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

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**FORM 10-Q**
| **(Mark One)**                                                                                                                                                                                                                                                                                                                                                                            |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                |
| **x**                                                                                                                                                                                                                                                                                                                                                                                     | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                |
| **For the  Fiscal Quarter Ended September 30, 2006**                                                                                                                                                                                                                                                                                                                                      |
| ** **                                                                                                                                                                                                                                                                                                                                                                                |
| **or**                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **                                                                                                                                                                                                                                                                                                                                                                                |
| **o**                                                                                                                                                                                                                                                                                                                                                                                     | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                                                      |
| **For the  transition period from                               to                             ** |

 

**Commission file number 0-50442**

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**MEDICOR LTD.******(Name of Small Business Issuer in Its Charter) 

| **Delaware**                                                     |   | **14-1871462**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction  of Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **4560 S.  Decatur Blvd.  Las Vegas, Nevada**                    |   | **89103**                             |
| (Address of  Principal Executive Offices)                        |   | (Zip Code)                            |

 

**(702) 932-4560**

(Issuer’sTelephone Number, Including Area Code)

Securities registered underSection 12(b) of the Exchange Act:

**None**

Securities registered underSection 12(g) of the Exchange Act:

**Common Stock, Par value $0.001 per share**

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Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes x    No o

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

Large accelerated filer o   Accelerated filer o   Non-accelerated filer x

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

       Yes o  No x

On November 1, 2006, there were23,746,162 shares of common stock outstanding.

 

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**MEDICOR LTD.Quarterly Report on Form 10-QFor the Fiscal Quarter Ended September 30, 2006TABLE OF CONTENTS**
|               | ** **                                                                                   | **Page** |
|---------------|----------------------------------------------------------------------------------------------|----------|
| ** **    | **PART I**                                                                                   |     |
| ** **    | ** **                                                                                   |     |
| Item 1.       | Consolidated Financial Statements (Unaudited)                                                | 2        |
|          | Consolidated Balance Sheet – September 30, 2006 and  June 30, 2006                      | 2        |
|          | Consolidated Statements of Operations – Three Months  Ended September 30, 2006 and 2005 | 3        |
|          | Consolidated  Statements of Cash Flows – Three months Ended September 30, 2006 and 2005 | 4        |
| Item 2.       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations  | 17       |
| Item 3.       | Quantitative and Qualitative Disclosures About Market  Risk                                  | 19       |
| Item  4.      | Controls  and Procedures                                                                     | 20       |
|          |                                                                                         |     |
| ** **    | **PART II**                                                                                  |     |
| ** **    | ** **                                                                                   | 21       |
| Item 1.       | Legal Matters                                                                                | 21       |
| Item 1A.      | Risk Factors                                                                                 | 29       |
| Item 2.       | Unregistered Sales of Equity Securities and Use of  Proceeds                                 | 29       |
| Item 3.       | Defaults Upon Senior Securities                                                              | 29       |
| Item 4.       | Submission of Matters to a Vote of Security Holders                                          | 29       |
| Item 5.       | Other Information                                                                            | 29       |
| Item 6.       | Exhibits                                                                                     | 29       |
| Signatures    | 30                                                                                           |
| Exhibit Index |                                                                                         |

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

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

1

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**PART I – FINANCIAL INFORMATION**

***ITEM 1- FINANCIAL STATEMENTS***

**MediCor Ltd.**

**Consolidated Balance Sheets**

**(thousands, except par value)**

 
| ** **                                                                                                                                                                                                                                                                               | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                                                                                               | ** ** | **2006**               | ** ** | **2006**          | ** ** |
| ** **                                                                                                                                                                                                                                                                               | ** ** | **(Unaudited)**        | ** ** | ** **        | ** ** |
| **Assets**                                                                                                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **        | ** ** |
| ** **                                                                                                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **        | ** ** |
| Current assets:                                                                                                                                                                                                                                                                          |       |                   |       |              |       |
| ** **                                                                                                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **        | ** ** |
| Cash and cash  equivalents                                                                                                                                                                                                                                                               |       | $                      | 5,378      |              | $          | 14,442 |   |
| Accounts  receivable, net of allowances of $1,560 and $1,605 at September 30, 2006 and  June 30, 2006, respectively                                                                                                                                                                      |       | 10,076                 |       | 10,422            |       |
| Notes  receivable, net of allowances of $3,782 and $3,673 at September 30, 2006 and  June 30, 2006, respectively                                                                                                                                                                         |       | —                 |       | —            |       |
| Inventories                                                                                                                                                                                                                                                                              |       | 9,781                  |       | 9,160             |       |
| Deferred  financing fees                                                                                                                                                                                                                                                                 |       | 1,154                  |       | 1,102             |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                                                               |       | 1,304                  |       | 1,090             |       |
| ** **                                                                                                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **        | ** ** |
| Total current  assets                                                                                                                                                                                                                                                                    |       | 27,692                 |       | 36,216            |       |
| Property and  equipment, net                                                                                                                                                                                                                                                             |       | 8,153                  |       | 8,135             |       |
| Goodwill and  other intangible assets, net                                                                                                                                                                                                                                               |       | 81,876                 |       | 81,777            |       |
| Deposits                                                                                                                                                                                                                                                                                 |       | 166                    |       | 165               |       |
| Other assets                                                                                                                                                                                                                                                                             |       | 2,466                  |       | 2,822             |       |
| ** **                                                                                                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **        | ** ** |
| Total assets                                                                                                                                                                                                                                                                             |       | $                      | 120,354    |              | $          | 129,115 |   |
| ** **                                                                                                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **        | ** ** |
| **Liabilities and Stockholders’  Equity (Deficit)**                                                                                                                                                                                                                                 | ** ** | ** **             | ** ** | ** **        | ** ** |
| ** **                                                                                                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **        | ** ** |
| Current  liabilities:                                                                                                                                                                                                                                                                    |       |                   |       |              |       |
| ** **                                                                                                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **        | ** ** |
| Accounts payable                                                                                                                                                                                                                                                                         |       | $                      | 7,044      |              | $          | 5,902 |   |
| Accrued expenses  and other current liabilities                                                                                                                                                                                                                                          |       | 11,291                 |       | 13,347            |       |
| Deferred tax  payable                                                                                                                                                                                                                                                                    |       | 1,022                  |       | 1,022             |       |
| Dividends payable                                                                                                                                                                                                                                                                        |       | 256                    |       | 256               |       |
| Short-term note  payable                                                                                                                                                                                                                                                                 |       | 120                    |       | 170               |       |
| Interest payable                                                                                                                                                                                                                                                                         |       | 450                    |       | 1,417             |       |
| Interest payable  to related party                                                                                                                                                                                                                                                       |       | 1,817                  |       | 752               |       |
| Current portion  of long-term debt                                                                                                                                                                                                                                                       |       | 2,832                  |       | 2,834             |       |
|                                                                                                                                                                                                                                                                                     |       |                   |       |              |       |
| Total current  liabilities                                                                                                                                                                                                                                                               |       | 24,832                 |       | 25,700            |       |
| ** **                                                                                                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **        | ** ** |
| Long-term debt,  net of current portion and note discounts                                                                                                                                                                                                                               |       | 27,101                 |       | 22,029            |       |
| Long-term debt  to related party, net of note discounts                                                                                                                                                                                                                                  |       | 37,538                 |       | 37,310            |       |
| Senior warrants                                                                                                                                                                                                                                                                          |       | 5,969                  |       | 6,375             |       |
| Senior note  conversion feature                                                                                                                                                                                                                                                          |       | 26,000                 |       | 27,750            |       |
|                                                                                                                                                                                                                                                                                     |       |                   |       |              |       |
| Total  liabilities                                                                                                                                                                                                                                                                       |       | 121,440                |       | 119,164           |       |
|                                                                                                                                                                                                                                                                                     |       |                   |       |              |       |
| Commitments and  contingencies                                                                                                                                                                                                                                                           |       |                   |       |              |       |
| ** **                                                                                                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **        | ** ** |
| Preferred shares  subject to mandatory redemption requirements                                                                                                                                                                                                                           |       | 6,810                  |       | 6,810             |       |
| ** **                                                                                                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **        | ** ** |
| Stockholders’  equity (deficit)                                                                                                                                                                                                                                                     |       |                   |       |              |       |
| ** **                                                                                                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **        | ** ** |
| Common shares,  $0.001 par value; authorized 100,000 shares and 100,000 shares at September  30, 2006 and June 30, 2006; issued 23,800 and 23,800 shares at September 30,  2006 and June 30, 2006; outstanding: 23,746 shares and 23,746 shares at  September 30, 2006 and June 30, 2006 |       | 24                     |       | 24                |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                              |       | 73,664                 |       | 73,144            |       |
| Deferred  compensation                                                                                                                                                                                                                                                                   |       | —                 |       | (111              | )          |
| Accumulated  deficit                                                                                                                                                                                                                                                                     |       | (84,690                | )          | (71,978           | )          |
| Accumulated  other comprehensive income                                                                                                                                                                                                                                                  |       | 3,106                  |       | 2,062             |       |
| ** **                                                                                                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **        | ** ** |
| Stockholders’  equity (deficit)                                                                                                                                                                                                                                                     |       | (7,896                 | )          | 3,141             |       |
| ** **                                                                                                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **        | ** ** |
| Total liabilities and  stockholders’ equity (deficit)                                                                                                                                                                                                                               |       | $                      | 120,354    |              | $          | 129,115 |   |

 

Seeaccompanying notes to unaudited consolidated interim financial statements

 

2

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**MediCor Ltd.**

**Consolidated Statements ofOperations**

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

**(Unaudited)**

 
| ** **                                                                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                 | ** ** | **September 30,**           | ** ** | **September 30,** | ** ** |
| ** **                                                                                 | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Net sales                                                                                  |       | $                                | 9,494      |   | $ | 5,662 |   |
| Cost of sales                                                                              |       | 6,368                            |       | 3,946 |   |
|                                                                                       |       |                             |       |   |   |
| Gross profit                                                                               |       | 3,126                            |       | 1,716 |   |
|                                                                                       |       |                             |       |   |   |
| Operating expenses:                                                                        |       |                             |       |   |   |
| Selling, general  and administrative                                                       |       |                             |       |   |   |
| Salaries and  wages                                                                        |       | 2,095                            |       | 1,286 |   |
| Other                                                                                      |       | 4,802                            |       | 2,293 |   |
| Research and  development                                                                  |       | 855                              |       | 913 |   |
|                                                                                       |       |                             |       |   |   |
| Operating loss                                                                             |       | (4,626                           | )          | (2,776 | ) |
|                                                                                       |       |                             |       |   |   |
| Non-operating expenses:                                                                    |       |                             |       |   |   |
| Net interest  expense                                                                      |       | 10,198                           |       | 1,454 |   |
| Other  expenses/(income)                                                                   |       |                             |       | — |   |
| Reduction in  value of derivative liabilities                                              |       | (2,156                           | )          | — |   |
| Loss/(gain) on  foreign exchange transactions                                              |       | (142                             | )          | (275 | ) |
|                                                                                       |       |                             |       |   |   |
| Loss before income  taxes                                                                  |       | (12,526                          | )          | (3,955 | ) |
| Income tax  expense (benefit)                                                              |       | 185                              |       | (128 | ) |
|                                                                                       |       |                             |       |   |   |
| Net loss                                                                                   |       | (12,711                          | )          | (3,827 | ) |
|                                                                                       |       |                             |       |   |   |
| Preferred dividends                                                                        |       |                             |       |   |   |
| Preferred  dividends deemed                                                                |       | —                           |       | — |   |
| Preferred  dividends in arrears series A Preferred 8%                                      |       | 135                              |       | 124 |   |
|                                                                                       |       |                             |       |   |   |
| Net loss attributable  to common stockholders                                              |       | $                                | (12,846    | ) | $ | (3,951 | ) |
|                                                                                       |       |                             |       |   |   |
| Net loss attributable  to common stockholders per share of common stock, basic and diluted |       | $                                | (0.54      | ) | $ | (0.19 | ) |
|                                                                                       |       |                             |       |   |   |
| Weighted average number of shares outstanding, basic and diluted                           |       | 23,746                           |       | 20,336 |   |

 

Seeaccompanying notes to unaudited consolidated interim financial statements

 

3

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**MediCor Ltd.**

**Consolidated Statements of CashFlows**

**(thousands)**

**(Unaudited)**

 
| ** **                                                                                                                  | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                  | ** ** | **September 30,**           | ** ** | **September 30,** | ** ** |
| ** **                                                                                                                  | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                                                  | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net loss                                                                                                                    |       | $                                | (12,711    | ) | $ | (4,101 | ) |
| Adjustments to  reconcile net loss to net cash utilized by operating activities                                             |       |                             |       |   |   |
| Depreciation and  amortization                                                                                              |       | 867                              |       | 435 |   |
| Provision for  doubtful accounts                                                                                            |       | 104                              |       | 304 |   |
| Employee stock  options                                                                                                     |       | 543                              |       | — |   |
| Non-employee  stock options                                                                                                 |       | 88                               |       | 28 |   |
| Directors’  restricted common stock                                                                                    |       | —                           |       | 27 |   |
| Non-cash  interest expense                                                                                                  |       | 6,690                            |       | — |   |
| Reduction in  value of derivative liabilities                                                                               |       | (2,156                           | )          | — |   |
| Increase  (decrease) in cash flows from changes in operating assets and liabilities, excluding  the effects of acquisitions |       |                             |       |   |   |
| Accounts  receivable, net                                                                                                   |       | 347                              |       | 398 |   |
| Notes receivable                                                                                                            |       | (104                             | )          | (293 | ) |
| Inventories                                                                                                                 |       | (621                             | )          | (715 | ) |
| Prepaid expenses  and other current assets                                                                                  |       | (214                             | )          | 22 |   |
| Deposits                                                                                                                    |       | (1                               | )          | (264 | ) |
| Other assets                                                                                                                |       | 303                              |       | 9 |   |
| Accounts payable                                                                                                            |       | 1,143                            |       | 113 |   |
| Accrued expenses  and other current liabilities                                                                             |       | (2,056                           | )          | (689 | ) |
| Interest payable                                                                                                            |       | 97                               |       | 1,220 |   |
| Long term  accrued liabilities                                                                                              |       | —                           |       | (517 | ) |
| Net cash used in  operating activities                                                                                      |       | (7,681                           | )          | (4,024 | ) |
|                                                                                                                        |       |                             |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                                                  | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Additions to  property and equipment                                                                                        |       | (159                             | )          | (111 | ) |
| Net cash  utilized in investing activities                                                                                  |       | (159                             | )          | (111 | ) |
|                                                                                                                        |       |                             |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                                                  | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Proceeds from  issuance of short-term debt                                                                                  |       | —                           |       | 4,400 |   |
| Payments on  convertible debentures                                                                                         |       | (50                              | )          | — |   |
| Payments on  short-term debt                                                                                                |       | (2,218                           | )          | (1,496 | ) |
| Net cash  provided by (utilized in) financing activities                                                                    |       | (2,268                           | )          | 2,904 |   |
|                                                                                                                        |       |                             |       |   |   |
| **EFFECT OF FOREIGN EXCHANGE  TRANSLATION ON CASH AND CASH EQUIVALENTS**                                                    |       | 1,044                            |       | 275 |   |
|                                                                                                                        |       |                             |       |   |   |
| **CHANGE IN CASH AND CASH  EQUIVALENTS**                                                                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net increase  (decrease) in cash and cash equivalents                                                                       |       | (9,064                           | )          | (956 | ) |
| Cash and cash  equivalents at beginning of period                                                                           |       | 14,442                           |       | 1,835 |   |
|                                                                                                                        |       |                             |       |   |   |
| Cash and cash  equivalents at end of period                                                                                 |       | $                                | 5,378      |   | $ | 879 |   |
|                                                                                                                        |       |                             |       |   |   |
| **SUPPLEMENTAL DISCLOSURE OF  NON-CASH ACTIVITIES**                                                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| ** **                                                                                                                  | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Conversion of  short-term debt to long-term debt                                                                            |       | $                                | —     |   | $ | 50 |   |
|                                                                                                                        |       |                             |       |   |   |
| **SUPPLEMENTAL CASH FLOW  DISCLOSURES**                                                                                     | ** ** | ** **                       | ** ** | ** ** | ** ** |
|                                                                                                                        |       |                             |       |   |   |
| Cash paid during  the period for:                                                                                           |       |                             |       |   |   |
| Interest                                                                                                                    |       | $                                | 2,598      |   | $ | 442 |   |
| Income taxes                                                                                                                |       | $                                | 2          |   | $ | 2 |   |

 

Seeaccompanying notes to unaudited consolidated interim financial statements

4

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**MEDICOR LTD.**

**NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS(unaudited)**

**September 30, 2006**

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

**Note A – Description of Business**

MediCor Ltd. (the “Company”) is a global health carecompany that acquires, develops, manufactures and markets products primarilyfor the aesthetic, plastic, and reconstructive surgery and dermatology markets.Current products include breast implant products and scar management products.The Company’s breast implant products are currently sold in approximately 85countries, but are not sold in the United States or Canada. The Company’sproducts are sold primarily in foreign (non-U.S.) countries and foreign salesare currently approximately 95% of total sales, with Brazil accounting forapproximately 11% of sales. Breast implant and other implant products accountfor approximately 95% of total sales for the three months ended September 30,2006, with sales in approximately 85 countries but not the U.S. or Canada; scarmanagement products contributed approximately 5% of total sales. The Companysells its products to hospitals, surgical centers and physicians through acombination of distributors and 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, McGhan Medical and McGhan Limited. MediCor’s objectiveis to be a leading supplier of selected international medical devices andtechnologies. To achieve this strategy, MediCor intends to build upon andexpand its business lines, primarily in the aesthetic, plastic andreconstructive surgery and dermatology markets. MediCor intends to both expandexisting product lines and offerings and acquire companies and other assets,including intellectual property rights and distribution rights.

**Note B – Basis of Presentation**

***InterimReporting***

The accompanying unaudited consolidated financialstatements for the three-month period ended September 30, 2006 and September30, 2005, have been prepared in accordance with accounting principles generallyaccepted in the United States and with the Securities and Exchange Commission(the “SEC”) rules for interim financial information reporting. Accordingly,they do not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements. These statements should be read in conjunction with theconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-KSB for the fiscal year ended June 30, 2006. In theopinion of management, all adjustments (consisting only of normal recurringaccruals, unless otherwise indicated) considered necessary for a fairpresentation of the results of operations for the indicated periods have beenincluded. Certain amounts recorded in previous periods have been reclassifiedto conform to the current period presentation. Operating results for the threemonths ended September 30, 2006 are not necessarily indicative of the resultsfor the full fiscal year.

***Principles ofConsolidation***

The consolidated financial statements include theaccounts of the Company and all of its subsidiaries in which a controllinginterest is maintained. All inter-company accounts and transactions have beeneliminated. Certain prior year amounts in previously issued financialstatements have been reclassified to conform to the current year presentation.The consolidated financial statements have been prepared in United Statesdollars.

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

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

5

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##### ***Share-Based Payments***

On July 1, 2006, the Company adopted Statement ofFinancial Accounting Standards (“SFAS”) No. 123 (revised), *Share-BasedPayment*(“SFAS No. 123R”), which requires measurement andrecognition of compensation expense for all share-based payment awards made toemployees, non-employees and directors. Under SFAS No. 123R the fair value ofshare-based payment awards is estimated at grant date using an option pricingmodel and the portion that is ultimately expected to vest is recognized ascompensation cost over the requisite service period. Prior to the adoption ofSFAS No. 123R, the Company accounted for share-based awards using the intrinsicvalue method prescribed by Accounting Principles Board Opinion (“APBO”)No. 25, *Accounting for Stock Issued to Employees*(“APBONo. 25”), as allowed under SFAS No. 123, *Accounting for Stock-BasedCompensation*. Under the intrinsic value method no share-basedcompensation cost was recognized for awards to employees or directors if theexercise price of the award was equal to the fair market value of theunderlying stock on the date of grant.

The Company adopted SFAS No. 123R using the modifiedprospective application method. Under the modified prospective applicationmethod prior periods are not revised for comparative purposes. The valuationprovisions of SFAS No. 123R apply to new awards and awards that areoutstanding on the adoption effective date that are subsequently modified orcancelled. Estimated compensation expense for awards outstanding and unvestedon the adoption effective date will be recognized over the remaining serviceperiod using the compensation cost calculated for pro forma disclosure purposesunder SFAS No. 123.

Pre-tax share-based compensation expense recognizedunder SFAS No. 123R for the three months ended September 30, 2006 was $616,which consisted of compensation related to employee, non-employee and directorstock options. Pre-tax share-based compensation expense recognized under APBONo. 25 for the three months ended September 30, 2005 was $54, which consistedof compensation related to non-employee stock options and director restrictedshare awards. There was no share-based compensation expense recognized duringthe three months ended September 30, 2005 related to employee or director stockoptions. The company did not recognize an income tax benefit related to therecognized share-based for the three months ended September 30, 2006 and 2005,respectively.

The Company uses the Black-Scholes option-pricingmodel to estimate the fair value of share-based awards. The determination offair value using the Black-Scholes model is affected by the Company’s commonstock price as well as assumptions regarding a number of highly complex andsubjective variables. These variables include, but are not limited to, theCompany’s expected common stock price volatility over the term of the awardsand projected employee stock option exercise behavior.

The Company recognizes share-based compensation costover the requisite service period using the straight-line single option method.Since share-based compensation under SFAS No. 123R is recognized only for thoseawards that are ultimately expected to vest, an estimated forfeiture rate hasbeen applied to unvested awards for the purpose of calculating compensation cost.SFAS No. 123R requires these estimates to be revised, if necessary, infuture periods if actual forfeitures differ from the estimates. Changes inforfeiture estimates impact compensation cost in the period in which the changein estimate occurs. In the Company’s pro forma information required under SFASNo. 123 prior to July 1, 2006, the Company accounted for forfeitures asthey occurred.

On November 10, 2005, the Financial AccountingStandards Board (“FASB”) issued Staff Position No. FAS 123(R)-3, *Transitional Election Related to Accounting for Tax Effects ofShare-Based Payment Awards*. The Company has elected to adopt thealternative transition method provided in this FASB Staff Position forcalculating the tax effects of share-based compensation pursuant to SFAS No.123R. The alternative transition method includes a simplified method toestablish the beginning balance additional paid-in capital pool (“APIC Pool”)related to tax effects of employee share-based compensation, which is availableto absorb tax deficiencies recognized subsequent to the adoption of SFAS No.123R.

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

In September 2006, theFASB issued SFAS No. 157, *Fair Value Measurements*.SFAS No. 157 defines fair value, establishes a framework for measuring fairvalue, and expands disclosures about fair value measurements.  We plan to adopt SFAS No. 157 on July 1,2008. We are evaluating the impact, if any, that SFAS No. 157 will have on ourfinancial statements.

In July 2006, the FASB issued FASB Interpretation No.48 (“FIN 48”), *Accounting for Uncertainty in IncomeTaxes—an interpretation of FASB Statement No. 109*, which prescribesa recognition threshold and measurement process for recording in the financialstatements uncertain tax positions taken or expected to be taken in a taxreturn. Additionally, FIN 48 provides guidance on de-recognition,classification, accounting in interim periods, and disclosure requirements foruncertain tax positions. FIN 48 is effective for fiscal years beginning afterDecember 15, 2006. The Company is currently assessing the impact of FIN 48 onits consolidated financial position and results of operations.

6

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In February 2006, the FASB issued SFAS No. 155, *Accounting for Certain Hybrid Financial Instruments—an amendment of FASBStatements No. 133 and 140*. This statement amends SFASNo. 133, *Accounting for Derivative Instruments andHedging Activities*, and SFAS No. 140, *Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities*, and resolves issues addressed in SFAS No. 133Implementation Issue No. D1, *Application ofStatement 133 to Beneficial Interest in Securitized Financial Assets*.SFAS No. 155 (a) permits fair value re-measurement for any hybridfinancial instrument that contains an embedded derivative that otherwise wouldrequire bifurcation; (b) clarifies which interest-only strips andprincipal-only strips are not subject to the requirements ofSFAS No. 133; (c) establishes a requirement to evaluatebeneficial interests in securitized financial assets to identify interests thatare freestanding derivatives or that are hybrid financial instruments thatcontain an embedded derivative requiring bifurcation; (d) clarifies thatconcentrations of credit risk in the form of subordination are not embeddedderivatives; and (e) eliminates restrictions on a qualifyingspecial-purpose entity’s ability to hold passive derivative financialinstruments that pertain to beneficial interests that are or contain aderivative financial instrument. The standard also requires presentation withinthe financial statements that identifies those hybrid financial instruments forwhich the fair value election has been applied and information on the incomestatement impact of the changes in fair value of those instruments. The Companyis required to apply SFAS No. 155 to all financial instruments acquired,issued or subject to a re-measurement event beginning July 1, 2007,although early adoption is permitted as of the beginning of an entity’s fiscalyear. The Company is evaluating the provisions of SFAS No. 155. Theeffects of adopting of SFAS No. 155 on the Company’s financial statementsare not known at this time.

In May 2005, FASB issuedSFAS No. 154, *Accounting Changes and Error Corrections*,which replaces APBO No. 20, *Accounting Changes*and SFAS No. 3, *Reporting Accounting Changes in InterimFinancial Statements*. This pronouncement applies to all voluntarychanges in accounting principle, and revises the requirements for accountingfor and reporting a change in accounting principle. SFAS No. 154 requiresretrospective application to prior periods’ financial statements of a voluntarychange in accounting principle, unless it is impracticable to do so. Thispronouncement also requires that a change in the method of depreciation,amortization, or depletion for long-lived, non-financial assets be accountedfor as a change in accounting estimate that is effected by a change inaccounting principle. SFAS No. 154 retains many provisions of APBO No. 20without change, including those related to reporting a change in accountingestimate, a change in the reporting entity, and correction of an error. Thepronouncement also carries forward the provisions of SFAS No. 3 which governreporting accounting changes in interim financial statements. SFAS No. 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005. The Statement does not change the transitionprovisions of any existing accounting pronouncements, including those that arein a transition phase as of the effective date of SFAS No. 154. TheCompany has applied the provisions of this statement effective July 1, 2006.

In December 2004, FASBissued SFAS No. 123(R), Share-Based Payment, which establishes standards for theaccounting for transactions in which an entity exchanges its equity instrumentsfor goods or services. A key provision of this statement is the requirement ofa public entity to measure the cost of employee services received in exchangefor an award of equity instruments (including stock options) based on the grantdate fair value of the award. That cost will be recognized over the periodduring which an employee is required to provide service in exchange for theaward (i.e., the requisite service period or vesting period). On April 14,2005, the SEC approved a new rule that delays the effective date for SFAS123(R) to fiscal years beginning after June 15, 2005, thereby rendering iteffective as to the Company on July 1, 2006. The adoption of SFAS 123(R) had animpact of $616 on the Company’s consolidated net income and a loss per share of$0.02.

No other new accountingpronouncement issued or effective during this fiscal year has had or isexpected to have a material impact on our consolidated financial statements.

**Note C – Inventories**

Inventories consisted of:
|                 | ** ** | **September 30, 2006** | ** ** | **June 30, 2006** | ** ** |
|-----------------|------------|----------------------------------|------------|-----------------------------|------------|
|            |       |                             |       |                        |       |
| Raw Materials   |       | $                                | 2,058      |                        | $          | 1,611 |   |
| Work in Process |       | 756                              |       | 646                         |       |
| Finished Goods  |       | 6,967                            |       | 6,902                       |       |
|            |       |                             |       |                        |       |
| Total           |       | $                                | 9,781      |                        | $          | 9,160 |   |

 

7

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**Note D – Accrued Expenses**

 

Accrued expenses and other current liabilities atSeptember 30, 2006 consisted of: 
|                                                                | ** ** | **September 30, 2006** | ** ** | **June 30, 2006** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
|                                                           |       |                             |       |                        |       |
| Subsequent  acquisition payment for Biosil Ltd. and Nagor Ltd. |       | $                                | 5,838      |                        | $          | 5,838 |   |
| Wages, paid  leave and payroll related taxes                   |       | 2,687                            |       | 3,200                       |       |
| Product  replacement allowance                                 |       | 1,847                            |       | 2,287                       |       |
| Accrued  purchases                                             |       | 520                              |       | 1,256                       |       |
| Legal settlement                                               |       | 150                              |       | 350                         |       |
| Other                                                          |       | 250                              |       | 416                         |       |
|                                                           |       |                             |       |                        |       |
|                                                           |       | $                                | 11,291     |                        | $          | 13,347 |   |

 

The Company entered into a settlement with itsprevious Mexican distributor, Europlex, S.A. de C.V., pursuant to whichEuroplex agreed to extinguish and release all claims against the Company, inexchange for future payments totaling $1,000 of which $850 has been paid. Otheraccrued expenses included interest and other legal expenses.

##### **NoteE - Product Replacement Programs**

Most of the Company’s subsidiaries provide a productreplacement program to surgeons for deflations of breast implant products for aperiod of ten years from the date of implantation. For Nagor products sold inthe U.K., the Company also provides a free replacement implant in cases ofcapsular contracture within one year of the original implantation. For certainsurgeons outside of the U.S., Eurosilicone provides a product replacementprogram for the life of the patient, including replacements for competitiveimplants, aesthetic dissatisfaction and for deflation. In follow-on clinicalstudies, the Company may extend the period in which free replacement implantscan be claimed for capsular contracture or deflation. In addition to a freereplacement, certain of the programs also pay limited financial assistance tothe surgeon to help reduce the cost of the replacement surgical procedure.Management has estimated the amount of potential future product replacementclaims based on a detailed analysis. Expected future obligations are determinedbased on the history of product shipments and claims and are discounted to acurrent value, and this amount is set aside as an allowance. Changes to thevolume or pattern of expected claims and changes in interest rates would affectthe calculation and could materially impact the Company’s allowance and resultsof operations. Although breast implant products are not currently being sold inthe U.S. (because the Company is in the process of seeking clearance from theU.S. Food and Drug Administration, or “FDA”, to market them in the U.S., asmore fully described below), they were sold under a distribution agreementprior to May 2000 and an allowance for product replacements is maintained forthe products sold in prior years.

For the three months ended September, 2006, IIIAcquisition Corporation, which does business under the name PIP.America, paid$167 with respect to settlements under its product replacement program forproducts previously sold under its distribution agreement with Poly ImplantsProthèses S.A. (“PIP”), a third-party manufacturer of breast implants. For thethree months ended September 30, 2006, MediCor Aesthetics paid $195 with respectto settlements under its product replacement program for the productspreviously sold under its distribution agreement between HutchisonInternational, Inc. and Biosil Limited.

As of September 30, 2006, the Eurosilicone,PIP.America and MediCor Aesthetics product replacement program allowanceconsisted of:
| Balance at July 1, 2005                                                |   | $      | 1,004  |   |
|------------------------------------------------------------------------|--------|--------|--------|--------|
| Provision for  product replacement program expansion during the period |   | 2,460  |   |
| Settlements  incurred during the period                                |   | (1,177 | )      |
| Balance at June  30, 2006                                              |   | 2,287  |   |
|                                                                   |   |   |   |
| Provision for  product replacement program expansion during the period |   | 50     |   |
| Settlements  incurred during the period                                |   | (490   | )      |
| Balance at September  30, 2006                                         |   | $      | 1,847  |   |

 

8

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**Note F – Debt**

## Long-term debt consisted ofthe following amounts:

| ** **                                                                                                              | ** ** | **September 30, 2006** | ** ** | **June 30, 2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
|                                                                                                                    |       |                             |       |                        |       |
| Senior secured  convertible note - variable 3-month LIBOR plus 6%, with maturity in March  2011                         |       | $                                | 50,000     |                        | $          | 50,000 |   |
| Variable 6-month  EURIBOR plus 2.25% euro-denominated note, with maturity in September 2011                             |       | 9,848                            |       | 11,695                      |       |
| Subordinated  secured convertible note to related party - variable 3- month LIBOR plus 6%,  with maturity in March 2011 |       | 37,500                           |       | 37,500                      |       |
| Subordinated  note to related party - 10%, with maturity in September 2011                                              |       | 32,388                           |       | 31,592                      |       |
| Convertible  debentures                                                                                                 |       | 100                              |       | 150                         |       |
| Obligations  under capital leases                                                                                       |       | 2,348                            |       | 2,265                       |       |
| Subsequent  acquisition payment for Biosil Ltd. and Nagor Ltd.                                                          |       | 5,255                            |       | 5,255                       |       |
| Other notes                                                                                                             |       | 321                              |       | 406                         |       |
|                                                                                                                    |       |                             |       |                        |       |
|                                                                                                                    |       | 137,760                          |       | 138,863                     |       |
| Less: current  maturities                                                                                               |       | (2,832                           | )          | (2,834                      | )          |
| Less: note  discounts                                                                                                   |       | (70,290                          | )          | (76,690                     | )          |
|                                                                                                                    |       |                             |       |                        |       |
| Long-term debt                                                                                                          |       | $                                | 64,639     |                        | $          | 59,339 |   |

 

## OnApril 26, 2006, the Company raised $50,000 in a private placement thatincluded the sale of senior secured convertible notes (the “Notes”). $25,000 ofthis was utilized in the acquisition of Biosil and Nagor, with the remainingbalance made available for the Company’s general working capital needs.  The Notes carry an interest rate ofthree-month LIBOR, plus 6%, and a one-time balloon payment at maturity on March2011.  As part of this financingtransaction, the Company also issued warrants (the “Warrants”) to purchaseshares of our common stock.  The Notesand Warrants are subject to a Registration Rights Agreement that requires thatthe Company register the underlying shares with the SEC and maintain theeffectiveness of the registration statement. The Registration Rights Agreement also provides for liquidated damageson the occurrence of several events.  Asof September 30, 2006, no liquidating damages have been incurred by theCompany.

## InSeptember 2004, MediCor’s ES Holdings subsidiary entered into an arrangementwith a financial institution to borrow up to €16,400, at an interest rate ofsix-month EURIBOR plus 2.25%, to fund payments due to the sellers ofEurosilicone, a company acquired by MediCor in July 2004. The last borrowing isscheduled for 2007 and scheduled repayments complete in September 2011. As ofSeptember 30, 2006, the outstanding principal was €7,762.

Convertible debentures at September 30, 2006 were $100.These areconvertible, at the holder’s discretion, after one year and at the 18-month,24-month, 30-month and 36-month anniversary of the issuance date to shares ofthe Company’s common stock at a price equal to the greater of $5.00 orseventy-five percent (75%) of the daily weighted average trading price pershare of the Company’s common stock over a period of twenty (20) trading daysprior to the conversion date. They are all reported within the current portionof long-term debt. During the three months ended September 30, 2006, theCompany did not incur any costs relating to these convertible debentures.

MediCor has severalcapital leases. Substantially all of these lease obligations reside with theCompany’s Eurosilicone subsidiary and are leases of facilities and vehicles. Inaddition, MediCor has several other notes, with outstanding principal balancesranging from $50 to $197 and annual interest rates ranging from 3.39% to 8.0%.As of September 30, 2006, MediCor had $3,447 of unamortized financing costsrecorded in other assets. These costs are being amortized straight-line overthe life of the related note. These notes mature in March and September 2011.

9

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Payments due on capital lease obligations as of September 30,2006 are as follows:
| October 2006 - September  2007                          |   | $      | 575    |   |
|---------------------------------------------------------|--------|--------|--------|--------|
| October 2007 - September 2008                           |   | 407    |   |
| October 2008 - September 2009                           |   | 371    |   |
| October 2009 - September 2010                           |   | 323    |   |
| October 2010 - September 2011                           |   | 262    |   |
| Later years                                             |   | 1,036  |   |
|                                                    |   |   |   |
| Total minimum  payments required                        |   | 2,974  |   |
| Less: Amount  representing interest                     |   | (626   | )      |
|                                                    |   |   |   |
| Present value  (principal) of capital lease obligations |   | 2,348  |   |
|                                                    |   |   |   |
| Less: Current  portion of capital lease obligations     |   | (532   | )      |
|                                                    |   |   |   |
| Long term portion of  capital lease obligations         |   | $      | 1,816  |   |

 

## Principalpayments due on long-term debt as of September 30, 2006, other than capitallease obligations, are as follows:

| September 2006 - October  2007             |   | $       | 2,200   |   |
|--------------------------------------------|--------|---------|---------|--------|
| September 2007 - October 2008              |   | 8,732   |    |
| September 2008 - October 2009              |   | 1,970   |    |
| September 2009 - October 2010              |   | 1,970   |    |
| September 2010 - October 2011              |   | 51,970  |    |
| Later years                                |   | 70,918  |    |
|                                       |   |    |    |
| Total minimum  payments required           |   | 137,760 |    |
|                                       |   |    |    |
| Less: Amount  representing current portion |   | (2,200  | )       |
|                                       |   |    |    |
| Non-current portion of  long-term debt     |   | $       | 135,560 |   |

 

The current portion of long-term debt is as follows:
| Current portion of capital  lease obligations |   | $      | 532    |   |
|-----------------------------------------------|--------|--------|--------|--------|
| Convertible  debentures                       |   | 100    |   |
| Current portion  of other long-term debt      |   | 2,200  |   |
|                                          |   |   |   |
|                                          |   | $      | 2,832  |   |

 

Short-term note payablewas $120 at September 30, 2006.

*SeniorSecured Convertible Debt and Related Instruments*

Pursuant to accountingguidance in EITF 00-19 and SFAS 133, the Company completed a thorough analysisand review of the terms of the Notes, their respective covenants, and theWarrants and determined that the appropriate accounting treatment for theWarrants and for the conversion feature of the Notes was as derivativeliabilities. At June 30, 2006, the Company ascribed values of $6,375 and$27,750 to these Warrants and the conversion feature, respectively. AtSeptember 30, 2006, the values ascribed to them were $5,969 and $26,000,respectively. The decline in the value of each liability gave rise to gains of$406 and $1,750, respectively, which have been reflected in the Company’sConsolidated Statement of Operations. The fair value of these derivativeliabilities had decreased due largely to a decrease in the market value of theCompany’s common stock from $3.00 at June 30 to $2.85 at September 30. Theestimated fair values of the Warrants and the conversion feature weredetermined using the Black-Scholes option pricing model. The model uses severalassumptions, including the Company’s common stock price volatility, risk-freeinterest rate, remaining time to maturity, and the closing price of the Company’scommon stock to determine the estimated fair value of the derivativeliabilities. In valuing the derivative liabilities at September 30, 2006, theCompany used its common stock closing price, the respective exercise prices,the remaining term on each Warrant and conversion right, and a common stockvolatility of 98.23%. The recorded value of such derivative liabilities canfluctuate significantly based on fluctuations in the market value of theunderlying securities of the issuer of the Warrants and of the Notes as well asin the volatility of the common stock price during the term used for 

10

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observation to serve as abasis to estimate future volatility and in the term remaining for the Warrantsand the conversion rights.

The value of the discounton the Notes is being accreted over the term of the Notes (4.9 years). For thethree months ended September 30, 2006, the Company accreted $3,699 of debtdiscount related to these Notes

The followingtable reflects the carrying value of the senior secured convertible Notes atSeptember 30, 2006:
| Principal              |   | $       | 50,000 |   |
|------------------------|--------|---------|--------|--------|
| (Less): Note  discount |   | (37,939 | )      |
|                   |   | $       | 12,061 |   |

 

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

*InterestExpense*

The following tablesummarizes interest expense—including that relating to the Notes, the SiriusCapital LLC (“Sirius”) subordinated note (“Subordinated Note”) andInternational Integrated, LLC (“LLC”) notes, and amortization of note discountand deferred financing fees—net, for the three months ended September 30, 2006:
| Interest expense on the  Notes, at stated rate                                |   | $     | 1,419  |   |
|-------------------------------------------------------------------------------|--------|-------|--------|--------|
| Amortization of  note discount on the Notes                                   |   | 3,699 |   |
| Amortization of  deferred financing fees from issuance of the Notes           |   | 290   |   |
| Interest expense  on Sirius and LLC Notes (to related party), at stated rates |   | 1,861 |   |
| Amortization of  note discount on Sirius and LLC Notes                        |   | 2,700 |   |
| Other interest  expense (income), net                                         |   | 229   |   |
|                                                                          |   | $     | 10,198 |   |

 

**Note G – Federal Income Taxes**

 The Companyfollows SFAS 109, **Accounting for Income Taxes**,**** for reporting income taxes. The expense(benefit) for income taxes reflected in the Consolidated Statements ofOperations for the Company for the periods noted consist of:
| ** **                                                           | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
|                                                                 |       |                             |       |                             |       |
| Current                                                              |       |                             |       |                             |       |
|                                                                 |       |                             |       |                             |       |
| Net loss                                                             |       | $                                | (3,955     | )                                | $          | (1,351 | ) |
| Foreign income tax expense (benefit) on  unconsolidated subsidiaries |       | 185                              |       | (128                             | )          |
|                                                                 |       | (3,770                           | )          | (1,480                           | )          |
| Deferred                                                             |       |                             |       |                             |       |
|                                                                 |       |                             |       |                             |       |
| Allowance for bad debts                                              |       | 168                              |       | 103                              |       |
| Allowance for product replacement                                    |       | (27                              | )          | 96                               |       |
| Depreciation and amortization                                        |       | 295                              |       | 20                               |       |
| Unrealized foreign currency gain/(loss)                              |       | 355                              |       | —                           |       |
|                                                                 |       | 791                              |       | 220                              |       |
|                                                                 |       |                             |       |                             |       |
| Total benefit                                                        |       | (2,979                           | )          | (1,260                           | )          |
| Valuation  provision for realization of deferred tax asset           |       | 3,164                            |       | 1,131                            |       |
|                                                                 |       |                             |       |                             |       |
| Total tax expense  (benefit)                                         |       | $                                | 185        |                             | $          | (128 | ) |

 

The current tax expense forthe three months ended September 30, 2006 was income tax paid by foreignsubsidiaries. As of September 30, 2006, the Company recorded an allowance of$44,946 against certain future tax benefits, the realization of which iscurrently uncertain. The deferred differences related to certain accountsreceivable, accrued warranties, and depreciation/amortization not currentlydeductible as expenses under Internal Revenue Service provisions. Although theCompany recorded this allowance to the deferred tax assets, the Company maystill utilize the future tax benefits from net operating losses for 20 yearsfrom the year of the loss to the extent of future taxable income. The estimatednet operating losses for tax purposes of approximately $64,000 will expire overseveral years ending in 2027.

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Primary components of the deferredtax asset as of September 30, 2006 were approximately as follows: 
| ** **                                                 | ** ** | **September 30, 2006** | ** ** | **June 30, 2006** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
|                                                       |       |                             |       |                        |       |
| Computed  expected income tax benefit at 34%               |       | $                                | 3,955      |                        | $          | 5,496 |   |
| Adjustments                                                |       |                             |       |                        |       |
| Net operating loss                                         |       | 36,114                           |       | 30,618                      |       |
| Provision for bad debts                                    |       | 1,816                            |       | 1,648                       |       |
| Provision for product replacement                          |       | 617                              |       | 644                         |       |
| Depreciation and amortization expense                      |       | 1,388                            |       | 1,093                       |       |
| Unrealized foreign currency gain                           |       | 1,056                            |       | 701                         |       |
|                                                       |       |                             |       |                        |       |
| Income tax  benefit                                        |       | $                                | 44,946     |                        | $          | 40,200 |   |
| Valuation  allowance for realization of deferred tax asset |       | (44,946                          | )          | (40,200                     | )          |
|                                                       |       |                             |       |                        |       |
| Deferred tax asset, net                                    |       | $                                | —     |                        | $          | — |   |

 

**Note H – Net Loss per Common ShareReconciliation**

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

A reconciliation of weighted average shares outstanding, usedto calculate basic loss per share, to weighted average shares outstandingassuming dilution, used to calculate diluted loss per share, follows:
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                          | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** |
| ** **                                          | ** ** | ** **                       | ** ** | ** **                       | ** ** | **Per-Share** | ** ** | ** ** | ** ** | ** ** | ** ** | **Per-Share** | ** ** |
| ** **                                          | ** ** | **Income**                       | ** ** | **Shares**                       | ** ** | **Amount** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| ** **                                          | ** ** | **(Numerator)**                  | ** ** | **(Denominator)**                | ** ** | ** ** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | ** ** | ** ** |
|                                                |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Net Income  (Loss) before preferred stock dividends |       | (12,712                          | )          |                             |       |   |   | (3,827 | ) |   |   |   |   |
| Less: Preferred  stock dividends                    |       | 135                              |       |                             |       |   |   | 124 |   |   |   |   |   |
|                                                |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Basic EPS                                           |       | (12,847                          | )          | 23,746                           |       | (0.54 | ) | (3,951 | ) | 20,336 |   | (0.19 | ) |
|                                                |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Effect of  dilutive securities                      |       | —                           |       |                             |       |   |   | — |   |   |   |   |   |
|                                                |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Diluted EPS                                         |       | $                                | (12,847    | )                                | 23,746     |   | (0.54 | ) | $ | (3,951 | ) | 20,336 |   | (0.19 | ) |
|                                                     |            |                                  |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 

Common equivalentshares of 32,367 have been excluded from the computation of diluted earningsper share because their effect would be anti-dilutive.

**Note I –Stock Options and Warrants**

The Company has a stock option planfor key employees and consultants. There were 4,243 shares reserved forissuance pursuant to the Company’s stock option plan and up to 4 shares werereserved for issuance pursuant to stand-alone options granted in connectionwith employment agreements. The Company’s employee share option activity for andrelated information is summarized below:

12

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TheCompany’s share option activity and related information is summarized below:
|                                            | ** ** | ** **  | ** ** | **Weighted Average** | ** ** |
|--------------------------------------------|------------|-------------|------------|---------------------------|------------|
| ** **                                 | ** ** | **Options** | ** ** | **Exercise Price**   | ** ** |
|                                       |       |        |       |                      |       |
| Options  outstanding at June 30, 2005      |       | 4,316       |       | $                         | 3.28       |   |
|                                       |       |        |       |                      |       |
| Granted                                    |       | 168         |       | 3.52                      |       |
| Exercised                                  |       | (235        | )          | 1.92                      |       |
| Cancelled                                  |       | (210        | )          | 4.16                      |       |
| Options  outstanding at June 30, 2006      |       | 4,039       |       | $                         | 3.31       |   |
|                                       |       |        |       |                      |       |
| Granted                                    |       | 1,117       |       | 2.50                      |       |
| Exercised                                  |       | —      |       | —                    |       |
| Cancelled                                  |       | —      |       | —                    |       |
| Options  outstanding at September 30, 2006 |       | 5,156       |       | $                         | 3.14       |   |
|                                       |       |        |       |                      |       |
| Options exercisable at  end of period      |       | 2,329       |       | $                         | 3.34       |   |

 

The following table summarizes information about stockoptions outstanding at September 30, 2006:
| Outstanding              | ** ** | **Exercisable**    | ** ** |
|--------------------------|------------|--------------------|------------|
| ** **               | ** ** | ** **         | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **         | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **         | ** ** | **Remaining** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **               | ** ** | ** **         | ** ** | **Years of** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of**        | ** ** | **Number of** | ** ** | **Contractual** | ** ** | **Exercise** | ** ** | **Number of** | ** ** | **Exercise** | ** ** |
| **Exercise Prices** | ** ** | **Options**        | ** ** | **Life** | ** ** | **Price** | ** ** | **Options** | ** ** | **Price** | ** ** |
|                     |       |               |       |   |   |   |   |   |   |   |   |
| $1.00 - $2.50            |       | 1,901              |       | 5.4 |   | $ | 2.18 |   | 477 |   | $ | 1.67 |   |
| $3.00 - $3.80            |       | 2,280              |       | 4.6 |   | $ | 3.48 |   | 1,125 |   | $ | 3.48 |   |
| $4.00 - $4.30            |       | 958                |       | 4.9 |   | $ | 4.22 |   | 727 |   | $ | 4.22 |   |

 

**Note J**–**Commitments and Contingencies**

In October 1999, Case No. 99-25227-CA-01, June 2000,Case No. 00-14665-CA-01, June 2003, Case No. 03-15006-CA-09, and September2003, Case Nos. 0322537-CA-27 and 03-22399-CA-15, separate litigations werefiled by Saul Kwartin, Ruth Kwartin, Steven M. Kwartin, Robert Kwartin and NinaKwartin against PIP.America (our subsidiary), PIP/USA, Inc., (“PIP/USA”) PolyImplants Protheses, S.A. (“PIP”), Jean Claude Mas, Jyll Farren-Martin andDonald K. McGhan in the Circuit Court of Miami-Dade County, Florida. TheKwartin family members variously allege that they are shareholders of PIP/USAor have statutory and common law rights of shareholders of PIP/USA as a resultof loans or investments allegedly made to or into PIP/USA or a third party orunder an alleged employment agreement. Plaintiffs assert that they have certainderivative or other rights to an alleged distribution agreement between PIP andPIP/USA. Plaintiffs further allege, among other things, that PIP.America andits chairman tortiously interfered with that agreement and plaintiffs’ otheralleged rights. In addition to monetary damages and injunctive relief,plaintiffs seek to reinstate the alleged distribution agreement between PIP/USAand PIP and invalidate PIP.America’s distributor relationship with PIP. Thesecases are consolidated for pretrial purposes but not for trial. Defendants havefiled a motion to dismiss the consolidated cases, which will be heard in March,2007.

Peggy Williams v. PIP/USA, Inc., Case No. 03 CH 9654,Jessica Fischer Schnebel, et al. v. PIP/USA, Inc., Case No. 03CH07239, DawnMarie Cooper, et al. v. PIP/USA, Inc., Case No. 03CH11316, Miriam Furman, etal. v. PIP/USA, Inc., Case No. 03CH10832 and Karen S. Witt, et al. v. PIP/USA,Inc., Case No. 03CH12928 were filed in the Circuit Court of Cook County,Chancery Division, in or around July 2003. Counsel for Jessica FischerSchnebel, 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 was voluntarily dismissed. The consolidated second amended complaintcontained counts alleging product liability, breach of the implied warrantiesof merchantability and fitness for a particular purpose, violation of theIllinois Consumer Fraud Act 

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and third-party beneficiary status. Unspecifiedmonetary damages, exemplary damages and attorneys fees and costs had been sought.On January 26, 2006, PIP.America, which was a defendant in the action, wondismissal of all counts in these cases but the third-party beneficiary claims.Plaintiffs have amended and refiled their complaint against PIP.America(seeking the same damages), and PIP.America has filed another motion to dismissplaintiffs’ latest complaint (the Third Amended Complaint). PIP.America’smotion to dismiss has been fully briefed and will be heard on November 1, 2006.PIP, a defendant in the Schnebel litigation, has agreed to indemnifyPIP.America for any losses PIP.America may suffer as a result of the Illinoislitigation.

With respect to cases involving PIP, PIP.America isindemnified by PIP/USA, PIP, and PIP’s President, Jean Claude Mas, personally,from, among other things, claims arising from products manufactured byPIP-France. PIP.America either already has, or is in the process of, assertingits indemnification claims and, in the event of an adverse judgment in any ofthe cases, PIP.America intends to seek the benefits of this indemnity. As aresult, we believe the costs associated with these matters will not have amaterial adverse impact on our business, results of operations or financialposition.

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

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

The Company leases offices, manufacturing and warehousefacilities and office equipment under various terms. Lease expenses amounted to$125 and $88 for the three months ended September 30, 2006 and 2005, respectively.Future minimum lease payments are as follows:
| Year ended September 30, | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|
| 2008                                    |       | $          | 713        |   |
| 2009                                    |       | 530        |       |
| 2010                                    |       | 388        |       |
| 2011                                    |       | 229        |       |
| 2012                                    |       | 133        |       |
| Later years                             |       | 594        |       |
|                                    |       |       |       |
| Total minimum payments  required        |       | $          | 2,586      |   |

 

**Note K – Acquisitions**

On April 28, 2006, theCompany, through its wholly-owned subsidiary, Biosil UK Ltd., completed itsacquisition of Biosil Limited. and Nagor Limited., both privately held Isle ofMan (British Isles) companies, from their shareholders (the “Sellers”) pursuantto the Agreement for the Sale and Purchase of the Shares of Biosil Limited andNagor Limited (the “Biosil/Nagor SPA”) dated September 13, 2005. The combinedpurchase price for both companies was £20,000 plus 2,640 shares of MediCorcommon stock. The Company paid £13,000 in cash at closing from funds availableas part of a separate, earlier $50,000 senior secured convertible note privateplacement. The remaining £7,000 is due in two equal payments in fiscal 2008. Inconjunction with the transaction, the Company and each of the Sellers enteredinto Put and Call Option Agreements and a Registration Rights Agreement. Copiesof these agreements and the Biosil/Nagor SPA were provided with the Company’sCurrent Report on Form 8-K filed with the SEC on May 4, 2006. The terms of theacquisition were determined on the basis of arm’s-length negotiations and atvalues that the Company believes are below the values associated 

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with comparable medicaldevice companies. The Company has included the operations of Biosil Limited andNagor Limited in its Consolidated Statement of Operations since the date ofacquisition, April 28, 2006, through September 30, 2006.

In accordance with SFASNo. 141, the total purchase price was allocated to the tangible and intangible assetsof Biosil and Nagor based upon their estimated fair values at the acquisitiondate with the excess purchase price allocated to goodwill. The estimates arepreliminary and are prior to completion of independent valuations.Consequently, the values below are subject to change as the valuations becomefinal.

The following table summarizes the preliminary,estimated fair values of the assets acquired and liabilities assumed at thedate of acquisition, April 28, 2006.
| Cash (£13,000 at $1.78726  per £ bank settlement rate at April 28, 2006)                                                                                                |   | $      | 23,234 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Cash (£7,000, discounted to £6,200 at 11.1% annual  interest, translated at $1.7893 per £ exchange rate at April 28, 2006)                                         |   | 11,093 |   |
| Shares of MediCor common stock   (2,640 shares at $3.60 per share, the median market price for 20 business  days on either side of the acquisition date, less registration costs) |   | 9,498  |   |
| Direct acquisition costs                                                                                                                                                          |   | 1,130  |   |
| Total purchase price                                                                                                                                                              |   | $      | 44,955 |   |
|                                                                                                                                                                              |   |   |   |
| Allocation of  purchase price                                                                                                                                                     |   |   |   |
|                                                                                                                                                                              |   |   |   |
| Cash and cash equivalents                                                                                                                                                         |   | $      | 1,376  |   |
| Accounts receivable                                                                                                                                                               |   | 1,804  |   |
| Inventories                                                                                                                                                                       |   | 4,124  |   |
| Other current assets                                                                                                                                                              |   | 304    |   |
| Property and equipment                                                                                                                                                            |   | 2,841  |   |
| Investments                                                                                                                                                                       |   | 43     |   |
| Intangible assets                                                                                                                                                                 |   | 36,219 |   |
| Other non-current assets                                                                                                                                                          |   | 96     |   |
| Accounts payable                                                                                                                                                                  |   | (144   | )      |
| Deferred tax liability, current                                                                                                                                                   |   | (273   | )      |
| Other current liabilities                                                                                                                                                         |   | (687   | )      |
| Deferred tax liability, non-current                                                                                                                                               |   | (748   | )      |
| Total purchase  price                                                                                                                                                             |   | $      | 44,955 |   |

 

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

 

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

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

The following unauditedpro-forma financial information reflects the condensed consolidated results ofoperations of the Company as if the acquisition had taken place on July 1,2005. The pro-forma financial information is not necessarily indicative of theresults of operations had the transaction been effected on July 1, 2005.
|                                                        | ** ** | **September 30, 2005** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| Net sales                                              |       | $                                | 8,408      |   |
| Net loss                                               |       | $                                | (3,619     | ) |
|                                                   |       |                             |       |
| Net loss per share of  common stock, basic and diluted |       | $                                | (0.18      | ) |

 

The informationpresented above is for illustrative purposes only and is not necessarilyindicative of the operating results or financial position that would haveoccurred had the acquisition been completed as of the dates indicated, nor arethey 

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necessarilyindicative of future operating results or financial position. The purchaseaccounting adjustments made in connection with the unaudited pro formacondensed consolidated financial statements are based on a preliminaryvaluation that has been made solely for the purpose of developing the pro formafinancial information and are based upon currently available information. Sucha valuation is subject to final adjustments. Accordingly, the actualadjustments to be recorded in connection with the final purchase price allocationmay differ from the pro forma adjustments reflected in the unaudited pro formacondensed consolidated financial statements, and any such differences may bematerial. The purchase price valuations are expected to be completed by March31, 2007.

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***ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OFOPERATIONS***
|                                                                        | ** ** | **For the Three Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                             | ** ** | **September 30,**                             | ** ** | **September 30,** | ** ** |
| **Major items as a percentage of sales** | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
|                                                                   |       |                                               |       |   |   |
| Cost of Sales                                                          |       | 67                                                 | %          | 70 | % |
| Selling, general  and administrative                                   |       | 73                                                 | %          | 63 | % |
| Research and  development                                              |       | 9                                                  | %          | 16 | % |
| Interest expense                                                       |       | 107                                                | %          | 26 | % |
| Reduction in  value of derivative liabilities                          |       | (23                                                | )%         | — |   |
| Net loss                                                               |       | (133                                               | )%         | (68 | )% |

 

***Sales***

Sales for the threemonths ended September 30, 2006 were $9,493,549, an increase of $3,831,534 or68% versus the same period a year ago. Of this, approximately $2,963,318reflects the inclusion in our financial statements of three months of theresults of operations of Biosil Limited and Nagor Limited. At Eurosilicone,positive unit growth—particularly in Latin America—was partially offset by adecrease in unit prices and a decline in the dollar relative to the euro. Thisdecline in the dollar negatively impacted overall MediCor sales by approximately4%.

***Cost of Sales***

Cost of sales as apercentage of net sales for the three months ended September 30, 2006 wasapproximately 67% compared to approximately 70% during the same period in 2005.This decrease was primarily attributable to the implementation of the programsto improve manufacturing efficiencies implemented during fiscal 2006 which haveenabled us to increase production and lower unit cost of sales. Based on ourhistorical review of costs, we expect that cost of sales in the future will remainin line on a percentage basis with our historic level of approximately 66%. Assales volumes and prices increase, costs should then reduce as a percentage ofsales.

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

Selling, generaland administrative (“SG&A”) expenses increased to $6,897,680 for the threemonths ended September 30, 2006, as compared to $3,579,066 during the sameperiod in 2005. Of this, approximately, $1,034,890 are SG&A expenses ofBiosil Limited and Nagor Limited. The remaining increase was attributable to$576,838 for share-based payments; payroll related expenses of $482,558;consulting fees of $216,261; product replacement related fees of $204,724;commission expense of $168,705; accounting fees of $155,958; additionalamortization and deprecation of $143,791; advertising fees of $82,637; andother various increases of $252,252. Of all SG&A expenses the Companyincurred during the three months ended September 30, 2006, the majority werecharges that are expected to be recurring.

***Research and Development Expenses***

Research anddevelopment expenses for the three months ended September 30, 2006 were$854,860 as compared to $912,565 for the comparable period in 2005. While werecognized an increase of costs associated with the PIP product of $82,256 andincreased expenses of $66,722 from Biosil Limited and Nagor Limited, werecognized a decrease in costs relating to the development of other productlines of $206,683. We expect that research and development expenses willcontinue to remain substantial and grow as we aggressively move to bringproducts to market. However, we expect that research and development expenseswill decrease with respect to a particular product once we receive requiredgovernment approvals for it, but these expenses will continue to increaseoverall as we bring new products to market or existing products to new markets.

***Interest Expense***

Interest expense increased to$10,198,446 for the three months ended September 30, 2006 as compared to$1,454,303 at September, 30, 2005. Interest expense consists primarily ofinterest related to borrowings.

Interest expense for the three monthsended September 30, 2006, primarily included $3,570,464 for the interest atstated rates on the senior secured convertible notes (the “Notes”) and subordinateddebt (the “Subordinated Note”) and $6,399,298 

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for amortization of related note discounts. We expectinterest expense to continue at a high level, due both to maintaining a highlevel of debt and to the amortization of the note discounts and deferredfinancing fees.

***Reduction in Value of Derivative Liabilities***

The value of derivative liabilitiesat September 30, 2006 was $2,156,250 less than at June 30, 2006, which resultedin a gain. There were no derivative liabilities in the same quarter a year ago.The gain was on the revaluation of the warrant liability and convertiblefeature liability of the Notes and the Subordinated Note from June 30, 2006until September 30, 2006. This resulted from a decline in our stock price,which reduced the carrying value of these liabilities.

***Net Loss***

Net loss attributable to common stockholders for thethree months ended September 30, 2006 increased to $12,846,129 from $3,951,126for the previous period. Basic and diluted loss attributable to commonstockholders per share of common stock for the three months ended September 30,2006 was $0.54 as compared to $0.19 for the three months ended September 30,2005.

**Liquidity and Capital Resources**

Cash used in operations during the three months endedSeptember 30, 2006 was $7,681,075.  Thiswas primarily driven by selling, general and administrative expenses, includingcontinued startup costs, increased regulatory and quality assurance expenses,increased engineering expenses, research and development expenses and interestexpense.  Our investing activities of$158,719 were principally due to the acquisition of additional fixedassets.  Our ability to make payments torefinance our debt and to fund operations and planned capital expenditures willdepend on our ability to secure additional significant financing and generatesufficient cash in the future. Currently, we have only limited product sales in the United States andwill not be in a position to materially increase United States sales unless anduntil the FDA issues a pre-market approval relating to one or more of theproducts sought to be sold by us. Product entry into the United States market is a significant businesspriority.  Our business strategy dependsin significant part on the success of bringing our products to the UnitedStates market.  We are currently fundingsubstantial activities for two pre-market approval applications which areoperating expenses.  There can be noassurance that either application will be approved.

Historically we have raised funds to support ouroperating expenses and capital requirements through sales of equity or debtsecurities or through other credit arrangements, including borrowing from ouraffiliates. Most recently, we raised $46.5 million ($50 million less fees) in aprivate placement that included the sale of Notes and Warrants. Of this,approximately $25 million was utilized in our acquisition of Biosil and Nagorand the balance was made available for general working capital needs. Inaddition, our ES Holdings subsidiary is party to a bank loan agreement underwhich it had an outstanding indebtedness of approximately $9,847,658 atSeptember 30, 2006. In fiscal 2006, ES Holdings notified the banks under theloan agreement that inconsistencies existed in the loan covenant formulationswhich prevented consistent calculation of certain covenants. ES Holdings andthe banks are currently negotiating an amendment to the loan agreement toclarify and correct these formulations. We anticipate that an amendment will becompleted in the second quarter of fiscal 2007. To satisfy our liquidityrequirements, we will need to raise additional funds. To the extent additionalsales of equity or debt securities are insufficient to satisfy our liquidityrequirements, we plan on being able to obtain any necessary additional fundsthrough the incurrence of additional indebtedness to our affiliates. We havereceived a written commitment from International Integrated Industries, LLC, anaffiliate of our chairman, to fund any operating expenses and capitalexpenditures through July 1, 2007. The same entity has provided to us over$77 million in funding through September 30, 2006. This historic fundinghas been a combination of equity and debt. However, our ability to incuradditional indebtedness is restricted by our outstanding Notes. These Notesonly permit the incurrence of a maximum of $10 million of indebtedness that isboth expressly subordinate to them and unsecured. We are also restricted bythese Notes from issuing convertible securities or options, and our Noteholders have a right of first refusal with respect to new security issuancesother than the issuance of common stock in an underwritten public offering of$75 million or more in which the net price per share (after deduction ofunderwriting discounts and commissions) is at or above $8.00. To the extent ourfuture liquidity requirements are greater than these capital resources orlimitations; we may have to seek to negotiate to obtain any necessaryadditional funds through the incurrence of additional indebtedness or issuanceof equity securities. Continued delays in or failure to successfully bringplanned products to the United States market adversely affects our liquidityand need for additional capital resources to a significant extent.

We expect our operating losses to continue andincrease as long as we do not have breast implant products approved for sale inthe United States. We anticipate that we will need additional liquidity tocover negative cash flow during fiscal 2007. In addition, to the extent we wantto pursue additional product introductions or acquisitions, we expect that wewill need additional financing. We do not presently have any commitments forsuch financing and it may not be available when we need it, on terms acceptableto us or at all. The lack of adequate financing could adversely affect ourability to effect 

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acquisitions. In particular, there is an exception tothe Note holders’ right of first refusal with respect to new security issuancesfor securities issued in connection with acquisitions in which we acquire atleast a majority of the voting power of the entity being acquired. However, wemay or may not be able to exclusively use common stock in any proposedtransaction.

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

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

Both Eurosilicone and the combined operations ofBiosil and Nagor have positive operating cash flows that may or may not besufficient to fund all of their respective projected operational, workingcapital, financial and other obligations. We expect that, from time to time, one or more of these operatingsubsidiaries may have additional liquidity needs which may require financing byMediCor, a third-party, such as a bank, or our affiliates.  In addition, we have a written commitmentfrom an affiliate of our chairman to fund any operating expenses and capitalexpenditures through July 1, 2007. However, the ability to access that commitment will be limited by therestrictions of the Notes described above.

Our revenues are primarily denominated in U.S.dollars, in euros and British pounds, with U.S. dollars accounting forapproximately 40% of total revenues. Our expenses are denominated in U.S.dollars; euros and British pounds. We do not currently hedge against foreignexchange risk and do not have any plan to do so.

***ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK***

In the normalcourse of business, our operations are exposed to fluctuations in interestrates and foreign currency exchange rates. Our experience and expectation isthat these fluctuations are not so great as to pose a significant risk to ourbusiness, even if they may be material to valuations on our balance sheet andto the results of our operations. We do not enter into financial instruments tohedge such exposures except where required by loan agreements, nor do we enterinto financial instruments for either trading or speculative purposes.

The value of two derivative liabilities on our balancesheet—warrants and senior note conversion feature—is affected both by interestrates and by the market value of our common stock. Our stock price is thinlytraded and its price is volatile, and thus changes in valuations of theseinstruments can be significant. However, changes in the valuation of thesederivatives have no impact on our cash obligations.

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*InterestRate Risk*

At September 30, 2006, we have $97,347,658 of variablerate debt—$87,500,000 of U.S. dollar-denominated debt that varies with thethree-month LIBOR rate and $9,847,658 (€7,761,701) of euro-denominated debtthat varies with the six-month EURIBOR rate. If the interest rates on ourvariable rate debt were higher or lower by 1%, 2% or 3% for the next year,interest expense would increase or decrease for that year by $973,477,$1,946,953 or $2,920,430, respectively.

The two derivative liabilities on our balance sheetare revalued quarterly using the Black-Scholes option pricing model, in whichone factor is the risk-free interest rate as of the valuation date. If thisrate had been higher by 1%, 2% or 3% at September 30, 2006, an additional lossof $312,500, $593,750, or $906,250, respectively, would have been recorded. Ifthis rate had been lower by 1%, 2% or 3% at September 30, 2006, an additionalgain of $187,500, $500,000, or $843,750, respectively, would have beenrecorded.

*ForeignCurrency Exchange Risk*

Our subsidiaries do not sell products only in theirlocal currencies nor do they buy materials or services only in their localcurrencies, and many of our subsidiaries operate in a local currency other thanthe U.S. dollar. The gains and losses from settling trade accounts receivableand payable in other than functional currencies is minimized by promptcollections and payments, so that our operations are not significantlyimpacted.

We also have transactions between oursubsidiaries—principally inter-company loans and the receivables and payablesthat result from inter-company supply of product—which can result in bothforeign currency transactions settlement and translation effects. However,these have no net cash impact on our operations.

Because $9,847,658 (€7,761,701) of our debt iseuro-denominated at September 30, 2006, we do have foreign currency exchangerisk on it. If the U.S. dollar were stronger or weaker by 10% relative to theeuro for the next year, interest expense would decrease or increase for thatyear by $984,766.

*CommonStock Market Value Risk*

The two derivative liabilities on our balance sheetare revalued quarterly using the Black-Scholes option pricing model, in whichone factor is the market price of our common stock as of the valuation date.Our stock has varied between $2.25 and $4.40 over the past year (varying lessthan 40% around its median of $3.20), with the market price having been $2.85at September 30, 2006. If this market price had been higher by 25% or 50% atSeptember 30, 2006, an additional loss of $9,718,750 or $19,781,250,respectively, would have been recorded. If this market price had been lower by25% or 50% at September 30, 2006, an additional gain of $9,312,500 or$18,375,000, respectively, would have been recorded.

***ITEM 4 - CONTROLS AND PROCEDURES***

As of the quarter ended September 30,2006, management, with the participation of the chief executive and financialofficers, carried out an evaluation of the effectiveness of our disclosurecontrols and procedures pursuant to Exchange Act Rule 13a-15. Based uponthat evaluation, the chief executive officer and the chief financial officerbelieve that, as of end of the fiscal quarter covered by this report, ourdisclosure controls and procedures were effective in making known to themmaterial information relating to MediCor (including its consolidatedsubsidiaries) required to be included in this report. There were no significantchanges in our internal control over financial reporting during the threemonths ended September 30, 2006 that have materially affected or are likely tomaterially affect our internal control over financial reporting.

Management of MediCor is responsiblefor establishing and maintaining effective internal control over financialreporting as is defined in Exchange Act Rule 13a-15(f). The consolidatedfinancial statements and other information presented in this quarterly reporthave been prepared in accordance with accounting principles generally acceptedin the United States. MediCor’s internal control system was designed to providereasonable assurance to our management and board of directors regarding thepreparation and fair presentation of published financial statements. Disclosurecontrols and procedures, no matter how well designed and implemented, can provideonly reasonable assurance of achieving an entity’s disclosure objectives. Thelikelihood of achieving such objectives is affected by limitations inherent indisclosure controls and procedures. These include the fact that human judgmentin decision-making can be faulty and that breakdowns in internal control canoccur because of human failures such as simple errors or mistakes orintentional circumvention of the established process. Management will continueto review our disclosure controls and procedures periodically to determinetheir effectiveness and to consider modifications or additions to them.

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**PART II**

***ITEM 1 - LEGAL PROCEEDINGS***

A description of material pendinglegal proceedings, other than ordinary routine litigation incidental to theCompany’s business, to which MediCor or any of its subsidiaries is a party orof which their property is subject is included in the Company’s Annual Reporton Form 10-K for the year ended June 30, 2006.  There were no material developments in suchlitigation during the quarter ended September 30, 2006.

***ITEM 1A – RISK FACTORS***

***Ifclinical trials or pre-market approval applications for our products areunsuccessful or delayed, we will be unable to meet our anticipated development,commercialization and revenue timelines.***

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

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

·                  complexchemical and other scientific issues;

·                  designand implementation of detailed testing and trial protocols;

·                  lackof efficacy during clinical trials;

·                  unforeseensafety issues;

·                  uncertaintieswith or actions of our collaborative partners or suppliers;

·                  slowerthan expected patient recruitment;

·                  difficultiesin recognizing technical or laboratory data and clinical data;

·                  inabilityto adhere to protocols during clinical trials, including collection of data;

·                  difficultiesin patient recruitment or retention;

·                  issuesin acceptance of clinical data by regulatory authorities;

·                  inabilityto follow patients after treatment in clinical trials;

·                  inconsistenciesbetween early clinical trial results and results obtained in later clinicaltrials;

·                  varyinginterpretations or criticisms of data generated by clinical trials;

·                  changesin regulatory policy during the period of product development in the UnitedStates and abroad; and

·                  governmentor regulatory delays.

 

The results from pre-clinical testingand early clinical trials are often not predictive of results obtained in laterclinical trials. A number of new products have shown promising results inclinical trials, but subsequently failed to establish sufficient safety andefficacy data to obtain necessary regulatory approvals. Data obtained frompre-clinical and clinical activities are susceptible to varyinginterpretations, or criticisms which may delay, limit or prevent regulatoryapproval. In addition, regulatory delays or rejections may be encountered as aresult of many factors, including perceived defects in the design of thepre-clinical testing or clinical trials, questions about data integrity andchanges in regulatory policy during the period of product development. We haveinvested and intend to continue to invest heavily in all aspects ofpre-clinical testing, clinical trials, and preparing and prosecuting regulatorysubmissions. If these efforts are not successful, we will not recover thatexpense and we will not achieve targeted revenue. This will adversely affectour business. Any delays in, or termination of, our pre-clinical testing orclinical trials or the pre-clinical testing or clinical trials of ourcollaborative partners or suppliers will similarly adversely affect ourdevelopment and commercialization timelines, which would adversely affect our futuresales and profitability.

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

The medical device industry is highlycompetitive and is subject to significant and rapid technological change. Webelieve that our ability to respond quickly to consumer needs or advances inmedical technologies, without compromising product quality, will be crucial toour success. We are continually engaged in product development and improvementprograms to establish and improve our competitive position. This includessubstantial pre-clinical testing, clinical trials and regulatory submissions.We cannot, however, guarantee that we will be successful in enhancing ourexisting products or 

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products we have in development or clinical trials.Nor can we guarantee that we will be successful in developing new products ortechnologies that will timely or ever achieve regulatory approval or receivemarket acceptance. Once developed, we must also timely obtain regulatoryapproval for our products including products currently in the late stages ofthe regulatory process. The success in gaining approval for our products iscritical to our business and viability, and delays may cause our products to beobsolete once regulatory approval is granted. Two of our competitors are in theadvanced stage of obtaining regulatory approval for their silicone-filledbreast implants, while we have not started the formal regulatory process forthose products in the United States. This could put us at a significantdisadvantage in the U.S. market. The lack of U.S. regulatory approval for ourproducts, in the face of our competitors’ approvals, may also adversely affectus in foreign markets.

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

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

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

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

***We rely on our chairman for continuedcapital funding, management direction and strategic planning and we do notpresently have any alternative funding or a management transition plan inplace.***

We rely on our chairman, Donald K.McGhan, for capital funding, management direction and strategic planning. Mr. McGhan,through certain of his affiliates, is a significant lender to us, and he is ourprincipal stockholder, chairman of our board of directors and a member of ourfour-person executive committee. Consequently, Mr. McGhan has substantialinfluence over significant corporate transactions, including acquisitions thatwe may pursue. Although we have no written charter, our executive committeegenerally 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 any event where Mr. McGhan has soughtto or exercised any type of unilateral control over us, though there can be noassurance that this will not happen in the future. The loss of Mr. McGhan’sfinancial support or services to our company could materially and adverselyaffect our operations. We do not presently have a written or otherwell-established management or financing transition plan in the event we wereto lose the services or financial support of Mr. McGhan.

***Because we have only a limited operatinghistory and our business strategy calls for significant growth through newproducts and acquisitions, there is significant uncertainty about our businessand prospects.***

MediCor and its subsidiaries haveonly been in existence since 1999. Although our Biodermis, Eurosilicone andBiosil/Nagor operations have been in existence for longer periods of time,Biodermis has only operated under our management since its acquisition in 2001and Eurosilicone and Biosil/Nagor have only operated under MediCor’s managementsince their acquisitions in July 2004 and April 2006, respectively.Significantly, during much of our history we have also been prevented fromselling our primary existing product, breast implants, in the U.S. market dueto the FDA’s call for a PMA by 2000 for those products. As a result of thisregulatory situation, all of our revenues prior to the Eurosilicone acquisitionin 2004 were derived primarily from our scar management products, both insideand outside the United States, and with respect with the recent acquisitions ofEurosilicone and Biosil and Nagor, more than 95% of our revenues are 

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sourced outside the United States. This revenue mix isexpected to change if and when products are approved for sale in the UnitedStates. However, revenue generated by our Biodermis subsidiary has not beensignificant, and we do not expect more than modest internal growth in thatsegment. For all these reasons, our historic business platform is notnecessarily indicative of our future business or prospects.

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

Risks for our business include theuncertainties associated with developing and implementing our business strategyas described in our Annual Report on form 10-KSB for the year ended June 30,2006 as we grow and the management of both internal and acquisition-basedgrowth. This is particularly acute in the rapid growth phase of a business,such as we are currently experiencing, and in a rapidly changing and highlyregulated market such as the market for medical devices. To address theserisks, we must continue to develop the strength and quality of our operations,expend heavily on regulatory applications and compliance, improve and maintainproduct quality, maximize the value delivered to customers, respond tocompetitive developments and continue to attract, retain and motivate qualifiedemployees. We may not be successful in addressing these challenges.

***If we suffer negative publicity concerningthe safety of our products, our sales may be harmed and we may be forced towithdraw products.***

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

***Because our strategy is based onsuccessfully making acquisitions and otherwise diversifying or expanding ourproduct offerings, we are exposed to numerous risks associated withacquisitions, diversification and rapid growth.***

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

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

Acquisitions also involve a number ofother risks, including the risks of acquiring undisclosed or undesiredliabilities, acquired in-process technology, stock compensation expense andincreased compensation expense resulting from newly hired employees, thediversion of management attention, potential disputes with the sellers of oneor more acquired entities and the possible failure to retain key acquiredpersonnel. Client satisfaction or performance problems with an acquiredbusiness or product line could also have a negative impact on our reputation asa whole, and any acquired entity or assets could significantly under-performrelative to our expectations. Our ability to meet these challenges has not beenestablished through repeated acquisitions.

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

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

Some aspects of our business, such asacquisitions, distribution agreements with third parties and product researchand development, including regulatory approvals and compliance, havesignificant and sometimes unpredictable events that can result in materialfinancial and accounting events, including allowances, write-offs andlitigation. For example, in our Eurosilicone acquisition, we made an aggregateof $941,257 in negative purchase accounting adjustments, we have incurred atotal of $7,947,761 in provisions and write-offs in connection with ourPIP.America subsidiary’s distribution agreement with PIP because of pastuncertainties regarding PIP’s ability to pay its portion of the productreplacement program for its products distributed in the United States, andEurosilicone is party to litigation commenced by the holder of patents relatingto texturing of breast implant surfaces in which damages in excess of €3 millionare alleged. Failure to timely achieve regulatory approvals and bring a productor products to market delays revenue and may result in not achieving any revenuefor those products. Those delays, in addition to resulting in write-offs, wouldmean that historic expense will not have hoped for future associated revenue.These aspects of our business, such as acquiring companies and technologies,establishing and administering distributor relationships and developing newproducts, are part of our business strategy. As a result of the significance ofthese events, their unpredictable timing and frequency and the variance instructure and outcome, these events and their financial impact areunpredictable and can create material fluctuations in our financial results andprospects.

***If our intellectual property rights do notadequately protect our products or technologies, others could compete againstus more directly.***

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

In addition to patents and trademarks,our intellectual property includes trade secrets and proprietary know-how. Weseek protection of this intellectual property primarily through confidentialityand proprietary information agreements with our employees and consultants.These agreements may not provide meaningful protection or adequate remedies forviolation of our rights in the event of unauthorized use or disclosure ofconfidential and proprietary information. Failure to protect our proprietaryrights could seriously impair our competitive position.

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

Historically, two distributors—ImportMedic in Brazil and Corporación Recimédica in Venezuela —have comprised1approximately 21% of our consolidated revenue. Currently, we are financiallydependent on the sales of these two distributors and the acquisition of Biosiland Nagor has not added any further customer concentration. For ourdistributors, as well as for our own direct sales force, the customer is eachdoctor that implants or uses our products. If either of these distributors wereto decide to no longer sell our products or were unable to sell our products,we would have to seek either to replace them, as we have done in some marketsfrom time to time, or begin selling directly in those markets, as we have donein various markets and as we are currently doing in additional targetedmarkets. However, we may or may not be able to timely replace a distributor orsell directly in that territory.

***We depend on a limited number of suppliersfor certain raw materials and the loss of any supplier could adversely affect ourability to manufacture many of our products.***

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

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***Our international business exposes us to anumber of risks.***

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

·                  foreigngovernment regulation of medical devices;

·                  productliability claims;

·                  newexport license requirements;

·                  politicalor economic instability in our target markets;

·                  traderestrictions;

·                  changesin tax laws and tariffs;

·                  inadequateprotection of intellectual property rights in some countries;

·                  managingforeign distributors, manufacturers and staffing;

·                  managingforeign branch offices; and

·                  foreign currency translations.

 

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

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

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

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

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

***In connection with our acquisition ofBiosil and Nagor, we entered into significant put and call arrangements, whichmay require us to pay substantial amounts to purchase the shares of our commonstock issued to the sellers. Those payments could reduce our cash flow and thefunds available to expand our business.***

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

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

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

Our dependence on supply,collaborative or consulting arrangements with third parties subjects us to anumber of risks. These arrangements may not be on terms favorable to us.Agreements with suppliers may limit our supply of products or require us topurchase products we can not profitably sell. They may also restrict ourability to market or distribute other products. Agreements with consultants orcollaborative partners typically allow the third parties significant discretionin electing whether or not to pursue any of the planned activities. We cannotwith certainty control the amount and timing of resources our suppliers,collaborative partners or consultants may devote to our products and thesethird parties may choose to pursue alternative products. These third partiesalso may not perform their obligations as expected. Business combinations,significant changes in their business strategy, or their access to financialresources may adversely affect a supplier’s, partner’s or consultant’s willingnessor ability to complete its obligations under the arrangement. Moreover, wecould become involved in disputes with our suppliers, partners or consultants,which could lead to delays or termination of the arrangements andtime-consuming and expensive litigation or arbitration.

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

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

·                  changesin demand for our products;

·                  ourability to meet the demand for our products;

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

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

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

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

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

·                  changesin pricing policies by us and our competitors;

·                  thetiming of significant orders and shipments;

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

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

·                  generaleconomic factors.

 

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

***If we default on the terms of the Notes ourbank debt, our lenders could accelerate our indebtedness, foreclose on ourassets and force us out of business.***

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

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***Ifwe are unable to avoid significant product liability claims or product recalls,we may be forced to pay substantial damage awards and other expenses that couldexceed our allowances and any applicable insurance coverage.***

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 andsale of breast implant products entails significant risk of product liabilityclaims due to potential allegations of possible disease transmission and otherhealth factors, rupture or 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 also face asubstantial risk of product liability claims from other products we may chooseto sell. In addition to product liability claims, we may in the future need torecall or issue field corrections related to our products due to manufacturingdeficiencies, labeling errors, or other safety or regulatory reasons. Productliability claims, relating to alleged product defects, are distinguishable fromproduct replacement claims, which relate to allegations that products do notmeet warranties of merchantability or fitness for a particular purpose. Weaddress the substance of potential product replacement claims relating toproducts distributed by us in the United States and other countries through ourproduct replacement programs discussed elsewhere in this Business section.

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

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

Lawsuits have been filed naming us orour PIP.America subsidiary, the French manufacturer from which we purchasebreast implant products, and the U.S. distributor of those same products whopreceded our subsidiary in the U.S. market. In these suits the plaintiffs havesought or currently seek, among other things, class action status for claims,including claims for breach of warranty. The claims arise from productsdistributed both before and after our subsidiary that distributed the productscame into existence. Although certain of the claims arise from productsdistributed by the other distributor prior to our subsidiary coming intoexistence, we have still been named as a defendant. While we have provided anamount equal to the outstanding product replacement claims for claims arisingfrom products our PIP.America subsidiary distributed, the plaintiffs areseeking to hold our subsidiary responsible for more damages. There can be noassurance that we can terminate the litigation as to our subsidiary for amountsalready provided. Although our subsidiary is indemnified by three separateentities, including PIP, the French manufacturer, PIP/USA, Inc., theprevious distributor, and Mr. Jean Claude Mas, personally, there can be noassurance this indemnity will protect us, as there is no guarantee that theFrench manufacturer, the previous distributor, or Mr. Mas will, or will beable to, honor the indemnification they have provided. Eurosilicone is also a partyto litigation commenced by the holder of patents relating to texturing ofbreast implant surfaces in which damages in excess of €3 million arealleged.

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

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

Eurosilicone has not in the past hada formal or informal product replacement program or any similar program, thoughnow it has enhanced its product replacement programs. Nagor provides a standardmanufacturers’ warranty on all products sold with no time limit, and has awarranty program called “NagorEnhance,” which applies to all breast implantproducts implanted within the United Kingdom. While these subsidiaries have nothad a history of material product-related litigation, we believe the limitednature of the litigation is in part due to the limited nature of these historicprograms and in part due to not selling products in the United States, whichhistorically has been much more litigious than the rest of the world.Eurosilicone and Nagor also have in the past relied on third-party distributorsto support their products in almost all countries. We also expect to developsimilar programs for the Biosil products marketed by Nagor and our othersubsidiaries. These 

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product replacement programs and changes in litigationexperience outside the United States may expose our subsidiaries to additionalpotential liability. In addition, although Biosil and Nagor carry limited product liability insurance (excluding theUnited States) and Eurosilicone carries limited product liability insurance,these policies only cover product failure, whereas our replacement programscover more than just failure. Although we have policies of carefullyobserving corporate formalities and otherwise seeking to preserve theprotection of the corporate form, there can be no assurance that some or all ofthese potential liabilities will not expose us or our other subsidiaries topotential liabilities as well.

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

Our commercial success dependssignificantly on our ability to operate without infringing upon the patents andother proprietary rights of others. However, regardless of our intent, ourtechnologies may infringe the patents or violate other proprietary rights ofthird parties. In the event of such infringement or violation, we may facelitigation and may be prevented from pursuing product development orcommercialization. Eurosilicone is party to litigation commenced by the holderof patents relating to texturing of breast implant surfaces in which damages inexcess of €3 million are alleged. Eurosilicone has not established anyallowances relating to this litigation.

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

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

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

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

***Government regulation of manufacturing ofmedical devices is expensive, time consuming and uncertain for manufacturersand may result in product unavailability or recalls.***

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

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

Breast augmentation and reconstruction and otheraesthetics procedures are elective procedures. Other than U.S. federallymandated insurance reimbursement for post-mastectomy reconstructive surgerythat is available in some cases, breast augmentations and other cosmeticprocedures are not typically covered by insurance. Adverse changes in theeconomy may cause consumers to reassess their spending choices and reduce thedemand for cosmetic surgery. This shift could have an adverse effect on ourprojected future sales and profitability.

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

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

***ITEM2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS***

Not Applicable.

***ITEM3 - DEFAULTS UPON SENIOR SECURITIES***

Not Applicable.

***ITEM4 -******SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS***

Not Applicable.

***ITEM5 –******OTHER INFORMATION***

Not Applicable.

***ITEM 6 –EXHIBITS***

The following exhibits are filed as part of this Quarterly Report onForm 10-Q:
| Exhibit No. | ** ** | **Description**                                                                                           |
|-------------|------------|-----------------------------------------------------------------------------------------------------------|
| 10.1        |       | Lease Agreement between  Laboratoires Eurosilicone SAS and the Commune of Apt dated May 25, 1999          |
| 10.2        |       | Lease Agreement between Laboratoires Eurosilicone  SAS and the Commune of Apt dated May 17, 2000          |
| 10.3        |       | Lease Agreement between Laboratoires Eurosilicone  SAS and Natiocredimurs Partnership dated March 8, 2001 |
| 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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**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 (Principal Executive Officer)  November 2, 2006 |
|   |         |   |
|   | By:          | /s/ Paul R. Kimmel |
|   |         | Paul R. Kimmel   Chief Financial Officer (Principal Financial and Accounting Officer)  November 2, 2006 |

 

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