**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington,D.C. 20549**

 

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**FORM10-KSB**

 
| **(Mark One)**                                                                                                                                                                                                                                                                                                                     |   |                                                                                                         |
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| **ý**                                                                                                                                                                                                                                                                                                                         |   | **ANNUAL REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|                                                                                                                                                                                                                                                                                                                               |
| **For the Fiscal Year Ended June 30, 2003**                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                               |
| **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 333-64420**

 

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| **MEDICOR  LTD.**                                                   |
|---------------------------------------------------------------------|
| (Name of Small Business Issuer in Its Charter)                      |
|                                                                |
| **Delaware**                                                        |   | **14-1871462** |
| (State or Other Jurisdiction  of Incorporation or Organization)     |   | (I.R.S. Employer  Identification No.) |
|                                                                |
| **4560 S. Decatur Blvd.  Las Vegas, Nevada**                        |   | **89103** |
| (Address of Principal Executive Offices)                            |   | (Zip Code) |
|                                                                |
| **(702) 932-4560**                                             |
| (Issuer’s Telephone Number, Including Area Code)               |
|                                                                |
| Securities registered under Section 12(b) of the Exchange Act: |
| **None**                                                            |
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| Securities registered under Section 12(g) of the Exchange Act: |
| **None**                                                            |

 

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Check whether theissuer:  (1)  filed all reports requiredto be filed 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 ý    No o

 

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-Bcontained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statements incorporatedby reference in Part III of this Form 10-KSB or any amendment to thisForm 10-KSB. ý

 

The issuer’s revenues for themost recent fiscal year: $1,676,905.

 

The aggregate market value ofvoting and non-voting common equity held by non-affiliates as of September 30,2003 was $19,285,182, based on the average bid and asked prices on the OTCBulletin Board on that date.

 

On September 30, 2003, therewere 17,548,192 shares of common stock outstanding.

 

TransitionalSmall Business Disclosure Format (Check one) Yes o   No ý

 

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**MEDICORLTD.**

** **

**AnnualReport on Form 10-KSBFor the Fiscal Year Ended June 30, 2003TABLE 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  and Executive Officers |
| 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, List and Reports on Form 8-K |
| 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 containstrademarks and trade names that are the property of MediCor Ltd. and itssubsidiaries, and of other companies, as indicated.

 

In this document, the words “we,” “our,” “ours,” “us”and “MediCor” refer only to MediCor Ltd. and its subsidiaries, not any otherperson or entity.

 

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**PART I**

 

This report onForm 10-KSB (including the section regarding Management’s Discussion andAnalysis or Plan of Operation) contains forward-looking statements regardingour business, financial condition, results of operations and prospects.  Words such as “expects,” “anticipates,”“intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions orvariations of such words are intended to identify forward-looking statements,but are not the exclusive means of identifying forward-looking statements inthis report on Form 10-KSB. Additionally, statements concerning future matters are forward-lookingstatements.

 

Although forward-lookingstatements in this report on Form 10-KSB reflect the good faith judgmentof our management, such statements can only be based on facts and factorscurrently known by us.  Consequently,forward-looking statements are inherently subject to risks and uncertaintiesand actual results and outcomes may differ materially from the results andoutcomes discussed in or anticipated by the forward-looking statements.  Factors that could cause or contribute tosuch differences 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 place undue reliance on these forward-lookingstatements, which speak only as of the date of this report onForm 10-KSB.  We undertake noobligation to revise or update any forward-looking statements in order toreflect any event or circumstance that may arise after the date of this reporton Form 10-KSB. Readers are urged to carefully review and consider the variousdisclosures made in this report, which attempt to advise interested parties ofthe risks and factors that may affect our business, financial condition,results of operations and prospects.

 

We file reports with theSecurities and Exchange Commission.  Weelectronically file our annual reports on Form 10-KSB, quarterly reportson Form 10-QSB, current reports on Form 8-K and amendments to thosereports with the SEC.  You can read andcopy any materials we file with the SEC at its Public Reference Room at 450Fifth Street, NW, Washington, DC 20549. You can obtain additional information about the operation of the PublicReference Room by calling the SEC at 1-800-SEC-0330.  In addition, the SEC maintains an Internet site (www.sec.gov)that contains reports, proxy and information statements, and other informationregarding issuers that file electronically with the SEC, including us.

 

***ITEM 1.  BUSINESS***

 

MediCoracquires, develops, manufactures and markets products for medical specialtiesin aesthetic, plastic and reconstructive surgery and dermatology markets.  Products include surgically implantableprostheses for aesthetic, plastic and reconstructive surgery and scarmanagement products.  Our products aresold worldwide to hospitals, surgery centers and physicians through variousdistributors and direct sales personnel.

 

MediCorwas incorporated in Delaware in December 2000 under the name Scientio,Inc.  On February 7, 2003, awholly owned subsidiary of MediCor merged with and into InternationalIntegrated Incorporated, with International Integrated as the surviving entityand a wholly owned subsidiary of MediCor. International Integrated was incorporated in the British Virgin Islandsin 1999.

 

**Products**

 

Medicor has two mainproduct lines –

 

•         surgically implantable prostheses foraesthetic plastic and reconstructive surgery and

•         scar management products.

* *

*AestheticPlastic and Reconstructive Surgery*

 

Prior to May 2000,through our III Acquisition Corp. subsidiary, which does business under thetradename PIP.America, we distributed in the United States saline filled breastimplants manufactured by Poly Implants Prostheses, S.A. on both a direct and aconsigned inventory basis.  As of May2000, the United States Food and Drug Administration (FDA) notified PIP.Americathat further distribution of the implants would be suspended until the FDAreviewed and approved the clinical study being conducted by Poly ImplantsProstheses.  Pursuant to a voluntarywithdrawal from the market, sales of PIP.America products ceased in November of2002 pending final Pre-Market Approval (PMA) clearance.  Poly Implants Prostheses is currentlyconducting its clinical study and is in a monitoring phase.  We currently anticipate that this phase willbe completed by the end of fiscal 2004 and that the FDA will approvecommercialization in the United States of the products in the second quarter offiscal 2005.  We are not, however,participating in the conduct of the clinical study and are dependent on PolyImplants Prostheses obtaining the approval before we can recommencedistribution of the products.

 

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In April 2002, we agreedto acquire substantially all of the assets of another privately-held UnitedStates medical products distributor. The closing is conditioned upon the distributor acquiring necessarygovernmental approvals for commercialization in the United States of theproducts to be distributed, which we anticipate will occur before the end ofthe second quarter of fiscal 2004.  Weintend to commence marketing and sales of the products as soon after approvalas practicable.

 

*ScarManagement Products*

 

Oursubsidiary, HPL Biomedical (which does business under the trade name Biodermis)manufactures and sells products in the specialty field of scar management andpost-operative care products.  In theUnited States, Biodermis distributes its products to dermatologists,dermatological surgeons, aesthetic plastic and reconstructive surgeons and Obstetric/Gynecologiststhrough a combination of a direct sales force and a distributor.  Internationally, Biodermis distributes tothe same fields of medicine through approximately 70 distributors in about 50countries, including Canada and Mexico.

 

Biodermis’core product line consists of products indicated for use in the prevention andmanagement of excessive or abnormal masses of visible scar tissue known askeloid and hypertrophic scars.  In theUnited States, the products are distributed under the names EpiDermTMsilicone gel sheeting and XeragelTM silicone ointment.  Internationally, the same products are alsomarketed under the names TopiGelTM and DermaSofTM.

 

Biodermis’secondary product lines consist mainly of two products, EPIfoamTMand HydroGOLDTM.  EPIfoam isa silicone backed, polyurethane foam utilized post-lipectomy to assist inrecovery and enhance the overall aesthetic appearance followingliposuction.  HydroGOLD is ahydrogel-based product for use in reducing the pain, discomfort and burning sensationfrequently associated with procedures of the skin typically aimed at reducingfine lines and wrinkles and to eliminate or reduce the signs of aging, such aslaser resurfacing, chemical peels and micro-dermabrasion.

 

Additionally,a portion of Biodermis’ revenue is derived from original equipmentmanufacturing of scar management and post-operative care products for othermedical device companies who then sell the products under their own brandnames.  To assure quality control andproper regulatory compliance, Biodermis retains all responsibilities related toUnited States Food and Drug Administration and European CE mark certificationand regulatory compliance related to manufacturing activities.  Some of these companies are allowed tocompete for sales in similar markets and for similar customers againstBiodermis’ distributors and direct sales staff.

 

**Business Strategy**

 

MediCor’s strategy is tobe the leading integrator of selected international medical device markets,technologies and corporations.  Toachieve this strategy, we intend to build upon and expand our business lines,primarily in the aesthetic plastic andreconstructive surgery and dermatology markets.  We intend to accomplish this growth through the expansion ofexisting product lines and offerings and through the acquisition of companiesand other assets, including intellectual property rights or distributionrights, in existing markets and other markets management believes arecompatible with our primary emphasis on the aesthetic plastic and reconstructive surgery and dermatologymarkets.  On March 18, 2003,MediCor acquired certain intellectual property relating to tissue fillermaterials and processes through the acquisition of a privately held company,Intellectual Property International.

 

**Sales and Marketing**

 

We sell our productsdirectly and through independent distributors in approximately 50 countriesworldwide.  We reinforce our sales andmarketing program with telemarketing, which is designed to increase salesthrough follow-up on leads and the distribution of product information topotential customers.  We supplement ourmarketing efforts with appearances at trade shows, advertisements in tradejournals and sales brochures.

 

*Breast Aesthetics*

 

Currently, we areawaiting the required FDA clearance to sell saline breast implants in theUnited States.  These products aretypically sold on both a direct and a consigned inventory basis.

 

*Scar Management Products*

 

Inthe United States, Biodermis distributes its products to dermatologists,dermatological surgeons, aesthetic, plastic and reconstructive surgeons andObstetric/Gynecologists through a combination of a direct sales force and adistributor.  Internationally, Biodermisdistributes to the same fields of medicine through approximately 70distributors in about 50 countries, including Canada and Mexico.

 

3

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**Competition**

 

*BreastAesthetics*

 

We have competed and willcompete in the U.S. breast implant market with Inamed Corporation and MentorCorporation. We are aware of other companies conducting clinical studies ofbreast implant products in the U.S. Internationally, we will compete with several manufacturers, includingInamed Corporation, Mentor Corporation, Silimed, S.A., LaboratoriesEurosilicone, S.A., Poly Implants Prostheses, S.A., Nagor Limited, LaboratoriesSebbin, and LPI.

 

We believe that theprincipal factors that will allow our products to compete effectively arehigh-quality product consistency, product design, management’s knowledge of andsensitivity 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 estimatethere are approximately 15 companies in the United States and internationalmarkets competing for market share among dermatologists and plastic andreconstructive surgeons for products that are competitive with those ofBiodermis.  EpiDerm, also sold asDermaSof and TopiGel, and Xeragel comprise Biodermis’ principal product lineand compete against such companies as “Cica Care,” by Smith and Nephew,“ReJuveness,” by ReJuveness Inc., “Kelo-Cote” by Advanced Bio-Technologies,Inc., “New Beginnings,” by PMT Corporation, and others.

 

EPIfoam post-operativecompression foam has no direct product-type competition.  However, it competes to some extent with aproduct known as “Reston” foam, manufactured by 3M, as a piping and insulationproduct, which is occasionally used off-label by a small number ofsurgeons.  HydroGOLD hydrogel sheetingcompetes against such companies products as “2nd Skin,” by Spenco Corp. and“HydraSkin” by HydraSkin Corp.

 

**Researchand Development**

 

We use employee andindependent consultant scientists, engineers, and technicians to work onmaterial technology and product design as part of our research and developmentefforts.  Our research and developmentexpense is currently primarily directed toward supporting the clinical trialsof our products or products which we seek to distribute for third parties.  In addition, we direct research anddevelopment toward development or acquisition of new and improved productsbased on scientific advances in technology and medical knowledge, together withinput from the surgical profession.  Wehave incurred expenses of $190,625 and $294,723 for the years ended, June 30,2003 and 2002, respectively, for research and development.

 

**Patents,Licenses and Related Agreements**

 

We currently own or haveexclusive license rights to numerous patents, patent applications, trademarksand trademark applications throughout the world.  During the third quarter of fiscal 2003, we acquiredInternational Property International, Inc., a Delaware corporation whose assetsinclude United States and foreign patents, proprietary formulations and patentdisclosures related to the use of certain materials in the construction ofimplantable devices.

 

Although we believe ourpatents and patent rights are valuable, our technical knowledge with respect tomanufacturing processes, materials and product design are also valuable.  As a condition of employment or consulting,we require that all employees and consultants execute a proprietary informationand inventions agreement relating to our proprietary information and intellectualproperty rights.

 

**Manufacturing and Raw Materials**

 

*BreastAesthetics*

 

We have not historicallymanufactured any of the breast implant products sold by us.  All of the saline filled breast implantproducts we distributed in the past were manufactured in France by PolyImplants Prostheses.  These productswere produced in controlled environments utilizing specialized equipment forprecision measurement, quality control, packaging, and sterilization.   The manufacturing activities for productssold in the U.S. are subject to FDA regulations and guidelines, and theseproducts and their manufacturing procedures are subject to review by theFDA.  Poly Implants Prostheses’manufacturing activities are also subject to regulatory requirements andperiodic inspections by European regulatory agencies.

 

4

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In the event we build oracquire our own breast implant manufacturing facilities, we will be subject tosimilar standards and government regulation and inspection.

 

There is a very limitednumber of qualified suppliers of silicone raw materials in the world.  To the extent we build or acquiremanufacturing capability, we will most likely be required to purchase oursilicone raw material supplies for production of breast implants from asingle-source supplier.

 

*ScarManagement Products*

 

Biodermis has developedproduct lines though OEM vendors.  Thesevendors are single-source suppliers due to the highly specialized nature of theproducts and the regulatory requirements for the manufacturing of theproducts.  Biodermis is responsible forthe governmental regulatory submissions for the products they distribute, aswell as a required vendor audit program and internal controls for all aspectsof product flow through the facility.

 

In the event we build oracquire our own manufacturing facilities for scar management products, we willbe subject to all standards and government regulation and inspection requiredfor all Class I and Class II medical devices.

 

There is a very limitednumber of qualified suppliers of the raw materials required for the Biodermisproducts in the world.  To the extent webuild or acquire scar management product manufacturing capability, we will mostlikely be required to purchase our raw material supplies for our products froma limited number of suppliers.

 

*EnvironmentalCompliance*

 

Our manufacturingfacilities in the U.S. are regulated by federal, state, and local laws.  We believe that our operations are in fullcompliance with all applicable laws and we received no citations or notices ofviolations in 2003.  In 2004, we do notexpect to incur any material expense to maintain our compliance level.

 

**Government Regulation**

 

Medical devices andbiologics are subject to regulation by the U. S. Food and Drug Administration(FDA), state agencies and, in varying degrees, by foreign government healthagencies. These regulations, as well as various U.S. Federal and state laws,govern the development, clinical testing, manufacturing, labeling, recordkeeping and marketing of these products. The majority of our product candidatesmust undergo rigorous testing and an extensive government regulatory approvalprocess prior to sale in the U.S. and other countries. The lengthy process ofseeking required approvals and the continuing need for compliance withapplicable laws and regulations require the expenditure of substantialresources. Regulatory approval, when and if obtained, may be limited in scope,and may significantly limit the indicated uses for which a product may bemarketed. Approved products and their manufacturers are subject to ongoingreview, and discovery of previously unknown problems with products may resultin restrictions on their manufacture, sale, or use or their withdrawal from themarket.

 

*Regulationof Medical Devices*

 

All of our currentproducts are medical devices intended for human use and are subject toregulation by FDA in the United States. Unless an exemption applies, each medical device we market in the U.S.must have a 510(k) clearance or a Pre-market Approval (PMA) in accordance withthe Federal Food, Drug, and Cosmetic Act, as amended.  FDA regulations generally require reasonable assurance of safetyand effectiveness prior to marketing, including safety data obtained underapproved clinical protocols and require compliance with “good manufacturingpractices” (GMPs), as determined by detailed FDA inspections of manufacturingfacilities.  These regulations alsorequire reporting of product defects to the FDA.

 

FDA regulation divides medicaldevices into three classes. Class I devices are subject to general controls that requirecompliance with device establishment registration, product listing, labeling,GMPs and other general requirements. Class II devices are subject to special controls in addition togeneral controls.  Class IIIdevices are subject to the most extensive regulation and in most cases requiresubmission to the FDA of a PMA application that includes data supporting thesafety and effectiveness of the device. Periodic reports must be submitted to the FDA, including anydescriptions of any adverse events reported. The majority of our intended products are regulated as Class IIImedical devices.

 

Products marketed in theEuropean Community must comply with the requirements of the European MedicalDevice Directive (MDD) and must be CE-marked. Medical device laws and regulations similar to those described above arealso in effect in many of the other countries to which we export our products.  These range from comprehensive deviceapproval requirements for some or all of our medical device products torequests for product data or certifications. Failure to comply with these domestic and international regulatorystandards and requirements could affect our ability to market and sell ourproducts in these countries.  Thecurrent regulatory status of our products is discussed in the “Products”section above.

 

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*Regulationof Manufacturing*

 

As a manufacturer anddistributor of medical devices or therapeutic products, our and our supplier’smanufacturing processes and facilities are subject to continuing review by theFDA and various state and international agencies.  These agencies inspect quality systems and facilities from time totime to determine whether the manufacturer is in compliance with variousregulations relating to manufacturing practices and other requirements.  In the U.S., manufacturing facilities(whether located in the U.S. or outside the U.S.) must comply with the FDA’sQuality System Regulation requirements for Good Manufacturing Practices.  For products sold in Europe, themanufacturer must demonstrate compliance with the ISO 9000 and EN 46000international quality system standards.

 

*OtherRegulation*

 

We are subject tofederal, state, local and foreign environmental laws and regulations, includingthe U.S. Occupational Safety and Health Act, the U.S. Toxic Substances ControlAct, the U.S. Resource Conservation and Recovery Act, and other current andpotential future federal, state, or local regulations.  The manufacturing and research anddevelopment activities for our products involve the controlled use of hazardousmaterials, chemicals and biological materials, which requires compliance withvarious laws and regulations regarding the use, storage and disposal of thematerials.

 

We are also subject tovarious federal and state laws pertaining to health care “fraud and abuse,”including anti-kickback laws and false claims laws.  Anti-kickback laws make it illegal to solicit, offer, receive orpay any remuneration in exchange for, or to induce, the referral of business,including the purchase or prescription of a particular product.  The U.S. federal government has published regulationsthat identify “safe harbors” or exemptions for certain payment arrangementsthat do not violate the anti-kickback statutes.  We seek to comply with the safe harbors where possible.  Due to the breadth of the statutoryprovisions and the absence of guidance in the form of regulations or courtdecisions addressing some of our practices, it is possible that our practicesmight be challenged under anti-kickback or similar laws.  False claims laws prohibit anyone fromknowingly and willingly presenting, or causing to be presented for payment tothird-party payers (including Medicare and Medicaid) claims for reimbursedproducts or services that are false or fraudulent, claims for items or servicesnot provided as claimed, or claims for medically unnecessary items or services.  Our activities relating to the sale andmarketing of our products may be subject to scrutiny under these laws.  Violations of fraud and abuse laws may bepunishable by criminal and/or civil sanctions, including fines and civil monetarypenalties, as well as the possibility of exclusion from federal health careprograms (including Medicare and Medicaid).

 

Our present and futurebusiness has been and will continue to be subject to various other laws andregulations.

 

*ForeignCorrupt Practices Act*

 

The U.S. Foreign CorruptPractices Act, to which we are subject, prohibits corporations and individualsfrom engaging in certain activities to obtain or retain business or toinfluence a person working in an official capacity. It is illegal to pay, offerto pay, or authorize the payment of anything of value to any foreign governmentofficial, government staff member, political party or political candidate in anattempt to obtain or retain business or to otherwise influence a person workingin an official capacity.

 

**Third-PartyCoverage and Reimbursement**

 

Purchases of breastaesthetics products for augmentation and facial aesthetics products aregenerally not reimbursed by government or private insurance carriers.  However, since 1998, U.S. federal law hasmandated nationwide insurance coverage of reconstructive surgery following amastectomy, which includes coverage for breast implants.  Outside the U.S., reimbursement for breastimplants used in reconstructive surgery following a mastectomy may beavailable, but the programs vary on a country-by-country basis.

 

Outside the U.S.,reimbursement programs vary on a country-by-country basis.  In some countries, both the procedure andproduct 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 the number of procedures that can beperformed at each hospital is limited either by the hospital’s overall budgetor by the budget for the type of product.

 

**ProductReplacement Programs**

 

We have always conductedour product development, manufacturing, marketing, and service and supportactivities with careful regard for the consequences to patients.  As with any medical device manufacturer ordistributor, however, we occasionally receive communications from surgeons orpatients with respect to various products claiming the products were defective,lost volume or have resulted in injury to the patient.  In the case of a deflation of saline-filledbreast implant

 

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products sold by us andimplanted in the U.S., in most cases our product replacement program providesproduct replacement and some financial assistance for surgical proceduresrequired within ten years of implantation. We do not warrant any level of aesthetic result and, as required bygovernment regulation, make extensive disclosure concerning the risks of ourproducts and implantation surgery. Anticipated estimated liabilities for product replacement and warrantyclaims are periodically reviewed and reflected in our financial statements.

 

**FinancialInformation About Geographic Areas**

 

A majority of our salesand substantially all of our long-lived assets are in the U.S.

 

**WorkingCapital and Product Inventories**

 

When in the past we havesold breast aesthetic products, we maintained significant breast aestheticsconsignment inventories, consistent with industry practice.  We expect this practice to continue as wereintroduce products to the market. Since a doctor may not be sure of the exact size of breast implantrequired for implantation and cannot be sure that no accidental damage willoccur to an implant, the doctor is likely to order extra quantities and sizesbeyond the quantity and size ultimately used in surgery.  By carrying a consignment inventory oftypical sizes at certain hospitals and other medical offices, we reduce thelevel of product return subsequent to surgery.

 

Otherwise, we attempt tomanage inventories to a level that permits good customer service.  Additionally, there are inventory buildsprior to launching new products.

 

Our accounts receivablepayment terms have been and we anticipate them to continue to be consistentwith normal industry practices for each of our product types.

 

**Employees**

 

As of June 30, 2003, wehad approximately 21 full-time or full-time equivalent employees, all of whichwere in the United States.  From time totime, we also engage consultants on short- or long-term contracts, primarily inconnection with research and development projects.  None of our employees are represented by a labor union.

 

We recognize theimportance of environmental responsibility and the need to provide a safe andhealthy workplace for our employees by complying with all federal, state andlocal laws, rules and regulations. During the past fiscal year, we have received no citations, notices ofviolations or other censures from public agencies regulating environmentalcompliance or our employees’ health and safety.  We do not expect any significant capital expenditures to complywith environmental, health, or safety regulations in 2004.  We believe that our current systems andprocesses are adequate for current needs.

 

**Risks and Uncertainties**

 

*If we areunable to avoid significant product liability claims or product recalls, we maybe forced to pay substantial damage awards and other expenses that could exceedour reserves and any applicable insurance coverage.*

 

Wehave in the past been, currently are, and may in the future be subject toproduct liability claims alleging that the use of our technology or productshas resulted in adverse health effects. These claims may be brought even with respect to products that havereceived, or in the future may receive, regulatory approval for commercialsale.  In particular, the manufactureand sale of breast implant products entails significant risk of productliability claims due to potential allegations of possible disease transmissionand other health factors, rupture or other product failure.  Other breast implant manufacturers thatsuffered such claims in the past have been forced to cease operations or evento declare bankruptcy.  We may also facea 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.

 

Wedo not presently have liability insurance to protect us from the costs ofclaims for damages due to the use or recall of our products, except thatBiodermis carries a limited amount of product liability insurance related toits products.  We may in the future seekadditional insurance, which will be limited in circumstance of coverage andlimited in amount.  Recent premiumincreases and coverage limitations may make this insurance uneconomic.  However, even if we obtain or increase suchinsurance, one or more product liability claims or recall orders could exceedany coverage we may hold.  If wecontinue to have limited or no coverage or our insurance does not providesufficient coverage, product liability claims or recalls could result in materiallosses in excess of our reserves.

 

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*If we suffernegative publicity concerning the safety of our products, our sales may beharmed and we may be forced to withdraw products.*

 

Physiciansand potential patients may have a number of concerns about the safety of ourproducts, whether such concerns have a basis in generally accepted science orpeer-reviewed scientific research or not. Negative publicity—whether accurate or inaccurate—about our products, basedon, for example, news about breast implant litigation, could materially reducemarket acceptance 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 inscientific fact.

 

*Our quarterlyoperating results are subject to substantial fluctuations and any failure tomeet financial expectations for any fiscal quarter may disappoint securitiesanalysts and investors and could cause our stock price to decline*.

 

Ourquarterly operating results may vary significantly due to a combination offactors, many of which are beyond our control. These factors include:

 

•     changes indemand for our products;

•     our ability tomeet the demand for our products;

•     existing andincreased competition;

•     our ability tocompete against significantly larger and better funded competitors;

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

•     our ability todevelop, introduce and market new and enhanced versions of our products on atimely basis;

•                  changes in pricing policies by us and ourcompetitors;

•                  the timing of significant orders and shipments;

•                  regulatory approvals or other regulatory actionaffecting new or existing products;

•                  litigation with respect to product liabilityclaims or product recalls and any insurance covering such claims or recalls;and

•                  general economic factors.

 

Asa result, we believe that period-to-period comparisons of our results ofoperations are not necessarily meaningful and you should not rely upon thesecomparisons as indications of future performance.  These factors may cause our operating results to be below marketanalysts’ expectations in some future quarters, which could cause the marketprice of our stock to decline.

 

*If changes inthe economy and consumer spending reduce consumer demand for our products, oursales and profitability will suffer.*

 

Breastaugmentation and reconstruction and other aesthetics procedures are electiveprocedures.  Other than U.S. federallymandated insurance reimbursement for post-mastectomy reconstructive surgery,breast augmentations and other cosmetic procedures are not typically covered byinsurance. Adverse changes in the economy may cause consumers to reassess theirspending choices and reduce the demand for cosmetic surgery.  This shift could have an adverse effect onour future sales and profitability.

 

*If we areunable to develop and market new products and technologies, we may experience adecrease in demand for our products or our products could become obsolete.*

 

Themedical device industry is highly competitive and is subject to significant andrapid technological change.  We believethat our ability to respond quickly to consumer needs or advances in medicaltechnologies, without compromising product quality, will be crucial to oursuccess.  We are continually engaged inproduct development and improvement programs to establish and improve ourcompetitive position.  We cannot,however, guarantee that we will be successful in enhancing existing products ordeveloping new products or technologies that will timely achieve regulatoryapproval or receive market acceptance.

 

*Our productsmay not gain market acceptance among physicians, patients and the medicalcommunity generally.*

 

Thedegree of market acceptance of any medical device or other product that wedevelop will depend on a number of factors, including demonstrated clinicalefficacy and safety, cost-effectiveness, potential advantages over alternativeproducts, and our marketing and distribution capabilities.  The relative size of our company may alsoaffect market acceptance of our products. Physicians will not recommend our products until clinical data or otherfactors demonstrate their safety and efficacy compared to other competingproducts.  Even if the clinical safetyand efficacy of using our products is established, physicians may elect not torecommend using them for any number of other reasons, including whether ourproducts best meet the particular needs of the individual patient and theiroverall evaluation of our company.

 

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*If clinicaltrials for our products are unsuccessful or delayed, we will be unable to meetour anticipated development and commercialization timelines.*

 

Beforeobtaining regulatory approvals for the commercial sale of any products, we mustdemonstrate through pre-clinical testing and clinical trials that our productsare safe and effective for use in humans. Conducting clinical trials is a lengthy, time-consuming and expensiveprocess.

 

Completionof clinical trials may take several years or more.  Our commencement and rate of completion of clinical trials may bedelayed by many factors, including:

 

•                  lack of efficacy during the clinical trials;

•                  unforeseen safety issues;

•                  slower than expected patient recruitment; and

•                  government or regulatory delays.

 

Theresults from pre-clinical testing and early clinical trials are often notpredictive of results obtained in later clinical trials.  A number of new products have shownpromising results in clinical trials, but subsequently failed to establishsufficient safety and efficacy data to obtain necessary regulatoryapprovals.  Data obtained frompre-clinical and clinical activities are susceptible to varyinginterpretations, which may delay, limit or prevent regulatory approval.  In addition, regulatory delays or rejectionsmay be encountered as a result of many factors, including perceived defects inthe design of the clinical trials and changes in regulatory policy during theperiod of product development.  Anydelays in, or termination of, our clinical trials will materially and adverselyaffect our development and commercialization timelines, which would cause ourstock price to decline.

 

*Our ability toexpand our business will be significantly limited if we cannot obtainadditional financing.*

 

Toaccomplish our plans to expand our current product lines and markets, purchasenew companies, products and intellectual property, we need substantialadditional capital which we may not be able to obtain.  While we have to date been funded insubstantial part from financing from an affiliate of our chairman, we do notanticipate this funding source will provide sufficient capital to finance ourintended growth strategy and that we will need significant external financingto accomplish our goals.  We arecurrently negotiating with potential equity and debt providers to obtainadditional financing, but this additional financing may not be available onterms that are favorable to us, or at all. If adequate funds are not available, or are not available on acceptableterms, our ability to implement our expansion and growth plans will besignificantly impaired.

 

*Because wehave only a limited operating history and our business strategy calls forsignificant growth, there is a limited basis on which to make an evaluation ofour business and prospects*.

 

MediCorand its subsidiaries have only been operating since 1999.  Although our Biodermis operation has been inexistence for a longer period of time, it has only operated under MediCor’smanagement since its acquisition in 2001. Significantly, during much of our history we have also been preventedfrom selling our primary existing product, saline breast implants, in the U.S.market due to the FDA’s 2000 call for a pre-marketing approval for thatproduct.   As a result, all of ourcurrent revenues have been derived from our scar management products.  Revenue generated by our Biodermissubsidiary has not been significant, and we do not expect more than modestinternal growth in that segment.  Ourbusiness plans call for significant expansion into other markets that in the futureit will constitute the significant majority of our sales and income.  As a result, our existing business platformis not necessarily indicative of our future business or prospects.

 

*MediCor andits prospects must be considered in light of the risks, expenses anddifficulties frequently encountered by companies in an early stage ofdevelopment, particularly companies in rapidly evolving markets such as themedical device market.*

 

Risksfor MediCor include the uncertainties associated with developing andimplementing an evolving business model and the management of both internal andacquisition-based growth.  To addressthese risks, we must continue to develop the strength and quality of ouroperations, maximize the value delivered to customers, respond to competitivedevelopments and continue to attract, retain and motivate qualifiedemployees.  We may not be successful inaddressing these challenges.

 

*Because a keycomponent of our growth strategy is based on successfully making acquisitionsand otherwise diversifying our product offerings, we are exposed to numerousrisks associated with acquisitions, diversification and rapid growth.*

 

Akey component of our growth strategy is the acquisition of other companies,products and technologies that meet our criteria for strategic fit, geographicpresence, revenues, profitability, growth potential and operatingstrategy.  The successful

 

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implementationof this strategy depends on our ability to identify suitable acquisitioncandidates, acquire companies and assets on acceptable terms and integratetheir operations successfully.

 

Wemay not be able to identify suitable acquisition candidates in our desiredproduct areas or we may not be able to acquire identified candidates onacceptable terms.  Moreover, in pursuingacquisition opportunities we will likely compete with other companies withgreater financial and other resources. Competition for these acquisition targets likely could also result inincreased prices of acquisition targets and a diminished pool of companies andassets available for acquisition.

 

Acquisitionsalso involve a number of other risks, including the risks of acquiringundisclosed or undesired liabilities, acquired in-process technology, stockcompensation expense and increased compensation expense resulting from newlyhired employees, the diversion of management attention, potential disputes withthe sellers of one or more acquired entities and the possible failure to retainkey acquired personnel.  Clientsatisfaction or performance problems with an acquired business or product linecould also have a negative impact on our reputation as a whole, and anyacquired entity or assets could significantly under-perform relative to ourexpectations.  Our ability to meet thesechallenges has not been established.

 

Weexpect that, at least for the foreseeable future, we will be required to usecash consideration for acquisitions.  Welikely will be required to obtain significant third-party financing toaccomplish these acquisitions.  This financingmay not be available on favorable terms, if at all.  If we issue stock to complete future acquisitions, existingstockholders will experience ownership dilution.

 

*MediCor’sfuture growth will place a significant strain on our managerial, operational,financial and other resources.*

 

Oursuccess will depend upon our ability to manage our internal and acquisitiongrowth effectively.  This will requirethat we continue to implement and improve our operational, administrative andfinancial and accounting systems and controls and continue to expand, train andmanage our employee base.  We anticipatethat we will need to hire and retain numerous additional employees andconsultants for both internal and acquisition-based growth for some time.  Integration of these employees andconsultants and employee and consultant loss in the process will requiresignificant management attention and resources.  Our systems, procedures and controls may not be adequate tosupport our future operations and our management may not be able to achieve therapid execution necessary to exploit the market for our business model.

 

*If ourconsultants or collaborative partners do not perform, we will be unable todevelop products as anticipate*d*and we may be exposed to additional risks*.

 

Wehave in the past and may in the future enter into consulting or collaborativearrangements with third parties to develop products.  These arrangements may not produce successful products.  If we fail to establish these arrangements,the number of products from which we could receive future revenues will belimited.

 

Ourdependence on consulting or collaborative arrangements with third partiessubjects us to a number of risks.  Thesearrangements may not be on terms favorable to us.  Agreements with consultants or collaborative partners typicallyallow the third parties significant discretion in electing whether or not topursue any of the planned activities. We cannot absolutely control the amount and timing of resources ourconsultants or collaborative partners may devote to our products, and thesethird parties may choose to pursue alternative products.  These third parties also may not performtheir obligations as expected.  Businesscombinations, significant changes in their business strategy, or their accessto financial resources may adversely affect a consultant’s or partner’swillingness or ability to complete its obligations under the arrangement.   Moreover, we could become involved indisputes with our consultants or partners, which could lead to delays ortermination of the arrangements and time-consuming and expensive litigation orarbitration.

 

*Our failure toattract and retain key managerial, technical, selling and marketing personnelcould adversely affect our business.*

 

Oursuccess will depend upon our ability to attract and retain key managerial,financial, technical, selling and marketing personnel.  The lack of key personnel mightsignificantly delay or prevent the achievement of our development and strategicobjectives.  We do not maintain key manlife insurance on any of our employees, and none of our employees is under anyobligation to continue providing services to MediCor.  We are currently in the process of building our management and technicalstaffs.  We believe that our successwill depend to a significant extent on the ability of our key personnel,including the new management and technical staffs, to operate effectively, bothindividually and as a group. Competition for highly skilled employees in our industry is high, and wecannot be certain that we will be successful in recruiting or retaining suchpersonnel.

 

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*If ourintellectual property rights do not adequately protect our products ortechnologies, others could compete against us more directly, which would hurtour profitability.*

 

Oursuccess depends in part on our ability to obtain patents or rights to patents,protect trade secrets, operate without infringing upon the proprietary rightsof others, and prevent others from infringing on our patents, trademarks andother intellectual property rights.  Wewill be able to protect our intellectual property from unauthorized use bythird parties only to the extent that it is covered by valid and enforceablepatents, trademarks and licenses. Patent protection generally involves complex legal and factual questionsand, therefore, enforceability of patent rights cannot be predicted withcertainty. Patents, if issued, may be challenged, invalidated orcircumvented.  Thus, any patents that weown or license from others may not provide adequate protection againstcompetitors. In addition, our pending and future patent applications may failto result in patents being issued. Also, those patents that are issued may notprovide us with adequate proprietary protection or competitive advantagesagainst competitors with similar technologies. Moreover, the laws of certain foreign countries do not protect ourintellectual property rights to the same extent as do the laws of the UnitedStates.

 

Inaddition to patents and trademarks, we rely on trade secrets and proprietaryknow-how.  We seek protection of theserights, in part, through confidentiality and proprietary informationagreements.  These agreements may notprovide meaningful protection or adequate remedies for violation of our rightsin the event of unauthorized use or disclosure of confidential and proprietaryinformation.  Failure to protect ourproprietary rights could seriously impair our competitive position.

 

*If thirdparties claim we are infringing their intellectual property rights, we couldsuffer significant litigation or licensing expenses or be prevented frommarketing our products.*

 

Ourcommercial success depends significantly on our ability to operate withoutinfringing the patents and other proprietary rights of others.  However, regardless of our intent, ourtechnologies may infringe the patents or violate other proprietary rights ofthird parties.  In the event of suchinfringement or violation, we may face litigation and may be prevented frompursuing product development or commercialization.

 

*We depend on alimited number of suppliers for certain raw materials and the loss of anysupplier could adversely affect our ability to manufacture many of ourproducts.*

 

Wecurrently rely on a single supplier for silicone raw materials used in many ofour products.  Although we have anagreement with this supplier to transfer the necessary formulations to us inthe event that it cannot meet our requirements, we cannot guarantee that wewould be able to produce a sufficient amount of quality silicone raw materialsin a timely manner.   We will alsodepend on a sole or limited number of third-party manufacturers for siliconebreast implants to be distributed by us.

 

*Our internationalbusiness exposes us to a number of risks.*

 

Asignificant part of our current sales are and a significant part of ourprojected future sales will be derived from international operations.  In addition, we anticipate having materialinternational operations, including, potentially, manufacturingoperations.  Accordingly, we will beexposed to risks associated with international operations, including risksassociated with re-valuation of the local currencies of countries where we sellour products or conduct business, which may result in our products becomingmore expensive in local currency terms, thus reducing demand or in increasedcosts to us.  Our operations andfinancial results also may be significantly affected by other internationalfactors, including:

 

•                  foreign government regulation of medical devices;

•                  product liability claims;

•                  new export license requirements;

•                  political or economic instability in our targetmarkets;

•                  trade restrictions;

•                  changes in tax laws and tariffs;

•                  inadequate protection of intellectual propertyrights in some countries;

•                  managing foreign distributors, manufacturers andstaffing; and

•                  managing foreign branch offices.

 

Ifthese risks actually materialize, our sales to international customers, as wellas those domestic customers that use products manufactured abroad, maydecrease.

 

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*We are subjectto substantial government regulation, which could materially adversely affectour business.*

 

Theproduction and marketing of our products and intended products and research anddevelopment, pre-clinical testing and clinical trial activities are subject toextensive regulation and review by numerous governmental authorities both inthe U.S. and abroad.  Most of themedical devices we intend to sell or develop must undergo rigorous pre-clinicaland clinical testing and an extensive regulatory approval process before theycan be marketed.  This process makes itlonger, harder and more costly to bring the products to market, and some ofthese products may not be approved, or, once approved, they may berecalled.  The pre-marketing approvalprocess can be particularly expensive, uncertain and lengthy, and a number ofdevices for which FDA approval has been sought by other companies have neverbeen approved for marketing. In addition to testing and approval procedures,extensive regulations also govern marketing, manufacturing, distribution,labeling, and record-keeping procedures. If we or our collaborative partners do not comply with applicableregulatory requirements, such violations 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 products mayalso adversely affect our business. Such delays or rejection may be encountered due to, among other reasons,government or regulatory delays, lack of efficacy during clinical trials,unforeseen safety issues, slower than expected rate of patient recruitment forclinical trials, inability to follow patients after treatment in clinicaltrials, inconsistencies between early clinical trial results and results obtainedin later clinical trials, varying interpretations of data generated by clinicaltrials, or changes in regulatory policy during the period of productdevelopment in the U.S. and abroad.  Inthe U.S., there has been a continuing trend of more stringent FDA oversight inproduct clearance and enforcement activities, causing medical devicemanufacturers to experience longer approval cycles, more uncertainty, greaterrisk, and higher expenses. Internationally, there is a risk that we or our collaborative partnersmay not be successful in meeting the quality standards or other certificationrequirements.  Even if regulatoryapproval of a product is granted, this approval may entail limitations on usesfor which the product may be labeled and promoted. It is possible, for example,that we or our collaborative partners may not receive FDA approval to marketour current products for broader or different applications or to market updatedproducts that represent extensions of our basic technology.  In addition, we or our collaborativepartners may not receive FDA export approval to export products in the future,and countries to which products are to be exported may not approve them forimport.

 

Medicaldevice manufacturing facilities also are subject to continual governmentalreview and inspection.  The FDA hasstated publicly that compliance with manufacturing regulations will bescrutinized more strictly.  Agovernmental authority may challenge our or our collaborative partners’(including suppliers’) compliance with applicable federal, state and foreignregulations.  In addition, any discoveryof previously unknown problems with products or facilities may result inrestrictions on the product or the facility, including withdrawal of theproduct from the market or other enforcement actions.

 

***ITEM2.  PROPERTIES***

 

Asof June 30, 2003, we owned no real property. Our principal executive office is located at 4560 S. Decatur Blvd.,Suite 300, Las Vegas, NV 89103, which we lease under a five-year leasebeginning in January 2003.  We also haveexecutive offices located in Glendale, California which we lease on amonth-to-month basis.  We also leaseoffice, manufacturing and warehouse facilities located in Las Vegas, Nevada,Santa Barbara, California and Minneapolis, Minnesota.  We believe our current facilities, together with those wemay acquire in connection with future acquisitions, will generally be adequatefor our needs for the foreseeable future.

 

***ITEM3.  LEGAL PROCEEDINGS***

 

InOctober 1999, June 2000 and July 2003, separate but related complaints werefiled by Saul Kwartin,  Steven M.Kwartin, and Robert and Nina Kwartin respectively, and various other unnamedplaintiffs, against III Acquisition Corporation, a Delaware corporation (whichoperates under the tradename PIP.America), a subsidiary of MediCor, asco-defendant with PIP/USA, Inc. and Poly Implants Prostheses, S.A., eachunaffiliated with MediCor, and Jean Claude Mas and our chairman, personally, inthe Circuit Court of Miami-Dade County, Florida.  In the first two cases, plaintiffs purport to be shareholders ofPIP/USA, Inc. suing derivatively on its behalf, and seeking to rescind varioustransactions between PIP.America and PIP/USA, Inc. and seek to impose liabilityagainst PIP.America and its co-defendants for unspecified monetary damagesarising out of alleged tortuous and other purported wrongful acts concerningalleged relationships between plaintiffs, PIP/USA, Inc. and Poly ImplantsProstheses.  In the third case, filed in2003, MediCor is named but has not yet been served, but does anticipate being adefendant.

 

PeggyWilliams v. PIP/USA, Case No. 03 CH 9654, Jessica Fischer Schnebel, etc, et al.v. PIP/USA, Inc., Case No. 03CH07239, Dawn Marie Cooper, etc. et al. v.PIP/USA, Inc., Case No. 03CH11316, Miriam Furman etc. et al. v. PIP/USA, Inc.,Case No. 03CH10832 & Karen S. Witt etc. et al. v. PIP/USA, Inc., Case No.03CH12928 were filed in the Circuit Court of Cook County, Chancery Division, inor around July 2003.   Each is styled asa “class action.”  PIP.America is adefendant

 

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inone of the cases.  The other four casesname PIP/USA, Inc., the former U.S. distributor for Poly Implants Prosthesesbreast implants and Poly Implants Prostheses, although plaintiffs incorrectlyrefer in the complaints to PIP.America as a d/b/a of PIP/USA.  Plaintiffs purport to sue on behalf ofthemselves and an alleged class of persons allegedly similarly situated forunspecific monetary damages, exemplary damages, attorneys fees and costs,injunctive relief and damages under the Illinois Consumer Fraud Act.

 

SalinasI. Landers, etc. et al. v. Poly Implants Prostheses, etc. et al., Case No. CV030377, was filed in June 2003 in the Superior Court of San Luis Obispo County,California.  Plaintiffs purport to sueon behalf of themselves and an alleged class of persons allegedly similarlysituated for unspecific monetary damages, exemplary damages, attorneys’ feesand costs and injunctive relief for alleged breach of express warranty andalleged violations of California’s Song-Beverly Consumer Warranty Act andUnfair Competition Law.  PIP.America hasfiled a demurrer challenging the sufficiency of plaintiffs’ allegations, whichis scheduled to be heard on October 7, 2003.

 

MarshaDicken etc. et al. v. PIP/USA, Inc. etc. et al., Case No. 2003-05588, was filedin or around July 2003 in the District Court of Harris County, Texas.  Plaintiffs purport to sue on behalf ofthemselves and an alleged class of persons allegedly similarly situated foralleged strict liability, breach of express warranty, breach of impliedwarranties, violation of Section 402B of the Restatement (Second) of Torts,negligence, misrepresentations, and violation of Texas’ Deceptive TradePractices Act with respect to implant products.  Plaintiffs seek unspecific compensatory damages, additionalstatutory damages, interest, attorneys’ fees and costs.  The court has scheduled a pretrial conferenceto be held on June 18, 2004, and has specified that a trial date will be setshortly thereafter.

 

Thoughit is not yet possible to predict the outcome of the cases above, MediCor hasdenied plaintiffs’ allegations and is vigorously defending againstcertification of any class, and upon the merits of each lawsuit.  While we are desirous to honor ourobligations under warranty provisions, we are fully indemnified by bothPIP/USA, Inc. Poly Implants Prostheses, and Poly Implants Prostheses’ PresidentJean Claude Mas personally, from all claims, including those asserted above, andthus believe the costs associated with such matters will not have a materialadverse impact on our business, results of operations or financial position.

 

Weand our subsidiaries have been and will continue to be periodically named as adefendant in other lawsuits in the normal course of our business, includingproduct liability and product warranty claims asserted against us.  Litigation, particularly product liabilitylitigation, can be expensive and disruptive to normal business operations andthe results of complex legal proceedings can be very difficult to predict.  Claims against us have been and areperiodically reviewed with counsel in the ordinary course of business.  We presently believe we have meritoriousdefenses in all lawsuits in which we or any of our subsidiaries aredefendants.  While it is not possible topredict the outcome of such matters, we believe that the costs associated withsuch matters will not have a material adverse impact on our business, resultsof operations or financial position.

 

***ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS***

 

During the fourth quarterof the fiscal year covered by this report, no matter was submitted to a vote ofsecurity holders through the solicitation of proxies or otherwise.

 

**PART II**

 

***ITEM5.  MARKET FOR COMMON EQUITY AND RELATEDSTOCKHOLDERS MATTERS***

 

**Market Information**

 

On September 30, 2003, wehad approximately 630 stockholders of record. Our common stock price at the close of business on September 30, 2003was $3.30 per share.  The average of thebid and asked price on that date was $2.48.

 

The table below setsforth the high and low bid prices of our common stock for the periods indicatedas reported on the OTC Bulletin Board under the symbol MDCR.  Quotations reflect prices between dealers,do not reflect retail markups, markdowns or commissions, and may notnecessarily represent actual transactions.  MediCor’s initial registration statement on Form SB-2 was first declaredeffective on September 24, 2001 and MediCor’s common stock commenced trading onthe OTC Bulletin Board in the quarter ended March 31, 2002, the third quarterof MediCor’s 2002 fiscal year. 

 

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|                              |   | **High** |   | **Low** |   |
|-----------------------------------|--------|----------|--------|---------|--------|
|                              |   |     |   |    |   |
| **Fiscal 2002**                   |   |     |   |    |   |
| Quarter  ended March 31, 2002     |   | $        | 0.51   |    | $      | 0.28 |   |
| Quarter  ended June 30, 2002      |   | $        | 0.85   |    | $      | 0.25 |   |
|                              |   |     |   |    |   |
| **Fiscal  2003**                  |   |     |   |    |   |
| Quarter  ended September 30, 2002 |   | $        | 0.90   |    | $      | 0.20 |   |
| Quarter  ended December 31, 2002  |   | $        | 0.20   |    | $      | 0.20 |   |
| Quarter  ended March 31, 2003     |   | $        | 5.30   |    | $      | 0.20 |   |
| Quarter  ended June 30, 2003      |   | $        | 5.30   |    | $      | 1.01 |   |

 

**Dividends**

 

We have never paid a cashdividend and do not anticipate paying cash dividends on our common stock in theforeseeable future.

 

**Securities Authorized for Issuances Under Equity CompensationPlans**

 

See Part III, Item11 in this report for the securities authorized for issuances under equitycompensation plans.

 

***ITEM6.  MANAGEMENT’S DISCUSSION AND ANALYSISOR PLAN OF OPERATION***

 

ThisAnnual Report on Form 10-KSB, including the following “Management’s Discussionand Analysis or Plan of Operation,” contains forward-looking statements thatinvolve risks and uncertainties, as well as assumptions that, if they evermaterialize or prove incorrect, could cause the results of the Company todiffer materially from those expressed or implied by such forward-lookingstatements.  All statements other thanstatements of historical fact are statements that could be deemedforward-looking statements, including: statements regarding new and existingproducts, technologies and opportunities; statements regarding market andindustry segment growth and demand and acceptance of new and existing productsany projections of sales, earnings, revenue, margins or other financial items;any statements of the plans, strategies and objectives of management for futureoperations, including the execution of acquisition plans; any statementsregarding future economic conditions or performance; any statements of beliefor intention; and any statements of assumptions underlying any of the foregoing.  Factors that may cause such differencesinclude, but are not limited to: increased competition; changes in productdemand; changes in market acceptance; new product development; United StatesFood and Drug Administration (“FDA”) approval or rescission of approval; delayor rejection of new or existing products; changes in agreements withgovernmental agencies; changes in government regulation; supply of rawmaterials; changes in reimbursement practices; adverse results of litigation;the performance of contracts by suppliers, customers and partners; employeemanagement issues; the challenge of managing asset levels, including inventory;the difficulty of aligning expense levels with revenue changes; and other risksthat are described herein and that are otherwise described from time to time inthe Company’s reports and other documents filed with the Securities andExchange Commission, including those contained in “Risks and Uncertainties “set forth in “Item 1–Business” above. The Company assumes no obligation and does not intend to update theseforward-looking statements, except as required by law.

 

**Application of Critical AccountingPolicies and Estimates**

 

Management’sDiscussion and Analysis or Plan of Operation addresses MediCor’s consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States.  The preparation of these financial statements requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and the disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, includingthose related to revenue recognition, inventories, adequacy of allowances fordoubtful accounts, valuation of long-lived assets and goodwill, income taxes,litigation and warranties.  We base ourestimates on historical and anticipated results and trends and on various otherassumptions that we believe are reasonable under the circumstances, includingassumptions as to future events.  Thepolicies discussed below are considered by management to be critical to anunderstanding of our 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 subject to an inherent degree ofuncertainty.  Actual results may differfrom those estimates.

 

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*RevenueRecognition*

 

Werecognize product revenue, net of sales discounts, returns and allowances, inaccordance with Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognitionin Financial Statements” and SFAS No. 48 “Revenue Recognition When Right ofReturn Exists.”  These statementsestablish that revenue can be recognized when persuasive evidence of anarrangement exists, delivery has occurred and all significant contractualobligations have been satisfied, the fee is fixed or determinable, andcollection is considered probable.  Werecognize revenue upon delivery of product to third-party distributors andcustomers.  Due to the widespreadholding of consignment inventory in our industry, we also recognize revenuewhen the products are withdrawn from consignment inventory in hospitals,clinics and doctors’ offices. Appropriate reserves are established for anticipated returns andallowances based on our product return history.  We believe our estimates for anticipated returns is a “criticalaccounting estimate” because it requires us to estimate returns and, if actualreturns vary, it could have a material impact on our reported sales and resultsof operations.  Historically ourestimates of return rates have not fluctuated from the actual returns by morethan 1% to 2%.

 

*Inventories*

 

Inventoriesare stated at the lower of cost or market using the first-in, first-out (FIFO)method.  We capitalize inventory costsassociated with certain product candidates prior to regulatory approval, basedon our judgment of probable future commercialization.  We believe our estimates of inventory values is a “criticalaccounting estimate” because we could be required to expense previouslycapitalized costs related to pre-approval inventory upon a change in suchjudgment, due to, among other factors, a decision denying approval of theproduct candidate by the necessary regulatory bodies, which could have amaterial impact on our results of operations.

 

*Allowance forDoubtful Accounts*

 

Wemaintain allowances for doubtful accounts for estimated losses resulting fromthe inability of some of our customers to make required payments.  The allowances for doubtful accounts arebased on the analysis of historical bad debts, customer credit-worthiness, pasttransaction history with the customer, current economic trends, and changes incustomer payment terms.  We believe ourestimates for our allowance for doubtful accounts is a “critical accountingestimate” because if the financial condition of our customers were todeteriorate, adversely affecting their ability to make payments, additionalallowances may be required, which could have a material impact on our resultsof operations.

 

*Valuation ofLong-lived Assets and Goodwill*

 

Weaccount for long-lived assets, other than goodwill in accordance with theprovisions of Statement of Financial Accounting Standards SFAS No. 144,“Accounting for the Impairment and Disposal of Long Lived Assets,” whichsupersedes SFAS No. 121 and certain sections of APB Opinion No. 30 specific todiscontinued operations.  SFAS No. 144classifies long-lived assets as either (1) to be held and used, (2) to bedisposed of by other than sale, or (3) to be disposed of by sale.  This standard introduces aprobability-weighted cash flow estimation approach to deal with situations inwhich alternative courses of action to recover the carrying amount of along-lived asset are under consideration or a range is estimated for the amountof possible future cash flows.  We haveadopted this statement, which has not had a material impact on our financialposition or results of operations.  SFASNo. 144 requires, among other things, that an entity review its long-livedassets and certain related intangibles for impairment whenever changes incircumstances indicate that the carrying amount of an asset may not be fullyrecoverable.  We do not believe that anysuch changes have taken place.

 

Wealso adopted SFAS No. 142 “Goodwill and Other Intangible Assets,” on July 1,2002.  As a result, goodwill is nolonger amortized, but is subject to a transitional impairment analysis and istested for impairment on an annual basis, or more frequently as impairmentindicators arise.  The test for impairmentinvolves the use of estimates related to the fair values of the businessoperations with which goodwill is associated and is usually based on projectedcash flows or market value approach. Other intangible assets are amortized using the straight-line methodover their estimated useful lives, of which periods of up to 30 years.

 

Webelieve the estimate of our valuation of Long-lived Assets and Goodwill is a“critical accounting estimate” because if circumstances arose that led to adecrease in the valuation it could have a material impact on our results ofoperations.

 

*Income Taxes*

 

Deferredincome tax assets or liabilities are computed based on the temporarydifferences between the financial statement and income tax bases of assets andliabilities using the statutory marginal income tax rate in effect for theyears in which the differences are expected to reverse.  Deferred income tax expenses or credits arebased on the changes in the deferred income tax assets or liabilities fromperiod to period.  We believe theestimate of our income tax assets, liabilities

 

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andexpense are “critical accounting estimates” because if the actual income taxassets, liabilities and expenses differ from our estimates the outcome couldhave a material impact on our results of operations.

 

*Litigation*

 

Weare involved in various litigation matters as a claimant and as adefendant.  We record any amountsrecovered in these matters when collection is certain.  We record liabilities for claims against uswhen the losses are probable and can be reasonably estimated.  Amounts recorded are based on reviews byoutside counsel, in-house counsel, and management.

 

*ProductWarranties*

 

Wehave an accrual for the warranty program for breast implant sales in the UnitedStates.  We estimate the amount ofpotential future claims from this warranty based on statistical analysis.  Expected future obligations are determinedbased on the history of product shipments and claims and are discounted to acurrent value.  We believe that ourestimate for product warranties is a “critical accounting estimate” because itrequires us to estimate failure rates, claim amounts, and discount rates.  Changes to actual claims and interest ratescould have a material impact on the actuarial calculation which couldmaterially impact our reported expenses and results of operations.

 

*RecentPronouncements*

 

OnAugust 16, 2001, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting forAsset Retirement Obligations.”  Thestatement requires entities to record the fair value of a liability for legalobligations associated with the retirement obligations of tangible long-livedassets in the period in which it is incurred. When the liability is initially recorded, the entity increases thecarrying amount of the related long-lived asset.  Over time, accretion of the liability is recognized each period,and the capitalized cost is depreciated over the useful life of the relatedasset.  Upon settlement of the liabilityan entity either settles the obligation for its recorded amount or incurs again or loss upon settlement.  Thestandard is effective for fiscal years beginning after June 15, 2002, withearlier application encouraged.  We donot expect that the adoption of SFAS No. 143 will have a material impact on ourresults from operations.

 

InApril 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4,44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,”which among other things provides guidance in reporting gains and losses fromextinguishments of debt and accounting for leases.  We will adopt this statement in fiscal 2004.  We do not expect the adoption of thisstandard to have a material impact on our financial position or its results ofoperations.

 

OnJuly 30, 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associatedwith Exit or Disposal Activities.”  SFASNo. 146 nullifies EITF Issue No. 94-3, “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring).” It requires that a liability be recognized for those costs only when theliability is incurred, that is, when it meets the definition of a liability inthe FASB’s conceptual framework.  SFASNo. 146 also establishes fair value as the objective for initial measurement ofliabilities related to exit or disposal activities.  SFAS No. 146 is effective for exit or disposal activities thatare initiated after December 31, 2002, with earlier adoption encouraged.  We adopted this statement in fiscal 2004 andits adoption did not have a material impact on our financial position orresults from operations.

 

InNovember 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others,” which clarifies disclosure andrecognition /measurement requirements related to certain guarantees.  The disclosure requirements are effectivefor financial statements issued after December 15, 2002 and the recognition/measurement requirements are effective on a prospective basis for guaranteesissued or modified after December 31, 2002. We do not expect the adoption of this statement to have a materialimpact on our consolidated financial statements.

 

InJanuary 2003, the FASB issued FASB Interpretation No. 46, “Consolidation ofVariable Interest Entities.” Interpretation No. 46 clarifies the application ofAccounting Research Bulletin No. 51, “Consolidated Financial Statements,” tocertain entities in which equity investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties.  Therecognition and measurement provisions of Interpretation No. 46 are effectivefor newly created variable interest entities formed after January 31, 2003, andfor existing variable interest entities, on the first interim or annualreporting period beginning after June 15, 2003.  We do not expect the adoption of this statement to have a materialimpact on our consolidated financial statements.

 

InDecember 2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure—an Amendment of FASB Statement No.123.”  SFAS No. 148 amends SFAS No. 123to provide alternative

 

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methodsof transition for a voluntary change to the fair value method of accounting forstock-based compensation.  In addition,amendments are made to the disclosure requirements of SFAS No. 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based compensation and the effect of the methodused on reported results.  Certain ofthe disclosure modifications are required for fiscal years ending afterDecember 15, 2002.  We have compliedwith the disclosure requirements of SFAS 148 and will determine whether we willadopt the fair value based method of accounting for stock-based employeecompensation.

 

**Results of Operations**

 

*Sales*

 

Salesfor the fiscal year ended June 30, 2003 decreased to $1,676,905 from $1,703,590in fiscal 2002.  The slight decrease wasdue to discontinuation of sales by PIP.America offset by sales increasesexperienced in the third and fourth quarters of fiscal 2003.

 

*Cost of Sales*

 

Costof sales as a percentage of net sales for fiscal 2003 were approximately 25%compared to approximately 26% during fiscal 2002.  The consistency in cost of sales resulted from a consistentproduct mix and stable supplier costs. We expect that cost of sales will remain relatively constant on apercentage basis.

 

*Selling,General and Administrative*

 

Selling,general and administrative expenses were $5,985,413 during fiscal 2003,compared to $8,230,133 for fiscal 2002. Substantially all of the change in fiscal 2003 selling, general andadministrative expenses resulted from a large increase in the allowance fordoubtful accounts in fiscal 2002 that was not repeated in fiscal 2003.  Otherwise, overall spending on selling,general and administrative expenses was consistent from 2002 to 2003 and theexpenses are primarily attributable to continued start-up expenses inpreparation for FDA approval of one or more products we seek to sell.  As our business and sales increase, weanticipate that selling, general and administrative expenses will increase inabsolute dollars, but decrease as a percentage of sales.

 

*Research andDevelopment*

 

Researchand development expenses remained constant during fiscal 2002 and 2003.  We expect that research and developmentexpenses will increase materially as our business matures.

 

*InterestExpense*

 

Interestexpense increased to $503,847 for fiscal 2003, compared to $362,226 in fiscal2002.  Interest expense consistsprimarily of interest related to borrowings. The change in interest expense was primarily due to an increase in theaverage principal note payable to related party balances and an increase inconvertible debentures.

 

*Net Loss*

 

Netloss for fiscal 2003 decreased to $5,289,731 from $8,217,559 in fiscal2002.  Basic and diluted loss per sharewas ($0.34) for fiscal 2003 compared to ($0.70) for fiscal 2002.  Net losses are primarily attributable to thesubstantial costs associated with facilitating FDA Pre-market Approvals forproducts sought to be sold by MediCor and limited sales of our currentproducts.

 

**Liquidity and Capital Resources**

 

Ourability to make payments to refinance our debt and to fund planned capitalexpenditures and operations will depend on our ability to secure additionalsignificant financing and generate sufficient cash in the future.  Because we have only limited product salesand will not be in a position to materially increase sales until the FDA issuesa pre-market approval relating to one or more of the products sought to be soldby us, we have historically raised funds to support our operating expenses andcapital requirements through sales of equity or debt securities or throughother credit arrangements, including borrowing from our affiliates.  Our existing cash, cash equivalent and cashgenerated from operations will be insufficient to meet our anticipated cashneeds for the next 12 months.  Tosatisfy our liquidity requirements, we will need to raise additionalfunds.  To the extent additional salesof equity or debt securities are insufficient to satisfy our liquidityrequirements, we expect that we will be able to obtain any necessary additionalfunds through the incurrence of additional indebtedness to our affiliates.  We have received a written commitment fromInternational Integrated Industries, LLC, an affiliate of our chairman, toprovide sufficient cash to fund any operating expenses and capital expendituresthrough June 30,

 

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2004.  The same entity has provided to MediCor over$22 million in funding from our formation through June 30, 2003.  The future funding may take the form of debtor equity or a combination thereof.

 

***ITEM 7.  FINANCIAL STATEMENTS***

 

The Financial Statementsbegin on page F-1.

 

***ITEM8.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE***

 

Deloitte & Touche LLPwere previously the principal accountants for III.  Upon consummating the merger in February 2003, that firm’sappointment as principal accountants was terminated and we engaged Greenberg &Company LLC, accountants to Scientio, Inc., as our principal accountants.  The decision to change accountants wasapproved by our Board of Directors.

 

In connection with theaudits of the fiscal year ended June 30, 2002 and the six-month period endedJune 30, 2001, and the subsequent interim period through December 31, 2002,there were no disagreements with Deloitte & Touche LLP on any matter ofaccounting principles or practices, financial statement disclosure, or auditingscope or procedures, which disagreements if not resolved to their satisfactionwould have caused them to make reference in connection with their opinion tothe subject matter of the disagreement in connection with their report for suchyears; and there were no reportable events as defined in Item304(a)(1)(iv)(B) of Regulation S-B.

 

The audit reports ofDeloitte & Touche LLP on the consolidated financial statements of III andsubsidiaries as of and for the year ended June 30, 2002 and the period endedJune 30, 2001, did not contain any adverse opinions, disclaimer of opinions,nor were they qualified or modified as to the uncertainty, audit scope, oraccounting principles.

 

The Company providedDeloitte & Touche LLP with a copy of the form of Form 8-K amendment tobe filed on July 8, 2003 and requested Deloitte & Touche LLP to furnish aletter addressed to the Securities and Exchange Commission stating whether itagreed with the statements in the Form 8-K.  Deloitte & Touche LLP supplied that letter on or about July3, 2003 and a copy of that letter was filed with the amendment to the Form 8-Kfiled on July 8, 2003.

 

During the fiscal periodsended June 30, 2001 and 2002 and through February 7, 2003, MediCor did notconsult Greenberg & Company LLC with respect to the application ofaccounting principles to a specified transaction, either completed or proposed,or the audit opinion that might be rendered on MediCor’s consolidated financialstatements, or any other matters or reportable events listed in Items304(a)(2)(i) and (ii) of Regulation S-B.

 

***ITEM8A.  CONTROLS AND PROCEDURES***

 

As of the end of fiscalyear 2003, management, with the participation of the chief executive andfinancial officers, carried out an evaluation of the effectiveness of ourdisclosure controls and procedures pursuant to Exchange Act Rule 15d-15.  Based upon that evaluation, the chiefexecutive officer and the chief financial officer believe that, as of end ofthe fiscal quarter covered by this report, our disclosure controls andprocedures were effective in making known to them material information relatingto MediCor (including its consolidated subsidiaries) required to be included inthis report.  As of the end of thefiscal year, management adopted formal disclosure controls and procedures whichwere employed in the preparation of this report.

 

Disclosure controls andprocedures, no matter how well designed and implemented, can provide onlyreasonable assurance of achieving an entity’s disclosure objectives.  The likelihood of achieving such objectivesis affected by limitations inherent in disclosure controls and procedures.  These include the fact that human judgmentin decision-making can be faulty and that breakdowns in internal control canoccur because of human failures such as simple errors or mistakes or intentionalcircumvention of the established process. Management will review our disclosure controls and proceduresperiodically to determine their effectiveness and to consider modifications oradditions to them.

 

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**PART III**

 

***ITEM9.  DIRECTORS AND EXECUTIVE OFFICERS OFTHE REGISTRANT***

 

The following table setsforth certain information with respect to age and background of MediCor’sdirectors, executive officers and certain key personnel at September 30, 2003: 

 
| **Name**                    |   | **Position**                            |   | **Age** |   |
|-----------------------------|--------|-----------------------------------------|--------|---------|--------|
|                        |   |                                    |   |    |   |
| Donald  K. McGhan           |   | Chairman                                |   | 69      |   |
| Theodore  R. Maloney        |   | Director, Chief  Executive Officer      |   | 42      |   |
| Jim  J. McGhan              |   | Director, Chief  Operating Officer      |   | 50      |   |
| Mark  E. Brown              |   | Director                                |   | 43      |   |
| Thomas  R. Moyes            |   | Chief Financial Officer                 |   | 43      |   |
| Marc  S. Sperberg           |   | Executive Vice  President and Secretary |   | 41      |   |
| Edward  V. Lower III, Ph.D. |   | Chief Strategy Officer                  |   | 58      |   |

 

*Donald K.McGhan*.  Mr. McGhan is a founder of MediCor (and itssubsidiary International Integrated Incorporated) and has served as itschairman from its inception. Previously, Mr. McGhan was a founder and director of Medical DeviceAlliance, Inc., where he served as its chairman from its inception in 1996.  Prior to that, Mr. McGhan was a founder anddirector of Miravant Medical Technologies, Inc., which was originally namedPDT, Inc.  Mr. McGhan was also afounder, chairman and president of Inamed Corporation from 1984 to 1998,founder, chairman and chief executive officer of McGhan NuSil Corporation,which was acquired by Union Carbide Corporation in 1990, and a founder,president and chairman of Immulok, Inc., which was acquired by OrthoDiagnostics Systems, Inc., a subsidiary of Johnson & Johnson in 1983.  A receiver was appointed for Medical DeviceAlliance in 1999 pursuant to certain shareholder litigation.  The litigation was settled in 2001.  In March 2000, Mr. McGhan settled a civilinjunctive action with the SEC relating to alleged improper reporting andfaulty record-keeping and internal controls at Inamed Corporation in 1996 and1997 while Mr. McGhan was its chairman and during Inamed’s breast implantlitigation.  Without admitting ordenying the allegations of the complaint, Mr. McGhan consented to the entry ofa final judgment permanently enjoining him from violating the antifraud,record-keeping and internal controls provisions of the federal securities lawsand ordering him to pay a $50,000 civil penalty.

 

*Theodore R.Maloney*.  Prior to joining MediCor in September 2003,Mr. Maloney was a partner in the corporate practice group of the law firm ofSheppard, Mullin, Richter & Hampton, LLP from September 2001 to September2003.  Sheppard Mullin acquired Nida& Maloney, LLP, a corporate law firm based in Santa Barbara, Californiawhich Mr. Maloney founded in 1994.  Priorto founding Nida & Maloney, Mr. Maloney was associated with Milbank, Tweed,Hadley & McCloy from 1988 to 1994 and with Clifford Chance from 1986 to1998, where he worked in the corporate departments.

 

*Jim J. McGhan*.  Mr.McGhan is a founder of MediCor (and its subsidiary International IntegratedIncorporated) and has served as a director and its chief operating officer fromits inception.  Previously, Mr. McGhanserved a director, a vice president and the chief operating officer of MedicalDevice Alliance, Inc.  As describedabove  receiver was appointed forMedical Device Alliance in 1999.  Mr.McGhan also served as a director and chief operating officer of InamedCorporation from 1996 to 1998.  Mr.McGhan also served as a director and chief executive officer of InamedCorporation’s subsidiary McGhan Medical Corporation from 1992 through1998.  Prior to that, Mr. McGhan alsoserved as president of Inamed’s subsidiaries, CUI Corporation and BioEntericsCorporation.  Mr. McGhan is Donald K.McGhan’s son.

 

*Mark E. Brown*.  Mr.Brown is the president and chief executive officer of Brown & Partners, aNevada-based public affairs, public relations and full-service advertisingagency.  Prior to founding Brown &Partners in 2000, Mr. Brown served as executive vice president of governmentrelations and corporate communications for Station Casinos, Inc.  Prior to that, Mr. Brown served as executivevice president of corporate and government relations for The Howard Hughes Corporation,an affiliate of The Rouse Company, which he joined in 1994.

 

*Thomas R.Moyes*.  Prior to joining MediCor in June 2003, Mr.Moyes served as the chief financial officer and senior vice president of AscentMedia Networks, a subsidiary of Liberty Media Company.   From 2000 to 2001, Mr. Moyes served aschief financial officer of Veon, a private technology company based in SanFrancisco.  From 1999 to 2000, Mr. Moyesserved as the Vice President, Finance and Accounting for the Columbia Tristar(Sony) International TV division of Sony Entertainment.  Prior to joining Sony, Mr. Moyes worked forapproximately 10 years for The Walt Disney Company, where he held numerousfinance positions with various divisions or subsidiaries in Burbank, New Yorkand London.  Additionally, Mr. Moyesworked in the investment banking group of Bankers Trust for four years.  Mr. Moyes holds a Masters in BusinessAdministration from the Wharton School.

 

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*Marc S.Sperberg*.  Mr. Sperberg has served as the vicepresident – business development for MediCor or its subsidiary InternationalIntegrated Incorporated since 2001.  Hewas appointed executive vice president and secretary in April 2003.  From 1998 to 2001, Mr. Sperberg was theprincipal shareholder and executive vice president, sales and marketing for HPLBiomedical, which was acquired by MediCor in 2001.  From 1996 to 1998, Mr. Sperberg was a principal and officer ofKohler, Sperberg and Rivera, Inc. Advertising, Design and Government Affairs,Las Vegas, Nevada, a full service advertising agency with a focus on thehigh-tech and medical device industries and government affairs.

 

*Edward V.Lower III, Ph.D*.  Dr. Lower is a founder of MediCor (and itssubsidiary International Integrated Incorporated).  He served as a director and chief executive officer from itsinception until May 2003.  He now servesas chief strategy officer.  From 1997 to1999, Dr. Lower was a private consultant to corporate executive officersand board members in the areas of strategic information, competitive advantage,business processes, information flows and financial models, crisiscommunications, global alliances, and mergers and acquisitions.  From 1995 to 1997, Dr. Lower was executivevice president and interim chief financial officer of publicly held ICF KaiserInternational, Inc.  From 1991 to 1995,Dr. Lower was the president of publicly held EA Engineering, Science andTechnology, Inc.  Prior to that, Dr. Lower held various managementpositions at Union Carbide Corporation. Dr. Lower holds a Ph.D. in business administration and a masters degreein Computer Applications and Information Systems, both from New York University.

 

**Section 16(a)Beneficial Ownership Reporting Compliance**

 

Because MediCor does nothave securities registered under Section 12(b) or 12(g) of the SecuritiesExchange Act of 1934 and reports pursuant to Section 15(d) of the Exchange Act,Section 16(a) of the Exchange Act is not applicable to MediCor’s executiveofficers, directors or persons who beneficially own more than 10% of MediCor’scommon stock.  MediCor anticipatesfiling a registration statement under Section 12(g) of the Exchange Act within120 days of the end of fiscal 2003, at which time its officers, directors and10% beneficial holders will become subject to Section 16 of the Exchange Act.

 

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***ITEM10.  EXECUTIVE COMPENSATION***

 

The following table sets forth, for each of the lastthree fiscal years, all compensation awarded to, paid to or earned by MediCor’schief executive officer and the four other most highly compensated executiveofficers serving during fiscal 2003. 

 
|                                        |   |                              |   | **Long-Term Compensation** |   |
|---------------------------------------------|--------|-----------------------------------|--------|----------------------------|--------|
|                                        |   | **Annual Compensation**** ** |   | **Stock Options**          |   |   |   |
| **Name and  Principal Positions**** ** |   | **Year**** **                |   | **Salary**                 |   | **Bonus** |   | **Other Annual  Compensation** |   | **Granted  (In Shares)****** |   | **All Other  Compensation****  ** |   |
|                                        |   |                              |   | **$**                      |   | **$** |   | **$** |   | **(#)****** |   | **($)** |   |
|                                        |   |                              |   |                       |   |   |   |   |   |   |   |   |   |
| Edward  V. Lower III, Ph.D.                 |   | 2003                              |   | 383,000               |   | — |   | — |   | — |   | — |   |
| Chief  Executive Officer (1)                |   | 2002                              |   | 349,500               |   | — |   | — |   | — |   | — |   |
|                                        |   | 2001                              |   | 122,500                    |   | — |   | — |   | — |   | — |   |
|                                        |   |                              |   |                       |   |   |   |   |   |   |   |   |   |
| Jim  J. McGhan                              |   | 2003                              |   | 230,000                    |   | — |   | — |   | 385,231 |   | — |   |
| Chief  Operating Officer                    |   | 2002                              |   | 220,000                    |   | — |   | — |   | — |   | — |   |
|                                        |   | 2001                              |   | 69,500                     |   | — |   | — |   | — |   | — |   |
|                                        |   |                              |   |                       |   |   |   |   |   |   |   |   |   |
| Donald  K. McGhan                           |   | 2003                              |   | —                     | (2)    | — |   | — |   | 385,231 |   | — |   |
| Chairman                                    |   | 2002                              |   | —                     |   | — |   | — |   | — |   | — |   |
|                                        |   | 2001                              |   | —                     |   | — |   | — |   | — |   | — |   |
|                                        |   |                              |   |                       |   |   |   |   |   |   |   |   |   |
| Thomas  R. Moyes                            |   |                              |   |                       |   |   |   |   |   |   |   |   |   |
| Chief  Financial Officer                    |   | 2003                              |   | 27,500                     | (3)    | 30,000 | (4) | — |   | — |   | — |   |
|                                        |   |                              |   |                       |   |   |   |   |   |   |   |   |   |
|                                        |   |                              |   |                       |   |   |   |   |   |   |   |   |   |
| Marc  S. Sperberg                           |   | 2003                              |   | 250,000                    |   | — |   | — |   | 49,708 |   | — |   |
| Executive  Vice President and               |   | 2002                              |   | 57,250                     |   | — |   | — |   | 49,708 |   | — |   |
| Secretary                                   |   | 2001                              |   | 10,500                     |   | — |   | — |   | — |   | — |   |

 

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(1)                      Mr. Lowerserved as chief executive officer until May 2003, at which time he took theposition of chief strategy officer.

(2)                      Mr. McGhandoes not draw a salary from MediCor.

(3)                      Mr. Moyescommenced with MediCor on June 2, 2003.

(4)                      Mr. Moyesreceived a one-time $30,000 bonus in connection with the signing of hisemployment agreement with MediCor.

 

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**OptionGrants in Last Fiscal Year**

 

The following table setsforth certain information regarding grants of stock options or warrants made toeach of the executive officers named in the Summary Compensation Table duringthe fiscal year ended June 30, 2003. 

 
|                        |   | **Individual Grants**                                           |   | **Potential Realizable  Value at Assumed  Annual Rates of  Stock Price  Appreciation for  Option Term(3)**** ** |       |
|-----------------------------|--------|-----------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------|------------|
|                        |   | **Number of  Securities  Underlying  Options  Granted  (#)(1)** |   | **%****of Total  Options  Granted to  Employees  in  Fiscal Year  (2)**                                              |       | **Exercise  Price  ($/Sh)** |   | **Expiration  Date** |   |   |
|                        |   |                                                            |   |                                                                                                                 |       |   |
|                        |   |                                                            |   |                                                                                                                 |       |   |
| **Name**                    |   |                                                            |   |                                                                                                                 |       | **5%($)** |   | **10%($)** |   |
|                        |   |                                                            |   |                                                                                                                 | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Edward  V. Lower III, Ph.D. |   | —                                                          |   | —                                                                                                               |       | — |   | — |   | xx |   | xx |   |
| Jim  J. McGhan              |   | 385,231                                                         |   | 33                                                                                                                   |       | 2.01 |   | 12/20/09 |   | 315,890 |   | 735,792 |   |
| Donald  K. McGhan           |   | 385,231                                                         |   | 33                                                                                                                   |       | 2.01 |   | 12/20/09 |   | 315,890 |   | 735,792 |   |
| Thomas  R. Moyes            |   | —                                                          |   | —                                                                                                               |       | — |   | — |   | — |   | — |   |
| Marc  S. Sperberg           |   | 49,708                                                          |   | 4                                                                                                                    |       | 2.01 |   | 12/20/09 |   | 40,762 |   | 94,942 |   |
|                             |        |                                                                 |        |                                                                                                                      |            |  |  |  |  |  |  |  |  |  |

 

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(1)                    Unlessotherwise noted, amounts represent shares of common stock underlying warrantsand/or options to purchase shares of common stock.

(2)                    In fiscal 2003,MediCor granted stock options covering a total of 1,155,695 shares of commonstock to employees under all stock option plans maintained by MediCor.

(3)                      The assumed5% and 10% annual rates of appreciation over the term of the options are setforth in accordance with the Securities and Exchange Commission rules andregulations and do not represent our estimates of stock price appreciation. Thepotential realizable value is calculated by assuming that the stock price onthe date of grant appreciates at the indicated rate, compounded annually, forthe entire term of the option and that the option is exercised and the stock issold on the last day of its term at this appreciated stock price.  No valuation method can accurately predictfuture stock prices or option values because there are too many unknownfactors.  No gain to the optionee ispossible unless the stock price increases over the option term.  Such a gain in stock price would benefit allstockholders.

 

**AggregatedOption Exercises in Last Fiscal Year and Fiscal Year-End Option Values**

 

The following table setsforth certain information concerning exercises of stock options and warrants bythe executive officers named in the Summary Compensation Table in fiscal year2003 and unexercised stock options and warrants held by the executive officersnamed in the Summary Compensation Table as of June 30, 2003.

 
| **Name**               |       | **Shares  Acquired on  Exercise(#)** |            | **Value  Realized($)** |              | **Number of Securities  Underlying  Unexercised Options at  2003 Fiscal Year-End(#)** | ** ** | **Value of Unexercised  In-The-Money Options at 2003 Fiscal  Year-End($)(1)** | ** ** |
|-----------------------------|------------|--------------------------------------|-----------------|------------------------|-------------------|---------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| **Exercisable**             | ** ** | **Unexercisable**                    | **Exercisable** | ** **             | **Unexercisable** |
|                        |       |                                 |            |                   |              |                                                                                  |       |                                                                          |       |   |   |   |   |
| Edward  V. Lower III, Ph.D. |       | —                               |            | —                 |              | 932,010                                                                               |       | 310,670                                                                       |       | 1,584,417 |   | 528,139 |   |
| Jim  J. McGhan              |       | 93,201                               |            | 7,456                  |              | —                                                                                |       | 478,432                                                                       |       | — |   | 158,442 |   |
| Donald  K. McGhan           |       | 466,005                              |            | 37,280                 |              | —                                                                                |       | 540,566                                                                       |       | — |   | 264,070 |   |
| Thomas  R. Moyes            |       | —                               |            | —                 |              | —                                                                                |       | —                                                                        |       | — |   | — |   |
| Marc  S. Sperberg           |       | 12,427                               |            | 20,007                 |              | —                                                                                |       | 86,989                                                                        |       | — |   | 63,378 |   |

 

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(1)                      On June 30,2003 (the last trading day of fiscal 2003), the last reported sales price ofMediCor’s common stock as reported on the OTC Bulletin Board was $1.70.

 

**Compensationof Directors**

 

Directors who are notemployees of MediCor did not receive compensation in fiscal 2003.  We anticipate implementing a non-employeedirector compensation plan during fiscal 2004. Directors who are employees of MediCor are not entitled to anycompensation for their service as a director.

 

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**EmploymentContracts and Termination of Employment and Change-in-Control Arrangements**

 

In June 2003, MediCorentered into an employment agreement with Mr. Moyes in connection with hisemployment as chief financial officer. Mr. Moyes’ employment agreement provides that Mr. Moyes willreceive (i) a base salary of $330,000, (ii) a bonus based onattainment of designated objectives of the board or compensation committee and(iii) options to purchase 120,000 shares of MediCor’s common stock.  Mr. Moyes’ employment agreement alsoprovides that upon termination of Mr. Moyes’ employment by MediCor without“cause” (as defined in the agreement), Mr. Moyes will be entitled toseverance compensation equal to 24 months of his then effective compensation.  Additionally, Mr. Moyes’ employment agreementalso provides that upon a “change in control” (as defined in the agreement) anda subsequent termination of Mr. Moyes, Mr. Moyes will be entitled toreceive compensation equal to 24 months of his then effective compensation.

 

In September 2003, MediCorentered into an employment agreement with Mr. Maloney in connection with hisemployment as chief executive officer. Mr. Maloney’s employment agreement provides that Mr. Maloneywill receive (i) a base salary of $480,000, (ii) a bonus based onattainment of designated objectives of the board or compensation committee and(iii) options to purchase 200,000 shares of MediCor’s common stock.  Mr. Maloney’s employment agreement alsoprovides that upon termination of Mr. Maloney’s employment by MediCorwithout “cause” (as defined in the agreement), Mr. Maloney will beentitled to severance compensation equal to 24 months of his then effectivecompensation.  Additionally,Mr. Maloney’s employment agreement also provides that upon a “change incontrol” (as defined in the agreement) and a subsequent termination ofMr. Maloney, Mr. Maloney will be entitled to receive compensationequal to 24 months of his then effective compensation.

 

In October 2003, MediCorentered into an employment agreement with Jim J. McGhan in connection with hisemployment as chief operating officer. Mr. McGhan’s employment agreement provides that Mr. McGhanwill receive (i) a base salary of $360,000, (ii) a bonus based onattainment of designated objectives of the board or compensation committee and(iii) options to purchase 120,000 shares of MediCor’s common stock.  Mr. McGhan’s employment agreement alsoprovides that upon termination of Mr. McGhan’s employment by MediCorwithout “cause” (as defined in the agreement), Mr. McGhan will be entitledto severance compensation equal to 24 months of his then effectivecompensation.  Additionally,Mr. McGhan’s employment agreement also provides that upon a “change incontrol” (as defined in the agreement) and a subsequent termination ofMr. McGhan, Mr. McGhan will be entitled to receive compensation equalto 24 months of his then effective compensation.

 

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***ITEM11.  SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS***

 

The following table setsforth information as to the shares of common stock of MediCor owned as ofSeptember 30, 2003, by (i) each person known by MediCor to be thebeneficial owner of more than five percent of the outstanding common stock of MediCor,(ii) each person who is presently a director of MediCor, (iii) eachof the officers named in the Summary Compensation Table and (iv) all thedirectors and officers of MediCor as a group. Unless otherwise indicated in the table below, each person or entitynamed below has an address in care of MediCor’s principal executive offices. 

 
| **Name and  Address of Beneficial Owner(1)**** **    |   | **Number of Shares  Beneficially Owned**** ** |       | **Shares Covered by  Options or Warrants  Included in Total(2)**** ** |       | **Percent of Total(3)**** ** |   |
|-----------------------------------------------------------|--------|----------------------------------------------------|------------|----------------------------------------------------------------------------|------------|-----------------------------------|--------|
|                                                      |   |                                               |       |                                                                       |       |                              |   |
| 1999  III Equity Performance I, LP                        |   | 1,304,814                                          |       | —                                                                     |       | 7.44                              | %      |
|                                                      |   |                                               |       |                                                                       |       |                              |   |
| 1999  III Equity Performance II, LP                       |   | 1,304,814                                          |       | —                                                                     |       | 7.44                              | %      |
|                                                      |   |                                               |       |                                                                       |       |                              |   |
| Nikki  M. Pomeroy                                         |   | 1,445,844                                          | (4)        | 6,213                                                                      |       | 7.52                              | %      |
|                                                      |   |                                               |       |                                                                       |       |                              |   |
| Edward  V. Lower III, Ph.D.                               |   | 1,242,680                                          |       | 1,242,680                                                                  |       | 6.61                              | %      |
|                                                      |   |                                               |       |                                                                       |       |                              |   |
| **Officers and Directors**                                |   |                                               | ** ** |                                                                       | ** ** |                              |   |
|                                                      |   |                                               |       |                                                                       |       |                              |   |
| Donald  K. McGhan                                         |   | 7,888,488                                          | (5)        | —                                                                     |       | 44.95                             | %      |
|                                                      |   |                                               |       |                                                                       |       |                              |   |
| Jim  J. McGhan                                            |   | 2,293,505                                          | (6)        | 93,201                                                                     |       | 13.00                             | %      |
|                                                      |   |                                               |       |                                                                       |       |                              |   |
| Theodore  R. Maloney                                      |   | 500,000                                            | (7)        | —                                                                     |       | 2.60                              | %      |
|                                                      |   |                                               |       |                                                                       |       |                              |   |
| Thomas  R. Moyes                                          |   | 200,000                                            | (8)        | —                                                                     |       | 1.04                              | %      |
|                                                      |   |                                               |       |                                                                       |       |                              |   |
| Marc  S. Sperberg                                         |   | 211,256                                            |       | 12,427                                                                     |       | 1.20                              | %      |
|                                                      |   |                                               |       |                                                                       |       |                              |   |
| Mark  E. Brown                                            |   | —                                             |       | —                                                                     |       |                              | *      |
|                                                      |   |                                               |       |                                                                       |       |                              |   |
| All  officers and directors as a group (six persons) |   | 10,393,249                                         |       |                                                                       |       | 58.87                             | %      |

 

----

*                             Less than 1%

(1)                      Information in this table regarding directorsand executive officers is based on information provided by them.  Unless otherwise indicated in the footnotesand subject to community property laws where applicable, each of the directorsand executive officers has sole voting and/or investment power with respect to suchshares.  The address for each of thepersons reported in the table is in care of MediCor at 4560 S. Decatur Blvd.,Suite 300, Las Vegas, Nevada 89103.

(2)                      In accordance with Rule 13d-3, the sharenumbers reported in the table include shares of common stock that may beacquired within 60 days of September 30, 2003 upon the exercise or conversionof other securities.

(3)                      The percentages are calculated on the basis ofthe number of outstanding shares of common stock as of September 30, 2003,which was 17,548,192.  In accordancewith Rule 13d-3, the percentage reported for each person includes in thecalculation common stock that may be acquired by that person within 60 days ofSeptember 30, 2003 upon the exercise or conversion of other securities.

(4)                      Ms. Pomeroy is the adult daughter of Donald K.McGhan, chairman of the board.  Includesshares held directly and by various entities beneficially owned or controlledby Ms. Pomeroy.  Does not include604,455 shares beneficially owned by Ms. Pomeroy’s adult son, as to which Ms.Pomeroy disclaims beneficial ownership.

(5)                      Includes shares held in various entitiesbeneficially owned or controlled by Mr. McGhan including 1,304,814 held by 1999III Equity Performance I, LP, 1,304,814 held by 1999 III Equity Performance II,LP and 621,340 held by 2000 III Equity Performance III, LP.  Mr. McGhan is the general partner of allthree limited partnerships and has voting and dispositive control with respectto all shares held by the partnerships. Does not include 729,454 shares beneficially owned by Mr. McGhan’s wife,as to which Mr. McGhan disclaims beneficial ownership.

(6)                      Includes shares held directly and by variousentities beneficially owned or controlled by Mr. McGhan.

(7)                      Includes 400,000 shares held by 1999 III EquityPerformance I, LP.

(8)                      Shares held by 1999 III Equity Performance I,LP.

 

24

----

 

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

 
|                                                                                                        |   | **Number of securities to  be issued upon the  exercise of outstanding  options** |   | **Weighted average  exercise price of  outstanding options** |   | **Number of securities  remaining available  for future issuance** |      |
|-------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|--------------------------------------------------------------------|-----------|
|                                                                                                        |   |                                                                              |   |                                                         |   |                                                               |      |
| Equity  compensation plans approved by Stockholders (Amended and Restated 1999 Stock  Compensation Program) |   | —                                                                            |   | —                                                       |   | 1,242,680                                                          |      |
|                                                                                                        |   |                                                                              |   |                                                         |   |                                                               |      |
| Stand-alone  options and warrants, not approved by Stockholders                                             |   | 3,125,344                                                                         |   | $                                                            | 0.61   |                                                               | —    |   |
|                                                                                                        |   |                                                                              |   |                                                         |   |                                                               |      |   |
| Total                                                                                                       |   | 3,125,344                                                                         |   | $                                                            | 0.61   |                                                               | 1,242,680 |   |

** **

**Stand-aloneoptions not approved by Stockholders**

 

In fiscal 2001, 2002 and2003 MediCor granted 479,073, 211,258 and 1,155,695 stand-alone options,respectively, and in fiscal 2002 issued warrants to purchase 62,135 shares ofcommon stock to employees and consultants. The exercise price per share for each option and warrant is the fair marketvalue per share on the date of grant. These options and warrants vest ratably over four years.  Some or all of these options and warrantsmay also vest immediately upon a change-of-control, as defined in therespective agreements.

 

***ITEM12.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS***

 

InternationalIntegrated Industries, LLC is a company in which MediCor’s chairman has acontrolling interest.  Neither MediCornor any of its subsidiaries has any direct ownership in InternationalIntegrated Industries, LLC. International Integrated Industries, LLC acted on behalf of MediCor byfunding significant expenses, for which MediCor has a revolving loan agreementwith International Integrated Industries, LLC, as reflected in our financialstatements of $213,834 at June 30, 2002 and $6,776,593 at June 30, 2003.  The outstanding balance of the note payableaccrues interest at an annual interest rate of ten percent (10%).  During the year ended June 30, 2002,International Integrated Industries, LLC advanced $4,744,984 to MediCor.  During same period, $4,000,000 of theoutstanding balance on the revolving loan agreement was converted to anequivalent of 2,485,360 shares of common stock and $1,118,232 of the balancewas repaid.  During the year ended June30, 2003, International Integrated advanced $7,363,759 to MediCor.  During the same period, none of the balancewas converted to common stock and $800,999 of the balance was repaid.  Interest expense relating to this notepayable was $231,821 for the year ended June 30, 2002 and $327,709 for the yearended June 30, 2003.  The unpaidliability for these expenses for the respective periods are included in ournote payable to affiliates, which is contained in our financial statementspresented in this report.  We had acommitment from International Integrated Industries, LLC to fund operatingshortfalls as necessary for fiscal 2002 and 2003 and International Integratedhas committed to us to fund any operating shortfalls for fiscal 2004.

 

Ourchief executive officer was a partner at the law firm of Sheppard, Mullin,Richter & Hampton, LLP from September 2001 to September 2003.  Sheppard Mullin provides corporate legalservices to MediCor.  Ms. Nikki Pomeroy,and adult daughter of Donald K. McGhan, chairman of the board, is a consultantto Medicor and received $67,365 in compensation during fiscal 2003.  Additionally, shares held in variousentities beneficially owned or controlled by Ms. Pomeroy are reflected in Item11 above, not including shares owned or controlled by Ms. Pomeroy’s adult sonreferenced in Item 11 above.

 

***ITEM 13.******  EXHIBITS, LIST AND REPORTS ON FORM 8-K***

 

**(a) Exhibits and List**

 

SeeExhibit Index at Page E-1.

 

**(b) Current Reports on Form 8-K**

 

On May 20, 2003, MediCorfiled an amendment to its Current Report onForm 8-K filed on February 24, 2003 relating to the merger among Scientio,Inc., International Integrated Incorporated and SC Merger, Ltd.  This filing included audited financialstatements for International Integrated Incorporated.  In addition, on July 8, 2003, MediCor filed a second amendment toits Current Report filed on February 24, 2003 to clarify that MediCor had, inconnection with the merger,

 

25

----

 

continuedScientio, Inc.’s auditors as MediCor’s auditors and that the auditorrepresentation of Deloitte & Touche LLP was concurrently terminated.

 

***ITEM14.  PRINCIPAL ACCOUNTANT FEES ANDSERVICES***

 

*Audit Fees*

 

MediCorpaid our auditor, Greenberg & Company LLC, an aggregate of $39,190 infiscal 2003 for professional services rendered by the auditor for the audit ofour financial statements and review of the financial statements included in ourForms 10-Q or other services that are normally provided by an accountant inconnection with statutory and regulatory flings or engagements.

 

*Audit-RelatedFees*

 

Wewere not billed any fees by Greenberg & Company LLC in either fiscal 2003or 2002 for assurance or related services reasonably related to the performanceof the audit or review of our financial statements that are not reported aboveunder “Audit Fees.”

 

*Tax Fees*

 

Wewere not billed any fees by Greenberg & Company LLC in either fiscal 2003or 2002 for professional services rendered by them for tax compliance, taxadvice or tax planning.  In September 2003,we engaged Greenberg & Company LLC to perform tax services in connectionwith the preparation of our tax returns.

 

*All Other Fees*

 

Wewere not billed any fees by Greenberg & Company LLC in either fiscal 2003or 2002 for any other products or services provided by them, other than asreported above.

 

Ourauditor did not perform any non-audit services.

 

***SUPPLEMENTALINFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THESECURITIES ACT OF 1934 BY REGISTRANT WHICH HAVE NOT REGISTERED SECURITIESPURSUANT TO SECTION 12 OF THE SECURITIES ACT OF 1934***

 

Noannual report or proxy material has been sent to security holders.  When such report or proxy materials arefurnished to securities holders subsequent to the filing of this report, copiesshall be furnished to the Commission when sent to securities holders.

 

26

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   | MEDICOR LTD. |
|--------|--------------|
|   |
|   |
|   | By:          | /s/  Theodore R. Maloney |   |
|   |         | Theodore R. Maloney |
|   |         | Chief Executive Officer |
|   |         | October 10, 2003 |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated. 

 
| /s/  Theodore  R. Maloney |   | Chief Executive Officer           | October 10, 2003 |
|-------------------------------------|--------|-----------------------------------|------------------|
| Theodore R. Maloney                 |   | (Principal Executive  Officer)    |             |
|                                |   |                              |             |
| /s/  Thomas  R. Moyes     |   | Chief Financial Officer           | October 10, 2003 |
| Thomas R. Moyes                     |   | (Principal Financial  Officer)    |             |
|                                |   |                              |             |
| /s/  Dawn L.  Smith       |   | Vice President –  Controller | October 10, 2003 |
| Dawn L. Smith                       |   | (Principal Accounting  Officer)   |             |
|                                |   |                              |             |
| /s/  Donald  K. McGhan    |   | Chairman                          | October 10, 2003 |
| Donald K. McGhan                    |   |                              |             |
|                                |   |                              |             |
| /s/  Jim J.  McGhan       |   | Director                          | October 10, 2003 |
| Jim J. McGhan                       |   |                              |             |
|                                |   |                              |             |
| /s/  Mark E.  Brown       |   | Director                          | October 10, 2003 |
| Mark E. Brown                       |   |                              |             |

 

27

----

 

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

 

Board of Directors and Stockholders

MEDICOR LTD.

Las Vegas, Nevada

 

We have audited the accompanying consolidated balance sheet of MEDICORLTD and Subsidiaries  (collectively, the“Company”) as of June 30,  2003,  and the related   consolidated   statementsof operations, shareholders’ equity, and cash flows for the year ended June30,  2003. These financial statementsare the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financialstatements based on our audit.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.   Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the consolidated financial position of the Company asof June 30, 2003, and the results of its operations and its cash flows for theyear ended June 30, 2003, in conformity with accounting principles generallyaccepted in the United States of America.

 

As discussed in Note A to the consolidated financial statements, on May2000, the United States Food and Drug Administration  (“FDA”) notified the Company that further sales to   customers by the Company’s subsidiary(PIP.America) would be suspended until the FDA has reviewed and approved theclinical study being conducted by Poly Implants Protheses, S.A.  Poly Implants Protheses, S.A. has currentlyenrolled all patients required for the clinical study and is in a monitoringphase, which management of the Company anticipates will be completed by the endof fiscal 2004.

 

As discussed in Note G to the consolidated financial statements, theCompany implemented statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible assets, on July 1, 2002.

 

 

GREENBERG AND COMPANY LLC

Springfield, New Jersey

August 15, 2003

 

F-1

----

 

INDEPENDENT AUDITORS’ REPORT

 

To the Board of Directors and Stockholders of

International Integrated Incorporated:

 

We have audited the accompanying consolidated balance sheet ofInternational Integrated Incorporated and Subsidiaries (collectively, the“Company”) as of June 30,  2002, and therelated consolidated statements of operations, shareholders’ equity, and cashflows for the year then ended, for the six months ended June 30,  2001, for the four months ended December 31, 2000 and for the year endedAugust 31, 2000. These financial statements are the responsibility of theCompany’s management.  Ourresponsibility is to express and opinion on these financial statements based onour audit.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.   Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the consolidated financial position of the Company asof June 30, 2002, and the results of its operations and its cash flows for theyear then ended, for the six months ended in June 30, 2001, for the four monthsended December 31, 2000 and for the year ended August 31, 2000, in conformitywith accounting principles generally accepted in the United States.

 

As discussed in Note A to the consolidated financial statements, on May12, 2000, the United States Food and Drug Administration (“FDA”) notified theCompany that  further sales to customersby the Company’s subsidiary (PIP.America) would be suspended until the FDA hasreviewed and approved the clinical study being conducted by the Company.  TheCompany has currently enrolled all patients required for the clinical study andis in a monitoring phase, which management of the Company anticipates will becompleted by the second quarter of calendar year 2003.

 

As discussed in Note O, additional equity and/or debt financing will berequired in order to complete the Company’s acquisition of HutchinsonInternational, Inc.

 

 
| Deloitte & Touche LLP                                                                            |
|------------------------------------------------------------------------------------------------------|
|                                                                                                 |
| December 2, 2002, except for the last paragraph in  Note O, as to which the date is February 7, 2003 |

 

F-2

----

 

MediCor Ltd.

Consolidated BalanceSheet

 
|                                                                                              |   | **June 30, 2003** |       |
|---------------------------------------------------------------------------------------------------|--------|-------------------|------------|
| **Assets**                                                                                        |   |              |       |
|                                                                                              |   |              |       |
| Current Assets:                                                                                   |   |              |       |
|                                                                                              |   |              |       |
| Cash                                                                                              |   | $                 | 50,631     |   |
| Receivables, less allowance for doubtful accounts of $3,151,832                                   |   | 193,634           |       |
| Notes receivable                                                                                  |   | 27,384            |       |
| Inventories                                                                                       |   | 139,828           |       |
| Prepaid expenses and other current assets                                                         |   | 106,228           |       |
|                                                                                              |   |              |       |
| Total Current Assets                                                                              |   | 517,705           |       |
| Property, plant and equipment, net                                                                |   | 374,740           |       |
| Goodwill and other intangibles, net                                                               |   | 4,423,342         |       |
| Deposits                                                                                          |   | 5,083,000         |       |
| Other assets                                                                                      |   | 43,882            |       |
|                                                                                              |   |              |       |
| Total assets                                                                                      |   | $                 | 10,442,669 |   |
|                                                                                              |   |              |       |
| **Liabilities and Stockholders’ Equity**                                                     |   |              | ** ** |
|                                                                                              |   |              |       |
| Current Liabilities:                                                                              |   |              |       |
|                                                                                              |   |              |       |
| Bank overdraft                                                                                    |   | $                 | 128,387    |   |
| Short term convertible debentures                                                                 |   | 410,000           |       |
| Notes payable                                                                                     |   | 222,770           |       |
| Note payable to related party                                                                     |   | 6,776,593         |       |
| Accounts payable                                                                                  |   | 1,995,545         |       |
| Accrued expenses and other current liabilities                                                    |   | 1,564,550         |       |
| Payroll taxes payable                                                                             |   | 24,675            |       |
| Interest payable to related party                                                                 |   | 327,709           |       |
| Interest payable                                                                                  |   | 2,816             |       |
|                                                                                              |   |              |       |
| Total Current Liabilities                                                                         |   | 11,453,045        |       |
|                                                                                              |   |              |       |
| Long-term convertible debentures                                                                  |   | 300,000           |       |
| Long-term accrued liabilities                                                                     |   | 1,413,597         |       |
|                                                                                              |   |              |       |
| Total liabilities                                                                                 |   | 13,166,642        |       |
|                                                                                              |   |              |       |
| Commitments and contingencies (Note R)                                                            |   |              |       |
|                                                                                              |   |              |       |
| Stockholders’ equity (deficit)                                                               |   |              |       |
|                                                                                              |   |              |       |
| Common shares, $.001 par value, 100,000,000 shares authorized,  17,518,161 issued and outstanding |   | 17,518            |       |
| Capital in excess of par value                                                                    |   | 16,910,432        |       |
| Accumulated (deficit)                                                                             |   | (19,651,923       | )          |
|                                                                                              |   |              |       |
| Stockholders’ equity (deficit)                                                               |   | (2,723,973        | )          |
|                                                                                              |   |              |       |
| Total liabilities and stockholders’ equity                                                   |   | $                 | 10,442,669 |   |

 

See accompanying notes toconsolidated financial statements

 

F-3

----

 

MediCor Ltd.

Consolidate Statements ofOperations

For the Periods Ended AsNoted

** **
|                                                  |   | **Year Ended  June 30, 2003** |       | **Year Ended  June 30, 2002** |       |
|-------------------------------------------------------|--------|-------------------------------|------------|-------------------------------|------------|
|                                                  |   |                          |       |                          |       |
| Net sales                                             |   | $                             | 1,676,905  |                          | $          | 1,703,590 |   |
| Cost of sales                                         |   | 412,729                       |       | 442,627                       |       |
| Return of consigned inventory previously written down |   | (265,700                      | )          |                          |       |
| Write down of inventory to fair market value          |   | —                        |       | 390,042                       |       |
|                                                  |   |                          |       |                          |       |
| Gross profit                                          |   | 1,529,876                     |       | 870,921                       |       |
| Operating Expenses:                                   |   |                          |       |                          |       |
| Selling, general and administrative expenses          |   | 5,876,413                     |       | 8,230,133                     |       |
| Research and development                              |   | 190,625                       |       | 294,723                       |       |
|                                                  |   | (4,537,162                    | )          | (7,653,935                    | )          |
| Operating Loss                                        |   |                          |       |                          |       |
| Other income (expense):                               |   |                          |       |                          |       |
| Net interest expense                                  |   | (503,847                      | )          | (362,226                      | )          |
|                                                  |   |                          |       |                          |       |
| Loss before income taxes                              |   | (5,041,009                    | )          | (8,016,161                    | )          |
| Income taxes                                          |   | 870                           |       | —                        |       |
|                                                  |   |                          |       |                          |       |
| Net Loss                                              |   | (5,041,879                    | )          | (8,016,161                    | )          |
| Preferred dividends                                   |   | 147,852                       |       | 201,398                       |       |
|                                                  |   |                          |       |                          |       |
| Net loss attributable to common stockholders          |   | $                             | (5,189,731 | )                             | $          | (8,217,559 | ) |
|                                                  |   |                          |       |                          |       |
| Earnings per share data:                              |   |                          |       |                          |       |
| Weighted average shares, basic and diluted            |   | 15,733,011                    |       | 11,693,937                    |       |
| Basic and diluted                                     |   |                          | ** ** |                          | ** ** |
| Net loss per share                                    |   | $                             | (0.33      | )                             | $          | (0.70 | ) |

 

Seeaccompanying notes to consolidated financial statements

 

F-4

----

 

MediCor Ltd.

Consolidated Statementsof Cash Flows

For the Periods Ended AsNoted

 
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   | **Year Ended  June 30, 2003** |       | **Year Ended  June 30, 2002** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|------------|-------------------------------|------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                          |       |                          |       |
| Cash flows form operating activities:                                                                                                                                                                                                                                                                                                                                                                                     |   |                          |       |                          |       |
| Net loss                                                                                                                                                                                                                                                                                                                                                                                                                  |   | $                             | (5,041,879 | )                             | $          | (8,016,161 | ) |
| Adjustments to reconcile net loss to net cash utilized by operating  activities:                                                                                                                                                                                                                                                                                                                                          |   |                          |       |                          |       |
| Depreciation and amortization                                                                                                                                                                                                                                                                                                                                                                                             |   | 251,368                       |       | 197,851                       |       |
| Provision for doubtful accounts                                                                                                                                                                                                                                                                                                                                                                                           |   | (53,417                       | )          | 3,128,172                     |       |
| Loss on disposal of property, plant and equipment                                                                                                                                                                                                                                                                                                                                                                         |   | 1,846                         |       | 1,922                         |       |
| Inventory write down                                                                                                                                                                                                                                                                                                                                                                                                      |   | —                        |       | 390,042                       |       |
| Changes in operating assets and liabilities                                                                                                                                                                                                                                                                                                                                                                               |   |                          |       |                          |       |
| Receivables                                                                                                                                                                                                                                                                                                                                                                                                               |   | 159,609                       |       | (2,194,715                    | )          |
| Notes receivable                                                                                                                                                                                                                                                                                                                                                                                                          |   | (27,384                       | )          | —                        |       |
| Inventories                                                                                                                                                                                                                                                                                                                                                                                                               |   | (31,192                       | )          | 101,357                       |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                                                                                                                                                                                 |   | (30,958                       | )          | 37,197                        |       |
| Other assets                                                                                                                                                                                                                                                                                                                                                                                                              |   | (43,882                       | )          | —                        |       |
| Bank overdraft                                                                                                                                                                                                                                                                                                                                                                                                            |   | 128,387                       |       | —                        |       |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                                                                          |   | (950,922                      | )          | 2,281,895                     |       |
| Accrued expenses and other current liabilities                                                                                                                                                                                                                                                                                                                                                                            |   | (81,571                       | )          | 970,415                       |       |
| Income taxes payable                                                                                                                                                                                                                                                                                                                                                                                                      |   | —                        |       | (15,868                       | )          |
| Payroll taxes payable                                                                                                                                                                                                                                                                                                                                                                                                     |   | 10,879                        |       | 13,796                        |       |
| Interest payable                                                                                                                                                                                                                                                                                                                                                                                                          |   | 330,525                       |       | (127,372                      | )          |
| Long term accrued liabilities                                                                                                                                                                                                                                                                                                                                                                                             |   | 423,729                       |       | 24,355                        |       |
| Net cash utilized by operating activities                                                                                                                                                                                                                                                                                                                                                                                 |   | (4,954,862                    | )          | (3,207,114                    | )          |
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                          |       |                          |       |
| Cash flows from investing activities:                                                                                                                                                                                                                                                                                                                                                                                     |   |                          | ** ** |                          | ** ** |
| Purchases of property, plant and equipment                                                                                                                                                                                                                                                                                                                                                                                |   | (242,494                      | )          | (13,753                       | )          |
| Increase in deposits                                                                                                                                                                                                                                                                                                                                                                                                      |   | (2,350,000                    | )          | (850,000                      | )          |
| Net cash utilized by investing activities                                                                                                                                                                                                                                                                                                                                                                                 |   | (2,592,494                    | )          | (863,753                      | )          |
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                          |       |                          |       |
| Cash flows from financing activities:                                                                                                                                                                                                                                                                                                                                                                                     |   |                          |       |                          |       |
| Proceeds from issuance of convertible debentures                                                                                                                                                                                                                                                                                                                                                                          |   | 560,000                       |       | 150,000                       |       |
| Proceeds from issuance of short term debt                                                                                                                                                                                                                                                                                                                                                                                 |   | 7,586,528                     |       | 4,744,986                     |       |
| Payments on short term debt                                                                                                                                                                                                                                                                                                                                                                                               |   | (800,999                      | )          | (1,118,232                    | )          |
| Issuance of common stock                                                                                                                                                                                                                                                                                                                                                                                                  |   | 262,462                       |       | 45,552                        |       |
| Issuance of preferred stock                                                                                                                                                                                                                                                                                                                                                                                               |   | 120,599                       |       | 424,763                       |       |
| Dividends paid                                                                                                                                                                                                                                                                                                                                                                                                            |   | (147,852                      | )          | (201,398                      | )          |
| Net cash provided by financing activities                                                                                                                                                                                                                                                                                                                                                                                 |   | 7,580,738                     |       | 4,045,671                     |       |
| Net increase in cash                                                                                                                                                                                                                                                                                                                                                                                                      |   | 33,382                        |       | (25,196                       | )          |
| Cash at beginning of period                                                                                                                                                                                                                                                                                                                                                                                               |   | 17,249                        |       | 42,445                        |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                          |       |                          |       |
| Cash at end of period                                                                                                                                                                                                                                                                                                                                                                                                     |   | $                             | 50,631     |                          | $          | 17,249 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                          |       |                          |       |   |   |
| **Supplemental Disclosure of Non-Cash Activities**                                                                                                                                                                                                                                                                                                                                                                        |   |                          |       |                          |       |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                          |       |                          |       |   |   |
| On March 18,  2003, the Company acquired all of the outstanding shares of capital stock of  Intellectual Property International Inc., a Delaware corporation (“IPI”), an  intellectual property holding company, in consideration for the issuance of  an aggregate of 600,000 shares of the Company’s common stock to the stockholders  of IPI.  The company received patents  valued at $3,000,000. |   |                          |       |                          |       |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                          |       |                          |       |   |   |
| Preferred stock valued at $3,079,058 was converted to 510, 059 share  of common stock during the year ended June 30, 2003.                                                                                                                                                                                                                                                                                                |   |                          |       |                          |       |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                          |       |                          |       |   |   |
| Conversion of short-term debt to common stock                                                                                                                                                                                                                                                                                                                                                                             |   | $                             | —     |                          | $          | 4,970,720 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                          |       |                          |       |
| Common stock commission on sale of preferred stock                                                                                                                                                                                                                                                                                                                                                                        |   | $                             | —     |                          | $          | 11,870 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                          |       |                          |       |   |   |
| **Supplemental Disclosure of Cash Flow Information**                                                                                                                                                                                                                                                                                                                                                                      |   |                          |       |                          |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                          |       |                          |       |
| Cash paid during the period for:                                                                                                                                                                                                                                                                                                                                                                                          |   |                          |       |                          |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                          |       |                          |       |
| Interest                                                                                                                                                                                                                                                                                                                                                                                                                  |   | $                             | 705        |                          | $          | 7,365 |   |
| Taxes                                                                                                                                                                                                                                                                                                                                                                                                                     |   | $                             | 870        |                          | $          | — |   |

** **

Seeaccompanying notes to consolidated financial statements

 

F-5

----

 

**MediCorLtd.**

**ConsolidatedStatements of Stockholders’ Equity**

**For thePeriods Ended As Noted**

 
|                               |   |                 |       |                             |       | **Par Value**                  |       |                                |       |                           |       |        |       |
|------------------------------------|--------|----------------------|------------|----------------------------------|------------|--------------------------------|------------|-------------------------------------|------------|--------------------------------|------------|-------------|------------|
|                               |   | **Number of Shares** |       | **Preferred********Shares $.01** |       | **Common********Shares $.001** |       | **Capital in excess  of par value** |       | **Accumulated********Deficit** |       | **Total**   |       |
|                               |   | **Preferred**        |       | **Common**                       |       |                           |       |                                |       |
|                               |   |                 | ** ** |                             | ** ** |                           | ** ** |                                | ** ** |                           | ** ** |        | ** ** |   | ** ** |
| **Balance  - July 1, 2001**        |   | 301,447              |       | 11,634,778                       |       | 3,014                          |       | 11,635                              |       | 9,059,925                      |       | (6,244,633  | )          | 2,829,941 |   |
| Issuance of  Preferred Shares      |   | 90,339               |       | —                           |       | 904                            |       | —                              |       | 423,859                        |       | —      |       | 424,763 |   |
| Issuance of  Common Shares         |   | —               |       | 2,934,309                        |       | —                         |       | 2,934                               |       | 4,042,618                      |       | —      |       | 4,045,552 |   |
| Net Loss                           |   | —               |       | —                           |       | —                         |       | —                              |       | —                         |       | (8,016,161  | )          | (8,016,161 | ) |
| Dividends Paid                     |   | —               |       | —                           |       | —                         |       | —                              |       | —                         |       | (201,398    | )          | (201,398 | ) |
| **Balance  - June 30, 2002**       |   | 391,786              |       | 14,569,087                       |       | 3,918                          |       | 14,569                              |       | 13,526,402                     |       | (14,462,192 | )          | (917,303 | ) |
| Issuance of  Preferred Shares      |   | 18,824               |       | —                           |       | 188                            |       | —                              |       | 120,411                        |       | —      |       | 120,599 |   |
| Issuance of  Common Shares         |   | —               |       | 1,776,915                        |       | —                         |       | 1,777                               |       | 3,260,023                      |       | —      |       | 3,261,800 |   |
| Reverse  Acquisition               |   | —               |       | 661,900                          |       | —                         |       | 662                                 |       | —                         |       | —      |       | 662 |   |
| Conversion of  Preferred to Common |   | (410,610             | )          | 510,259                          |       | (4,106                         | )          | 510                                 |       | 3,596                          |       | —      |       | — |   |
| Net Loss                           |   | —               |       | —                           |       | —                         |       | —                              |       | —                         |       | (5,041,879  | )          | (5,041,879 | ) |
| Dividends Paid                     |   | —               |       | —                           |       | —                         |       | —                              |       | —                         |       | (147,852    | )          | (147,852 | ) |
| **Balance  - June 30, 2003**       |   | —               |       | 17,518,161                       |       | $                              | —     |                                | $          | 17,518                         |       | $           | 16,910,432 |   | $ | (19,651,923 | ) | $ | (2,723,973 | ) |
|                                    |        |                      |            |                                  |            |                                |            |                                     |            |                                |            |             |            |  |  |  |  |  |  |  |

 

See accompanying notes toconsolidated financial statements

 

F-6

----

 

**MEDICORLTD.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**June 30,2003**

** **

**Note A -Business Activity**

 

MediCor Ltd. (the“Company”) was incorporated in December 2000.  The Company acquires,develops, manufactures and markets products for medical specialties inaesthetic plastic and reconstructive surgery, and dermatology markets. Products include surgically implantable prostheses for aesthetic plastic andreconstructive surgery and scar management products.  The Company’sproducts are sold worldwide to hospitals, surgery centers and physiciansthrough various distributors and direct sales personnel.

 

Prior to May 2000,through our III Acquisition Corp. subsidiary (which does business under thetradename PIP.America), we distributed in the United States saline filledbreast implants manufactured by Poly Implants Protheses, S.A. on both a directand a consigned inventory basis.  As ofMay 2000, the United States Food and Drug Administration (FDA) notifiedPIP.America that further distribution of the implants would be suspended untilthe FDA reviewed and approved the clinical study being conducted by PolyImplants Protheses.  Pursuant to avoluntary withdrawal from the market, sales of PIP.America products ceased inNovember of 2002 pending final Pre-Market Approval (PMA) clearance.  Poly Implants Protheses is currentlyconducting its clinical study and is in a monitoring phase.  We currently anticipate that this phase willbe completed by the end of fiscal 2004 and that the FDA will approvecommercialization in the United States of the products in the second quarter offiscal 2005.  We are not, however,participating in the conduct of the clinical study and are dependent on PolyImplants Protheses obtaining the approval before we can recommence distributionof the products.  

 

**Note B -Summary of Significant Accounting Policies**

 

**Basis ofPresentation**

 

On February 7, 2003, SCMerger Corp., Ltd., a British Virgin Islands company and wholly ownedsubsidiary of the Company, merged with and into International IntegratedIncorporated, a British Virgin Islands company (“III”), with III as thesurviving entity.  The February 7, 2003merger has been accounted for as a reverse acquisition.  In accordance with Statement of Financial AccountingStandards No. 141, for accounting purposes III has been treated as thecontinuing reporting entity that acquired Scientio, Inc.  Therefore, the reports filed by the Companyafter the reverse acquisition parallel the financial reporting required undergenerally accepted accounting principles as if III were the legal successor toScientio, Inc.’s reporting obligation as of the date of the merger.  The Annual Report on Form 10-KSB is filedbased on the fiscal year of III, the accounting acquirer.  In accordance with Statement of FinancialAccounting Standards No. 141, the Company has included in its results ofoperations for the year ended June 30, 2003 the results of Scientio, Inc. fromFebruary 7, 2003.

 

F-7

----

 

**Principlesof Consolidation**

 

The consolidatedfinancial statements include the accounts of the Company and all of itssubsidiaries in which a controlling interest is maintained.  All intercompany accounts and transactionshave been eliminated.  Certain prior year amounts in previously issuedfinancial statements have been reclassified to conform to the current yearpresentation.  The consolidated financial statements have been prepared inUnited States dollars.

 

**Use ofEstimates**

 

Financial statementsprepared in accordance with accounting principles generally accepted in theUnited States require management to make estimates and judgments that affectamounts and disclosures reported in the financial statements.  Actualresults could differ from those estimates.

 

##### **Revenue Recognition**

 

##### **The Company generally recognizes revenue from product salesupon surgical implantation for consigned items and upon shipment for allothers, provided that no significant post-delivery obligations remain andcollection of the resulting receivable is reasonably assured.  When significant post-delivery obligationsexist, revenue is deferred until such obligations are fulfilled.  MediCor allows credit for products returnedwithin its policy terms.  Such returnsare estimated and an allowance for product returns is recorded at the time ofsale as necessary.**

##### ** **

##### **Receivables**

##### ** **

##### **The Company has reserved $3,151,832 against certainreceivables due to issues regarding collectibility.  The Company intends to pursue all avenues to collect on amountsdue.**

 

##### **Product Warranties**

 

##### **III Acquisition Corp. d/b/a PIP.America (“PIP.America”), asubsidiary of the Company, provides a warranty replacement program to surgeonsfor deflations for a period of ten (10) years from the date ofimplantation.  For each deflation, thesurgeon receives financial assistance plus a free replacement. Managementestimated the amount of potential future warranty claims based on statisticalanalysis.  Expected future obligations aredetermined based on the history of product shipments and claims and arediscounted to a current value.  Changesto actual claims and interest rates could have a material impact on thestatistical calculation which could materially impact the Company’s reportedexpenses and results of operations.**

 

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

 

##### **The Company accounts for long-lived assets, other thangoodwill, in accordance with the provisions of SFAS No. 144, “Accounting forthe Impairment and Disposal of Long**

##### ** **

##### **F-8**

##### ****

##### ** **

##### **Lived Assets.” Which supercedes SFAS No 121 “Accounting forthe Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposedof.”  This statement creates oneaccounting model, based on the framework established in SFAS No. 121, to beapplied to all long-lived assets including discontinued operations.  Adoption of this statement had no materialeffect on its financial position or results of operations.  SFAS No. 144 requires, among other things,that an entity review its long-lived assets and certain related intangibles forimpairment whenever changes in circumstances indicate that the carrying amountof an asset may not be fully recoverable. The Company does not believe that any such changes have taken place.**

##### ** **

##### **Research and Development**

##### ** **

##### **Research and development costs are expensed by the Companyas incurred, including the costs of clinical studies and other regulatoryapproval activities.**

##### ** **

##### **Shares and Share Amounts**

 

Effective as of February7, 2003, the Company merged with International Integrated Incorporated(“III”).  All references in thefinancial statements to the number of shares and per share amounts have beenretroactively restated to reflect the increased number of common stockoutstanding.

 

**Effectsof Recent Accounting Pronouncements**

 

In June 2001, theFinancial Accounting Standards Board issued SFAS No. 141, “BusinessCombination” and SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 141 is effective as of July 1, 2001and SFAS No. 142 is effective January 2002 for companies having fiscal yearsbeginning after December 15, 2001. Under SFAS No. 142, goodwill will not be amortized, but will be subjectto impairment testing.  The Companyadopted SFAS No. 141 and SFAS No. 142 effective for the fiscal year beginningJuly 1, 2002.  The Company has evaluatedSFAS No. 141 and has determined that it will not have an effect on theCompany’s June 30, 2003 consolidated financial statements.  The absence of goodwill amortization as aresult of adopting SFAS No. 142 did not have a material effect on the Company’sconsolidated results of operations or financial position.  There was no indication that goodwill wasimpaired.

 

In August 2001, theFinancial Accounting Standards Board issued SFAS No. 143, “Accounting for AssetRetirement Obligations,” which addresses the financial accounting and reportingfor obligations associated with the retirement of tangible long-lived assetsand the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002.  The Company has determined that SFAS No. 143will not have an effect on the Company’s June 30, 2003 financial statements.

 

In October 2001, theFinancial Accounting Standards Board issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” This statement replaces SFAS No.121, “Accounting for the Impairment of Long-Lived Assets and for

 

F-9

----

 

Long-Lived Assets to beDisposed of,” and provisions of Accounting Principles Board Opinion (“APB”) No.30, “Reporting of Results of Operations-Reporting the Effects of Disposal of aSegment of a Business, and Extraordinary, Unusual, and Infrequently OccurringEvents and Transactions” for the disposal of segments of a business.  This statement creates one accounting model,based on the framework established in SFAS No. 121, to be applied to alllong-lived assets including discontinued operations.  SFAS No. 144 is effective for fiscal years beginning afterDecember 15, 2001.  Adoption of SFAS No.144 in the first quarter of fiscal 2003 had no impact on the Company’sconsolidated results of operations or financial position.

 

In April 2002, theFinancial Accounting Standards Board issued SFAS No. 145, “Rescission of FASBStatements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.” The most significant provisions of this statement relate to therescission of Statement No. 4, “Reporting Gains and Losses from Extinguishmentof Debt;” and it also amends other existing authoritative pronouncements tomake various technical corrections, clarify meanings, or describe theirapplicability under changes conditions. Under this new statement, any gain or loss on extinguishment of debt thatwas classified as an extraordinary item in prior periods that does not meetcertain defined criteria as an extraordinary item in prior periods must bereclassified.  This statement iseffective for financial statements issued on or after May 15, 2002.  The Company has completed an evaluation ofSFAS No. 145, and has determined that it will not have an effect on theconsolidated financial statements.

 

In June 2002, theFinancial Accounting Standards Board issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.”  This statement requires companies to recognize costs associatedwith exit or disposal activities when they are incurred rather than at the dateof a commitment to an exit or disposal plan. Statement No. 146 is to be applied prospectively to exit or disposalactivities initiated after December 31, 2002. Adoption of this statement did not have a material effect on theCompany’s consolidated results of operations or financial position.

 

In November 2002, theFASB issued Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers,” which clarifies disclosure and recognition / measurement requirementsrelated to certain guarantees.  Thedisclosure requirements are effective for financial statements issued afterDecember 15, 2002 and the recognition and measurement requirements areeffective on a prospective basis for guarantees issued or modified afterDecember 31, 2002.  The adoption of FIN45 did not have a material impact on the Company’s financial position, resultsof operations or cash flows.

 

On December 31, 2002, theFinancial Accounting Standards Board issued FASB Statement No. 148, “Accounting for Stock-Based Compensation -Transition and Disclosure.”  Statement 148 amends FASB StatementNo. 123, “Accounting for Stock-BasedCompensation,” to provide alternative methods of transition to Statement123’s fair value method of accounting for stock-based employeecompensation.  Statement 148 also amends the disclosure provisions ofStatement 123 and APB Opinion No. 28, “Interim

 

F-10

----

 

FinancialReporting,” to require disclosure in the summary of significantaccounting policies of the effects of an entity’s accounting policy withrespect to stock-based employee compensation on reported net income andearnings per share in annual and interim financial statements.  While theStatement does not amend Statement 123 to require companies to account foremployee stock options using the fair value method, the disclosure provisionsof Statement 148 are applicable to all companies with stock-based employeecompensation, regardless of whether they account for that compensation usingthe fair value method of Statement 123 or the intrinsic value method of Opinion25. Statement No. 148 is effective for fiscal years ending after December 15,2002.  The Company will continue to account for stock-based employeecompensation under the intrinsic value method of Opinion 25 but adopted thedisclosure provisions of Statement No. 148 in the fourth quarter of fiscal2003.  Adoption of this standard did not have a material effect on theCompany’s consolidated results of operations or financial position.

 

In January 2003, the FASBissued Interpretation No. 46, “Consolidation of Variable InterestEntities.”  A variable interest entity(“VIE”) is one where the contractual or ownership interest in an entity changewith changes in the entity’s net asset value. This interpretation requires the consolidation of a VIE by the primarybeneficiary, and also requires disclosure about VIEs where an enterprise has asignificant variable interest but is not the primary beneficiary.  At the effective date, the Company has notentered into any VIEs.

 

In April 2003, the FASBissued SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments andHedging Activities.”  SFAS 149establishes accounting and reporting standards for derivative instruments andfor hedging activities.  This statementis effective for contracts entered into or modified after June 30, 2003.  The Company is calculating the effect thatthis SFAS will have on its financial statements.

 

**Note C -Cash & Cash Equivalents**

 

Allhighly liquid investments with original maturities of three months or less at thedate of purchase are considered to be cash equivalents.

** **

**Note D –Accounts Receivable and Notes Receivable**

 

Accountsreceivable at June 30, 2003 consisted of: 

 
| Accounts  receivable             |   | $          | 3,345,466 |   |
|----------------------------------|--------|------------|-----------|--------|
| Allowance for  doubtful accounts |   | (3,151,832 | )         |
|                             |   |       |      |
| Total                            |   | $          | 193,634   |   |

 

PIP.Americahas a distribution agreement with a third-party manufacturer (Poly ImplantsProtheses, S.A.) for certain surgically implantable prosthesis.  As part of the distribution agreementcertain expenses are reimbursable to the Company by the manufacturer.  

 

F-11

----

 

Accountsreceivable consist primarily of reimbursements associated with the PIP. Americareplacement program, clinical study expenses and returned products.

 

Changesin allowance for doubtful accounts are as follows:

 
| Balance July 1,  2002  |   | $       | 3,205,249 |   |
|------------------------|--------|---------|-----------|--------|
| Provisions/(recovery)  |   | (53,417 | )         |
| Write-offs             |   | —  |      |
| Balance June 30,  2003 |   | $       | 3,151,832 |   |

 

Thenotes receivable balance of $27,384 at June 30, 2003 was for stock purchasespaid in full on July 31, 2003.

 

**Note E –Inventories**

 

Inventories are stated atthe lower of cost or market, cost determined by the first-in, first-out (FIFO)method.  The Company writes down its inventory for estimated obsolescenceor unmarketable inventory equal to the difference between the cost of inventoryand the estimated market value based upon assumptions about future demand andmarket conditions. 

 

Inventories at June 30,2003 consisted of:

 
| Raw Materials  |   | $      | 125,607 |   |
|----------------|--------|--------|---------|--------|
| Finished Goods |   | 14,221 |    |
|           |   |   |    |
| Total          |   | $      | 139,828 |   |

 

The 2002 value ofconsigned inventory of implants in physician offices on the books of thePIP.America subsidiary of the company was uncertain.  A voluntary withdrawal of such inventory form the market wasinitiated subsequent to June 30, 2002 in conjunction with an agreement reachedbetween the FDA and PIP.America. Accordingly, the Company wrote down such inventory to a fair marketvalue of zero as of June 30, 2002. During the year ended June 30, 2003, inventory previously written downto a fair market value of zero was returned to the manufacture for credit. 

 

**Note F -Property and Equipment**

 

Property and equipment isstated at cost.  Depreciation is based on the useful lives of theproperties and computed using the straight-line method.  Buildings aredepreciated over 30 years, furniture and equipment over 3 to 10 years andleasehold improvements over the shorter of their estimated remaining lives orlease term.  Significant improvements

 

F-12

----

 

and betterments arecapitalized, while maintenance and repairs are charged to operations asincurred. 

 

Property and equipment atJune 30, 2003 consisted of: 

 
| Leasehold  Improvements                |   | $        | 137,518 |   |
|----------------------------------------|--------|----------|---------|--------|
| Furniture,  Fixtures and equipment     |   | 402,420  |    |
| Computer  Equipment and tools and dies |   | 136,950  |    |
|                                   |   |     |    |
| Subtotal                               |   | 676,888  |    |
| Accumulated  depreciation              |   | (302,148 | )       |
|                                   |   |     |    |
| Total                                  |   | $        | 374,740 |   |

 

Depreciation expense was$110,384 for the year ended June 30, 2003 and $97,091 for the year ended June30, 2002.

## ** **

## **NoteG – Goodwill and Other Intangibles**

## ** **

## **Goodwill represents the excess ofthe purchase price over the estimated fair value of the identified assets(including other intangible assets) and liabilities assumed in the  acquisition of HPL Biomedical, Inc.  The Company adopted SFAS No. 142 and nolonger amortized goodwill.  Otherintangible assets are recorded at fair value and amortized over periods rangingfrom 3 to 17 years.**

## ** **

## **Goodwill and other intangibles asof June 30, 2003 consisted of:**

## ** **

| Goodwill                  |   | $         | 1,219,210 |   |
|---------------------------|--------|-----------|-----------|--------|
| Distribution  Agreements  |   | 225,000   |      |
| Non-compete               |   | 130,000   |      |
| Patents                   |   | 3,100,000 |      |
| Other                     |   | 23,083    |      |
|                      |   |      |      |
| Subtotal                  |   | 4,697,293 |      |
| Accumulated  amortization |   | (273,951  | )         |
|                      |   |      |      |
| Total                     |   | $         | 4,423,342 |   |

## ** **

## **The increase in goodwill andother intangibles net was due to the purchase of $3,000,000 of patents relatingto the March 18, 2003 acquisition of all of the outstanding shares of capitalstock of Intellectual Property International Inc., an intellectual propertyholding**

## ** **

## **F-13**

## ****

 

## **company, as described in Note M,and amortization of patents and other intangibles of $140,384.  Amortization for the year ended June 30,2002 was $99,950.**

## ** **

## **III acquired HPL Biomedical, Inc.on February 28, 2001.  The purchaseprice included a cash payment of $1,240,000 and the assumption of $860,000 inliabilities, $647,000 of which were amounts due to the III and were eliminatedupon consolidation when the transactions was consummated.  The recording of this transaction created$1,697,000 in intangibles consisting of $1,219,200 in goodwill, $225,000 indistribution agreements, $130,000 in non-compete provisions, $100,000 for apatent and $23,083 in other intangibles.**

## ** **

## **The following table reconcilespreviously reported net loss and loss per share for the years ended June 30,2003 and June 30, 2002 to net loss and loss per share as adjusted for thecessation of amortization expense related to our goodwill balances.**

## ** **

|                                          |   | **Year Ended  June 30, 2003** |       | **Year Ended  June 30, 2002** |   |
|-----------------------------------------------|--------|-------------------------------|------------|-------------------------------|--------|
| Net loss as reported                          |   | $                             | (5,189,731 | )                             | $      | (8,217,559 | ) |
| Amortization of  goodwill, net of tax         |   | —                        |       | 31,480                        |   |
|                                          |   |                          |       |                          |   |
| Net loss as  adjusted                         |   | $                             | (5,189,731 | )                             | $      | (8,186,079 | ) |
|                                          |   |                          |       |                          |   |
| Basic and  diluted loss per share information |   |                          |       |                          |   |
| Loss per share  as reported                   |   | (0.33                         | )          | $                             | (0.87  | ) |
| Amortization of  goodwill, net of tax         |   | $                             | —     |                          | — |   |
|                                          |   |                          |       |                          |   |
| Loss per share  adjusted                      |   | $                             | (0.33      | )                             | $      | (0.87 | ) |

## ** **

## **NoteH – Deposits**

## ** **

## **Deposits at June 30, 2003 totaled$5,083,000.  In 2000, the Companyobtained the right to purchase a 7.5% common equity interest in a third-partymanufacturer from its founder for $3,750,000. In 2000, the Company made a non-refundable deposit of $1,883,000 againstthe purchase price.  The Company isunder no obligation to fund the remainder of the payment or the exercise thepurchase right.  The remaining depositbalance of $3,200,000 is related to an asset purchase agreement described inNote R.**

## ** **

## **NoteI – Accrued Expenses**

## ** **

## **Accrued expenses and othercurrent liabilities at June 30, 2003 consisted of:**

## ** **

## **F-14**

## ****

##  

| Consulting                |   | $       | 985,500   |   |
|---------------------------|--------|---------|-----------|--------|
| Product warranty  reserve |   | 404,591 |      |
| Other                     |   | 174,459 |      |
|                      |   |    |      |
| Total                     |   | $       | 1,564,550 |   |

## ** **

## **Consulting fees consisted ofamounts relating to consulting agreements with key executives.**

## ** **

## **Other accrued expenses included salariesand employee benefits, dividends, legal and other miscellaneous accruedexpenses.**

## ** **

## **Long-term accrued liabilities of$1,413,597 at June 30, 2003 consisted of product warranty reserves.**

 

## **NoteJ – Convertible Debentures**

## ** **

## **Short-term Convertible Debenturesof $410,000 at June 30, 2003 consisted of short-term Convertible Debenturespaying 10-15% interest.  Interest isprepaid and amortized over the life of the Convertible Debenture.  The Convertible Debentures are convertiblewithin one year at the holder’s discretion to shares of Company common stock ata price of $4.02.  These convertibledebentures mature between June 2003 and December 2003.**During the year ended June 30, 2002, $150,000 of Short-termConvertible Debentures was converted to 37,281 shares of common stock.

## ** **

## **Long-term Convertible Debenturesof $300,000 at June 30, 2003 consisted of long-term Convertible Debenturespaying 8% interest.  Interest is prepaidand amortized over the life of the Convertible Debenture. The ConvertibleDebentures are convertible after one year and at the 18-month, 24-month,30-month and 36-month anniversary of the issuance date at the holder’sdiscretion to shares of Company common stock at a price equal to the greater of$5.00 or seventy-five percent (75%) of the daily weighted average trading priceper share of the Company’s common stock over a period of twenty (20) tradingdays prior to the conversion date. These convertible debentures mature betweenApril 2006 and June 2006.**

## ** **

## **There were costs of $86,250associated with the above Convertible Debentures, of which $42,368 wasamortized. The remaining balance of $43,882 will be amortized over the life ofthe Convertible Debentures.**

** **

**Note K –Notes Payable**

 

Notespayable of $222,770 at June 30, 2003 consisted of the following: $200,000 inone year notes paying 8% interest and $22,770 in a nine-month term loan with aninitial principal amount of $30,000 with an interest rate of 15%.  Interest on the 8% notes is payablequarterly on the last calendar day of the quarter.  At maturity, at the holder’s

 

F-15

----

 

discretion,the 8% notes may be either repaid or converted to shares of Company commonstock at a mutually agreed upon price per share.  The 15% loan was provided to a subsidiary of the Company from thespouse of a key employee of that subsidiary. 

** **

**Note L –Related Party Transactions**

 

InternationalIntegrated Industries, LLC (“LLC”) is a company in which the Company’s Chairmanhas a controlling interest.  Neither theCompany nor any of its subsidiaries has any direct ownership in LLC.  LLC acted on behalf of the Company byfunding significant expenses incurred for which the Company has a revolvingloan agreement as shown on the Company’s Balance Sheet of $6,776,593 at June 30,2003.  The outstanding balance of thenote payable accrues interest at an annual interest rate of ten percent(10%).  During the year ended June 30,2003, LLC advanced $7,363,759 to the Company, of which none was converted tocommon stock and $800,999 was repaid. Interest expense relating to this note payable was $327,709 for the yearended June 30, 2003.  The unpaidliability for these expenses are included in the Company’s note payable toaffiliates, which is contained in the financial statements presentedherein.  The Company had a commitmentfrom LLC to fund operating shortfalls as necessary for each period presented. ** **

 

Ourchief executive officer was a partner at the law form of Sheppard, Mullin,Richter & Hampton, LLP from September 2001 to September 2003.  Sheppard Mullin provides corporate legalservices to MediCor.  Fees of $510,885were paid to Sheppard Mullin for fiscal 2003.

 

Ms.Nikki Pomeroy, an adult daughter of Donald K. McGhan, Chairman of the Board, isa consultant to the Company and was paid $67,363 in fiscal 2003.  Additionally, shares held in variousentities beneficially owned or controlled by Ms Pomeroy total 1,445,844, notincluding shares owned or controlled by Ms. Pomeroy’s adult son.

** **

**Note M –Federal Income Taxes**

 

Thebenefit for income taxes reflected in the Consolidated Statements of Operationsfor the Company for the periods noted consist of:

 
|                                                  |   | **June 30,  2003** |       | **June 30,  2002** |       |
|-------------------------------------------------------|--------|--------------------|------------|--------------------|------------|
|                                                  |   |               |       |               |       |
| Current                                               |   | $                  | 1,814,778  |               | $          | 1,089,784 |   |
| Deferred                                              |   | 240,568            |       | 3,347,104          |       |
|                                                  |   |               |       |               |       |
| Total Benefit                                         |   | 2,055,346          |       | 4,436,888          |       |
| Less allowance  for realization of deferred tax asset |   | $                  | (2,055,346 | )                  | (4,436,888 | ) |
|                                                  |   |               |       |               |       |
| Benefit Net                                           |   | $                  | —     |               | $          | — |   |

 

F-16

----

 

Asof June 30, 2003, the Company recorded allowances of $6,492,224 and $4,436,888,respectively, against certain future tax benefits, the realization of which iscurrently uncertain.  Subsequent to theend of the periods noted, no deferred tax benefits were recorded as assets fortaxable losses of the Company.  Thedeferred differences related to certain accounts receivable anddepreciation/amortization not currently deductible as expenses under IRSprovisions.  Although the Companyrecorded this allowance to the deferred tax assets, the Company may still utilizethe future tax benefits from net operating losses for 20 years from the year ofthe loss to the extent of future taxable income.

 

Primarycomponents of the deferred tax asset at the periods noted were approximately asfollows:

 
|                                                   |   | **June 30,  2003** |      | **June 30,  2002** |   |
|--------------------------------------------------------|--------|--------------------|-----------|--------------------|--------|
|                                                   |   |               |      |               |   |
| Computed  expected income tax asset/(liability) at 34% |   | $                  | 1,814,778 |               | $      | 1,450,651 |   |
| Adjustments                                            |   |               |      |               |   |
| Net operating  loss                                    |   | 2,918,064          |      | 1,467,413          |   |
| Allowance for  bad debt                                |   | 1,071,617          |      | 1,089,784          |   |
| Warranty reserve                                       |   | 624,677            |      | 373,774            |   |
| Depreciation and  amortization                         |   | 63,088             |      | 55,256             |   |
|                                                   |   |               |      |               |   |
| Income tax  benefit                                    |   | $                  | 6,492,224 |               | $      | 4,436,878 |   |
| Less allowance  for realization of deferred tax asset  |   | (6,492,224         | )         | (4,436,878         | )      |
|                                                   |   |               |      |               |   |
| Deferred tax  asset, net                               |   | $                  | —    |               | $      | — |   |

 

**Note N –Loss per Share**

 

A reconciliation ofweighted average shares outstanding, used to calculate basic loss per share, toweighted average shares outstanding assuming dilution, used to calculatediluted loss per share, follows:

 
|                                          |   | **Year ended  June 30, 2003** |   | **Year ended  June 30, 2002** |   |
|-----------------------------------------------|--------|-------------------------------|--------|-------------------------------|--------|
|                                          |   |                          |   |                          |   |
| Weighted average  outstanding shares: basic   |   | 15,733,011                    |   | 11,693,937                    |   |
| Common  equivalent shares                     |   | —                        |   | —                        |   |
| Weighted average  outstanding shares: diluted |   | 15,733,011                    |   | 11,693,937                    |   |

 

Certain common equivalentshares have been excluded from the computation of diluted earnings per sharebecause their effect would be anti-dilutive. 

## ** **

## **F-17**

## ****

 

## **NoteO – Stock Options and Warrants**

## ** **

## **The Company has a stock optionplan for key employees and consultants.1,242,680 shares were reserved forissuance pursuant to the Company’s stock option plan and up to 3,038,356 shareswere reserved for issuance pursuant to stand-alone options granted inconnection with employment agreements. The Company accounts for those plans under the recognition andmeasurement principles of APB Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations. No stock-based employee compensation cost is reflected in net income, asall options granted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.**

## ** **

## **The Company’s share optionactivity and related information is summarized below:**

## ** **

|                                        |   | **Year Ended  June 30, 2003** |   |
|---------------------------------------------|--------|-------------------------------|--------|
|                                        |   | **Options**                   |   | **Weighted  Average  Exercise Price** |   |
|                                        |   |                          |   |   |   |
| Options  outstanding at beginning of period |   | 3,560,284                     |   | $ | 0.33 |   |
| Granted                                     |   | 1,155,695                     |   | $ | 1.05 |   |
| Exercised                                   |   | (1,130,842                    | )      | $ | 0.10 |   |
| Cancelled                                   |   | (546,781                      | )      | $ | 0.95 |   |
|                                        |   |                          |   |   |   |
| Options  outstanding at end of period       |   | 3,038,356                     |   | $ | 0.59 |   |

## ** **

## **The following table summarizesinformation about stock options outstanding at June 30, 2003:**

## ** **

| **Outstanding**               |   | **Exercisable**        |   |
|-------------------------------|--------|------------------------|--------|
| **Range of  Exercise Prices** |   | **Number of  Options** |   | **Weighted  Average  Remaining  Years of  Contractual  Life** |   | **Weighted  Average  Exercise  Price** |   | **Number of  Options** |   | **Weighted  Average  Exercise********Price** |   |
|                          |   |                   |   |   |   |   |   |   |   |   |   |
| $ 0.05 - $0.10                |   | 1,606,164              |   | 2.58 |   | $ | 0.08 |   | 1,522,283 |   | $ | 0.07 |   |
| $ 1.00 - $2.01                |   | 1,432,194              |   | 4.07 |   | $ | 1.17 |   | 580,949 |   | $ | 1.25 |   |

## ** **

## **The following table illustratesthe effect on net income and earnings per share if the Company had applied thefair value recognition provisions of FASB Statement No. 123, “Accounting forStock-Based Compensation,” to stock-based employee compensation including therequired disclosures of FAS 148..**

## ** **

## **F-18**

## ****

##  

|                                                                                                                                                |   | **Year Ended  June 30, 2003** |       | **Year Ended  June 30, 2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|------------|-------------------------------|--------|
|                                                                                                                                                |   |                          |       |                          |   |
| Net Loss, as  reported                                                                                                                              |   | $                             | (5,189,731 | )                             | $      | (8,217,559 | ) |
| Deduct:  Total stock-based employee compensation  expense determined  under fair value based method for all awards, net of related tax effects |   | (192,537                      | )          | (16,649                       | )      |
|                                                                                                                                                |   |                          |       |                          |   |
| Pro forma net  loss                                                                                                                                 |   | $                             | (5,382,268 | )                             | $      | (8,234,208 | ) |
|                                                                                                                                                |   |                          |       |                          |   |
| Loss per share:                                                                                                                                     |   |                          |       |                          |   |
| Basic and  diluted                                                                                                                                  |   | $                             | (0.33      | )                             | $      | (0.71 | ) |
|                                                                                                                                                |   |                          |       |                          |   |
| Basic and  diluted - pro forma                                                                                                                      |   | $                             | (0.34      | )                             | $      | (0.71 | ) |

 

These pro forma amounts may not be representative of future disclosuressince the estimated fair value of stock options is amortized to expense overthe vesting period, and additional options may be granted in future years.

 

The estimated fair value of each MediCor option granted is calculatedusing the Black-Scholes pricing model. The weighted average assumptions used in the model were as follows:

 
|                           |   | **2003** |   | **2002** |       |
|--------------------------------|--------|----------|--------|----------|------------|
| Risk-free  interest rate       |   | 3.5      | 0%     |     | 6.00-6.50% |   |
| Expected years  until exercise |   | 6        | Years  |     | 3-4 Years  |   |
| Expected stock  volatility     |   | 0.       | 0%     |     | 0.0%       |   |
| Dividend yield                 |   | 0%       |   |     | 0          |   |
|                                |        |          |        |          |            |  |  |

 

 

## **The Company also issued warrantsto purchase 86,988 shares of common stock to consultants in connection withconsulting agreements. Warrants were granted between 1999 and 2001 at pricesbetween $.08 and $1.61.  All warrantsgranted had an exercise price equal to the market value of the underlyingcommon stock on the date of grant.**

## ** **

## **NoteP – Acquisitions**

## ** **

## **On February 7, 2003, SC MergerCorp., Ltd., a British Virgin Islands company and wholly owned subsidiary ofthe Company, merged with and into III, a British Virgin Islands company, withIII as the surviving entity.  The mergerhas been accounted for as a reverse acquisition.  In accordance with Statement of Financial Accounting StandardsNo. 141, for accounting purposes III has been treated as the continuingreporting entity that acquired Scientio, Inc. Therefore, the reports filed by the Company after the reverseacquisition parallel the financial reporting required under generally acceptedaccounting principles as if III were the legal successor to Scientio, Inc.’sreporting obligation as of the date of the merger.  The Annual Report on Form 10-KSB is filed based on the fiscalyear of III, the accounting acquirer. In accordance with Statement of Financial Accounting Standards No. 141,the Company has included in its results of operations for the year ended June30, 2003 the results of Scientio, Inc. from February 7, 2003.  In the merger, all of the outstanding sharesof capital stock of III were converted into an aggregate of 15,079,439 sharesof common stock of the Company based on a conversion ratio of 1.24268 shares ofCompany common stock for each outstanding share of III capital stock.  As part of the conversion, all outstandingpreferred stock of III was converted into common shares of the Company.  Additionally, 661,900 shares were issued toshareholders of Sciento, Inc.in conjunction with the merger.**

## ** **

## **On March 18, 2003, the Companyacquired all of the outstanding shares of capital stock of IntellectualProperty International Inc., a Delaware corporation (“IPI”), an intellectualproperty holding company, in consideration of the issuance of an aggregate of600,000 shares of the Company’s common stock to the stockholders of IPI.  As a result of the acquisition the Companyacquired patents valued at $3,000,000. **

## ** **

## **F-19**

## ****

##  

## **NoteQ - Business Segment Information**

 

The Company operates as asingle business in multiple geographic locations within the U.S. andinternationally in the medical device technology segment of the medical/healthcare market, and as such does not have multiple segments to report.  Revenues from customers attributable to any individualforeign country were not material.

** **

**Note R – Commitments and Contingencies**

 

The Company has receiveda written commitment from International Integrated Industries, LLC, anaffiliate of the Company’s chairman, to provide sufficient cash to fund anyoperating loss through July 1, 2004.  Thesame entity has provided the Company an aggregate of over $22 million infunding from the Company’s inception through June 30, 2003.  The future funding may take the form of debtor equity or a combination thereof.

 

Pursuant to an AssetPurchase Agreement signed April 25, 2002, the Company agreed to acquiresubstantially all of the assets of a privately-held United States medicalproducts distributor.  The maximumpurchase price under the agreement is $10,000,000, subject to downwardadjustments based on the time elapsed before closing.  The closing is conditioned upon the distributor acquiringnecessary governmental approvals for commercialization in the United Stated ofthe products to be distributed, which the Company anticipates will occur beforethe end of the second quarter of fiscal 2004. The Company is making weekly deposits of $50,000 against the adjustedpurchase price.  As of June 30, 2003,deposits paid totaled $3,200,000.

 

InOctober 1999, June 2000, and July 2003, separate but related complaints werefiled by Saul Kwartin,  Steven M.Kwartin, and Robert and Nina Kwartin respectively, and various other unnamedplaintiffs, against III Acquisition Corporation, a Delaware corporation (whichoperates under the tradename PIP.America), a subsidiary of MediCor, asco-defendant with PIP/USA, Inc. and Poly Implants Prostheses, S.A., eachunaffiliated with MediCor, and Jean Claude Mas and our chairman, personally, inthe Circuit Court of Miami-Dade County, Florida.  In the first two cases, plaintiffs purport to be shareholders ofPIP/USA, Inc. suing derivatively on its behalf, and seeking to rescind varioustransactions between PIP.America and PIP/USA, Inc. and seek to impose liabilityagainst PIP.America and its co-defendants for unspecified monetary damagesarising out of alleged tortuous and other purported wrongful acts concerningalleged relationships between plaintiffs, PIP/USA, Inc. and Poly ImplantsProstheses.  In the third case, filed in2003, MediCor is named but has not yet been served, but does anticipate being adefendant.  

 

PeggyWilliams v. PIP/USA, Case No. 03 CH 9654, Jessica Fischer Schnebel, etc, et al.v. PIP/USA, Inc., Case No. 03CH07239, Dawn Marie Cooper, etc. et al. v.PIP/USA, Inc., Case No. 03CH11316, Miriam Furman etc. et al. v. PIP/USA, Inc.,Case No. 03CH10832 & Karen S. Witt etc. et al. v. PIP/USA, Inc., Case No.03CH12928 were filed in the Circuit Court of Cook County, Chancery Division, inor around July 2003.

 

F-20

----

 

Eachis styled as a “class action.” PIP.America is a defendant in one of the cases.  The other four cases name PIP/USA, Inc., theformer U.S. distributor for Poly Implants Prostheses breast implants and PolyImplants Prostheses, although plaintiffs incorrectly refer in the complaints toPIP.America as a d/b/a of PIP/USA. Plaintiffs purport to sue on behalf of themselves and an alleged classof persons allegedly similarly situated for unspecific monetary damages,exemplary damages, attorneys fees and costs, injunctive relief and damagesunder the Illinois Consumer Fraud Act.

 

SalinasI. Landers, etc. et al. v. Poly Implants Prostheses, etc. et al., Case No. CV030377, was filed in June 2003 in the Superior Court of San Luis Obispo County,California.  Plaintiffs purport to sueon behalf of themselves and an alleged class of persons allegedly similarlysituated for unspecific monetary damages, exemplary damages, attorneys’ feesand costs and injunctive relief for alleged breach of express warranty andalleged violations of California’s Song-Beverly Consumer Warranty Act andUnfair Competition Law.  PIP.America hasfiled a demurrer challenging the sufficiency of plaintiffs’ allegations, whichis scheduled to be heard on October 7, 2003. 

 

MarshaDicken etc. et al. v. PIP/USA, Inc. etc. et al., Case No. 2003-05588, was filedin or around July 2003 in the District Court of Harris County, Texas.  Plaintiffs purport to sue on behalf ofthemselves and an alleged class of persons allegedly similarly situated foralleged strict liability, breach of express warranty, breach of impliedwarranties, violation of Section 402B of the Restatement (Second) of Torts,negligence, misrepresentations, and violation of Texas’ Deceptive TradePractices Act with respect to implant products.  Plaintiffs seek unspecific compensatory damages, additionalstatutory damages, interest, attorneys’ fees and costs.  The court has scheduled a pretrialconference to be held on June 18, 2004, and has specified that a trial datewill be set shortly thereafter.  

 

Thoughit is not yet possible to predict the outcome of the cases above, MediCor hasdenied plaintiffs’ allegations and is vigorously defending againstcertification of any class, and upon the merits of each lawsuit.  While we are desirous to honor ourobligations under warranty provisions, we are fully indemnified by bothPIP/USA, Inc. Poly Implants Prostheses, and Poly Implants Prostheses’ PresidentJean Claude Mas personally, from all claims, including those asserted above,and thus believe the costs associated with such matters will not have amaterial adverse impact on our business, results of operations or financialposition.

 

PIP.Americahas and will continue to be periodically named as a defendant in other lawsuitsin the normal course of its business, including product liability and productwarranty claims asserted against PIP.America. Litigation, particularly product liability litigation, can be expensiveand disruptive to normal business operations and the results of complex legalproceedings can be very difficult to predict. Claims against PIP.America have been and are periodically reviewed withcounsel in the ordinary course of business. We presently believe we have meritorious defenses in all lawsuits inwhich we or any of our subsidiaries are defendants.  While it is not possible to predict the outcome of such matters,we believe that the costs associated with such matters will not

 

F-21

----

 

havea material adverse impact on our business, results of operations or financialposition.  As of June 30, 2003, therehas been no liability recorded for any of these actions as the probable outcomeof these actions cannot be determined at this time.

 

The Company leasedoffice, manufacturing and warehouse facilities and office equipment undervarious terms.  Lease expenses amountedto $519,398 and $572,777 for the years ended June 30, 2003 and 2002,respectively.  Future minimum leasepayments are approximated as follows:

 
| **Year ended  June 30,** |   | **Amount** |   |
|--------------------------|--------|------------|--------|
|                     |   |       |   |
| 2004                     |   | 220,259    |   |
| 2005                     |   | 234,137    |   |
| 2006                     |   | 251,118    |   |
| 2007                     |   | 268,290    |   |
| 2008                     |   | 175,253    |   |

 

F-22

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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, SC Merger 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, Commission File No. 333-64420) |
| 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 Certificate of Incorporation of the Registrant                                                                                                                                                                                                                                                                                                                           |
| 3.3             |   | Amended and Restated  Bylaws of the Registrant                                                                                                                                                                                                                                                                                                                                                        |
| 10.1*           |   | Securities Purchase  Agreement, dated as of March 18, 2003, by and among the Registrant, Graeco2,  Limited and AAB Corporation (incorporated by reference to Exhibit 10.2 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31,  2003, Commission File No. 333-64420)                                                                                               |
| 10.2*           |   | Asset Purchase  Agreement, dated as of April 19, 2002                                                                                                                                                                                                                                                                                                                                                 |
| 10.3            |   | MediCor Ltd. 1999  Amended and Restated Stock Compensation Program                                                                                                                                                                                                                                                                                                                                    |
| 10.4            |   | Lease Agreement between  the Registrant and Skyview Business Park, LLC                                                                                                                                                                                                                                                                                                                                |
| 10.5            |   | Lease Agreement  Addendum between the Registrant and Skyview Business Park, LLC                                                                                                                                                                                                                                                                                                                       |
| 10.6            |   | Employment Agreement  dated June 2, 2003 between the Registrant and Thomas R. Moyes                                                                                                                                                                                                                                                                                                                   |
| 10.7            |   | Option Agreement dated  July 18, 2003 between the Registrant and Thomas R. Moyes                                                                                                                                                                                                                                                                                                                      |
| 10.8            |   | Form of Consultant  Warrant                                                                                                                                                                                                                                                                                                                                                                           |
| 10.9            |   | Form of Employee Stock  Option                                                                                                                                                                                                                                                                                                                                                                        |
| 10.10*          |   | Amendment No. 1 to  Asset Purchase Agreement, dated as of November 20, 2002                                                                                                                                                                                                                                                                                                                           |
| 21              |   | Subsidiaries of the  Registrant                                                                                                                                                                                                                                                                                                                                                                       |
| 31.1            |   | Principal Executive  Officer Certification Pursuant To 17 C.F.R. Section 240.15d-14(a)                                                                                                                                                                                                                                                                                                                |
| 31.2            |   | Principal Financial  Officer Certification Pursuant To 17 C.F.R. Section 240.15d-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-1

----