** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM10-QSB**

 

| **(Mark  One)**                                                                                                  |                                                                                                          |
|------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                       | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|                                                                                                             |                                                                                                          |
| **For the Quarterly Period Ended September 30, 2004**                                                            |
|                                                                                                             |                                                                                                          |
| **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 000-50442**                                                                             |

 

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**MEDICORLTD.**

(Exact name of small business issuer as specified in its charter)

 

| **Delaware**                                                    | **14-1871462**                     |
|-----------------------------------------------------------------|------------------------------------|
| (State or other jurisdiction  of incorporation or organization) | (IRS Employer  Identification No.) |
|                                                            |                               |
| **4560 S. Decatur Blvd., Suite 300  Las Vegas, Nevada**         | **89103**                          |
| (Address of principal executive offices)                        | (Zip Code)                         |
|                                                            |                               |
| **(702) 932-4560**                                              |
| (Issuer’s telephone number)                                |

 

Check whether the issuer (1)filed all reports required to be filed by Section 13 or 15 (d) of the ExchangeAct during the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes **ý****   **No o

 

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On November 5, 2004, there were 18,107,399 shares of common stockoutstanding.

 

Transitional Small Business Disclosure Format (Check one):  Yes o** **No **ý**

** **

 

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**MEDICOR LTD.**

 

# **INDEX**

# ** **

| Part I. Financial  Information |                                                                                         |
|--------------------------------|----------------------------------------------------------------------------------------------|
|                           |                                                                                         |
| Item  1.                       | Consolidated  Financial Statements (Unaudited)                                               |   |
|                           |                                                                                         |   |
|                           | Consolidated Balance Sheet –  September 30, 2004                                        |   |
|                           |                                                                                         |   |
|                           | Consolidated  Statements of Operations – Three Months Ended September 30, 2004 and 2003 |   |
|                           |                                                                                         |   |
|                           | Consolidated  Statements of Cash Flows - Three Months Ended September 30, 2004 and 2003      |   |
|                           |                                                                                         |   |
|                           | Notes to  Consolidated Financial Statements – September 30, 2004                        |   |
|                           |                                                                                         |   |
| Item  2.                       | Management’s  Discussion and Analysis or Plan of Operation                              |   |
|                           |                                                                                         |   |
| Item 3.                        | Controls and  Procedures                                                                     |   |
|                           |                                                                                         |   |
|                           |                                                                                         |   |
| Part II. Other Information     |                                                                                         |
|                           |                                                                                         |
| Item 1.                        | Legal Proceedings                                                                            |   |
|                           |                                                                                         |   |
| Item 2.                        | Changes in Securities                                                                        |   |
|                           |                                                                                         |   |
| Item 3.                        | Defaults upon  Senior Securities                                                             |   |
|                           |                                                                                         |   |
| Item  4.                       | Submission  of Matters to a Vote of Security Holders                                         |   |
|                           |                                                                                         |   |
| Item 5.                        | Other Information                                                                            |   |
|                           |                                                                                         |   |
| Item 6.                        | Exhibits and  Reports on Form 8-K                                                            |   |
|                           |                                                                                         |   |
|                           | Signatures                                                                                   |   |

 

----

 

***PART I – FINANCIAL INFORMATION***

 

***ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)***

** **

**MediCor, Ltd.**

**ConsolidatedBalance Sheet**

**September 30, 2004**

**(Unaudited)**

** **
| ** **                                                                                                                                         | ** ** | **September 30, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| **Assets**                                                                                                                                         |       |                   |       |
|                                                                                                                                               |       |                   |       |
| Current assets:                                                                                                                                    |       |                   |       |
|                                                                                                                                               |       |                   |       |
| Cash                                                                                                                                               |       | $                      | 4,079,470  |   |
| Receivables, less allowance for doubtful  accounts of $935,797                                                                                     |       | 4,962,480              |       |
| Notes receivable, less allowance for  doubtful accounts of $452,067                                                                                |       | —                 |       |
| Inventories                                                                                                                                        |       | 3,544,403              |       |
| Prepaid expenses and other current assets                                                                                                          |       | 710,661                |       |
|                                                                                                                                               |       |                   |       |
| Total current assets                                                                                                                               |       | 13,297,014             |       |
| Property, plant and equipment, net                                                                                                                 |       | 2,334,119              |       |
| Goodwill and other intangibles, net                                                                                                                |       | 37,042,492             |       |
| Deposits                                                                                                                                           |       | 74,518                 |       |
| Other assets                                                                                                                                       |       | 538,627                |       |
|                                                                                                                                               |       |                   |       |
| Total assets                                                                                                                                       |       | $                      | 53,286,770 |   |
|                                                                                                                                               |       |                   |       |
| **Liabilities and Stockholders’ Equity**                                                                                                      | ** ** | ** **             | ** ** |
|                                                                                                                                               |       |                   |       |
| Current liabilities:                                                                                                                               |       |                   |       |
|                                                                                                                                               |       |                   |       |
| Short term convertible debentures                                                                                                                  |       | $                      | 175,000    |   |
| Notes payable                                                                                                                                      |       | 1,826,759              |       |
| Note payable to related party                                                                                                                      |       | 43,280,649             |       |
| Accounts payable                                                                                                                                   |       | 4,474,639              |       |
| Accrued expenses and other current  liabilities                                                                                                    |       | 3,019,250              |       |
| Income tax payable                                                                                                                                 |       | 538,149                |       |
| Payroll taxes payable                                                                                                                              |       | 663,029                |       |
| Interest payable to related party                                                                                                                  |       | 384,499                |       |
|                                                                                                                                               |       |                   |       |
| Total current liabilities                                                                                                                          |       | 54,361,974             |       |
|                                                                                                                                               |       |                   |       |
| Long-term convertible debentures                                                                                                                   |       | 400,000                |       |
| Long-term notes payable                                                                                                                            |       | 8,446,454              |       |
| Long-term accrued liabilities                                                                                                                      |       | 1,856,773              |       |
|                                                                                                                                               |       |                   |       |
| Total liabilities                                                                                                                                  |       | 65,065,201             |       |
|                                                                                                                                               |       |                   |       |
| Commitments and contingencies (Note U)                                                                                                             |       |                   |       |
|                                                                                                                                               |       |                   |       |
| Stockholders’ equity (deficit)                                                                                                                |       |                   |       |
|                                                                                                                                               |       |                   |       |
| Preferred shares, $.001 par value, 45,000  shares authorized, 10,353 issued and outstanding; liquidation preference  $10,353,000                   |       | 10                     |       |
| Additional paid in capital - preferred  stock                                                                                                      |       | 10,550,451             |       |
| Common shares, $.001 par value, 100,000,000  shares authorized, 18,127,697 shares issued, 18,107,399 shares outstanding  and 20,298 shares retired |       | 18,107                 |       |
| Additional paid in capital - common stock                                                                                                          |       | 17,507,441             |       |
| Accumulated (deficit)                                                                                                                              |       | (39,854,440            | )          |
|                                                                                                                                               |       |                   |       |
| Stockholders’ equity (deficit)                                                                                                                |       | (11,778,431            | )          |
|                                                                                                                                               |       |                   |       |
| Total liabilities and stockholders’ equity                                                                                                    |       | $                      | 53,286,770 |   |
|                                                                                                                                                    |            |                        |            |  |  |

 

Seeaccompanying notes to unaudited consolidated financial statements

 

2

----

 

**MediCor, Ltd.**

**Consolidated Statements of Operations**

**Three Months Ended September 30, 2004 and 2003**

**(Unaudited)**

** **
| ** **                                             | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                   |       |       |       |       |       |
| Net sales                                              |       | $          | 6,143,059  |       | $          | 336,340 |   |
| Cost of sales                                          |       | 3,553,835  |       | 78,213     |       |
| Return of consigned inventory previously  written down |       | (350       | )          | (22,575    | )          |
|                                                   |       |       |       |       |       |
| Gross profit                                           |       | 2,589,574  |       | 280,702    |       |
| Operating expenses:                                    |       |       |       |       |       |
| Selling, general and administrative  expenses          |       | 3,853,797  |       | 1,187,845  |       |
| Research and development                               |       | 633,714    |       | 9,125      |       |
| Other expenses                                         |       | 7,271      |       | —     |       |
|                                                   |       |       |       |       |       |
| Operating income / (loss)                              |       | (1,905,208 | )          | (916,268   | )          |
|                                                   |       |       |       |       |       |
| Net interest expense / (income)                        |       | 1,269,439  |       | 228,579    |       |
|                                                   |       |       |       |       |       |
| Income / (loss) before income taxes                    |       | (3,174,647 | )          | (1,144,847 | )          |
| Income taxes                                           |       | 340,911    |       | —     |       |
|                                                   |       |       |       |       |       |
| Net income / (loss)                                    |       | (3,515,558 | )          | (1,144,847 | )          |
| Preferred dividends deemed                             |       | 105,704    |       | —     |       |
| Preferred dividends in arrears Series A  Preferred 8%  |       | 208,766    |       | —     |       |
|                                                   |       |       |       |       |       |
| Net loss attributable to common  stockholders          |       | $          | (3,830,028 | )          | $          | (1,144,847 | ) |
|                                                   |       |       |       |       |       |
| Earnings per share data:                               |       |       |       |       |       |
| Weighted average shares, basic and diluted             |       | 18,062,419 |       | 17,547,156 |       |
| Basic and diluted                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss per share                                     |       | $          | (0.21      | )          | $          | (0.07 | ) |

 

Seeaccompanying notes to unaudited consolidated financial statements

 

3

----

 

**MediCor, Ltd.**

**Consolidated Statements of Cash Flows**

**Three Months Ended September 30, 2004 and 2003**

**(Unaudited)**

** **
| ** **                                                                                                                                                                                                | ** ** | **2004**   | ** **  | **2003**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-------------|------------|------------|
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                                                                                                                                 |       |       |        |       |       |
| Net loss                                                                                                                                                                                                  |       | $          | (3,515,558  | )          | $          | (1,144,847 | ) |
| Adjustments to reconcile net loss to net  cash utilized by operating activities:                                                                                                                          |       |       |        |       |       |
| Depreciation and amortization                                                                                                                                                                             |       | 256,282    |        | 128,126    |       |
| Provision for doubtful accounts                                                                                                                                                                           |       | 197,852    |        | 110,490    |       |
| Inventory write down                                                                                                                                                                                      |       | 350        |        | 22,575     |       |
| Non-employee stock options                                                                                                                                                                                |       | 24,919     |        | —     |       |
| Employee preferred stock                                                                                                                                                                                  |       | 48,000     |        | —     |       |
| Changes in operating assets and liabilities                                                                                                                                                               |       |       |        |       |       |
| Receivables                                                                                                                                                                                               |       | 164,299    |        | (91,307    | )          |
| Notes receivable                                                                                                                                                                                          |       | (147,639   | )           | 27,384     |       |
| Inventories                                                                                                                                                                                               |       | (47,744    | )           | (13,844    | )          |
| Prepaid expenses and other current assets                                                                                                                                                                 |       | (4,512     | )           | (37,715    | )          |
| Goodwill                                                                                                                                                                                                  |       | (617,675   | )           | —     |       |
| Deposits                                                                                                                                                                                                  |       | 617,675    |        | (550,000   | )          |
| Other assets                                                                                                                                                                                              |       | (508,533   | )           | (10,697    | )          |
| Bank overdraft                                                                                                                                                                                            |       | —     |        | (100,977   | )          |
| Accounts payable                                                                                                                                                                                          |       | (1,577,503 | )           | (321,707   | )          |
| Accrued expenses and other current  liabilities                                                                                                                                                           |       | 40,106     |        | (182,349   | )          |
| Income tax payable                                                                                                                                                                                        |       | 538,149    |        | —     |       |
| Payroll taxes payable                                                                                                                                                                                     |       | 165,768    |        | 1,782      |       |
| Interest payable                                                                                                                                                                                          |       | (123,463   | )           | 209,138    |       |
| Long term accrued liabilities                                                                                                                                                                             |       | —     |        | 15,910     |       |
| Net cash provided by (utilized) operating  activities                                                                                                                                                     |       | (4,489,227 | )           | (1,938,038 | )          |
|                                                                                                                                                                                                      |       |       |        |       |       |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                                                                                                                                 |       |       |        |       |       |
| Payments for property, plant and equipment                                                                                                                                                                |       | (40,339)   |        | —     |       |
| Payments for purchase of Laboratoires  Eurosilicone S.A., net of cash acquired                                                                                                                            |       | (8,800,727 | )           | —     |       |
| Payments for purchase of Deramedics, net of  cash aquired                                                                                                                                                 |       | (75,000    | )           | —     |       |
| Net cash provided by (utilized) investing  activites                                                                                                                                                      |       | (8,916,066 | )           | —     |       |
|                                                                                                                                                                                                      |       |       |        |       |       |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                                                                                                                                 |       |       |        |       |       |
| Proceeds from issuance of convertible  debentures                                                                                                                                                         |       | —     |        | 350,000    |       |
| Proceeds from issuance of short term debt                                                                                                                                                                 |       | 15,687,811 |        | 1,715,000  |       |
| Proceeds from issuance of long term debt                                                                                                                                                                  |       | 7,333,407  |        |       |       |
| Payments on convertible debentures                                                                                                                                                                        |       | (100,000   | )           |       |       |
| Payments on short term debt                                                                                                                                                                               |       | (5,966,515 | )           | (15,012    | )          |
| Issuance of preferred stock                                                                                                                                                                               |       | 359,999    |        | —     |       |
| Issuance of common stock                                                                                                                                                                                  |       | 4,969      |        | 3,751      |       |
| Purchase of treasury stock                                                                                                                                                                                |       | —     |        | (39,999    | )          |
| Net cash provided by financing activities                                                                                                                                                                 |       | 17,319,671 |        | 2,013,740  |       |
| Net increase in cash                                                                                                                                                                                      |       | 3,914,378  |        | 75,702     |       |
| Cash at beginning of period                                                                                                                                                                               |       | 165,092    |        | 50,631     |       |
|                                                                                                                                                                                                      |       |       |        |       |       |
| **CASH AT END OF PERIOD**                                                                                                                                                                                 |       | $          | 4,079,470   |       | $          | 126,333 |   |
|                                                                                                                                                                                                      |       |       |        |       |       |
| **SUPPLEMENTAL DISCLOSURE OF NON-CASH  ACTIVITIES**                                                                                                                                                       |       |       |        |       |       |
|                                                                                                                                                                                                      |       |       |        |       |       |
| Conversion of short-term debt to preferred  stock                                                                                                                                                         |       | $          | 100,000     |       | $          | — |   |
| Issuance of preferred stock to  employees/consultants                                                                                                                                                     |       | $          | 48,000      |       | $          | — |   |
|                                                                                                                                                                                                      |       |       |        |       |       |
| The Company purchased all of the capital  stock of Laboratories Euorsilcone S.A.S. for $39,332,356. In conjunction with  the acquisition, liabilities were assumed as follows:                            |       |       |        |       |       |
| Fair value of assets acquired                                                                                                                                                                             |       | $          | 45,549,577  |       |       |   |
| Cash paid for capital stock                                                                                                                                                                               |       | $          | (39,332,356 | )          |       |   |
| Liabilities assumed                                                                                                                                                                                       |       | $          | (6,217,221  | )          |       |   |
|                                                                                                                                                                                                      |       |       |        |       |       |
| The Company purchased all of the capital  stock of Dermatological Medical Products and Specialites, S.A. de C.V. for  $75,000. In conjunction with the acquisition, liabilities were assumed as  follows: |       |       |        |       |       |
| Fair value of assets acquired                                                                                                                                                                             |       | $          | 75,000      |       |       |   |
| Cash paid for capital stock                                                                                                                                                                               |       | $          | (75,000     | )          |       |   |
| Liabilities assumed                                                                                                                                                                                       |       | $          | —      |       |       |   |
|                                                                                                                                                                                                      |       |       |        |       |       |
| **SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION**                                                                                                                                                     |       |       |        |       |       |
| Cash paid during the period for:                                                                                                                                                                          |       |       |        |       |       |
|                                                                                                                                                                                                      |       |       |        |       |       |
| Interest                                                                                                                                                                                                  |       | $          | 1,610,350   |       | $          | 28,212 |   |
| Taxes                                                                                                                                                                                                     |       | $          | —      |       | $          | — |   |

 

See accompanying notes to unauditedconsolidated financial statements

 

4

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**MEDICORLTD.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**September 30, 2004**

**(Unaudited)**

 

**Note A - Description of Business**

 

MediCor Ltd. (the “Company”or “MediCor”) is a global health care company that acquires, develops,manufactures and markets products primarily for the aesthetic plastic surgeryand dermatology markets.  Current products include breast implants andscar management products.  The Company’s products are sold worldwide tohospitals, surgery centers and physicians mostly through various distributorsas well as through some direct sales personnel.

 

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

 

*Principlesof Consolidation*

 

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

* *

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

 

The preparation of financialstatements in accordance with accounting principles generally accepted in theUnited States of America requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, anddisclosure of contingent assets and liabilities. On an on-going basis, weevaluate our estimates and judgments, including those related to revenuerecognition, inventories, adequacy of allowances for doubtful accounts,valuation of long-lived assets and goodwill, income taxes, litigation andwarranties. We base our estimates on historical and anticipated results andtrends and on various other assumptions that we believe are reasonable under thecircumstances, including assumptions as to future events. The policiesdiscussed below are considered by management to be critical to an understandingof our 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.

##### *** ***

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

##### *** ***

##### ***Werecognize product revenue, net of sales discounts, returns and allowances, inaccordance with Staff Accounting Bulletin (SAB) No. 104, “RevenueRecognition” and SFAS No. 48 “Revenue Recognition When Right of ReturnExists.” These statements establish that revenue can be recognized whenpersuasive evidence of an arrangement exists, delivery has occurred and allsignificant contractual obligations have been satisfied, the fee is fixed ordeterminable, and collection is considered probable. We recognize revenue upondelivery of product to third-party distributors and customers. Due to thewidespread holding of consignment inventory in our industry, we also recognizerevenue when the products are withdrawn from consignment inventory inhospitals, clinics and doctors’ offices. Appropriate reserves are establishedfor anticipated returns and allowances based on our product return history. Webelieve our estimates for anticipated returns is a “critical accountingestimate” because it requires us to estimate returns and, if actual returnsvary, it could have a material impact on our reported sales and results ofoperations. Historically our estimates of return rates have not fluctuated fromthe actual returns by more than 1% to 2%.***

 

5

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* *

*Allowance for Doubtful Accounts*

##### *** ***

##### ***MediCormaintains allowances for doubtful accounts for estimated losses resulting fromthe inability of some of its customers to make required payments. Theallowances for doubtful accounts are based on the analysis of historical baddebts, customer credit-worthiness, past transaction history with the customer,current economic trends, and changes in customer payment terms. If thefinancial condition of MediCor’s customers were to deteriorate, adverselyaffecting their ability to make payments, additional allowances may berequired.***

##### *** ***

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

##### *** ***

##### ***Inventoriesare stated at the lower of cost or market using the first-in, first-out (FIFO)method. The Company may capitalize inventory costs associated with certainproduct candidates prior to regulatory approval, based on management’s judgmentof probable future commercialization. We could be required to expensepreviously capitalized costs related to pre-approval inventory upon a change insuch judgment, due to, among other factors, a decision denying approval of theproduct candidate by the necessary regulatory bodies.***

##### *** ***

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

 

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

##### *** ***

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

##### *** ***

##### ***TheCompany accounts for long-lived assets, other than goodwill, in accordance withthe provisions of SFAS No. 144, “Accounting for the Impairment and Disposal ofLong Lived Assets,” which supersedes SFAS No. 121 “Accounting for the Impairmentof Long-Lived Assets and for Long-Lived Assets to be disposed of.”  This statement creates one accounting model,based on the framework established in SFAS No. 121, to be applied to alllong-lived assets including discontinued operations.  Adoption of this statement had no materialeffect on the financial position or results of operations.  SFAS No. 144 requires, among other things,that an entity review its long-lived assets and certain related intangibles forimpairment whenever changes in circumstances indicate that the carrying amountof an asset may not be fully recoverable.***  We believe the estimate of ourvaluation of long-lived assets is a “critical accounting estimate” because ifcircumstances arose that led to a decrease in the valuation it could have amaterial impact on our results of operations. With the exception of the third-party purchase agreements in June of2004, as described in Note J to the financial statements included in our annualreport on Form 10-KSB, we do not believe that any other changes have takenplace.

##### *** ***

##### ***Goodwill and Other IntangibleAssets***

##### *** ***

##### ***Goodwillrepresents the excess of the purchase price over the estimated fair value ofidentified assets the businesses acquired. Other intangible assets are recordedat fair value and amortized over periods ranging from 3 to 17 years.  The Company adopted SFAS No. 142 “Goodwilland Other Intangible Assets,” in January 2002. As a result, goodwill is nolonger amortized, but was subject to a transitional impairment analysis and istested for impairment on an annual basis. The test for impairment involves theuse of estimates related to the fair values of the business operations withwhich goodwill is associated and is usually based on a market value approach.Other intangible assets are amortized using the straight-line method over theirestimated useful lives and are evaluated for impairment under SFASNo. 144.***

 

6

----

 

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

##### *** ***

##### ***IIIAcquisition Corp. d/b/a PIP.America (“PIP.America”), a subsidiary of theCompany in the U.S., provides a product replacement program to surgeons fordeflations of breast implant products for a period of ten (10) years from thedate of implantation.  For eachdeflation, the surgeon receives financial assistance plus a freereplacement.  Management estimated theamount of potential future product replacement claims based on statisticalanalysis.  Expected future obligationsare determined based on the history of product shipments and claims and are discountedto a current value, and this amount is reserved.  Changes to actual claims, interest rates orother estimations could have a material impact on the statistical calculationwhich could materially impact the Company’s reserves and results of operations.Although these products are not currently being sold (because they are in theprocess of obtaining FDA approval more fully described below), they were soldunder a distribution agreement prior to November 2000 and a warranty reserve ismaintained for these products sold in prior years.  Eurosilicone, a subsidiary of the Companylocated in France, does not maintain a reserve because of its sole relianceupon third-party distributors in countries where sales occur and because of alack of a formal or informal product replacement program.***

##### *** ***

| ** **                                        | ** ** | **Product  Replacement Program** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
|                                              |       |                             |       |
| Balance at June 30, 2004                          |       | $                                | 2,057,991  |   |
| Accruals for warranties issued during the  period |       | —                           |       |
| Settlements made during the period                |       | —                           |       |
|                                              |       |                             |       |
| Balance at September 30, 2004                     |       | $                                | 2,057,991  |   |

##### *** ***

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

##### *** ***

##### ***TheCompany’s shipping and handling costs are included under cost of sales.***

##### *** ***

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

##### *** ***

##### ***Researchand development costs are expensed by the Company as incurred, including thecosts of clinical studies and other regulatory approval activities.***

##### *** ***

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

##### *** ***

The Company has adopted the provisions ofSFAS No. 123, “Accounting for Stock-Based Compensation.” In accordancewith SFAS No. 123, MediCor has elected the disclosure-only provisionsrelated to employee stock options and follows the intrinsic value method inAccounting Principals Board Opinion (APB) No. 25 in accounting for stockoptions issued to employees. Under APB No. 25, compensation expense, ifany, is recognized as the difference between the exercise price and the fairvalue of the common stock on the measurement date, which is typically the dateof grant, and is recognized over the service period, which is typically thevesting period.

 

The Company accounts for options and warrantgrants to non-employees using the guidance prescribed by SFAS No. 123,Financial Accounting Standards Board (FASB) Interpretation No. 44, “Accountingfor Certain Transactions Involving Stock Compensation, and interpretation ofAPB No. 25,” and Emerging Issue Task Force No. 96-18, “Accounting forEquity Instruments That Are Issued to Other Than Employees for Acquiring, or InConjunction with Selling, Goods, or Services,” whereby the fair value of suchoption and warrant grants are measured using the Fair Value Based Method at theearlier of the date at which the non-employee’s performance is completed or aperformance commitment is reached.

 

7

----

 

*IncomeTaxes*

 

Deferred income tax assets or liabilities arecomputed based on the temporary differences between the financial statement andincome tax bases of assets and liabilities using the statutory marginal incometax rate in effect for the years in which the differences are expected toreverse. Deferred income tax expenses or credits are based on the changes inthe deferred income tax assets or liabilities from period to period. Avaluation allowance against deferred tax assets is required if, based on theweight of available evidence, it is more likely than not that some portion orall of the deferred tax assets will not be realized. The valuation allowanceshould be sufficient to reduce the deferred tax asset to the amount that ismore likely than not to be realized.

 

##### ***Effects of Recent AccountingPronouncements***

 

In December 2003, the SEC Staff AccountingBulletin (“SAB”) No. 104, “Revenue Recognition,” which codifies, revises, andrescinds certain sections of SAB No. 101, “Revenue Recognition,” in order tomake this interpretive guidance consistent with current authoritativeaccounting and auditing guidance and SEC rules and regulations.  The changes in SAB No. 104 did not have amaterial impact on our financial position or results of operations.

 

On March 31, 2004, the FASB issued anexposure draft, “Share-Based Payment, an Amendment of SFAS No. 123 and 95.”  The exposure draft proposes to expense thefair value of share-based payments to employees beginning in 2005.  We are currently evaluating the impact ofthis proposed standard on our financial statements.

 

**Note C – Interim Reporting**

 

The accompanying unauditedconsolidated financial statements for the three months ended September 30, 2004and September 30, 2003 have been prepared in accordance with accountingprinciples generally accepted in the United States for interim financialinformation and with instructions to Form 10-QSB and Item 310 ofRegulation S-B.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  In the opinion ofmanagement, all adjustments (consisting only of normal recurring accruals,unless otherwise indicated) considered necessary for a fair presentation of theresults of operations for the indicated periods have been included. Certain amounts recorded in previous periods have been reclassified to conformto the current period presentation.  Operating results for the threemonths ended September 30, 2004 are not necessarily indicative of the resultsfor the full fiscal year.

 

**Note D– Major Customers**

 

During the threemonths ended September 30, 2004, two different customers accounted for 10% and 15%respectively of the Company’s consolidated revenue.  While revenue related to these twodistributors for the three months ended September 30, 2003 is not comparabledue to the acquisition of Eurosilicone.

 

**Note E – Cash and Cash Equivalents**

 

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

 

8

----

 

**Note F – Accounts Receivable**

 

Accountsreceivable at September 30, 2004 consisted of:

 
| ** **                      | ** ** | **September 30, 2004** | ** ** |
|---------------------------------|------------|------------------------|------------|
|                            |       |                   |       |
| Accounts receivable             |       | $                      | 5,898,277  |   |
| Allowance for doubtful accounts |       | (935,797               | )          |
|                            |       |                   |       |
| Total                           |       | $                      | 4,962,480  |   |

 

Changesin allowance for doubtful accounts are as follows:

 
| Balance July 1, 2004       |   | $       | 213,021 |   |
|----------------------------|--------|---------|---------|--------|
| Provisions/(recovery)      |   | 722,776 |    |
| Write-offs                 |   | —  |    |
| Balance September 30, 2004 |   | $       | 935,797 |   |

 

**Note G – Notes Receivable**

 

Notesreceivable at September 30, 2004 consisted of:

 
| ** **                      | ** ** | **September 30, 2004** | ** ** |
|---------------------------------|------------|------------------------|------------|
|                            |       |                   |       |
| Notes receivable                |       | $                      | 452,067    |   |
| Allowance for doubtful accounts |       | (452,067               | )          |
|                            |       |                   |       |
| Total                           |       | $                      | —     |   |

 

PolyImplants Protheses S.A. (“PIP”), a third-party manufacturer of breast implantslocated in France issuedto the Company a revolving promissory note for certain sums to come due to theCompany based on the Company’s and the manufacturer’s administration of productwarranty and product warranty related claims. These amounts have been fully reserved for, with an allowance fordoubtful account, due to the lack of payment and uncertain prospect ofcollection.

 

**Note H – Inventories**

 

Inventories at September 30,2004 consisted of:

 
| ** **      | ** ** | **September 30, 2004** | ** ** |
|-----------------|------------|------------------------|------------|
|            |       |                   |       |
| Raw Materials   |       | $                      | 742,911    |   |
| Work in Process |       | 962,918                |       |
| Finished Goods  |       | 1,838,574              |       |
|            |       |                   |       |
| Total           |       | $                      | 3,544,403  |   |

 

9

----

 

**Note I - Property and Equipment**

 

Property and equipment at September30, 2004 consisted of:

 
| ** **                            | ** ** | **September 30, 2004** | ** ** |
|---------------------------------------|------------|------------------------|------------|
|                                  |       |                   |       |
| Computer Equipment and tools and dies |       | $                      | 256,050    |   |
| Furniture, Fixtures and equipment     |       | 394,201                |       |
| Land and buildings                    |       | 1,807,914              |       |
| Leasehold Improvements                |       | 107,748                |       |
| Machinery and equipment               |       | 322,676                |       |
|                                  |       |                   |       |
| Subtotal                              |       | 2,888,589              |       |
| Accumulated depreciation              |       | (554,470               | )          |
|                                  |       |                   |       |
| Total                                 |       | $                      | 2,334,119  |   |

 

Depreciation expense was $168,775for the three months ended September 30, 2004 and $38,744 for the three months endedSeptember 30, 2003.

 

**Note J –Goodwill and Other Intangibles**

 

Goodwill and otherintangibles as of September 30, 2004 consisted of:

 
| ** **                                                                 | ** ** | **September 30, 2004** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------|------------|
|                                                                       |       |                   |       |
| Goodwill                                                                   |       | $                      | 34,281,531 |   |
| Distribution Agreements, Non-Compete and  Other                            |       | 375,501                |       |
| Patents                                                                    |       | 3,100,000              |       |
|                                                                       |       |                   |       |
| Subtotal                                                                   |       | 37,757,032             |       |
|                                                                       |       |                   |       |
| Accumulated Amortization - Goodwill                                        |       | (41,973                | )          |
| Accumulated Amortization - Distribution  Agreements, Non-Compete and Other |       | (217,582               | )          |
| Accumulated Amortization - Patents                                         |       | (454,985               | )          |
|                                                                       |       |                   |       |
| Subtotal                                                                   |       | (714,540               | )          |
|                                                                       |       |                   |       |
| Total                                                                      |       | $                      | 37,042,492 |   |

 

Amortization for the three months ended September30, 2004 was $87,507 compared to $89,382 from the prior period ending September30, 2003.

 

The estimated amortization for the next fiveyears consists of:

 

10

----

 
| ** **              | ** ** | **September 30, 2005** | ** ** | **September 30, 2006** | ** ** | **September 30, 2007** | ** ** | **September 30, 2008** | ** ** | **September 30, 2009** | ** ** |
|-------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
|                    |       |                   |       |                   |       |                   |       |                   |       |                   |       |
| Distribution Agreements |       | 22,500                 |       | 22,500                 |       | 22,500                 |       | 22,500                 |       | 22,500                 |       |
| Non-compete             |       | 13,542                 |       | —                 |       | —                 |       | —                 |       | —                 |       |
| Patents                 |       | 295,029                |       | 295,029                |       | 295,029                |       | 295,029                |       | 295,029                |       |
|                    |       |                   |       |                   |       |                   |       |                   |       |                   |       |
| Total                   |       | $                      | 331,071    |                   | $          | 317,529                |       | $                      | 317,529    |                   | $          | 317,529 |   | $ | 317,529 |   |
|                         |            |                        |            |                        |            |                        |            |                        |            |                        |            |  |  |  |  |  |

 

**Note K –Deposits and Other Assets**

 

Deposits at September 30, 2004 totaled $74,518.  These are security deposits on office leasesand with local utility companies.

 

Other assets consisted of security investmentsof $33,680 and debt acquisition costs of $504,947 at September 30, 2004.

 

**Note L –Accrued Expenses**

 

Accrued expenses and othercurrent liabilities at September 30, 2004 consisted of:

 
| ** **                  | ** ** | **September 30, 2004** | ** ** |
|-----------------------------|------------|------------------------|------------|
|                        |       |                   |       |
| Consulting                  |       | $                      | 296,647    |   |
| Wages and paid leave        |       | 1,039,826              |       |
| Product replacement reserve |       | 834,574                |       |
| Debt Acquisition Fees       |       | 486,280                |       |
| Other                       |       | 361,923                |       |
|                        |       |                   |       |
| Total                       |       | $                      | 3,019,250  |   |

 

Consulting fees consisted ofamounts relating to various consulting agreements. Other accrued expenses includedinterest and legal expenses.

 

Long-term accruedliabilities at September 30, 2004 consisted of:

 
| ** **                  | ** ** | **September 30, 2004** | ** ** |
|-----------------------------|------------|------------------------|------------|
|                        |       |                   |       |
| Legal settlement            |       | $                      | 517,356    |   |
| Product replacement reserve |       | 1,339,417              |       |
|                        |       |                   |       |
| Total                       |       | $                      | 1,856,773  |   |

 

11

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## ***NoteM – Convertible Debentures***

## *** ***

## ***Short-term convertible debentures at September 30, 2004 were $175,000. Duringthe first quarter of fiscal 2005 $100,000 was converted to Series A 8.0%Convertible Preferred Stock. These convertible debentures pay 10%interest.  Interest is prepaid andamortized over the life of the convertible debenture.  The convertible debentures are convertiblewithin one year at the holder’s discretion to shares of Company common stock ata price of $4.02.  These convertibledebentures mature in December 2004.***

## *** ***

## ***Long-term convertible debentures at September 30, 2004 were $400,000.  During the quarter ended September 30, 2004,$100,000. was repaid.  These convertibledebentures are convertible after one year and at the 18-month, 24-month,30-month and 36-month anniversary of the issuance date at the holder’sdiscretion to shares of Company common stock at a price equal to the greater of$5.00 or seventy-five percent (75%) of the daily weighted average trading priceper share of the Company’s common stock over a period of twenty (20) tradingdays prior to the conversion date. These convertible debentures mature betweenApril 2006 and August 2006.***

## *** ***

## ***During the quarter ended September 30, 2004, we did not incur any costsrelating to the above convertible debentures.***

## *** ***

## ***NoteN – Notes Payable***

## *** ***

## ***Short-term notes payable of $1,826,759 at September 30, 2004 consistedof several notes which ranged from $40,282 to $1,287,811 with annual interestrates of between 3.39% and 8%.***

## *** ***

## ***Long-term notes payable consisted of a bank term loan in the amount of $7,726,869for a term of seven years denominated in Euros with an annual interest rate basedon six month Libor plus 2.25%.  Thevariable interest rate as of September 30, 2004 was 4.49%. In addition we have severalnotes which ranged from $20,618 to $412,367 with terms of between twenty-onemonths and four years, with annual rates of interest between 3.39% 5.25%.***

## *** ***

Future maturities of long-term debt are asfollows:

 
| **Year ended September 30,** | ** ** | **Amount** | ** ** |
|------------------------------|------------|------------|------------|
|                         |       |       |       |
| 2005                         |       | $          | 1,826,759  |   |
| 2006                         |       | 1,606,320  |       |
| 2007                         |       | 1,526,748  |       |
| 2008                         |       | 1,449,952  |       |
| 2009                         |       | 1,287,811  |       |
|                         |       |       |       |
|                         |       | 7,697,590  |       |
|                         |       |       |       |
| Payments over five years     |       | 2,575,623  |       |
|                         |       |       |       |
| Total                        |       | $          | 10,273,213 |   |

 

**Note O – Related Party Transactions**

 

InternationalIntegrated Industries, LLC (“LLC”) is a company in which the Company’s chairmanhas a controlling interest.  Neither theCompany nor any of its subsidiaries has any direct ownership in LLC.  LLC acted on behalf of the Company by fundingsignificant expenses incurred for which the Company has a revolving loanagreement as shown on the Company’s Balance Sheet of $43,280,649 at September30, 2004.  The outstanding balance of thenote payable accrues interest at an annual interest rate of ten percent(10%).  During the three months ended September30, 2004, LLC advanced $14,400,000 to the Company, of which $5,435,752 wasrepaid.  Interest expense relating tothis note payable was $1,195,052 for the quarter ended September 30, 2004.  During the quarter ending September 30, 2004,the Company repaid $1,318,515 of the accrued interest on this note.  The unpaid liability for these expenses areincluded in the Company’s note payable to affiliates, which is contained in thefinancial statements presented herein. The Company had a commitment from LLC to fund operating shortfalls asnecessary for the period presented.

 

12

----

 

InOctober 2003, the Company entered into a Reimbursement Agreement with a companycontrolled by the Company’s chairman, Mr. Donald K. McGhan, for thereimbursement of expenses incurred in the operation of its private plane whenused for MediCor business.  TheReimbursement Agreement is effective for expenses incurred for MediCor businesspurposes.  The Company recognized a totalof $449,505 for the three months ended September 30, 2004 in expenses pursuantto the Reimbursement Agreement.  Allexpenses recognized pursuant to the Reimbursement Agreement have been includedby the Company in selling, general, and administrative expenses.  In June 2004, MediCor modified itsReimbursement Agreement to reflect a “dry lease” effective June 1, 2004.  Only costs directly tied to MediCor’s use ofthe planes asset will be reimbursable to the company controlled by the Company’schairman.  All other operating costs(like fuel, pilot wages, food, etc.) will be paid directly by the Company orthrough a disbursement agent to those third parties and only when the plane isused for MediCor business purposes.

 

**Note P – Federal Income Taxes**

 

Thecompany follows FAS 109 for reporting income taxes. The income tax expense (benefit) reflected in the Consolidated Statements ofOperations for the Company for the periods noted consist of:

 
| ** **                                            | ** ** | **September 30, 2004** | ** ** | **September 30, 2003** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
|                                                  |       |                   |       |                   |       |
| Current                                               |       | $                      | 340,911    |                   | $          | (389,248 | ) |
| Deferred                                              |       | (1,421,243             | )          | (263,086               | )          |
|                                                  |       |                   |       |                   |       |
| Total Benefit                                         |       | $                      | (1,080,332 | )                      | $          | (652,334 | ) |
| Less allowance for realization of deferred  tax asset |       | (1,421,243             | )          | (652,334               | )          |
|                                                  |       |                   |       |                   |       |
| Total Tax Expense                                     |       | $                      | 340,911    |                   | $          | — |   |

 

Thecurrent tax expense for the quarter ended September 30, 2004 resulted fromincome tax paid on a foreign subsidiary. As of September 30, 2004 and June 30, 2004, the Company recordedallowances of $12,787,231 and $11,365,988 respectively, against certain futuretax benefits, the realization of which is currently uncertain.  The deferred differences related to certainaccounts receivable, accrued warranties, and depreciation/amortization notcurrently deductible as expenses under IRS provisions.  Although the Company recorded this allowanceto the deferred tax assets, the Company may still utilize the future taxbenefits from net operating losses for 20 years from the year of the loss tothe extent of future taxable income.  Theestimated net operating losses for tax purposes of approximately $15 millionwill expire over several years ending in 2024.

 

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

 
| ** **                                             | ** ** | **September 30, 2004** | ** ** | **September 30, 2003** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
|                                                   |       |                   |       |                   |       |
| Computed expected income tax  asset/(liability) at 34% |       | $                      | 1,328,474  |                   | $          | 5,592,408 |   |
| Adjustments                                            |       |                   |       |                   |       |
| Net operating loss                                     |       | 10,325,250             |       | 4,732,842              |       |
| Allowance for bad debt                                 |       | 243,202                |       | 175,933                |       |
| Warranty reserve                                       |       | 699,717                |       | 699,717                |       |
| Depreciation and amortization                          |       | 190,588                |       | 165,088                |       |
|                                                   |       |                   |       |                   |       |
| Income tax benefit                                     |       | $                      | 12,787,231 |                   | $          | 11,365,988 |   |
| Less allowance for realization of deferred  tax asset  |       | (12,787,231            | )          | (11,365,988            | )          |
|                                                   |       |                   |       |                   |       |   |   |
| Deferred tax asset, net                                |       | $                      | —     |                   | $          | — |   |

 

13

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**Note Q – Preferred Stock**

 

TheCompany created a series of 45,000 shares of preferred stock designated asSeries A 8.0% Convertible Preferred Stock on July 5, 2004.  The stock has a par value of $.001 per sharewith a liquidation preference of $1,000 per share.  In the event of liquidation, shareholders ofpreferred stock shall be entitled to receive priority as to distribution overcommon stock.  The preferred stock isconvertible into common stock at any time at a conversion price of $3.85 pershare until June 30, 2010. One June 30, 2011 all unconverted shares to commonstock will be subject to a mandatory redemption.  The redemption price of $1,000 per share plus$1,000 per whole share for all accrued and unpaid paid-in-kind dividends andany other accrued and unpaid dividends whether or not declared which amountwill be payable by the Company in cash. The Company has issued since itsinception 10,353 shares for $10,353,000.

 

**Note R – Loss per Share**

 

A reconciliation of weightedaverage shares outstanding, used to calculate basic loss per share, to weightedaverage shares outstanding assuming dilution, used to calculate diluted lossper share, follows:

 
| ** **                                          | ** ** | **Quarter Ended  September 30, 2004** | ** ** | **Quarter Ended  September 30, 2003** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                          | ** ** | **Income  (Numerator)**               | ** ** | **Shares  (Denominator)**             | ** ** | **Per-Share  Amount** | ** ** | **Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per-Share  Amount** | ** ** |
|                                                |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Net Income (Loss) before preferred stock  dividends |       | (3,515,558                            | )          |                                  |       |   |   | (1,144,847 | ) |   |   |   |   |
| Less: Preferred stock dividends                     |       | 314,470                               |       |                                  |       |   |   | — |   |   |   |   |   |
|                                                |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Basic EPS                                           |       | (3,830,028                            | )          | 18,062,419                            |       | (0.21 | ) | (1,144,847 | ) | 17,547,156 |   | (0.07 | ) |
|                                                |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Effect of dilutive securities                       |       | —                                |       |                                  |       |   |   |   |   |   |   |   |   |
|                                                |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Diluted EPS                                         |       | $                                     | (3,830,028 | )                                     | 18,062,419 |   | (0.21 | ) | $ | (1,144,847 | ) | 17,547,156 |   | (0.07 | ) |
|                                                     |            |                                       |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |

 

Common equivalent shares of 4,772,580 havebeen excluded from the computation of diluted earnings per share because theireffect would be anti-dilutive.

 

**Note S –Stock Options and Warrants**

 

The Company has a stockoption plan for key employees and consultants. There were 1,242,680 shares reserved for issuance pursuant to theCompany’s stock option plan and up to 6,000,000 shares were reserved forissuance pursuant to stand-alone options granted in connection with employmentagreements.  The Company’s share optionactivity and related information is summarized below:

 

14

----

 
| ** **                                | ** ** | **Options** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------------------------------|------------|
|                                      |       |        |       |                                 |       |
| Outstanding Options at June 30, 2004      |       | 2,121,152   |       | $                                    | 3.11       |   |
|                                      |       |        |       |                                 |       |
| Granted                                   |       | 390,000     |       | $                                    | 3.40       |   |
| Exercised                                 |       | —      |       | $                                    | 0.00       |   |
| Cancelled                                 |       | (62,134     | )          | $                                    | 1.61       |   |
|                                      |       |        |       |                                 |       |
| Outstanding Options at September 30, 2004 |       | 2,449,018   |       | $                                    | 3.19       |   |
|                                      |       |        |       |                                 |       |
| Options exercisable at end of period      |       | 535,803     |       | $                                    | 2.73       |   |

 

15

----

 

The following table summarizes informationabout stock options outstanding at September 30, 2004:

 
| **Outstanding**               | ** ** | **Exercisable**        | ** ** |
|-------------------------------|------------|------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number of  Options** | ** ** | **Weighted  Average  Remaining  Years of  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                          |       |                   |       |   |   |   |   |   |   |   |   |
| $1.00 -  $2.01                |       | 799,018                |       | 5.2 |   | $ | 1.67 |   | 313,720 |   | $ | 1.80 |   |
| $3.00 -  $3.80                |       | 650,000                |       | 6.6 |   | $ | 3.44 |   | 63,750 |   | $ | 3.55 |   |
| $4.15 - $4.30                 |       | 1,000,000              |       | 6.6 |   | $ | 4.24 |   | 158,333 |   | $ | 4.24 |   |

 

## ***The following table illustrates the effect on net income and earningsper share if the Company had applied the fair value recognition provisions ofFASB Statement No. 123, “Accounting for Stock-Based Compensation,” tostock-based employee compensation including the required disclosures of FAS148.***

## *** ***

| ** **                                                                                                                                     | ** ** | **Three Months Ended  September 30, 2004** | ** ** | **Three Months Ended  September 30, 2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
|                                                                                                                                           |       |                                       |       |                                       |       |
| Net Loss, as reported                                                                                                                          |       | $                                          | (3,830,028 | )                                          | $          | (1,144,847 | ) |
|                                                                                                                                           |       |                                       |       |                                       |       |
| Add: Total stock-based non-employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | 24,919                                     |       | 38,922                                     |       |
|                                                                                                                                           |       |                                       |       |                                       |       |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects  |       | (398,033                                   | )          | (223,701                                   | )          |
|                                                                                                                                           |       |                                       |       |                                       |       |
| Pro forma net loss                                                                                                                             |       | $                                          | (4,203,142 | )                                          | $          | (1,329,626 | ) |
|                                                                                                                                           |       |                                       |       |                                       |       |
| Loss per share:                                                                                                                                |       |                                       |       |                                       |       |
| Basic and diluted - as reported                                                                                                                |       | $                                          | (0.21      | )                                          | $          | (0.10 | ) |
|                                                                                                                                           |       |                                       |       |                                       |       |
| Basic and diluted - pro forma                                                                                                                  |       | $                                          | (0.23      | )                                          | $          | (0.12 | ) |

 

These pro forma amounts may not berepresentative of future disclosures since the estimated fair value of stockoptions is amortized to expense over the vesting period, and additional optionsmay be granted in future years.

 

The estimated fair value of each MediCoroption granted is calculated using the Black-Scholes pricing model.  The weighted average assumptions used in themodel were as follows:

 
| ** **                    | ** ** | **2004** | ** ** | **2003**  | ** ** |
|-------------------------------|------------|----------|------------|-----------|------------|
|                          |       |     |       |      |       |
| Risk-free interest rate       |       | 3.50     | %          | 6.00-6.50 | %          |
| Expected years until exercise |       | 7 Years  |       | 3-4 Years |       |
| Expected stock volatility     |       | 50.0     | %          | 0.0       | %          |
| Dividend yield                |       | 0        | %          | 0         | %          |

 

16

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The Company also issued warrants to purchase80,776 shares of common stock to consultants in connection with consultingagreements.  Warrants were grantedbetween 1999 and 2001 at prices between $.08 and $1.61.  All warrants granted had an exercise priceequal to the market value of the underlying common stock on the date of grant.

 

## ***Note T - Business Segment Information***

## *** ***

The Company is a corporateentity with a number of wholly-owned, autonomous subsidiaries which operate assingle business units in multiple geographic locations within the U.S. andinternationally and, as such, does not have multiple segments to report.  Revenues from customers and distributorsattributable to various foreign countries outside the U.S were material, withthe largest country accounting for about 13% of revenues.  Additionally, a significant amount ofrevenues and costs are Euro denominated.

 

**Note U –Commitments and Contingencies**

 

The Company has received awritten commitment from International Integrated Industries, LLC, an affiliateof the Company’s chairman, to provide sufficient cash to fund any operatingloss through October 1, 2005.  The sameentity has provided the Company an aggregate of over $59 million in fundingfrom the Company’s inception through September 30, 2004.  The future funding may take the form of debtor equity or a combination thereof.

 

Pursuant to an Asset Purchase Agreementsigned April 25, 2002, the Company agreed to acquire substantially all of theassets of a privately-held United States medical products distributor.  Pursuant to an amendment dated October 16,2003 to the Asset Purchase Agreement, the purchase price was amended to equalthe deposits made by the Company as of October 16, 2003, plus an additionalagreed payment in cash at closing and issuance of MediCor Ltd equity atclosing.  The closing is conditioned uponthe distributor acquiring necessary governmental approvals forcommercialization in the United States of the products to be distributed.  The Company is no longer obligated to makeadditional deposits against the purchase price, but the Company has committedto fund all future expenses associated with obtaining required governmentapprovals.  In June 2004, the Companybooked a reserve for the entire deposit, due to various uncertainties relatedto this third-party distributor.  Duringthe quarter ending September 30, 2004, the Company has received variouscommunications relating to this distributor which raises significantuncertainty about the likelihood or timing of a successful commercialization ofthese products.

 

The Company’sPIP.America subsidiary has a distribution agreement with Poly ImplantsProtheses S.A.  (“PIP”), a third-partymanufacturer of breast implants located in France. This agreement covers thesale by the Company of PIP’s saline, pre-filled breast implant products in North America; although no sales werereported in the year ending June 30, 2004 because these products are notcurrently approved for distribution in North America.  Previously, this manufacturer was undertakingthe process of securing FDA approval for these products.   At March 30, 2004, the Company had$3,444,802 of accounts receivable from the manufacturer, representing amountsowed to the Company under the indemnification terms of the distributionagreement.  These amounts have been fullyreserved for, with an allowance for doubtful account, due to the lack ofpayment and uncertain prospect of collection. Effective March 30, 2004, the Company and this manufacturer amended thedistribution agreement to provide for, among other things, transferringadministration, funding and ownership of the pre-market approval applicationprocess to the Company’s subsidiary.  Inconjunction with this change, the Company forgave certain amounts owed by themanufacturer, and the parties amended the pricing terms.  The amendments obligate the Company to fundthe ongoing clinical and regulatory costs and expenses.  The amount and timing of these costs isunknown and may be material; the likelihood and timing of obtaining FDAapproval are also uncertain. Concurrently with the amended distribution agreement, this manufacturerissued to the Company a revolving promissory note for certain sums to come dueto the Company based on the Company’s and the manufacturer’s administration ofproduct warranty and product warranty related claims.  The principal amount under the note as of September30, 2004 was $452,067.  Additionally, PIPowed the Company amounts under the indemnification terms of the distributionagreement various legal costs, interest on the promissory note and other costs.

 

In October 1999, June 2000 and July 2003,separate but related complaints were filed by Saul and Ruth Kwartin, Steven M.Kwartin, and Robert and Nina Kwartin respectively, against our PIP.Americasubsidiary as co-defendant with PIP/USA, Inc. and Poly Implants Protheses,S.A., each unaffiliated with MediCor, and Jean Claude Mas, Jyll

 

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Farren-Martin and our chairman, Donald K.McGhan, personally, in the Circuit Court of Miami-Dade County, Florida.

 

Initially, two cases were filed in October1999 and June 2000, Case No. 99-25227-CA-01 and Case No. 00-14665-CA-01. Of thetwo, Case No. 99-25227 was dismissed. The same plaintiffs then, in September 2003, filed Case No.0322537-CA-27, alleging similar claims to those included in the dismissedcase.  Also in September 2003, anothermember of the same family filed Case No. 03-15006-CA-09, again alleging similarclaims on his own behalf. Plaintiffs are all members of one family who purportto be shareholders of PIP/USA, Inc. suing derivatively on its behalf orindividually, and seeking to rescind various transactions between PIP.Americaand Poly Implants Protheses, S.A. and impose liability against PIP.America andits co-defendants for unspecified monetary damages arising out of allegedtortious and other purported wrongful acts concerning alleged relationshipsbetween plaintiffs, PIP/USA, Inc. and Poly Implants Protheses, S.A.

 

Peggy Williams v. PIP/USA, Inc., Case No. 03CH 9654, Jessica Fischer Schnebel, et al. v. PIP/USA, Inc., Case No. 03CH07239,Dawn Marie Cooper, et al. v. PIP/USA, Inc., Case No. 03CH11316, Miriam Furman,et al. v. PIP/USA, Inc., Case No. 03CH10832 and Karen S. Witt, et al. v.PIP/USA, Inc., Case No. 03CH12928 were filed in the Circuit Court of CookCounty, Chancery Division, in or around July 2003. Plaintiffs in JessicaFischer Schnebel, Case No. 03CH07239, amended the class action complaint toinclude plaintiffs from the other four cases, and each of the others has beenvoluntarily dismissed. The consolidated amended complaint seeks class actioncertification and contains counts alleging product liability, breach of theimplied warranties of merchantability and fitness for a particular purpose,violation of the Illinois Consumer Fraud Act and third-party beneficiarystatus. Plaintiffs seek unspecified monetary damages, exemplary damages andattorneys fees and costs. PIP.America has filed a motion seeking to dismiss allcounts but the third-party beneficiary claim. Plaintiffs requested and receiveda second two-month extension to tender written discovery to our witnessesbefore filing a response to the motion to dismiss. A ruling on the motionshould come by February of 2005. PIP.America has tendered this case to PolyImplant Prostheses, S.A., for defense and indemnity.

 

Though it is not yet possible to predict theoutcome of the cases described above, MediCor and its subsidiaries, asapplicable, have denied plaintiffs’ allegations and are vigorously defendingthemselves upon the merits of each lawsuit and against certification of anyclass. While MediCor and its subsidiaries are desirous to honor theirrespective obligations under our product replacement programs, the purportedclass action case above includes two distinctly different types of claims. Thefirst of these arise from products sold by PIP/USA, Inc., with whom neitherMediCor nor any of its affiliates are affiliated. This company sold implantsmanufactured by Poly Implants Protheses, S.A. prior to PIP.America’s entry intothe U.S. market, which occurred in late 1999. Because PIP.America did not sellthese products, PIP.America similarly did not warrant these products. The nextclaims arise from products sold by PIP.America and associated to the product replacementprogram administered by PIP.America. With respect to claims arising fromproducts sold by PIP.America, PIP.America is administering and fulfilling itsobligations to its customers in the ordinary course of business, and for whichit has taken appropriate reserves. Other than a limited, $500 portion ofcertain of its own product replacement claims that it is administering,PIP.America is indemnified by PIP/USA, Inc., Poly Implants Protheses, S.A., andPoly Implants Protheses, S.A.’s President, Jean Claude Mas, personally, fromall claims, including those asserted above.

 

 PIP.Americaeither already has, or is in the process of, asserting its indemnificationclaims and, in the event of an adverse judgment in any case, PIP.Americaintends to seek the benefits of this indemnity. As a result, we believe thecosts associated with these matters will not have a material adverse impact onour business, results of operations or financial position.

 

 MediCor and its subsidiaries have been andwill continue to be periodically named as a defendant in other lawsuits in thenormal course of business, including product liability and product warrantyclaims. Litigation, particularly product liability litigation, can be expensiveand disruptive to normal business operations and the results of complexproceedings can be very difficult to predict. Claims against MediCor or itssubsidiaries have been and are periodically reviewed with counsel in theordinary course of business. We presently believe we or our subsidiaries havemeritorious defenses in all lawsuits in which we or our subsidiaries aredefendants, subject to the subsidiaries’ continuing warranty obligations, whichthe subsidiaries intend to continue to satisfy. While it is not possible topredict the outcome of these matters, we believe that the costs associated withthem will not have a material adverse impact on our business, results ofoperations or financial position.

 

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The Company leases office,manufacturing and warehouse facilities under various terms expiring from 2008to 2016.  Lease expenses amounted to $248,317and $92,985 for the three months ended September 30, 2004 and 2003,respectively. Future minimum lease payments are approximated as follows:

 
| **Year ended September 30,** | ** ** | **Amount** | ** ** |
|------------------------------|------------|------------|------------|
|                         |       |       |       |
| 2005                         |       | 730,742    |       |
| 2006                         |       | 757,028    |       |
| 2007                         |       | 766,392    |       |
| 2008                         |       | 617,258    |       |
| 2009                         |       | 513,472    |       |

 

 

**Note V – Acquisitions**

 

On July 5, 2004, the Companyacquired all of the capital stock of Laboratories Eurosilicone SAS, aprivately-held medical device manufacturer based in Apt, France. Thefinancing for the acquisition was provided primarily by additional loans fromInternational Integrated Industries, LLC, an affiliate of the Company’schairman.  The Company may also beobligated to make additional performance payments based on revenue targets overthe next three years. During the quarter ending September 30, 2004, the Companyhas filed a current report on Form 8-K, containing additional pro forma,historical financials and other exhibits.

 

The financial statements reflect variouspurchase price allocations.  Inaccordance with SFAS No. 141, Business Combinations (“SFAS No. 141”), the totalpurchase price was allocated to the tangible and intangible assets ofEurosilicone based upon their estimated fair values at the acquisition datewith the excess purchase price allocated to goodwill. The purchase accountingadjustments made are based upon currently available information.  Accordingly, the actual adjustments recordedin connection with the final purchase price allocation may be updated accordingSFAS No. 141, and any such changes may be material.

 

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The following table summarizes the componentsof the total purchase price and the allocation as of the date of acquisitionand updated as of September 30, 2004:

 
| ** **                                      | ** ** | **Book Value of  Assets Acquired /  Liabilities Assumed** | ** ** | **Purchase Price  Adjustments** | ** ** | **Preliminary  Fair Value** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| Cash and cash equivalents                       |       | $                                                         | 1,929,698  |                            | $          | —                      |       | $ | 1,929,698 |   |
| Accounts receivables                            |       | 5,625,350                                                 |       | (672,563                        | )(a)       | 4,952,787                   |       |
| Inventory                                       |       | 2,654,043                                                 |       | 699,745                         | (c )  | 3,353,788                   |       |
| Other current assets                            |       | 96,909                                                    |       |                            |       | 96,909                      |       |
|                                            |       |                                                      |       |                            |       |                        |       |
| Total current assets                            |       | 10,306,000                                                |       | 27,182                          |       | 10,333,182                  |       |
|                                            |       |                                                      |       |                            |       |                        |       |
| PP&E                                        |       | 2,367,354                                                 |       | —                          |       | 2,367,354                   |       |
| Goodwill                                        |       | —                                                    |       | 32,367,060                      |  (d)  | 32,367,060                  |       |
| Other long term assets                          |       | 481,981                                                   |       | —                          |       | 481,981                     |       |
| Total assets                                    |       | $                                                         | 13,155,335 |                            | $          | 32,394,242                  |       | $ | 45,549,577 |   |
|                                            |       |                                                      |       |                            |       |                        |       |
| Accounts payables                               |       | 2,774,978                                                 |       | —                          |       | 2,774,978                   |       |
| Notes Payable                                   |       | 367,742                                                   |       | —                          |       | 367,742                     |       |
| Other current liabilities                       |       | 1,607,362                                                 |       | 204,479                         | (c )  | 1,811,841                   |       |
| Long term notes payable                         |       | 745,304                                                   |       | —                          |       | 745,304                     |       |
| Long term accrued liabilities                   |       | —                                                    |       | 517,356                         | (c)        | 517,356                     |       |
| Shareholders’ equity                       |       | 7,659,949                                                 |       | 31,672,407                      | (b)        | 39,332,356                  |       |
| Total Liabilities and Shareholders’ equity |       | $                                                         | 13,155,335 |                            | $          | 32,394,242                  |       | $ | 45,549,577 |   |

 

 

In accordance with SFAS No. 142, Goodwill andOther Intangible Assets (“SFAS No. 142”), goodwill will not be amortized andwill be tested for impairment at least annually.  The amounts contained in the purchase priceallocation may change as additional information becomes available regarding theassets and liabilities acquired.  Thepurchase price allocations are expected to be finalized before the end of thethird fiscal quarter.  Any change in thefair value of the net assets will change the amount of the purchase priceallocable to goodwill.

 

The following adjustmentshave been reflected in the balance sheet.

 

(a)          To record an additional allowance for doubtful accounts as of theacquisition.

 

(b)         To eliminate historical shareholders’ equity of Laboratoires EurosiliconeSAS.

 

(c)          Reflects several one-time reserves as of the acquisition date, relatingto inventory adjustments, legal settlement with a commercial agent and otheritems.

 

(d)         To reflect goodwill.

 

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The following unaudited pro-forma financialinformation reflects the condensed consolidated results of operations of theCompany as if the acquisition had taken place on July 1, 2003.  The pro-forma financial information is notnecessarily indicative of the results of operations had the transaction beeneffected on July 1, 2003.

 
| ** **                               | ** ** | **For the Three Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                               | ** ** | **2004**                                      | ** ** | **2003** | ** ** |
| Net sales                                |       | $                                             | 6,143,059  |   | $ | 4,741,267 |   |
| Net income / (loss)                      |       | (3,830,028                                    | )          | (699,818 | ) |
| Diluted (loss) earnings per common share |       | (0.21                                         | )          | (0.04 | ) |
|                                          |            |                                               |            |  |  |  |  |

 

 

On August 27, 2004, the Company completed theacquisition of the privately-held DermatologicalMedical Products and Specialties, S.A. de C.V., a distributor of aestheticplastic and reconstructive surgery devices in Mexico.

 

**Note W – Subsequent Events**

 

In November 2004, PIP.America has reachedsettlement in Salinas I. Landers, et al. v. Poly Implants Protheses, S.A., CaseNo. 030377, filed in June 2003 in the Superior Court of San Luis Obispo County,California.  The settlement requiresPIP.America to pay the product replacement program claims of certain namedplaintiffs, a portion of their legal fees, and continue to administer its productreplacement program in California. On November 2, 2004 the court granted theplaintiffs and PIP.America’s Application for Good Faith Determination and aMotion to Dismiss PIP.America from this action.  Plaintiffs are continuing to proceed against PolyImplants Prothesis, S.A. in the litigation******

 

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***ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLANOF OPERATION***

 

ThisQuarterly Report on Form 10-QSB, including the following “Management’sDiscussion and Analysis or Plan of Operation,” contains forward-lookingstatements that involve risks and uncertainties, as well as assumptions that,if they ever materialize or prove incorrect, could cause the results of theCompany to differ materially from those expressed or implied by suchforward-looking statements.  All statements other than statements of historicalfact are statements that could be deemed forward-looking statements, includingstatements regarding new and existing products, technologies and opportunities;statements regarding market and industry segment growth and demand andacceptance of new and existing products any projections of sales, earnings,revenue, margins or other financial items; any statements of the plans,strategies and objectives of management for future operations, including theexecution of acquisition plans; any statements regarding future economicconditions or performance; any statements of belief or intention; and anystatements of assumptions underlying any of the foregoing.  Factors thatmay cause such differences include, but are not limited to: increased competition;changes in product demand; changes in market acceptance; new productdevelopment; United States Food and Drug Administration (“FDA”) approval orrescission of approval; delay or rejection of new or existing products; changesin agreements with governmental agencies; changes in government regulation;supply of raw materials; changes in reimbursement practices; adverse results oflitigation; the performance of contracts by suppliers, customers and partners;employee management issues; the challenge of managing asset levels, includinginventory; the difficulty of aligning expense levels with revenue changes; andother risks that are described herein and that are otherwise described fromtime to time in the Company’s reports and other documents filed with the Securitiesand Exchange Commission, including those contained in “Factors that May AffectFuture Results” set forth below in “Management’s Discussion and Analysis orPlan of Operation.”  The Company assumes no obligation and does not intendto update these forward-looking statements, except as required by law.

 

**OVERVIEW**

 

MediCorLtd. is a global health care company that acquires, develops, manufactures andmarkets products primarily for the aesthetic plastic surgery and dermatologymarkets.  Current products include breast implants and scar managementproducts.  Our products are sold worldwide to hospitals, surgical centersand physicians mostly through various distributors as well as through somedirect sales personnel.

 

**CompanyHistory and Business Strategy**

** **

MediCor was founded in 1999by Chairman of the Board Donald K. McGhan, the founder and former Chairman andChief Executive Officer of Inamed, McGhan Medical and McGhan Limited.  MediCor’s objective is to be a leadingsupplier of selected international medical devices and technologies.  To achieve this strategy, we intend to buildupon and expand our business lines, primarily in the aesthetic, plastic andreconstructive surgery and dermatology markets. We intend to accomplish this growth through the expansion of existingproduct lines and offerings and through the acquisition of companies and otherassets, including intellectual property rights and distribution rights.

 

**Products**

** **

Currently, MediCor has twomain product lines –

 

•                  breast implants foraesthetic plastic and reconstructive surgery and

•                  scar managementproducts

 

***Breastimplant products***

 

MediCor’sprimary product line is breast implants. We have a strategy of establishing or acquiring manufacturing anddistribution capabilities for this product line.  Historically, we acted as a distributor inthe United States for breast implant products manufactured by a third-partymanufacturer.  In May 2004, we agreed topurchase and in July 2004 we closed on the acquisition of Eurosilicone SAS (“Eurosilicone”).  Based on our evaluation of

 

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available industry data,Eurosilicone is the third largest breast implant manufacturer in theworld.  The financing for theEurosilicone acquisition was primarily provided through additional loans from InternationalIntegrated Industries, LLC, an affiliate of MediCor’s chairman, as more fullydescribed in the financial statements and notes.

 

Priorto May 2000, through our III Acquisition Corp. subsidiary, which does businessunder the trade name PIP.America, we distributed in the United Statespre-filled saline breast implants manufactured by Poly Implants Protheses, S.A.(“PIP”), on both a direct and a consigned inventory basis.  As of May 2000, the United States Food and DrugAdministration (“FDA”) notified PIP.America and PIP that further direct salesto customers by PIP.America would be suspended until the FDA reviewed andapproved the clinical study being conducted by PIP.  Pursuant to a voluntary withdrawal from themarket, sales of PIP.America products ceased in November of 2002 pending finalPre-Market Approval (“PMA”) clearance. PIP.America and MediCor are currently conducting the clinical study andit is in a monitoring phase.  Thelikelihood and timing of obtaining FDA approval are uncertain as is the timingof commercialization in the U.S.

 

InApril 2002, we agreed to acquire substantially all of assets of anotherprivately-held United States breast implant distributor whose principal productline consists of inflatable saline breast implants.  As in the case of PIP’s products, these werealso available in the U.S. prior to May 2000. The closing of this asset acquisition is conditioned upon thedistributor acquiring necessary governmental approvals for commercialization inthe United States of the products to be distributed.  During the quarter ending September 30, 2004,the Company has received various communications relating to this distributorwhich raises significant uncertainty about the likelihood or timing of asuccessful commercialization of these products.

 

***Scar Management Products***

 

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

 

**APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Management’sDiscussion and Analysis or Plan of Operation addresses MediCor’s consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States.  The preparation ofthese financial statements requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  On an on-going basis, we evaluate our estimates andjudgments, including those related to revenue recognition, inventories,adequacy of allowances for doubtful accounts, valuation of long-lived assetsand goodwill, income taxes, litigation and warranties.  We base ourestimates on historical and anticipated results and trends and on various otherassumptions that we believe are reasonable under the circumstances, includingassumptions as to future events.  The policies discussed below areconsidered by management to be critical to an understanding of our financialstatements.  These estimates form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources.  By their nature,estimates are subject to an inherent degree of uncertainty.  Actualresults may differ from those estimates.

 

Managementhas identified the critical accounting policies to be those related to revenuerecognition, adequacies of allowances for doubtful accounts, valuation oflong-lived assets and goodwill, income taxes, litigation and warranties.

 

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**RESULTS OF OPERATIONS**

 

***Sales***

 

Salesfor the three months ended September 30, 2004 equaled $6,143,059, an increaseof $5,806,719 or 1,726% as compared to the prior year quarter. This increase isattributed to the sales of our newly acquired subsidiary Eurosilicone.  On a pro forma basis, sales increased by about$1.4 million or 30% versus the prior year quarter.

 

***Cost of Sales***

 

Costof sales as a percentage of net sales for the three months ended September 30, 2004were approximately 58% compared to approximately 23% during the same period in2003.  This excludes a benefit of $22,575 for the three months ended September30, 2003 from a return of consigned inventory previously written down.  Consequently, gross profit rose to $2,589,574or about 42% of sales.  The overall increasein cost of sales and gross profit for the three month period was driven by theacquisition of Eurosilicone.  Normally,we expect that cost of sales will remain relatively constant on a percentagebasis of approximately 55% to 65%.

 

***Selling,General and Administrative***

 

Selling,general and administrative expenses increased 224% to $3,853,797 for the threemonths ended September 30, 2004, as compared to $1,187,845 during the sameperiod in 2003, primarily as the result of the acquisition of Eurosilicone.  In addition, there were increases in accountingfees, payroll and payroll related expenses; costs related to both acquisitions;travel; commission expense and consulting fees. As our business and sales increase, we anticipate that SG&A expenseswill increase in absolute dollars, but decrease as a percentage of sales.

 

***Research and Development***

 

Research and development inthe recent quarter ending September 30, 2004 was $633,714 as compared to $9,125for the same period in 2003.  Theincrease for the three month period was driven by expenses associated withobtaining required government approvals for saline breast implant products.  We expect that research and developmentexpenses will decrease once we receive required government approvals.

 

***Interest Expense***

 

Interestexpense increased to $1,269,439 for the three months ended September 30, 2004,compared to $288,579 in same period in the prior year.  Interest expense consists primarily ofinterest related to borrowings.  The change in interest expense wasprimarily due to an increase in the average principal note payable to relatedparty balances.

 

***Other Expense***

 

Other expense increased to $7,271 for the threemonths ended September 30, 2004 compared to no expense in the same period ayear ago.  Other expense consists of aloss on the exchange rate from Euros to United States Dollars.

 

***Net Loss***

 

Netloss for the three months ended September 30, 2004 increased to $3,830,028 from$1,144,847 in the comparable period in the year.  The decline was due tohigher selling costs, general and administrative expenses, research anddevelopment and interest expense.  Basicand diluted loss per share was ($0.21) for the three month period compared to($0.07) for the comparable period last year.

 

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**LIQUIDITYAND CAPITAL RESOURCES**

 

Ourability to make payments to refinance our debt and to fund planned capitalexpenditures and operations will depend on our ability to secure additionalsignificant financing and generate sufficient cash in the future. Currently, we have only limited product sales in the United States and will notbe in a position to materially increase United States sales until the FDAissues a Pre-market Approval relating to one or more of the products sought tobe sold by us.  We recently acquired Eurosilicone,in connection with which we substantially increased our indebtedness to ouraffiliates.  We have historically raisedfunds to support our operating expenses and capital requirements through salesof equity or debt securities or through other credit arrangements, includingborrowing from our affiliates.  Our existing cash, cash equivalents andcash generated from operations, including the operations of Eurosilicone, willbe insufficient to meet our anticipated cash needs for the next 12 months. To satisfy our liquidity requirements, we will need to raise additionalfunds.  To the extent additional sales of equity or debt securities areinsufficient to satisfy our liquidity requirements, we plan on being able toobtain any necessary additional funds through the incurrence of additionalindebtedness to our affiliates.  We have received a written commitmentfrom International Integrated Industries, LLC, an affiliate of our chairman, toprovide sufficient cash to fund any operating expenses and capital expendituresthrough October 1, 2005.  The same entity has provided to us over $59million in funding through September 30, 2004.  The future funding maytake the form of debt or equity or a combination thereof.

 

**FACTORSTHAT MAY AFFECT FUTURE RESULTS**

 

Certainstatements contained in this Quarterly Report on Form 10-QSB, and otherwritten and oral statements made from time to time by us, do not relate solelyto historical facts.  These statementsare considered “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934.  Wordssuch as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,”“may,” “plan,” “possible,” “project,” “should,” “will,” and similar words andexpressions, identify forward looking statements.  These forward-looking statements involveimportant risks and uncertainties that could materially alter results in thefuture from those expressed in any forward-looking statements made by us or onour behalf.  We caution you thatforward-looking statements are only predictions and that actual events orresults may differ materially.  Inevaluating these statements, you should specifically consider the variousfactors that could cause actual events or results to differ materially,including those factors described below. It is not possible to foresee or identify all factors affecting ourforward-looking statements and you should not consider any list of such factorsto be exhaustive. We assume no obligation and do not intend to update theseforward-looking statements, except as required by law.

 

***If we are unable to reach satisfactory agreementswith third-party manufactures to distribute saline filled breast implants inthe United States, we may not be able to distribute those products in theUnited States.***

 

Wecurrently are dependant on establishing or maintaining rights to distribute inthe United States breast implant products manufactured by third-parties.  We may not be able to establish or maintainthese rights on acceptable terms or at all. If we fail to establish or maintain these rights, we may not be able tosell breast implant products in the United States for a number of years, if atall.

 

***Ifclinical trials for our products are unsuccessful or delayed, we will be unableto meet our anticipated development and commercialization timelines.***

 

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

 

Completionof clinical trials may take several years or more.  Our commencement andrate of completion of clinical trials may be delayed by many factors,including:

 

•                  lackof efficacy during the clinical trials;

•                  unforeseensafety issues;

•                  uncertaintieswith or actions of our collaborative partners or suppliers;

•                  slowerthan expected patient recruitment;

 

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•                  difficultiesin patient retention; and

•                  governmentor regulatory delays.

 

Theresults from pre-clinical testing and early clinical trials are often notpredictive of results obtained in later clinical trials.  A number of newproducts have shown promising results in clinical trials, but subsequentlyfailed to establish sufficient safety and efficacy data to obtain necessaryregulatory approvals.  Data obtained from pre-clinical and clinical activitiesare susceptible to varying interpretations, which may delay, limit or preventregulatory approval.  In addition, regulatory delays or rejections may beencountered as a result of many factors, including perceived defects in thedesign of the clinical trials and changes in regulatory policy during theperiod of product development.  Any delays in, or termination of, ourclinical trials or clinical trials of our collaborative partners or supplierswill adversely affect our development and commercialization timelines, whichwould adversely affect our future sales and profitability.

 

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

 

Themedical device industry is highly competitive and is subject to significant andrapid technological change.  We believe that our ability to respondquickly to consumer needs or advances in medical technologies, withoutcompromising product quality, will be crucial to our success.  We arecontinually engaged in product development and improvement programs toestablish and improve our competitive position.  We cannot, however,guarantee that we will be successful in enhancing our existing products orproducts we have in development or clinical trials.  Nor can we guarantee that we will besuccessful in developing new products or technologies that will timely achieveregulatory approval or receive market acceptance.  Once developed, we must also timely obtainregulatory approval for our products, the failure of which may cause ourproducts to be obsolete once regulatory approval is granted.

 

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

 

Breastaugmentation and reconstruction and other aesthetics procedures are electiveprocedures.  Other than insurance reimbursement for post-mastectomy reconstructivesurgery that is available in some cases, breast augmentations and othercosmetic procedures are not typically covered by insurance.  Adverse changes in the economy may causeconsumers to reassess their spending choices and reduce the demand for cosmeticsurgery.  This shift could have an adverse effect on our projected futuresales and profitability.

 

***Our Businesswill be negatively impacted if we cannot obtain additional financing.***

 

Toaccomplish our plans to conduct our current operations, to expand our currentproduct lines and markets and to purchase new companies, products andintellectual property, we need substantial additional capital, which we may notbe able to obtain.  We currently have significant debt that must beserviced.  While we have to date beenfunded in substantial part from financing from an affiliate of our chairman, wedo not anticipate this funding source will provide sufficient capital tofinance our intended growth strategy and that we will need significant externalfinancing to accomplish our goals.  Our primary lender may also seek tocollect its debt on an accelerated basis, which we would be unlikely to be ableto do. 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 favorable to us, orat all.  If adequate funds are not available, or are not available onacceptable terms, our ability to implement our expansion and growth plans willbe significantly impaired.  In addition,the financial terms of any such financing, if obtainable, may be dilutive toexisting stockholders.

 

***Becausewe have only a limited operating history and our business strategy calls forsignificant growth through new products and acquisitions, there is significantuncertainty about our business and prospects*****.**

 

MediCorand its subsidiaries have only been operating since 1999.  Although ourBiodermis operation has been in existence for a longer period of time, it hasonly operated under MediCor’s management since its acquisition in 2001. 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 2000 call for a Pre-market Approval for those

 

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products.   As aresult, all of our revenues prior to the Eurosilicone acquisition were derivedfrom our scar management products.  Revenue generated by our Biodermissubsidiary has not been significant, and we do not expect more than modestinternal growth in that segment.  Our business plans call for significantexpansion into other products and markets that in the future will constitutethe significant majority of our sales and income.  As a result, ourexisting business platform is not necessarily indicative of our future businessor prospects.

 

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

 

Risksfor our business include the uncertainties associated with developing andimplementing an evolving business model and the management of both internal andacquisition-based growth.  This is particularly acute in a rapidlyevolving market such as the market for medical devices.  To address these risks, we must continue todevelop the strength and quality of our operations, maximize the valuedelivered to customers, respond to competitive developments and continue toattract, retain and motivate qualified employees.  We may not besuccessful in addressing these challenges.

 

***We aresubject to substantial government regulation, which could materially adverselyaffect our business.***

 

Theproduction and marketing of our products and intended products and our researchand development, pre-clinical testing and clinical trial activities are subjectto extensive regulation and review by numerous governmental authorities, bothin the U.S. and abroad.  Most of the medical devices we sell or intend tosell or develop must undergo rigorous pre-clinical testing and clinical trialsand an extensive regulatory approval process before they can be marketed. This process makes it longer, more uncertain and more costly to bring theproducts to market, and some of these products may not be approved, or, onceapproved, they may be recalled.  The pre-marketing approval process can beparticularly expensive, uncertain and lengthy.  Many devices for which FDA approval has been sought by other companieshave never been approved for marketing. In addition to testing and approval procedures, extensive regulationsalso govern marketing, manufacturing, distribution, labeling, andrecord-keeping procedures.  If we or our suppliers or collaborativepartners do not comply with applicable regulatory requirements, this couldresult in warning letters, non-approval, suspensions of regulatory approvals,civil penalties and criminal fines, product seizures and recalls, operatingrestrictions, injunctions, and criminal prosecution.

 

Delaysin or rejection of FDA or other government entity approval of new productswould adversely affect our business.  Delays or rejection may beencountered due to, among other reasons, government or regulatory delays, lackof efficacy during clinical trials, unforeseen safety issues, slower thanexpected rate of patient recruitment for clinical trials, inability to followpatients after treatment in clinical trials, inconsistencies between earlyclinical trial results and results obtained in later clinical trials, varyinginterpretations of data generated by clinical trials, or changes in regulatorypolicy during the period of product development in the U.S. and abroad. In the U.S., there has been a continuing trend of more stringent FDA oversightin product clearance and enforcement activities, causing medical devicemanufacturers to experience longer approval cycles, more uncertainty, greaterrisk, and higher expenses.  Internationally, there is a risk that we orour suppliers or collaborative partners may not be successful in meeting thequality standards or other certification requirements.  Even if regulatoryapproval of a product is granted, this approval may entail limitations on usesfor which the product may be labeled and promoted. It is possible, for example,that we or our suppliers or collaborative partners may not receive FDA approvalto market our current or future products for broader or different applicationsor to market updated products that represent extensions of our, our suppliers’or collaborative partners’ basic technology.  In addition, we or oursuppliers or collaborative partners may not receive export or import approvalfor products in the future, and countries to which products are to be exportedmay not approve them for import.

 

***Governmentregulation of manufacturing of medical devices is expensive and time consumingfor manufacturers and may result in product unavailability or recalls.***

 

Medical device manufacturingfacilities also are subject to continual governmental review andinspection.  The FDA has stated publicly that compliance withmanufacturing regulations will be scrutinized more strictly.  A governmentalauthority may challenge our or our suppliers’ or collaborative partners’compliance with applicable federal, state and foreign regulations.  Inaddition, any discovery of previously unknown problems with products or

 

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facilities may result in restrictions on theproduct or the facility, including withdrawal of the product from the market orother enforcement actions.

 

***If weare unable to avoid significant product liability claims or product recalls, wemay be forced to pay substantial damage awards and other expenses that couldexceed our reserves and any applicable insurance coverage.***

 

Wehave in the past been, currently are, and may in the future be subject toproduct liability claims alleging that the use of our technology or productshas resulted in adverse health effects.  These claims may be brought evenwith respect 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 productliability claims, we may in the future need to recall or issue fieldcorrections related to our products due to manufacturing deficiencies, labelingerrors, or other safety or regulatory reasons.

 

Wedo not presently have liability insurance to protect us from the costs of claimsfor damages due to the use or recall of our products, except that our Biodermissubsidiary carries a limited amount of product liability insurance related toits products.  We may in the future seek additional insurance, which willbe limited in both circumstance of coverage and amount.  Recent premiumincreases and coverage limitations, including specifically limitations orprohibitions by insurers on insurance covering breast implant manufacturers,may make this insurance uneconomic or even unavailable.  However, even ifwe obtain or increase insurance, one or more product liability claims or recallorders could exceed any coverage we may hold.  If we continue to havelimited or no coverage or our insurance does not provide sufficient coverage,product liability claims or recalls could result in losses in excess of ourreserves.

 

***Lawsuits,including those seeking class action status, may, if successful, cause us toincur substantial liability, including damage awards and significant legal feesthat may exceed our reserves.***

 

Lawsuitshave been filed naming us or one of our subsidiaries, the French manufacturerfrom which we purchase breast implant products, and the U.S. distributor ofthose same products who preceded our subsidiary in the U.S. market.  In these suits the plaintiffs have sought orcurrently seek, among other things, class action status for claims, includingclaims for breach of warranty.  Theclaims arise from products distributed both before and after our subsidiarythat distributed the products came into existence.  Although certain of the claims arise fromproducts distributed by the other distributor prior to our subsidiary cominginto existence, we have still been named as a defendant.  While we have reserved an amount equal to theoutstanding warranty claims for claims arising from products our subsidiary diddistribute, the plaintiffs are seeking to hold us responsible for moredamages.  There can be no assurance wecan terminate the litigation as to our subsidiary for reserved amounts.  Although our subsidiary is indemnified bythree separate entities, including Poly Implants Protheses, S.A., the Frenchmanufacturer, PIP/USA, Inc. the previous distributor, and Mr. Jean Claude Mas,personally, there can be no assurance this indemnity will protect us, as thereis no guarantee the French manufacturer, the previous distributor, or Mr. Maswill, or is able to, honor the indemnification they have provided.

 

Ifwe are unsuccessful in defending against the claims involved in these suits, orif class action status is achieved, and the indemnification were to provenon-reliable, we could be responsible for significant damages above thereserves and available assets needed to satisfy such a judgment.

 

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

 

Physiciansand potential patients may have a number of concerns about the safety of ourproducts and proposed products, whether such concerns have a basis in generallyaccepted science or peer-reviewed scientific research or not.  Negativepublicity—whether accurate or inaccurate—about our products, based on, forexample, news about breast implant litigation or regulatory actions, couldmaterially reduce market acceptance of our products and could

 

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result in productwithdrawals.  In addition, significantnegative publicity could result in an increased number of product liabilityclaims, whether or not these claims have a basis in fact.

 

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

 

Akey component of our strategy is the acquisition of other companies, productsand technologies 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 their operations successfully.

 

Wemay not be able to identify suitable acquisition candidates in our desiredproduct areas or we may not be able to acquire identified candidates onacceptable terms.  Moreover, in pursuing acquisition opportunities we willlikely compete with other companies with greater financial and other resources. Competition for these acquisition targets likely could also result in increasedprices of acquisition targets and a diminished pool of companies and assetsavailable for acquisition.

 

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

 

Weexpect that, at least for the foreseeable future, we will be required to usecash consideration for acquisitions.  We likely will be required to obtainsignificant third-party financing to accomplish these acquisitions.  Thisfinancing may not be available on favorable terms, if at all.  The termsof any such financing may be dilutive to existing stockholders.

 

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

 

Oursuccess depends in part on our ability to obtain patents or rights to patents,protect trade secrets, operate without infringing upon the proprietary rightsof others, and prevent others from infringing on our patents, trademarks andother intellectual property rights.  We will be able to protect ourintellectual property from unauthorized use by third parties only to the extentthat it is covered by valid and enforceable patents, trademarks and licensesand we are able to enforce those rights.  Patent protection generallyinvolves complex legal and factual questions and, therefore, enforceability andenforcement of patent rights cannot be predicted with certainty.  Patents, if issued, may be challenged,invalidated or circumvented.  Thus, any patents that we own or licensefrom others may not provide adequate protection against competitors.  In addition, our pending and future patentapplications may fail to result in patents being issued.  Also, those patents that are issued may notprovide us with adequate proprietary protection or competitive advantagesagainst competitors with similar technologies.  Moreover, the laws ofcertain foreign countries do not protect our intellectual property rights tothe same extent as do the laws of the United States.

 

Inaddition to patents and trademarks, we rely on trade secrets and proprietaryknow-how.  We seek protection of these rights, in part, throughconfidentiality and proprietary information agreements.  These agreementsmay not provide meaningful protection or adequate remedies for violation of ourrights in the event of unauthorized use or disclosure of confidential andproprietary information.  Failure to protect our proprietary rights couldseriously impair our competitive position.

 

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

 

Our commercial success depends significantly on ourability to operate without infringing the patents and other proprietary rightsof others.  However, regardless of our intent, our technologies mayinfringe the patents or violate other proprietary rights of thirdparties.  In the event of such infringement or violation, we may facelitigation and may be prevented from pursuing product development or commercialization.

 

***Wedepend on a limited number of suppliers for certain raw materials and the lossof any supplier could adversely affect our ability to manufacture many of ourproducts.***

 

Wecurrently rely on a single supplier for silicone raw materials used in many ofour products.  Although we have an agreement with this supplier totransfer the necessary formulations to us in the event that it cannot meet ourrequirements, we cannot guarantee that we would be able to produce a sufficientamount of quality silicone raw materials in a timely manner.   Wewill also depend on a sole or limited number of third-party manufacturers forsilicone breast implants to be distributed by us.

 

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

 

A significant part of our current sales are and asignificant part of our projected future sales will be derived frominternational operations.  In addition, we have and anticipate having inthe future material international suppliers and operations, includingmanufacturing operations.  Accordingly, we are exposed to risks associatedwith international operations, including risks associated with re-valuation ofthe local currencies of countries where we purchase or sell our products orconduct business, which may result in our purchased products becoming moreexpensive to us in U.S. dollar terms or sold products becoming more expensivein local currency terms, thus reducing demand and sales of our products, orincreased costs to us.  Our operations and financial results also may besignificantly affected 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; and

•                  managingforeign branch offices.

•                  foreigncurrency translations

 

Ifthese risks actually materialize, our sales to international customers, as wellas those domestic customers that use products manufactured abroad, may decreaseor our supplier or manufacturing costs may materially increase.

 

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

 

Oursuccess will depend upon our ability to attract and retain key managerial,financial, technical, selling and marketing personnel.  The lack of keypersonnel might significantly delay or prevent the achievement of ourdevelopment and strategic objectives.  We do not maintain key man lifeinsurance on any of our employees.  Otherthan certain of our executives who are parties to employment agreements, noneof our employees is under any obligation to continue providing services toMediCor.  We are currently in the process of building our management andtechnical 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 ishigh, and we cannot be certain that we will be successful in recruiting orretaining these personnel.  We may alsoface litigation from competitors with hiring personnel formerly employed bythem.

 

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

 

Oursuccess will depend upon our ability to manage our internal andacquisition-based growth effectively.  This will require that we continueto implement and improve our operational, administrative and financial andaccounting systems and controls and continue to expand, train and manage ouremployee base.  We anticipate that we will need to hire and retainnumerous additional employees and consultants for both internal andacquisition-based growth for some time.  Integration of these employeesand consultants and employee and consultant loss in the process will requiresignificant management attention and resources.  Our systems, procedures,controls and personnel may not be adequate to support our future operations andour management may not be able to achieve the rapid execution necessary toexploit the market for our business model.

 

***If oursuppliers,  collaborative partners orconsultants do not perform, we will be unable to obtain, develop, market orsell  products as anticipate******d******and we may beexposed to additional risks*****.**

 

Wehave in the past and may in the future enter into supply, collaborative orconsulting arrangements with third parties to supply or develop products. These arrangements may not produce or provide successful products.  If wefail to establish these arrangements, the number of products from which wecould receive future revenues will be limited.

 

Ourdependence on supply, collaborative or consulting arrangements with thirdparties subjects us to a number of risks.  These arrangements may not beon terms favorable to us.  Agreements with suppliers may limit our supplyof products or require us to purchase products we can not profitably sell.  They may also restrict our ability to marketor distribute other products.  Agreementswith consultants or collaborative partners typically allow the third partiessignificant discretion in electing whether or not to pursue any of the plannedactivities.  We cannot with certainty control the amount and timing ofresources our suppliers, collaborative partners or consultants may devote toour products and these third parties may choose to pursue alternativeproducts.  These third parties also may not perform their obligations asexpected.  Business combinations, significant changes in their businessstrategy, or their access to financial resources may adversely affect asupplier’s, partner’s or consultant’s willingness or ability to complete itsobligations under the arrangement.   Moreover, we could become involvedin disputes with our suppliers, partners or consultants, which could lead todelays or termination of the arrangements and time-consuming and expensivelitigation 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*****.**

 

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

 

•                  changes in demand for our products;

•                  our ability to meet the demand for our products;

•                  movementin various foreign currencies, primarily the Euro and the U.S. dollar;

•                  existing and increased competition;

•                  our ability to compete against significantly larger andbetter funded competitors;

•                  the number, timing, pricing and significance of newproducts and product introductions and enhancements by us and our competitors;

•                  our ability to develop, introduce and market new andenhanced versions of our products on a timely basis;

•                  changes in pricing policies by us and our competitors;

•                  the timing of significant orders and shipments;

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

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

•                  general economic factors.

 

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Asa result, we believe that period-to-period comparisons of our results ofoperations are not necessarily meaningful and investors should not rely uponthese comparisons as indications of future performance.  These factors maycause our operating results to be below market analysts’ expectations in somefuture quarters, which could cause the market price of our stock to decline.

 

***ITEM 3.  CONTROLS AND PROCEDURES***

 

Asof the quarter ended September 30, 2004, management, with the participation ofthe chief executive and financial officers, carried out an evaluation of theeffectiveness of our disclosure controls and procedures pursuant to ExchangeAct Rule 15d-15.  Based upon that evaluation, the chief executive officerand the chief financial officer believe that, as of end of the fiscal quartercovered by this report, our disclosure controls and procedures were effectivein making known to them material information relating to MediCor (including itsconsolidated subsidiaries) required to be included in this report.  As ofthe end of our fiscal year ended June 30, 2004, management adopted formaldisclosure controls and procedures which were employed in the preparation ofthis report.

 

Disclosurecontrols and procedures, no matter how well designed and implemented, canprovide only reasonable assurance of achieving an entity’s disclosureobjectives.  The likelihood of achieving such objectives is affected bylimitations inherent in disclosure controls and procedures.  These includethe fact that human judgment in decision-making can be faulty and thatbreakdowns in internal control can occur because of human failures such assimple errors or mistakes or intentional circumvention of the establishedprocess.  Management will review our disclosure controls and proceduresperiodically to determine their effectiveness and to consider modifications oradditions to them.

 

***PART II – OTHER INFORMATION***

 

***ITEM 1.  LEGAL PROCEEDINGS***

 

 In October 1999, June2000 and July 2003, separate but related complaints were filed by Saul and RuthKwartin, Steven M. Kwartin, and Robert and Nina Kwartin respectively, againstour PIP.America subsidiary as co-defendant with PIP/USA, Inc. and Poly ImplantsProtheses, S.A., each unaffiliated with MediCor, and Jean Claude Mas, Jyll Farren-Martinand our chairman, Donald K. McGhan, personally, in the Circuit Court ofMiami-Dade County, Florida.

 

Initially, two cases werefiled in October 1999 and June 2000, Case No. 99-25227-CA-01 and Case No.00-14665-CA-01. Of the two, Case No. 99-25227 was dismissed.  The same plaintiffs then, in September 2003,filed Case No. 0322537-CA-27, alleging similar claims to those included in thedismissed case.  Also in September 2003,another member of the same family filed Case No. 03-15006-CA-09, again allegingsimilar claims on his own behalf. Plaintiffs are all members of one family whopurport to be shareholders of PIP/USA, Inc. suing derivatively on its behalf orindividually, and seeking to rescind various transactions between PIP.Americaand Poly Implants Protheses, S.A. and impose liability against PIP.America andits co-defendants for unspecified monetary damages arising out of allegedtortious and other purported wrongful acts concerning alleged relationshipsbetween plaintiffs, PIP/USA, Inc. and Poly Implants Protheses, S.A.

 

Peggy Williams v. PIP/USA,Inc., Case No. 03 CH 9654, Jessica Fischer Schnebel, et al. v. PIP/USA, Inc.,Case No. 03CH07239, Dawn Marie Cooper, et al. v. PIP/USA, Inc., Case No.03CH11316, Miriam Furman, et al. v. PIP/USA, Inc., Case No. 03CH10832 and KarenS. Witt, et al. v. PIP/USA, Inc., Case No. 03CH12928 were filed in the CircuitCourt of Cook County, Chancery Division, in or around July 2003. Plaintiffs inJessica Fischer Schnebel, Case No. 03CH07239, amended the class actioncomplaint to include plaintiffs from the other four cases, and each of theothers has been voluntarily dismissed. The consolidated amended complaint seeksclass action certification and contains counts alleging product liability,breach of the implied warranties of merchantability and fitness for aparticular purpose, violation of the Illinois Consumer Fraud Act andthird-party beneficiary status. Plaintiffs seek unspecified monetary damages,exemplary damages and attorneys fees and costs. PIP.America has filed a motionseeking to dismiss all counts but the third-party beneficiary claim. Plaintiffsrequested and received a second two-month extension to tender written discoveryto our witnesses before filing a response to the motion to dismiss. A

 

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ruling on the motion should come by Februaryof 2005. PIP.America has tendered this case to Poly Implant Prostheses, S.A.,for defense and indemnity.

 

Though it is not yetpossible to predict the outcome of the cases described above, MediCor and itssubsidiaries, as applicable, have denied plaintiffs’ allegations and arevigorously defending themselves upon the merits of each lawsuit and againstcertification of any class. While MediCor and its subsidiaries are desirous tohonor their respective obligations under our product replacement programs, thepurported class action case above includes two distinctly different types ofclaims. The first of these arise from products sold by PIP/USA, Inc., with whomneither MediCor nor any of its affiliates are affiliated. This company soldimplants manufactured by Poly Implants Protheses, S.A. prior to PIP.America’sentry into the U.S. market, which occurred in late 1999. Because PIP.Americadid not sell these products, PIP.America similarly did not warrant theseproducts. The next claims arise from products sold by PIP.America andassociated to the product replacement program administered by PIP.America. Withrespect to claims arising from products sold by PIP.America, PIP.America isadministering and fulfilling its obligations to its customers in the ordinarycourse of business, and for which it has taken appropriate reserves. Other thana limited, $500 portion of certain of its own product replacement claims thatit is administering, PIP.America is indemnified by PIP/USA, Inc., Poly ImplantsProtheses, S.A., and Poly Implants Protheses, S.A.’s President, Jean ClaudeMas, personally, from all claims, including those asserted above.

 

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

 

MediCor and its subsidiarieshave been and will continue to be periodically named as a defendant in otherlawsuits in the normal course of business, including product liability andproduct warranty claims. Litigation, particularly product liability litigation,can be expensive and disruptive to normal business operations and the resultsof complex proceedings can be very difficult to predict. Claims against MediCoror its subsidiaries have been and are periodically reviewed with counsel in theordinary course of business. We presently believe we or our subsidiaries havemeritorious defenses in all lawsuits in which we or our subsidiaries aredefendants, subject to the subsidiaries’ continuing warranty obligations, whichthe subsidiaries intend to continue to satisfy. While it is not possible topredict the outcome of these matters, we believe that the costs associated withthem will not have a material adverse impact on our business, results ofoperations or financial position.

 

***ITEM 2.  CHANGES IN SECURITIES***

 

During the quarter ended September 30, 2004, we grantedoptions covering 390,000 shares of common stock to new employees.  In addition, we issued 508 shares of Series A 8.0%Convertible Preferred Stock, 460 of which were sold to 6 accredited investors and 48 of which were issued to anemployee in lieu of cash compensation.  The offer and sale of the options, thepreferred stock and the underlying shares of common stock were exempt fromregistration pursuant to section 4(2) of the Securities Act.

 

***ITEM 3. DEFAULTS UPON SENIOR SECURITIES***

 

None

 

***ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS***

 

Duringthe quarter covered by this report, no matter was submitted to a vote ofsecurity holders through the solicitation of proxies or otherwise.

 

***ITEM 5.  OTHER INFORMATION***

 

None

 

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***ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K***

 

**(a)  Exhibits**

 

SeeExhibit Index at Page 36.

 

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

 

OnJuly 6, 2004, MediCor filed a Current Report on Form 8-K relating to the pressrelease announcing MediCor had completed the acquisition of LaboratoiresEurosilicone S.A. (now Eurosilicone SAS)

 

OnSeptember 13, 2004, MediCor filed a Current Report on Form 8-K relating to thepress release announcing MediCor’s French subsidiary ES Holdings SAS had signeda loan agreement with BNP Paribas providing for up to $20 million in financing.

 

OnSeptember 20, 2004, MediCor filed a Current Report on Form 8-K/A relating toLaboratoires Eurosilicone S.A. (now Euorsilicone SAS) most current auditedfinancials and the pro-forma at the time of the acquisition.

 

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SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 

 
|   | ***MEDICOR LTD.*** (Registrant) |
|--------|-------------------------------------------|
|   | *** ***                              |
| Date:  | November 15, 2004                         | By: |   |
|   |                                      |   | /s/ Theodore R Maloney |
|   |                                      |   | Theodore R. Maloney  Chief Executive Officer |
|   |                                      |   |   |
| Date:  | November 15, 2004                         | By: | /s/ Thomas R. Moyes |
|   |                                      |   | Thomas R. Moyes  Chief Financial Officer |

 

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EXHIBIT INDEX

 
| **Exhibit   No.** | ** ** | **Description**                                                                        |
|-------------------|------------|----------------------------------------------------------------------------------------|
| 31.1              |       | Principal  Executive Officer Certification Pursuant To 17 C.F.R. Section 240.15d-14(a) |
| 31.2              |       | Principal  Financial Officer Certification Pursuant To 17 C.F.R. Section 240.15d-14(a) |
| 32.1              |       | Principal  Executive Officer Certification Pursuant To 18 U.S.C. Section 1350          |
| 32.2              |       | Principal  Financial Officer Certification Pursuant To 18 U.S.C. Section 1350          |

 

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