·                  changes in tax laws and tariffs;

·                  inadequate protection of intellectualproperty rights in some countries;

·                  managing foreign distributors,manufacturers and staffing;

·                  managing foreign branch offices; and

·                  foreign currency translations.

If these risks actually materialize,our sales to international customers, as well as those domestic customers thatuse products manufactured abroad, may decrease or our supplier or manufacturingcosts may materially increase.

***Ourfailure to attract and retain key managerial, technical, selling and marketingpersonnel could adversely affect our business.***

Our success will depend upon ourability to attract and retain key managerial, financial, technical, selling andmarketing personnel. The lack of key personnel might significantly delay orprevent the achievement of our development and strategic objectives. Althoughwe maintain a key man policy on two of our Eurosilicone managers for thebenefit of our commercial bank lenders, we do not maintain any other key manlife insurance on any of our employees. Other than certain of our executiveswho are parties to employment agreements, none of our employees is under anyobligation to continue providing services to us. We are continuing to build ourmanagement and technical staffs. We believe that our success will depend to asignificant extent on the ability of our key personnel, including the newmanagement and technical staffs, to operate effectively, both individually andas a group. Competition for highly skilled employees in our industry is high,and we cannot be certain that we will be successful in recruiting or retainingthese personnel. We may also face litigation from competitors with hiringpersonnel formerly employed by them.

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***MediCor’s future growth will place asignificant strain on our managerial, operational, financial and otherresources.***

Our success will depend upon ourability to manage our internal and acquisition-based growth effectively. Thiswill require that we continue to implement and improve our operational,administrative and financial and accounting systems and controls and continueto expand, train and manage our employee base. We anticipate that we will needto hire and retain numerous additional employees and consultants for bothinternal and acquisition-based growth for some time. Integration of theseemployees and consultants and employee and consultant loss in the process willrequire significant management attention and resources. Our systems,procedures, controls and personnel may not be adequate to support our futureoperations and our management may not be able to achieve the rapid executionnecessary to exploit the market for our business model.

***In connection with ouracquisition of Biosil and Nagor, we entered into significant put and callarrangements, which may require us to pay substantial amounts to purchase theshares of our common stock issued to the sellers. Those payments could reduceour cash flow and the funds available to expand our business.***

In connection with our acquisition ofBiosil and Nagor, we entered into put and call option agreements with each ofthe former shareholders of Biosil and Nagor, pursuant to which the formershareholders have the right under certain circumstances to put to us the2,640,000 shares of our common stock issued to them in connection withacquisition at a purchase price ranging between $5.50 and $7.50 per share.These agreements may require us to pay substantial amounts to purchase theseshares, which could decrease our liquidity and the funds available to expandour business, and we presently have no specific contingency plan for thispossible future event. These agreements are described in the Management’sDiscussion and Analysis or Plan of Operation—Liquidity and Capital Resourcessection of this annual report.

***If our suppliers, collaborative partners orconsultants do not perform, we will be unable to obtain, develop, market orsell products as anticipated and we may be exposed to additional risks.***

We have in the past and will in thefuture enter into supply, collaborative or consulting arrangements with thirdparties to supply or develop products. These arrangements may not produce orprovide successful products even though they receive substantial investment. Ifwe fail to establish these arrangements, the number of products from which wecould receive future revenues will be limited.

Our dependence on supply,collaborative or consulting arrangements with third parties subjects us to anumber of risks. These arrangements may not be on terms favorable to us.Agreements with suppliers may limit our supply of products or require us topurchase products we can not profitably sell. They may also restrict ourability to market or distribute other products. Agreements with consultants orcollaborative partners typically allow the third parties significant discretionin electing whether or not to pursue any of the planned activities. We cannotwith certainty control the amount and timing of resources our suppliers, collaborativepartners or consultants may devote to our products and these third parties maychoose to pursue alternative products. These third parties also may not performtheir obligations as expected. Business combinations, significant changes intheir business strategy, or their access to financial resources may adverselyaffect a supplier’s, partner’s or consultant’s willingness or ability tocomplete its obligations under the arrangement. Moreover, we could becomeinvolved in disputes with our suppliers, partners or consultants, which couldlead to delays or termination of the arrangements and time-consuming andexpensive litigation or arbitration.

***Ourquarterly operating results are subject to substantial fluctuations and anyfailure to meet financial expectations for any fiscal quarter may disappointsecurities analysts and investors and could cause our stock price to decline.***

Our quarterly operating results mayvary significantly due to a combination of factors, many of which are beyondour control. These factors include:

·      changesin demand for our products;

·      ourability to meet the demand for our products;

·      movementin various foreign currencies, primarily the euro, the British pound and theU.S. dollar;

·      existingand increased competition, including the particular selling strategies andother actions of our competitors; 

·      ourability to compete against significantly larger and better funded competitors;

·      thenumber, timing, pricing and significance of new products and productintroductions and enhancements by us and our competitors;

·      ourability to develop, introduce and market new and enhanced versions of ourproducts on a timely basis;

·      changesin pricing policies by us and our competitors;

·      thetiming of significant orders and shipments;

·      regulatoryapprovals or other regulatory action affecting new or existing products;

·      litigationwith respect to product liability claims or product recalls and any insurancecovering such claims or recalls; and

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·      generaleconomic factors.

As a result, we believe thatperiod-to-period comparisons of our results of operations are not necessarilymeaningful and investors should not rely upon these comparisons as indicationsof future performance. These factors may cause our operating results to bebelow market analysts’ expectations in some future quarters, which could causethe market price of our stock to decline.

***If we default on the termsof the Notes our bank debt, our lenders could accelerate our indebtedness,foreclose on our assets and force us out of business.***

On April 26, 2006, we sold theNotes in the aggregate principal amount of $50 million. In addition in2004, our ES Holdings subsidiary also entered into a bank loan agreement. Ourobligation to repay the Notes is secured by a first lien on substantially allof our assets, including all of the assets of certain of our subsidiaries thatguaranteed payment and performance of all or any portion of the obligations byus to the Note holders. If we are unable to make timely payment of principal orinterest on the Notes or on the bank debt, or if we default on any of thecovenants or other requirements of the Note, or other agreements relating tothe Note or to the banknote financing, the lenders may accelerate ourindebtedness and our Note holders will be able to accelerate our indebtednessor foreclose on our assets. Any such default, acceleration or foreclosure couldforce us out of business.

***If we are unable to avoid significantproduct liability claims or product recalls, we may be forced to pay substantialdamage awards and other expenses that could exceed our allowances and anyapplicable insurance coverage.***

In the past, the breast implantmanufacturing industry has been subject to significant litigation allegingproduct liability. We also have in the past been, currently are, and may in thefuture be subject to product liability claims alleging that the use of ourtechnology or products has resulted in adverse health effects. These claims maybe brought even with respect to products that have received, or in the futuremay receive, regulatory approval for commercial sale. In particular, themanufacture and sale of breast implant products entails significant risk ofproduct liability claims due to potential allegations of possible diseasetransmission and other health factors, rupture or other product failure. Somebreast implant manufacturers that suffered these types of claims in the pasthave been forced to cease operations or even to declare bankruptcy. We may alsoface a substantial risk of product liability claims from other products we maychoose to sell. In addition to product liability claims, we may in the futureneed to recall or issue field corrections related to our products due tomanufacturing deficiencies, labeling errors, or other safety or regulatoryreasons. Product liability claims, relating to alleged product defects, aredistinguishable from product warranty claims, which relate to allegations thatproducts do not meet warranties of merchantability or fitness for a particularpurpose. We address the substance of potential product warranty claims relatingto products distributed by us in the United States and other countries throughour product replacement programs discussed elsewhere in this Business section.

Presently, we do not have liabilityinsurance to protect us from the costs of claims for damages due to the use orrecall of our products, except that our Biodermis subsidiary carries a limitedamount of product liability insurance related to its products and our Biosiland Nagor subsidiaries carry product liability insurance excluding the UnitedStates. We may in the future seek additional insurance, which will be limitedin both circumstance of coverage and amount. Recent premium increases andcoverage limitations, including specifically limitations or prohibitions byinsurers on insurance covering breast implant manufacturers, may make thisinsurance uneconomic or even unavailable. However, even if we obtain orincrease insurance, one or more product liability claims or recall orders couldexceed any coverage we may hold. If we continue to have limited or no coverageor our insurance does not provide sufficient coverage, product liability claimsor recalls could result in losses in excess of our allowances.

***Lawsuits, including those seeking classaction status, may, if successful, cause us to incur substantial liability,including damage awards and significant legal fees that may exceed ourallowances.***

Lawsuits have been filed naming us orour PIP.America subsidiary, the French manufacturer from which we purchasebreast implant products, and the U.S. distributor of those same products whopreceded our subsidiary in the U.S. market. In these suits the plaintiffs havesought or currently seek, among other things, class action status for claims,including claims for breach of warranty. The claims arise from productsdistributed both before and after our subsidiary that distributed the productscame into existence. Although certain of the claims arise from productsdistributed by the other distributor prior to our subsidiary coming intoexistence, we have still been named as a defendant. While we have provided anamount equal to the outstanding product replacement claims for claims arisingfrom products our PIP.America subsidiary distributed, the plaintiffs areseeking to hold our subsidiary responsible for more damages. There can be noassurance that we can terminate the litigation as to our subsidiary for amountsalready provided. Although our subsidiary is indemnified by three separate entities,including PIP, the French manufacturer, PIP/USA, Inc., the previousdistributor, and Mr. Jean Claude Mas, personally, there can be noassurance this indemnity will protect us, as there is no guarantee that theFrench manufacturer, the previous distributor, or Mr. Mas will, or will beable to, honor the indemnification they have provided. Eurosilicone is also a 

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party to litigation commenced by theholder of patents relating to texturing of breast implant surfaces in whichdamages in excess of €3 million are alleged.

If our subsidiaries are unsuccessfulin defending against the claims involved in these suits, or if class actionstatus is achieved in the product warranty case, and the indemnification wereto prove non-reliable, our subsidiary named in that litigation could beresponsible for significant damages above the allowances provided and availableassets needed to satisfy such a judgment. Eurosilicone does not have anyallowances relating to the patent action against it.

***Our product replacement programs may exposeus to uninsured risk.***

Eurosilicone has not in the past hada formal or informal product replacement program or any similar program, thoughnow it has enhanced its product replacement programs.  Nagor provides astandard manufacturers’ warranty on all products sold with no time limit, andhas a warranty program called “NagorEnhance,” which applies to all breastimplant products implanted within the United Kingdom. While these subsidiarieshave not had a history of material product-related litigation, we believe thelimited nature of the litigation is in part due to the limited nature of thesehistoric programs and in part due to not selling products in the United States,which historically has been much more litigiousthan the rest of the world. Eurosilicone and Nagor also have in the past reliedon third-party distributors to support their products in almost all countries.We also expect to develop similar programs for the Biosil products marketed byNagor and our other subsidiaries. These product replacement programs andchanges in litigation experience outside the United States may expose oursubsidiaries to additional potential liability. In addition, although Biosil and Nagor carry limited productliability insurance (excluding the United States) and Eurosilicone carrieslimited product liability insurance, these policies only cover product failure,whereas our replacement programs cover more than just failure. Althoughwe have policies of carefully observing corporate formalities and otherwiseseeking to preserve the protection of the corporate form, there can be noassurance that some or all of these potential liabilities will not expose us orour other subsidiaries to potential liabilities as well.

***If third parties claim we are infringingtheir intellectual property rights, we could suffer significant litigation orlicensing expenses or be prevented from marketing our products.***

Our commercial success dependssignificantly on our ability to operate without infringing upon the patents andother proprietary rights of others. However, regardless of our intent, ourtechnologies may infringe the patents or violate other proprietary rights of thirdparties. In the event of such infringement or violation, we may face litigationand may be prevented from pursuing product development or commercialization.Eurosilicone is party to litigation commenced by the holder of patents relatingto texturing of breast implant surfaces in which damages in excess of €3 millionare alleged. Eurosilicone has not established any allowances relating to thislitigation.

***Weare subject to substantial government regulation, which could adversely affectour business.***

The production and marketing of ourproducts and intended products and our research and development, pre-clinicaltesting and clinical trial activities are subject to extensive regulation andreview by numerous governmental authorities, both in the United States andabroad. Most of the medical devices we sell or intend to sell or develop mustundergo rigorous pre-clinical testing and clinical trials and an extensiveregulatory approval process before they can be marketed. This process makes itlonger, more uncertain and more costly to bring the products to market, andsome of these products may not be approved, or, once approved, they may berecalled. The pre-market approval process can be particularly expensive,uncertain and lengthy. Many devices for which FDA approval has been sought byother companies have never been approved for marketing. This could happen tous. In addition to testing and approval procedures, extensive regulations alsogovern marketing, manufacturing, distribution, labeling, and record-keepingprocedures. If we or our suppliers or collaborative partners do not comply withapplicable regulatory requirements, this could result in warning letters,non-approval, suspensions of regulatory approvals, civil penalties and criminalfines, product seizures and recalls, operating restrictions, injunctions, andcriminal prosecution.

***Delaysin or rejection of FDA or other government entity approval of new productswould adversely affect our business.***

Delays or rejection may beencountered due to a number of reasons identified above in this Risks andUncertainties section. In the United States, there has been a continuing trendof more stringent FDA oversight in product clearance and enforcementactivities, causing medical device manufacturers to experience longer approvalcycles, more uncertainty, greater risk, and higher expenses. Internationally,there is also risk that we or our suppliers or collaborative partners may notbe successful in meeting the quality standards or other certificationrequirements. Regulatory approval of any given product is highly uncertain andmay not be forthcoming despite extraordinary expense and diligence. Even ifregulatory approval of a product is granted, this approval may entaillimitations on uses for which the product may be labeled and promoted. It ispossible, for example, that we or our suppliers or collaborative partners maynot receive FDA approval to market our current 

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or future products for intendedindications or for broader or different applications or to market updatedproducts that represent extensions of our, our suppliers’ or collaborativepartners’ basic technology. In addition, we or our suppliers or collaborativepartners may not receive export or import approval for products in the future,and countries to which products are to be exported may not approve them forimport.

***Government regulation ofmanufacturing of medical devices is expensive, time consuming and uncertain formanufacturers and may result in product unavailability or recalls.***

Medical device manufacturingfacilities also are subject to continual governmental review and inspection.The FDA has stated publicly that compliance with manufacturing regulations willbe scrutinized strictly. A governmental authority may challenge our or oursuppliers’ or collaborative partners’ compliance with applicable federal, stateand foreign regulations. In addition, any discovery of previously unknownproblems with products or facilities may result in restrictions on the productor the facility, including withdrawal of the product from the market or otherenforcement actions.

***Ifour use of hazardous materials results in contamination or injury, we couldsuffer significant financial loss.***

Our manufacturing and researchactivities involve the controlled use of hazardous materials. We cannoteliminate the risk of accidental contamination or injury from these materials.In the event of an accident or environmental discharge, we may be held liablefor any resulting damages, which may exceed our financial resources.

***ITEM 2.  PROPERTIES***

Our Eurosilicone subsidiary leases approximately91,300 square feet of land and three buildings consisting of approximately44,100 square feet of manufacturing, storage and office space located in Apt,France. The leases expire December 31, 2009 (approximately 23,400 squarefeet of building and land), December 31, 2010 (approximately 68,200 squarefeet of building and land) and January 14, 2017 (approximately 43,800square feet of building and land). The terms of the leases provide foraggregate annual lease payment obligations of approximately $613,000.

Our Biosil subsidiary leasesapproximately 10,000 square feet of manufacturing, storage and office spacelocated in Ashby de la Zouche, England and approximately 18,400 square feet ofmanufacturing, storage and office space located in Cumbernauld, Scotland. Theterms of the leases expire in 2009, 2010, 2015 and 2017, respectively. Theterms of the leases provide for aggregate annual lease payment obligations ofapproximately $199,000. Our Nagor subsidiary owns a building consisting ofapproximately 8,800 square feet of storage and office space located in Douglas,Isle of Man.

Our MediCor Germany subsidiary leasesapproximately 600 square feet of office space located in Warngau, Germany undera three-year lease that commenced on March 1, 2006. The lease provides for anaggregate annual payment obligation of approximately $42,624.

Our MediCor Mexico subsidiary leasesthree warehouse and office spaces in Mexico. The first lease is located inMexico City and is approximately 10,000 square feet of warehouse and officespace under a one-year lease that commenced on May 15, 2006. The second leaseis approximately 950 square feet of office space located in Guadalajara, Mexicounder a one-year lease that commenced on November 15, 2005. The third lease isapproximately 770 square feet of office space located in Tijuana, Mexico undera one-year lease that commenced on June 1, 2006. The leases provide for anaggregate annual aggregate payment obligation of approximately $51,349.

Our Biodermis subsidiary, located inLas Vegas, Nevada, leases approximately 6,500 square feet of office,manufacturing and warehouse space under a five-year lease that commenced onMay 1, 2003 for an aggregate annual payment of $70,850.

We lease approximately 7,000 squarefeet of administrative office space and research and development space in SantaBarbara under a four-year lease that commenced in April 2006. The leaseprovides for an aggregate annual payment obligation of approximately $170,304.

Our principal executive office islocated at 4560 S. Decatur Blvd., Suite 300, Las Vegas, NV 89103. Welease these approximately 6,400 square feet under a five-year lease thatcommenced in January 2003. The lease provides for an aggregate annual paymentof $178,120. We believe our current facilities, together with those we mayacquire in connection with future acquisitions, will generally be adequate forour needs for the foreseeable future.

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***ITEM 3.  LEGAL PROCEEDINGS***

In October 1999, Case No.99-25227-CA-01, June 2000, Case No. 00-14665-CA-01, June 2003, Case No.03-15006-CA-09, and September 2003, Case Nos. 0322537-CA-27 and 03-22399-CA-15,separate litigations were filed by Saul Kwartin, Ruth Kwartin, Steven M.Kwartin, Robert Kwartin and Nina Kwartin against PIP.America (our subsidiary),PIP/USA, Inc., Poly Implants Protheses, S.A., Jean Claude Mas, JyllFarren-Martin and Donald K. McGhan in the Circuit Court of Miami-Dade County,Florida. The Kwartin family members variously allege that they are shareholdersof PIP/USA, Inc. (“PIP/USA”) or have statutory and common law rights ofshareholders of PIP/USA as a result of loans or investments allegedly made toor into PIP/USA or a third party or under an alleged employment agreement.Plaintiffs assert that they have certain derivative or other rights to analleged distribution agreement between PIP and PIP/USA. Plaintiffs furtherallege, among other things, that PIP.America and its chairman tortiouslyinterfered with that agreement and plaintiffs’ other alleged rights. Inaddition to monetary damages and injunctive relief, plaintiffs seek toreinstate the alleged distribution agreement between PIP/USA and PIP andinvalidate PIP.America’s distributor relationship with PIP. These cases areconsolidated for pretrial purposes but not for trial.

Peggy Williams v. PIP/USA, Inc., CaseNo. 03 CH 9654, Jessica Fischer Schnebel, et al. v. PIP/USA, Inc., Case No.03CH07239, Dawn Marie Cooper, et al. v. PIP/USA, Inc., Case No. 03CH11316,Miriam Furman, et al. v. PIP/USA, Inc., Case No. 03CH10832 and Karen S. Witt,et al. v. PIP/USA, Inc., Case No. 03CH12928 were filed in the Circuit Court ofCook County, Chancery Division, in or around July 2003. Counsel for JessicaFischer Schnebel, et al. v. PIP/USA, Inc., Case No. 03CH07239 amended her classaction complaint to include plaintiffs from the other four cases, and each ofthe others was voluntarily dismissed. The consolidated second amended complaintcontained counts alleging product liability, breach of the implied warrantiesof merchantability and fitness for a particular purpose, violation of theIllinois Consumer Fraud Act and third-party beneficiary status. Unspecifiedmonetary damages, exemplary damages and attorneys fees and costs had beensought. On January 26, 2006, PIP.America, which was a defendant in the action,won dismissal of all counts in these cases but the third-party beneficiaryclaims. Plaintiffs have amended and refiled their complaint against PIP.America(seeking the same damages), and PIP.America has filed another motion to dismissplaintiffs’ latest complaint (the Third Amended Complaint). PIP.America’smotion to dismiss has been fully briefed and will be heard on November 1, 2006.PIP, a defendant in the Schnebel litigation, has agreed to indemnifyPIP.America for any losses PIP.America may suffer as a result of the Illinoislitigation.

With respect to cases involving PIP,PIP.America is indemnified by PIP/USA, Inc., PIP, and PIP’s President, JeanClaude Mas, personally, from, among other things, claims arising from productsmanufactured by PIP-France. PIP.America either already has, or is in theprocess of, asserting its indemnification claims and, in the event of anadverse judgment in any of the cases, PIP.America intends to seek the benefitsof this indemnity. As a result, we believe the costs associated with thesematters will not have a material adverse impact on our business, results ofoperations or financial position.

In July, 2005, IP Resources Limited,a UK-based company filed an action against our subsidiary, Eurosilicone, SAS inthe Marseille Civil Court (Tribunal de Grande Instance), Marseille, France. Thecomplaint alleges that Eurosilicone infringed upon a certain European Patentlicensed by IP Resources, Inc. known as “Implantable prosthesis device”, Patent#0174141B1, and seeks damages of €3 million, plus legal costs. The case is inthe preliminary stages and we believe we do not infringe on the 0174141B1patent and are prepared to wage a vigorous defense based on both the validityof the patent and upon the merits of the claims.

Though it is not yet possible topredict the outcome of the cases described above, MediCor and its subsidiaries,as applicable, have denied plaintiffs’ allegations and are vigorously defendingthemselves in each lawsuit. MediCor and its subsidiaries have been and willcontinue to be periodically named as defendants in other lawsuits in the normalcourse of business, including product liability and product warranty claims. Inthe majority of such cases, the claims are dismissed, or settled for immaterialamounts. Litigation, particularly product liability litigation, can beexpensive and disruptive to our normal business operations and the results ofcomplex proceedings can be very difficult to predict. Claims against MediCor orits subsidiaries have been and are periodically reviewed with counsel in theordinary course of business. We presently believe that we or our subsidiarieshave meritorious defenses in all lawsuits in which we or our subsidiaries aredefendants, subject to the subsidiaries’ continuing product replacementobligations, which the subsidiaries intend to continue to satisfy. While it isnot possible to predict the outcome of these matters, we believe that the costsassociated with these proceedings will not have a material adverse impact onour business, results of operations or financial position.

***ITEM 4.  SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS***

None.

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**PART II**

***ITEM 5.  MARKET FOR COMMON EQUITY AND RELATEDSTOCKHOLDERS MATTERS***

**Market Information**

On September 22, 2006, we hadapproximately 560 stockholders of record. Our common stock price at the closeof business on September 22, 2006 was $2.40 per share. The average of the bidand asked price on that date was $2.40.

During the quarter ended December 31,2005, we issued 237 shares of series A convertible preferred stock as dividendsof the preferred stock and granted options to purchase 160,000 shares of commonstock to one employee. During fourth quarter of fiscal 2006, we granted optionsto purchase 8,000 shares of common stock to one employee.

**Dividends**

We have never paid a cash dividend onour common stock and do not anticipate paying cash dividends on our commonstock in the foreseeable future.

***ITEM 6.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS***

***Sales***

Sales for the fiscal yearended June 30, 2006 were $31,382,963, an increase of $4,424,416 or 16% versusthe same period a year ago. Of this, approximately $1,986,105 of the increasewas attributable to the acquisition of Biosil Limited and Nagor Limited. AtEurosilicone, unit growth—particularly in Latin America—was offset by adecrease in unit prices and a decline in the dollar relative to the euro. Thisdecline impacted overall MediCor sales by approximately 3%.

***Cost of Sales***

Cost of sales as a percentageof net sales for the fiscal year ended June 30, 2006 was approximately 69%compared to approximately 56% during the same period in 2005. This increase wasprimarily attributable to the decrease in average selling prices of breastimplants noted above. However, an increase in ongoing regulatory and qualitycontrol costs contributed to the increase. These costs are from programs toimprove manufacturing efficiencies and quality systems, programs which webelieve will enable us to increase production and lower future unit cost ofsales. Based on our historical review of costs, we expect that cost of sales inthe future will remain in line on a percentage basis with our historic level ofapproximately 66%. As sales volumes and prices increase, costs should thenreduce as a percentage of sales.

***Selling, General and Administrative Expenses***

Selling, general andadministrative (“SG&A”) expenses increased to $22,360,416 for the fiscalyear ended June 30, 2006, as compared to $19,143,127 during the same period in2005. The increase was attributable to payroll related expenses of $2,340,202;product replacement related fees of $1,894,744; a legal settlement of$1,000,000; additional amortization and deprecation of $691,388; consultingfees of $520,454; travel related expenditures of $398,269; advertising fees of$268,595; acquisition expense of $249,920 and other various increases of$54,973. The legal settlement was related to our decision to discontinue andbuy out a distributor in the Mexico market and commence direct sales efforts inthat market. These increases were partly offset by a reduction in bad debtexpense of $1,323,998; a vendor settlement of $983,558 relieving accountspayable recorded in a prior period; a bad debt recovery of $672,663; a reversalof $517,536 in long-term accrued liability previously provided for in a priorperiod; a reduction in annual management fees of $414,063 and lower commissionexpense of $289,438. Of all SG&A expenses the Company incurred duringfiscal 2006, the majority were charges that are expected to be recurring.

***Research and Development Expenses***

Research and development expenses in the fiscal year ended June 30,2006 were $3,482,371 as compared to $2,691,333 for the comparable period in2005. The increase of $791,038 was primarily attributable to a net increase ofhigher spending associated with the saline-filled breast implant clinicaltrials. Costs associated with the PIP product increased $174,360 and costsrelating to the development of other product lines increased $616,678. Weexpect that research and development expenses will continue to remainsubstantial and grow as we aggressively move to bring products to market.However, we expect that research and development expenses will decrease withrespect to a particular product once we receive required 

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government approvals forit, but these expenses will continue to increase overall as we bring newproducts to market or existing products to new markets.

***Interest Expense***

Interest expense increased to$12,760,518 for the fiscal year ended June 30, 2006 as compared to $5,315,568at June 30, 2005. Interest expense consists primarily of interest related toborrowings.

Interest expense for this fiscal yearprimarily included $12,219,286 related to the Notes and subordinated debt,including $4,878,899 amortization of related note discounts. We expect interestexpense to continue as we maintain high debt levels.

***Other Expense/(Income)***

Other income and expense was a gainof $11,416,711 for the fiscal year ended June 30, 2006 but was nothing for theprior fiscal year. The largest part of this year’s gain was a $10,218,750 gainon the revaluation of the warrant liability and convertible feature liabilityfrom their inception with the placement of the Notes until the fiscal year end.This resulted from a decline in our stock price, which reduced the carryingvalue of these liabilities. We also recognized a gain on extinguishment of ourrevolving debt with LLC. This demand debt was replaced with a subordinatedconvertible long-term note to Sirius Capital, a warrant for the benefit ofSirius, and a subordinated long-term note to International IntegratedIndustries, LLC with no change in principal amount. The present value of thesetwo new long-term notes plus the value of the warrant and conversion feature onthe Sirius note were $1,597,961 less than the demand note value they replaced.These gains were offset by $400,000 when we wrote down four patents as therewas no commercial utilization of the patents over the past year. Thus, our abilityto economically benefit over the life of the patents has been reduced.

***Net Loss***

Net loss attributable to commonstockholders for the fiscal year ended June 30, 2006 increased to $18,452,880from $17,282,311 for the previous fiscal year. Basic and diluted lossattributable to common stockholders per share of common stock for the fiscalyear ended was $0.87 as compared to $0.95 for the fiscal year ended June 30,2005.

**Liquidity and Capital Resources**

Cash used in operations during the fiscal year endedJune 30, 2006 was $15,004,370 as impacted by selling, general andadministrative expenses including continued startup costs, increased regulatoryand quality assurance expenses, increased engineering expenses, research anddevelopment expenses and interest expense. Our investing activities of$26,883,590 were principally due to the acquisition of Biosil Ltd. and NagorLtd. Our ability to make payments to refinance our debt and to fund plannedcapital expenditures and operations will depend on our ability to secureadditional significant financing and generate sufficient cash in the future.Currently, we have only limited product sales in the United States and will notbe in a position to materially increase United States sales unless and untilthe FDA issues a pre-market approval relating to one or more of the productssought to be sold by us. Product entry into the United States market is asignificant business priority. Our business strategy depends in significantpart on the success of bringing our products to the United States market. Weare currently funding substantial activities for two pre-market approvalapplications which are operating expenses.

Historically wehave raised funds to support our operating expenses and capital requirementsthrough sales of equity or debt securities or through other creditarrangements, including borrowing from our affiliates. Most recently, we raised$46.5 million ($50 million less fees) in a private placement that included thesale of notes and warrants. Of this, approximately $25 million was utilized inour acquisition of Biosil and Nagor and the balance was made available forgeneral working capital needs. In addition, our ES Holdings subsidiary is partyto a bank loan agreement under which it had an outstanding indebtedness ofapproximately $11,694,794 at June 30, 2006. In fiscal 2006, ES Holdingsnotified the banks under the loan agreement that inconsistencies existed in theloan covenant formulations which prevented consistent calculation of certaincovenants. ES Holdings and the banks are currently negotiating an amendment tothe loan agreement to clarify and correct these formulations. We anticipatethat an amendment will be completed in the second quarter of fiscal 2007. Tosatisfy our liquidity requirements, we will need to raise additional funds. Tothe extent additional sales of equity or debt securities are insufficient tosatisfy our liquidity requirements, we plan on being able to obtain anynecessary additional funds through the incurrence of additional indebtedness toour affiliates. We have received a written commitment from InternationalIntegrated, an affiliate of our chairman, to fund any operating expenses andcapital expenditures through July 1, 2007. The same entity has provided to usover $77 million in funding through June 30, 2006. This historic fundinghas been a combination of equity and debt. However, our ability to incuradditional indebtedness is restricted by our outstanding Notes. These Notesonly permit the incurrence of a maximum of $10 million of indebtedness that isboth expressly subordinate to them and unsecured. We are also restricted bythese Notes from issuing convertible securities or options, and our Noteholders have a right of first refusal with respect to new security issuancesother than the issuance of common stock in an underwritten public offering of 

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$75 million or more inwhich the net price per share (after deduction of underwriting discounts andcommissions) is at or above $8.00. To the extent our future liquidityrequirements are greater than these capital resources or limitations; we mayhave to seek to negotiate to obtain any necessary additional funds through theincurrence of additional indebtedness or issuance of equity securities.Continued delays in or failure to successfully bring planned products to theUnited States market adversely affects our liquidity and need for additionalcapital resources to a significant extent.

We expect our operating losses to continue andincrease as long as we do not have breast implant products approved for sale inthe United States. We anticipate that we will need additional liquidity tocover negative cash flow in fiscal 2007. In addition, to the extent we want topursue additional product introductions or acquisitions, we expect that we willneed additional financing. We do not presently have any commitments for suchfinancing and it may not be available when we need it, on terms acceptable tous or at all. The lack of adequate financing could adversely affect our abilityto effect acquisitions. In particular, there is an exception to the Noteholders’ right of first refusal with respect to new security issuances forsecurities issued in connection with acquisitions in which we acquire at leasta majority of the voting power of the entity being acquired. However, we may ormay not be able to exclusively use common stock in any proposed transaction.

Our ES Holdings subsidiary may be required to make aperformance payment of up to €3 million to the sellers in fiscal 2008 under theEurosilicone acquisition agreement and our Biosil U.K. Holdings Ltd. subsidiarywill be required to make two subsequent payments of £3.5 million each in fiscal2008 under the Biosil/Nagor acquisition agreement. If a payment is required andES Holdings does not otherwise have sufficient funds from dividends ordistributions from Eurosilicone, we may seek third-party financing to make thispayment. We intend to pay the two required Biosil/Nagor £3.5 million paymentsout of current funding resources—operating cash flows plus our recent debtfinancing.

We have also entered into put and call optionagreements with each of the former shareholders of Biosil and Nagor. Theseagreements were required by the sellers in connection with their agreeing totake a portion of the acquisition consideration in shares of our common stock.Under those agreements we may be obligated to purchase the 2,640,000 shares ofcommon stock issued to those shareholders in the acquisition if they are put tous by the holders. We may also call the same shares. The shares may be put tous starting 18 months after the saline-filled breast implant manufactured byBiosil is approved for commercialization in the United States by the FDA. Theput options expire if our common stock ever trades at or above $10.00 per sharefor 30 out of 45 consecutive trading days (whether before or after the puts areexercisable) and each put option is only exercisable to the extent theindividual selling shareholder still holds the common stock we issued to him orher in the acquisition. The purchase price associated with the puts variesdepending on when the FDA approves silicone-filled breast implants forcommercialization in the United States. If FDA silicone approval occurs on orbefore the date that is nine months after the Biosil product’s approval, theprice is $5.50 per share. If FDA silicone approval occurs after the date thatis nine months after the Biosil product’s approval and on or before the datethat is 18 months after the Biosil product’s approval, the price is $6.50 pershare. If FDA silicone approval occurs after the date that is 18 months afterthe Biosil product’s approval, the price is $7.50 per share. Under each ofthese circumstances, the maximum number of shares that may be put to us in anythree-month period by all of the selling shareholders is 660,000, less anyshares of common stock otherwise sold by any of those holders during thatperiod. The puts are also exercisable if there is a public offer by any personto acquire all of our outstanding shares of common stock. In such event, theprice will be $5.50 per share if both Biosil’s saline-filled breast implant andany third party’s silicone-filled breast implant have both been approved forcommercialization in the United States by the FDA by the time the personbecomes entitled to compulsorily acquire our common stock. Otherwise the pricewill be $6.50 per share. Any exercise of the puts will put additional demandson our capital resources, and we presently have no specific contingency planfor this possible future event. We may also call the shares of common stockissued to the selling shareholders at any time after FDA commercializationapproval of the Biosil saline-filled breast implant and until our common stocktrades at or above $20.00 per share for 30 out of 45 consecutive trading daysat prices of $7.50, $10.00 and $15.00 per share, based on the same FDA siliconeapproval events that apply to the puts. Each holder also terminates the callwith respect to his or her shares if he or she elects in his or her discretionto terminate the put.

Both Eurosilicone and the combined operations ofBiosil and Nagor have positive operating cash flows that may or may not besufficient to fund all of their respective projected operational, workingcapital, financial and other obligations. We expect that, from time to time,one or more of these operating subsidiaries may have additional liquidity needswhich may require financing by MediCor, a third-party, such as a bank, or ouraffiliates. In addition, we have a written commitment from InternationalIntegrated Industries, LLC, to fund any operating expenses and capitalexpenditures through July 1, 2007. However, the ability to access thatcommitment will be limited by the restrictions of the Notes.

Our revenues areprimarily denominated in U.S. dollars, in euros and British pounds, with U.S.dollars accounting for approximately 40% of total revenues. Our expenses aredenominated in U.S. dollars; euros and British pounds. We do not currentlyhedge against foreign exchange risk and do not have any plan to do so.

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***ITEM7.  FINANCIAL STATEMENTS***

The Financial Statements begin on page F-1.

***ITEM 8.  CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE***

Notapplicable.

***ITEM 8A.  CONTROLS AND PROCEDURES***

As of the end of fiscal year 2006,management, with the participation of the chief executive and financialofficers, carried out an evaluation of the effectiveness of our disclosurecontrols and procedures pursuant to Exchange Act Rule 13a-15. Based uponthat evaluation, the chief executive officer and the chief financial officerbelieve that, as of end of the period covered by this report, our disclosurecontrols and procedures were effective in making known to them materialinformation relating to MediCor (including its consolidated subsidiaries)required to be included in this report. There were no significant changes inour internal control over financial reporting during the three months endedJune 30, 2006 that have materially affected or are likely to materially affectour internal control over financial reporting.

The management of MediCor isresponsible for establishing and maintaining adequate internal control overfinancial reporting as is defined in Exchange Act Rule 13a-15(f). Theconsolidated financial statements and other information presented in thisannual report have been prepared in accordance with accounting principlesgenerally accepted in the United States. MediCor’s internal control system wasdesigned to provide reasonable assurance to our management and board ofdirectors regarding the preparation and fair presentation of publishedfinancial statements. Disclosure controls and procedures and our internalcontrols, no matter how well designed and implemented, can provide onlyreasonable assurance of achieving an entity’s objectives. The likelihood ofachieving such objectives is affected by limitations inherent in disclosurecontrols and procedures and the internal controls. These include the fact thathuman judgment in decision-making can be faulty and that breakdowns in internalcontrol can occur because of human failures such as simple errors or mistakesor intentional circumvention of the established process. Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within MediCor have been detected.

Management, with the participation ofthe chief executive and financial officers, evaluated the effectiveness of ourinternal control over financial reporting as of June 30, 2006 based on thecriteria for effective internal control established in “InternalControl-Integrated Framework” issued by the Committee of Sponsoring Organizationsof the Treadway Commission. Based on this evaluation, management determinedthat, as of June 30, 2006, MediCor maintained effective internal control overfinancial reporting. Greenberg & Company CPAs, the registered publicaccounting firm that audited the financial statements included in this annualreport, is not required to issue and has not issued an attestation report onmanagement’s assessment of MediCor’s internal control over financial reporting.Management will continue to review our disclosure controls and proceduresperiodically to determine their effectiveness and to consider modifications oradditions to them.

***ITEM 8B.  OTHER INFORMATION***

None.

**PART III**

***ITEM 9.  DIRECTORS, EXECUTIVEOFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THEEXCHANGE ACT***

Our Board of Directors has adopted aCode of Business Conduct and Ethics that is applicable to all employees,executive officers, including our principal executive officer, principalfinancial officer, principal accounting officer or controller or personsperforming similar functions, and members of our Board of Directors.  This Code of Business Conduct and Ethics isintended to promote and require ethical conduct among our directors, executiveofficers and employees.  A copy of thecode is available upon request, without charge, to our Corporate Secretary, at4560 South Decatur Boulevard, Suite 300, Las Vegas, Nevada 89103, and complieswith the rules of the SEC and the listing standards of the American StockExchange. 

The rest of the information requiredin this item is incorporated herein by reference to the information containedin the registrant’s Proxy Statement for Annual Meeting of Stockholders to befiled with the SEC no later than October 28, 2006.

24

----

 

***ITEM 10.  EXECUTIVE COMPENSATION***

The information required in this itemis incorporated herein by reference to the information contained in theregistrant’s Proxy Statement for Annual Meeting of Stockholders to be filedwith the SEC no later than October 28, 2006.

***ITEM 11.  SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS***

The information required in this itemis incorporated herein by reference to the information contained in theregistrant’s Proxy Statement for Annual Meeting of Stockholders to be filedwith the SEC no later than October 28, 2006.

***ITEM 12.  CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS***

The information required in this itemis incorporated herein by reference to the information contained in theregistrant’s Proxy Statement for Annual Meeting of Stockholders to be filedwith the SEC no later than October 28, 2006.

***ITEM 13.  EXHIBITS***

See Exhibit Index at Page E-1.

***ITEM 14.  PRINCIPAL ACCOUNTANTFEES AND SERVICES***

The information required in this itemis incorporated herein by reference to the information contained in theregistrant’s Proxy Statement for Annual Meeting of Stockholders to be filedwith the SEC no later than October 28, 2006.

**SIGNATURES**

Pursuant to the requirements ofSection 13 of the Securities Exchange Act of 1934, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.
|   |   | MEDICOR LTD. |
|--------|--------|--------------|
|   |   |         |   |
|   |   |         |   |
|   |   | By:          | /s/ Theodore R. Maloney |
|   |   |         | Theodore R. Maloney  Chief Executive Officer  September 28, 2006 |

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.
| /s/ Theodore R. Maloney |   | Chief Executive Officer       |   | September 25,  2006 |
|-------------------------|--------|-------------------------------|--------|---------------------|
| Theodore R.  Maloney    |   | (Principal Executive Officer) |   |
|                    |   |                          |   |                |
| /s/ Paul R.  Kimmel     |   | Chief Financial Officer       |   | September 25,  2006 |
| Paul R. Kimmel          |   | (Principal Financial Officer) |   |
|                    |   |                          |   |                |
| /s/ Donald K.  McGhan   |   | Chairman                      |   | September 25,  2006 |
| Donald K. McGhan        |   |                          |
|                    |   |                          |   |                |
| /s/ Jim J.  McGhan      |   | Director                      |   | September 25,  2006 |
| Jim J. McGhan           |   |                          |
|                    |   |                          |   |                |
| /s/ Mark E.  Brown      |   | Director                      |   | September 25,  2006 |
| Mark E. Brown           |   |                          |

 

25

----

 
| /s/ Samuel C. Rogers     |   | Director |   | September 25,  2006 |
|--------------------------|--------|----------|--------|---------------------|
| Samuel C. Rogers         |   |     |
|                     |   |     |   |                |
| /s/ Thomas Y.  Hartley   |   | Director |   | September 25,  2006 |
| Thomas Y.  Hartley       |   |     |
|                     |   |     |   |                |
| /s/ Robert L.  Forbuss   |   | Director |   | September 25,  2006 |
| Robert L.  Forbuss       |   |     |
|                     |   |     |   |                |
| /s/ Ikram U.  Khan, M.D. |   | Director |   | September 25,  2006 |
| Ikram U. Khan,  M.D.     |   |     |
|                     |   |     |   |                |
| /s/ Eugene I.  Davis     |   | Director |   | September 25,  2006 |
| Eugene I. Davis          |   |     |

 

26

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Shareholders andBoard of DirectorsMedicor Ltd.Las Vegas, Nevada

We have audited the accompanying consolidated balance sheet of MedicorLtd. and subsidiaries (collectively the “Company”) as of June 30, 2006 and therelated consolidated statements of operations and comprehensive income (loss),changes in shareholders’ equity (deficit) and cash flows for each of the twoyears in the period ended June 30, 2006. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements based upon our audits.

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis of designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion of the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statements presentation. We believe that ouraudit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements presented abovepresent fairly, in all material respects, the financial position of MedicorLtd. at June 30, 2006, and the results of its operations and cash flows foreach of the two years then ended in conformity with U.S. generally acceptedaccounting principles.

GREENBERG & COMPANY LLC

Springfield, New JerseyAugust 25, 2006, except for Note U, as to which the date is September 28, 2006

F-1

----

**MediCor Ltd.**

**ConsolidatedBalance Sheet**

**June 30, 2006**

**(thousands,except par value)**

 
| **Assets**                                                                                                                          |   |    |    |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|---------|---------|
|                                                                                                                                |   |    |    |
| Current assets:                                                                                                                     |   |    |    |
|                                                                                                                                |   |    |    |
| Cash and cash equivalents                                                                                                           |   | $       | 14,442  |   |
| Accounts receivable, net of allowance of $1,605                                                                                     |   | 10,422  |    |
| Notes receivable, net of allowance of $3,673                                                                                        |   | —  |    |
| Inventories                                                                                                                         |   | 9,160   |    |
| Deferred financing fees                                                                                                             |   | 1,102   |    |
| Prepaid expenses and other current assets                                                                                           |   | 1,090   |    |
| Total current assets                                                                                                                |   | 36,216  |    |
| Property and equipment, net                                                                                                         |   | 8,135   |    |
| Goodwill and other intangible assets, net                                                                                           |   | 81,777  |    |
| Deposits                                                                                                                            |   | 165     |    |
| Other assets                                                                                                                        |   | 2,822   |    |
| Total assets                                                                                                                        |   | $       | 129,115 |   |
|                                                                                                                                |   |    |    |
| **Liabilities  and Stockholders’ Equity**                                                                                      |   |    |    |
|                                                                                                                                |   |    |    |
| Current liabilities:                                                                                                                |   |    |    |
|                                                                                                                                |   |    |    |
| Accounts payable                                                                                                                    |   | $       | 5,902   |   |
| Accrued expenses and other current liabilities                                                                                      |   | 13,347  |    |
| Deferred tax payable                                                                                                                |   | 1,022   |    |
| Dividends payable                                                                                                                   |   | 256     |    |
| Short-term note payable                                                                                                             |   | 170     |    |
| Interest payable                                                                                                                    |   | 1,417   |    |
| Interest payable to related party                                                                                                   |   | 752     |    |
| Current portion of long-term debt                                                                                                   |   | 2,834   |    |
| Total current liabilities                                                                                                           |   | 25,700  |    |
|                                                                                                                                |   |    |    |
| Long-term debt, net of current portion and note  discounts                                                                          |   | 22,029  |    |
| Long-term debt to related party, net of note  discounts                                                                             |   | 37,310  |    |
| Senior warrants                                                                                                                     |   | 6,375   |    |
| Senior note conversion feature                                                                                                      |   | 27,750  |    |
| Total liabilities                                                                                                                   |   | 119,164 |    |
|                                                                                                                                |   |    |    |
| Commitments and contingencies (Note S)                                                                                              |   |    |    |
|                                                                                                                                |   |    |    |
| Preferred shares subject to mandatory redemption  requirements                                                                      |   | 6,810   |    |
|                                                                                                                                |   |    |    |
| Stockholders’ equity                                                                                                           |   |    |    |
|                                                                                                                                |   |    |    |
| Common shares, $0.001 par value, 100,000 shares  authorized, 23,800 shares issued, 23,746 shares outstanding and 54 shares  retired |   | 24      |    |
| Additional paid-in capital                                                                                                          |   | 73,144  |    |
| Deferred compensation                                                                                                               |   | (111    | )       |
| Accumulated deficit                                                                                                                 |   | (71,978 | )       |
| Accumulated other comprehensive income                                                                                              |   | 2,062   |    |
| Stockholders’ equity                                                                                                           |   | 3,141   |    |
| Total  liabilities and stockholders’ equity                                                                                    |   | $       | 129,115 |   |

 

See accompanying notes toconsolidated financial statements

F-2

----

**MediCor Ltd.**

**Consolidated Statements of Operations**

**For the Years Ended as Noted**

**(thousands, expect per share data)**

 
| ** **                                                                                  | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Net sales                                                                                   |       | $                           | 31,383     |                        | $          | 26,959 |   |
| Cost of sales                                                                               |       | 21,748                      |       | 15,163                      |       |
| Gross profit                                                                                |       | 9,635                       |       | 11,795                      |       |
|                                                                                        |       |                        |       |                        |       |
| Operating  expenses:                                                                        |       |                        |       |                        |       |
| Selling, general and administrative                                                         |       |                        |       |                        |       |
| Salaries and wages                                                                          |       | 6,759                       |       | 4,666                       |       |
| Other                                                                                       |       | 15,602                      |       | 14,478                      |       |
| Research and development                                                                    |       | 3,482                       |       | 2,691                       |       |
| Operating loss                                                                              |       | (16,208                     | )          | (10,039                     | )          |
|                                                                                        |       |                        |       |                        |       |
| Non-operating  expenses:                                                                    |       |                        |       |                        |       |
| Net interest expense                                                                        |       | 12,761                      |       | 5,316                       |       |
| Other expenses/(income)                                                                     |       |                        |       |                        |       |
| Net change in value of derivative liabilities                                               |       | (10,219                     | )          | —                      |       |
| Gain on debt extinguishment, net                                                            |       | (1,598                      | )          | —                      |       |
| Impairment of intangible assets                                                             |       | 400                         |       | —                      |       |
| Loss on foreign exchange transactions                                                       |       | 218                         |       | 237                         |       |
| Loss before  income taxes                                                                   |       | (17,770                     | )          | (15,592                     | )          |
| Income tax expense                                                                          |       | 175                         |       | 543                         |       |
| Net loss                                                                                    |       | (17,945                     | )          | (16,135                     | )          |
|                                                                                        |       |                        |       |                        |       |
| Preferred  dividends                                                                        |       |                        |       |                        |       |
| Preferred dividends deemed                                                                  |       | —                      |       | 263                         |       |
| Preferred dividends in arrears series A Preferred 8%                                        |       | 508                         |       | 884                         |       |
| Net loss  attributable to common stockholders                                               |       | $                           | (18,453    | )                           | $          | (17,282 | ) |
|                                                                                        |       |                        |       |                        |       |
| Net loss  attributable to common stockholders per share of common stock, basic and  diluted |       | $                           | (0.87      | )                           | $          | (0.95 | ) |
|                                                                                        |       |                        |       |                        |       |
| Weighted average number  of shares outstanding, basic and diluted                           |       | 21,092                      |       | 18,233                      |       |

 

See accompanying notes toconsolidated financial statements

F-3

----

**MediCor Ltd.**

**Consolidated Statements of Cash Flows**

**For the Years Ended as Noted**

**(thousands)**

 
| ** **                                                                                                                 | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                                 |       |                        |       |                        |       |
| Net loss                                                                                                                   |       | $                           | (17,945    | )                           | $          | (16,135 | ) |
| Adjustments to reconcile net loss to net cash  utilized by operating activities                                            |       |                        |       |                        |       |
| Depreciation and amortization                                                                                              |       | 2,480                       |       | 1,800                       |       |
| Provision for doubtful accounts                                                                                            |       | 1,134                       |       | 3,627                       |       |
| Non-employee stock options                                                                                                 |       | 296                         |       | 179                         |       |
| Employee preferred stock                                                                                                   |       | —                      |       | 267                         |       |
| Directors’ restricted common stock                                                                                    |       | 111                         |       | 80                          |       |
| Increase (decrease) in cash flows from changes in  operating assets and liabilities, excluding the effects of acquisitions |       |                        |       |                        |       |
| Accounts receivable, net                                                                                                   |       | (2,350                      | )          | (2,543                      | )          |
| Notes receivable                                                                                                           |       | (894                        | )          | (2,474                      | )          |
| Inventories                                                                                                                |       | (1,128                      | )          | (479                        | )          |
| Prepaid expenses and other current assets                                                                                  |       | (549                        | )          | 513                         |       |
| Goodwill                                                                                                                   |       | —                      |       | (618                        | )          |
| Deposits                                                                                                                   |       | (27                         | )          | 618                         |       |
| Other assets                                                                                                               |       | (3,824                      | )          | (589                        | )          |
| Accounts payable                                                                                                           |       | (269                        | )          | 39                          |       |
| Accrued expenses and other current liabilities                                                                             |       | 9,668                       |       | 963                         |       |
| Dividends payable                                                                                                          |       | 256                         |       | —                      |       |
| Interest payable                                                                                                           |       | (1,446                      | )          | 3,666                       |       |
| Non-current accrued liabilities                                                                                            |       | (517                        | )          | (1,339                      | )          |
| Net cash used in operating activities                                                                                      |       | (15,004                     | )          | (12,425                     | )          |
|                                                                                                                       |       |                        |       |                        |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                                 |       |                        |       |                        |       |
| Additions to property and equipment                                                                                        |       | (667                        | )          | (373                        | )          |
| Acquisition of Laboratoires Eurosilicone S.A., net  of cash acquired                                                       |       | (3,227                      | )          | (13,943                     | )          |
| Acquisition of Deramedics, net of cash acquired                                                                            |       | —                      |       | (75                         | )          |
| Acquisition of selected assets of Hutchison  International, Inc., net of cash acquired                                     |       | —                      |       | (250                        | )          |
| Acquisition of Biosil Ltd. and Nagor Ltd., net of  cash acquired                                                           |       | (22,990                     | )          | —                      |       |
| Net cash utilized in investing activities                                                                                  |       | (26,884                     | )          | (14,641                     | )          |
|                                                                                                                       |       |                        |       |                        |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                                 |       |                        |       |                        |       |
| Proceeds from issuance of short-term debt                                                                                  |       | 19,597                      |       | 22,874                      |       |
| Proceeds from issuance of long-term debt                                                                                   |       | 39,158                      |       | 10,901                      |       |
| Proceeds from issuance of common stock                                                                                     |       | 598                         |       | 586                         |       |
| Purchase of treasury stock                                                                                                 |       | (250                        | )          |                        |       |
| Proceeds from issuance of preferred shares subject  mandatory redemption requirements                                      |       | —                      |       | 862                         |       |
| Payments on convertible debentures                                                                                         |       | (50                         | )          | (300                        | )          |
| Payments on short-term debt                                                                                                |       | (477                        | )          | (6,388                      | )          |
| Payments on long-term debt                                                                                                 |       | (1,768                      | )          | —                      |       |
| Payments of preferred shares dividends                                                                                     |       | (14                         | )          | (35                         | )          |
| Net cash provided by financing activities                                                                                  |       | 56,794                      |       | 28,500                      |       |
|                                                                                                                       |       |                        |       |                        |       |
| **EFFECT  OF FOREIGN EXCHANGE TRANSLATION ON CASH AND CASH EQUIVALENTS**                                                   |       | (2,299                      | )          | 237                         |       |
|                                                                                                                       |       |                        |       |                        |       |
| **CHANGE  IN CASH AND CASH EQUIVALENTS**                                                                                   |       |                        |       |                        |       |
| Net increase (decrease) in cash and cash equivalents                                                                       |       | 12,607                      |       | 1,671                       |       |
| Cash and cash equivalents at beginning of period                                                                           |       | 1,835                       |       | 165                         |       |
|                                                                                                                       |       |                        |       |                        |       |
| Cash and cash  equivalents at end of period                                                                                |       | $                           | 14,442     |                        | $          | 1,836 |   |

 

F-4

----

 
| ** **                                                                                                                                                                                           | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                                                                                                                                                                                 |       |                        |       |                        |       |
| **SUPPLEMENTAL  DISCLOSURE OF NON-CASH ACTIVITIES**                                                                                                                                                  |       |                        |       |                        |       |
|                                                                                                                                                                                                 |       |                        |       |                        |       |
| Conversion of short-term debt to preferred stock                                                                                                                                                     |       | $                           | —     |                        | $          | 250 |   |
| Conversion of short-term debt to long-term debt                                                                                                                                                      |       | $                           | 66,342     |                        | $          | — |   |
| Conversion of long-term debt to common stock                                                                                                                                                         |       | $                           | 50         |                        | $          | 512 |   |
| Issuance of preferred stock to employees and  consultants                                                                                                                                            |       | $                           | —     |                        | $          | 267 |   |
| Issuance of preferred stock in lieu of dividends                                                                                                                                                     |       | $                           | 237        |                        | $          | — |   |
| Issuance of common stock to directors                                                                                                                                                                |       | $                           | —     |                        | $          | 80 |   |
| Issuance of common stock for the acquisition of  Biosil Ltd. and Nagor Ltd.                                                                                                                          |       | $                           | 9,504      |                        | $          | — |   |
| The Company converted 6 shares of our Series A  preferred stock to 1,495 shares of our common stock with a stated value of  $1,000 per share                                                         |       | $                           | —     |                        | $          | 5,755 |   |
|                                                                                                                                                                                                 |       |                        |       |                        |       |
| The Company purchased all of the capital stock of  Laboratories Eurosilicone S.A. for $43,298. In conjunction with the  acquisition, liabilities were assumed as follows:                            |       |                        |       |                        |       |
| Fair value of assets acquired                                                                                                                                                                        |       | $                           | —     |                        | $          | 20,275 |   |
| Goodwill                                                                                                                                                                                             |       | $                           | —     |                        | $          | 32,104 |   |
| Less: Liabilities assumed                                                                                                                                                                            |       | $                           | —     |                        | $          | (9,081 | ) |
| Cash paid for capital stock                                                                                                                                                                          |       | $                           | —     |                        | $          | 43,298 |   |
|                                                                                                                                                                                                 |       |                        |       |                        |       |
| Included in the fair value of assets acquired and  liabilities assumed was $2,532,081 for capital lease obligations.                                                                                 |       |                        |       |                        |       |
|                                                                                                                                                                                                 |       |                        |       |                        |       |
| The Company purchased all of the capital stock of  Dermatological Medical Products and Specialites, S.A. de C.V. for $75. In  conjunction with the acquisition, liabilities were assumed as follows: |       |                        |       |                        |       |
| Fair value of assets acquired                                                                                                                                                                        |       | $                           | —     |                        | $          | 75 |   |
| Less: Liabilities assumed                                                                                                                                                                            |       | $                           | —     |                        | $          | — |   |
| Cash paid for capital stock                                                                                                                                                                          |       | $                           | —     |                        | $          | 75 |   |
|                                                                                                                                                                                                 |       |                        |       |                        |       |
| The Company purchased all of the assets and  liabilities of Hutchinson International, Inc. for $3,000. In conjunction with  the acquisition, liabilities were assumed as follows:                    |       |                        |       |                        |       |
| Fair value of assets acquired                                                                                                                                                                        |       | $                           | —     |                        | $          | 3,283 |   |
| Less: Liabilities assumed                                                                                                                                                                            |       | $                           | —     |                        | $          | (283 | ) |
| Less: Common stock issued to sellers                                                                                                                                                                 |       |                        |       | $                           | (2,750     | ) |
| Cash paid for capital stock                                                                                                                                                                          |       | $                           | —     |                        | $          | 250 |   |
|                                                                                                                                                                                                 |       |                        |       |                        |       |
| The Company purchased all of the capital stock of  Biosil Ltd. and Nagor Ltd. for $44,957. In conjunction with the acquisition,  liabilities were assumed as follows:                                |       |                        |       |                        |       |
| Fair value of assets acquired, net of cash acquired  of $1,376                                                                                                                                       |       | $                           | 12,085     |                        | $          | — |   |
| Goodwill                                                                                                                                                                                             |       | $                           | 33,348     |                        | $          | — |   |
| Less: Liabilities assumed                                                                                                                                                                            |       | $                           | (1,852     | )                           | $          | — |   |
| Less: Subsequent payments to the sellers of Biosil  Ltd. and Nagor Ltd.                                                                                                                              |       | $                           | (11,093    | )                           | $          | — |   |
| Less: Common stock issued to sellers                                                                                                                                                                 |       | $                           | (9,498     | )                           | $          | — |   |
| Cash paid for capital stock                                                                                                                                                                          |       | $                           | 22,990     |                        | $          | — |   |
|                                                                                                                                                                                                 |       |                        |       |                        |       |
| **SUPPLEMENTAL  CASH FLOW DISCLOSURES**                                                                                                                                                              |       |                        |       |                        |       |
|                                                                                                                                                                                                 |       |                        |       |                        |       |
| Cash paid during the period for:                                                                                                                                                                     |       |                        |       |                        |       |
| Interest                                                                                                                                                                                             |       | $                           | 960        |                        | $          | 2,235 |   |
| Income taxes                                                                                                                                                                                         |       | $                           | 553        |                        | $          | 1,662 |   |

 

See accompanying notes toconsolidated financial statements

F-5

----

**MediCor Ltd.**

**Consolidated Statement of Stockholders’ Equity / (Deficit)**

**For the Periods Ended As Noted**

**(thousands)**

 
| ** **                                 | ** ** | ** **             | ** ** | **Common**             | ** ** | ** **               | ** ** | ** **       | ** ** | ** **      | ** ** | **Accumulated Other**    | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------|------------|------------------|------------|-----------------|------------|-------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **Number of**     | ** ** | **Shares $0.001** | ** ** | **Additional paid** | ** ** | **Deferred**     | ** ** | **Accumulated** | ** ** | **Comprehensive**             | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Common Shares** | ** ** | **Par Value**     | ** ** | **in capital**      | ** ** | **Compensation** | ** ** | **Deficit**     | ** ** | **Income / (Loss)** | ** ** | **Total**  | ** ** |
| ** **                                 | ** ** | ** **             | ** ** | ** **             | ** ** | ** **               | ** ** | ** **       | ** ** | ** **      | ** ** | ** **                    | ** ** | ** ** | ** ** |
| **Balance  - July 1, 2004**                |       | 18,045                 |       | 18                     |       | $                        | 17,477     |             | $          | —          |       | $                             | (36,231    | )          | $          | — |   | $ | (18,736 | ) |
| Comprehensive income:                      |       |                   |       |                   |       |                     |       |             |       |            |       |                          |       |       |       |
| Net loss                                   |       | —                 |       | —                 |       | —                   |       | —           |       | (17,044         | )          | —                        |       | (17,044    | )          |
| Foreign currency translation adjustments   |       |                   |       |                   |       |                     |       |             |       |            |       | (237                          | )          | (237       | )          |
| Total comprehensive income                 |       |                   |       |                   |       |                     |       |             |       |            |       |                          |       | (17,281    | )          |
|                                       |       |                   |       |                   |       |                     |       |             |       |            |       |                          |       |       |       |
| Issuance of  common shares                 |       | 2,288                  |       | 2                      |       | 9,270                    |       | —           |       | —          |       | —                        |       | 9,272      |       |
| Directors’  restricted common stock   |       | —                 |       | —                 |       | —                   |       | (27              | )          | —          |       | —                        |       | (27        | )          |
| Non-employee  stock options                |       | —                 |       | —                 |       | 179                      |       | —           |       | —          |       | —                        |       | 179        |       |
| **Balance  - June 30, 2005**               |       | 20,333                 |       | 20                     |       | 26,926                   |       | (27              | )          | (53,275         | )          | (237                          | )          | (26,593    | )          |
|                                       |       |                   |       |                   |       |                     |       |             |       |            |       |                          |       |       |       |
| Comprehensive  income:                     |       |                   |       |                   |       |                     |       |             |       |            |       |                          |       |       |       |
| Net loss                                   |       | —                 |       | —                 |       | —                   |       | —           |       | (18,453         | )          | —                        |       | (18,453    | )          |
| Foreign currency translation adjustments   |       | —                 |       | —                 |       | —                   |       | —           |       |            |       | 2,299                         |       | 2,299      |       |
| Total comprehensive income                 |       |                   |       |                   |       |                     |       |             |       |            |       |                          |       | (16,154    | )          |
|                                       |       |                   |       |                   |       |                     |       |             |       |            |       |                          |       |       |       |
| Issuance of  common shares                 |       | 3,446                  |       | 3                      |       | 10,508                   |       | —           |       | —          |       | —                        |       | 10,512     |       |
| Subordinated  warrant                      |       | —                 |       | —                 |       | 6,258                    |       | —           |       | —          |       | —                        |       | 6,258      |       |
| Subordinated note  conversion feature      |       | —                 |       | —                 |       | 29,156                   |       | —           |       | —          |       | —                        |       | 29,156     |       |
| Non-employee  stock options                |       | —                 |       | —                 |       | 296                      |       | (84              | )          | —          |       | —                        |       | 212        |       |
| Repurchase and  retirement of common stock |       | (33                    | )          | (0.03                  | )          | —                   |       | —           |       | (250            | )          | —                        |       | (250       | )          |
| **Balance - June 30, 2006**                |       | 23,746                 |       | $                      | 24         |                     | $          | 73,144           |       | $               | (111       | )                             | $          | (71,978    | )          | $ | 2,062 |   | $ | 3,141 |   |
|                                            |            |                        |            |                        |            |                          |            |                  |            |                 |            |                               |            |            |            |  |  |  |  |  |  |

 

See accompanying notes toconsolidated financial statements

 

F-6

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**MEDICOR LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**June 30, 2006**

**(thousands, except per share data)**

**Note A – Description of Business**

MediCor Ltd. (the “Company”) is a global health care companythat acquires, develops, manufactures and markets products primarily for theaesthetic, plastic surgery and dermatology markets. Current products includebreast implant products and scar management products. The Company’s breastimplant products are currently sold in approximately 85 countries, but are notsold in the United States or Canada. The Company’s products are sold primarilyin foreign (non-U.S.) countries and foreign sales are currently approximately95% of total sales, with Brazil accounting for approximately 14% of sales.Breast implant and other implant products account for approximately 94% oftotal sales for the year ended June 30, 2006, with sales in approximately 85countries but not the U.S. or Canada; scar management products contributedapproximately 6% of total sales. The Company sells its products to hospitals,surgical centers and physicians primarily through distributors, as well asthrough direct sales personnel.

MediCor was founded in 1999 by chairman of the board DonaldK. McGhan, the founder and former chairman and chief executive officer ofInamed Corporation, McGhan Medical and McGhan Limited. MediCor’s objective isto be a leading supplier of selected international medical devices andtechnologies. To achieve this strategy, MediCor intends to build upon andexpand its business lines, primarily in the aesthetic, plastic andreconstructive surgery and dermatology markets. MediCor intends to accomplishthis growth through the expansion of existing product lines and offerings andthrough the acquisition of companies and other assets, including intellectualproperty rights and distribution rights.

**Note B – Summary of SignificantAccounting Policies**

*Principlesof Consolidation*

The consolidated financial statements include the accounts ofthe Company and all of its subsidiaries in which a controlling interest ismaintained. All inter-company accounts and transactions have been eliminated.Certain prior year amounts in previously issued financial statements have beenreclassified to conform to the current year presentation. The consolidatedfinancial statements have been prepared in United States dollars.

*CriticalAccounting Policies and Use of Estimates*

The preparation of financial statements in accordance withaccounting principles generally accepted in the United States of Americarequires the Company to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and disclosure ofcontingent assets and liabilities. On an on-going basis, the Company evaluatesits estimates and judgments, including those related to revenue recognition,inventories, adequacy of allowances for doubtful accounts, valuation oflong-lived assets and goodwill, income taxes, litigation and warranties. TheCompany bases its estimates on historical and anticipated results and trendsand on various other assumptions that the Company believes are reasonable underthe circumstances, including assumptions as to future events. The policiesdiscussed below are considered by management to be critical to an understandingof the Company’s financial statements. These estimates form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. By their nature, estimates are subjectto an inherent degree of uncertainty. Actual results may differ from thoseestimates.

##### *Revenue Recognition*

The Company recognizes product revenue, net of salesdiscounts, returns and allowances, in accordance with the Securities andExchange Commission’s (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, *Revenue Recognition* and the Financial Accounting StandardsBoard’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”)No. 48, *Revenue Recognition When Right of ReturnExists*. These statements establish that revenue can be recognizedwhen persuasive evidence of an arrangement exists, delivery has occurred andall significant contractual obligations have been satisfied, the fee is fixedor determinable, and collection is considered probable. The Company recognizesrevenue upon the delivery of product to third-party distributors and customersand does not allow for bill-and-hold sales. Due to the widespread holding ofconsignment inventory in the Company’s industry, the Company also recognizesrevenue when the products are withdrawn from consignment inventory inhospitals, clinics and doctors’ offices. The Company does not offer priceprotection to its third-party distributors and customers and accepts productreturns only if the product is defective. Because of this restrictive 

F-7

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return policy, actual returns areimmaterial and thus no allowance for returned product is appropriate. For productalleged to have failed, an allowance for product replacement programs ismaintained, as described on the next page.

##### *Allowance for Doubtful Accounts*

MediCor maintains allowances for doubtful accounts forestimated losses resulting from the inability of some of its customers to makerequired payments. The allowances for doubtful accounts are based on theanalysis of historical bad debts, customer credit-worthiness, past transactionhistory with the customer, current economic trends, and changes in customerpayment terms. If the financial condition of MediCor’s customers were todeteriorate, and adversely affect their ability to make payments, additionalallowances might be required.

##### *Inventories*

Inventories are stated at the lower of cost or marketusing the first-in, first-out (“FIFO”) method. The Company may write down itsinventory for estimated obsolescence or unmarketable inventory equal to thedifference between the cost of inventory and the estimated market value basedupon assumptions about future demand and market conditions.

##### *Property and Equipment*

Property and equipment are stated at cost lessaccumulated depreciation and amortization. Depreciation is recorded on thestraight-line basis over the estimated useful lives of the assets, which rangefrom three to ten years. Amortization of leasehold improvements is based uponthe estimated useful lives of the assets or the term of the lease, whichever isshorter. Significant improvements and betterments are capitalized, whilemaintenance and repairs are charged to operations as incurred. Assetretirements and dispositions are accounted for in accordance with SFAS No. 144,*Accounting for the Impairment and Disposal of LongLived Assets*, as described below.

##### *Accounting for Long-Lived Assets*

##### The Companyaccounts for long-lived assets, other than goodwill, in accordance with theprovisions of SFAS No. 144, *Accounting forthe Impairment and Disposal of Long Lived Assets*, which supersededSFAS No. 121, *Accounting for the Impairmentof Long-Lived Assets and for Long-Lived Assets to Be Disposed Of*.”This statement creates one accounting model, based on the framework establishedin SFAS No. 121, to be applied to all long-lived assets including discontinuedoperations. Adoption of this statement had no material effect on the Company’sfinancial position or results of operations. SFAS No. 144 requires, among otherthings, that an entity review its long-lived assets and certain relatedintangibles for impairment whenever changes in circumstances indicate that thecarrying amount of an asset may not be fully recoverable. The Company believesthe estimate of its valuation of long-lived assets is a “critical accountingestimate” because if circumstances arose that led to a decrease in thevaluations it could have a material impact on the Company’s results ofoperations. With the exception of the impairment of a patent, which was writtenoff in June 2005, as described in Note I to the financial statements includedin our annual report on Form 10-KSB and the impairments to four of our patentswhich were written off in June 2006, as described in Note I to the financialstatements included in the Company’s annual report on Form 10-KSB, the Companydoes not believe that any other changes have taken place.

##### *Goodwill and Other Intangible Assets*

##### Goodwillrepresents the excess of the purchase price over the estimated fair value ofidentified assets of businesses acquired by the Company. Other intangibleassets are recorded at fair value and amortized over periods ranging from threeto 20 years. The Company adopted SFAS No. 142, *Goodwill and Other Intangible Assets*, in January 2002. As aresult, goodwill is no longer amortized, but was subject to a transitionalimpairment analysis and is tested for impairment on an annual basis. The testfor impairment involves the use of estimates related to the fair values of thebusiness operations with which goodwill is associated and is usually based on amarket value approach. Other intangible assets are amortized using thestraight-line method over their estimated useful lives and are evaluated forimpairment under SFAS No. 144.

##### *Product Replacement Programs*

Most of the Company’ssubsidiaries provide a product replacement program to surgeons for deflationsof breast implant products for a period of ten years from the date ofimplantation. For Nagor products in the U.K., the Company also provides a freereplacement implant in cases of capsular contracture within one year of theoriginal implantation. For certain surgeons outside of the U.S., the Company providesa product replacement program for the life of the patient, including forcompetitive implants, aesthetic dissatisfaction and for deflation. In follow-onclinical studies, the Company may extend the period in which free replacementimplants can be claimed for capsular contracture or deflation. In addition to afree replacement, certain of the programs also pay limited financial assistanceto the surgeon to help reduce the cost of the 

F-8

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replacement surgicalprocedure. Management has estimated the amount of potential future productreplacement claims based on a detailed analysis. Expected future obligationsare determined based on the history of product shipments and claims and arediscounted to a current value, and this amount is set aside as an allowance.Changes to the volume or pattern of expected claims and changes in interestrates would affect the calculation and could materially impact the Company’sallowance and results of operations. Although breast implant products are notcurrently being sold in the U.S. (because the Company is in the process ofobtaining FDA approval of them, as more fully described below), they were soldunder a distribution agreement prior to May 2000 and an allowance for productreplacements is maintained for the products sold in prior years.

For the year ended June, 2006, III Acquisition Corporation,which does business under the name PIP.America, paid $983 with respect tosettlements under its product replacement program for products previously soldunder its distribution agreement with Poly Implants Prothèses S.A. (“PIP”), athird-party manufacturer of breast implants. For the year ended June 30, 2006,MediCor Aesthetics paid $194 with respect to settlements under its productreplacement program for the products previously sold under its distributionagreement between Hutchison International, Inc. and Biosil Limited.

As of June 30, 2006, theEurosilicone, PIP.America and MediCor Aesthetics product replacement programallowance consisted of:

|                                                                        | ** ** | **Product  Replacement Allowance** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------|------------|
|                                                                   |       |                                    |       |
| Balance at June  30, 2005                                              |       | $                                       | 1,004      |   |
| Provision for  product replacement program expansion during the period |       | 2,460                                   |       |
| Settlements  incurred during the period                                |       | (1,177                                  | )          |
|                                                                   |       |                                    |       |
| Balance at June 30,  2006                                              |       | $                                       | 2,287      |   |

 

##### *Classification of Financial Instruments*

In accordance with SFAS No. 150, *Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity*, financial instruments with a mandatory redemption rights arenot to be recorded as permanent equity unless the redemption is to occur uponthe liquidation or termination of the issuer. SFAS No. 150 also specifies thata financial instrument that embodies a conditional obligation is based solelyor predominantly on variations inversely related to changes in the fair valueof the issuer’s equity shares. Based on these characteristics, and followingthe further guidance in the SEC’s Accounting Series Release No. 268 and that inFASB’s Emerging Issues Task Force (“EITF”)Abstracts, Topic No. D-98, *Classification andMeasurement of Redeemable Securities*, the Company has recorded thePreferred Stock on the balance sheet between liabilities and stockholders’equity. See Note O, Preferred Stock.

##### *Convertible Debentures*

The Company has issued convertible debt securities withnon-detachable conversion features and detachable warrants. The Companyevaluated and accounts for such securities in accordance with EITF Issue Nos.98-5, 00-19, 00-27, 05-02, 05-04 and 05-08, and SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*as amended.

In accordance SFAS No. 133, the Company evaluates that theholder’s conversion right provision, interest rate adjustment provision,liquidated damages clause, cash premium option, and the redemption option (collectively,the debt features) contained in the terms governing the Notes to determinewhether they are or are not clearly and closely related to the characteristicsof the Notes.  Accordingly, if thefeatures qualify as embedded derivative instruments at issuance and,furthermore if they do or do not qualify for any scope exception within SFASNo. 133 (paragraphs 12-32), then they are required by SFAS No. 133 to beaccounted for separately from the debt instrument and recorded as derivativefinancial instruments.

Evaluationof Conversion Feature

In accordance with EITF Issue No. 98-5, *Accountingfor Convertible Securities with Beneficial Conversion Features or ContingentlyAdjusted Conversion Rights*, as amended by EITF Issue No. 00-27, theCompany must evaluate the potential effect of any beneficial conversion interms related to convertible instruments such as convertible debt orconvertible preferred stock. Valuation of the benefit is determined based uponvarious factors including the valuation of equity instruments, such as warrantsthat may have been issued with convertible instruments, conversion terms, andthe value of the 

F-9

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instruments to which the convertibleinstrument is convertible, etc. Accordingly, the ultimate value of thebeneficial feature is considered an estimate due to the partially subjectivenature of the valuation techniques.

##### *Accounting For Obligations And Instruments Potentially To Be Settled InThe Company’s Own Stock*

The Company accounts forobligations and instruments potentially to be settled in the Company’s stock inaccordance with EITF Issue No. 00-19, *Accounting for DerivativeFinancial Instruments Indexed To, and Potentially Settled In a Company’s OwnStock*. This issue addresses the initial balance sheet classificationand measurement of contracts that are indexed to, and potentially settled in,the Company’s own stock.

Under EITF Issue No. 00-19contracts are initially classified as equity or as either assets orliabilities, in the following situations:

Equity

·                  Contracts that require physicalsettlement or net-share settlement; and

·                  Contractsthat give the company a choice of net-cash settlement or settlement in its ownshares (physical settlement or net-share settlement), assuming that all thecriteria for equity classification have been met.

Assetsor Liabilities

·                  Contracts that require net-cashsettlement (including a requirement to net-cash settle the contract if an eventoccurs and if that event is outside the control of the company); and

·                  Contractsthat give the counterparty a choice of net-cash settlement or settlement inshares (physical settlement or net-share settlement).

All contracts are initiallymeasured at fair value and subsequently accounted for based on the currentclassification. Contracts initially classified as equity do not recognizesubsequent changes in fair value as long as the contracts continue to beclassified as equity. For contracts classified as assets or liabilities, theCompany reports changes in fair value in earnings and discloses these changes inthe financial statements as long as the contracts remain classified as assetsor liabilities. If contracts classified as assets or liabilities are ultimatelysettled in shares, any previously reported gains or losses on those contractscontinue to be included in earnings. The classification of a contract isreassessed at each balance sheet date.

In accordance with EITFIssue No. 00-19, a transaction which includes a potential for net-cashsettlement, including liquidated damages, requires that derivative financialinstruments, including warrants and additional investment rights, initially berecorded at fair value as an asset or liability and subsequent changes in fairvalue be reflected in the statement of operations. The recorded value of theliability for such derivatives can fluctuate significantly based onfluctuations in the market value of the underlying common stock of the issuerof the derivative instruments, as well as in the volatility of the stock priceduring the term used for observation and the remaining term.

Warrant DerivativeLiabilities

The Company accounts forwarrants issued in connection with financing arrangements in accordance withEITF Issue No. 00-19, *Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock*. Pursuant to EITF Issue No. 00-19, an evaluation ofspecifically identified conditions is made to determine whether the fair valueof warrants issued is required be classified as a derivative liability. Thefair value of warrants classified as derivative liabilities is adjusted forchanges in fair value at each reporting period, and the corresponding non-cashgain or loss is recorded in current period earnings.

*Deferred Financing Costs*

Costs relating to obtainingthe convertible debt financing are capitalized and amortized over the term ofthe related debt using the effective-interest method. When a loan is paid infull or converted, any related unamortized financing costs are removed from therelated accounts and charged to operations.

##### *Accounting for Financial Restructuring*

Theissuance of new debt in exchange for the old debt was evaluated under EITFIssue No. 96-19, *Debtors Accounting for a Modification orExchange of Debt Instruments*, and EITF Issue No. 05-07, *Accounting for Modifications to Conversion Options Embedded in DebtInstruments and Related Issues*. Pursuant to EITF Issue No. 96-19,the exchange of debt instruments was accounted for as an extinguishment ratherthan as a modification. Accordingly, a gain was recorded in connection with thefinancial restructuring.

F-10

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*Shipping and Handling Costs*

##### The Company’sshipping and handling costs are included in its cost of sales.

##### *Research and Development*

##### Research anddevelopment costs are expensed by the Company as incurred, including the costsof clinical studies and other regulatory approval activities.

##### *Stock-Based Compensation*

The Company has adopted the provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*. In accordance withSFAS No. 123, MediCor has elected the disclosure-only provisions relatedto employee stock options and follows the intrinsic value method in AccountingPrincipals Board Opinion (“APBO”) No. 25, *Accountingfor Stock Issued to Employees*, in accounting for stock optionsissued to employees. Under APBO No. 25, compensation expense, if any, isrecognized as the difference between the exercise price and the fair value ofthe common stock on the measurement date, which is typically the date of grant,and is recognized over the service period, which is typically the vestingperiod.

The Company accounts for options and warrant grants tonon-employees using the guidance prescribed by SFAS No. 123, FASBInterpretation No. 44, *Accounting for CertainTransactions Involving Stock Compensation, Interpretation of APB No. 25*,and the EITF Issue No. 96-18, *Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring, or InConjunction with Selling, Goods, or Services*, whereby the fair valueof such option and warrant grants are measured using the Fair Value BasedMethod at the earlier of the date at which the non-employee’s performance iscompleted or a performance commitment is reached.
| ** **                                                                                                                                    | ** ** | **Year Ended**         | ** ** | **Year Ended**         | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                    | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
|                                                                                                                                          |       |                        |       |                        |       |
| Net loss, as  reported                                                                                                                        |       | $                           | (18,453    | )                           | $          | (17,282 | ) |
|                                                                                                                                          |       |                        |       |                        |       |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (1,974                      | )          | (640                        | )          |
|                                                                                                                                          |       |                        |       |                        |       |
| Pro forma net  loss                                                                                                                           |       | $                           | (20,427    | )                           | $          | (17,922 | ) |
|                                                                                                                                          |       |                        |       |                        |       |
| Loss per share:                                                                                                                               |       |                        |       |                        |       |
| Basic and diluted - as reported                                                                                                               |       | $                           | (0.87      | )                           | $          | (0.95 | ) |
|                                                                                                                                          |       |                        |       |                        |       |
| Basic and  diluted - pro forma                                                                                                                |       | $                           | (0.97      | )                           | $          | (0.98 | ) |

 

These pro forma amountsmay not be representative of future disclosures since the estimated fair valueof stock options is amortized to expense over the vesting period, andadditional options may be granted in future years.

The estimated fair valueof each MediCor option granted is calculated using the Black-Scholes pricingmodel. The weighted average assumptions used in the model were as follows:
|                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Risk-free interest rate        |       | 5.10     | %          | 3.50     | %          |
| Expected years until  exercise |       | 7 years  |       | 7 years  |       |
| Expected stock  volatility     |       | 95.1     | %          | 50.0     | %          |
| Dividend yield                 |       | 0        | %          | 0        | %          |

 

At fiscal year end June 30, 2006, the Company hadissued 237 shares of restricted series A 8.0% Convertible Preferred Stock topreferred shareholders in lieu of cash dividends. There is no vestingrequirement for such restricted shares, the only restriction being that theshares and the underlying common stock into which they are convertible are notcurrently registered under the Securities Act.

F-11

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*IncomeTaxes*

Deferred income tax assets or liabilities are computed basedon the temporary differences between the financial statement and income taxbases of assets and liabilities using the statutory marginal income tax rate ineffect for the years in which the differences are expected to reverse. Deferredincome tax expenses or credits are based on the changes in the deferred incometax assets or liabilities from period to period. A valuation allowance againstdeferred tax assets is required if, based on the weight of available evidence,it is more likely than not that some portion or all of the deferred tax assetswill not be realized. The valuation allowance should be sufficient to reducethe deferred tax asset to the amount that is more likely than not to berealized.

*Effects of Recent AccountingPronouncements*

In February 2006, theFASB issued SFAS No. 155, *Accounting for CertainHybrid Financial Instruments—an amendment of FASB Statements No. 133 and140*. This statement amends SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, and SFASNo. 140, *Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities*, and resolvesissues addressed in SFAS No. 133 Implementation Issue No. D1, *Application of Statement 133 to Beneficial Interest in SecuritizedFinancial Assets*. SFAS No. 155 (a) permits fair valuere-measurement for any hybrid financial instrument that contains an embeddedderivative that otherwise would require bifurcation; (b) clarifies whichinterest-only strips and principal-only strips are not subject to therequirements of SFAS No. 133; (c) establishes a requirement toevaluate beneficial interests in securitized financial assets to identifyinterests that are freestanding derivatives or that are hybrid financialinstruments that contain an embedded derivative requiring bifurcation; (d)clarifies that concentrations of credit risk in the form of subordination arenot embedded derivatives; and (e) eliminates restrictions on a qualifyingspecial-purpose entity’s ability to hold passive derivative financialinstruments that pertain to beneficial interests that are or contain aderivative financial instrument. The standard also requires presentation withinthe financial statements that identifies those hybrid financial instruments forwhich the fair value election has been applied and information on the incomestatement impact of the changes in fair value of those instruments. The Companyis required to apply SFAS No. 155 to all financial instruments acquired,issued or subject to a re-measurement event beginning July 1, 2007,although early adoption is permitted as of the beginning of an entity’s fiscal year.The Company is evaluating the provisions of SFAS No. 155. The effects ofadopting of SFAS No. 155 on the Company’s financial statements are notknown at this time.

In May 2005, FASB issuedSFAS No. 154, *Accounting Changes and Error Corrections*,which replaces APBO No. 20, Accounting Changes and SFAS No. 3, *Reporting Accounting Changes in Interim Financial Statements*.This pronouncement applies to all voluntary changes in accounting principle,and revises the requirements for accounting for and reporting a change inaccounting principle. SFAS No. 154 requires retrospective application to priorperiods’ financial statements of a voluntary change in accounting principle,unless it is impracticable to do so. This pronouncement also requires that achange in the method of depreciation, amortization, or depletion forlong-lived, non-financial assets be accounted for as a change in accountingestimate that is effected by a change in accounting principle. SFAS No. 154retains many provisions of APBO No. 20 without change, including thoserelated to reporting a change in accounting estimate, a change in the reportingentity, and correction of an error. The pronouncement also carries forward theprovisions of SFAS No. 3 which govern reporting accounting changes in interimfinancial statements. SFAS No. 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15, 2005.The Statement does not change the transition provisions of any existingaccounting pronouncements, including those that are in a transition phase as ofthe effective date of SFAS No. 154. The Company intends to apply theprovisions of this statement effective July 1, 2006.

On April 14, 2005, theSEC approved a new rule that delays the effective date for SFAS 123(R) tofiscal years beginning after June 15, 2005, thereby rendering it effective asto the Company on July 1, 2006.  The adoption of SFAS 123(R) is expectedto have a material impact on the Company’s consolidated net income and earningsper share.

In December 2004, FASB issued Statement of Financial Accounting Standards SFAS No. 123(R), Share-Based Payment, which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services.  A key provision of this statement is the requirement of a public entity to measure the cost of employee services received in exchange for an award of equity instruments (including stock options) based on the grant date fair value of the award.  That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (i.e., the requisite service period or vesting period).

F-12

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**Note C– Major Customer**

During the year ended June 30, 2006, two different distributorcustomers—Import Medic in Brazil and Corporación Recimédica inVenezuela—accounted for 14% and 8%, respectively, of the Company’s consolidatedrevenue. Revenue related to these two distributors for the year ended June 30,2005 was 12% and 12%, respectively.

As these two distributors make up approximately 22% of theCompany’s consolidated revenue, we are currently financially dependent on theirsales. However, as with other distributors and with the Company’s direct sales,the Company’s ultimate customers are the doctors that implant or use theCompany’s products. If either of these distributors were to decide to no longersell the Company’s product, the Company would seek either to replace them, asthe Company has done in some markets from time to time, or begin sellingdirectly in those markets, as the Company has done in various markets and as weare currently doing in some of the Company’s targeted markets.

**Note D – Cash and Cash Equivalents**

All highly liquid investments withoriginal maturities of three months or less at the date of purchase areconsidered to be cash equivalents.

**Note E – Accounts Receivable**

Accounts receivable at June 30,2006 consisted of: 

|                                  | ** ** | **June 30, 2006** | ** ** |
|----------------------------------|------------|-----------------------------|------------|
|                             |       |                        |       |
| Accounts  receivable             |       | $                           | 12,027     |   |
| Allowance for  doubtful accounts |       | (1,605                      | )          |
|                             |       |                        |       |
| Total                            |       | $                           | 10,422     |   |

Changes in the allowance fordoubtful accounts are as follows:

| Balance July 1, 2005     |   | $      | 1,366  |   |
|--------------------------|--------|--------|--------|--------|
| Provisions /  (recovery) |   | 239    |   |
| Write-offs               |   | — |   |
| Balance June 30, 2006    |   | $      | 1,605  |   |

**Note F – Notes Receivable**

Notes receivable at June 30, 2006consisted of: 

|                                  | ** ** | **June 30, 2006** | ** ** |
|----------------------------------|------------|-----------------------------|------------|
|                             |       |                        |       |
| Notes receivable                 |       | $                           | 3,673      |   |
| Allowance for  doubtful accounts |       | (3,673                      | )          |
|                             |       |                        |       |
| Total                            |       | $                           | —     |   |

 

PIP issued to the Company’sPIP.America subsidiary a revolving promissory note for certain sums to come dueto PIP.America based on PIP.America’s and the manufacturer’s administration ofproduct replacement and product replacement related claims. These amounts havebeen fully provided, as an allowance for doubtful account, due to the minimalpast payments and uncertain prospect of collection.

F-13

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**Note G – Inventories**

Inventories at June 30, 2006 consisted of:

|                 | ** ** | **June 30, 2006** | ** ** |
|-----------------|------------|-----------------------------|------------|
|            |       |                        |       |
| Raw Materials   |       | $                           | 1,611      |   |
| Work in Process |       | 646                         |       |
| Finished Goods  |       | 6,902                       |       |
|            |       |                        |       |
| Total           |       | $                           | 9,160      |   |

**Note H – Property and Equipment**

Property and equipment at June 30, 2006 consisted of: 

|                                                  | ** ** | **June 30, 2006** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
|                                             |       |                        |       |
| Buildings                                        |       | $                           | 5,816      |   |
| Machinery and equipment                          |       | 4,254                       |       |
| Furniture and fixtures                           |       | 1,054                       |       |
| Land                                             |       | 598                         |       |
| Leasehold improvements                           |       | 678                         |       |
|                                             |       |                        |       |
| Property and equipment,  gross                   |       | 12,400                      |       |
| Less: Accumulated  depreciation and amortization |       | (4,265                      | )          |
|                                             |       |                        |       |
| Property and equipment, net                      |       | $                           | 8,135      |   |

Depreciation expense was $754 for the year ended June 30,2006 and $464 for the year ended June 30, 2005.

F-14

----

**Note I – Goodwill and OtherIntangible Assets**

Goodwill and other intangible assets as of June 30, 2006consisted of:

|                                                                     | ** ** | **June 30, 2006** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------|------------|
|                                                                |       |                        |       |
| Goodwill                                                            |       | $                           | 70,941     |   |
| Customer-related  intangibles                                       |       | 7,446                       |       |
| Supply agreement  and other intangibles                             |       | 262                         |       |
| Patents                                                             |       | 2,600                       |       |
| Distribution and  non-compete agreements                            |       | 3,598                       |       |
| Trademarks and  trade names                                         |       | 290                         |       |
|                                                                |       |                        |       |
| Intangible  assets, gross                                           |       | 85,137                      |       |
|                                                                |       |                        |       |
| Accumulated  amortization - goodwill                                |       | (42                         | )          |
| Accumulated  amortization - customer-related intangibles            |       | (1,851                      | )          |
| Accumulated  amortization - supply agreements and other intangibles |       | (5                          | )          |
| Accumulated  amortization - patents                                 |       | (574                        | )          |
| Accumulated  amortization - distribution agreements and non-compete |       | (855                        | )          |
| Accumulated  amortization - trademarks and trade names              |       | (33                         | )          |
|                                                                |       |                        |       |
| Accumulated  amortization                                           |       | (3,360                      | )          |
|                                                                |       |                        |       |
| Intangible assets, net                                              |       | $                           | 81,777     |   |

 

Amortization for the yearended June 30, 2006 was $1,768 compared to $977 from the prior period endingJune 30, 2005. During the year ended June 30, 2006, the Company completed are-valuation of our goodwill and determined that there was no impairment neededfor this asset.

The distributionagreement was acquired in connection with the acquisition of selected assets ofHutchison International, Inc. in April 2005. The Company completed thethird-party valuation in April 2006 of this intangible asset in detail andplaced a fair value upon it.

During the year endedJune 30, 2006, the Company wrote down four patents as there had been nocommercial utilization of the patents over the past year. As a result, theCompany’s ability to economically benefit over their respective lives has beenreduced. The impaired loss of $400 is reported under other expenses on theconsolidated statement of operations and comprehensive income (loss).

The estimatedamortization for the next five years consists of:
| ** **                    | ** ** | **June 30, 2007** | ** ** | **June 30, 2008** | ** ** | **June 30, 2009** | ** ** | **June 30, 2010** | ** ** | **June 30, 2011** | ** ** |
|-------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                          |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Customer-Related  Intangibles |       | $                           | 1,731      |                        | $          | 1,731                       |       | $                           | 1,731      |                        | $          | 890 |   | $ | 407 |   |
| Distribution  Agreements      |       | 541                         |       | 541                         |       | 541                         |       | 541                         |       | 530                         |       |
| Patents                       |       | 197                         |       | 197                         |       | 197                         |       | 172                         |       | 172                         |       |
| Trademarks                    |       | 11                          |       | 11                          |       | 11                          |       | 11                          |       | 11                          |       |
|                          |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Total                         |       | $                           | 2,480      |                        | $          | 2,480                       |       | $                           | 2,480      |                        | $          | 1,614 |   | $ | 1,120 |   |

 

**Note J –Deposits and Other Assets**

Deposits at June 30, 2006totaled $165. These are security deposits on office leases and with localutility companies.

Other assetsconsisted of security investments of $168 and debt acquisition costs of $2,654at June 30, 2006.

F-15

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**Note K – Accrued Expenses**

Accrued expenses and other current liabilities at June 30, 2006consisted of: 
|                                                                | ** ** | **June 30, 2006** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|
|                                                           |       |                        |       |
| Subsequent  acquisition payment for Biosil Ltd. and Nagor Ltd. |       | $                           | 5,838      |   |
| Wages, paid  leave and payroll related taxes                   |       | 3,200                       |       |
| Product  replacement allowance                                 |       | 2,287                       |       |
| Accrued  purchases                                             |       | 1,256                       |       |
| Legal settlement                                               |       | 350                         |       |
| Other                                                          |       | 416                         |       |
|                                                           |       |                        |       |
|                                                           |       | $                           | 13,347     |   |

 

The Company entered intoa settlement with its previous Mexican distributor, Europlex, S.A. de C.V.,pursuant to which Europlex agreed to extinguish and release all claims againstthe Company, in exchange for future payments totaling $1,000 of which $650 hasbeen paid. Other accrued expenses included interest and other legal expenses.

## **Note L –Debt**

## Long-term debt consisted of the following amounts:

| Senior secured convertible  note - variable 3-month LIBOR plus 6%, with maturity in March 2011                         |   | $       | 50,000 |   |
|------------------------------------------------------------------------------------------------------------------------|--------|---------|--------|--------|
| Variable 6-month  EURIBOR plus 2.25% euro-denominated note, with maturity in September 2011                            |   | 11,695  |   |
| Subordinated  secured convertible note to related party - variable 3-month LIBOR plus 6%,  with maturity in March 2011 |   | 37,500  |   |
| Subordinated  note to related party - 10%, with maturity in September 2011                                             |   | 31,592  |   |
| Convertible  debentures                                                                                                |   | 150     |   |
| Obligations  under capital leases                                                                                      |   | 2,265   |   |
| Subsequent  acquisition payment for Biosil Ltd. and Nagor Ltd.                                                         |   | 5,255   |   |
| Other notes                                                                                                            |   | 406     |   |
|                                                                                                                   |   |    |   |
|                                                                                                                   |   | 138,863 |   |
| Less: current  maturities                                                                                              |   | (2,834  | )      |
| Less: note  discounts                                                                                                  |   | (76,690 | )      |
|                                                                                                                   |   |    |   |
| Long-term debt                                                                                                         |   | $       | 59,339 |   |

 

On April 26, 2006, the Company raised $50,000 in a privateplacement that included the sale of notes and warrants. $25,000 of this wasutilized in the acquisition of Biosil and Nagor, with the remaining balancemade available for the Company’s general working capital needs. These notescarry an interest rate of three month LIBOR, plus 6%, and a one-time balloonpayment due in March 2011.

## In September 2004, MediCor’sES Holdings subsidiary entered into an arrangement with a financial institutionto borrow up to €16,400, at an interest rate of six-month EURIBOR plus 2.25%,to fund payments due to the sellers of Eurosilicone, a company acquired byMediCor in July 2004. The last borrowing is scheduled for 2007 and scheduledrepayments complete in September 2011. As of June 30, 2006, the outstandingprincipal was €9,318.

F-16

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Convertible debentures at June 30,2006 were $150. These are convertible, at the holder’s discretion, after oneyear and at the 18-month, 24-month, 30-month and 36-month anniversary of theissuance date to shares of the Company’s common stock at a price equal to thegreater of $5.00 or seventy-five percent (75%) of the daily weighted averagetrading price per share of the Company’s common stock over a period of twenty(20) trading days prior to the conversion date. They mature in August 2006 andthus are all reported within the current portion of long-term debt. During theyear ended June 30, 2006, the Company did not incur any costs relating to theseconvertible debentures.

MediCor hasseveral capital leases. Substantially all of these lease obligations residewith the Company’s Eurosilicone subsidiary and are leases of facilities andvehicles. In addition, MediCor has several other notes, with outstandingprincipal balances ranging from $98 to $219 and annual interest rates rangingfrom 3.39% to 8.0%. As of June 30, 2006, MediCor had $3,366 of unamortizedfinancing costs recorded in other assets. These costs are being amortizedstraight-line over the life of the related note. This notes mature in March andSeptember 2011.

Payments due on capital lease obligations as of June 30, 2006are as follows:

|                                                         | ** ** | **        Amount        ** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|
|                                                    |       |                                                                                                       |       |
| July 2006 - June 2007                                   |       | $                                                                                                          | 571        |   |
| July 2007 - June 2008                                   |       | 410                                                                                                        |       |
| July 2008 - June 2009                                   |       | 374                                                                                                        |       |
| July 2009 - June 2010                                   |       | 320                                                                                                        |       |
| July 2010 - June 2011                                   |       | 258                                                                                                        |       |
| Later years                                             |       | 1,119                                                                                                      |       |
|                                                    |       |                                                                                                       |       |
| Total minimum  payments required                        |       | 3,051                                                                                                      |       |
| Less: Amount  representing interest                     |       | (652                                                                                                       | )          |
|                                                    |       |                                                                                                       |       |
| Present value  (principal) of capital lease obligations |       | 2,399                                                                                                      |       |
|                                                    |       |                                                                                                       |       |
| Less: Current  portion of capital lease obligations     |       | (439                                                                                                       | )          |
|                                                    |       |                                                                                                       |       |
| Long term portion of  capital lease obligations         |       | $                                                                                                          | 1,961      |   |

 

Principal payments due on long-term debt as of June 30, 2006, otherthan capital lease obligations, are as follows:

 

|                                            | ** ** | **        Amount        ** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|
|                                       |       |                                                                                                       |       |
| June 2006 - July 2007                      |       | $                                                                                                          | 2,834      |   |
| June 2007 - July 2008                      |       | 7,314                                                                                                      |       |
| June 2008 - July 2009                      |       | 1,949                                                                                                      |       |
| June 2009 - July 2010                      |       | 1,949                                                                                                      |       |
| June 2010 - July 2011                      |       | 51,949                                                                                                     |       |
| Later years                                |       | 72,867                                                                                                     |       |
|                                       |       |                                                                                                       |       |
| Total minimum  payments required           |       | 138,863                                                                                                    |       |
|                                       |       |                                                                                                       |       |
| Less: Amount  representing current portion |       | (2,834                                                                                                     | )          |
|                                       |       |                                                                                                       |       |
| Non-current portion of  long-term debt     |       | $                                                                                                          | 136,029    |   |

 

The current portion of long-term debt is as follows:

 

|                                               | ** ** | **        Amount        ** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|
|                                          |       |                                                                                                       |       |
| Current portion  of capital lease obligations |       | $                                                                                                          | 439        |   |
| Convertible  debentures                       |       | 150                                                                                                        |       |
| Current portion  of other long-term debt      |       | 2,246                                                                                                      |       |
|                                          |       |                                                                                                       |       |
|                                          |       | $                                                                                                          | 2,834      |   |

 

F-17

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Short-term note payablewas $170,254 at June 30, 2006.

*Senior Secured Convertible Debtand Related Instruments*

In April 2006, theCompany entered into a Securities Purchase Agreement (the “Financing SPA”) withSilver Oak Capital, LLC, HFTP Investment LLC, GAIA Offshore Master Fund, Ltd.,and Portside Growth and Opportunity Fund (the “Purchasers”). The transactionclosed on April 26, 2006. This financing was a private placement to accreditedinvestors and is exempt from registration pursuant to Section 4(2) of theSecurities Act of 1933, as amended. Pursuant to the Financing SPA, thePurchasers purchased Senior Secured Convertible Notes (“Notes”) in aggregateprincipal amount of $50,000 together with warrants (“Warrants”) to purchase anaggregate of 3,100 shares of the Company’s common stock (“Common Stock”). TheCompany expects to use the proceeds of the financing (a) to fund the Company’sacquisition of Biosil Limited and Nagor Limited; (b) to pay expenses andcommissions related to the sale of the Notes and Warrants; and (c) to fundongoing working capital needs. The Company also entered into a Guarantee andCollateral Agreement dated April 26, 2006 by and between the Company and thePurchasers (the “Collateral Agreement”), pursuant to which the Notes are securedby substantially all of the assets of the Company, including the Company’sintellectual property. Interest is payable on the Notes at the three-monthLIBOR rate (with the rate for the next six-month period set two days prior toeach interest payment date) plus 6%—which is 11.1% for the six month periodwhich includes June 30, 2006. The principal amount of the Notes is payable ontheir maturity date of March 31, 2011, subject to earlier conversion,acceleration or redemption. Interest is payable every six months beginning onSeptember 30, 2006. At the option of the Company, interest on the Notes ispayable either in cash or in registered Common Stock (at a conversion pricethat is 93% of the weighted average price of the common stock during the fivedays previous to the relevant interest payment date), subject to certainconditions as specified in the Notes. The Company currently intends to elect topay the interest in cash.

The Notes are convertibleat the option of the holder at any time and from time to time into Common Stockof the Company at a conversion price of $4.00 per share, subject to certainadjustments. Pursuant to the terms of the Notes, the conversion price will bereset (the “Reset Provision”) in the event the Company (i) effects a reverse/forwardstock split, (ii) pays a dividend, (iii) issues shares, convertible securitiesor options entitling the recipient to subscribe for or purchase shares at aprice per share less than the fixed conversion price then in effect, (iv) hasits Common Stock delisted from the NASDAQ OTC Bulletin Board, the NASDAQ StockMarket or another national stock exchange, or (v) an event of default.

The Warrants permit thePurchasers to purchase Common Stock at an exercise price of $4.50 per share andare exercisable from April 26, 2006 until April 26, 2011. They containprovisions to adjust the Warrant Exercise Price and the Warrant Share Amount inthe event that the Company issues Common Stock, convertible securities, oroptions in an equity financing at a price less than the then applicable WarrantExercise Price, in which case (i) the Warrant Exercise Price is reduced tothe price at which such Common Stock was issued and (ii) the Warrant ShareAmount is increased such that the aggregate Warrant Exercise Price payable,after taking into account the decrease in the Warrant Exercise Price, is equalto the aggregate Warrant Exercise Price prior to such adjustment. The Warrantsalso contain reset provisions similar to those in the Notes, by which theWarrant Exercise Price and the Warrant Share amounts would be adjusted if theCompany were to issue cash, debt, or securities to holders of Common Stock. TheWarrants may be net exercised on a cashless basis. The Company would receiveproceeds of up to $14,063 for them, according to how many are exercised forcash.

In connection withissuance of the Notes and Warrants, the Company and the Purchasers entered intoa Registration Rights Agreement under which the Company is obligated toregister with the SEC the shares of Common Stock underlying the Notes andWarrants. Under the Registration Rights Agreement, the Company was required tofile a registration statement within ten days of the closing of the sale of theNotes and to have the registration statement declared effective by the SECwithin 270 days of that closing. Additionally, the Company is required to keepthe registration statement effective at all times until all of the sharesregistered have been sold or may be resold pursuant to Rule 144(k) under theSecurities Act of 1933. If the Company does not satisfy these registrationobligations, it would constitute an event of default, and the Company wouldhave to pay each holder of the Notes or Warrants an amount in cash, as partialliquidated damages, as provided in the Registration Rights Agreement, asdiscussed further below.

The registrationstatement was filed with the SEC in May 2006, and it is currently under reviewby the SEC. The registration statement will need to be updated to maintaineffectiveness pursuant to the rules and regulations promulgated by the SEC.

The Registration Rights Agreement provides for liquidated damages forfailure to register or maintain an effective registration statement for theshares underlying the Notes and Warrants. If the Company fails to have theregistration statement declared effective within the specified period, theCompany would be required to pay liquidated damages to the investor(s) until:

·                  the registration statement isdeclared effective;

·                  effectivenessis maintained for a prescribed period; or

F-18

----

·                  thePurchasers are no longer incurring damages for the Company’s failure toregister the securities (e. g., if the securities become freely transferableafter a holding period under Rule 144(k) of the Securities Act of 1933).

Liquidated damages arepaid in cash and the amount is determined by a formula in the RegistrationRights Agreement. The liquidated damages are 1.5% per month of the aggregatepurchase price paid by the holder of the Notes plus the aggregate exerciseprice of the Warrants covered by the Registration Rights Agreement. As of June30, 2006, the maximum cash penalty that could be payable in the event of abreach of the Registration Rights Agreement is $26,859 or approximately 54% ofthe outstanding principal amount of the Notes plus all accrued and unpaidinterest. The potential liquidated damages were considered to be greater thanvalue of unregistered and registered shares.

In accordance with EITFIssue 05-04, the Company believes that the effect of the liquidated damages shouldbe treated under the first view (View A), which states that a registrationrights agreement should be treated as a combined unit together with theunderlying financial instruments, warrants and derivative debenture andevaluated as a single instrument under EITF Issue 00-19 and SFAS No. 133. TheCompany concluded that this view is the most appropriate for the transaction.Accordingly, the Registration Rights Agreement and the financial instruments towhich it pertains (the Warrants and the convertible Notes) were considered acombined instrument and accounted for accordingly.

The values ascribed tothe Notes, the conversion feature of the Notes, other potential embeddedderivative features, and detachable Warrants follow the guidance of EITF IssueNo. 00-19, *Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock*; SFASNo. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*; and EITF Issue No.00-27, *Application of Issue No. 98-5 to CertainConvertible Instruments*. The Company evaluated the impact of theregistration rights agreement on the embedded conversion feature and theWarrants and determined that their effect based on EITF Issue No. 00-19. In accordancewith EITF Issue No. 00-19, a transaction which includes a potential fornet-cash settlement, including liquidated damages, requires that derivativefinancial instruments, including warrants and the embedded conversion feature,which was bifurcated, initially be recorded at fair value as an asset orliability and subsequent changes in fair value be reflected in the statement ofoperations. The registration rights agreement provided that, if theregistration statements for the warrants and the shares underlying theconvertible debentures did not remain effective, it was possible the Companywould be required to make cash payments, as liquidated damages. In accordancewith EITF Issue No. 00-19, the fair values of the warrants and the additionalconversion rights were accounted for as liabilities, and subsequent changes intheir fair value are reflected in the Company’s Consolidated Statement ofOperations.

The note discountassociated with the Warrants and with the conversion feature of the Notes is amortizedto interest expense over the life of the Notes or upon earlier conversion ofthe Notes using the effective yield method.

The Notes containcustomary negative covenants for loans of this type, including limitations onthe Company’s ability to incur indebtedness, issue securities, make loans andinvestments, make capital expenditures, dispose of assets and enter intomergers and acquisition transactions. Events of default under the Notes aredescribed below and include breaches of the Company’s obligations under theNotes and other agreements relating to the transaction, certain defaults underany other indebtedness of at least $500 and certain bankruptcy events. An eventof default under the Notes entitles the holders to declare all amounts then outstandingdue and payable. As of June 30, 2006, the Company is not in default on any ofits debt covenants.

Material Events that would cause default under the Notes include:

·                  failure to pay principal or anypremium on any Note when due;

·                  failure to pay any interest, latefees or liquidated damages on any Note after a period of two business days;

·                  failure to perform other covenantsunder any Note that is not cured by the earlier of ten days after notice byholder or ten trading days after the Company is aware of such default;

·                  any representation or warranty underthe financing documents that is untrue or incorrect in any material respect;

·                  certain events such as bankruptcy orinsolvency of the Company or any of its subsidiaries;

·                  any default by the Company or itssubsidiaries under any instrument in excess of $500 that results in suchobligation becoming due and payable prior to maturity;

·                  the Company becoming party to achange of control transaction;

·                  failure by the Company to have itsregistration statement (registering the resale of the Common Stock issuableupon the conversion of the Notes and the exercise of the Warrants) declaredeffective by the SEC on or prior to March 7, 2007;

·                  if, during the effectiveness periodof the registration statement, the effectiveness of the registration statementlapses for any reason or if the holder is not be permitted to resellregistrable securities under the registration statement, in 

F-19

----

either case, for morethan five consecutive trading days and an aggregate of ten trading days duringany twelve-month period, subject to certain limited exceptions; and

·                  failureto deliver Common Stock certificates to a holder prior to the third businessday after a Note conversion date.

Upon an event of default,120% of the outstanding principal of the Notes plus all accrued and unpaidinterest become immediately due and payable to the holders of the Notes.

In addition, as long asthe Notes remain outstanding, the Purchasers have the right to participate inthe Company’s future equity or equity-linked financings.

The proceeds to theCompany for the Notes and Warrants issued to the Purchasers were $50,000. Inconnection with consummating the financing pursuant to the Financing SPA, theCompany incurred issuance costs—direct legal expenses and finders’ feestotaling $3,127. These issuance costs were recorded as an asset and are beingamortized to interest expense from the date of issuance to the statedredemption date using the effective interest method.

If the aggregateprincipal amount owing under the Notes is converted, the Company will issue 12,500 shares of Common Stock, which may be adjusted pursuant to the resetprovisions in the Notes. If the Notes are not converted, the first payment ofaccrued but unpaid interest will be due on September 30, 2006 and additionalpayments will be due every six months thereafter with the final payment due onMarch 31, 2011. The Company may pay accrued interest in cash or in shares ofCommon Stock, based on 93% of the weighted average price during the fivetrading days immediately prior to such interest payment, subject to certainlimitations.

The Registration RightsAgreement provides for liquidated damages relating to the Company’s obligationto timely file and to maintain effectiveness of the registration statement withthe Securities and Exchange Commission. Under EITF Issue No. 00-19, *Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock*, the ability toregister stock is deemed to be outside of the Company’s control.

In accordance with SFASNo. 133, *Accounting for Derivative Instruments andHedging Activities*, the Company determined that the conversionfeature of the Notes met the criteria of an embedded derivative and thereforethe conversion feature of the debt needed to be bifurcated and accounted for asa derivative. Due to the Registration Rights Agreement covering the Notes andWarrants and the reset provisions of the Notes, the debt does not meet thedefinition of “conventional convertible debt” because there is the possibilityof net cash settlement. Therefore, the conversion feature fails to qualify forclassification as permanent equity under EITF Issue No. 00-19 andmust be accounted as a derivative liability.

The fair value of the conversion option was estimated at the debtissuance date, April 26, 2006, using the Black-Scholes option pricing modelusing the following assumptions:

·                  common stock price of $3.70;

·                  exercise price of $2.86;

·                  risk-free interest rate of 5.01%;

·                  contractual term of 4.93 years;

·                  expected volatility of 95.31%; and

·                  expecteddividend yield of 0%.

The Company determinedthe exercise price per share for the Notes’ conversion feature by computing thenet present value (NPV) of the debt ($50,000 plus interest at 11.1% over fiveyears, discounted at 20%) and dividing the NPV amount by the total number ofshares into which the debt is convertible. The 20% discount factor is theCompany’s estimate of the appropriate rate of return that an investor wouldexpect from a similar debenture not taking into consideration the conversionfeature or warrants. As a result, the Company ascribed a value of $36,000 tothis derivative feature at the date of issuance, which is recorded as aderivative liability. The fair value of the conversion feature was subsequentlyrevalued to $27,750 at June 30, 2006, with the change in value reflected in theCompany’s Consolidated Statement of Operations in other expenses/(income)as again.

The Warrants are free-standing derivatives accounted under SFAS No.133. The fair values of these derivatives were estimated at the debt issuancedate, April 26, 2006, using the Black-Scholes pricing model using the followingassumptions:

·                  common stock price of $3.70;

·                  exercise price of $4.50;

·                  risk-free interest rate of 5.01%;

·                  contractual term of 5 years;

·                  expected volatility of 95.31%; and

F-20

----

·                  expecteddividend yield of 0%.

As of the date ofissuance, the Company has ascribed the value of $8,344 to the Warrants, whichis recorded as warrant liabilities. The fair value of the Warrants wassubsequently revalued to $6,375 at June 30, 2006, with the change in valuereflected in the Company’s Consolidated Statement of Operations in otherexpenses/(income) as a gain.

The $50,000 face amountof the Notes was stripped of its conversion feature due to the accounting forthe conversion feature as a derivative, which was recorded based on its fairvalue, whereby any remaining proceeds after allocating the proceeds to theWarrants and conversion option would be attributed to the debt. The value ofthe Warrants and conversion option result in a note discount of $44,344. Thus,at issuance, the debt was recorded, net, as $5,656. The note discount is beingaccreted and recognized as interest expense from the date of issuance to thestated redemption date using the effective interest method.

The following tablereflects the Notes at June 30, 2006:

|                       | ** ** | **       Amount       ** | ** ** |
|-----------------------|------------|------------------------------------------------------------------------------------------------|------------|
|                  |       |                                                                                           |       |
| Principal of Notes    |       | $                                                                                              | 50,000     |   |
| (Less): Note discount |       | (41,638                                                                                        | )          |
|                  |       |                                                                                           |       |
|                  |       | $                                                                                              | 8,362      |   |

 

For the Notes, the$50,000 total of principal amounts is due in the year ending June 30, 2011.

*Subordinated Notes Payable andRelated Instruments*

Until April 26,2006, International Integrated Industries, LLC (“LLC”) held a promissory note(revolving debt payable upon demand) of the Company which accrued additionalprincipal at an annual interest rate of 10%. At April 26, this note had abalance of $68,539. At that date, this promissory note was split into twonotes, one for $37,500 in favor of Sirius Capital LLC (“Sirius”) and one for$31,039 in favor of LLC, with the original note indefeasibly paid in full. Eachof these new promissory notes was then amended and restated, one to an Amendedand Restated Subordinated Convertible Note in favor of Sirius (the “SubordinatedNote”) and the other to an Amended and Restated Subordinated Promissory Note infavor of LLC (the “LLC Note”). LLC is a family holding company in which thechairman of the Company, Mr. Donald K. McGhan, has a controlling interest,Sirius is a private equity investment fund controlled by certain members of theMcGhan family. LLC and Sirius are deemed to be related parties.

The maturity date of theLLC Note is six months after the earlier of (1) the maturity date of theNotes, or (2) the date on which the entire principal amount of the Noteshas been converted or redeemed. The LLC Note is expressly subordinate andjunior in right of payment to the Notes.

The Subordinated Note hassimilar terms as the Notes, except for the following key differences:(1) prior to the indefeasible payment in full in cash of the Notes, allinterest on the Subordinated Note is to be paid only by adding such interest tothe principal amount of the Sirius Note, (2) the Sirius Note has the samematurity date as the LLC Note, and (3) the Company may not issue anyshares of Common Stock upon conversion of the Sirius Note until the Companyobtains the approval by the Company’s stockholders of the Company’s issuance ofall shares of Common Stock issuable upon conversion of the Sirius Note and theNotes and exercise of the Sirius Warrant (described below) and the Warrants inaccordance with the rules and regulations applicable to companies on theprincipal securities exchange or trading market for the Common Stock. Inaddition, the Sirius Note is expressly subordinate and junior in right ofpayment to the Notes. Furthermore, the Sirius Note is not covered by aregistration rights agreement.

In connection withthe amendment and restatement of the Subordinated Note, the Company grantedSirius a warrant (the “Subordinated Warrant”) to purchase up to 2,344 shares ofthe Company’s common stock at an exercise price of $4.50 per share. TheSubordinated Warrant has similar terms as the Warrants, except that the Companymay not issue any shares of common stock upon exercise of the SubordinatedWarrant until the Company obtains the approval by the Company’s stockholders ofthe Company’s issuance of all shares of common stock issuable upon conversionof the Subordinated Note and the Notes and exercise of the Subordinated Warrantand the Warrants in accordance with the rules and regulations applicable tocompanies on the principal securities exchange or trading market for theCompany’s common stock. The Subordinated Note and the Subordinated Warrant donot have any mandatory registration rights or other features which would causenet-cash settlement; accordingly, the value of the Subordinated Warrant and thevalue of the conversion feature are classified as components of shareholders’equity.

F-21

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The Company determinedthat the exchange of debt instruments met the requirements of EITF Issue No.96-19, *Debtors Accounting for a Modification or Exchangeof Debt Instruments*, of an exchange of debt with substantiallydifferent terms and accordingly has deemed the promissory note payable to beextinguished as of April 26, 2006, and replaced with new Subordinated Notes onthat date. The conversion feature of the new Subordinated Note was not requiredto be bifurcated from the host under EITF Issue No. 00-19 and SFAS No. 133. PerEITF Issue Nos. 05-07 and 96-19, the Company determined that the demand note’scash flows and the cash flows of each of the new subordinated debt instruments,discounted at the promissory note’s interest rate of 10%, varied more than 10%.Accordingly the change in terms was considered significant in each case andextinguishment accounting was applied to the original debt instrument. TheCompany took into account the fair value of the Subordinated and LLC Note’sconversion option in determining the cash flows. The resulting net gain of$1,598, included in other expenses/(income), was computed using the fair valueof the newly issued debt, conversion feature and the Subordinated Warrant.

At the time of theexchange and recording the extinguishment of the original promissory note (dueon demand), the Company recorded a corresponding entry to record the two newnotes at their principal balance as of April 26, 2006 of $37,500 and $31,039,respectively, and further recorded entries to record an aggregate discount of$37,012. The recorded note discount will be amortized as non-cash interestexpense over the remaining term of the debt.

The fair value of the Subordinated Warrant was determined to be $6,258using the Black-Scholes option-pricing model with the following assumptions:

·                  common stock price of $3.70;

·                  exercise price of $4.50;

·                  risk-free interest rate of 5.01%;

·                  contractual term of 5 years;

·                  expected volatility of 95.31%; and

·                  expecteddividend yield of 0%.

The fair value of the conversion feature was also determined using theBlack-Scholes option-pricing model with the following assumptions:

·                  common stock price of $3.70;

·                  exercise price of $1.89;

·                  risk-free interest rate of 5.01%;

·                  contractual term of 4.93 years;

·                  expected volatility of 95.31%; and

·                  expecteddividend yield of 0%.

For the Sirius andLLC Notes, accrued interest is added to principal semi-annually and the totalamount is due in the fiscal year ending June 30, 2011:

|                                               | ** ** | **Sirius Note** | ** ** | **LLC Note** | ** ** |
|-----------------------------------------------|------------|----------------------|------------|-------------------|------------|
| Original  principal                           |       | $                    | 37,500     |              | $          | 31,039 |   |
| Projected  interest added to principal        |       | 68,016               |       | 52,748            |       |
| Total principal  expected due in year ending: |       |                 |       |              |       |
| June, 30 2012                                 |       | $                    | 105,516    |              | $          | 83,787 |   |

 

*InterestExpense*

The following tablesummarizes interest expense—including that relating to the Notes, theSubordinated and LLC Notes, and amortization of note discount and deferredfinancing fees—net, for the twelve months ended June 30, 2006:

| Interest expense on Senior  Secured Convertible Notes (the “Notes”)              |   | $     | 1,238  |   |
|--------------------------------------------------------------------------------------------|--------|-------|--------|--------|
| Amortization of  note discount on Senior Secured Convertible Notes                         |   | 2,705 |   |
| Amortization of  deferred financing fees from issuance of Senior Secured Convertible Notes |   | 212   |   |
| Interest expense  on Sirius and LLC Notes (to related party)                               |   | 5,948 |   |
| Amortization of  note discount on Sirius and LLC Notes                                     |   | 1,961 |   |
| Interest expense  on capital leases                                                        |   | 155   |   |
| Other interest  expense (income), net                                                      |   | 541   |   |
|                                                                                       |   | $     | 12,761 |   |

 

F-22

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**Note M – RelatedParty Transactions**

LLC and Sirius are McGhan family companies in which thechairman of the Company, Mr. Donald K. McGhan, holds a controllinginterest. Neither the Company nor any of its subsidiaries has any directownership in LLC or Sirius. LLC has acted on behalf of the Company by fundingsignificant expenses incurred for which the Company had a revolving loanagreement as shown on the Company’s Consolidated Balance Sheet of $50,533 atJune 30, 2005. The outstanding balance of the note payable accrues interest atan annual interest rate of ten percent (10%) per annum. During the fiscal yearended June 30, 2006, LLC advanced $10,630 to the Company, of which $477 wasrepaid. Interest expense relating to this note payable was $5,196 for thefiscal year ended June 30, 2006, of which $1,072 was paid. On April 26, 2006the LLC promissory note was replaced by a note to Sirius and a new note to LLC(see Note L for further detail). The Company has a commitment up to $10,000from LLC to fund operating shortfalls as necessary through July 1, 2007.

In October 2003, the Company entered into a reimbursementagreement with Global Aviation Delaware, LLC, a company controlled by itschairman, for the reimbursement of expenses incurred in the operation of itsprivate plane when used for MediCor business. The reimbursement agreement iseffective only for expenses incurred for MediCor business purposes. The Companyrecognized a total expense of $705 for the twelve months ended June 30, 2006pursuant to the reimbursement agreement. This amount represents approximately12.3% of the annual operating costs of the entity. The Company has no minimumguarantees or guarantee of debt for this company. All expenses recognizedpursuant to the reimbursement agreement have been included by the Company inselling, general, and administrative expenses. Under this agreement, only costsdirectly tied to MediCor’s use of the plane asset are reimbursable to theowner. All other operating costs (such as fuel, pilot wages, food, etc.) arepaid directly by the Company through a service agreement the company has withNexGen Management, a company controlled by the Company’s chairman. Alldisbursements to this agent occur only when the plane is used for MediCorbusiness purposes. The Company recognized a total expense of $881 for twelvemonths ended June 30, 2006 pursuant to the service agreement with NexGenManagement. The Company has no minimum guarantees or guarantee of debt for thiscompany. All expenses recognized pursuant to the service agreement have beenincluded by the Company in selling, general, and administrative expenses.

**Note N – Federal Income Taxes**

The company follows SFAS 109, **Accounting forIncome Taxes**,**** forreporting income taxes. The expense (benefit) for income taxes reflected in theConsolidated Statements of Operations for the Company for the periods notedconsist of:
| ** **                                                           | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                                                 |       |                        |       |                        |       |
| Current                                                              |       |                        |       |                        |       |
|                                                                 |       |                        |       |                        |       |
| Net loss                                                             |       | $                           | (5,496     | )                           | $          | (6,078 | ) |
| Foreign income tax expense (benefit) on  unconsolidated subsidiaries |       | 175                         |       | 543                         |       |
|                                                                 |       | (5,321                      | )          | (5,535                      | )          |
| Deferred                                                             |       |                        |       |                        |       |
|                                                                 |       |                        |       |                        |       |
| Allowance for bad debts                                              |       | 16                          |       | (1,233                      | )          |
| Allowance for product replacement                                    |       | 304                         |       | 245                         |       |
| Depreciation and amortization                                        |       | 843                         |       | (85                         | )          |
| Unrealized foreign currency gain/(loss)                              |       | 782                         |       | —                      |       |
|                                                                 |       | 1,945                       |       | (1,073                      | )          |
|                                                                 |       |                        |       |                        |       |
| Total benefit                                                        |       | (3,376                      | )          | (6,608                      | )          |
| Valuation  provision for realization of deferred tax asset           |       | 3,551                       |       | 7,151                       |       |
|                                                                 |       |                        |       |                        |       |
| Total tax expense  (benefit)                                         |       | $                           | 175        |                        | $          | 543 |   |

The current tax expense for thefiscal year ended June 30, 2006 was income tax paid by a foreign subsidiary. Asof June 30, 2006, the Company recorded an allowance of $24,919 against certainfuture tax benefits, the realization of which is currently uncertain. Thedeferred differences related to certain accounts receivable, accruedwarranties, and depreciation/amortization not currently deductible as expensesunder Internal Revenue Service provisions. Although the Company recorded thisallowance to the deferred tax assets, the Company may still utilize the futuretax benefits from net operating losses for 20 

F-23

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years fromthe year of the loss to the extent of future taxable income. The estimated netoperating losses for tax purposes of approximately $60,000 will expire overseveral years ending in 2026.

Primary components of the deferredtax asset as of June 30, 2006 were approximately as follows: 

|                                                            | ** ** | **June 30, 2006** | ** ** |
|------------------------------------------------------------|------------|-----------------------------|------------|
|                                                       |       |                        |       |
| Computed  expected income tax liability at 34%             |       | $                           | (5,496     | ) |
| Adjustments                                                |       |                        |       |
| Net operating loss                                         |       | 30,618                      |       |
| Provision for bad debts                                    |       | 1,648                       |       |
| Provision for product replacement                          |       | 644                         |       |
| Depreciation and amortization expense                      |       | 1,093                       |       |
| Unrealized foreign currency gain                           |       | 701                         |       |
|                                                       |       |                        |       |
| Income tax  benefit                                        |       | $                           | 29,208     |   |
| Valuation  allowance for realization of deferred tax asset |       | (29,208                     | )          |
|                                                       |       |                        |       |
| Deferred tax asset, net                                    |       | $                           | —     |   |

**Note O – Preferred Stock**

The Company authorized a series of45 shares of preferred stock designated as series A 8.0% Convertible PreferredStock (“Series A Preferred”) on July 5, 2004. The Series A Preferred has a parvalue of $0.001 per share with a liquidation preference of $1,000 per share. Inthe event of liquidation, shareholders of the Series A Preferred shall beentitled to receive priority as to distribution over common stock. The Series APreferred stock is convertible into common stock at any time at a conversionprice of $3.85 per share until June 30, 2010, subject to potential adjustmentin the event certain EBITDA or common stock value targets are not met. On June30, 2011, all shares not yet converted to common stock will be subject to amandatory redemption. The redemption price of $1,000 per share plus $1,000 perwhole share for all accrued and unpaid paid-in-kind dividends and any otheraccrued and unpaid dividends, whether or not declared, will be payable by theCompany in cash. At June 30, 2006, the Company had outstanding an aggregate of6 shares, issued for aggregate consideration of $6,810.

**Note P – Loss per Common Share**

Basic loss per share is computed by dividing the net lossapplicable to common shares after preferred dividend requirements by theweighted average of common shares outstanding during the period. Diluted lossper share adjusts basic loss per share for the effects of convertiblesecurities, stock options and other potentially dilutive financial instruments,only in the periods in which such effect is dilutive.

F-24

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A reconciliation of weighted averageshares outstanding, used to calculate basic loss per share, to weighted averageshares outstanding assuming dilution, used to calculate diluted loss per share,follows:
| ** **                                          | ** ** | **Year Ended**         | ** ** | **Year Ended**         | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
| ** **                                          | ** ** | **Income**                  | ** ** | **Shares**                  | ** ** | **Per-Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Per-Share** | ** ** |
| ** **                                          | ** ** | **(Numerator)**             | ** ** | **(Denominator)**           | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
|                                                |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Net Income  (Loss) before preferred stock dividends |       | (17,945                     | )          |                        |       |   |   | (16,135 | ) |   |   |   |   |
| Less: Preferred  stock dividends                    |       | 508                         |       |                        |       |   |   | 1,147 |   |   |   |   |   |
|                                                |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Basic EPS                                           |       | (18,453                     | )          | 21,092                      |       | (0.87 | ) | (17,282 | ) | 18,233 |   | (0.95 | ) |
|                                                |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Effect of  dilutive securities                      |       | —                      |       |                        |       |   |   | — |   |   |   |   |   |
|                                                |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Diluted EPS                                         |       | $                           | (18,453    | )                           | 21,092     |   | (0.87 | ) | $ | (17,282 | ) | 18,233 |   | (0.95 | ) |
|                                                     |            |                             |            |                             |            |  |  |  |  |  |  |  |  |  |  |

 

Common equivalent shares of 32,060 have been excluded from thecomputation of diluted earnings per share because their effect would beanti-dilutive.

**Note Q – Stock Options andWarrants**

The Company has a stock option plan for key employees andconsultants. There were 4,243 shares reserved for issuance pursuant to theCompany’s stock option plan and up to 4 shares were reserved for issuancepursuant to stand-alone options granted in connection with employmentagreements. The Company’s employee share option activity for and relatedinformation is summarized below:

The Company’s share option activity and related informationis summarized below:

|                                       | ** ** | ** **  | ** ** | **Weighted Average** | ** ** |
|---------------------------------------|------------|-------------|------------|---------------------------|------------|
| ** **                            | ** ** | **Options** | ** ** | **Exercise Price**   | ** ** |
|                                  |       |        |       |                      |       |
| Options  outstanding at June 30, 2005 |       | 4,316       |       | $                         | 3.28       |   |
|                                  |       |        |       |                      |       |
| Granted                               |       | 168         |       | 3.52                      |       |
| Exercised                             |       | (235        | )          | 1.92                      |       |
| Cancelled                             |       | (210        | )          | 4.16                      |       |
|                                  |       |        |       |                      |       |
| Options  outstanding at June 30, 2006 |       | 4,039       |       | $                         | 3.31       |   |
|                                  |       |        |       |                      |       |
| Options exercisable at  end of period |       | 1,592       |       | $                         | 3.34       |   |

 

F-25

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The following table summarizes information about stockoptions outstanding at June 30, 2006:
| Outstanding              | ** ** | **Exercisable**    | ** ** |
|--------------------------|------------|--------------------|------------|
| ** **               | ** ** | ** **         | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **         | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **         | ** ** | **Remaining** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **               | ** ** | ** **         | ** ** | **Years of** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of**        | ** ** | **Number of** | ** ** | **Contractual** | ** ** | **Exercise** | ** ** | **Number of** | ** ** | **Exercise** | ** ** |
| **Exercise Prices** | ** ** | **Options**        | ** ** | **Life** | ** ** | **Price** | ** ** | **Options** | ** ** | **Price** | ** ** |
|                     |       |               |       |   |   |   |   |   |   |   |   |
| $1.00 - $2.01            |       | 801                |       | 3.5 |   | $ | 1.75 |   | 342 |   | $ | 1.76 |   |
| $3.00 - $3.80            |       | 2,280              |       | 4.9 |   | $ | 3.48 |   | 748 |   | $ | 3.47 |   |
| $4.00 - $4.30            |       | 958                |       | 5.1 |   | $ | 4.22 |   | 502 |   | $ | 4.22 |   |

##  

## **Note R –Business Segment Information**

The Company is a corporate entity with a number ofwholly-owned, autonomous subsidiaries which operate as single business units ina single industry segment across multiple geographic locations within the U.S.and internationally and, as such, does not have multiple segments to report.For the year ended June 30, 2006, sales from breast implant and other implantswere approximately 94% of total sales, whereas sales from scar managementproduct were approximately 6% of total sales. Revenues from customers anddistributors attributable to various foreign countries outside the U.S. werematerial. Sales in foreign (non-U.S.) countries are currently approximately 95%of total sales, with the largest country (Brazil) accounting for approximately14% of sales. Additionally, a significant amount of revenues and costs areeuro-denominated. Long-lived assets attributable to various foreign countriesoutside the U.S. were material and equaled approximately $39,000 in Franceand $35,000 in the British Isles. Amounts attributable to the U.S. wereapproximately $7,000.

**Note S –****Commitments and Contingencies**

The Company has received a written commitment from LLC, anaffiliate of the Company’s chairman, to fund any operating loss through July 1,2007. LLC has also provided the Company an aggregate of over $77,000 infunding from the Company’s inception through June 30, 2006. However, theCompany’s ability to incur additional indebtedness is restricted by the Company’soutstanding Notes. These Notes only permit the incurrence of a maximum of$10,000 of indebtedness that is both expressly subordinate to them andunsecured.

The Company’s PIP.America subsidiary has a distributionagreement with PIP, a third party manufacturer of breast implants. Thisagreement covers the sale by PIP.America of PIP’s saline, pre-filledbreast implant products in North America, although no sales were reported inthe year ending June 30, 2006 because these products are not currentlyapproved for distribution in North America. Previously, PIP was undertaking theprocess of securing United States Food and Drug Administration (“FDA”) approvalfor these products. At March 30, 2004, PIP.America had $3,445 of accountsreceivable from PIP, representing amounts owed to PIP.America under the termsof the distribution agreement. These amounts have been fully provided for, withan allowance for doubtful account, due to the lack of payment and uncertainprospect of collection from PIP. Effective March 30, 2004, PIP.America andPIP amended the distribution agreement to provide for, among other things,transferring to PIP.America administration, funding and ownership of thepre-market approval application process relating to PIP’s saline-breastimplants. In conjunction with this amendment, PIP.America forgave certainamounts owed by PIP, and the parties amended the pricing terms. The amendmentsobligate PIP.America to fund the ongoing clinical and regulatory costs andexpenses. The amounts and timing of these future costs are unknown and may bematerial. The likelihood and timing of obtaining FDA approval are alsouncertain. Concurrently, PIP issued to PIP.America a revolving promissory notefor certain sums to come due to PIP.America based on PIP.America’s and PIP’sadministration of product replacement and product replacement related claims.The principal amount under the note as of June 30, 2006 was $3,673.

The Company’s Eurosilicone Holdings SAS subsidiary may becommitted to make an additional performance payment to the previousshareholders of Eurosilicone in connection with revenue targets. This paymentmight be as high as €3,000. The Company plans on funding the 2007 payment withthe funds received from the private placement of the Notes.

In October 1999, Case No. 99-25227-CA-01, June 2000, Case No.00-14665-CA-01, June 2003, Case No. 03-15006-CA-09, and September 2003, CaseNos. 0322537-CA-27 and 03-22399-CA-15, separate litigations were filed by SaulKwartin, Ruth Kwartin, Steven M. Kwartin, Robert Kwartin and Nina Kwartinagainst Medicor subsidiary PIP.America, PIP/USA, Inc., Poly Implants Protheses,S.A., Jean Claude Mas, Jyll Farren-Martin and Donald K. McGhan in the CircuitCourt of Miami-Dade

F-26

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County, Florida. The Kwartin family members variously allegethat they are shareholders of PIP/USA, Inc. (“PIP/USA”) or have statutory andcommon law rights of shareholders of PIP/USA as a result of loans orinvestments allegedly made to or into PIP/USA or a third party or under analleged employment agreement. Plaintiffs assert that they have certainderivative or other rights to an alleged distribution agreement between PIP andPIP/USA. Plaintiffs further allege, among other things, that PIP.America andits chairman tortiously interfered with that agreement and plaintiffs’ otheralleged rights. In addition to monetary damages and injunctive relief,plaintiffs seek to reinstate the alleged distribution agreement between PIP/USAand PIP and invalidate PIP.America’s distributor relationship with PIP. Thesecases are consolidated for pretrial purposes but not for trial.

Peggy Williams v. PIP/USA, Inc., Case No. 03 CH 9654, JessicaFischer Schnebel, et al. v. PIP/USA, Inc., Case No. 03CH07239, Dawn MarieCooper, et al. v. PIP/USA, Inc., Case No. 03CH11316, Miriam Furman, et al. v.PIP/USA, Inc., Case No. 03CH10832 and Karen S. Witt, et al. v. PIP/USA, Inc.,Case No. 03CH12928 were filed in the Circuit Court of Cook County, ChanceryDivision, in or around July 2003. Counsel for Jessica Fischer Schnebel, et al.v. PIP/USA, Inc., Case No. 03CH07239 amended her class action complaint toinclude plaintiffs from the other four cases, and each of the others wasvoluntarily dismissed. The consolidated second amended complaint containedcounts alleging product liability, breach of the implied warranties ofmerchantability and fitness for a particular purpose, violation of the IllinoisConsumer Fraud Act and third-party beneficiary status. Unspecified monetarydamages, exemplary damages and attorneys fees and costs had been sought. OnJanuary 26, 2006, PIP.America won dismissal of all counts in these cases butthe third-party beneficiary claims. Plaintiffs have amended and refiled theircomplaint against PIP.America (seeking the same damages), and PIP.America hasfiled another motion to dismiss plaintiffs’ latest complaint (the Third AmendedComplaint). PIP.America’s motion to dismiss has been fully briefed and will beheard on November 1, 2006. PIP, a defendant in the Schnebel litigation, hasagreed to indemnify PIP.America for any losses PIP.America may suffer as aresult of the Illinois litigation.

With respect to cases involving PIP, PIP.America isindemnified by PIP/USA, Inc., PIP, and PIP’s President, Jean Claude Mas,personally, from, among other things, claims arising from products manufacturedby PIP-France. PIP.America either already has, or is in the process of,asserting its indemnification claims and, in the event of an adverse judgmentin any of the cases, PIP.America intends to seek the benefits of thisindemnity. As a result, the Company believes the costs associated with thesematters will not have a material adverse impact on our business, results ofoperations or financial position.

In July, 2005, IP Resources Limited, a UK-based company filedan action against MediCor subsidiary, Eurosilicone, SAS in the Marseille CivilCourt (Tribunal de Grande Instance), Marseille, France. The complaint allegesthat Eurosilicone infringed upon a certain European Patent licensed by IPResources, Inc. known as “Implantable prosthesis device,” Patent #0174141B1,and seeks damages of €3,000, plus legal costs. The case is in the preliminarystages and the Company believes it does not infringe on the 0174141B1 patentand is prepared to wage a vigorous defense based on both the validity of thepatent and upon the merits of the claims.

Though it is not yet possible to predict the outcome of thecases described above, MediCor and its subsidiaries, as applicable, have deniedplaintiffs’ allegations and are vigorously defending themselves in eachlawsuit. MediCor and its subsidiaries have been and will continue to beperiodically named as a defendant in other lawsuits in the normal course ofbusiness, including product liability and product warranty claims. In themajority of such cases, the claims are dismissed, or settled for immaterial amounts.Litigation, particularly product liability litigation, can be expensive anddisruptive to normal business operations and the results of complex proceedingscan be very difficult to predict. Claims against MediCor or its subsidiarieshave been and are periodically reviewed with counsel in the ordinary course ofbusiness. The Company presently believes it or its subsidiaries havemeritorious defenses in all lawsuits in which the Company or its subsidiariesare defendants, subject to the subsidiaries’ continuing product replacementobligations, which the subsidiaries intend to continue to satisfy. While it isnot possible to predict the outcome of these matters, the Company believes thatthe costs associated with them will not have a material adverse impact on itsbusiness, results of operations or financial position.

F-27

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The Company leases offices, manufacturing and warehousefacilities and office equipment under various terms. Lease expenses amounted to$441 and $509 for the years ended June 30, 2006 and 2005, respectively. Futureminimum lease payments are approximated as follows:
| Year ended June 30, | ** ** | **Amount** | ** ** |
|------------------------------------|------------|------------|------------|
|                               |       |       |       |
| 2007                               |       | $          | 716        |   |
| 2008                               |       | 586        |       |
| 2009                               |       | 406        |       |
| 2010                               |       | 275        |       |
| 2011                               |       | 129        |       |
| Later years                        |       | 608        |       |
|                               |       |       |       |
| Total minimum payments  required   |       | $          | 2,720      |   |

 

**Note T - Acquisitions**

On April 25, 2005, one ofthe Company’s subsidiaries completed the purchase of selected assets andliabilities of privately-held HutchisonInternational, Inc., a third-party distributor of breast implantsproducts in the United States for Biosil Limited. The completion of thistransaction allowed the Company to, among other things, negotiate andultimately enter into an exclusive distribution agreement directly with BiosilLimited for its breast implants in the United States. The acquisition itselfdid not have a significant impact on the operating results of the Company,since the operations have no existing revenue—pending FDA approval of theproducts. The various agreements called for payments in the form of stock andcash of approximately $3,000 as follows: cash payments of $250 and 367 sharesof MediCor common stock valued at $7.50, subject to future adjustment based onactual trading prices following approval for marketing the products in theUnited States.

The financial statementsreflect various purchase price allocations. In accordance with SFAS No. 141,Business Combinations, the total purchase price was allocated to the tangibleand intangible assets acquired from Hutchison International, Inc. based upontheir estimated fair values at the acquisition date. The purchase accountingadjustments made were based upon available information. Accordingly, the actualadjustments recorded in connection with the final purchase price allocationhave been finalized.

The purchase priceresulted in a significant amount of other intangible assets. However, theCompany has evaluated this in detail and has determined that $3,243 of thepurchase price is attributable to the distribution agreement with BiosilLimited., pursuant to EITF Issue No. 02-17 and SFAS No. 141.

The following tablesummarizes the components of the total purchase price and the allocation as ofthe date of acquisition and updated as of June 30, 2006.

F-28

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| ** **                                       | ** ** | **Book Value of**     | ** ** | ** **              | ** ** | ** **          | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|-------------------------|------------|---------------------|------------|
| ** **                                       | ** ** | **Assets Acquired /** | ** ** | **Purchase Price** | ** ** | ** **          | ** ** |
| ** **                                       | ** ** | **Liabilities Assumed**    | ** ** | **Adjustments**         | ** ** | **Fair Value** | ** ** |
| Employee  advances                               |       | $                               | 40         |                    | $          | —              |       | $ | 40 |   |
| Inventory                                        |       | 372                             |       | (372                    | )          | —              | (a)        |
| Property and  equipment                          |       | 1                               |       | (1                      | )          | —              | (b)        |
| Distribution  agreement                          |       | —                          |       | 3,243                   |       | 3,243               | (c)        |
|                                             |       |                            |       |                    |       |                |       |
| Total assets                                     |       | $                               | 413        |                    | $          | 2,870               |       | $ | 3,283 |   |
|                                             |       |                            |       |                    |       |                |       |
| Short-term  product replacement allowance        |       | 196                             |       | 87                      |       | 283                 | (d)        |
| Book value of  net assets                        |       | 218                             |       | (218                    | )          | —              | (e)        |
| Purchase price                                   |       |                            |       | 3,000                   |       | 3,000               | (e)        |
|                                             |       |                            |       |                    |       |                |       |
| Total liabilities and  shareholders’ equity |       | $                               | 413        |                    | $          | 2,870               |       | $ | 3,283 |   |

 

The following adjustments have been reflected in the balancesheet.

(a)                                                         Inventory is obsolete because no FDAPre-Market Approval exists, and therefore no current market for the productexists.

(b)                                                        Office equipment appears to beobsolete and beyond its useful life.

(c)                                                         Reflects the value associated withthe Biosil Ltd. distribution agreement, which will be amortized overapproximately seven years.

(d)                                                        Reflects additional amounts forallowance associated with product replacement program.

(e)                                                         To record the purchase price, asfollows: $250 of cash and $2,750 in the form of common stock in MediCor (367shares), which exceeds the book value of purchased net assets by $2,782.

On April 28, 2006, theCompany, through its wholly-owned subsidiary, Biosil UK Ltd., completed itsacquisition of Biosil Limited. and Nagor Limited., both privately held Isle ofMan (British Isles) companies, from their shareholders (the “Sellers”) pursuantto the Agreement for the Sale and Purchase of the Shares of Biosil Limited andNagor Limited (the “Biosil/Nagor SPA”) dated September 13, 2005. The combinedpurchase price for both companies was £20,000 plus 2,640 shares of MediCorcommon stock. The Company paid £13,000 in cash at closing from funds availableas part of a separate, earlier $50,000 senior secured convertible note privateplacement. The remaining £7,000 is due in two equal payments on January 3, 2007and December 31, 2007. In conjunction with the transaction, the Company andeach of the Sellers entered into Put and Call Option Agreements and aRegistration Rights Agreement. Copies of these agreements and the Biosil/NagorSPA were provided with the Company’s Current Report on Form 8-K filed with theSEC on May 4, 2006. The terms of the acquisition were determined on the basisof arm’s-length negotiations and at values that the Company believes are belowthe values associated with comparable medical device companies. The Company hasincluded the operations of Biosil Limited and Nagor Limited in its ConsolidatedStatement of Operations since the date of acquisition, April 28, 2006, throughJune 30, 2006.

In accordance with SFASNo. 141, the total purchase price was allocated to the tangible and intangibleassets of Biosil and Nagor based upon their estimated fair values at theacquisition date with the excess purchase price allocated to goodwill. Theestimates are preliminary and are prior to completion of independentvaluations. Consequently, the values below are subject to change as thevaluations become final.

The following tablesummarizes the preliminary, estimated fair values of the assets acquired andliabilities assumed at the date of acquisition, April 28, 2006.
| Cash (£13,000 at $1.78726  per £ bank settlement rate at April 28, 2006)                                                                |   | $      | 23,234 |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Cash (£7,000,  discounted to £6,200 at 11.1% annual interest,  translated at $1.7893 per £ exchange rate at April 28, 2006)        |   | 11,093 |   |
| Shares of  MediCor common stock                                                                                                                   |   | 9,498  |   |
| (2,640 shares at $3.60 per share, the median market  price for 20 business days on either side of the acquisition date, less  registration costs) |   |   |   |
| Direct  acquisition costs                                                                                                                         |   | 1,130  |   |
| Total purchase price                                                                                                                              |   | $      | 44,955 |   |

 

F-29

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Allocation of purchaseprice
| Cash and cash equivalents            |   | $      | 1,376  |   |
|--------------------------------------|--------|--------|--------|--------|
| Accounts receivable                  |   | 1,804  |   |
| Inventories                          |   | 4,124  |   |
| Other current assets                 |   | 304    |   |
| Property and equipment               |   | 2,841  |   |
| Investments                          |   | 43     |   |
| Intangible assets                    |   | 36,219 |   |
| Other non-current  assets            |   | 96     |   |
| Accounts payable                     |   | (144   | )      |
| Deferred tax liability,  current     |   | (273   | )      |
| Other current  liabilities           |   | (687   | )      |
| Deferred tax liability,  non-current |   | (748   | )      |
| Total purchase price                 |   | $      | 44,955 |   |

 

The Company is awaiting independent valuation of theintangible assets listed above. The values assigned to these intangible assetsas of the acquisition date were preliminary and estimated as follows:
|                         | ** ** | **Amount** | ** ** | **Life**   | ** ** |
|-------------------------|------------|------------|------------|------------|------------|
| Customer list           |       | $          | 2,871      |       | 3.1  years |   |
| Goodwill                |       | 33,348     |       | Indefinite |       |
| Total intangible assets |       | $          | 36,219     |       |       |   |

 

In addition, theCompany is awaiting independent valuation of other possible intangibles;therefore no value has yet been assigned for patents, trade names, non-competeagreements, etc.

In accordance withSFAS No. 142, *Goodwill and Other Intangible Assets,*goodwill and certain other intangible assets are deemed to have indefinitelives and, accordingly, are not amortized but instead are subject to periodicimpairment testing at future periods. Customer relationships are amortized over3.1 years using the straight-line method.

The followingunaudited pro-forma financial information reflects the condensed consolidatedresults of operations of the Company as if the acquisition had taken place onJuly 1, 2004. The pro-forma financial information is not necessarily indicativeof the results of operations had the transaction been effected on July 1, 2004.
|                                                        | ** ** | **For the Year Ended** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                             | ** ** | **June 30,**                     | ** ** |
| ** **                                             | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Net sales                                              |       | $                                     | 40,630     |   | $ | 38,517 |   |
| Net loss                                               |       | (16,710                               | )          | (19,002 | ) |
|                                                   |       |                                  |       |   |   |
| Net loss per share of  common stock, basic and diluted |       | (0.79                                 | )          | (1.04 | ) |
|                                                        |            |                                       |            |  |  |  |  |

 

The informationpresented above is for illustrative purposes only and is not necessarilyindicative of the operating results or financial position that would haveoccurred had the acquisition been completed as of the dates indicated, nor arethey necessarily indicative of future operating results or financial position.The purchase accounting adjustments made in connection with the unaudited proforma condensed consolidated financial statements are based on a preliminaryvaluation that has been made solely for the purpose of developing the pro formafinancial information and are based upon currently available information. Sucha valuation is subject to final adjustments. Accordingly, the actualadjustments to be recorded in connection with the final purchase priceallocation may differ from the pro forma adjustments reflected in the unauditedpro forma condensed consolidated financial statements, and any such differencesmay be material. The purchase price valuations are expected to be completed byMarch 31, 2007.

**Note U – Subsequent Event**

On September 27,2006 the Sellers of Laboratoires Eurosilicone S.A. agreed to postpone theperformance payment due on March 31, 2007 to July 20, 2007 and the Sellers ofBiosil Ltd. and Nagor Ltd. agreed to postpone the subsequent payment of £3,500previously due on January 3, 2007 to a payment date of July 3, 2007.    

 

F-30

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**EXHIBIT INDEX**
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                  |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.1         |       | Agreement of Merger dated as of February 7, 2003, by  and among Scientio, Inc., International Integrated Incorporated, SCMerger  Ltd., certain members of International Integrated Incorporated and certain  stockholders of Scientio, Inc. – Incorporated by reference to Exhibit 2.1 to  the Registrant’s Current Report on Form 8-K filed February 24, 2003.                                        |
| 2.2         |       | Agreement for the Sale and Purchase of the Shares of  Laboratoires Eurosilicone S.A. dated May 17, 2004 – Incorporated by reference  to Exhibit 2.2 to the Registrant’s Annual Report on Form 10-KSB/A for the  year ended June 30, 2004.                                                                                                                                                              |
| 2.3         |       | Stock Purchase Agreement between MediCor Latin  America S.A de C.V., International Integrated Management, Inc., Carlos  Francisco Lazo de la Vega Jasso and Hector Jesus Chulia de la Torre dated  August 27, 2004 – Incorporated by reference to Exhibit 2.3 to the  Registrant’s Annual Report on Form 10-KSB/A for the year ended June 30, 2004.                                                    |
| 2.4*        |       | Agreement for the Sale and Purchase of the Shares of  Biosil Limited and Nagor Limited dated September 13, 2005 among  MediCor Ltd., John Gordon Evans, Jessie Anne Evans, John A. Alsop, and  Joseph S. Gallagher, incorporated by reference to Exhibit 2.1 to the  Registrant’s current report on Form 8-K/A filed on September 19,  2005.                                       |
| 3.1         |       | Certificate of Incorporation of the Registrant –  Incorporated by reference to Exhibit 3.1 to the Registrant’s Registration  Statement on Form SB-2/A filed September 14, 2001 (Commission File No.  333-64420).                                                                                                                                                                                       |
| 3.2         |       | Certificate of Amendment of Incorporation of the  Registrant – Incorporated by reference to Exhibit 3.2 of the Registrant’s  Annual Report on Form 10-KSB for the year ended June 30, 2003.                                                                                                                                                                                                            |
| 3.3         |       | Amended and Restated Bylaws of the Registrant –  Incorporated by reference to Exhibit 3.3 of the Registrant’s Annual Report on  Form 10-KSB for the year ended June 30, 2003.                                                                                                                                                                                                                          |
| 3.4         |       | Certificate of Designation, Preferences and Rights  of Series A 8.0% Convertible Preferred stock – Incorporated by reference to  Exhibit 3.3 of the Registrant’s Annual Report on Form 10-KSB for the year  ended June 30, 2004.                                                                                                                                                                       |
| 3.5         |       | Amended and Restated Bylaws of the Registrant, filed  herewith                                                                                                                                                                                                                                                                                                                                                   |
| 4.1         |       | Form of Convertible Debenture Loan Agreement –  Incorporated by reference to Exhibit 4.1 of the Registrant’s Registration  Statement on Form SB-2/A filed April 1, 2005 (Commission File No.  333-121832).                                                                                                                                                                                             |
| 4.2         |       | Form of Convertible Debenture – Incorporated by  reference to Exhibit 4.2 of the Registrant’s Quarterly Report on Form 10-QSB  for the quarter ended September 30, 2003 and December 31, 2003.                                                                                                                                                                                                         |
| 4.3         |       | Form of Amendment to Convertible Debenture –  Incorporated by reference to Exhibit 4.3 of the Registrant’s Quarterly Report  on From 10-QSB for the quarter ended September 30, 2003.                                                                                                                                                                                                                  |
| 4.4         |       | Form of Convertible Debenture Agreement –  Incorporated by reference to Exhibit 4.4 of the Registrant’s Registration  Statement on Form SB-2/A filed April 1, 2005 (Commission File No.  333-121832).                                                                                                                                                                                                  |
| 4.5         |       | Form of Convertible Debenture – Incorporated by  reference to Exhibit 4.5 of the Registrant’s Quarterly Report on Form 10-QSB  for the quarter ended September 30, 2003.                                                                                                                                                                                                                               |
| 4.6         |       | Form of Investment Agreement – Incorporated by  reference to Exhibit 4.1 of the Registrant’s Quarterly Report on Form 10-QSB  for the quarter ended December 31, 2003.                                                                                                                                                                                                                                 |
| 4.7         |       | Written Consent of the Board of Directors of  International Integrated Incorporated establishing the Voting Powers,  Designations, Preferences, Limitations, Restrictions, and Relative Rights of  8% Class A Convertible Preferred Stock – Incorporated by reference to Exhibit  4.7 of the Registrant’s Registration Statement on Form SB-2/A filed March 4,  2005 (Commission File No. 333-121832). |
| 4.8         |       | Specimen common stock certificate of the Registrant –  Incorporated by reference to Exhibit 4.8 of the Registrant’s Registration  Statement on Form SB-2/A filed March 4, 2005 (Commission File No.  333-121832).                                                                                                                                                                                      |
| 4.9         |       | Specimen Series A 8.0% Convertible Preferred Stock  certificate – Incorporated by reference to Exhibit 4.9 of the Registrant’s  Registration Statement on Form SB-2/A filed March 4, 2005 (Commission File  No. 333-121832).                                                                                                                                                                           |

 

E-1

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| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                 |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.10        |       | Securities Purchase Agreement dated as of  April 26, 2006 by and among MediCor Ltd., Silver Oak Capital,  L.L.C., in its capacity as collateral agent, and the investors listed  therein, incorporated by reference to Exhibit 10.1 of the Registrant’s  current report on Form 8-K/A filed on May 1, 2006.                                                       |
| 4.11        |       | Form of Note dated April 26, 2006, incorporated  by reference to Exhibit 10.2 of the Registrant’s current report on  Form 8-K/A filed on May 1, 2006.                                                                                                                                                                                                                  |
| 4.12        |       | Registration Rights Agreement dated as of  April 26, 2006 by and among MediCor Ltd. And the undersigned  purchasers therein, incorporated by reference to Exhibit 10.3 of the  Registrant’s current report on Form 8-K/A filed on May 1, 2006.                                                                                                                    |
| 4.13        |       | Form of Warrant dated April 26, 2006,  incorporated by reference to Exhibit 10.4 of the Registrant’s current  report on Form 8-K/A filed on May 1, 2006.                                                                                                                                                                                                               |
| 4.14        |       | Guarantee and Collateral Agreement dated as of  April 26, 2006 made by MediCor Ltd. and the other pledgors from  time to time party thereto in favor of Silver Oak Capital, L.L.C. as  collateral agent, incorporated by reference to Exhibit 10.5 of the  Registrant’s current report on Form 8-K filed on May 1, 2006.                                          |
| 4.15        |       | Subordination Agreement dated as of April 26,  2006 by and among MediCor Ltd. and Silver Oak Capital, L.L.C., in its  capacity as collateral agent, incorporated by reference to Exhibit 10.6  of the Registrant’s current report on Form 8-K/A filed on May 1,  2006.                                                                                            |
| 10.1        |       | Agreement of Merger, dated as of February 7, 2003,  by and among Scientio, Inc., International Integrated Incorporated, SC  Merger, Ltd., certain members of International Integrated Incorporated and  certain stockholders of Scientio, Inc. – Incorporated by reference to Exhibit  10.1 of the Registrant’s Quarterly Report on Form 10-QSB for the quarter  ended March 31, 2003 |
| 10.2*       |       | Securities Purchase Agreement, dated as of March 18,  2003, by and among the Registrant, Graeco2, Limited and AAB Corporation –  Incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly  Report on Form 10-QSB for the quarter ended March 31, 2003.                                                                                                                 |
| 10.3*       |       | Asset Purchase Agreement, dated as of April 25, 2002  – Incorporated by reference to Exhibit 10.2 of the Registrant’s Annual Report  on Form 10-KSB for the year ended June 30, 2003.                                                                                                                                                                                                 |
| 10.4        |       | MediCor Ltd. 1999 Amended and Restated Stock  Compensation Program – Incorporated by reference to Exhibit 10.3 of the Registrant’s  Annual Report on Form 10-KSB for the year ended June 30, 2003.                                                                                                                                                                                    |
| 10.5        |       | Lease Agreement between the Registrant and Skyview  Business Park, LLC – Incorporated by reference to Exhibit 10.4 of the  Registrant’s Annual Report on Form 10-KSB for the year ended June 30, 2003.                                                                                                                                                                                |
| 10.6        |       | Lease Agreement Addendum between the Registrant and  Skyview Business Park, LLC – Incorporated by reference to Exhibit 10.5 of the  Registrant’s Annual Report on Form 10-KSB for the year ended June 30, 2003.                                                                                                                                                                       |
| 10.7        |       | Employment Agreement dated June 2, 2003 between the  Registrant and Thomas R. Moyes – Incorporated by reference to Exhibit 10.6 of  the Registrant’s Annual Report on Form 10-KSB for the year ended June 30,  2003.                                                                                                                                                                  |
| 10.8        |       | Option Agreement dated July 18, 2003 between the  Registrant and Thomas R. Moyes – Incorporated by reference to Exhibit 10.7 of  the Registrant’s Annual Report on Form 10-KSB for the year ended June 30,  2003.                                                                                                                                                                     |
| 10.9        |       | Form of Consultant Warrant – Incorporated by  reference to Exhibit 10.8 of the Registrant’s Annual Report on Form 10-KSB  for the year ended June 30, 2003.                                                                                                                                                                                                                           |
| 10.10       |       | Form of Employee Stock Option – Incorporated by  reference to Exhibit 10.9 of the Registrant’s Annual Report on Form 10-KSB  for the year ended June 30, 2003.                                                                                                                                                                                                                        |
| 10.11*      |       | Amendment No. 1 to Asset Purchase Agreement, dated  as of November 20, 2002 – Incorporated by reference to Exhibit 10.10 of the  Registrant’s Annual Report on Form 10-KSB for the year ended June 30, 2003.                                                                                                                                                                          |
| 10.12       |       | Employment Agreement dated October 1, 2003 between  the Registrant and Jim J. McGhan – Incorporated by reference to Exhibit 10.1  of the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended  September 30, 2003.                                                                                                                                                      |

 

E-2

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| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                         |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                                                    |
| 10.13       |       | Option Agreement dated October 27, 2003 between the  Registrant and Jim J. McGhan – Incorporated by reference to Exhibit 10.2 of  the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended  September 30, 2003.                                                                                                                 |
| 10.14       |       | Employment Agreement dated September 1, 2003 between  the Registrant and Theodore R. Maloney – Incorporated by reference to Exhibit  10.3 of the Registrant’s Quarterly Report on Form 10-QSB for the quarter  ended September 30, 2003.                                                                                                 |
| 10.15       |       | Option Agreement dated September 2, 2003 between the  Registrant and Theodore R. Maloney – Incorporated by reference to Exhibit  10.4 of the Registrant’s Quarterly Report on Form 10-QSB for the quarter  ended September 30, 2003.                                                                                                     |
| 10.16       |       | Amendment No. 2 to Asset Purchase Agreement dated as  of October 16, 2003 – Incorporated by reference to Exhibit 10.5 of the  Registrant’s Quarterly Report on Form 10-QSB/A for the quarter ended  September 30, 2003.                                                                                                                       |
| 10.17*      |       | Form of Amended Distribution Agreement –  Incorporated by Reference to Exhibit 10.1 of the Registrant’s Quarterly  Report on Form 10-QSB/A for the quarter ended March 31, 2004.                                                                                                                                                              |
| 10.18       |       | Form of Promissory Note – Incorporated by Reference  to Exhibit 10.2 of the Registrant’s Quarterly Report on  Form 10-QSB/A for the Quarter ended March 31, 2004.                                                                                                                                                                             |
| 10.19       |       | Certificate of Designation, Preferences and Rights  of Series A 8.0% Convertible Preferred Stock – Incorporated by reference to  Exhibit 10.19 of the Registrant’s Annual Report on Form 10-KSB for the year  ended June 30, 2004.                                                                                                            |
| 10.20       |       | Transportation Dry Lease Agreement between MediCor  and Global Aviation, LLC dated June 30, 2001 – Incorporated by reference to  Exhibit 10.22 of the Registrant’s Annual Report on Form 10-KSB/A for the year  ended June 30, 2004.                                                                                                          |
| 10.21*      |       | Loan Agreement with BNP  Paribas dated September 10, 2004 – Incorporated by reference to Exhibit 10.23 of the Registrant’s Annual  Report on Form 10-KSB/A for the year ended June 30, 2004.                                                                                                                                                  |
| 10.22       |       | Revolving Promissory Note made by MediCor Ltd. in  favor of International Integrated Industries, LLC – Incorporated by reference  to Exhibit 10.24 of the Registrant’s Registration Statement on Form SB-2/A  filed March 4, 2005 (Commission File No. 333-121832).                                                                           |
| 10.23       |       | Assignment and Assumption Agreement dated as of  April 1, 2003, by and among International Integrated Incorporated, MediCor  Ltd. and International Integrated Industries, LLC – Incorporated by reference  to Exhibit 10.25 of the Registrant’s Registration Statement on Form SB-2/A  filed March 4, 2005 (Commission File No. 333-121832). |
| 10.24       |       | Reimbursement Agreement between MediCor Ltd. and  Global Aviation Delaware LLC dated October 1, 2003 – Incorporated by  reference to Exhibit 10.26 of the Registrant’s Registration Statement on Form  SB-2/A filed April 1, 2005 (Commission File No. 333-121832).                                                                           |
| 10.25       |       | Addendum to Promissory Note made by MediCor Ltd. in  favor of International Integrated Industries, LLC – Incorporated by reference  to Exhibit 10.27 of the Registrant’s Registration Statement on Form SB-2/A  filed April 1, 2005 (Commission File No. 333-121832).                                                                         |
| 10.26*      |       | Supplier Novation and  Amendment Agreement among Biosil Limited, Hutchison International, Inc.,  MediCor Aesthetics and International Integrated Incorporated dated as of  February 10, 2005 – Incorporated  by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K  filed May 3, 2005.                                  |
| 10.27       |       | Guarantee dated as of  February 10, 2005 between MediCor Ltd. and Biosil Limited – Incorporated by  reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K  filed May 3, 2005.                                                                                                                                              |
| 10.28       |       | Transaction Accommodation  Agreement between International Integrated Incorporated, MediCor Ltd and  Hutchison International, Inc. dated as of March 21, 2005 – Incorporated by  reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K  filed May 3, 2005.                                                                 |
| 10.29       |       | Employment Agreement dated April 1, 2005  between the Registrant and Marc S. Sperberg, incorporated by reference  to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-QSB  for the quarter ended September 30, 2005.                                                                                          |
| 10.30       |       | Employment Agreement dated November 7, 2005  between the Registrant and Paul R. Kimmel incorporated by reference to  Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-QSB  for the quarter ended September 30, 2005.                                                                                          |

 

E-3

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| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                      |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                 |
| 10.31       |       | Amended and Restated Subordinated Promissory Note  dated April 26, 2006 made by MediCor Ltd. in favor of International  Integrated Industries, LLC, incorporated by reference to Exhibit 10.7 of  the Registrant’s current report on Form 8-K/A filed on May 1, 2006.  |
| 10.32       |       | Amended and Restated Subordinated Convertible Note  dated April 26, 2006 made by MediCor Ltd. in favor of Sirius  Capital LLC incorporated by reference to Exhibit 10.7 of the  Registrant’s current report on Form 8-K/A filed on May 1, 2006.                        |
| 10.33       |       | Warrant to Purchase Common Stock dated  April 26, 2006 by MediCor Ltd. to Sirius Capital LLC.                                                                                                                                                                                              |
| 10.34       |       | Put and Call Option Agreement dated April 28,  2006 between MediCor Ltd. and Gordon Evans, incorporated by reference to  Exhibit 10.1 to the Registrant’s current report on Form 8-K filed  on May 4, 2006.                                                            |
| 10.35       |       | Put and Call Option Agreement dated April 28,  2006 between MediCor Ltd. and Jessie Anne Evans, incorporated by  reference to Exhibit 10.2 to the Registrant’s current report on  Form 8-K filed on May 4, 2006.                                                       |
| 10.36       |       | Put and Call Option Agreement dated April 28,  2006 between MediCor Ltd. and John A. Alsop, incorporated by reference  to Exhibit 10.3 to the Registrant’s current report on Form 8-K  filed on May 4, 2006.                                                           |
| 10.37       |       | Put and Call Option Agreement dated April 28,  2006 between MediCor Ltd. and Joseph S. Gallagher, incorporated by  reference to Exhibit 10.4 to the Registrant’s current report on  Form 8-K filed on May 4, 2006.                                                     |
| 10.38       |       | Registration Rights Agreement dated April 28,  2006 between MediCor Ltd. and Gordon Evans, Jessie Anne Evans, John A.  Alsop and Joseph S. Gallagher, incorporated by reference to Exhibit 10.5  to the Registrant’s current report on Form 8-K filed on May 4,  2006. |
| 10.39       |       | Non-Employee Directors’ Deferral Plan, incorporated  by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on  Form 10-QSB for the quarter ended March 31, 2006.                                                                                           |
| 10.40       |       | Addendum to Promissory Note  made by MediCor Ltd. in favor of International Integrated Industries, filed  herewith                                                                                                                                                                                   |
| 21          |       | Subsidiaries of the Registrant, incorporated by  reference to Exhibit 21 to the Registrant’s Registration on  Form SB-2/A filed July 24, 2006 (File No. 333-121832).                                                                                                        |
| 31.1        |       | Principal Executive Officer Certification Pursuant  To 17 C.F.R. Section 240.13a-14(a).                                                                                                                                                                                                              |
| 31.2        |       | Principal Financial Officer Certification Pursuant  To 17 C.F.R. Section 240.13a-14(a).                                                                                                                                                                                                              |
| 32.1        |       | Principal Executive Officer Certification Pursuant  To 18 U.S.C. Section 1350.                                                                                                                                                                                                                       |
| 32.2        |       | Principal Financial Officer Certification Pursuant  To 18 U.S.C. Section 1350.                                                                                                                                                                                                                       |

 

----

*                 Certainportions of this Exhibit, for which confidential treatment has been requested,have been redacted and filed separately with the Securities and ExchangeCommission.

 

E-4

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