**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

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**FORM 10-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, 2005**                                                                                                                                                                                                                                                                                                                                                                                                                                          |
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| **or**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
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| **o**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
| **For  the transition period from                                        to                                     ** |

 

**Commission file number 0-50442**

 

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**MEDICOR LTD.**

(Name of Small Business Issuer in ItsCharter)

 
| **Delaware**                                           | ** ** | **14-1871462**       |
|--------------------------------------------------------|------------|----------------------|
| (State or Other  Jurisdiction                          | ** ** | (I.R.S. Employer     |
| of Incorporation  or Organization)                     | ** ** | 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) |

 

Securitiesregistered under Section 12(b) of the Exchange Act:

**None**

 

Securitiesregistered under Section 12(g) of the Exchange Act:

**Common Stock, Parvalue $0.001 per share**

 

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Checkwhether the issuer:  (1)  filed allreports required to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý    No o

 

Checkif there is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B contained in this form, and no disclosure will becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-KSBor any amendment to this Form 10-KSB. o

 

Theissuer’s revenues for the most recent fiscal year: $26,958,547.

 

Theaggregate market value of voting and non-voting common equity held bynon-affiliates as of September 26, 2005 was approximately $31,099,661,based on the average bid and asked prices on the OTC Bulletin Board on thatdate.

 

OnSeptember 26, 2005, there were 20,343,157 shares of common stock outstanding.

 

Transitional Small BusinessDisclosure Format (Check one) Yes oNo ý

 

 

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**MEDICOR LTD.Annual Report on Form 10-KSBFor the Fiscal Year Ended June 30, 2005TABLE 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 or Plan of Operation                                                         |   |
| Item 7.                                                                                                                                         | Financial Statements                                                                                                    |   |
| Item 8.                                                                                                                                         | Changes in and Disagreements  with Accountants on Accounting and Financial Disclosure                                   |   |
| Item 8A.                                                                                                                                        | Controls and Procedures                                                                                                 |   |
|                                                                                                                                            |                                                                                                                    |   |
| **PART III**                                                                                                                               |                                                                                                                    |
|                                                                                                                                            |                                                                                                                    |   |
| Item 9.                                                                                                                                         | Directors, Executive Officers,  Promoters and Control Persons; Compliance with Section 16(a) of the Exchange  Act  |   |
| Item 10.                                                                                                                                        | Executive Compensation                                                                                                  |   |
| Item 11.                                                                                                                                        | Security Ownership of  Certain Beneficial Owners and Management and Related Stockholder Matters                         |   |
| Item 12.                                                                                                                                        | Certain Relationships and  Related Transactions                                                                         |   |
| Item 13.                                                                                                                                        | Exhibits                                                                                                                |   |
| Item 14.                                                                                                                                        | Principal Accountant Fees  and Services                                                                                 |   |
|                                                                                                                                            |                                                                                                                    |   |
| Supplemental  Information to be Furnished with Reports Filed Pursuant to Section 15(d) of  the Exchange Act by  Non-Reporting Issuers |                                                                                                                    |
|                                                                                                                                            |                                                                                                                    |
| Signatures                                                                                                                                      |                                                                                                                    |
|                                                                                                                                            |                                                                                                                    |
| Financial  Statements                                                                                                                           |                                                                                                                    |

 

This report contains trademarks and trade names thatare the property of MediCor Ltd. and its subsidiaries, 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 Annual Report on Form 10-KSB (including the section regardingManagement’s Discussion and Analysis or Plan of Operation) contains forward-lookingstatements regarding our business, financial condition, results of operationsand 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-looking statements in this AnnualReport on Form 10-KSB reflect the good faith judgment of our management,such statements can only be based on facts and factors currently known byus.  Consequently, forward-lookingstatements are inherently subject to risks and uncertainties and actual resultsand outcomes may differ materially from the results and outcomes discussed inor anticipated by the forward-looking statements.  Factors that could cause or contribute tosuch differences in results and outcomes include without limitation thosediscussed under the heading “Risks and Uncertainties” below, as well as thosediscussed elsewhere in this report on Form 10-KSB.  Readers are urged not to place undue relianceon these forward-looking statements, which speak only as of the date of thisreport on Form 10-KSB.  We undertakeno obligation 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 urgedto carefully review and consider the various disclosures made in this report,which attempt to advise interested parties of the risks and factors that mayaffect our business, financial condition, results of operations and prospects.

 

We file reports with the Securities and ExchangeCommission (“SEC”).  We electronicallyfile our Annual Reports on Form 10-KSB, quarterly reports on Form 10-QSB,current reports on Form 8-K and amendments to those reports with theSEC.  You can read and copy any materialswe file with the SEC at its Public Reference Room at 450 Fifth Street, NW,Washington, DC 20549.  You can obtainadditional information about the operation of the Public Reference Room bycalling the SEC at 1-800-SEC-0330.  Inaddition, the SEC maintains an Internet site (www.sec.gov) that containsreports, proxy and information statements, and other information regardingissuers that file electronically with the SEC, including us.

 

***ITEM 1. BUSINESS***

 

MediCor Ltd. is a global health care company thatacquires, develops, manufactures and markets products primarily for theaesthetic, plastic surgery and dermatology markets.  Current products include breast implants,other implants and scar management products. The Company’s breast implant products are currently sold inapproximately 70 countries, but are not sold in the United States orCanada.  Foreign (non-U.S.) sales arecurrently about 95% of total sales, with the largest country (Brazil)accounting for about 13% of sales.  Wesell our products to hospitals, surgical centers and physicians, primarilythrough distributors, as well as through direct sales personnel.

 

**Company History and BusinessStrategy**

 

MediCor was founded in 1999 by chairman of the boardDonald K. McGhan, the founder and former Chairman and Chief Executive Officerof Inamed Corporation, McGhan Medical and McGhan Limited.  Our objective is to be a leading supplier ofselected international medical devices and technologies.  To achieve this objective, we intend to buildupon and expand our business lines, primarily in the aesthetic, plastic andreconstructive surgery and dermatology markets. We intend to accomplish thisgrowth through the expansion of existing product lines and offerings andthrough the acquisition of companies and other assets, including intellectualproperty rights and distribution rights. We believe that the acquisition of Eurosilicone SAS in July 2004has had a material, positive impact on our historical sales and cash flow,increasing sales from about $1.4 million for the year ending June 30, 2004to about $27 million for the year ending June 30, 2005 (as furtherdetailed in the accompanying financial statements).

 

**Products**

 

Currently, MediCor hastwo main product lines:

 

•                  breast implants for aesthetic plastic andreconstructive surgery and

•                  scar management products.

 

***Breast implant products***

 

Our primary product line is breast implants,accounting for about 94%of total sales for the year ended June 30, 2005.With the acquisition of Eurosilicone in July 2004, we have become the thirdlargest breast implant manufacturer in the world in terms of sales, with anestimated 17% of the non-U.S. market. Sales in foreign (non-U.S.) countries are currently about 95% of totalsales, with the largest country accounting for about 13% of sales.  Eurosilicone also manufactures a broad lineof other implant products targeted for the aesthetic, cosmetic andreconstructive markets, including gluteal, calf, pectoral, malar

 

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and testicularimplants, as well as external breast prosthesis, which account for less than 4%of total sales.  These other productsaccount for approximately 5% of total sales. The financing for the Eurosilicone acquisition was primarily providedthrough additional loans from International Integrated Industries, LLC, anaffiliate of MediCor’s chairman, as more fully described in the financialstatements and notes.

 

In addition, we currently are participating, directlyor indirectly, in two PMA applications to bring breast implant products intothe United States.  The likelihood andtiming of obtaining FDA approval are uncertain as is the timing ofcommercialization in the United States for these or other products.

 

***Scar Management Products***

 

Biodermis, one of our subsidiaries, competes in thescar management market and distributes products used in the prevention andmanagement of visible scar tissue known as keloid and hypertrophic scars. Salesfrom these products contributed about 6% of total sales for the year ended June 30,2005.  The Biodermis products achievetherapeutic results by encapsulating the scar tissue with a soft, malleable,semi-occlusive polymer in the form of sheets and ointments that are believed tomimic the natural barrier function of the skin, improving the condition andappearance of scars. In the United States, the products are marketed under thenames EpiDermTM silicone gel sheeting and XeragelTMsilicone ointment.Internationally, the same products are also marketed under the names TopiGelTM and DermaSofTM.

 

Biodermis’ secondary product lines consist mainly oftwo products, EPIfoamTM and HydroGOLDTM. EPIfoam is a silicone backed, polyurethane foam utilized post-lipectomyto assist in recovery and enhance the overall aesthetic appearance followingliposuction.  HydroGOLD is ahydrogel-based product for use in reducing the pain, discomfort and burningsensation frequently associated with procedures of the skin typically aimed atreducing fine lines and wrinkles and to eliminate or reduce the signs of aging,such as laser resurfacing, chemical peels and micro-dermabrasion.  Additionally, a portion of Biodermis’ revenueis derived from original equipment manufacturing of scar management andpost-operative care products for other medical device companies who then sellthe products under their own brand names. To assure quality control and proper regulatory compliance, Biodermisretains all responsibilities related to the FDA and European CE-markcertification and regulatory compliance related to manufacturing activities.Some of these companies are allowed to compete for sales in similar markets andfor similar customers against Biodermis’ distributors and direct sales staff.

 

**Sales and Marketing**

 

We sell our products primarily through independentdistributors worldwide, as well as through a small direct sales force.  We reinforce our sales and marketing programwith appearances at trade shows, advertisements in trade journals,telemarketing and sales brochures.

 

***BreastImplants***

 

We sell our Eurosilicone breast implant and otherproducts in over 70 countries (other than the United States and Canada),primarily through approximately 50 third-party distributors. Currently, we areawaiting completion of the required FDA submissions and FDA clearance to sellsaline filled breast implants in the United States. The FDA approved PMAapplications for two competitors’ saline filled products in 2000.  We believe that the FDA will approve otherPMA applications for saline filled devices in the future following submissionand their review of complete PMA applications.

 

Our strategy to gain entry into the U.S. saline filledbreast implant market relies upon our contractual agreements with independentparties with whom we are working to obtain FDA approval of their PMAapplications.  The PMA application forthe Biosil inflatable saline breast implant has been submitted in moduleformat, and we are addressing observations arising from the FDA review of theapplication. The four-year interval clinical trial data is currently beinganalyzed and will be submitted as a PMA amendment following completion of thatanalysis.  Although we anticipatesubmitting the appropriate data in response to the FDA’s observations andguidance in late 2005, there can be no assurance of timing, review or decisionconcerning the PMA application. We are also continuing to work with PolyImplants Protheses, S.A. (“PIP”) in furtherance of the PMA application for PIP’spre-filled saline breast implant.  We arecurrently assisting in the collection of appropriate data through its ongoingclinical trial.  We intend to submit thePMA application to the FDA upon satisfactory completion of data collection andanalysis. Although we anticipate submission of the completed PMA applicationduring 2006, there can be no assurance of timing, review or decision concerningthe PMA application.  Although we are notthe manufacturer we do and will continue to provide technical and otherassistance with the clinical trials and regulatory efforts.

 

In January 2004, the FDA issued Draft Guidancefor Saline, Silicone Gel, and Alternative Breast Implants.  While this guidance applies to all types ofbreast implants, it is most significant in understanding the new requirementsfor silicone gel breast implants.  Weanticipate that this guidance will be the basis for the FDA’s review of PMAapplications, including those relating to saline filled implants, goingforward. Although, there have been regulatory actions on silicone filled breastimplants since issuance of the new guidelines, the FDA’s interpretation andunderstanding of the new guidance has yet to be demonstrated through formaldecisions concerning final approval of any applications.  No public review by the FDA of anyalternative breast implants has been undertaken.

 

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Our strategy to enter the U.S. market for silicone gelbreast implants is based upon our products currently manufactured and marketedoutside the United States.  In April 2005,an FDA advisory panel reviewed the PMA application for each of our twocompetitors and recommended approval for one and disapproval for theother.  Consistent with the panelrecommendation, in July 2005, the FDA issued a letter to one of thesecompetitors indicating that its application was in approvable form.  Customarily, within a few months followingissuance of such a letter the FDA approves the PMA application.  It is currently unclear what decision the FDAwill make regarding the other application. We intend to initiate clinical trials and PMA applications in the UnitedStates in the future in accordance with current FDA guidance and based onproduct lines marketed internationally. The FDA evaluates each PMA applicationon its own merits and independently of competing applications.  There can be no assurance that our clinicaltrial and PMA application efforts in the future will lead to FDA approval ofany such application.

 

Our earlier distribution of saline-filled products inthe United States was based upon the manufacturers having obtained what isknown as 510(k) regulatory status for the devices.  This refers to a section of FDAregulations that permits the marketing of medical devices without a PMA.  Following the approval in 2000 of twocompetitors’ PMA applications for saline breast implants, we were notified thatdirect sales of the PIP implants to customers would be suspended until thespecific products we were distributing received a PMA. The private companysponsors for both the PIP and Biosil PMA applications were pursuing their PMA applicationsfrom 1999-2000, but unlike the large U.S.-based manufacturers, neither had aU.S. clinical trial underway at the time of the FDA’s call for PMAs for salinebreast implants. In addition, neither sponsor had extensive FDA or PMAexperience.  As a result, neither PMAapplication advanced as quickly as may have occurred if it previously had moresignificant funding and expertise. Nonetheless, each PMA application has sinceadvanced in a reasonable manner as we have more recently become more involved inproviding assistance and expertise to enhance the prospects for success andtiming of the PMA applications. As is customary in the PMA application process,through ongoing dialogue with the FDA, each of the PMA sponsors has continuedto amend and refine its regulatory submissions, including their presentationsof clinical study data and each continues an ongoing dialogue with the FDAconcerning their applications. The FDA’s approval of either or both of thesePMA applications will provide regulatory clearance to resume our distributionof saline breast implants in the United States.

 

***ScarManagement Products***

 

In the United States, Biodermis distributes itsproducts to dermatologists, dermatological surgeons, aesthetic plastic andreconstructive surgeons and Obstetric/Gynecologists through a combination of adirect sales force and a distributor. Internationally, Biodermis distributes tothe same fields of medicine through approximately 70 distributors in about 50countries, including Canada and Mexico.

 

**Competition**

 

***Breast Implants***

 

We face competition in every aspect of our business,and particularly from other companies that acquire, develop, manufacture ormarket breast implants and breast implant related products. Currently, weconsider our primary competitors in the U.S. breast implant market to be InamedCorporation and Mentor Corporation.  Inthe near term, as we bring products currently scheduled for U.S. distributionto the U.S. market, we will offer only saline filled implants, while Inamed andMentor will offer saline and silicone filled implants.  In the future we may bring a full line ofimplant types to the U.S. market. Through Eurosilicone, we compete internationally with severalmanufacturers and distributors, including Inamed Corporation, MentorCorporation, Silimed, S.A. Poly Implants Protheses, S.A., Nagor Limited,Laboratories Sebbin S.A., and Laboratoire Perouse Implant S.A.  In these international markets, we offer abroad line of saline and silicone filled implants although approximately 96%are silicone implants; these include various sizes, shapes, textures andcohesiveness, to compete across the various available product offerings of ourcompetition.

 

We believe that the principal factors that will allowour products to compete effectively are high-quality product consistency,product design, broad product array, management’s knowledge of and sensitivityto market demands, plastic surgeons’ familiarity with our management andproducts, and our sales and marketing efforts.

 

***Scar Management Products***

 

Currently, we estimate there are approximately 15companies in the United States and international markets competing for marketshare among dermatologists and plastic and reconstructive surgeons for productsthat are competitive with those of Biodermis. EpiDerm, also sold as DermaSofand TopiGel, and Xeragel comprise Biodermis’ principal product line and competeagainst such product lines as “Cica Care,” by Smith and Nephew, “ReJuveness,”by ReJuveness Pharmaceuticals, “Kelo-Cote” by Advanced Bio-Technologies, Inc.,“New Beginnings,” by PMT Corporation, and others.

 

EPIfoam post-operative compression foam has no directproduct-type competition.  However, itcompetes to some extent with a product known as “Reston” foam, manufactured by3M, a piping and insulation product which is occasionally used

 

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off-label bysurgeons.  HydroGOLD hydrogel sheetingcompetes against such products as “2nd Skin,” by Spenco Corp. and “HydraSkin”by HydraSkin Corp.

 

**Researchand Development**

 

We use employee and independent consultant scientists,engineers, and technicians to work on material technology and product design aspart of our research and development efforts. Our research and developmentexpense is currently primarily directed toward supporting the clinical trialsof our manufactured products or products which we seek to distribute for thirdparties.  In addition, we direct researchand development toward development or acquisition of new and improved products basedon scientific advances in technology and medical knowledge, together with inputfrom the surgical profession.  We haveincurred expenses of $2,691,333 and $2,149,049 for the years ended June 30,2005 and 2004, respectively, for research and development.  The increase was attributed to non-recurringexpenses of $148,082 incurred in obtaining required government approvals forthe PIP saline breast implants and $394,202 for other expenses relating to thedevelopment of product lines.

 

**Patents,Licenses, and Related Agreements**

 

We currently own or haveexclusive license rights to numerous patents, patent applications, trademarksand trademark applications throughout the world.  Although we believe our patents and patentrights are valuable, our technical knowledge with respect to manufacturingprocesses, 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 andintellectual property rights.

 

Our intellectual property includes trademarks, patentsand trade secret information. Our trademarks cover a large percentage of ourcommercial products.  Most marks areregistered in the United States, some are registered outside the United Statesand additional registrations are being pursued. Our current commercial breast implant line is manufactured anddistributed completely outside the United States.  Its design technology and manufacturingtechnology are considered trade secrets. United States patents to which we have acquired ownership and thecorresponding foreign patents protect technology under investigation in theresearch and development of a new generation of breast implant fillers, shellmaterial and component design.  While weare hopeful that this research will produce proprietary products, we cannotassure that any developments will be commercialized or that any of our currentpatents will be material.  Another U.S.patent protects a minor product in our dermatology and wound care offerings.

 

All patents mentioned in the preceding discussion(except that covering dermatology) were acquired through the acquisition ofIntellectual Property International, Inc. The patents currently expire at various dates from November 2009 toMay 2024.  Additional patents arepending in the United States and in the European community based on newimprovements to the specific technology portfolio so acquired.

 

**Manufacturing and Raw Materials**

 

***Breast implants***

 

Our Eurosilicone productsare manufactured at the Eurosilicone facility in Apt, France. These productsare produced in controlled environments utilizing specialized equipment forprecision measurement, quality control, packaging and sterilization at athird-party location.  The Eurosiliconefacility and its operations are subject to standards and government regulationand inspection for manufacturing facilities similar to the U.S.

 

Prior to 2000, we soldbreast implants manufactured in France by PIP. These products were also produced in controlled environments utilizingspecialized equipment for precision measurement, quality control, packaging,and sterilization.   The manufacturingactivities for products sold in the U.S. are subject to FDA regulations andguidelines, and these products and their manufacturing procedures were reviewedby the FDA prior to the FDA’s call for a pre-marketing approval for salinebreast implants in 2000.  Poly ImplantsProtheses’ manufacturing activities are also subject to regulatory requirementsand periodic inspections by European regulatory agencies.

 

There are a very fewqualified suppliers of high quality, 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 a single-sourcesupplier.   Eurosilicone relies upon onemanufacturer for its silicone raw material supplies, the same supplier used byour two largest competitors.

 

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***Scar Management Products***

 

Biodermis has developedproduct lines though original equipment manufacturer vendors.  These vendors are single-source suppliers dueto the highly specialized nature of the products and the regulatoryrequirements for the manufacturing of the products.  Biodermis is responsible for the governmentalregulatory submissions for the products they distribute, as well as a requiredvendor audit program and internal controls for all aspects of product flowthrough the facility.

 

In the event we build 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 are very fewqualified suppliers of the raw materials required for the Biodermis products inthe world.  To the extent we build oracquire scar management product manufacturing capability, we will most likely berequired to purchase our raw material supplies for our products from one ofthese suppliers.

 

***Environmental Compliance***

 

Our manufacturing facilities are regulated by variousnational, state, regional and local laws. We believe that our operations are incompliance with all applicable laws and we received no citations or notices ofviolations in fiscal 2005. We expect to incur some expenses in fiscal 2006 tomaintain our compliance level.

 

**Government Regulation**

 

Medical devices are subject to regulation by the FDA,state agencies and, in varying degrees, by foreign government health agencies.These regulations, as well as various U.S. federal and state laws, govern thedevelopment, clinical testing, manufacturing, labeling, record keeping, andmarketing of these products.  Themajority of our product candidates must undergo rigorous testing and anextensive government regulatory approval process prior to sale in the UnitedStates and other countries.  The lengthyprocess of seeking required approvals and the continuing need for compliancewith applicable laws and regulations require the expenditure of substantialresources.  Regulatory approval, when andif obtained, may be limited in scope, and may significantly limit the indicateduses for which a product may be marketed. Approved products and their manufacturers are subject to ongoing review,and discovery of previously unknown problems with products may result inrestrictions on their manufacture, sale, or use or their withdrawal from themarket.

 

***Regulation of Medical Devices***

 

Our current products are medical devices intended forhuman use and are subject to regulation by FDA in the United States. Unless anexemption applies, each medical device we market in the U.S. must have a 510(k)clearance or a pre-market approval (PMA) in accordance with the federal Food,Drug, and Cosmetic Act of 1976, as amended. FDA regulations generally requirereasonable assurance of safety and effectiveness prior to marketing, includingsafety data obtained under approved clinical protocols.  FDA regulation divides medical devices intothree classes.  Class I devices aresubject to general controls that require compliance with device establishmentregistration, product listing, labeling, good manufacturing practices and othergeneral requirements. Class II devices are subject to special controls inaddition to general controls. Class III devices are subject to the mostextensive regulation and in most cases require submission to the FDA of a PMAapplication that includes data, including clinical data, supporting the safetyand effectiveness of the device. Manufacturing must comply with the FDA’s Quality System Requirementsfor   “good manufacturing practices,” andthe compliance is verified by detailed FDA inspections of manufacturingfacilities. These regulations also require reporting of product defects to theFDA.  Periodic reports must be submittedto the FDA, including any descriptions of any adverse events reported.  The majority of our products are regulated asClass III medical devices.  Theadvertising, promotion and distribution of medical devices are regulated by theFDA and the Federal Trade Commission (“FTC”) in the U.S.

 

Products marketed in the European Community mustcomply with the requirements of the European Medical Device Directive, or MDD,and must be CE-marked. Medical device laws and regulations similar to thosedescribed above are also in effect in many of the other countries to which weexport our products.  These range fromcomprehensive device approval requirements for some or all of our medicaldevice products to requests for product data or certifications.  Our Eurosilicone breast implant line marketedoutside the United States has received the European CE mark and has beenregistered or approved for sale in other markets.  The CE Mark provides sufficient regulatorystatus for the products to be marketed throughout most of the European andeastern European countries. In Central and South America, Eurosilicone has receivedregulatory approval for its breast implant line in several countries, includingBrazil and Argentina. Eurosilicone’s breast implant product line has alsoreceived approval from the TGA in Australia. Regulatory registration has beenachieved in China.  Russian authoritieshave authorized registration for Eurosilicone’s breast implants and a varietyof Eurosilicone’s other implantable silicone devices.  Eurosilicone also distributes its breastimplant product line in several countries that do not require additionalregulatory approval.

 

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Failure to comply with these domestic andinternational regulatory standards and requirements could affect our ability tomarket and sell our products in these countries.  The current regulatory status of our Biodermisproducts is discussed in the “Manufacturing and Raw Materials” section above.  The current regulatory status of theEurosilicone products and the breast implant products we distribute isdiscussed above and in the “Company History and Business Strategy” section above.Failure to comply with FDA regulations could result in requirements by the FDAto correct such conditions while allowing the affected products to remain onthe market.  In more serious situations,failure to comply with FDA regulations could result in products being recalledand/or products being prevented from sale in the United States or preventedfrom exportation abroad.

 

***Regulation of Manufacturing***

 

For medical devices sold in the United States themanufacturing processes and facilities are subject to continuing review by theFDA and various state and other national agencies.  These agencies inspect quality systems andfacilities from time to time to determine whether they are in compliance withvarious regulations relating to manufacturing practices and otherrequirements.  Facilities thatmanufacture products sold in the U.S. must comply with the FDA’s Quality SystemRegulation requirements for good manufacturing practices.  For products sold in Europe, we mustdemonstrate compliance with the ISO 13485 and EN 46000 international qualitysystem standards.  The regulatory statusof our manufacturing facilities is discussed under “Manufacturing and RawMaterials” above.

 

***Other Regulation***

 

We are subject to federal, state, local and foreignenvironmental laws and regulations, including the U.S. Occupational Safety andHealth Act, the U.S. Toxic Substances Control Act, the U.S. ResourceConservation and Recovery Act, and other current and potential future federal,state, or local regulations. Our manufacturing and research and developmentactivities involve the controlled use of hazardous materials, chemicals, andbiological materials, which require compliance with various laws andregulations regarding the use, storage, and disposal of such materials.

 

We are also subject to various federal and state lawspertaining to health care “fraud and abuse,” including anti-kickback laws andfalse claims laws.  Anti-kickback lawsmake it illegal to solicit, offer, receive, or pay any remuneration in exchangefor, or to induce, the referral of business, including the purchase orprescription of a particular product. The U.S. federal government has published regulations that identify “safeharbors” or exemptions for certain payment arrangements that do not violate theanti-kickback statutes.  We seek tocomply with the safe harbors where possible. Due to the breadth of the statutory provisions and the absence ofguidance in the form of regulations or court decisions addressing some of ourpractices, it is possible that our practices might be challenged underanti-kickback or similar laws.  Falseclaims laws prohibit anyone from knowingly and willingly presenting, or causingto be presented for payment to third-party payers (including Medicare and Medicaid)claims for reimbursed products or services that are false or fraudulent, claimsfor items or services not provided as claimed, or claims for medicallyunnecessary items or services.  Ouractivities relating to the sale and marketing of our products may be subject toscrutiny under these laws.  Violations offraud and abuse laws may be punishable by criminal and/or civil sanctions,including fines and civil monetary penalties, as well as the possibility ofexclusion from federal health care programs (including Medicare and Medicaid).

 

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

 

***Foreign Corrupt Practices Act***

 

The U.S. Foreign Corrupt Practices Act, to which weare subject, prohibits corporations and individuals from engaging in certainactivities to obtain or retain business or to influence a person working in anofficial capacity. It is illegal to pay, offer to pay, or authorize the paymentof anything of value to any foreign government official, government staffmember, political party, or political candidate in an attempt to obtain orretain business or to otherwise influence a person working in an officialcapacity.  Because many of our competitorsinternationally are not subject to such restrictions, our adherence to theselaws may place us at a competitive disadvantage.

 

**Third-Party Coverage and Reimbursement**

 

Purchases of breast implant products for augmentationand facial aesthetics products are generally not reimbursed by government orprivate insurance carriers.  However,since 1998, U.S. federal law has mandated nationwide insurance coverage ofreconstructive surgery following a mastectomy, which includes coverage forbreast implants.  Outside the U.S.,reimbursement for breast implants used in reconstructive surgery following amastectomy may be available, but the programs vary on a country-by-countrybasis.

 

In some countries, both the procedure and product arefully reimbursed by the government healthcare systems for all citizens who needit, and there is no limit on the number of procedures that can beperformed.  In other countries, there is

 

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completereimbursement but the number of procedures that can be performed at each hospitalis limited either by the hospital’s overall budget or by the budget for thetype of product.

 

**Product Replacement Programs**

 

We have always conducted our product service andsupport activities with careful regard for the consequences to patients.  As with any medical device manufacturerhowever, we occasionally receive communications from surgeons with respect tovarious products claiming the products were defective, lost volume, or haveotherwise failed.  In the case of adeflation of a saline-filled breast implant product sold by us and implanted inthe U.S., in most cases our product replacement program provides for a freereplacement implant and limited financial assistance paid to the surgeon tohelp reduce the costs of a replacement surgical procedure.  In order to receive the surgical assistance,the deflation must have occurred within ten years of the original implantation,and certain other claim procedures must be met. 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.  In April2005, our Eurosilicone subsidiary announced its Breast Aesthetics MarketingAlliance (“BAMA”) which includes as an integral part of its Ultimate PatientSatisfaction Program (“UPSP”), a comprehensive customer support program thatincludes a robust product a product replacement program.  This program covers not only productdeflation, but also aesthetic results in specified circumstances for surgeonscommitted to purchasing at least 80% of their breast implants fromEurosilicone. As of the year ended June 30, 2005, we have not committed tosuch a program nor signed up any distributors or doctors.  Eurosilicone intends to begin enrollingdoctors in its BAMA program and the UPSP in fiscal 2006.

 

**Financial Information About Geographic Areas**

 

A majority of our sales and substantially all of ourlong-lived assets are outside the U.S. We expect that in the near future our financial assets and sales will beprimarily outside of the U.S., including manufacturing assets in France, andsales into over 85 countries.  If wereceive approval to sell breast implant products in the U.S., this could changematerially.

 

**Working Capital and Product Inventories**

 

When in the past we have sold breast implant products,we maintained significant breast implants consignment inventories, consistentwith industry practice.  With theexception of MediCor Mexico, Eurosilcone’s direct distributor, which had nomaterial inventory at June 30, 2005, there were no other directsubsidiaries with consignment inventory. We do expect this practice to continue if we reintroduce products to themarket.  Since a doctor may not be sureof the exact size of breast implant required for implantation and cannot besure that no accidental damage will occur to an implant, the doctor is likelyto order extra quantities and sizes beyond the quantity and size ultimatelyused in surgery.  By carrying a consignmentinventory of typical sizes at certain hospitals and other medical offices, wereduce the level of product return subsequent to surgery.

 

We attempt to manage inventories to a level thatpermits good customer service. Additionally, there are inventory builds prior to launching newproducts.

 

Our accounts receivable payment terms have been and weanticipate them to continue to be consistent with normal industry practices foreach of our market segments.

 

Other than one-time purchase accounting adjustmentsthat increased Eurosilicone’s work-in-process inventory, for the year ended June 30,2005, we experienced no material changes or fluctuations in Eurosilicone’shistorical working capital or inventories. Our working capital and product inventories may change materially in thefuture, especially if we continue to experience strong sales growth and demandfor our products.  We anticipate thatinventory and accounts receivable will be consistent with norms in the industryand consistent with Eurosilicone’s history.

 

**Employees**

 

As of June 30, 2005, we had approximately 245full-time or full-time equivalent employees, approximately 20 of whom are inthe United States and approximately 210 of whom are in France and 15 of whomare in other countries. From time to time, we also engage consultants on short-or long-term contracts, primarily in connection with research and developmentprojects.  We have one employee that isrepresented by a labor union in France and all other employees at Eurosiliconeare represented by a statutory workers’ council.

 

We recognize the importance of environmentalresponsibility and the need to provide a safe and healthy workplace for ouremployees by complying with all federal, state, and local laws, rules, andregulations.  During the past fiscalyear, we have received no citations, notices of violations or other censuresfrom public agencies regulating environmental compliance

 

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or ouremployees’ health and safety.  We do notexpect any significant capital expenditures to comply with environmental,health, or safety regulations in fiscal 2006. We believe that our current systems and processes are adequate forcurrent needs.

 

**Risks andUncertainties**

 

***If we are unable to maintain satisfactory agreements withthird-party manufactures to distribute saline filled breast implants in theUnited States, we may not be able to distribute those products in the UnitedStates.***

 

We currently are dependent on maintaining rights todistribute in the United States breast implant products manufactured by thirdparties.  We may not be able to maintainthese rights on acceptable terms or at all. If we fail to maintain these rights, we may not be able to sell breastimplant products in the United States for a number of years, if at all.

 

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

 

Before obtaining regulatory approvals for thecommercial sale of any products, we must demonstrate through pre-clinicaltesting and clinical trials that our products are safe and effective for use inhumans.  Conducting clinical trials is a lengthy, time-consuming andexpensive process.

 

Completion of clinical trials may take several yearsor more.  Our commencement and rate of completion of clinical trials maybe delayed by many factors, including:

 

•   lackof efficacy during the clinical trials;

•   unforeseen safetyissues;

•   uncertainties withor actions of our collaborative partners or suppliers;

•   slower thanexpected patient recruitment;

•   difficulties inpatient retention; and

•   government orregulatory delays.

 

The results from pre-clinical testing and earlyclinical trials are often not predictive of results obtained in later clinicaltrials.  A number of new products have shown promising results in clinicaltrials, but subsequently failed to establish sufficient safety and efficacydata to obtain necessary regulatory approvals.  Data obtained frompre-clinical and clinical activities are susceptible to varyinginterpretations, which may delay, limit or prevent regulatory approval. In addition, regulatory delays or rejections may be encountered as a result ofmany factors, including perceived defects in the design of the clinical trialsand changes in regulatory policy during the period of productdevelopment.  Any delays in, or termination of, our clinical trials orclinical trials of our collaborative partners or suppliers will adverselyaffect our development and commercialization timelines, which would adverselyaffect our future sales and profitability.

 

***If we areunable to develop, gain regulatory approval for and market new products andtechnologies, we will not achieve meaningful revenue and may experience adecrease in demand for our products or our products could become obsolete.***

 

The medical device industry is highly competitive andis subject to significant and rapid technological change. We believe that ourability 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 our existingproducts or products we have in development or clinical trials.  Nor can we guarantee that we will besuccessful in developing new products or technologies that will timely achieveregulatory approval or receive market acceptance.  Once developed, we must also timely obtainregulatory approval for our products, the failure of which may cause ourproducts to be obsolete once regulatory approval is granted.  Two of our competitors are in the advancedstage of obtaining regulatory approval for their silicone filled breastimplants in the United States, while we have not started the regulatory processfor those products in the U.S.  Thiscould put us at a significant disadvantage in the U.S. market. The lack of U.S.regulatory approval for our products, in the face of our competitors’approvals, may also adversely affect us in foreign markets.

 

***If changes inthe economy and consumer spending reduce consumer demand for our products orour products in development, our sales and profitability will suffer.***

 

Breast augmentation and reconstruction and otheraesthetics procedures are elective procedures.  Other than U.S. federallymandated insurance reimbursement for post-mastectomy reconstructive surgery,breast augmentations and other

 

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cosmeticprocedures are not typically covered by insurance.  Adverse changes in the economy may causeconsumers to reassess their spending choices and reduce the demand for cosmeticsurgery.  This shift could have an adverse effect on our projected futuresales and profitability.

 

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

 

To accomplish our plans to conduct our currentoperations, to expand our current product lines and markets and to purchase newcompanies, products and intellectual property, we need substantial additionalcapital, which we may not be able to obtain. We currently have significant debtthat must be serviced.  While we have todate been funded in substantial part by an affiliate of our chairman, we do notanticipate this funding source will provide sufficient capital to finance ourintended growth strategy, and we expect that we will need significant externalfinancing to accomplish our goals.  Ourprimary lender is an affiliate of our chairman and may also seek to collect itsdebt on an accelerated basis, which we would be unlikely to be able to do.  We have in the past and will likely in thefuture negotiate with potential equity and debt providers to obtain additionalfinancing, but this additional financing may not be available on terms that areacceptable to us, or at all.  If adequatefunds are not available, or are not available on acceptable terms, our abilityto operate our business or implement our expansion and growth plans will besignificantly impaired.  In addition, thefinancial terms of any such financing, if obtainable, may be dilutive toexisting stockholders.

 

***We rely on our chairman for continued capital funding,management direction and strategic planning and we do not presently have anyalternative funding or a management transition plan in place.***

 

We rely on our chairman, Donald K. McGhan, for ourcontinued capital funding, management direction and strategic planning.  Mr. McGhan is our principal lender,principal stockholder, chairman of our board of directors and a member of ourfour-person executive committee. Consequently, Mr. McGhan has substantial influence over significantcorporate transactions, including acquisitions that we may pursue.  Although we have no written charter, ourexecutive committee generally functions on the basis of consensus, though Mr. McGhan’smultiple roles and significant financial and stockholder stake are typicallyconsidered.  To date, we have not had anyevent where Mr. McGhan has sought to or exercised any type of unilateralcontrol over us, though there can be no assurance that this will not happen inthe future.  The loss of Mr. McGhan’sservices or financial support to our company could materially and adverselyaffect our operations.  We do notpresently have a written or other well-established management or financingtransition plan in the event we were to lose the services or financial support ofMr. McGhan.

 

***Because we haveonly a limited operating history and our business strategy calls forsignificant growth through new products and acquisitions, there is significantuncertainty about our business and prospects*****.**

 

MediCor and its subsidiaries have only been operatingsince 1999. Although our Biodermis and Eurosilicone operations have been inexistence for longer periods of time, Biodermis has only operated under ourmanagement since its acquisition in 2001 and Eurosilicone has only operatedunder MediCor’s management since its acquisition in July 2004.  Significantly, during much of our history wehave also been prevented from selling our primary existing product, breastimplants, in the U.S. market due to the FDA’s 2000 call for a PMA for thoseproducts.  As a result, all of our revenuesprior to the Eurosilicone acquisition were derived primarily from our scarmanagement products.  Revenue generatedby our Biodermis subsidiary has not been significant, and we do not expect morethan modest internal growth in that segment. As a result, our historic business platform is not necessarilyindicative of our future business or prospects.

 

***MediCor and itsprospects must be considered in light of the risks, expenses and difficultiesfrequently encountered by companies in an early stage of development,particularly companies in rapidly evolving markets such as the medical devicemarket.***

 

Risks for our business include the uncertaintiesassociated with developing and implementing an evolving business model and themanagement of both internal and acquisition-based growth.  This isparticularly acute in a rapidly evolving market such as the market for medicaldevices.  To address these risks, we mustcontinue to develop the strength and quality of our operations, maximize thevalue delivered to customers, respond to competitive developments and continueto attract, retain and motivate qualified employees.  We may not besuccessful in addressing these challenges.

 

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

 

Physicians and potential patients may have a number ofconcerns about the safety of our products and proposed products, whether suchconcerns have a basis in generally accepted science or peer-reviewed scientificresearch or not.  Negativepublicity—whether accurate or inaccurate—about our products, based on, forexample, news about breast implant litigation

 

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or regulatoryactions, could materially reduce market acceptance of our products and couldresult in product withdrawals.  Inaddition, significant negative publicity could result in an increased number ofproduct liability claims, whether or not these claims have a basis in fact.

 

***Because our strategy is based on successfully makingacquisitions and otherwise diversifying or expanding our product offerings, weare exposed to numerous risks associated with acquisitions, diversification andrapid growth.***

 

Our present growth strategy is based in significantpart on the acquisition of other companies, products and technologies that meetour criteria for strategic fit, geographic presence, revenues, profitability,growth potential and operating strategy. The successful implementation of this strategy depends on our ability toidentify suitable acquisition candidates finance acquisitions, acquirecompanies and assets on acceptable terms and integrate their operationssuccessfully.

 

We may not be able to identify suitable acquisitioncandidates in our desired product areas or we may not be able to acquireidentified candidates on acceptable terms. Moreover, in pursuing acquisition opportunities we will likely competewith other companies with greater financial and other resources.  Competition for these acquisition targetslikely could also result in increased prices of acquisition targets and adiminished pool of companies and assets available for acquisition.

 

Acquisitions also involve a number of other risks,including the risks of acquiring undisclosed or undesired liabilities, acquiredin-process technology, stock compensation expense and increased compensationexpense resulting from newly hired employees, the diversion of managementattention, potential disputes with the sellers of one or more acquired entitiesand the possible failure to retain key acquired personnel.  Client satisfaction or performance problemswith an acquired business or product line could also have a negative impact onour reputation as a whole, and any acquired entity or assets couldsignificantly under-perform relative to our expectations.  Our ability to meet these challenges has notbeen established through repeated acquisitions.

 

We expect that, at least for the foreseeable future,we will be required to use primarily cash consideration for acquisitions. Welikely will be required to obtain significant third-party financing toaccomplish these acquisitions.  Thisfinancing may not be available on acceptable terms, if at all.  The terms of any such financing may bedilutive to existing stockholders.

 

***Acquisitions, distribution agreement terms, product researchand development, and regulatory approvals and compliance can result insignificant reserves, write-offs and litigation.***

 

Some aspects of our business, such as acquisitions,distribution agreements with third parties and product research anddevelopment, including regulatory approvals and compliance, have significantand sometimes unpredictable events that can result in material financial andaccounting events, including reserves, write-offs and litigation.  For example, in our Eurosilicone acquisition,we made an aggregate of $754,463 in negative purchase accounting adjustments,we have incurred a total of $6,700,042 in reserves and write-offs in connectionwith our PIP.America subsidiary’s distribution agreement with PIP because ofpast uncertainties regarding PIP’s ability to pay its portion of the productreplacement program for its products distributed in the United States, andEurosilicone is party to litigation with one of its distributors in whichdamages of €4 million are alleged.  Theseaspects of our business, such as acquiring companies and technologies,establishing and administering distributor relationships and developing new products,are part of our business strategy.  As aresult of the significance of these events, their unpredictable timing andfrequency and the variance in structure and outcome, these events and theirfinancial impact are unpredictable and can create material fluctuations in ourfinancial results.

 

***If our intellectual property rights do not adequatelyprotect our products or technologies, others could compete against us moredirectly.***

 

Our success depends in part on our ability to obtainpatents or trademarks or rights to patents or trademarks, protect tradesecrets, operate without infringing upon the proprietary rights of others, andprevent others from infringing on our patents, trademarks and otherintellectual property rights.  We will beable to protect our intellectual property from unauthorized use by thirdparties only to the extent that it is covered by valid and enforceable patents,trademarks and licenses and we are able to enforce those rights.  Patent protection generally involves complexlegal and factual questions and, therefore, enforceability and enforcement ofpatent rights cannot be predicted with certainty.  Patents, if issued, may be challenged,invalidated or circumvented.  Thus, anypatents that we own or license from others may not provide adequate protectionagainst competitors.  In addition, ourpending and future patent applications may fail to result in patents beingissued.  Also, those patents that areissued may not provide us with adequate proprietary protection or competitiveadvantages against competitors with similar technologies.  Moreover, the laws of certain foreigncountries do not protect our intellectual property rights to the same extent asdo the laws of the United States.

 

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In addition to patents and trademarks, ourintellectual property includes trade secrets and proprietary know-how.  We seek protection of this intellectualproperty primarily through confidentiality and proprietary informationagreements with our employees and consultants. These agreements may not provide meaningful protection or adequateremedies for violation of our rights in the event of unauthorized use ordisclosure of confidential and proprietary information.  Failure to protect our proprietary rightscould seriously impair our competitive position.

 

***We depend on a limited number of suppliers for certain rawmaterials and the loss of any supplier could adversely affect our ability tomanufacture many of our products.***

 

We currently rely on a single supplier for siliconeraw materials used in many of our products. We only have an oral supply agreement with this supplier which includesan understanding that they will transfer the necessary formulations to us inthe event that it cannot meet our requirements. We cannot guarantee that this agreement will be enforceable or that wewould be able to produce a sufficient amount of quality silicone raw materialsin a timely manner.  We will also dependon a sole or limited number of third-party manufacturers for silicone breastimplants to be distributed by us in the North America market.

 

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

 

A significant part of our current sales are and asignificant part of our projected future sales will be derived frominternational operations.  In addition,we have and anticipate having in the future material international suppliersand operations, including manufacturing operations.  Accordingly, we are exposed to risksassociated with international operations, including risks associated withre-valuation of the local currencies of countries where we purchase or sell ourproducts or conduct business, which may result in our purchased productsbecoming more expensive to us in U.S. dollar terms or sold products becomingmore expensive in local currency terms, thus reducing demand and sales of ourproducts, or increased costs to us.  Ouroperations and financial results also may be significantly affected by otherinternational factors, including:

 

• foreigngovernment regulation of medical devices;

• productliability claims;

• new exportlicense requirements;

• political oreconomic instability in our target markets;

• traderestrictions;

• changes intax laws and tariffs;

• inadequateprotection of intellectual property rights in some countries;

• managingforeign distributors, manufacturers and staffing;

• managingforeign branch offices; and

• foreigncurrency translations.

 

If these risks actually materialize, our sales tointernational customers, as well as those domestic customers that use products manufacturedabroad, may decrease or our supplier or manufacturing costs may materiallyincrease.

 

***Our failure to attract and retain key managerial, technical,selling and marketing personnel could adversely affect our business.***

 

Our success will depend upon our ability to attractand retain key managerial, financial, technical, selling and marketingpersonnel.  The lack of key personnelmight significantly delay or prevent the achievement of our development andstrategic objectives.  Although wemaintain a key man policy on two of our Eurosilicone managers for the benefitof our commercial bank lenders, we do not maintain any other key man lifeinsurance on any of our employees.  Otherthan certain of our executives who are parties to employment agreements, noneof our employees is under any obligation to continue providing services tous.  We are continuing to build ourmanagement and technical staffs. We believe that our success will depend to asignificant extent on the ability of our key personnel, including the newmanagement and technical staffs, to operate effectively, both individually andas a group.  Competition for highlyskilled employees in our industry is high, and we cannot be certain that wewill be successful in recruiting or retaining these personnel.  We may also face litigation from competitorswith hiring personnel formerly employed by them.

 

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

 

Our success will depend upon our ability to manage ourinternal and acquisition-based growth effectively.  This will require that we continue toimplement and improve our operational, administrative and financial andaccounting systems and controls and continue to expand, train and manage ouremployee base.  We anticipate that wewill need to hire and retain

 

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numerousadditional employees and consultants for both internal and acquisition-basedgrowth for some time.  Integration of theseemployees and consultants and employee and consultant loss in the process willrequire significant management attention and resources.  Our systems, procedures, controls andpersonnel may not be adequate to support our future operations and our managementmay not be able to achieve the rapid execution necessary to exploit the marketfor our business model.

 

***If our suppliers, collaborative partners or consultants donot perform, we will be unable to obtain, develop, market or sell products asanticipated and we may be exposed to additional risks.***

 

We have in the past and may in the future enter intosupply, collaborative or consulting arrangements with third parties to supplyor develop products.  These arrangementsmay not produce or provide successful products. If we fail to establish these arrangements, the number of products fromwhich we could receive future revenues will be limited.  Our dependence on supply, collaborative orconsulting arrangements with third parties subjects us to a number of risks.  These arrangements may not be on termsfavorable to us.  Agreements withsuppliers may limit our supply of products or require us to purchase productswe can not profitably sell.  They mayalso restrict our ability to market or distribute other products.  Agreements with consultants or collaborativepartners typically allow the third parties significant discretion in electingwhether or not to pursue any of the planned activities.  We cannot with certainty control the amountand timing of resources our suppliers, collaborative partners or consultantsmay devote to our products and these third parties may choose to pursuealternative products.  These thirdparties also may not perform their obligations as expected.  Business combinations, significant changes intheir business strategy, or their access to financial resources may adverselyaffect a supplier’s, partner’s or consultant’s willingness or ability tocomplete its obligations under the arrangement. Moreover, we could become involved in disputes with our suppliers,partners or consultants, which could lead to delays or termination of thearrangements and time-consuming and expensive litigation or arbitration.

 

***Our quarterly operating results are subject to substantialfluctuations and any failure to meet financial expectations for any fiscalquarter may disappoint securities analysts and investors and could cause ourstock price to decline.***

 

Our quarterly operating results may vary significantlydue to a combination of factors, many of which are beyond our control.  These factors include:

 

• changes indemand for our products;

• our abilityto meet the demand for our products;

• movement invarious foreign currencies, primarily the Euro and the U.S. dollar;

• existing andincreased competition;

• our abilityto compete against significantly larger and better funded competitors;

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

• our abilityto develop, introduce and market new and enhanced versions of our products on atimely basis;

• changes inpricing policies by us and our competitors;

• the timingof significant orders and shipments;

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

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

• generaleconomic factors.

 

As a result, we believe that period-to-periodcomparisons of our results of operations are not necessarily meaningful andinvestors should not rely upon these comparisons as indications of futureperformance.  These factors may cause ouroperating results to be below market analysts’ expectations in some futurequarters, which could cause the market price of our stock to decline.

 

***If we are unable to avoid significant product liabilityclaims or product recalls, we may be forced to pay substantial damage awardsand other expenses that could exceed our reserves and any applicable insurancecoverage.***

 

In the past, the breast implant manufacturing industryhas been subject to significant litigation alleging product liability. We alsohave 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 withrespect to products that have received, or in the future may receive,regulatory approval for commercial sale. In particular, the manufacture and sale of breast implant productsentails significant risk of product liability claims due to potentialallegations of possible disease transmission and other health factors, ruptureor other product failure.  Some breast implantmanufacturers that suffered these types of claims in the past have been forcedto cease operations or even to declare bankruptcy.  We may

 

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also face asubstantial risk of product liability claims from other products we may chooseto sell.  In addition to productliability claims, we may in the future need to recall or issue fieldcorrections related to our products due to manufacturing deficiencies, labelingerrors, or other safety or regulatory reasons. Product liability claims, relating to alleged product defects, aredistinguishable from product warranty claims, which relate to allegations thatproducts do not meet warranties of merchantability or fitness for a particularpurpose.  We address the substance ofpotential product warranty claims relating to products distributed by us in theUnited States through our product replacement programs discussed above in thisItem 1, “Business.”

 

We do not presently have liability insurance toprotect us from the costs of claims for damages due to the use or recall of ourproducts, except that our Biodermis subsidiary carries a limited amount ofproduct liability insurance related to its products.  We may in the future seek additionalinsurance, which will be limited in both circumstance of coverage andamount.  Recent premium increases andcoverage limitations, including specifically limitations or prohibitions byinsurers on insurance covering breast implant manufacturers, may make thisinsurance uneconomic or even unavailable. However, even if we obtain or increase insurance, one or more productliability claims or recall orders could exceed any coverage we may hold.  If we continue to have limited or no coverageor our insurance does not provide sufficient coverage, product liability claimsor recalls could result in losses in excess of our reserves.

 

***Lawsuits, including those seeking class action status, may,if successful, cause us to incur substantial liability, including damage awardsand significant legal fees that may exceed our reserves.***

 

Lawsuits have been filed naming us or one of oursubsidiaries, the French manufacturer from which we purchase breast implantproducts, and the U.S. distributor of those same products who preceded oursubsidiary in the U.S. market.  In thesesuits the plaintiffs have sought or currently seek, among other things, classaction status for claims, including claims for breach of warranty.  The claims arise from products distributedboth before and after our subsidiary that distributed the products came intoexistence.  Although certain of theclaims arise from products distributed by the other distributor prior to oursubsidiary coming into existence, we have still been named as a defendant.  While we have reserved an amount equal to theoutstanding product replacement claims for claims arising from products oursubsidiary did distribute, the plaintiffs are seeking to hold our subsidiaryresponsible for more damages.  There canbe no assurance we can terminate the litigation as to our subsidiary forreserved amounts.  Although oursubsidiary is indemnified by three separate entities, including Poly ImplantsProtheses, S.A., the French manufacturer, PIP/USA, Inc. the previousdistributor, and Mr. Jean Claude Mas, personally, there can be noassurance this indemnity will protect us, as there is no guarantee the Frenchmanufacturer, the previous distributor, or Mr. Mas will, or is able to,honor the indemnification they have provided. If our subsidiary is unsuccessful in defending against the claimsinvolved in these suits, or if class action status is achieved, and theindemnification were to prove non-reliable, our subsidiary could be responsiblefor significant damages above the reserves and available assets needed tosatisfy such a judgment.

 

***Our Eurosiliconeoperation does not carry product liability or similar insurance and may exposeus to additional risk.***

 

Our French Eurosilicone subsidiary has not in the pasthad a formal or informal product replacement or any similar program.  It also does not have a history of product-relatedlitigation.  We believe this is in partdue to not selling products in the United States, which historically has beenmuch more litigious than the rest of the world. Eurosilicone also has in the past relied on third-party distributors incountries where sales occur to support those products.  Eurosilicone recently began introducing aproduct replacement program on a country-by-country basis.  The institution of this product replacementprogram outside the United States or significant changes in litigationexperience outside the United States may expose our Eurosilicone subsidiary toadditional potential liability.  Althoughwe have policies of carefully observing corporate formalities and otherwise seekingto preserve the protection of the corporate form, there can be no assurancethat some or all of these potential liabilities will not expose us or our othersubsidiaries to potential liabilities as well.

 

***If third parties claim we are infringing their intellectualproperty rights, we could suffer significant litigation or licensing expensesor be prevented from marketing our products.***

 

Our commercial success depends significantly on ourability to operate without infringing the patents and other proprietary rightsof others.  However, regardless of ourintent, our technologies may infringe the patents or violate other proprietaryrights of third parties.  In the event ofsuch infringement or violation, we may face litigation and may be preventedfrom pursuing product development or commercialization.

 

***We are subject tosubstantial government regulation, which could materially adversely affect ourbusiness.***

 

The production and marketing of our products andintended products and our research and development, pre-clinical testing andclinical trial activities are subject to extensive regulation and review bynumerous governmental authorities, both

 

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in the UnitedStates and abroad.  Most of the medicaldevices we sell or intend to sell or develop must undergo rigorous pre-clinicaltesting and clinical trials and an extensive regulatory approval process beforethey can be marketed.  This process makesit longer, more uncertain and more costly to bring the products to market, andsome of these products may not be approved, or, once approved, they may berecalled.  The pre-market approvalprocess can be particularly expensive, uncertain and lengthy.  Many devices for which FDA approval has beensought by other companies have never been approved for marketing.  In addition to testing and approvalprocedures, extensive regulations also govern marketing, manufacturing,distribution, labeling, and record-keeping procedures.  If we or our suppliers or collaborativepartners do not comply with applicable regulatory requirements, this couldresult in warning letters, non-approval, suspensions of regulatory approvals,civil penalties and criminal fines, product seizures and recalls, operatingrestrictions, injunctions, and criminal prosecution.

 

***Delays in or rejectionof FDA or other government entity approval of new products would adverselyaffect our business.***

 

Delays or rejection may be encountered due to, amongother reasons, government or regulatory delays, lack of efficacy duringclinical trials, unforeseen safety issues, slower than expected rate of patientrecruitment for clinical trials, inability to follow patients after treatmentin clinical trials, inconsistencies between early clinical trial results andresults obtained in later clinical trials, varying interpretations of datagenerated by clinical trials, or changes in regulatory policy during the periodof product development in the United States and abroad.  In the United States, there has been acontinuing trend of more stringent FDA oversight in product clearance andenforcement activities, causing medical device manufacturers to experiencelonger approval cycles, more uncertainty, greater risk, and higherexpenses.  Internationally, there is arisk that we or our suppliers or collaborative partners may not be successfulin meeting the quality standards or other certification requirements. Even ifregulatory approval of a product is granted, this approval may entaillimitations on uses for which the product may be labeled and promoted.  It is possible, for example, that we or oursuppliers or collaborative partners may not receive FDA approval to market ourcurrent or future products for broader or different applications or to marketupdated products that represent extensions of our, our suppliers’ orcollaborative partners’ basic technology. In addition, we or our suppliers or collaborative partners may notreceive export or import approval for products in the future, and countries towhich products are to be exported may not approve them for import.

 

***Government regulation of manufacturing of medical devices isexpensive and time consuming for manufacturers and may result in productunavailability or recalls.***

 

Medical device manufacturing facilities also aresubject to continual governmental review and inspection.  The FDA has stated publicly that compliancewith manufacturing regulations will be scrutinized more strictly.  A governmental authority may challenge our orour suppliers’ or collaborative partners’ compliance with applicable federal,state and foreign regulations.  Inaddition, any discovery of previously unknown problems with products orfacilities may result in restrictions on the product or the facility, includingwithdrawal of the product from the market or other enforcement actions.

 

***If our use ofhazardous materials results in contamination or injury, we could suffersignificant financial loss.***

 

Our manufacturing and research activities involve thecontrolled use of hazardous materials. We cannot eliminate the risk of accidental contamination or injury fromthese materials.  In the event of anaccident or environmental discharge, we may be held liable for any resultingdamages, which may exceed our financial resources.

 

***It is unlikely thatwe will issue dividends on our common stock in the foreseeable future.***

 

We have never declared or paid dividends on our commonstock and do not intend to pay dividends in the foreseeable future.  The payment of dividends in the future willbe at the discretion of our board of directors. Therefore, an investor who purchases our common stock, in alllikelihood, will only realize a profit on its investment if the market price ofour common stock increases in value.

 

***We will sell additional equity securities in the futurewhich will be at undetermined prices and will reduce the percentage of ourequity owned by our existing stockholders.***

 

In the future we will sell additional shares of ourcommon stock, or other securities convertible into or otherwise entitling theholder to purchase our common stock.  In thefuture we will also issue additional options to purchase our common stock toour employees, possibly including our executive officers, and our directors,and possibly to consultants and vendors. We also intend to issue shares of our common stock in connection withacquisitions or other commercial transactions and to holders of outstandingdebt, including holders that are affiliates. All such sales and issuances of our common stock, other equitysecurities and warrants and options to purchase our common stock, will be atpresently undetermined prices, which may be lower than prices at which otherholders of common stock purchased such shares and dilutive to those holders,and

 

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will reduce thepercentage of our equity owned by our existing stockholders.  These issuances may also adversely affectprevailing market prices for our common stock.

 

***The exercise of outstanding options and conversion rightswill dilute the percentage ownership of our stockholders, and any sales in thepublic market of shares of our common stock underlying these options andconversion rights may adversely affect prevailing market prices for our commonstock.***

 

As of the date of this filing, there are outstandingoptions to purchase an aggregate of 6,018,532 shares of our common stock at pershare exercise prices ranging from $0.08 to $4.30.  Furthermore, outstanding shares of our seriesA preferred stock may be converted into 1,615,351 shares of our common stock atany time, and outstanding convertible debentures may be converted into anaggregate of 80,000 shares of our common stock at any time.  In addition, we may issue additional sharesof our common stock in respect of dividends paid on outstanding shares of ourseries A preferred stock.  The exerciseof such outstanding options and conversion rights will dilute the percentageownership of our stockholders, and any sales in the public market of shares ofour common stock underlying such options and conversion rights may adverselyaffect prevailing market prices for our common stock.

 

***The price of ourcommon stock has historically been volatile.***

 

The market price of our common stock has in the pastbeen, and may in the future continue to be, volatile.  A variety of events, includingquarter-to-quarter variations in operating results or news announcements by usor our competitors as well as market conditions in the medical device industrygenerally or the breast implant segment of that market specifically or changesin earnings estimates by securities analysts may cause the market price of ourcommon stock to fluctuate significantly. In addition, the stock market has experienced significant price andvolume fluctuations which have particularly affected the market prices ofequity securities of many companies and which often have been unrelated to theoperating performance of such companies. These market fluctuations may adversely affect the price of our commonstock.

 

***Our common stock is thinly traded on the Over-the-CounterBulletin Board, which may not provide liquidity for our investors.***

 

Our common stock is quoted on the OTC BulletinBoard.  The OTC Bulletin Board is aninter-dealer, over-the-counter market that provides significantly lessliquidity than the Nasdaq Stock Market or national or regional exchanges, suchas the New York Stock Exchange and the American Stock Exchange. Securitiestraded on the OTC Bulletin Board are usually thinly traded, highly volatile,have fewer market makers and are not followed by analysts.  Although we have commenced the applicationprocess to have our common stock listed on the American Stock Exchange, therecan be no assurance that our common stock will be approved for listing and ourstated intention to seek to list our common stock on the Exchange, may itselfadversely affect investors’ willingness to trade our stock unless and untilsuch listing.  The SEC’s order handlingrules, which apply to Nasdaq-listed securities, do not apply to securitiesquoted on the OTC Bulletin Board. Quotes for stocks included on the OTCBulletin Board are not listed in newspapers. Therefore, prices for securities traded solely on the OTC Bulletin Boardmay be difficult to obtain and holders of shares of our common stock may havebeen unable to resell their shares at or near their original acquisition price,or at any price.  If our common stock isapproved for listing, because we will have no prior trading history on theAmerican Stock Exchange, there also can be no way to determine the prices orvolumes at which our common stock would trade on the Exchange if it were solisted.  Holders of shares of our commonstock may not be able to resell their shares at or near their originalacquisition price, or at any price.

 

***We have been subject to the penny stock regulations and willcontinue to be unless and until our common stock is listed on a nationalsecurities exchange or quoted on the Nasdaq Stock Market.***

 

SEC regulations require additional disclosure relatingto the market for penny stocks in connection with trades in any stock definedas a penny stock.  These regulationsgenerally define a penny stock to be an equity security not listed on anational securities exchange or quoted on the Nasdaq Stock Market that has amarket price of less than $5.00 per share, subject to certain exceptions.  Accordingly, we have been subject to thepenny stock regulations, including those regulations that require the delivery,prior to any transaction involving a penny stock, of a disclosure schedule explainingthe penny stock market and the risks associated therewith and which imposevarious sales practice requirements on broker-dealers who sell penny stocks topersons other than established customers and accredited investors (generally,institutional investors).  In addition,under penny stock regulations, the broker-dealer must provide the customer withcurrent bid and offer quotations for the penny stock, the compensation of thebroker-dealer and its salesperson in the transaction and monthly accountstatements showing the market value of each penny stock held in the customer’saccount.  Moreover, broker-dealers whorecommend “penny stocks” to persons other than established customers andaccredited investors must make a special written suitability determination forthe purchaser and receive the purchaser’s written agreement to a transactionprior to sale.  These regulations tend tolimit the ability of broker-dealers to sell our securities and thus the abilityof purchasers of our securities

 

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to sell theirsecurities in the secondary market. Unless and until our common stock is listed on a national securitiesexchange or quoted on the Nasdaq Stock Market or trades consistently above$5.00 per share, our common stock will be defined as a penny stock and besubject to these disclosure and trading restrictions.

 

***The terms of our outstanding preferred stock or futurepreferred stock may negatively affect the value of our common stock.***

 

We have the authority to issue an aggregate of 20,000,000shares of preferred stock which may be issued by our board of directors withsuch preferences, limitations and relative rights as our board may determinewithout a vote of our stockholders. Presently we have authorized 45,000 sharesof preferred stock in one series, Series A 8.0% Convertible PreferredStock, 6,219 of which were outstanding on the date of this filing. Our series Apreferred stock has, and other classes of our preferred stock we may issue inthe future will have, priority over our common stock in the event ofliquidation or dissolution.  In the eventof our liquidation or dissolution, our then-outstanding preferred stock(including series A preferred stock) will have priority of payment over allshares of our common stock.  Preferredstock also generally has priority on payment of dividends over commonstock.  Our series A preferred stock hasthis priority, meaning that no dividends may be paid on our common stock unlessall accrued dividends on our series A preferred stock have been paid.  Each holder of convertible preferred stock(such as our series A preferred stock) may also generally, at the holder’soption, convert the preferred stock into common stock at any time.  We cannot predict whether, or to what extent,holders of convertible preferred stock will convert to common stock.  Preferred stock may also provide that theholders thereof may participate with the holders of common stock on dividendsor liquidation.  This may have the effectof substantially diluting the interest of the common stock holders.  Our series A preferred stock is not aparticipating preferred stock, though it is convertible into our common stock.

 

Our series A preferred stock is presently convertibleinto shares of our common stock at a price of $3.85 per share of common stockbased on the initial $1,000 liquidation preference per share of series Apreferred stock.  Our series A preferredstock also votes on an as-converted basis, has the right to elect two of ourseven authorized directors and has special voting rights on specifiedsignificant transactions or events.  Thecertificate of designation for the series A preferred stock, which is anexhibit to this report, includes a provision that if certain EBITDA or commonstock value targets are not met by June 30, 2008, then the liquidationpreference of our series A preferred stock will be increased pursuant to aformula, capped at an additional 83% of the original liquidation preference ofthe originally issued series A preferred stock.

 

The perceived risk of dilution or any actual dilutionoccasioned by the conversion of our series A preferred stock, any other futureseries of preferred stock and/or issuance of awards under our 1999 stockcompensation program may discourage persons from investing in our common stockor cause our stockholders to sell their shares, which would contribute to thedownward movement in stock price of our common stock.  New investors could also require that theirinvestment be on terms at least as favorable as the terms of our series A preferredstock (or another series of preferred stock) due to the potential negativeeffect of the dilution on a potential investment.  In addition, downward pressure on the tradingprice of our common stock could encourage investors to engage in short sales,which would further contribute to downward pressure on the price of our commonstock.

 

The rights, preferences, powers and limitations of ourseries A preferred stock, as well as those of any future series of preferredstock as may be established, may have the effect of delaying, deterring orpreventing a change of control of our company.

 

***Our rights and the rights of our stockholders to take actionagainst our directors and officers are limited, which could limit stockholders’recourse in the event of action not in stockholders’ best interests.***

 

Our certificate of incorporation limits the liabilityof directors and officers to the maximum extent permitted by Delaware law.  In addition, our certificate of incorporationauthorizes us to obligate our company to indemnify our present and formerdirectors and officers for actions taken by them in those capacities to themaximum extent permitted by Delaware law. Our bylaws require us to indemnify each present or former director orofficer, to the maximum extent permitted by Delaware law, in the defense of anyproceeding to which he or she is made, or threatened to be made, a party byreason of his or her service to us.  Inaddition, we may be obligated to fund the defense costs incurred by ourdirectors and officers.  Theselimitations on recourse against officers and directors and the affirmativeprotections of officers and directors may limit or restrict actions by or onbehalf of the company or stockholders, which could adversely affect the companyour stockholders.

 

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***Concentration of ownership of our common stock by ourmanagement and others and termination of employment agreements we have enteredinto with our executive and other officers could negatively affect the marketprice of our common stock because they discourage open market purchases of ourcommon stock by purchasers who might seek to secure control of MediCor.***

 

Our officers and directors as a group currently own anaggregate of 12,049,914 shares of common stock, hold securities convertibleinto 117,403 shares of common stock, and have been granted options to purchasean additional 1,132,258 shares of common stock. Not all of these options can be exercised immediately and the optionsare exercisable at prices ranging from $1.50 to $4.30 per share.  We may in the future issue additional sharesof common stock, or securities exercisable for or convertible into commonstock, to our officers or directors.

 

If our executive officers and directors exercised alltheir options and converted all of the securities beneficially owned by theminto an aggregate of 13,299,575 shares of our common stock, our officers anddirectors would own approximately 65% of our then-outstanding common stock.  This concentration of ownership wouldprobably insure our management’s continued control of MediCor.

 

In addition, International Integrated Industries, LLC,or International Integrated, an affiliate of our chairman, currently holdsapproximately $50,533,489 of our debt. If some or all of that debt were converted into our common stock,International Integrated could own a substantial percentage of our outstandingcommon stock.  This additionalconcentration of ownership of our common stock could further discourage personsfrom making open market purchases of our common stock for the purpose ofsecuring a controlling interest in MediCor and thereby prevent increases in themarket price of our common stock.

 

We have entered into employment agreements with Messrs. TheodoreMaloney, Jim McGhan and Thomas Moyes, three of our executive officers.  These agreements provide for payments to themin the event that their employment is terminated by us, including without “goodreason” as defined in the agreements.  Wewill pay an amount equal to two times the annual base compensation paid by usto such person plus applicable pro rata bonus amounts in the event of atermination by us without cause, as defined in the agreements, or a terminationby the executive for good reason, which includes the occurrence of a change incontrol, as defined in the agreements. The employment agreements further provide that in the event of the deathor disability of any of Messrs. Maloney, McGhan or Moyes, we will pay tosuch person an amount equal to three months’ compensation or compensationthrough the date our long-term disability policy begins paying benefits, asapplicable.  Thesetermination-of-employment agreements may discourage persons from making openmarket purchases of our common stock for the purpose of securing a controllinginterest in MediCor.

 

***ITEM 2.    PROPERTIES***

 

Our Eurosilicone subsidiary leases approximately91,300 square feet of land and three buildings consisting of approximately44,100 square feet of manufacturing, storage and office space located in Apt,France. The terms of the leases expire in December 31, 2009 (approximately23,400 square feet of building and land), December 31, 2010 (approximately68,200 square feet of building and land) and January 14, 2017(approximately 43,800 square feet of building and land).  The terms of the leases provide for aggregateannual lease payment obligations of approximately $613,000.  Our principal executive office is located at4560 S. Decatur Blvd., Suite 300, Las Vegas, Nevada 89103.  We lease these approximately 6,400 squarefeet under a five-year lease beginning in January 2003.  Our Biodermis subsidiary, located in LasVegas, Nevada, leases approximately 6,500 square feet of office, manufacturingand warehouse space under a five-year lease that commenced on May 1,2003.  We lease approximately 2,000square feet of administrative office space in Santa Barbara under amonth-to-month lease.  In addition, wehave a month-to-month lease for an administrative office in Glendale,California, which is approximately 200 square feet.  Through March 2005, we leasedapproximately 10,000 square feet of office and equipment storage space inMinneapolis, Minnesota under a month-to-month lease, but the lease ended April 30,2005.  This space was originally leasedin March 2003 in connection with the acquisition of a small amount ofmanufacturing equipment stored at that location.  We had acquired the equipment with thepurpose of disposing of it in such a way as it could not be used by competitorsto manufacture competitive medical devices. We have accomplished this task, and the space is not material to ourbusiness.  Neither of the Santa Barbaraor Glendale space leases are material to our operations. We believe our currentfacilities, together with those we may acquire in connection with futureacquisitions, will generally be adequate for our needs for the foreseeablefuture.

 

***ITEM 3.     LEGAL PROCEEDINGS***

 

In October 1999,Case No. 99-25227-CA-01 June 2000 Case No. 00-14665-CA-01, and July 2003,Case No. 0322537-CA-27, separate but related complaints were filed by Sauland Ruth Kwartin, Steven M. Kwartin, and Robert and Nina Kwartin respectively,against our PIP.America subsidiary as co-defendant with PIP/USA, Inc. andPoly Implants Protheses, S.A., each unaffiliated with MediCor, and Jean ClaudeMas, Jyll Farren-Martin and our chairman, personally, in the Circuit Court ofMiami-Dade County, Florida.  Also in September 2003,another member of the same family filed Case No. 03-15006-CA-09, againalleging similar claims on his own behalf. The Kwartin family members’ claims are primarily premised on allegationsthat plaintiffs are shareholders of PIP/USA, Inc. (“PIP/USA”) or havestatutory and common law rights of shareholders of PIP/USA as a result of loansor investments allegedly made to or into PIP/USA or a third party or under analleged employment agreement.  Plaintiffsallege that, as a result, they have certain derivative or other rights to analleged

 

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distribution agreement between Poly Implants Prostheses, S.A. (“PIP-France”)and PIP/USA.  Plaintiffs claim, amongother things, that III Acquisition Corporation (“PIP.America”) and its chairmantortiously interfered with that agreement and with plaintiffs’ other allegedrights as lenders, investors, shareholders, quasi-shareholders or employees ofPIP/USA or other entities. In addition to monetary damages and injunctiverelief, plaintiffs seek to reinstate the alleged distribution agreement betweenPIP/USA and PIP-France and invalidate PIP.America’s distributor relationshipwith PIP-France.  It is PIP.America’sposition that the Kwartin litigations are within the scope of theindemnification agreements.

 

Peggy Williams v. PIP/USA, Inc.,Case No. 03 CH 9654, Jessica Fischer Schnebel, et al. v. PIP/USA, Inc.,Case No. 03CH07239, Dawn Marie Cooper, et al. v. PIP/USA, Inc., Case No. 03CH11316,Miriam Furman, et al. v. PIP/USA, Inc., Case No. 03CH10832 and KarenS. Witt, et al. v. PIP/USA, Inc., Case No. 03CH12928 were filed inthe Circuit Court of Cook County, Chancery Division, in or around July 2003.  Counsel for Jessica Fischer Schnebel, et al.v. PIP/USA, Inc., Case No. 03CH07239 amended her class actioncomplaint to include plaintiffs from the other four cases, and each of theothers has been voluntarily dismissed. The consolidated amended complaint contains counts alleging productliability, breach of the implied warranties of merchantability and fitness fora particular purpose, violation of the Illinois Consumer Fraud Act andthird-party beneficiary status. Unspecified monetary damages, exemplary damages and attorneys fees andcosts are sought. PIP.America has filed a motion seeking to dismiss all countsbut the third-party beneficiary claim. Plaintiffs deposed MediCor witnesses in January of 2005 and thensought additional documents from MediCor, which were recently provided toplaintiffs.  Plaintiffs have now asked tofile a written response to PIP.America’s pending motion to dismiss.  A ruling on the motion is expected by November of2005.  At the request of the judge,PIP.America will seek to defeat the class certification attempt plaintiffs havemade after the motion to dismiss is ruled upon. Poly Implants Protheses, S.A., a defendant in the Schnebel litigation,has agreed that it will indemnify PIP.America for any losses PIP.America maysuffer as a result of the Illinois litigation.

 

On December 23,2004, Europlex, a Mexican company, purported to file a lawsuit againstEurosilicone SAS, one of our French subsidiaries, in the Avignon CommercialCourt in France, alleging that Eurosilicone implicitly terminated adistribution agreement between the parties by failing to deliver productsordered by Europlex pursuant to the agreement, among other allegations.  As a result of these allegations, Europlexclaims damages in amount of approximately $4,000,000 Euros.  A status hearing has been set for October 14in Avignon.  We believe the suit iswithout merit and intend to vigorously defend against the alleged claims.

 

Though it is not yetpossible to predict the outcome of the cases described above, MediCor and itssubsidiaries, as applicable, have denied plaintiffs’ allegations and arevigorously defending themselves upon the merits of each lawsuit and against certificationof any class.  While MediCor and itssubsidiaries are desirous to honor their respective obligations under ourproduct replacement programs, the purported class action case above includestwo distinctly different types of claims. The first of these arise fromproducts sold by PIP/USA, Inc., with whom neither MediCor nor any of itsaffiliates are affiliated.  This companysold implants manufactured by Poly Implants Protheses, S.A. prior toPIP.America’s entry into the U.S. market, which occurred in late 1999. BecausePIP.America did not sell these products, PIP.America similarly did not warrantthese products.  The next claims arisefrom products sold by PIP.America and associated to the product replacement programadministered by PIP.America.  Withrespect to claims arising from products sold by PIP.America, PIP.America isadministering and fulfilling its obligations to its customers in the ordinarycourse of business, and for which it has taken appropriate reserves.  Other than a limited, $500 portion of certainof its own product replacement claims that it is administering, PIP.America isindemnified by PIP/USA, Inc., Poly Implants Protheses, S.A., and PolyImplants Protheses, S.A.’s President, Jean Claude Mas, personally, from allclaims, including those asserted above.

 

PIP.America eitheralready has, or is in the process of, asserting its indemnification claims and,in the event of an adverse judgment in any case, PIP.America intends to seekthe benefits of this indemnity.  As a result,we believe the costs

 

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associated with these matters will not have a material adverse impacton our business, results of operations or financial position.

 

MediCor and itssubsidiaries have been and will continue to be periodically named as adefendant in other lawsuits in the normal course of business, including productliability and product warranty claims. In the majority of such cases, the claims are dismissed, or settled for *de minimis* amounts.  Litigation, particularlyproduct liability litigation, can be expensive and disruptive to normalbusiness operations and the results of complex proceedings can be verydifficult to predict.  Claims againstMediCor or its subsidiaries have been and are periodically reviewed withcounsel in the ordinary course of business. We presently believe we or oursubsidiaries have meritorious defenses in all lawsuits in which we or oursubsidiaries are defendants, subject to the subsidiaries’ continuing productreplacement obligations, which the subsidiaries intend to continue tosatisfy.  While it is not possible topredict the outcome of these matters, we believe that the costs associated withthem will not have a material adverse impact on our business, results ofoperations or financial position.

 

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

 

None.

 

**PART II**

 

***ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS***

 

**Market Information**

 

On September 22, 2005, we had 570 stockholders ofrecord. Our common stock price at the close of business on September 26,2005 was $3.70 per share.  The average ofthe bid and asked price on that date was $3.75.

 

During the quarter ended June 30, 2005, we issued187 shares of series A preferred stock to two accredited investors for a totalof $187,000 for employee wages and consulting fees.  No commissions were paid in connection withthe sale of these shares.  In addition,850 shares were issued in lieu of cash for dividends paid-in-kind.  On June 30, 2005, 5,755 shares of our Series Apreferred stock was converted to 1,494,857 shares of our common stock.  During the fourth quarter of fiscal 2005, wegranted 1,845,000 in stock options to our employees, directors andnon-employees.

 

**Dividends**

 

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

 

***ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION***

 

***Sales***

 

Sales for the fiscal year ended June 30, 2005equaled $26,958,547, an increase of $25,536,964 as compared to the prior fiscalyear of $1,421,583.  The sales of oursubsidiary Eurosilicone, acquired on July 5, 2004, drove the increase insales versus the prior year periods.  On a pro forma basis, sales for thefiscal year ended June 30, 2005, increased by about $4.4 million orapproximately 20% versus the prior year period. Excluding the estimated impact of foreign exchange rates, the growthrate was about 16%.  The growth betweenperiods was attributable to strong unit sales resulting from continued salesefforts and strong demand.

 

***Cost of Sales***

 

Cost of sales as a percentage of net sales for thefiscal year ended June 30, 2005 were approximately 56% compared toapproximately 29% at fiscal year ended June 30, 2004, although the prioryear figure does not include the cost of sales for Eurosilicone, so may not becomparable. The majority of the costs associated with the production of ourproduct are recurring, and primarily include labor, raw material and qualitycontrol costs.  On the basis of theresults for the year ended June 30, 2005 which included twelve months ofresults for Eurosilicone, we expect that cost of sales in the future willremain in line on a percentage basis with this historic level of approximately56%.

 

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***Selling, General and Administrative***

 

Selling, general and administrative (“SG&A”)expenses increased to $19,036,374 for the fiscal year ended June 30, 2005as compared to $8,483,694 for the fiscal year ended June 30, 2004.  One of the sources to the increase inexpenses can be attributed to the costs from the operations of Eurosiliconewhich accounted for $8,421,025, all of which was not included in the prior yearperiod.  An additional $1,092,886 inSG&A expenses are associated with the operations of our Latin Americasubsidiaries which were not included in the prior year.  The remaining increase of $1,038,709 can beattributed to: travel related expenses of $597,606; payroll and payroll relatedexpenses of $351,381 and licensing fees of $84,892.  Of all SG&A expenses, about two-thirdswere recurring charges.  The reason forthe level of SG&A expenses relative to revenue are due to normal start upperiod costs and costs associated with establishing and maintaining a fixedinfrastructure.  As our business andsales increase, we anticipate that recurring SG&A expenses will increase inabsolute dollars, but decrease as a percentage of sales.

 

***Research and Development***

 

Research and developmentin the fiscal year ended June 30, 2005 was $2,691,333 as compared to$2,149,049 for the comparable period in 2004.  The increase of $542,284 isprimarily attributable to a net increase of higher spending associated with thesaline breast implant clinical trials.  Costs associated with the PIPproduct were $148,082 and costs relating to the development of other productlines were $394,202.  We expect thatresearch and development expenses will decrease once we receive requiredgovernment approvals, but will increase as we bring new products to market orexisting products to new markets.

 

***Interest Expense***

 

Interest expense increased to $5,315,568 for thefiscal year ended June 30, 2005 as compared to $1,195,543 at June 30,2004.  Interest expense consistsprimarily of interest related to borrowings.  The change in interestexpense was primarily due to a significant increase in the average principalnote payable to related party balances incurred as a result of the Eurosiliconeacquisition.

 

***Other Expense***

 

Other expenses decreased to $106,903 during the fiscalyear ended June 30, 2005 from $5,686,849 for the fiscal year ended June 30,2004.   Other expenses consistedprimarily of an impairment loss on a patent of $74,129.  During the year ended June 30, 2005, theCompany wrote off one patent that carried a fair market value of $100,000 dueto it being abandoned and subsequently expiring.  A decision had been made not to pursue anyefforts toward reinstatement, based upon an analysis of value and utility tothe Company.

 

***Net Loss***

 

Net loss at the fiscal year ended June 30, 2005increased to $17,281,768 from $16,566,733 at June 30, 2004.  The increasein net loss was due to higher selling costs, general and administrativeexpenses, research and development and interest expense.  Basic and diluted loss per share at thefiscal year ended June 30, 2005 was ($.093) as compared to ($0.94) atfiscal year ended June 30, 2004.

 

**Liquidityand Capital Resources**

 

Cash used in operations during the fiscal year ended June 30,2005 was $12,425,927 as impacted by selling, general and administrativecontinued startup costs, research and development and interest expense. On July 5,2004, we completed the acquisition of Eurosilicone, which had a net effect onour investing activities of ($14,461,239). To complete the acquisition weborrowed an additional $11,000,000 from International Integrated. In connectionwith indebtedness to International Integrated, we entered into a creditfacility with BNP Paribas. Under that facility we initially drew approximately$9,014,680, of which $5,000,000 was repaid to International Integrated. On March 21,2005, we drew an additional $3,965,559 under the BNP Paribas facility to paythe fiscal 2005 performance payment to the sellers of Eurosilicone under theacquisition agreement. The remaining balance of available credit under the BNPParibas facility is tied to performance payments we may have to make to thesellers under the Eurosilicone acquisition agreement during fiscal 2006 and2007.

 

We completed the purchase of substantially all of theassets of privately-held Hutchison International, Inc. on April 25,2005.  As part of this acquisition wewere obligated to pay $250,000 in cash, which we borrowed from InternationalIntegrated.

 

Our ability to make payments to refinance our debt andto fund planned capital expenditures and operations will depend on our abilityto secure additional significant financing and generate sufficient cash in thefuture. Currently, we have only limited product sales in the United States and willnot be in a position to materially increase United States sales until the FDAissues a pre-market approval relating to one or more of the products sought tobe sold by us. We are currently funding activities for two pre-market approvalapplications which are operating expenses. Under our asset purchase agreement

 

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relating to one ofthose product lines, we have an obligation to make additional cash payments onclosing of that transaction (which only occurs following FDA approval of theapplication). Thus, we have no obligation to close this transaction or makethis payment unless the product is cleared for marketing in the United States.We expect we will be able to make that payment from available cash or from theproceeds of affiliate debt, provided by such date we have not concluded athird-party financing.

 

We have historically raised funds to support ouroperating expenses and capital requirements through sales of equity or debtsecurities or through other credit arrangements, including borrowing from ouraffiliates. Our existing cash, cash equivalents and cash generated fromoperations, including the operations of Eurosilicone, will be insufficient tomeet our anticipated cash needs for the next 12 months. To satisfy ourliquidity requirements, we will need to raise additional funds. To the extentadditional sales of equity or debt securities are insufficient to satisfy ourliquidity requirements, we plan on being able to obtain any necessary additionalfunds through the incurrence of additional indebtedness to our affiliates. Wehave received a written commitment from International Integrated, an affiliateof our chairman, to provide sufficient cash to fund any operating expenses andcapital expenditures through July 1, 2006. The same entity has provided tous over $67 million in funding through June 30, 2005. This historicfunding has been a combination of equity and debt. The outstanding debt is arevolving credit facility with interest accruing at 10% per annum. We have noset payment terms, though we try to remain current on payments of interest soas not to incur compound interest. It is payable on demand. As a result, it canbe called at any time, and for any reason. From time to time in connection withour other fund-raising activities, International Integrated has converted someof the debt to equity along side third-party investors. There is no obligationor understanding that any such conversions will occur. We are presently seekingto refinance some or all of the International Integrated indebtedness from acombination of third-party indebtedness, equity and possible conversions ofdebt to equity.

 

We may or may not be successful. In the interim, anyfuture funding from International Integrated may take the form of debt orequity or a combination thereof. We expect our operating losses to continue andanticipate that we will need between $6.0 and $8.0 million in additionalliquidity to cover negative cash flow in fiscal 2006. In addition, to theextent we want to pursue additional acquisitions, we expect that we will needadditional financing. We do not presently have any commitments for suchfinancing and it may not be available when we need it, on terms acceptable tous or at all. The lack of adequate financing could adversely affect our abilityto effect acquisitions. Our Eurosilicone Holdings subsidiary may be required tomake a performance payment of up to €3 million to the sellers in each of fiscal2006 and 2007 under the Eurosilicone acquisition agreement. If these paymentsare required and Eurosilicone Holdings does not otherwise have sufficient fundsfrom dividends or distributions from Eurosilicone, Eurosilicone Holdingsintends to draw the necessary funds from its credit facility with BNP Paribas,which was established in part specifically to provide a back-up funding sourcefor these performance payments. Eurosilicone has positive cash flow that issufficient to fund all of its operational and projected capital needs. As aresult, and with the bank financing of the possible performance payments, we donot expect Eurosilicone to have any additional liquidity needs.

 

Our revenues are primarily denominated in U.S. dollarsand in Euros, with U.S. dollars accounting for approximately 50% of totalrevenues. Our expenses are primarily denominated in U.S. dollars, with theexception of certain operating expenses of Eurosilicone. We have a net foreignexchange exposure impact of approximately 10% of our sales, which is primarilyattributable to the Euro. We do not currently hedge against foreign exchangerisk and do not have any plan to do so in the immediate future.

 

***ITEM7. FINANCIAL STATEMENTS***

 

The Financial Statementsbegin on page F-1.

 

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

 

Not applicable.

 

***ITEM 8A.      CONTROLS ANDPROCEDURES***

 

As of the end of fiscal year 2005, management, withthe participation of the chief executive and financial officers, carried out anevaluation of the effectiveness of our disclosure controls and procedurespursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the chief executive officer and the chieffinancial officer believe that, as of end of the fiscal quarter covered by thisreport, our disclosure controls and procedures were effective in making knownto them material information relating to MediCor (including its consolidatedsubsidiaries) required to be included in this report.  There were no significant changes in ourinternal control over financial reporting during the three months ended June 30,2005 that have materially affected or are likely to materially affect ourinternal control over financial reporting.

 

22

----

 

Management of MediCor is responsible for establishingand maintaining effective internal control over financial reporting as isdefined in Exchange Act Rule 13a-15(f). The consolidated financial statements and other information presented inthis annual report have been prepared in accordance with accounting principlesgenerally accepted in the United States. MediCor’s internal control system was designed to provide reasonableassurance to our management and board of directors regarding the preparationand fair presentation of published financial statements.  Disclosure controls and procedures, no matterhow well designed and implemented, can provide only reasonable assurance ofachieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitationsinherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can befaulty and that breakdowns in internal control can occur because of humanfailures such as simple errors or mistakes or intentional circumvention of theestablished process.  Management assessedits internal control over financial reporting as of June 30, 2005 inrelation to the criteria for effective internal control established in “InternalControl-Integrated Framework” issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on this assessment, management determined that, as of June 30,2005, MediCor maintained effective internal control over financialreporting.  [Greenberg & CompanyCPAs, the registered public accounting firm that audited the financialstatements included in this annual report, has issued an attestation report onmanagement’s assessment of MediCor’s internal control over financialreporting.]  Management will continue toreview our disclosure controls and procedures periodically to determine theireffectiveness and to consider modifications or additions to them.

 

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

 

None.

 

**PART III**

 

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

 

The information required in this item is incorporatedherein by reference to the information contained in the registrant’s ProxyStatement for Annual Meeting of Stockholders to be filed with the SEC no laterthan October 28, 2005.

 

***ITEM 10.  EXECUTIVE COMPENSATION***

 

The information required in this item is incorporatedherein by reference to the information contained in the registrant’s ProxyStatement for Annual Meeting of Stockholders to be filed with the SEC no laterthan October 28, 2005.

 

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

 

The information required in this item is incorporatedherein by reference to the information contained in the registrant’s ProxyStatement for Annual Meeting of Stockholders to be filed with the SEC no laterthan October 28, 2005.

 

***ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS***

 

The information required in this item is incorporatedherein by reference to the information contained in the registrant’s ProxyStatement for Annual Meeting of Stockholders to be filed with the SEC no laterthan October 28, 2005.

 

***ITEM 13. EXHIBITS***

 

SeeExhibit Index at Page E-1.

 

***ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES***

 

The information required in this item is incorporatedherein by reference to the information contained in the registrant’s ProxyStatement for Annual Meeting of Stockholders to be filed with the SEC no laterthan October 28, 2005.

 

23

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 of theSecurities Exchange Act of 1934, the registrant caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|   | MEDICOR LTD. |
|--------|--------------|
|   |         |
|   |         |
|   | By:          | /s/ Theodore R. Maloney |
|   |         | Theodore R. Maloney |
|   |         | Chief Executive Officer |
|   |         | September 28, 2005 |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 
| /s/ Theodore R. Maloney |   | Chief Executive Officer  (Principal Executive Officer) |   | September 28, 2005 |
|-------------------------|--------|--------------------------------------------------------|--------|-------------------------|
| Theodore R. Maloney     |   |                                                   |   |
|                    |   |                                                   |   |                    |
| /s/ Thomas R. Moyes     |   | Chief Financial Officer  (Principal Financial Officer) |   | September 28, 2005 |
| Thomas R. Moyes         |   |                                                   |   |
|                    |   |                                                   |   |                    |
| /s/ Donald K. McGhan    |   | Chairman                                               |   | September 28, 2005 |
| Donald K. McGhan        |   |                                                   |   |
|                    |   |                                                   |   |                    |
| /s/ Jim J. McGhan       |   | Director                                               |   | September 28, 2005 |
| Jim J. McGhan           |   |                                                   |   |
|                    |   |                                                   |   |                    |
| /s/ Mark E. Brown       |   | Director                                               |   | September 28, 2005 |
| Mark E. Brown           |   |                                                   |   |
|                    |   |                                                   |   |                    |
| /s/ Samuel C. Rogers    |   | Director                                               |   | September 28, 2005 |
| Samuel C. Rogers        |   |                                                   |   |
|                    |   |                                                   |   |                    |
| /s/ Thomas Y. Hartley   |   | Director                                               |   | September 28, 2005 |
| Thomas Y. Hartley       |   |                                                   |   |

 

24

----

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Shareholders and Board of Directors

Medicor Ltd.

Las Vegas, Nevada

 

We have audited the accompanying consolidated balance sheet of MedicorLtd. and subsidiaries (collectively the “Company”) as of June 30, 2005 and therelated consolidated statements of operations and comprehensive income (loss),changes in shareholders’ equity (deficit) and cash flows for each of the twoyears in the period ended June 30, 2005. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based upon our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, anaudit of its internal control over financial reporting.  Our audit included consideration of internalcontrol over financial reporting as a basis of designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing an opinionof the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementspresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements presented abovepresent fairly, in all material respects, the financial position of MedicorLtd. at June 30, 2005, and the results of its operations and cash flows foreach of the two years then ended in conformity with U.S. generally acceptedaccounting principles.

 

 
|                    |   | GREENBERG & COMPANY LLC |
|-------------------------|--------|-----------------------------|
| Springfield, New Jersey |   |                        |
| August 19, 2005         |   |                        |

 

F-1

----

 

**MediCor, Ltd.**

**Consolidated Balance Sheet**

**June 30, 2005**

 
| **Assets**                                                                                                                                         |   |        |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|------------|
|                                                                                                                                               |   |        |       |
| Current assets:                                                                                                                                    |   |        |       |
|                                                                                                                                               |   |        |       |
| Cash                                                                                                                                               |   | $           | 1,834,799  |   |
| Receivables,  less allowance for doubtful accounts of $1,365,613                                                                                   |   | 6,567,476   |       |
| Notes  receivable, less allowance for doubtful accounts of $2,778,584                                                                              |   | —      |       |
| Inventories                                                                                                                                        |   | 3,876,835   |       |
| Prepaid expenses  and other current assets                                                                                                         |   | 232,810     |       |
|                                                                                                                                               |   |        |       |
| Total current  assets                                                                                                                              |   | 12,511,920  |       |
| Property, plant and equipment, net                                                                                                                 |   | 1,141,048   |       |
| Leased property under capital leases, net                                                                                                          |   | 4,060,553   |       |
| Goodwill and other intangibles, net                                                                                                                |   | 43,151,460  |       |
| Deposits                                                                                                                                           |   | 96,180      |       |
| Other assets                                                                                                                                       |   | 618,916     |       |
|                                                                                                                                               |   |        |       |
| Total assets                                                                                                                                       |   | $           | 61,580,077 |   |
|                                                                                                                                               |   |        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                      |   |        |       |
|                                                                                                                                               |   |        |       |
| Current liabilities:                                                                                                                               |   |        |       |
|                                                                                                                                               |   |        |       |
| Notes payable                                                                                                                                      |   | $           | 1,853,523  |   |
| Note payable to  related party                                                                                                                     |   | 50,533,489  |       |
| Accounts payable                                                                                                                                   |   | 6,091,388   |       |
| Obligations  under capital leases                                                                                                                  |   | 397,168     |       |
| Accrued expenses  and other current liabilities                                                                                                    |   | 3,377,806   |       |
| Payroll taxes  payable                                                                                                                             |   | 1,061,330   |       |
| Interest payable  to related party                                                                                                                 |   | 3,609,908   |       |
|                                                                                                                                               |   |        |       |
| Total current  liabilities                                                                                                                         |   | 66,924,612  |       |
|                                                                                                                                               |   |        |       |
| Long-term convertible debentures                                                                                                                   |   | 300,000     |       |
| Long-term notes payable                                                                                                                            |   | 12,014,159  |       |
| Long-term obligations under capital leases                                                                                                         |   | 1,843,199   |       |
| Long-term accrued liabilities                                                                                                                      |   | 517,356     |       |
|                                                                                                                                               |   |        |       |
| Total  liabilities                                                                                                                                 |   | 81,599,326  |       |
|                                                                                                                                               |   |        |       |
| Commitments and contingencies (Note U)                                                                                                             |   |        |       |
|                                                                                                                                               |   |        |       |
| Preferred shares subject to mandatory redemption  requirements                                                                                     |   | 6,573,258   |       |
|                                                                                                                                               |   |        |       |
| Stockholders’ equity (deficit)                                                                                                                |   |        |       |
| Common shares,  $.001 par value, 100,000,000 shares authorized, 20,353,455 shares issued,  20,333,157 shares outstanding and 20,298 shares retired |   | 20,300      |       |
| Additional paid  in capital                                                                                                                        |   | 26,926,753  |       |
| Deferred  compensation                                                                                                                             |   | (26,500     | )          |
| Accumulated  (deficit)                                                                                                                             |   | (53,275,603 | )          |
| Accumulated  other comprehensive income (loss)                                                                                                     |   | (237,457    | )          |
|                                                                                                                                               |   |        |       |
| Stockholders’  equity (deficit)                                                                                                               |   | (26,592,507 | )          |
|                                                                                                                                               |   |        |       |
| Total  liabilities and stockholders’ equity                                                                                                   |   | $           | 61,580,077 |   |

 

Seeaccompanying notes to consolidated financial statements

 

F-2

----

 

**MediCor, Ltd.**

**Consolidated Statements of Operations andComprehensive Income/(Loss)**

**For the Years Ended as Noted**

 
| ** **                                                 | ** ** | **June 30, 2005** | ** **  | **June 30, 2004** | ** ** |
|------------------------------------------------------------|------------|-------------------|-------------|-------------------|------------|
| Net sales                                                  |       | $                 | 26,958,547  |              | $          | 1,421,583 |   |
| Cost of sales                                              |       | 15,163,457        |        | 412,713           |       |
| Return of consigned inventory previously written  down     |       | (350              | )           | (60,175           | )          |
|                                                       |       |              |        |              |       |
| Gross profit                                               |       | 11,795,440        |        | 1,069,045         |       |
|                                                       |       |              |        |              |       |
| Operating Expenses:                                        |       |              |        |              |       |
| Selling, general and administrative expenses               |       | 19,036,314        |        | 8,483,694         |       |
| Research and development                                   |       | 2,691,333         |        | 2,149,049         |       |
| Other expenses                                             |       | 106,903           |        | 5,686,849         |       |
|                                                       |       |              |        |              |       |
| Operating income  / (loss)                                 |       | (10,039,110       | )           | (15,250,547       | )          |
|                                                       |       |              |        |              |       |
| Net interest expense / (income)                            |       | 5,315,568         |        | 1,195,543         |       |
|                                                       |       |              |        |              |       |
| Income / (loss) before income taxes                        |       | (15,354,678       | )           | (16,446,090       | )          |
| Income tax  expense (benefit)                              |       | 542,555           |        | 1,737             |       |
|                                                       |       |              |        |              |       |
| Net income / (loss)                                        |       | (15,897,233       | )           | (16,447,827       | )          |
| Preferred  dividends deemed                                |       | 262,600           |        | 91,558            |       |
| Preferred  dividends in arrears Series A Preferred 8% |       | 884,478           |        | 27,388            |       |
|                                                       |       |              |        |              |       |
| Net loss attributable to common stockholders               |       | (17,044,311       | )           | (16,566,773       | )          |
|                                                       |       |              |        |              |       |
| Other comprehensive income / (loss), net of tax:           |       |              |        |              |       |
| Foreign currency  translation adjustments                  |       | (237,457          | )           | —            |       |
|                                                       |       |              |        |              |       |
| Comprehensive income / (loss)                              |       | $                 | (17,281,768 | )                 | $          | (16,566,773 | ) |
|                                                       |       |              |        |              |       |
| Loss per share data:                                       |       |              |        |              |       |
| Weighted average shares, basic and diluted                 |       | 18,233,175        |        | 17,633,120        |       |
| Basic and diluted                                          |       |              |        |              |       |
| Net loss per share                                         |       | $                 | (0.93       | )                 | $          | (0.94 | ) |

 

See accompanying notes toconsolidated financial statements

 

F-3

----

 

**MediCor, Ltd.**

**Consolidated Statements of CashFlows**

**For the Years Ended June 30,2005 and 2004**

 
| ** **                                                                                                                                                                                                | ** ** | **2005**    | ** **  | **2004**    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                                                                                                                |       |        |        |        |       |
| Net loss                                                                                                                                                                                                  |       | $           | (16,134,690 | )           | $          | (16,447,827 | ) |
| Adjustments to  reconcile net loss to net cash utilized by operating activities:                                                                                                                          |       |        |        |        |       |
| Depreciation and  amortization                                                                                                                                                                            |       | 1,799,958   |        | 488,503     |       |
| Provision for  doubtful accounts                                                                                                                                                                          |       | 3,626,748   |        | (2,634,384  | )          |
| Inventory write  down                                                                                                                                                                                     |       | 350         |        | 60,175      |       |
| Loss on disposal  of property, plant and equipment                                                                                                                                                        |       | —      |        | 22,928      |       |
| Non-employee  stock options                                                                                                                                                                               |       | 179,297     |        | 74,156      |       |
| Employee  preferred stock                                                                                                                                                                                 |       | 267,000     |        | 940,000     |       |
| Directors  restricted common stock                                                                                                                                                                        |       | 79,500      |        | —      |       |
| Changes in  operating assets and liabilities                                                                                                                                                              |       |        |        |        |       |
| Receivables                                                                                                                                                                                               |       | (2,543,076  | )           | 2,908,240   |       |
| Notes receivable                                                                                                                                                                                          |       | (2,474,156  | )           | (277,043    | )          |
| Inventories                                                                                                                                                                                               |       | (479,320    | )           | (24,233     | )          |
| Prepaid expenses  and other current assets                                                                                                                                                                |       | 512,677     |        | (153,692    | )          |
| Investment  advances and deferred charges                                                                                                                                                                 |       | —      |        | (29,019,801 | )          |
| Goodwill                                                                                                                                                                                                  |       | (617,675    | )           | —      |       |
| Deposits                                                                                                                                                                                                  |       | 617,675     |        | 5,062,910   |       |
| Other assets                                                                                                                                                                                              |       | (588,822    | )           | 17,179      |       |
| Bank overdraft                                                                                                                                                                                            |       | —      |        | (128,387    | )          |
| Accounts payable                                                                                                                                                                                          |       | 39,246      |        | 1,281,620   |       |
| Accrued expenses  and other current liabilities                                                                                                                                                           |       | 398,662     |        | 54,890      |       |
| Payroll taxes  payable                                                                                                                                                                                    |       | 564,070     |        | 20,450      |       |
| Interest payable                                                                                                                                                                                          |       | 3,666,016   |        | 177,437     |       |
| Long term  accrued liabilities                                                                                                                                                                            |       | (1,339,417  | )           | (74,180     | )          |
| Net cash  provided by (utilized) operating activities                                                                                                                                                     |       | (12,425,957 | )           | (37,651,059 | )          |
|                                                                                                                                                                                                      |       |        |        |        |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                                                                                                                |       |        |        |        |       |
| Payments for  property, plant and equipment                                                                                                                                                               |       | (373,433    | )           | (44,994     | )          |
| Payments for  purchase of Laboratoires Eurosilicone S.A., net of cash acquired                                                                                                                            |       | (13,942,806 | )           | —      |       |
| Payments for  purchase of Deramedics, net of cash aquired                                                                                                                                                 |       | (75,000     | )           | —      |       |
| Payments for  asset purchase of Hutchison International, Inc., net of cash aquired                                                                                                                   |       | (250,000    | )           |        |       |
| Net cash  provided by (utilized) investing activites                                                                                                                                                      |       | (14,641,239 | )           | (44,994     | )          |
|                                                                                                                                                                                                      |       |        |        |        |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                                                                                                                |       |        |        |        |       |
| Principal  payments under capital lease obligation                                                                                                                                                        |       | (515,169    | )           | —      |       |
| Proceeds from  issuance of convertible debentures                                                                                                                                                         |       | —      |        | 1,350,000   |       |
| Proceeds from  issuance of short term debt                                                                                                                                                                |       | 22,873,812  |        | 33,798,790  |       |
| Proceeds from  issuance of long term debt                                                                                                                                                                 |       | 10,901,112  |        | —      |       |
| Payments on  convertible debentures                                                                                                                                                                       |       | (300,000    | )           | (60,000     | )          |
| Payments on  short term debt                                                                                                                                                                              |       | (5,872,912  | )           | —      |       |
| Issuance of  common stock                                                                                                                                                                                 |       | 585,895     |        | 11,523      |       |
| Purchase of  treasury stock                                                                                                                                                                               |       | —      |        | (39,999     | )          |
| Issuance of  preferred shares subject mandatory redemption requirements                                                                                                                                   |       | 862,100     |        | 2,750,200   |       |
| Dividends paid  on preferred shares subject mandatory redemption requirements                                                                                                                             |       | (35,392     | )           | —      |       |
| Net cash  provided by (utilized) financing activities                                                                                                                                                     |       | 28,499,446  |        | 37,810,514  |       |
|                                                                                                                                                                                                      |       |        |        |        |       |
| **EFFECT  ON EXCHANGE RATE CHANGES ON CASH**                                                                                                                                                              |       | 237,457     |        | —      |       |
|                                                                                                                                                                                                      |       |        |        |        |       |
| Net increase in  cash                                                                                                                                                                                     |       | 1,669,707   |        | 114,461     |       |
| Cash at  beginning of period                                                                                                                                                                              |       | 165,092     |        | 50,631      |       |
|                                                                                                                                                                                                      |       |        |        |        |       |
| **CASH AT  END OF PERIOD**                                                                                                                                                                                |       | $           | 1,834,799   |        | $          | 165,092 |   |
|                                                                                                                                                                                                      |       |        |        |        |       |
| **SUPPLEMENTAL  DISCLOSURE OF NON-CASH ACTIVITIES**                                                                                                                                                       |       |        |        |        |       |
|                                                                                                                                                                                                      |       |        |        |        |       |
| Conversion of  short-term debt to preferred stock                                                                                                                                                         |       | $           | 250,000     |        | $          | — |   |
| Conversion of  short-term debt to common stock                                                                                                                                                            |       | $           | 512,160     |        | $          | — |   |
| Issuance of  preferred stock to employees/consultants                                                                                                                                                     |       | $           | 267,000     |        | $          | — |   |
| Issuance of  common stock to directors                                                                                                                                                                    |       | $           | 79,500      |        | $          | — |   |
| The Company  converted 5,755 Shares of our Series A preferred stock to 1,494,857 shares of  our common stock with a stated value of                                                                       |       | $           | 5,755,200   |        | $          | — |   |
| The Company  purchased all of the capital stock of Laboratories Euorsilcone S.A.S. for $43,297,915.  In conjunction with the acquisition, liabilities were assumed as follows:                            |       |        |        |        |       |
| Fair value of  assets acquired                                                                                                                                                                            |       | $           | 20,275,250  |        |       |   |
| Goodwill                                                                                                                                                                                                  |       | $           | 32,103,570  |        |       |   |
| Cash paid for  capital stock                                                                                                                                                                              |       | $           | (43,297,915 | )           |       |   |
| Liabilities  assumed                                                                                                                                                                                      |       | $           | (9,080,905  | )           |       |   |
|                                                                                                                                                                                                      |       |        |        |        |       |
| Included in the  fair value of assets acquired and liabilities assumed is $2,366,059 for capital  lease obligations.                                                                                      |       |        |        |        |       |
|                                                                                                                                                                                                      |       |        |        |        |       |
| The Company  purchased all of the capital stock of Dermatological Medical Products and  Specialites, S.A. de C.V. for $75,000. In conjunction with the acquisition,  liabilities were assumed as follows: |       |        |        |        |       |
| Fair value of  assets acquired                                                                                                                                                                            |       | $           | 75,000      |        |       |   |
| Cash paid for  capital stock                                                                                                                                                                              |       | $           | (75,000     | )           |       |   |
| Liabilities  assumed                                                                                                                                                                                      |       | $           | —      |        |       |   |
|                                                                                                                                                                                                      |       |        |        |        |       |
| The Company  purchased all of the assets and liabilites of Hutchinson  International, Inc. for $3,000,0003. In conjunction with the  acquisition, liabilities were assumed as follows:               |       |        |        |        |       |
| Fair value of  assets acquired                                                                                                                                                                            |       | $           | 3,282,928   |        |       |   |
| Cash paid and  common stock issued for assets and liabilities                                                                                                                                             |       | $           | (3,000,003  | )           |       |   |
| Liabilities  assumed                                                                                                                                                                                      |       | $           | (282,925    | )           |       |   |
|                                                                                                                                                                                                      |       |        |        |        |       |
| A capital lease  obligation of $188,612 was incurred when the Company entered into a lease for  new vehicles.                                                                                             |       |        |        |        |       |
|                                                                                                                                                                                                      |       |        |        |        |       |
| **SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION**                                                                                                                                                     |       |        |        |        |       |
| Cash paid during  the period for:                                                                                                                                                                         |       |        |        |        |       |
|                                                                                                                                                                                                      |       |        |        |        |       |
| Interest                                                                                                                                                                                                  |       | $           | 2,235,397   |        | $          | 390,701 |   |
| Taxes                                                                                                                                                                                                     |       | $           | 1,661,719   |        | $          | 1,737 |   |

 

See accompanying notes toconsolidated financial statements

 

F-4

----

 

**MediCor Ltd.**

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

**For the Years Ended As Noted**

 
| ** **                                 | ** ** | ** **         | ** ** | **Common**        | ** ** | ** **           | ** ** | ** **       | ** ** | ** **      | ** ** | **Accumulated  Other** | ** ** | ** **  | ** ** |
|--------------------------------------------|------------|--------------------|------------|-------------------|------------|----------------------|------------|------------------|------------|-----------------|------------|------------------------|------------|-------------|------------|
| ** **                                 | ** ** | **Number  of**     | ** ** | **Shares  $.001** | ** ** | **Additional  Paid** | ** ** | **Deferred**     | ** ** | **Accumulated** | ** ** | **Comprehensive**      | ** ** | ** **  | ** ** |
| ** **                                 | ** ** | **Common  Shares** | ** ** | **Par  Value**    | ** ** | **in  Capital**      | ** ** | **Compensation** | ** ** | **Deficit**     | ** ** | **Income/(Loss)**      | ** ** | **Total**   | ** ** |
| ** **                                 | ** ** | ** **         | ** ** | ** **        | ** ** | ** **           | ** ** | ** **       | ** ** | ** **      | ** ** | ** **             | ** ** | ** **  | ** ** |
| **Balance  - July 1, 2003**                |       | 17,518,161         |       | 17,518            |       | 16,910,432           |       | —           |       | (19,651,922     | )          | —                 |       | (2,723,973  | )          |
| Issuance of  Common Shares                 |       | 547,402            |       | 548               |       | 493,026              |       | —           |       | —          |       | —                 |       | 493,574     |       |
| Non-Employee  Stock Options                |       | —             |       | —            |       | 74,156               |       | —           |       | —          |       | —                 |       | 74,156      |       |
| Repurchase and  Retirement of Common Stock |       | (20,298            | )          | (20               | )          | —               |       | —           |       | (39,985         | )          | —                 |       | (40,005     | )          |
| Net Loss                                   |       | —             |       | —            |       | —               |       | —           |       | (16,539,385     | )          | —                 |       | (16,539,385 | )          |
| **Balance  - June 30, 2004**          |       | 18,045,265         |       | 18,046            |       | 17,477,614           |       | —           |       | (36,231,292     | )          | —                 |       | (18,735,633 | )          |
| Issuance of  Common Shares                 |       | 2,287,892          |       | 2,254             |       | 9,269,842            |       | —           |       | —          |       | —                 |       | 9,325,097   |       |
| Directors  Restricted Common Stock         |       | —             |       | —            |       | —               |       | (26,500          | )          | —          |       | —                 |       | (79,500     | )          |
| Non-Employee  Stock Options                |       | —             |       | —            |       | 179,297              |       | —           |       | —          |       | —                 |       | 179,297     |       |
| Foreign Currency  Translation Adjustments  |       | —             |       | —            |       | —               |       | —           |       | —          |       | (237,457               | )          | (237,457    | )          |
| Net Loss                                   |       | —             |       | —            |       | —               |       | —           |       | (17,044,311     | )          | —                 |       | (17,044,311 | )          |
| **Balance  - June 30, 2005**          |       | 20,333,157         |       | $                 | 20,300     |                 | $          | 26,926,753       |       | $               | (26,500    | )                      | $          | (53,275,603 | )          | $ | (237,457 | ) | $ | (26,592,507 | ) |
|                                            |            |                    |            |                   |            |                      |            |                  |            |                 |            |                        |            |             |            |  |  |  |  |  |  |

 

Seeaccompanying notes to consolidated financial statements

 

F-5

----

 

**MEDICOR LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005**

 

**Note A - Description of Business**

 

MediCor Ltd. (the “Company” or “MediCor”) is a globalhealth care company that acquires, develops, manufactures and markets productsprimarily for the aesthetic, plastic surgery and dermatology markets. Currentproducts include breast implant products, other implants and scar managementproducts. The Company’s breast implant products are currently sold inapproximately 85 countries, but are not sold in the United States or Canada.Our products are sold primarily in foreign (non-U.S.) countries and foreignsales are currently about 95% of total sales, with the largest country (Brazil)accounting for about 15% of sales. Breast implant and other implants accountfor about 93% of total sales for the year ended June 30, 2005, while scarmanagement products contributed less than 7% of total sales. The Company sellsits products to hospitals, surgical centers and physicians primarily throughdistributors, as well as through direct sales personnel.

 

MediCor was founded in 1999 by chairman of the boardDonald K. McGhan, the founder and former chairman and chief executive officerof Inamed Corporation and McGhan Medical. MediCor’s objective is to be aleading supplier of selected international medical devices and technologies. Toachieve this strategy, MediCor intends to build upon and expand its businesslines, primarily in the aesthetic, plastic and reconstructive surgery anddermatology markets. MediCor intends to accomplish this growth through theexpansion of existing product lines and offerings and through the acquisitionof companies and other assets, including intellectual property rights anddistribution rights.  We believe that theacquisition of Eurosilicone SAS on July 5, 2004 has had a material,positive impact on our historical sales and cash flow, increasing sales fromabout $1.4 million for the year ending June 30, 2004 to about $27.1million for the year ending June 30, 2005 (and as further detailed in theaccompanying financial statements).

 

**Note B - Summary of Significant AccountingPolicies**

 

*Principlesof Consolidation*

 

Theconsolidated financial statements include the accounts of the Company and allof its subsidiaries in which a controlling interest is maintained.  All inter-company 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.

 

*CriticalAccounting Policies and Use of Estimates*****

 

Thepreparation of financial statements in accordance with accounting principlesgenerally accepted in the United States of America requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and disclosure of contingent assets andliabilities. On an on-going basis, we evaluate our estimates and judgments,including those related to revenue recognition, inventories, adequacy ofallowances for doubtful accounts, valuation of long-lived assets and goodwill,income taxes, litigation and warranties. We base our estimates on historicaland anticipated results and trends and on various other assumptions that webelieve are reasonable under the circumstances, including assumptions as tofuture events. The policies discussed below are considered by management to becritical to an understanding of our financial statements. These estimates formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. By their nature,estimates are subject to an inherent degree of uncertainty. Actual results maydiffer from those estimates.

 

##### ***Revenue Recognition***

 

##### **We recognize product revenue, netof sales discounts, returns and allowances, in accordance with Staff AccountingBulletin (SAB) No. 104, “Revenue Recognition” and SFAS No. 48 “RevenueRecognition When Right of Return Exists.” These statements establish thatrevenue can be recognized when persuasive evidence of an arrangement exists,delivery has occurred and all significant contractual obligations have beensatisfied, the fee is fixed or determinable, and collection is consideredprobable. We recognize revenue upon delivery of product to third party distributorsand customers. Due to the widespread holding of consignment inventory in ourindustry, we also recognize revenue when the products are withdrawn fromconsignment inventory in hospitals, clinics and doctors’ offices. Appropriatereserves are established for anticipated returns and allowances based on ourproduct 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**

 

F-6

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##### **our reported sales and results ofoperations. Historically our estimates of return rates have not fluctuated fromthe actual returns by more than 1% to 2%.**

##### ** **

##### ***Allowance for Doubtful Accounts***

##### ** **

##### **MediCor maintains allowances fordoubtful accounts for estimated losses resulting from the inability of some ofits customers to make required payments. The allowances for doubtful accountsare based on the analysis of historical bad debts, customer credit-worthiness,past transaction history with the customer, current economic trends, andchanges in customer payment terms. If the financial condition of MediCor’scustomers were to deteriorate, adversely affecting their ability to makepayments, additional allowances may be required.**

##### ** **

##### ***Inventories***

##### ** **

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

 

##### ***Property and Equipment***

##### ** **

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

 

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

##### ** **

##### **The Company accounts forlong-lived assets, other than goodwill, in accordance with the provisions ofSFAS No. 144, “Accounting for the Impairment and Disposal of Long LivedAssets,” which supersedes SFAS No. 121 “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be disposed of.”  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.  Adoption of this statement had no materialeffect on its financial position or results of operations.  SFAS No. 144 requires, among otherthings, that an entity review its long-lived assets and certain relatedintangibles for impairment whenever changes in circumstances indicate that thecarrying amount of an asset may not be fully recoverable.  We believe the estimate of our valuation ofLong-lived Assets is a “critical accounting estimate” because if circumstancesarose that led to a decrease in the valuation it could have a material impacton our results of operations.  With theexception of the impairment of a patent which was written off in June 2005,as described in Note I to the financial statements included in our annualreport on Form 10-KSB, the Company does not believe that any other changeshave taken place.**

##### ** **

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

##### ** **

##### **Goodwill represents the excess ofthe purchase price over the estimated fair value of identified assets thebusinesses acquired. Other intangible assets are recorded at fair value andamortized over periods ranging from 3 to 20 years.  The Company adopted SFAS No. 142 “Goodwilland Other Intangible Assets,” in January 2002. As a result, goodwill is nolonger amortized, but was subject to a transitional impairment analysis and istested for impairment on an annual basis. The test for impairment involves theuse of estimates related to the fair values of the business operations withwhich goodwill is associated and is usually based on a market value approach.Other intangible assets are amortized using the straight-line method over theirestimated useful lives and are evaluated for impairment under SFAS No. 144.**

##### ** **

##### ***Product Replacement Programs***

##### ** **

III Acquisition Corp. d/b/a PIP.America (“PIP.America”)and MediCor Aesthetics, subsidiaries of the Company in the U.S., provides aproduct replacement program to surgeons for deflations of breast implantproducts for a period of ten (10) years from the date of implantation. Foreach deflation, the surgeon receives financial assistance plus a free implantreplacement. Management estimated the amount of potential future productreplacement claims based on statistical analysis. Expected future obligationsare determined based on the history of product shipments and claims and arediscounted to a current value, and this amount is reserved. Changes to actualclaims, interest rates or other estimations could have a material impact on thestatistical calculation which could materially impact the Company’s reservesand results of operations. Although these products are not currently being sold(because they are in the process of obtaining FDA approval, as more fullydescribed below), they were sold under a distribution agreement prior to November 2000and a reserve for product replacements is maintained for the products sold inprior years.  Eurosilicone, a subsidiaryof the Company located in France, has historically not provided a productreplacement program or any similar program. Additionally, it has solely relied on third-party

 

F-7

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distributors. As a result, Eurosilicone does not maintain a reserve.  In April, Eurosilicone announced theformation of a product replacement program for marketing purposes, but as ofthe year ended June 30, 2005, it has not committed to such a program norsigned up any distributors or doctors. The Company expects to provide for a reserve in the future for such aprogram under the same approach as described above.  Until the implementation of the program andthe completion of the analysis, the Company cannot currently estimate any such reserves,which may be material.

 

For the fiscal year ended June 30, 2005,PIP.America has paid $2,161,775 with respect to settlements under its productreplacement program for products previously sold under its distributionagreement with Poly Implants Protheses S.A. (“PIP”), a third-party manufacturerof breast implants. Due to PIP.America’s agreement with PIP, this amount hasbeen recorded under the revolving promissory note as described in Note F, andtherefore does not impact our reserve listed below.

 

As of June 30, 2005 PIP.America and MediCorAesthetics product replacement program reserve consisted of:

 
| ** **                                                  | ** ** | **Product   Replacement Reserve** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------|------------|
|                                                        |       |                              |       |
| Balance at June 30, 2004                               |       | $                                 | 2,057,991  |   |
| Accruals for product replacements issued during the  period |       | 1,107,856                         |       |
| Settlements incurred during the period                      |       | (2,161,775                        | )          |
|                                                        |       |                              |       |
| Balance at June 30, 2005                               |       | $                                 | 1,004,072  |   |

 

##### ***Shipping and Handling Costs***

##### ** **

##### **The Company’s shipping andhandling costs are included under cost of sales.**

##### ** **

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

##### ** **

##### **Research and development costsare expensed by the Company as incurred, including the costs of clinicalstudies and other regulatory approval activities.**

##### ** **

##### ***Stock-Based Compensation***

##### ** **

The Company has adoptedthe provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.”In accordance with SFAS No. 123, MediCor has elected the disclosure-onlyprovisions related to employee stock options and follows the intrinsic valuemethod in Accounting Principals Board Opinion (APB) No. 25 in accountingfor stock options issued to employees. Under APB No. 25, compensationexpense, if any, is recognized as the difference between the exercise price andthe fair value of the common stock on the measurement date, which is typicallythe date of grant, and is recognized over the service period, which istypically the vesting period.

 

The Company accounts foroptions and warrant grants to non-employees using the guidance prescribed bySFAS No. 123, Financial Accounting Standards Board (FASB) Interpretation No. 44,“Accounting for Certain Transactions Involving Stock Compensation, andinterpretation of APB No. 25,” and Emerging Issue Task Force No. 96-18,“Accounting for Equity Instruments That Are Issued to Other Than Employees forAcquiring, or In Conjunction with Selling, Goods, or Services,” whereby thefair value of such option and warrant grants are measured using the Fair ValueBased Method at the earlier of the date at which the non-employee’s performanceis completed or a performance commitment is reached.

 

The following table illustrates the effect on netincome and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation,” to stock-based employee compensation including the requireddisclosures of SFAS No. 148, “Accounting for Stock-Based Compensation—Transitionand Disclosure—and Amendment of FASB Statement No. 123” (“SFAS No. 148”).

 

F-8

----

 
| ** **                                                                                                                                          | ** ** | **Year Ended**         | ** **  | **Year Ended**         | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|------------------------|------------|
| ** **                                                                                                                                          | ** ** | **June 30, 2005** | ** **  | **June 30, 2004** | ** ** |
|                                                                                                                                                |       |                   |        |                   |       |
| Net Loss, as reported                                                                                                                               |       | $                      | (17,281,768 | )                      | $          | (16,566,773 | ) |
|                                                                                                                                                |       |                   |        |                   |       |
| Add: Total  stock-based non-employee compensation expense determined under fair value  based method for all awards, net of related tax effects      |       | 179,297                |        | 74,157                 |       |
|                                                                                                                                                |       |                   |        |                   |       |
| Deduct:  Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |       | (640,402               | )           | (494,157               | )          |
|                                                                                                                                                |       |                   |        |                   |       |
| Pro forma net loss                                                                                                                                  |       | $                      | (17,742,873 | )                      | $          | (16,986,773 | ) |
|                                                                                                                                                |       |                   |        |                   |       |
| Loss per share:                                                                                                                                     |       |                   |        |                   |       |
| Basic and  diluted - as reported                                                                                                                    |       | $                      | (0.93       | )                      | $          | (0.94 | ) |
|                                                                                                                                                |       |                   |        |                   |       |
| Basic and  diluted - pro forma                                                                                                                      |       | $                      | (0.97       | )                      | $          | (0.96 | ) |

 

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

 

The estimated fair valueof each MediCor option granted is calculated using the Black-Scholes pricingmodel The weighted average assumptions used in the model were as follows:

 
| ** **                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |
| Risk-free interest rate       |       | 3.50%    |       | 3.50%    |       |
| Expected years until exercise |       | 7 Years  |       | 7 Years  |       |
| Expected stock volatility     |       | 50.0%    |       | 50.0%    |       |
| Dividend yield                |       | 0%       |       | 0%       |       |

 

At fiscal year end June 30,2005 the Company had issued 267 shares of restricted Series A 8.0%Convertible Preferred Stock to consultants and an employee in lieu of cash ascompensation to their fees and salary. There is no requirement of vesting, theonly restriction being that the shares and the underlying common stock intowhich they are convertible are not registered under the Securities Act. Theliquidation preference of the preferred stock is $367,000 and, based on theconversion price of the preferred stock of $3.85, the number of common sharesissuable upon conversion is 69,351. Compensation expense of $267,000 was recordedin the year ended June 30, 2005.

 

*IncomeTaxes*

 

Deferred income taxassets or liabilities are computed based on the temporary differences betweenthe financial statement and income tax bases of assets and liabilities usingthe statutory marginal income tax rate in effect for the years in which thedifferences are expected to reverse. Deferred income tax expenses or creditsare based on the changes in the deferred income tax assets or liabilities fromperiod to period. A valuation allowance against deferred tax assets is requiredif, based on the weight of available evidence, it is more likely than not thatsome portion or all of the deferred tax assets will not be realized. Thevaluation allowance should be sufficient to reduce the deferred tax asset tothe amount that is more likely than not to be realized.

 

##### ***Effects of Recent Accounting Pronouncements***

 

In July 2004, FASB released draft abstract EITFIssue No. 04-08, “The Effect of Contingently Convertible Debt on DilutedEarnings per Share” (“EITF No. 04-08”), for comment. The objective of EITFNo. 04-08 is to provide guidance for whether contingently convertible debtinstruments should be included in diluted earnings per share calculations. Thedraft abstract reflects the EITF’s tentative conclusion that contingentlyconvertible debt should be included in diluted earnings per share calculationsregardless of whether or not the trigger price has been reached. In its September meeting,the EITF confirmed the July conclusion, and the guidance becomes effectiveDecember 15, 2004. The Company does not believe the impact of EITF No. 04-08is significant to its results of operations or financial position. The Companyadopted the guidance in the year ended June 30, 2005.

 

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs—An Amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”).SFAS No. 151 requires abnormal amounts of idle facility expense, freight,handling costs, and wasted material be recognized as current-period charges. Inaddition, SFAS 151 requires that allocation of fixed production overheads tothe costs of conversion be based on the normal capacity of the productionfacilities. This statement is applicable to fiscal years beginning after June 15,2005. The Company does not anticipate the adoption of SFAS 151 will have amaterial impact on its financial position or results from operations.

 

In December 2004, FASB issued Statement ofFinancial Accounting Standards SFAS No. 123R, “Share-Based Payment”, whichestablishes standards for the accounting for transactions in which an entityexchanges its equity instruments for goods or services. A key provision of thisstatement is the requirement of a public entity to measure the cost of employeeservices received in exchange for an award of equity instruments (includingstock options) based on the grant date fair value of the award. That cost willbe recognized over the period during which an employee is required to provideservice in exchange for the award (i.e., the requisite service period or vestingperiod). This standard becomes effective for the Company January 1, 2006as the Company is currently a small business issuer.

 

In May 2005, FASBissued Statement of Financial Accounting Standards SFAS No. 154, “AccountingChanges and Error Corrections” (“SFAS No. 154”), which replaces APBOpinion No. 20, Accounting Changes and SFAS No. 3, ReportingAccounting Changes in Interim Financial Statements. This pronouncement appliesto all voluntary changes in accounting principle, and revises the requirementsfor accounting for and reporting a change in accounting principle. SFAS No. 154requires retrospective application to prior periods’ financial statements of avoluntary change in accounting principle, unless

 

F-9

----

 

it is impracticable to doso. This pronouncement also requires that a change in the method ofdepreciation, amortization, or depletion for long-lived, non-financial assetsbe accounted for as a change in accounting estimate that is affected by a changein accounting principle. SFAS No. 154 retains many provisions of APBOpinion 20 without change, including those related to reporting a change inaccounting estimate, a change in the reporting entity, and correction of anerror. The pronouncement also carries forward the provisions of SFAS No. 3which govern reporting accounting changes in interim financial statements. SFASNo. 154 is effective for accounting changes and corrections of errors madein fiscal years beginning after December 15, 2005. The Statement does notchange the transition provisions of any existing accounting pronouncements,including those that are in a transition phase as of the effective date of SFASNo. 154. The Company intends to apply the provisions of this statementeffective July 1, 2006.

 

**Note C– Major Customer**

 

During the year ended June 30, 2005, twodifferent distributor customers accounted for 11.5% and 11.7%, respectively, ofthe Company’s consolidated revenue. Revenue related to these two distributorsfor the year ended June 30, 2004 is not comparable due to the acquisitionof Eurosilicone.

 

**Note D – Cash and Cash Equivalents**

 

All highly liquid investments with originalmaturities of three months or less at the date of purchase are considered to becash equivalents.

 

**Note E – Accounts Receivable**

 

Accounts receivable at June 30, 2005 consistedof:

 
| ** **                      | ** ** | **June 30, 2005** | ** ** |
|---------------------------------|------------|------------------------|------------|
|                            |       |                   |       |
| Accounts receivable             |       | $                      | 7,933,089  |   |
| Allowance for doubtful accounts |       | (1,365,613             | )          |
|                            |       |                   |       |
| Total                           |       | $                      | 6,567,476  |   |

 

Changes in allowance for doubtful accounts are asfollows:

 
| Balance  July 1, 2004 |   | $         | 213,021   |   |
|----------------------------|--------|-----------|-----------|--------|
| Provisions / (recovery)    |   | 1,152,592 |      |
| Write-offs                 |   | —    |      |
| Balance June 30, 2005 |   | $         | 1,365,613 |   |

 

F-10

----

 

**Note F – Notes Receivable**

 

Notes receivable at June 30, 2005 consisted of:

 
| ** **                      | ** ** | **June 30, 2005** | ** ** |
|---------------------------------|------------|------------------------|------------|
|                            |       |                   |       |
| Notes receivable                |       | $                      | 2,778,584  |   |
| Allowance for doubtful accounts |       | (2,778,584             | )          |
|                            |       |                   |       |
| Total                           |       | $                      | —     |   |

 

Poly Implants Protheses S.A. (“PIP”), a third-partymanufacturer of breast implants located in France, issued to the Company’sPIP.America subsidiary a revolving promissory note for certain sums to come dueto PIP.America based on PIP.America’s and the manufacturer’s administration ofproduct replacement and product replacement related claims. These amounts have beenfully reserved for, as an allowance for doubtful account, due to the minimalpast payments and uncertain prospect of collection.

 

**Note G – Inventories**

 

Inventoriesat June 30, 2005 consisted of:

 
| ** **      | ** ** | **June 30, 2005** | ** ** |
|-----------------|------------|------------------------|------------|
|            |       |                   |       |
| Raw Materials   |       | $                      | 758,293    |   |
| Work in Process |       | 363,925                |       |
| Finished Goods  |       | 2,754,617              |       |
|            |       |                   |       |
| Total           |       | $                      | 3,876,835  |   |

 

**Note H - Property and Equipment**

 

Propertyand equipment at June 30, 2005 consisted of:

 
| ** **                            | ** ** | **June 30, 2005** | ** ** |
|---------------------------------------|------------|------------------------|------------|
|                                  |       |                   |       |
| Automobiles                           |       | $                      | 86,043     |   |
| Computer Equipment and tools and dies |       | 327,634                |       |
| Furniture, Fixtures and equipment     |       | 470,974                |       |
| Land                                  |       | 144,972                |       |
| Leasehold Improvements                |       | 107,747                |       |
| Machinery and equipment               |       | 690,176                |       |
|                                  |       |                   |       |
| Subtotal                              |       | 1,827,546              |       |
| Accumulated depreciation              |       | (686,499               | )          |
|                                  |       |                   |       |
| Total                                 |       | $                      | 1,141,048  |   |

 

Depreciationexpense was $463,679 for the year ended June 30, 2005 and $132,027 for theyear ended June 30, 2004.  Theincrease is due to the depreciation of the acquired assets of Eurosilicone.

 

F-11

----

 

**Note I – Goodwill and OtherIntangibles**

 

Goodwilland other intangibles as of June 30, 2005 consisted of:

 
| ** **                                                 | ** ** | **June 30, 2005** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|
|                                                       |       |                   |       |
| Goodwill                                                   |       | $                      | 33,400,363 |   |
| Customer - Related Intangibles                             |       | 4,480,820              |       |
| Distribution Agreements                                    |       | 225,000                |       |
| Non-compete                                                |       | 130,000                |       |
| Patents                                                    |       | 3,000,000              |       |
| Supply Agreement                                           |       | 125,000                |       |
| Trademarks / Tradenames                                    |       | 120,128                |       |
| Other                                                      |       | 3,248,146              |       |
|                                                       |       |                   |       |
| Subtotal                                                   |       | 44,729,457             |       |
|                                                       |       |                   |       |
| Accumulated Amortization - Goodwill                        |       | (41,973                | )          |
| Accumulated Amortization - Customer - Related  Intangibles |       | (818,922               | )          |
| Accumulated Amortization - Distribution Agreements         |       | (97,500                | )          |
| Accumulated Amortization - Non-compete                     |       | (130,000               | )          |
| Accumulated Amortization - Patents                         |       | (463,289               | )          |
| Accumulated Amortization - Trademarks / Tradenames         |       | (21,313                | )          |
| Accumulated Amortization - Other                           |       | (5,000                 | )          |
|                                                       |       |                   |       |
| Subtotal                                                   |       | (1,577,997             | )          |
|                                                       |       |                   |       |
| Total                                                      |       | $                      | 43,151,460 |   |

 

Amortization for the yearended June 30, 2005 was $976,835 compared to $356,317 from the priorperiod ending June 30, 2004.  Duringthe year ended June 30, 2005, the Company completed a re-valuation of ourgoodwill and determined that there was no impairment needed for thisasset.  We based this valuation onrelevant comparable public company multiples of sales, EBITDA, and net incomein determining annual amortization of our goodwill asset.

 

During the year ended June 30,2005, the Company wrote off one patent that carried a fair market value of$100,000 due to it being abandoned and subsequently expiring.  A decision had been made not to pursue anyefforts toward reinstatement, based upon an analysis of value and utility tothe Company.  The impaired loss of$74,129 is reported under other expenses on the consolidated statement ofoperations and comprehensive income (loss).

 

The estimatedamortization for the next five years consists of:

 
| ** **                     | ** ** | **June 30, 2006** | ** ** | **June 30, 2007** | ** ** | **June 30, 2008** | ** ** | **June 30, 2009** | ** ** | **June 30, 2010** | ** ** |
|--------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
|                           |       |                   |       |                   |       |                   |       |                   |       |                   |       |
| Customer - Related Intangibles |       | $                      | 813,755    |                   | $          | 813,755                |       | $                      | 813,755    |                   | $          | 813,755 |   | $ | 406,878 |   |
| Distribution Agreements        |       | 22,500                 |       | 22,500                 |       | 22,500                 |       | 22,500                 |       | 22,500                 |       |
| Patents                        |       | 236,902                |       | 236,902                |       | 236,902                |       | 236,902                |       | 206,369                |       |
| Trademarks                     |       | 10,979                 |       | 10,979                 |       | 10,979                 |       | 10,979                 |       | 10,979                 |       |
| Other                          |       |                   | —     |                   |       | —                 |       |                   | —     |                   |       | — |   |   | — |   |
|                           |       |                   |       |                   |       |                   |       |                   |       |                   |       |
| Total                          |       | $                      | 1,084,136  |                   | $          | 1,084,136              |       | $                      | 1,084,136  |                   | $          | 1,084,136 |   | $ | 646,726 |   |

 

F-12

----

 

**Note J – Leased Property underCapital Leases**

 

Thefollowing is an analysis of the leased property under capital leases by majorclasses.  All of this property is locatedin France as a part of our Eurosilicone subsidiary, except for the copier whichis located at the Company’s corporate office:

 
| ** **               | ** ** | **June 30, 2005** | ** ** |
|--------------------------|------------|------------------------|------------|
|                     |       |                   |       |
| Buildings                |       | $                      | 4,048,143  |   |
| Vehicles                 |       | 347,717                |       |
| Copier                   |       | 24,138                 |       |
|                     |       |                   |       |
| Subtotal                 |       | 4,419,997              |       |
|                     |       |                   |       |
| Accumulated Depreciation |       | (359,444               | )          |
|                     |       |                   |       |
| Subtotal                 |       | (359,444               | )          |
|                     |       |                   |       |
| Total                    |       | $                      | 4,060,553  |   |

 

Forthe fiscal year ended June 30, 2005 depreciation expense was $359,444.

 

Thefollowing is a schedule by years of future minimum lease payments undercapital leases that have initial or remaining non-cancelable lease terms inexcess of one year as of June 30, 2005:

 
| **Year ended June 30,**    | ** ** | **Amount** | ** ** |
|---------------------------------|------------|------------|------------|
| ** **                      | ** ** | ** ** | ** ** |
| 2006                            |       | $          | 513,283    |   |
| 2007                            |       | 437,549    |       |
| 2008                            |       | 396,568    |       |
| 2009                            |       | 359,356    |       |
| 2010                            |       | 307,451    |       |
| Payments due  beyond 2010       |       | 575,227    |       |
|                            |       |       |       |
| Total minimum payments required |       | $          | 2,589,434  |   |

 

**Note K – Deposits and OtherAssets**

 

Deposits at June 30,2005 totaled $96,180.  These are securitydeposits on office leases and with local utility companies.

 

Other assets consisted ofsecurity investments of $41,480 and debt acquisition costs of $577,436 at June 30,2005.

 

**Note L – Accrued Expenses**

 

Accruedexpenses and other current liabilities at June 30, 2005 consisted of:

 
| ** **                  | ** ** | **June 30, 2005** | ** ** |
|-----------------------------|------------|------------------------|------------|
|                        |       |                   |       |
| Consulting                  |       | $                      | 296,647    |   |
| Legal Settlement            |       | 521,160                |       |
| Wages and paid leave        |       | 1,074,023              |       |
| Product replacement reserve |       | 1,004,072              |       |
| Other                       |       | 481,904                |       |
|                        |       |                   |       |
| Total                       |       | $                      | 3,377,806  |   |

 

Consultingfees consisted of amounts relating to a consulting agreement.

 

Otheraccrued expenses included employee benefits, legal, and other miscellaneousaccrued expenses.

 

Long-termaccrued liabilities at June 30, 2005 consisted of $517,356 for a legalsettlement.

 

F-13

----

 

## ***Note M – Convertible Debentures***

## *** ***

Long-termconvertible debentures at June 30, 2005 were $300,000.  During the fourth quarter ended June 30,2005, $100,000 was repaid.

 

Theseconvertible debentures 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 the Company’s common stock at a price equal to thegreater of $5.00 or seventy-five percent (75%) of the daily weighted averagetrading price per share of the Company’s common stock over a period of twenty(20) trading days prior to the conversion date. These convertible debentures mature between April 2006 and August 2006.

 

Duringthe fiscal year ended June 30, 2005, we did not incur any costs relatingto these convertible debentures.

 

## ***Note N – Notes Payable***

## *** ***

## ***Short-term notes payable of$1,853,523 at June 30, 2005 consisted of the bank term loan from BNPParibas.   The Company also has anoutstanding balance at June 30, 2005 of $50,533,489 under a note payableto an affiliate, as described in Note O.***

## *** ***

During the third quarterended March 31, 2005, the Company drew an additional $3,965,559 from abank term loan for the performance payments to the previous shareholders asdescribed in Note U.  No additionalamounts were drawn down in the quarter ended June 30, 2005.   The short-term portion of this debt is $566,508and the remaining $3,399,051 will be required to be paid back in the next sixyears.

 

## ***Long-term notes payable consistedof a bank term loan in the amount of $11,125,919 for a term of seven yearsdenominated in Euros with an annual interest rate based on nine-month Liborplus 2.25%.  The variable interest rateas of June 30, 2005 was 4.35%.  Inaddition, we have several notes which ranged from $158,094 to 324,129 withterms of between nineteen months and four years, with annual rates of interestbetween 3.39% 5.25%.***

## *** ***

Future maturities oflong-term debt are as follows:

 
| **Year ended June 30,** | ** ** | **Amount** | ** ** |
|------------------------------|------------|------------|------------|
|                         |       |       |       |
| 2006                         |       | $          | 2,336,566  |   |
| 2007                         |       | 2,105,772  |       |
| 2008                         |       | 2,008,861  |       |
| 2009                         |       | 1,854,320  |       |
| 2010                         |       | 1,854,320  |       |
|                         |       |       |       |
| Subtotal                     |       | 10,159,839 |       |
|                         |       |       |       |
| Payments due beyond 2010     |       | 1,854,320  |       |
|                         |       |       |       |
| Total                        |       | $          | 12,014,159 |   |

 

**Note O – Related Party Transactions**

 

International Integrated Industries, LLC (“LLC”) isa family holding company in which the chairman of the Company, Mr. DonaldK. McGhan, has a controlling interest. Neither the Company nor any of its subsidiaries has any direct ownershipin LLC.  LLC acted on behalf of theCompany by funding significant expenses incurred for which the Company has arevolving loan agreement as shown on the Company’s Consolidated Balance Sheetof $50,533,489 at June 30, 2005. The outstanding balance of the note payable accrues interest at anannual interest rate of ten percent (10%) per annum.  During the fiscal year ended June 30,2005, LLC advanced $22,090,000 to the Company, of which $5,872,912 wasrepaid.  Interest expense relating tothis note payable was $4,510,969.  Theunpaid liability for these expenses is included in the Company’s note payableto affiliates, which is contained in the financial statements presentedherein.  The Company has a commitmentfrom LLC to fund operating shortfalls as necessary for fiscal 2006.

 

F-14

----

 

In October 2003, the Company entered into areimbursement agreement with Global Aviation Delaware, LLC, a companycontrolled by its chairman for the reimbursement of expenses incurred in theoperation of its private plane when used for MediCor business.  The reimbursement agreement is effective forexpenses incurred for MediCor business purposes.  The Company recognized a total of $637,670for the fiscal year ended June 30, 2005 in expenses pursuant to thereimbursement agreement. This amount represents sales 5% of the annualoperating costs of the entity, and the Company has no minimum guarantees orguarantee of debt for this company.   Allexpenses recognized pursuant to the reimbursement agreement have been includedby the Company in selling, general, and administrative expenses.  Under this agreement, only costs directlytied to MediCor’s use of the plane asset are reimbursable to the lessor.  All other operating costs (such as fuel,pilot wages, food, etc.) are paid directly by the Company through a serviceagreement we have with NexGen Management, a company controlled by itschairman.  All disbursements to thisagent occur only when the plane is used for MediCor purposes.  The Company recognized a total of $496,015for the fiscal year ended June 30, 2005 in expenses pursuant to serviceagreement with NexGen Management.  TheCompany has no minimum guarantees or guarantee of debt for this company.   All expenses recognized pursuant to theservice agreement have been included by the Company in selling, general, andadministrative expenses.

 

**Note P – Federal Income Taxes**

 

The company follows FAS 109 for reporting incometaxes. The expenses (benefit) for income taxes reflected in the ConsolidatedStatements of Operations for the Company for the periods noted consist of:

 
| ** **                                           | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
|                                                 |       |                   |       |                   |       |
| Current                                              |       |                   |       |                   |       |
| Net loss                                             |       | $                      | (6,077,606 | )                      | $          | (5,592,408 | ) |
| Foreign income  tax on subsidiary                    |       | 542,555                |       | —                 |       |
|                                                 |       | (5,535,051)            |       | (5,592,408             | )          |
| Deferred                                             |       |                   |       |                   |       |
|                                                 |       |                   |       |                   |       |
| Allowance for  bad debts                             |       | (1,233,094             | )          | 895,684                |       |
| Product  replacement reserve                         |       | 244,680                |       | (75,040                | )          |
| Depreciation and  amortization                       |       | (85,000                | )          | (102,000               | )          |
|                                                 |       | (1,073,414             | )          | 718,644                |       |
|                                                 |       |                   |       |                   |       |
| Total benefit                                        |       | (6,608,465             | )          | (4,873,764             | )          |
| Less allowance for realization of deferred tax asset |       | 7,151,020              |       | (4,873,764             | )          |
| State taxes, not of federal benefit                  |       | —                 |       | 1,737                  |       |
| Total tax expense                                    |       | $                      | 542,555    |                   | $          | 1,737 |   |

 

The current tax expense for the fiscal year ended June 30,2005, resulted from income tax paid on a foreign subsidiary.  As of June 30, 2005, the Companyrecorded an allowance of $18,517,008 against certain future tax benefits, therealization of which is currently uncertain. The deferred differences related to certain accounts receivable, accruedwarranties, and depreciation/amortization not currently deductible as expensesunder Internal Revenue Service provisions. Although the Company recorded this allowance to the deferred tax assets,the Company may still utilize the future tax benefits from net operating lossesfor 20 years from the year of the loss to the extent of future taxableincome.  The estimated net operatinglosses for tax purposes of approximately $25 million will expire over severalyears ending in 2024.

 

Primary components of the deferred tax asset as ofJune 30, 2005 were approximately as follows:

 
| ** **                                             | ** ** | **June 30, 2005** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|
|                                                   |       |                   |       |
| Computed expected income tax asset/(liability) at  34% |       | $                      | 6,077,606  |   |
| Adjustments                                            |       |                   |       |
| Net operating  loss                                    |       | 10,325,250             |       |
| Allowance for  bad debt                                |       | 1,409,027              |       |
| Product  replacement reserve                           |       | 455,037                |       |
| Depreciation and  amortization                         |       | 250,088                |       |
|                                                   |       |                   |       |
| Income tax benefit                                     |       | $                      | 18,517,008 |   |
| Less allowance for realization of deferred tax asset   |       | (18,517,008            | )          |
|                                                   |       |                   |       |
| Deferred tax asset, net                                |       | $                      | —     |   |

 

**Note Q – Preferred Stock**

 

The Company authorized a series of 45,000 shares ofpreferred stock designated as Series A 8.0% Convertible Preferred Stock (“Series APreferred”) on July 5, 2004.  The Series APreferred has a par value of $.001 per share with a liquidation preference of$1,000 per share.  In the event ofliquidation, shareholders of the Series A Preferred shall be entitled toreceive priority as to distribution over common stock.  The Series A Preferred stock isconvertible into common stock at any time at a

 

F-15

----

 

conversion price of $3.85 per share until June 30,2010, subject to potential adjustment in the event certain EBITDA or commonstock value targets are not met.  On June 30,2011 all unconverted shares to common stock will be subject to a mandatoryredemption.  The redemption price of$1,000 per share plus $1,000 per whole share for all accrued and unpaidpaid-in-kind dividends and any other accrued and unpaid dividends, whether ornot declared which amount will be payable by the Company in cash.  At June 30, 2005, the Company hadoutstanding an aggregate of 6,219 shares, issued for aggregate consideration of$6,573,258.

 

**Note R – Loss per Share**

 

Areconciliation of weighted average shares outstanding, used to calculate basicloss per share, to weighted average shares outstanding assuming dilution, usedto calculate diluted loss per share, follows:

 
| ** **                                          | ** ** | **Year Ended  June 30, 2005** | ** **  | **Year Ended  June 30, 2004** | ** ** |
|-----------------------------------------------------|------------|------------------------------------|-------------|------------------------------------|------------|
| ** **                                          | ** ** | **Income**                         | ** **  | **Shares**                         | ** ** | **Per-Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Per-Share** | ** ** |
| ** **                                          | ** ** | **(Numerator)**                    | ** **  | **(Denominator)**                  | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
|                                                |       |                               |        |                               |       |   |   |   |   |   |   |   |   |
| Net Income  (Loss) before preferred stock dividends |       | (15,897,233                        | )           |                               |       |   |   | (16,447,827 | ) |   |   |   |   |
| Less:  Preferred stock dividends               |       | 1,147,078                          |        |                               |       |   |   | 118,946 |   |   |   |   |   |
|                                                |       |                               |        |                               |       |   |   |   |   |   |   |   |   |
| Basic EPS                                           |       | (17,044,311                        | )           | 18,233,175                         |       | (0.93 | ) | (16,566,773 | ) | 17,633,120 |   | (0.94 | ) |
|                                                |       |                               |        |                               |       |   |   |   |   |   |   |   |   |
| Effect of dilutive securities                       |       | —                             |        |                               |       |   |   | — |   |   |   |   |   |
|                                                |       |                               |        |                               |       |   |   |   |   |   |   |   |   |
| Diluted EPS                                         |       | $                                  | (17,044,311 | )                                  | 18,233,175 |   | (0.93 | ) | $ | (16,566,773 | ) | 17,633,120 |   | (0.94 | ) |
|                                                     |            |                                    |             |                                    |            |  |  |  |  |  |  |  |  |  |  |

 

4,286,569 commonequivalent shares have been excluded from the computation of diluted earningsper share because their effect would be anti-dilutive.

 

**Note S – Stock Options andWarrants**

 

TheCompany has a stock option plan for key employees and consultants.  There were 4,242,680 shares reserved forissuance pursuant to the Company’s stock option plan and up to 4,100,000 shareswere reserved for issuance pursuant to stand-alone options granted inconnection with employment agreements. The Company’s employee share option activity for and related informationis summarized below:

 

TheCompany’s share option activity and related information is summarized below:

 
| ** **                                | ** ** | ** **  | ** ** | **Weighted Average** | ** ** |
|-------------------------------------------|------------|-------------|------------|----------------------|------------|
| ** **                                | ** ** | **Options** | ** ** | **Exercise Price**   | ** ** |
|                                      |       |        |       |                 |       |
| Outstanding Options at June 30, 2004 |       | 2,369,688   |       | $                    | 2.99       |   |
|                                      |       |        |       |                 |       |
| Granted                                   |       | 1,920,000   |       | $                    | 3.48       |   |
| Exercised                                 |       | (297,616    | )          | $                    | 1.80       |   |
| Cancelled                                 |       | (62,134     | )          | $                    | 1.61       |   |
|                                      |       |        |       |                 |       |
| Outstanding Options at June 30, 2005 |       | 3,929,938   |       | $                    | 3.34       |   |
|                                      |       |        |       |                 |       |
| Options exercisable at end of period      |       | 496,791     |       | $                    | 3.62       |   |

 

The following tablesummarizes information about stock options outstanding at June 30, 2005:

 

F-16

----

 
| **Outstanding**     | ** ** | **Exercisable** | ** ** |
|---------------------|------------|-----------------|------------|
| ** **          | ** ** | ** **      | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **      | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **      | ** ** | **Remaining** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **          | ** ** | ** **      | ** ** | **Years of** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of**        | ** ** | **Number of**   | ** ** | **Contractual** | ** ** | **Exercise** | ** ** | **Number of** | ** ** | **Exercise** | ** ** |
| **Exercise Prices** | ** ** | **Options**     | ** ** | **Life** | ** ** | **Price** | ** ** | **Options** | ** ** | **Price** | ** ** |
|                |       |            |       |   |   |   |   |   |   |   |   |
| $1.00 - $2.01       |       | 749,938         |       | 4.5 |   | $ | 1.73 |   | 49,708 |   | $ | 1.61 |   |
| $3.00 - $3.80       |       | 2,180,000       |       | 5.8 |   | $ | 3.48 |   | 226,250 |   | $ | 3.46 |   |
| $4.15 - $4.30       |       | 1,000,000       |       | 5.9 |   | $ | 4.24 |   | 220,833 |   | $ | 4.24 |   |

 

 

F-17

----

 

## ***Note T - Business SegmentInformation***

## *** ***

The Company is acorporate entity with a number of wholly-owned, autonomous subsidiaries whichoperate as single business units in a single industry segment across multiplegeographic locations within the U.S. and internationally and, as such, does nothave multiple segments to report.  Forthe year ended June 30, 2005, sales from breast implant and other implantsaccounted for about 94%, whereas sales from scar management product contributedless than 6%  Revenues from customers anddistributors attributable to various foreign countries outside the U.S werematerial and equaled about 95% of total sales, with the largest country(Brazil) accounting for about 15% of sales. Additionally, a significant amount of revenues and costs are Eurodenominated.  Long-lived assetsattributable to various foreign countries outside the U.S. were material andequaled about $38 million, located in France. Amounts attributable to the U.S. were approximately $8 million.

 

**Note U – Commitments andContingencies**

 

TheCompany has received a written commitment from LLC, an affiliate of itschairman, to provide sufficient cash to fund any operating loss through July 1,2006.  The same entity has provided theCompany an aggregate of over $67 million in funding from the Company’sinception through June 30, 2005. The future funding may take the form of debt or equity or a combinationthereof.

 

TheCompany’s PIP.America subsidiary has a distribution agreement with PolyImplants Protheses S.A. (“PIP”), a third-party manufacturer of breast implantslocated in France.  This agreement coversthe sale by PIP.America of PIP’s saline, pre-filled breast implant products inNorth America; although no sales were reported in the year ending June 30,2004 because these products are not currently approved for distribution inNorth America.  Previously, themanufacturer was undertaking the process of securing FDA approval for theseproducts.  Effective March 30, 2004,PIP.America and the manufacturer amended the distribution agreement to providefor, among other things, transferring administration, funding and ownership ofthe pre-market approval application process to PIP.America.  The amendments obligate PIP.America to fund theongoing clinical and regulatory costs and expenses.  The amount and timing of these costs isunknown and may be material.  Although weanticipate submission of the completed PMA application during 2006, there canbe no assurance of timing, review or decision concerning the PMA application.  Concurrently, the manufacturer issued toPIP.America a revolving promissory note for certain sums to come due toPIP.America based on PIP.America’s and the manufacturer’s administration ofproduct replacement and product replacement related claims.  The principal amount under the note as of June 30,2005 was $2,778,584.

 

TheCompany’s Eurosilicone Holdings SAS subsidiary may be committed to makeadditional performance payments to the previous shareholders of Eurosilicone,over the next two years, in connection with revenue targets.  Thesepayments might be as high as €3,000,000 for each year, or a total of€6,000,000.  Eurosilicone Holdings SASplans on funding these amounts under the commitments of the bank loan describedunder Note N.  During the quarter ended March 31, 2005 such a paymentwas made and funded under the bank loan agreement in the amount of $3,965,559.

 

In October 1999,Case No. 99-25227-CA-01 June 2000 Case No. 00-14665-CA-01, and July 2003,Case No. 0322537-CA-27, separate but related complaints were filed by Sauland Ruth Kwartin, Steven M. Kwartin, and Robert and Nina Kwartin respectively,against our PIP.America subsidiary as co-defendant with PIP/USA, Inc. andPoly Implants Protheses, S.A., each unaffiliated with MediCor, and Jean Claude Mas,Jyll Farren-Martin and our chairman, personally, in the Circuit Court ofMiami-Dade County, Florida.  Also in September 2003,another member of the same family filed Case No. 03-15006-CA-09, againalleging similar claims on his own behalf. The Kwartin family members’ claimsare primarily premised on allegations that plaintiffs are shareholders ofPIP/USA, Inc. (“PIP/USA”) or have statutory and common law rights ofshareholders of PIP/USA as a result of loans or investments allegedly made toor into PIP/USA or a third party or under an alleged employment agreement.  Plaintiffs allege that, as a result, theyhave certain derivative or other rights to an alleged distribution agreementbetween Poly Implants Prostheses, S.A. (“PIP-France”) and PIP/USA.  Plaintiffs claim, among other things, thatIII Acquisition Corporation (“PIP.America”) and its chairman tortiouslyinterfered with that agreement and with plaintiffs’ other alleged rights aslenders, investors, shareholders, quasi-shareholders or employees of PIP/USA orother entities. In addition to monetary damages and injunctive relief,plaintiffs seek to reinstate the alleged distribution agreement between PIP/USAand PIP-France and invalidate PIP.America’s distributor relationship withPIP-France. It is PIP.America’s position that the Kwartin litigations arewithin the scope of the indemnification agreements.

 

F-18

----

 

Peggy Williams v. PIP/USA, Inc.,Case No. 03 CH 9654, Jessica Fischer Schnebel, et al. v. PIP/USA, Inc.,Case No. 03CH07239, Dawn Marie Cooper, et al. v. PIP/USA, Inc., Case No. 03CH11316,Miriam Furman, et al. v. PIP/USA, Inc., Case No. 03CH10832 and KarenS. Witt, et al. v. PIP/USA, Inc., Case No. 03CH12928 were filed inthe Circuit Court of Cook County, Chancery Division, in or around July 2003.Counsel for Jessica Fischer Schnebel, et al. v. PIP/USA, Inc., Case No. 03CH07239amended her class action complaint to include plaintiffs from the other fourcases, and each of the others has been voluntarily dismissed. The consolidatedamended complaint contains counts alleging product liability, breach of theimplied warranties of merchantability and fitness for a particular purpose,violation of the Illinois Consumer Fraud Act and third-party beneficiarystatus. Unspecified monetary damages, exemplary damages and attorneys fees andcosts are sought. PIP.America has filed a motion seeking to dismiss all countsbut the third-party beneficiary claim. Plaintiffs deposed Medicor witnesses in January of2005 and then sought additional documents from Medicor, which were recentlyprovided to plaintiffs.  Plaintiffs havenow asked to file a written response to PIP.America’s pending motion todismiss.  A ruling on the motion isexpected by November of 2005.  Atthe request of the judge, PIP.America will seek to defeat the classcertification attempt plaintiffs have made after the motion to dismiss is ruledupon.  Poly Implants Protheses, S.A., adefendant in the Schnebel litigation, has agreed that it will indemnifyPIP.America for any losses PIP.America may suffer as a result of the Illinoislitigation.

 

On December 23,2004, Europlex, a Mexican company, purported to file a lawsuit againstEurosilicone SAS, one of our French subsidiaries, in the Avignon Commercial Courtin France, alleging that Eurosilicone implicitly terminated a distributionagreement between the parties by failing to deliver products ordered byEuroplex pursuant to the agreement, among other allegations. As a result ofthese allegations, Europlex claims damages in amount of approximately$4,000,000 Euros. A status hearing has been set for October 14 in Avignon.We believe the suit is without merit and intend to vigorously defend againstthe alleged claims.

 

Though it is not yetpossible to predict the outcome of the cases described above, MediCor and itssubsidiaries, as applicable, have denied plaintiffs’ allegations and arevigorously defending themselves upon the merits of each lawsuit and againstcertification of any class. While MediCor and its subsidiaries are desirous tohonor their respective obligations under our product replacement programs, thepurported class action case above includes two distinctly different types ofclaims. The first of these arise from products sold by PIP/USA, Inc., withwhom neither MediCor nor any of its affiliates are affiliated. This companysold implants manufactured by Poly Implants Protheses, S.A. prior toPIP.America’s entry into the U.S. market, which occurred in late 1999. BecausePIP.America did not sell these products, PIP.America similarly did not warrantthese products. The next claims arise from products sold by PIP.America andassociated to the product replacement program administered by PIP.America. Withrespect to claims arising from products sold by PIP.America, PIP.America isadministering and fulfilling its obligations to its customers in the ordinarycourse of business, and for which it has taken appropriate reserves. Other thana limited, $500 portion of certain of its own product replacement claims thatit is administering, PIP.America is indemnified by PIP/USA, Inc., PolyImplants Protheses, S.A., and Poly Implants Protheses, S.A.’s President, JeanClaude Mas, personally, from all claims, including those asserted above.

 

PIP.America either alreadyhas, or is in the process of, asserting its indemnification claims and, in theevent of an adverse judgment in any case, PIP.America intends to seek thebenefits of this indemnity. As a result, we believe the costs associated withthese matters will not have a material adverse impact on our business, resultsof operations or financial position

 

MediCor and itssubsidiaries have been and will continue to be periodically named as adefendant in other lawsuits in the normal course of business, including productliability and product warranty claims. In the majority of such cases, the claims are dismissed, or settled for *de minimis* amounts.  Litigation,particularly product liability litigation, can be expensive and

 

F-19

----

 

disruptive to normalbusiness operations and the results of complex proceedings can be verydifficult to predict. Claims against MediCor or its subsidiaries have been andare periodically reviewed with counsel in the ordinary course of business. Wepresently believe we or our subsidiaries have meritorious defenses in alllawsuits in which we or our subsidiaries are defendants, subject to thesubsidiaries’ continuing product replacement obligations, which thesubsidiaries intend to continue to satisfy. While it is not possible to predictthe outcome of these matters, we believe that the costs associated with themwill not have a material adverse impact on our business, results of operationsor financial position.

 

TheCompany leased office, manufacturing and warehouse facilities and officeequipment under various terms.  Leaseexpenses amounted to $509,476 and $387,247 for the years ended June 30,2005 and 2004, respectively. Future minimum lease payments are approximated asfollows:

 
| **Year ended June 30,** | ** ** | **Amount** | ** ** |
|------------------------------|------------|------------|------------|
|                         |       |       |       |
| 2006                         |       | 237,757    |       |
| 2007                         |       | 247,027    |       |
| 2008                         |       | 163,446    |       |

 

**Note V - Acquisitions**

 

On July 5, 2004, the Company, through itsEurosilicone Holdings SAS subsidiary, acquired all of the capital stock ofEurosilicone, a privately-held breast implant manufacturer based in Apt,France.  The financing for theacquisition was provided primarily by additional loans from InternationalIntegrated Industries, LLC, an affiliate of the Company’s chairman.  The Company may also be obligated to makeadditional performance payments based on revenue targets over the next twoyears (as more fully described in Note U). The primary reasons for acquiring Eurosilicone include its historicalsales, cash flow and market share of the breast implant industry, its manufacturingfacilities and its product line.  Due tothe relatively low book value of its current and fixed assets, as compared tothe purchase price, this resulted in a significant amount of goodwill.  There was no initial allocation of thisamount to intangible assets, because no patents were acquired and the otherrelevant assets (e.g., customer-related, marketing-related, contracts) wereinitially determined to be insignificant and immaterial. However, the Companyhas evaluated this in detail and has determined that about $4.4 million of thepurchase price is attributable to customer related intangible assets, pursuantto EITF 02-17 and SFAS No. 141.

 

The financial statementsreflect various purchase price allocations. In accordance with SFAS No. 141, “Business Combinations” (“SFAS No. 141”),the total purchase price was allocated to the tangible and intangible assets ofEurosilicone based upon their estimated fair values at the acquisition datewith the excess purchase price allocated to goodwill.  The purchase accounting adjustments made arebased upon currently available information. Accordingly, the actual adjustments recorded in connection with thefinal purchase price allocation have been finalized.

 

F-20

----

 

The following tablesummarizes the components of the total purchase price and the allocation as ofthe date of acquisition and updated as of June 30, 2005:

 
| ** **                                      | ** ** | **Book Value of**       | ** ** | ** **         | ** ** | ** **     | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|--------------------|------------|----------------|------------|
| ** **                                      | ** ** | **Assets Acquired /**   | ** ** | **Purchase Price** | ** ** | ** **     | ** ** |
| ** **                                      | ** ** | **Liabilities Assumed** | ** ** | **Adjustments**    | ** ** | **Fair Value** | ** ** |
| Cash and cash equivalents                       |       | $                       | 1,929,698  |               | $          | —         |       | $ | 1,929,698 |   |
| Accounts receivable                             |       | 5,625,350               |       | (672,563           | )**(a)**   | 4,952,787      |       |
| Inventory                                       |       | 2,654,043               |       | 639,936            | **(c)**    | 3,293,979      |       |
| Other current assets                            |       | 96,909                  |       | —             |       | 96,909         |       |
|                                            |       |                    |       |               |       |           |       |
| Total current assets                            |       | 10,306,000              |       | (32,627            | )          | 10,273,373     |       |
|                                            |       |                    |       |               |       |           |       |
| Property, plant and equipment                   |       | 801,085                 |       | —             |       | 801,085        |       |
| Leased property under capital leases            |       | 4,048,560               |       | 84,804             | **(d)**    | 4,133,364      |       |
| Customer - related intangibles                  |       | —                  |       | 4,475,653          | **(e)**    | 4,475,653      |       |
| Trademarks                                      |       | 49,917                  |       | 59,877             | **(f)**    | 109,794        |       |
| Goodwill                                        |       | —                  |       | 28,138,011         | **(g)**    | 28,138,011     |       |
|                                            |       | —                  |       | 3,965,559          | **(i)**    | 3,965,559      |       |
| Other long term assets                          |       | 481,981                 |       | —             |       | 481,981        |       |
|                                            |       |                    |       |               |       |           |       |
| Total assets                                    |       | $                       | 15,687,543 |               | $          | 36,691,277     |       | $ | 52,378,820 |   |
|                                            |       |                    |       |               |       |           |       |
| Accounts payable                                |       | 2,774,978               |       | —             |       | 2,774,978      |       |
| Notes payable                                   |       | 367,742                 |       | —             |       | 367,742        |       |
| Obligations under capital leases                |       | 554,217                 |       | —             |       | 554,217        |       |
| Other current liabilities                       |       | 1,607,362               |       | 204,480            | **(c)**    | 1,811,842      |       |
| Long term notes payable                         |       | 745,304                 |       | —             |       | 745,304        |       |
| Long term obligations under capital leases      |       | 1,977,991               |       | 331,475            | **(d)**    | 2,309,466      |       |
| Long term accrued liabilities                   |       | —                  |       | 517,356            | **(c)**    | 517,356        |       |
| Shareholders’ equity                       |       | 7,659,949               |       | (7,659,949         | )**(b)**   | —         |       |
|                                            | ** ** | ** **              |       | 39,332,356         | **(h)**    | 39,332,356     |       |
|                                            | ** ** | ** **              |       | 3,965,559          | **(i)**    | 3,965,559      |       |
|                                            |       |                    |       |               |       |           |       |
| Total Liabilities and Shareholders’ equity |       | $                       | 15,687,543 |               | $          | 36,691,277     |       | $ | 52,378,820 |   |

 

In accordance with SFAS No. 142, goodwill willnot be amortized and will be tested for impairment at least annually.

 

Thefollowing adjustments have been reflected in the balance sheet.

 

----

(a)          To record anadditional allowance for doubtful accounts as of the acquisition.  In addition, to record a reserve against ashort-term non-liquid deposit.

 

(b)         To eliminate historical shareholders’equity of Eurosilicone.

 

(c)          Reflects severalone-time reserves as of the acquisition date, relating to inventory previouslynot recognized of $639,936.  Alsoincludes a legal settlement with a commercial agent for $517,536 incurred ascontingency of the acquisition and an additional accrual for employee andproduct litigation of $204,480.

 

(d)         To place additional value on leasedproperty based on the fair market evaluation performed on Eurosilicone’s assetsas of July 5, 2004 and to record the additional liability associated withthe leased property.

 

(e)          To record the valueof Eurosilcone’s customer lists, contracts and related customer relationships.

 

(f)            To record the fairmarket value of Eurosilicone's trademark.

 

(g)         To reflect goodwill.

 

(h)         To record the purchase price ofEurosilicone.

 

F-21

----

 

(i)             To recordperformance payment required under the acquisition agreement which had occurredduring the quarter ending March 31, 2005. Please see Note U for the possibility of additional performancepayments.

 

Thefollowing unaudited pro-forma financial information reflects the condensedconsolidated results of operations of the Company as if the acquisition hadtaken place on July 1, 2003.  Thepro-forma financial information is not necessarily indicative of the results ofoperations had the transaction been effected on July 1, 2003.

 
| ** **                               | ** ** | **Year Ended**    | ** ** |
|------------------------------------------|------------|-------------------|------------|
| ** **                               | ** ** | **June 30,** | ** ** |
| ** **                               | ** ** | **2005**          | ** ** | **2004** | ** ** |
| Net sales                                |       | $                 | 26,958,547 |   | $ | 22,568,028 |   |
| Net income / (loss)                      |       | (17,281,768       | )          | (13,821,277 | ) |
| Diluted (loss) earnings per common share |       | (0.93             | )          | (0.78 | ) |
|                                          |            |                   |            |  |  |  |  |

 

On August 27, 2004,the Company completed the acquisition of privately-held Dermatological Medical Products and Specialties,S.A. de C.V., a distributor of aesthetic, plastic and reconstructive surgerydevices in Mexico.

 

On April 25, 2005,one of the Company’s subsidiaries completed the purchase of selected assets andliabilities of privately-held HutchisonInternational, Inc., a third-party distributor of breast implantsproducts in the United States for Biosil Limited.  The completion of this transaction allowedthe Company to, among other things, negotiate and ultimately enter into anexclusive distribution agreement directly with Biosil Limited for its breastimplants in the United States.  Theacquisition itself will not have a significant impact on the operating resultsof the Company, since the operations have no existing revenue—pending FDAapproval of the products.  The various agreements call for payments in theform of stock and cash of about $3,000,003 as follows:  cash payments of$625,000 and 366,667 shares of MediCor Ltd. common stock valued at $7.50,subject to future adjustment based on actual trading prices following approvalfor marketing the products in the United States.

 

The financial statementsreflect various purchase price allocations. In accordance with SFAS No. 141, “Business Combinations” (“SFAS No. 141”),the total purchase price was allocated to the tangible and intangible assets ofHutchison International, Inc. based upon their estimated fair values atthe acquisition date.  The purchaseaccounting adjustments made are based upon currently availableinformation.  Accordingly, the actualadjustments recorded in connection with the final purchase price allocation maybe updated according SFAS No. 141, and any such changes may be material.

 

F-22

----

 

The following tablesummarizes the components of the total purchase price and the allocation as ofthe date of acquisition and updated as of June 30, 2005:

 
| ** **                                           | ** ** | **Book Value of**       | ** ** | ** **         | ** ** | ** **      | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|--------------------|------------|-----------------|------------|
| ** **                                           | ** ** | **Assets Acquired /**   | ** ** | **Purchase Price** | ** ** | **Preliminary** | ** ** |
| ** **                                           | ** ** | **Liabilities Assumed** | ** ** | **Adjustments**    | ** ** | **Fair Value**  | ** ** |
| Employee advances                                    |       | $                       | 39,782     |               | $          | —          |       | $ | 39,782 |   |
| Inventory                                            |       | 372,061                 |       | (372,061           | )          | —          | (a)        |
| Property, plant and equipment                        |       | 1,492                   |       | (1,492             | )          | —          | (b)        |
| Intangibles                                          |       | —                  |       | 3,243,146          |       | 3,243,146       | (c)        |
|                                                 |       |                    |       |               |       |            |       |
| Total assets                                         |       | $                       | 413,335    |               | $          | 2,869,593       |       | $ | 3,282,928 |   |
|                                                 |       |                    |       |               |       |            |       |
| Short-term product replacement reserve               |       | 195,750                 |       | 87,175             |       | 282,925         | (d)        |
| Shareholder’s equity related to assets acquired |       | 217,585                 |       | (217,585           | )          | —          | (e)        |
| Purchase price                                       |       |                    |       | 3,000,003          |       | 3,000,003       | (f)        |
|                                                 |       |                    |       |               |       |            |       |
| Total liabilities and shareholders’ equity      |       | $                       | 413,335    |               | $          | 2,869,593       |       | $ | 3,282,928 |   |

 

The amounts contained in the purchase price allocationmay change as additional information becomes available regarding the assets andliabilities acquired.  The purchase priceallocations are expected to be finalized before the year ended June 30,2006.  Any change in the fair value ofthe net assets may change the amount of the purchase price allocable togoodwill.  The Company is continuing toevaluate this in detail and anticipates that it will determine and place a fairvalue upon completion of such valuation. Until completion of such evaluation, the Company cannot currentlyestimate any purchase price allocations.

 

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(a)                                                         Inventory isobsolete because no FDA Pre-Market Approval exists, and therefore no market forthe product at present exists.

 

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

 

(c)                                                         Reflects initial determination of valueassociated with intangibles (specifically the distribution/supply agreementwith Biosil). Amount may be impacted by other purchase accounting adjustmentsand finalization of intangible valuation under SFAS 141 which will be finalizedwithin 1 year of acquisition.

 

(d)                                                        Reflects additional amounts for reserve associated with productreplacement program.

 

(e)                                                         To eliminateshareholder’s equity.

 

(f)                                                           To recordthe purchase price, as follows:  $250,000of cash, and $2,750,003 in the form of common stock in MediCor (366, 666shares).

 

**Note W –Subsequent Events**

 

On September 16,2005, the Company agreed to acquire all of the capital stock of Biosil Limitedand Nagor Limited, privately-held companies based in the U.K. in exchange forcash and stock.  The closing of theacquisition is subject to customary closing conditions.  The Company has filed a current report on Form 8-Kon September 13, 205 and on September 16, 2005 containing additionalinformation related to this acquisition.

 

F-23

----

 

EXHIBIT INDEX

 
| **Exhibit No** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.1                 |       | Agreement of Merger  dated as of February 7, 2003, by and among Scientio, Inc.,  International Integrated Incorporated, SCMerger Ltd., certain members of  International Integrated Incorporated and certain stockholders of  Scientio, Inc. – Incorporated by reference to Exhibit 2.1 to the  Registrant’s Current Report on Form 8-K filed February 24, 2003.                       |
| 2.2                 |       | Agreement for the Sale  and Purchase of the Shares of Laboratoires Eurosilicone S.A. dated  May 17, 2004 – Incorporated by reference to Exhibit 2.2 to the  Registrant’s Annual Report on Form 10-KSB/A for the year ended  June 30, 2004.                                                                                                                                                       |
| 2.3                 |       | Stock Purchase  Agreement between MediCor Latin America S.A. de C.V., International  Integrated Management, Inc., Carlos Francisco Lazo de la Vega Jasso and  Hector Jesus Chulia de la Torre dated August 27, 2004 – Incorporated by  reference to Exhibit 2.3 to the Registrant’s Annual Report on  Form 10-KSB/A for the year ended June 30, 2004.                                       |
| 3.1                 |       | Certificate of  Incorporation of the Registrant – Incorporated by reference to  Exhibit 3.1 to the Registrant’s Registration Statement on Form SB-2/A  filed September 14, 2001 (Commission File No. 333-64420).                                                                                                                                                                                      |
| 3.2                 |       | Certificate of  Amendment of Incorporation of the Registrant – Incorporated by reference to  Exhibit 3.2 of the Registrant’s Annual Report on Form 10-KSB for  the year ended June 30, 2003.                                                                                                                                                                                                          |
| 3.3                 |       | Amended and Restated  Bylaws of the Registrant – Incorporated by reference to Exhibit 3.3 of  the Registrant’s Annual Report on Form 10-KSB for the year ended  June 30, 2003.                                                                                                                                                                                                                        |
| 3.4                 |       | Certificate of  Designation, Preferences and Rights of Series A 8.0% Convertible  Preferred stock – Incorporated by reference to Exhibit 3.3 of the  Registrant’s Annual Report on Form 10-KSB for the year ended  June 30, 2004.                                                                                                                                                                |
| 4.1                 |       | Form of  Convertible Debenture Loan Agreement – Incorporated by reference to  Exhibit 4.1 of the Registrant’s Registration Statement on Form SB-2/A  filed April 1, 2005 (Commission File No. 333-121832).                                                                                                                                                                                                 |
| 4.2                 |       | Form of Convertible  Debenture – Incorporated by reference to Exhibit 4.2 of the Registrant’s  Quarterly Report on Form 10-QSB for the quarter ended September 30,  2003 and December 31, 2003.                                                                                                                                                                                             |
| 4.3                 |       | Form of Amendment  to Convertible Debenture – Incorporated by reference to Exhibit 4.3 of  the Registrant’s Quarterly Report on From 10-QSB for the quarter ended  September 30, 2003.                                                                                                                                                                                                                |
| 4.4                 |       | Form of  Convertible Debenture Agreement – Incorporated by reference to  Exhibit 4.4 of the Registrant’s Registration Statement on Form SB-2/A  filed April 1, 2005 (Commission File No. 333-121832).                                                                                                                                                                                                      |
| 4.5                 |       | Form of  Convertible Debenture – Incorporated by reference to Exhibit 4.5 of the  Registrant’s Quarterly Report on Form 10-QSB for the quarter ended  September 30, 2003.                                                                                                                                                                                                                        |
| 4.6                 |       | Form of Investment  Agreement – Incorporated by reference to Exhibit 4.1 of the Registrant’s  Quarterly Report on Form 10-QSB for the quarter ended December 31,  2003.                                                                                                                                                                                                                          |
| 4.7                 |       | Written Consent of the  Board of Directors of International Integrated Incorporated establishing the  Voting Powers, Designations, Preferences, Limitations, Restrictions, and  Relative Rights of 8% Class A Convertible Preferred Stock – Incorporated  by reference to Exhibit 4.7 of the Registrant’s Registration Statement  on Form SB-2/A filed March 4, 2005 (Commission File No. 333-121832).     |
| 4.8                 |       | Specimen common stock certificate of the Registrant –  Incorporated by reference to Exhibit 4.8 of the Registrant’s  Registration Statement on Form SB-2/A filed March 4, 2005 (Commission File  No. 333-121832).                                                                                                                                                                                               |
| 4.9                 |       | Specimen Series A 8.0% Convertible Preferred  Stock certificate – Incorporated by reference to Exhibit 4.9 of the  Registrant’s Registration Statement on Form SB-2/A filed March 4, 2005  (Commission File No. 333-121832).                                                                                                                                                                               |
| 10.1                |       | Agreement of Merger,  dated as of February 7, 2003, by and among Scientio, Inc.,  International Integrated Incorporated, SC Merger, Ltd., certain members of  International Integrated Incorporated and certain stockholders of  Scientio, Inc. – Incorporated by reference to Exhibit 10.1 of the  Registrant’s Quarterly Report on Form 10-QSB for the quarter ended  March 31, 2003 |
| 10.2*               |       | Securities Purchase  Agreement, dated as of March 18, 2003, by and among the Registrant,  Graeco2, Limited and AAB Corporation – Incorporated by reference to  Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-QSB  for the quarter ended March 31, 2003                                                                                                                            |
| 10.3*               |       | Asset Purchase  Agreement, dated as of April 25, 2002 – Incorporated by reference to  Exhibit 10.2 of the Registrant’s Annual Report on Form 10-KSB for  the year ended June 30, 2003.                                                                                                                                                                                                           |
| 10.4                |       | MediCor Ltd. 1999  Amended and Restated Stock Compensation Program – Incorporated by reference  to                                                                                                                                                                                                                                                                                                                        |

 

E-1

----

 
|   |   | Exhibit 10.3 of  the Registrant’s Annual Report on Form 10-KSB for the year ended  June 30, 2003.                                                                                                                                                                                                                                               |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.5   |   | Lease Agreement between  the Registrant and Skyview Business Park, LLC – Incorporated by reference to  Exhibit 10.4 of the Registrant’s Annual Report on Form 10-KSB for  the year ended June 30, 2003.                                                                                                                                    |
| 10.6   |   | Lease Agreement  Addendum between the Registrant and Skyview Business Park, LLC – Incorporated  by reference to Exhibit 10.5 of the Registrant’s Annual Report on  Form 10-KSB for the year ended June 30, 2003.                                                                                                                           |
| 10.7   |   | Employment Agreement  dated June 2, 2003 between the Registrant and Thomas R. Moyes –  Incorporated by reference to Exhibit 10.6 of the Registrant’s Annual  Report on Form 10-KSB for the year ended June 30, 2003.                                                                                                                  |
| 10.8   |   | Option Agreement dated  July 18, 2003 between the Registrant and Thomas R. Moyes – Incorporated  by reference to Exhibit 10.7 of the Registrant’s Annual Report on  Form 10-KSB for the year ended June 30, 2003.                                                                                                                     |
| 10.9   |   | Form of Consultant  Warrant – Incorporated by reference to Exhibit 10.8 of the Registrant’s  Annual Report on Form 10-KSB for the year ended June 30, 2003.                                                                                                                                                                           |
| 10.10  |   | Form of Employee  Stock Option – Incorporated by reference to Exhibit 10.9 of the  Registrant’s Annual Report on Form 10-KSB for the year ended  June 30, 2003.                                                                                                                                                                       |
| 10.11* |   | Amendment No. 1 to  Asset Purchase Agreement, dated as of November 20, 2002 – Incorporated by  reference to Exhibit 10.10 of the Registrant’s Annual Report on  Form 10-KSB for the year ended June 30, 2003.                                                                                                                    |
| 10.12  |   | Employment Agreement  dated October 1, 2003 between the Registrant and Jim J. McGhan –  Incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly  Report on Form 10-QSB for the quarter ended September 30, 2003.                                                                                                      |
| 10.13  |   | Option Agreement dated  October 27, 2003 between the Registrant and Jim J. McGhan – Incorporated  by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on  Form 10-QSB for the quarter ended September 30, 2003.                                                                                                         |
| 10.14  |   | Employment Agreement  dated September 1, 2003 between the Registrant and Theodore R. Maloney –  Incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly  Report on Form 10-QSB for the quarter ended September 30, 2003.                                                                                              |
| 10.15  |   | Option Agreement dated  September 2, 2003 between the Registrant and Theodore R. Maloney –  Incorporated by reference to Exhibit 10.4 of the Registrant’s Quarterly  Report on Form 10-QSB for the quarter ended September 30, 2003.                                                                                                  |
| 10.16  |   | Amendment No. 2 to  Asset Purchase Agreement, dated as of October 16, 2003 – Incorporated by  reference to Exhibit 10.5 of the Registrant’s Quarterly Report on  Form 10-QSB/A for the quarter ended September 30, 2003.                                                                                                         |
| 10.17* |   | Form of Amended  Distribution Agreement – Incorporated by Reference to Exhibit 10.1 of  the Registrant’s Quarterly Report on Form 10-QSB/A for the quarter ended  March 31, 2004.                                                                                                                                                     |
| 10.18  |   | Form of Promissory  Note – Incorporated by Reference to Exhibit 10.2 of the Registrant’s  Quarterly Report on From 10-QSB/A for the Quarter ended March 31, 2004.                                                                                                                                                                          |
| 10.19  |   | Certificate of  Designation, Preferences and Rights of Series A 8.0% Convertible  Preferred Stock – Incorporated by reference to Exhibit 10.19 of the  Registrant’s Annual Report on Form 10-KSB for the year ended  June 30, 2004.                                                                                                   |
| 10.20  |   | Transportation Dry  Lease Agreement between MediCor and Global Aviation, LLC dated June 30,  2001 – Incorporated by reference to Exhibit 10.22 of the Registrant’s  Annual Report on Form 10-KSB/A for the year ended June 30, 2004.                                                                                                  |
| 10.21* |   | Loan  Agreement with BNP Paribas dated September 10, 2004 – Incorporated by  reference to Exhibit 10.23 of the Registrant’s Annual Report on  Form 10-KSB/A for the year ended June 30, 2004.                                                                                                                                         |
| 10.22  |   | Revolving  Promissory Note made by MediCor Ltd. in favor of International Integrated  Industries, LLC – Incorporated by reference to Exhibit 10.24 of  the Registrant’s Registration Statement on Form SB-2/A filed March 4, 2005  (Commission File No. 333-121832).                                                                                 |
| 10.23  |   | Assignment  and Assumption Agreement, dated as of April 1, 2003, by and among  International Integrated Incorporated, MediCor Ltd. and International  Integrated Industries, LLC – Incorporated by reference to Exhibit 10.25  of the Registrant’s Registration Statement on Form SB-2/A filed March 4, 2005  (Commission File No. 333-121832). |
| 10.24  |   | Reimbursement  Agreement between MediCor Ltd. and Global Aviation Delaware LLC dated  October 1, 2003 – Incorporated by reference to Exhibit 10.26 of the  Registrant’s Registration Statement on Form SB-2/A filed April 1, 2005  (Commission File No. 333-121832).                                                                            |
| 10.25  |   | Addendum  to Promissory Note made by MediCor Ltd. in favor of International Integrated  Industries, LLC – Incorporated by reference to Exhibit 10.27 of the  Registrant’s Registration Statement on Form SB-2/A filed April 1, 2005  (Commission File No. 333-121832).                                                                               |

 

E-2

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| 10.26* |   | Supplier  Novation and Amendment Agreement among Biosil Limited, Hutchison  International, Inc., MediCor Aesthetics and International Integrated  Incorporated dated as of February 10, 2005 – Incorporated by reference  to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K  filed May 3, 2005. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.27  |   | Guarantee  dated as of February 10, 2005 between MediCor Ltd. and Biosil Limited –  Incorporated by reference to Exhibit 10.2 of the Registrant’s Current  Report on Form 8-K filed May 3, 2005.                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                            |
| 10.28  |   | Transaction Accommodation  Agreement between International Integrated Incorporated, MediCor Ltd and  Hutchison International, Inc. dated as of March 21, 2005 –  Incorporated by reference to Exhibit 10.3 of the Registrant’s Current  Report on Form 8-K filed May 3, 2005.                                |
| 10.29  |   | Administrative Service  Agreement between MediCor and NexGen Management LLC, filed herewith.                                                                                                                                                                                                                                                    |
| 10.30  |   | Addendum  to Promissory Note made by MediCor Ltd. in favor of International Integrated  Industries, LLC, filed herewith.                                                                                                                                                                                                                        |
| 21     |   | Subsidiaries of the  Registrant – Incorporated by reference to Exhibit 21 of the Registrant’s  Registration Statement on Form SB-2/A filed March 4, 2005 (Commission File  No. 333-121832).                                                                                                                                      |
| 31.1   |   | Principal Executive  Officer Certification Pursuant To 17 C.F.R. Section 240.13a-14(a)                                                                                                                                                                                                                                                     |
| 31.2   |   | Principal Financial  Officer Certification Pursuant To 17 C.F.R. Section 240.13a-14(a)                                                                                                                                                                                                                                                     |
| 32.1   |   | Principal Executive  Officer Certification Pursuant To 18 U.S.C. Section 1350                                                                                                                                                                                                                                                              |
| 32.2   |   | Principal Financial  Officer Certification Pursuant To 18 U.S.C. Section 1350                                                                                                                                                                                                                                                              |

 

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

 

E-3

----