**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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

 

**Commissionfile number 0-50442**

 

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**MEDICORLTD.**

(Exact name of smallbusiness 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 reportsrequired to be filed by Section 13 or 15 (d) of the Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes ý  No o

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).  Yes o  No ý

 

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On November 10, 2005,there were 20,355,584 shares of common stock outstanding.

 

Transitional Small BusinessDisclosure Format (Check one):  Yes o No o

 

 

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**MEDICORLTD.**

 

**INDEX**

 
| Part I. Financial Information |                                                                                            |
|------------------------------------|-------------------------------------------------------------------------------------------------|
|                               |                                                                                            |   |
| Item 1.                            | Consolidated Financial Statements (Unaudited)                                                   |   |
|                               |                                                                                            |   |
|                               | Consolidated Balance Sheet—September 30,  2005                                        |   |
|                               |                                                                                            |   |
|                               | Consolidated Statements of Operations—Three  Months Ended September 30, 2005 and 2004 |   |
|                               |                                                                                            |   |
|                               | Consolidated Statements of Cash Flows—Three  Months Ended September 30, 2005 and 2004 |   |
|                               |                                                                                            |   |
|                               | Notes to Consolidated Financial  Statements—September 30, 2005                        |   |
|                               |                                                                                            |   |
| 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.                            | Unregistered Sales of Equity Securities  and Use of Proceeds                                    |   |
|                               |                                                                                            |   |
| 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                                                                                      |   |

 

2

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***PART I—FINANCIAL INFORMATION***

 

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

 

**MediCor, Ltd.**

**Consolidated Balance Sheet**

**September 30, 2005**

**(Unaudited)**

 
| **Assets**                                                                                                                                         |   |        |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|------------|
|                                                                                                                                               |   |        |       |
| Current assets:                                                                                                                                    |   |        |       |
|                                                                                                                                               |   |        |       |
| Cash                                                                                                                                               |   | $           | 879,259    |   |
| Receivables, less allowance for doubtful  accounts of $1,376,075                                                                                   |   | 6,158,961   |       |
| Notes receivable, less allowance for  doubtful accounts of $3,071,980                                                                              |   | —      |       |
| Inventories                                                                                                                                        |   | 4,591,808   |       |
| Prepaid expenses and other current assets                                                                                                          |   | 210,595     |       |
|                                                                                                                                               |   |        |       |
| Total current assets                                                                                                                               |   | 11,840,623  |       |
| Property, plant and equipment, net                                                                                                                 |   | 1,158,289   |       |
| Leased property under capital leases, net                                                                                                          |   | 3,990,353   |       |
| Goodwill and other intangibles, net                                                                                                                |   | 43,347,150  |       |
| Deposits                                                                                                                                           |   | 359,980     |       |
| Other assets                                                                                                                                       |   | 609,775     |       |
|                                                                                                                                               |   |        |       |
| Total assets                                                                                                                                       |   | $           | 61,306,169 |   |
|                                                                                                                                               |   |        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                      |   |        |       |
|                                                                                                                                               |   |        |       |
| Current liabilities:                                                                                                                               |   |        |       |
|                                                                                                                                               |   |        |       |
| Notes payable                                                                                                                                      |   | $           | 2,297,539  |   |
| Note payable to related party                                                                                                                      |   | 54,933,489  |       |
| Accounts payable                                                                                                                                   |   | 6,204,608   |       |
| Obligations under capital leases                                                                                                                   |   | 599,964     |       |
| Accrued expenses and other current  liabilities                                                                                                    |   | 2,684,191   |       |
| Payroll taxes payable                                                                                                                              |   | 1,065,691   |       |
| Interest payable to related party                                                                                                                  |   | 4,830,341   |       |
| Convertible debentures                                                                                                                             |   | 250,000     |       |
|                                                                                                                                               |   |        |       |
| Total current liabilities                                                                                                                          |   | 72,865,823  |       |
|                                                                                                                                               |   |        |       |
| Long-term notes payable                                                                                                                            |   | 10,133,528  |       |
| Long-term obligations under capital leases                                                                                                         |   | 2,047,729   |       |
|                                                                                                                                               |   |        |       |
| Total liabilities                                                                                                                                  |   | 85,047,080  |       |
|                                                                                                                                               |   |        |       |
| Commitments and contingencies (Note V)                                                                                                             |   |        |       |
|                                                                                                                                               |   |        |       |
| Preferred shares subject to mandatory  redemption requirements                                                                                     |   | 6,573,258   |       |
|                                                                                                                                               |   |        |       |
| Stockholders’ equity (deficit)                                                                                                                |   |        |       |
|                                                                                                                                               |   |        |       |
| Common shares, $.001 par value, 100,000,000  shares authorized, 20,353,455 shares issued, 20,343,157 shares outstanding  and 20,298 shares retired |   | 20,333      |       |
| Additional paid in capital                                                                                                                         |   | 27,004,686  |       |
| Accumulated (deficit)                                                                                                                              |   | (57,377,026 | )          |
| Accumulated other comprehensive income  (loss)                                                                                                     |   | 37,838      |       |
|                                                                                                                                               |   |        |       |
| Stockholders’ equity (deficit)                                                                                                                |   | (30,314,169 | )          |
|                                                                                                                                               |   |        |       |
| Total liabilities and stockholders’ equity                                                                                                    |   | $           | 61,306,169 |   |

 

See accompanying notes to unaudited consolidated financial statements

 

3

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**MediCor, Ltd.**

**Consolidated Statements of Operations and ComprehensiveIncome / (Loss)**

**Three Months Ended September 30, 2005 and 2004**

**(Unaudited)**

 
| ** **                                                 | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------------------------|------------|------------|------------|------------|------------|
| Net sales                                                  |       | $          | 5,662,015  |       | $          | 6,143,059 |   |
| Cost of sales                                              |       | 3,945,992  |       | 3,553,485  |       |
|                                                       |       |       |       |       |       |
| Gross profit                                               |       | 1,716,023  |       | 2,589,574  |       |
|                                                       |       |       |       |       |       |
| Operating Expenses:                                        |       |       |       |       |       |
| Selling, general and administrative  expenses              |       |       |       |       |       |
| Salaries and wages expense                                 |       | 1,286,426  |       | 1,094,559  |       |
| Other                                                      |       | 2,292,640  |       | 2,759,947  |       |
| Research and development                                   |       | 912,565    |       | 633,714    |       |
|                                                       |       |       |       |       |       |
| Operating income / (loss)                                  |       | (2,775,608 | )          | (1,898,646 | )          |
|                                                       |       |       |       |       |       |
| Net interest expense / (income)                            |       | 1,454,303  |       | 1,269,439  |       |
|                                                       |       |       |       |       |       |
| Income / (loss) before income taxes                        |       | (4,229,911 | )          | (3,168,085 | )          |
| Income tax expense (benefit)                               |       | (128,490   | )          | 340,911    |       |
|                                                       |       |       |       |       |       |
| Net income / (loss)                                        |       | (4,101,421 | )          | (3,508,996 | )          |
| Preferred dividends deemed                                 |       | —     |       | 105,704    |       |
| Preferred dividends in arrears  Series A Preferred 8% |       | 124,000    |       | 208,766    |       |
|                                                       |       |       |       |       |       |
| Net loss attributable to common  stockholders              |       | (4,225,421 | )          | (3,823,466 | )          |
|                                                       |       |       |       |       |       |
| Other comprehensive income / (loss), net of  tax:          |       |       |       |       |       |
| Foreign currency translation adjustments                   |       | 275,295    |       | (6,562     | )     |
|                                                       |       |       |       |       |       |
| Comprehensive income / (loss)                              |       | $          | (3,950,126 | )          | $          | (3,830,028 | ) |
|                                                       |       |       |       |       |       |
| Loss per share data:                                       |       |       |       |       |       |
| Weighted average shares, basic and diluted                 |       | 20,335,766 |       | 18,062,419 |       |
| Basic and diluted                                          |       |       |       |       |       |
| Net loss per share                                         |       | $          | (0.21      | )          | $          | (0.21 | ) |

 

See accompanying notes to unaudited consolidated financial statements

 

4

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**MediCor, Ltd.**

**Consolidated Statements of Cash Flows**

**Three Months Ended September 30, 2005 and 2004**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                                                                                                                |       |       |       |       |       |
| Net loss                                                                                                                                                                                                  |       | $          | (4,101,421 | )          | $          | (3,515,558 | ) |
| Adjustments to reconcile net loss to net  cash utilized by operating activities:                                                                                                                          |       |       |       |       |       |
| Depreciation and amortization                                                                                                                                                                             |       | 434,867    |       | 256,282    |       |
| Provision for doubtful accounts                                                                                                                                                                           |       | 303,858    |       | 197,852    |       |
| Inventory write down                                                                                                                                                                                      |       | —     |       | 350        |       |
| Loss on disposal of property, plant and  equipment                                                                                                                                                        |       | —     |       | 24,919     |       |
| Non-employee stock options                                                                                                                                                                                |       | 27,965     |       | —     |       |
| Employee preferred stock                                                                                                                                                                                  |       | —     |       | 48,000     |       |
| Directors restricted common stock                                                                                                                                                                         |       | 26,500     |       | —     |       |
| Changes in operating assets and liabilities                                                                                                                                                               |       |       |       |       |       |
| Receivables                                                                                                                                                                                               |       | 398,053    |       | 164,299    |       |
| Notes receivable                                                                                                                                                                                          |       | (293,396   | )          | (147,639   | )          |
| Inventories                                                                                                                                                                                               |       | (714,973   | )          | (47,744    | )          |
| Prepaid expenses and other current assets                                                                                                                                                                 |       | 22,215     |       | (4,512     | )          |
| Goodwill                                                                                                                                                                                                  |       | —     |       | (617,675   | )          |
| Deposits                                                                                                                                                                                                  |       | (263,800   | )          | 617,675    |       |
| Other assets                                                                                                                                                                                              |       | 9,141      |       | (508,533   | )          |
| Accounts payable                                                                                                                                                                                          |       | 113,220    |       | (1,577,503 | )          |
| Accrued expenses and other current  liabilities                                                                                                                                                           |       | (693,615   | )          | 40,106     |       |
| Income tax payable                                                                                                                                                                                        |       | —     |       | 538,149    |       |
| Payroll taxes payable                                                                                                                                                                                     |       | 4,360      |       | 165,768    |       |
| Interest payable                                                                                                                                                                                          |       | 1,220,433  |       | (123,463   | )          |
| Long term accrued liabilities                                                                                                                                                                             |       | (517,356   | )          | —     |       |
| Net cash provided by (utilized) operating  activities                                                                                                                                                     |       | (4,023,949 | )          | (4,489,227 | )          |
|                                                                                                                                                                                                      |       |       |       |       |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                                                                                                                |       |       |       |       |       |
| Payments for property, plant and equipment                                                                                                                                                                |       | (110,874   | )          | (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                                                                                                                                                      |       | (110,874   | )          | (8,916,066 | )          |
|                                                                                                                                                                                                      |       |       |       |       |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                                                                                                                |       |       |       |       |       |
| Principal payments under capital lease  obligation                                                                                                                                                        |       | (59,397    | )          | —     |       |
| Proceeds from issuance of short term debt                                                                                                                                                                 |       | 4,400,000  |       | 15,687,811 |       |
| Proceeds from issuance of long term debt                                                                                                                                                                  |       | —     |       | 7,333,407  |       |
| Payments on convertible debentures                                                                                                                                                                        |       | —     |       | (100,000   | )          |
| Payments on short term debt                                                                                                                                                                               |       | (1,436,615 | )          | (5,966,515 | )          |
| Issuance of common stock                                                                                                                                                                                  |       | —     |       | 4,969      |       |
| Issuance of preferred shares subject  mandatory redemption requirements                                                                                                                                   |       | —     |       | 359,999    |       |
| Net cash provided by (utilized) financing  activities                                                                                                                                                     |       | 2,903,988  |       | 17,319,671 |       |
|                                                                                                                                                                                                      |       |       |       |       |       |
| **EFFECT  ON EXCHANGE RATE CHANGES ON CASH**                                                                                                                                                              |       | 275,295    |       | —     |       |
|                                                                                                                                                                                                      |       |       |       |       |       |
| Net increase  (decrease) in cash                                                                                                                                                                          |       | (955,540   | )          | 3,914,378  |       |
| Cash at beginning of period                                                                                                                                                                               |       | 1,834,799  |       | 165,092    |       |
|                                                                                                                                                                                                      |       |       |       |       |       |
| **CASH AT  END OF PERIOD**                                                                                                                                                                                |       | $          | 879,259    |       | $          | 4,079,470 |   |
|                                                                                                                                                                                                      |       |       |       |       |       |
| **SUPPLEMENTAL  DISCLOSURE OF NON-CASH ACTIVITIES**                                                                                                                                                       |       |       |       |       |       |
|                                                                                                                                                                                                      |       |       |       |       |       |
| Conversion of short-term debt to preferred  stock                                                                                                                                                         |       | $          | —     |       | $          | 100,000 |   |
| Conversion of long-term debt to common  stock                                                                                                                                                             |       | $          | 50,000     |       | $          | — |   |
| Issuance of preferred stock to  employees/consultants                                                                                                                                                     |       | $          | —     |       | $          | 48,000 |   |
|                                                                                                                                                                                                      |       |       |       |       |       |
| The Company purchased all of the capital  stock of Laboratories Euorsilcone S.A.S. for $43,297,915. In conjunction with  the acquisition, liabilities were assumed as follows:                            |       |       |       |       |       |
| Fair value of assets acquired                                                                                                                                                                             |       | $          | —     |       | $          | 45,549,577 |   |
| Goodwill                                                                                                                                                                                                  |       | $          | —     |       | $          | — |   |
| Cash paid for capital stock                                                                                                                                                                               |       | $          | —     |       | $          | (39,332,356 | ) |
| Liabilities assumed                                                                                                                                                                                       |       | $          | —     |       | $          | (6,217,221 | ) |
|                                                                                                                                                                                                      |       |       |       |       |       |
| Included in the fair value of assets  acquired and liabilities assumed is $2,532,081 for capital lease obligations.                                                                                       |       |       |       |       |       |
|                                                                                                                                                                                                      |       |       |       |       |       |
| The Company purchased all of the capital  stock of Dermatological Medical Products and Specialites, S.A. de C.V. for  $75,000. 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                                                                                                                                                                                                  |       | $          | 442,247    |       | $          | 1,610,350 |   |
| Taxes                                                                                                                                                                                                     |       | $          | 2,410      |       | $          | — |   |

 

See accompanying notes to unaudited consolidated financial statements

 

5

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**MEDICORLTD.**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**September 30,2005**

 

**Note A—Description of Business**

 

MediCorLtd. (the “Company” or “MediCor”) is a global health care company thatacquires, develops, manufactures and markets products primarily for theaesthetic, plastic surgery and dermatology markets.  Current products include breast implantproducts, other implants and scar management products.  The Company’s breast implant products arecurrently sold in approximately 85 countries, but are not sold in the UnitedStates or Canada.  Our products are soldprimarily in foreign (non-U.S.) countries and foreign sales are currently about95% of total sales, with the largest country (Brazil) accounting for about 13%of sales.  Breast implant and otherimplant products account for about 91% of total sales for the quarter ended September 30,2005, while scar management products contributed approximately 9% of totalsales. The Company sells its products to hospitals, surgical centers andphysicians primarily through distributors, as well as through direct salespersonnel.

 

MediCorwas founded in 1999 by chairman of the board Donald K. McGhan, the founder andformer chairman and chief executive officer of Inamed Corporation and McGhanMedical.  MediCor’s objective is to be aleading supplier of selected international medical devices and technologies.  To achieve this strategy, MediCor intends tobuild upon and expand its business lines, primarily in the aesthetic, plasticand reconstructive surgery and dermatology markets.  MediCor intends to accomplish this growththrough the expansion of existing product lines and offerings and through theacquisition of companies and other assets, including intellectual propertyrights and distribution rights.

 

**Note B—Summary of SignificantAccounting Policies**

 

*Principles of Consolidation*

 

The consolidated financial statements include the accounts of theCompany and all of its subsidiaries in which a controlling interest ismaintained.  All inter-company accountsand transactions have been eliminated.  Certain prior period amounts inpreviously issued financial statements have been reclassified to conform to thecurrent period presentation.  The consolidated financial statements havebeen prepared in United States dollars.

 

*Critical Accounting Policies andUse of Estimates*****

 

The preparation of financial statements in accordance with accountingprinciples generally accepted in the United States of America requires theCompany to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and disclosure of contingent assetsand liabilities.  On an on-going basis, theCompany evaluates its estimates and judgments, including those related torevenue recognition, inventories, adequacy of allowances for doubtful accounts,valuation of long-lived assets and goodwill, income taxes, litigation andwarranties.  The Company bases its estimateson historical and anticipated results and trends and on various otherassumptions that the Company believes are reasonable under the circumstances,including assumptions as to future events. The policies discussed below are considered by management to be criticalto an understanding of the Company’s financial statements.  These estimates form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources.  Bytheir nature, estimates are subject to an inherent degree of uncertainty.  Actual results may differ from thoseestimates.

 

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

 

##### ***TheCompany recognizes product revenue, net of sales discounts, returns andallowances, in accordance with Staff Accounting Bulletin No. 104, “RevenueRecognition” (“SAB No. 104”) and Statement of Financial Accounting StandardsNo. 48, “Revenue Recognition When Right of Return Exists” (“SFAS No. 48”). These statements establish that revenuecan be recognized when persuasive evidence of an arrangement exists, deliveryhas occurred and all significant contractual obligations have been satisfied,the fee is fixed or determinable, and collection is considered probable.  The Company recognizes revenue upon deliveryof product to third-party distributors and customers and does not allow forbill-and-hold sales.  Due to thewidespread holding of consignment inventory in the Company’s industry, theCompany also recognizes revenue when the products are withdrawn fromconsignment inventory in hospitals, clinics and doctors’ offices.  The***

 

6

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##### ***Companydoes not offer price protection to its third-party distributors and customersand accepts product returns only if the product is defective.  Appropriate reserves are established foranticipated returns and allowances are based on product return history.  The Company believes its estimate foranticipated returns is a “critical accounting estimate” because it requires theCompany to estimate returns and, if actual returns vary, it could have amaterial impact on reported sales and results of operations.  Historically the Company’s estimates of returnrates have not deviated from the actual returns by more than 1% to 2%.***

 

*Allowance for Doubtful Accounts*

 

##### ***MediCormaintains allowances for doubtful accounts for estimated losses resulting fromthe inability of some of its customers to make required payments.  The allowances for doubtful accounts are basedon the analysis of historical bad debts, customer credit-worthiness, pasttransaction history with the customer, current economic trends, and changes incustomer payment terms.  If the financialcondition of MediCor’s customers were to deteriorate, adversely affecting theirability to make payments, additional allowances may be required.***

 

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

 

##### ***Inventoriesare stated at the lower of cost or market using the first-in, first-out (“FIFO”)method.  The Company may write down its inventoryfor estimated obsolescence or unmarketable inventory equal to the differencebetween the cost of inventory and the estimated market value based uponassumptions about future demand and market conditions.***

 

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

 

Propertyand equipment are stated at cost less accumulated depreciation andamortization.  Depreciation is recordedon the straight-line basis over the estimated useful lives of the assets, whichrange from three to ten years.  Amortizationof leasehold improvements is based upon the estimated useful lives of theassets or the term of the lease, whichever is shorter.  Significant improvements and betterments arecapitalized, while maintenance and repairs are charged to operations asincurred.  Asset retirements and dispositionsare accounted for in accordance with Statement of Financial AccountingStandards No. 144, “Accounting for the Impairment and Disposal of LongLived Assets” (“SFAS No. 144”), as described below.

 

##### ***Accounting for Long-LivedAssets***

##### *** ***

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

 

##### ***Goodwill and OtherIntangible Assets***

##### *** ***

##### ***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 three to 17 years.  The Company adopted SFAS No. 142, “Goodwilland Other Intangible Assets” in January 2002.  As a result, goodwill is no longer amortized,but is subject to a transitional impairment analysis and is tested forimpairment on an annual basis.  The testfor impairment involves the use of estimates related to the fair values of thebusiness operations with which goodwill is associated and is usually based on amarket value approach.  Other intangibleassets are amortized using the straight-line method over their estimated usefullives and are evaluated for impairment under SFAS No. 144.***

 

7

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##### ***Product ReplacementPrograms***

 

IIIAcquisition Corp. d/b/a PIP.America (“PIP.America”) and MediCor Aesthetics,subsidiaries of the Company in the U.S., provides a product replacement programto surgeons for deflations of breast implant products for a period of ten (10) yearsfrom the date of implantation.  For eachdeflation, the surgeon receives financial assistance plus a free implantreplacement. Management estimated the amount of potential future productreplacement claims based on statistical analysis.  Expected future obligations are determinedbased on the history of product shipments and claims and are discounted to acurrent 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 notcurrently being sold (because they are in the process of obtaining FDAapproval, as more fully described below), they were sold under a distributionagreement prior to November 2000 and a reserve for product replacements ismaintained for the products sold in prior years.  Eurosilicone, a subsidiary of the Companylocated in France, prior to July 1, 2005 did not provide a productreplacement program or any similar program. Additionally, it had solely relied on third-party distributors.  As a result, Eurosilicone did not maintain areserve in prior years.  During thequarter ending September 30, 2005, Eurosilicone began making formalcommitments to third-parties for a product replacement program.  Consequently, the Company has provided areserve for this program under the same approach as described above.  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.

 

Forthe quarter ended September 30, 2005, PIP.America paid $363,275 withrespect to settlements under its product replacement program for productspreviously sold under its distribution agreement with Poly Implants ProthesesS.A. (“PIP”), a third-party manufacturer of breast implants. For the quarterended September 30, 2005, MediCor Aesthetics paid $26,000 with respect tosettlements under its product replacement program for the products previouslysold under its distribution agreement between Hutchison International, Inc.and Biosil Limited.

 

Asof September 30, 2005, the Company’s product replacement program reserveconsisted of:

 
| ** **                                                  | ** ** | **Product  Replacement Reserve** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|
|                                                        |       |                             |       |
| Balance at  June 30, 2005                              |       | $                                | 1,004,072  |   |
| Accruals for  product replacements issued during the period |       | 83,526                           |       |
| Settlements  incurred during the period                     |       | (389,275                         | )          |
|                                                        |       |                             |       |
| Balance at  September 30, 2005                         |       | $                                | 698,323    |   |

 

##### ***Shipping and HandlingCosts***

 

##### ***Shippingand handling costs incurred by the Company 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***

 

TheCompany has adopted the provisions of SFAS No. 123, “Accounting forStock-Based Compensation” (“SFAS No. 123”).  In accordance with SFAS No. 123, MediCorhas elected the disclosure-only provisions related to employee stock optionsand follows the intrinsic value method in Accounting Principals Board Opinion No. 25,“Accounting for Stock Issued to Employees, (“APB Opinion No. 25”) inaccounting for stock options issued to employees.  Under APB Opinion No. 25, compensationexpense, if any, is recognized as the difference between the exercise price andthe fair value of the common stock on the measurement date, which is typicallythe date of grant, and is recognized over the service period, which istypically the vesting period.

 

8

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TheCompany accounts for options and warrant grants to non-employees using theguidance prescribed by SFAS No. 123, Financial Accounting Standards Board(“FASB”) Interpretation No. 44, “Accounting for Certain Transactions InvolvingStock Compensation, and Interpretation of APB No. 25,” and Emerging IssueTask Force (“EITF”) No. 96-18, “Accounting for Equity Instruments That AreIssued to Other Than Employees for Acquiring, or In Conjunction with Selling,Goods, or Services” (“EITF No. 96-18”), 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.

 

##### ***Income Taxes***

 

Deferredincome tax assets or liabilities are computed based on the temporarydifferences between the financial statement and income tax bases of assets andliabilities using the statutory marginal income tax rate in effect for theyears in which the differences are expected to reverse.  Deferred income tax expenses or credits arebased on the changes in the deferred income tax assets or liabilities fromperiod to period.  A valuation allowanceagainst deferred tax assets is required if, based on the weight of availableevidence, it is more likely than not that some portion or all of the deferredtax assets will not be realized.  Thevaluation allowance should be sufficient to reduce the deferred tax asset tothe amount that is more likely than not to be realized.

 

##### ***Effects of RecentAccounting Pronouncements***

 

InMay 2005, FASB issued Statement of Financial Accounting Standards SFAS No. 154,“Accounting Changes and Error Corrections” (“SFAS No. 154”), whichreplaces APB Opinion No. 20, “Accounting Changes and SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements.”  This pronouncement applies to all voluntarychanges in an accounting principle, and revises the requirements for accountingfor and reporting a change in an accounting principle. SFAS No. 154 requiresretrospective application to prior periods’ financial statements of a voluntarychange in accounting principle, unless it is impracticable to do so.  This pronouncement also requires that a changein the method of depreciation, amortization, or depletion for long-lived,non-financial assets be accounted for as a change in accounting estimate thatis affected by a change in accounting principle.  SFAS No. 154 retains many provisions ofAPB Opinion 20 without change, including those related to reporting a change inaccounting estimate, a change in the reporting entity, and correction of anerror.  The pronouncement also carriesforward the provisions of SFAS No. 3 which govern reporting accountingchanges in interim financial statements.  SFAS No. 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December 15,2005.  The Statement does not change thetransition provisions of any existing accounting pronouncements, includingthose that are in a transition phase as of the effective date of SFAS No. 154. The Company intends to apply theprovisions of this statement effective July 1, 2006.

 

**Note C—Interim Reporting**

 

The accompanying unaudited consolidated financial statements for thethree months ended September 30, 2005 and September 30, 2004, havebeen prepared in accordance with accounting principles generally accepted inthe United States for interim financial information and with instructions to Form 10-QSBand Item 310 of Regulation S-B.  Accordingly, they do not include allof the information and footnotes required by accounting principles generallyaccepted in the United States for complete financial statements.  In theopinion of management, 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 three monthsended September 30, 2005 are not necessarily indicative of the results forthe full fiscal year.

 

**Note D—Major Customers**

 

During the three months ended September 30,2005, two different distributor customers accounted for 9% and 13%, respectively,of the Company’s consolidated revenue.  Revenuerelated to these two distributors for the three months ended September 30,2004 was 10% and 15%, respectively.

 

9

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**Note E—Cash and Cash Equivalents**

 

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

 

**Note F—Accounts Receivable**

 

Accounts receivable at September 30,2005 consisted of:

 
| ** **                       | ** ** | **September 30, 2005** | ** ** |
|----------------------------------|------------|-----------------------------|------------|
|                             |       |                        |       |
| Accounts  receivable             |       | $                           | 7,535,036  |   |
| Allowance  for doubtful accounts |       | (1,376,075                  | )          |
|                             |       |                        |       |
| Total                            |       | $                           | 6,158,961  |   |

 

Changes in allowance for doubtful accountsare as follows:

 
| Balance July 1, 2005        |   | $      | 1,365,613 |   |
|----------------------------------|--------|--------|-----------|--------|
| Provisions /  (recovery)         |   |   |      |
| Write-offs                       |   | 10,462 |      |
| Balance  September 30, 2005 |   | $      | 1,376,075 |   |

 

**Note G—Notes Receivable**

 

Notes receivable at September 30, 2005consisted of:

 
| ** **                       | ** ** | **September 30, 2005** | ** ** |
|----------------------------------|------------|-----------------------------|------------|
|                             |       |                        |       |
| Notes  receivable                |       | $                           | 3,071,980  |   |
| Allowance  for doubtful accounts |       | (3,071,980                  | )          |
|                             |       |                        |       |
| Total                            |       | $                           | —     |   |

 

Poly Implants Protheses S.A. (“PIP”), athird-party manufacturer of breast implants located in France, issued to the Company’s PIP.Americasubsidiary a revolving promissory note for certain sums to come due to PIP.Americabased on PIP.America’s and the manufacturer’s administration of product replacementand product replacement related claims. These amounts have been fully reserved for, as an allowance for doubtfulaccount, due to the lack of past payments and uncertain prospect of collection.

 

10

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**Note H—Inventories**

 

Inventories at September 30, 2005 consisted of:

 
| ** **       | ** ** | **September 30, 2005** | ** ** |
|------------------|------------|-----------------------------|------------|
|             |       |                        |       |
| Raw  Materials   |       | $                           | 928,385    |   |
| Work in  Process |       | 529,055                     |       |
| Finished  Goods  |       | 3,134,368                   |       |
|             |       |                        |       |
| Total            |       | $                           | 4,591,808  |   |

 

**Note I—Property and Equipment**

 

Property and equipment at September 30, 2005 consisted of:

 
| ** **                             | ** ** | **September 30, 2005** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|
|                                   |       |                        |       |
| Machinery  and equipment               |       | $                           | 677,729    |   |
| Furniture,  Fixtures and equipment     |       | 469,968                     |       |
| Computer  Equipment and tools and dies |       | 422,223                     |       |
| Land and  buildings                    |       | 144,972                     |       |
| Leasehold  Improvements                |       | 107,748                     |       |
| Automobiles                            |       | 86,043                      |       |
|                                   |       |                        |       |
| Subtotal                               |       | 1,908,683                   |       |
| Accumulated  depreciation              |       | (750,394                    | )          |
|                                   |       |                        |       |
| Total                                  |       | $                           | 1,158,289  |   |

 

Depreciation expense was $93,633 for the three months ended September 30,2005 and $115,583 for the three months ended September 30, 2004.

 

11

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**Note J—Goodwill and Other Intangibles**

 

Goodwill and other intangibles as of September 30, 2005 consistedof:

 
| ** **                                                             | ** ** | **September 30, 2005** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------|------------|
|                                                                   |       |                        |       |
| Goodwill                                                               |       | $                           | 33,867,087 |   |
| Customer-Related  Intangibles                                          |       | 4,480,820                   |       |
| Supply  Agreements and Other Intangibles                               |       | 3,373,146                   |       |
| Patents                                                                |       | 3,000,000                   |       |
| Distribution  Agreements and Non-compete                               |       | 355,000                     |       |
| Trademarks /  Tradenames                                               |       | 120,128                     |       |
|                                                                   |       |                        |       |
| Subtotal                                                               |       | 45,196,181                  |       |
|                                                                   |       |                        |       |
| Accumulated  Amortization—Goodwill                                |       | (41,973                     | )          |
| Accumulated  Amortization—Customer-Related Intangibles            |       | (1,022,361                  | )          |
| Accumulated  Amortization—Supply Agreements and Other Intangibles |       | (5,000                      | )          |
| Accumulated  Amortization—Patents                                 |       | (522,514                    | )          |
| Accumulated  Amortization—Distribution Agreements and Non-compete |       | (233,125                    | )          |
| Accumulated  Amortization—Trademarks / Tradenames                 |       | (24,058                     | )          |
|                                                                   |       |                        |       |
| Subtotal                                                               |       | (1,849,031                  | )          |
|                                                                   |       |                        |       |
| Total                                                                  |       | $                           | 43,347,150 |   |

 

Amortization expense for the three months ended September 30, 2005was $271,034, compared to $87,507 for the prior period ended September 30,2004.

 

The estimated amortization expense for the next five years consists of:

 
| ** **                   | ** ** | **September 30, 2006** | ** ** | **September 30, 2007** | ** ** | **September 30, 2008** | ** ** | **September 30, 2009** | ** ** | **September 30, 2010** | ** ** |
|------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                         |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Customer-Related Intangibles |       | $                           | 610,316    |                        | $          | 610,316                     |       | $                           | 610,316    |                        | $          | 610,316 |   | $ | 610,316 |   |
| Distribution Agreements      |       | 16,875                      |       | 16,875                      |       | 16,875                      |       | 16,875                      |       | 16,875                      |       |
| Patents                      |       | 177,677                     |       | 177,677                     |       | 177,677                     |       | 177,677                     |       | 177,677                     |       |
| Trademarks                   |       | 8,235                       |       | 8,235                       |       | 8,235                       |       | 8,235                       |       | 8,235                       |       |
| Other                        |       | —                      |       | —                      |       | —                      |       | —                      |       | —                      |       |
|                         |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Total                        |       | $                           | 813,102    |                        | $          | 813,102                     |       | $                           | 813,102    |                        | $          | 813,102 |   | $ | 813,102 |   |

 

12

----

 

**Note K—Leased Property under Capital Leases**

 

The following is an analysis of the leased property under capitalleases by major classes.  All of thisproperty is located in France as a part of our Eurosilicone subsidiary, exceptfor the copier which is located at the Company’s corporate office:

 
| ** **                | ** ** | **September 30, 2005** | ** ** |
|---------------------------|------------|-----------------------------|------------|
|                      |       |                        |       |
| Buildings                 |       | $                           | 4,048,143  |   |
| Vehicles                  |       | 347,717                     |       |
| Copier                    |       | 24,138                      |       |
|                      |       |                        |       |
| Subtotal                  |       | 4,419,997                   |       |
|                      |       |                        |       |
| Accumulated  Depreciation |       | (429,644                    | )          |
|                      |       |                        |       |
| Subtotal                  |       | (429,644                    | )          |
|                      |       |                        |       |
| Total                     |       | $                           | 3,990,353  |   |

 

Depreciation expense was $70,200 for the three months ended September 30,2005 as compared to $53,192 for the three months ended September 30, 2004.

 

The following is a schedule by years of future minimum leasepayments under capital leases that have initial or remaining noncancelablelease terms in excess of one year as of September 30, 2005:

 
| **Year ended September 30,** | ** ** | **Amount** | ** ** |
|-----------------------------------|------------|------------|------------|
|                              |       |       |       |
| 2006                              |       | $          | 509,004    |   |
| 2007                              |       | 548,729    |       |
| 2008                              |       | 395,985    |       |
| 2009                              |       | 358,828    |       |
| 2010                              |       | 306,995    |       |
| Later years                       |       | 1,088,311  |       |
|                              |       |       |       |
| Total  minimum payments required  |       | $          | 3,207,852  |   |

 

**Note L—Deposits and Other Assets**

 

Deposits at September 30, 2005 totaled $359,980.  These are security deposits on office leases,with local utility companies and expenses incurred during the acquisitionprocess of Biosil Limited and Nagor Limited.

 

Other assets consisted of security investments of $55,010 and debtacquisition costs of $554,765 at September 30, 2005.

 

13

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**Note M—Accrued Expenses**

 

Accrued expenses and other current liabilities at September 30,2005 consisted of:

 
| ** **                   | ** ** | **September 30, 2005** | ** ** |
|------------------------------|------------|-----------------------------|------------|
|                         |       |                        |       |
| Wages and  paid leave        |       | $                           | 1,043,209  |   |
| Other                        |       | $                           | 646,012    |   |
| Product  replacement reserve |       | 698,323                     |       |
| Consulting                   |       | 296,647                     |       |
|                         |       |                        |       |
| Total                        |       | $                           | 2,684,191  |   |

 

Consulting fees consisted of amounts relating to a consulting agreement. Other accrued expenses included interestand legal expenses.

 

**Note N—Convertible Debentures**

 

Convertible debentures at September 30, 2005 were $250,000. During the firstquarter of fiscal 2006, $50,000 was converted to 10,000 shares of our commonstock.  These convertibledebentures are convertible after one year and at the 18-month, 24-month, 30-monthand 36-month anniversary of the issuance date at the holder’s discretion toshares of the Company’s common stock at a price equal to the greater of $5.00or seventy-five percent (75%) of the daily weighted average trading price pershare of the Company’s common stock over a period of twenty (20) trading daysprior to the conversion date.  Theseconvertible debentures mature between June 2006 and August 2006.

 

During the quarter ended September 30, 2005, we did not incur anycosts relating to these convertible debentures.

 

**Note O—Notes Payable**

 

## ***Short-term notes payable of $2,297,539 at September 30, 2005consisted of several notes which ranged from $115,641 to $1,946,374 with annualinterest rates of between 3.39% and 8%.   The Company also has an outstanding balanceat September 30, 2005 of $54,933,489 under a note payable to an affiliate,as described in Note P.***

 

## ***Long-term notes payable consisted of a bank term loan in the amount of $10,133,528for a term of six years denominated in Euros with an annual interest rate basedon nine-month Libor plus 2.25%.  Thevariable interest rate as of September 30, 2005 was 4.46%.  In addition, we have several notes whichranged from $13,427 to $333,133 with terms of between 16 months and threeyears, with annual rates of interest between 3.39% 5.25%.***

 

Future maturities oflong-term debt are as follows:

 
| **Year ended September 30,** | ** ** | **Amount** | ** ** |
|-----------------------------------|------------|------------|------------|
|                              |       |       |       |
| 2007                              |       | $          | 2,198,141  |   |
| 2008                              |       | 2,096,265  |       |
| 2009                              |       | 1,946,374  |       |
| 2010                              |       | 1,946,374  |       |
| 2011                              |       | 1,946,374  |       |
|                              |       |       |       |
| Total                             |       | $          | 10,133,528 |   |

 

14

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**Note P—Related Party Transactions**

 

InternationalIntegrated Industries, LLC (“LLC”) is a family holding company in which thechairman of the Company, Mr. Donald K. McGhan, has a controllinginterest.  Neither the Company nor any ofits 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 Consolidated Balance Sheet of $54,933,489at September 30, 2005.  Theoutstanding balance of the note payable accrues interest at an annual interestrate of ten percent (10%) per annum. During the three months ended September 30, 2005, LLC advanced $4,400,000to the Company, of which none was repaid. Interest expense relating to this note payable was $1,320,433, of which$100,000 was paid.  The unpaid liabilityfor these expenses is included in the Company’s note payable to affiliates,which is contained in the financial statements presented herein.  The Company has a commitment from LLC to fundoperating shortfalls as necessary through October 1, 2006.

 

InOctober 2003, the Company entered into a reimbursement agreement withGlobal Aviation Delaware, LLC, a company controlled by its chairman 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 $245,210 for the three months ended September 30, 2005 in expensespursuant to the reimbursement agreement.  This amount represents approximately 15.3% ofthe quarterly operating costs of the entity, and the Company has no minimumguarantees or guarantee of debt for this company.   All expenses recognized pursuant to thereimbursement agreement have been included by the Company in selling, general,and administrative expenses.  Under thisagreement, only costs directly tied to MediCor’s use of the plane asset arereimbursable to the owner.  All otheroperating costs (such as fuel, pilot wages, food, etc.) are paid directly bythe Company through a service agreement we have with NexGen Management, acompany controlled by the Company’s chairman. All disbursements to this agent occur only when the plane is used forMediCor business purposes.  The Companyrecognized a total of $172,198 for three months ended September 30, 2005in expenses pursuant to the service agreement with NexGen Management.  The Company has no minimum guarantees orguarantee of debt for this company.   Allexpenses recognized pursuant to the service agreement have been included by theCompany in selling, general, and administrative expenses.

 

**Note Q—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, 2005** | ** ** | **September 30, 2004** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                                                  |       |                        |       |                        |       |
| Current                                                               |       |                        |       |                        |       |
|                                                                  |       |                        |       |                        |       |
| Net loss                                                              |       | $                           | (1,351,158 | )                           | $          | (1,328,474 | ) |
| Foreign income tax expense/ (benefit) on  unconsolidated subsidiaries |       | (128,490                    | )          | 340,911                     |       |
|                                                                  |       | (1,479,648                  | )          | (987,563                    | )          |
| Deferred                                                              |       |                        |       |                        |       |
|                                                                  |       |                        |       |                        |       |
| Allowance for bad debts                                               |       | 103,312                     |       | 67,269                      |       |
| Product replacement reserve                                           |       | 96,475                      |       | —                      |       |
| Depreciation and amortization                                         |       | 20,137                      |       | 25,500                      |       |
|                                                                  |       | 219,924                     |       | 92,769                      |       |
|                                                                  |       |                        |       |                        |       |
| Total benefit                                                         |       | (1,259,724                  | )          | (894,794                    | )          |
| Less allowance for realization of deferred  tax asset                 |       | 1,131,234                   |       | 1,235,705                   |       |
|                                                                  |       |                        |       |                        |       |
| Total tax expense/ (benefit)                                          |       | $                           | (128,490   | )                           | $          | 340,911 |   |

 

Thecurrent tax expense for the quarter ended September 30, 2005 resulted fromincome tax paid on a foreign subsidiary. As of September 30, 2005, the Company recorded an allowance of $19,648,242against certain future tax benefits, the realization of which is currentlyuncertain.  The deferred differencesrelated to certain accounts receivable, accrued warranties, anddepreciation/amortization not currently deductible as expenses under Internal RevenueService provisions.  Although the

 

15

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Company recorded thisallowance to the deferred tax assets, the Company may still utilize the futuretax benefits from net operating losses for 20 years from the year of the lossto the extent of future taxable income. The estimated net operating losses for tax purposes of approximately $25million will expire over several years ending in 2024.

 

Primarycomponents of the deferred tax assets at the periods noted were approximatelyas follows:

 
| ** **                                             | ** ** | **September 30, 2005** | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|
|                                                   |       |                        |       |
| Computed  expected income tax asset/(liability) at 34% |       | $                           | 1,351,158  |   |
| Adjustments                                            |       |                        |       |
| Net operating loss                                     |       | 16,402,856                  |       |
| Allowance for bad debt                                 |       | 1,512,339                   |       |
| Product replacement reserve                            |       | 551,512                     |       |
| Depreciation and amortization                          |       | 270,225                     |       |
|                                                   |       |                        |       |
| Income tax  benefit                                    |       | $                           | 20,088,090 |   |
| Less  allowance for realization of deferred tax asset  |       | (20,088,090                 | )          |
|                                                   |       |                        |       |
| Deferred tax  asset, net                               |       | $                           | —     |   |

 

**Note R—Preferred Stock**

 

TheCompany authorized a series of 45,000 shares of preferred stock designated as Series A8.0% Convertible Preferred Stock (“Series A Preferred”) on July 5,2004.  The Series A Preferred has apar value of $.001 per share with a liquidation preference of $1,000 pershare.  In the event of liquidation,shareholders of the Series A Preferred shall be entitled to receivepriority as to distribution over common stock. The Series A Preferred stock is convertible into common stock atany time at a conversion price of $3.85 per share until June 30, 2010,subject to potential adjustment in the event certain EBITDA or common stockvalue targets are not met.  On June 30,2011, all unconverted shares to common stock will be subject to a mandatoryredemption.  The redemption price of$1,000 per share plus $1,000 per whole share for all accrued and unpaidpaid-in-kind dividends and any other accrued and unpaid dividends, whether ornot declared which amount will be payable by the Company in cash.  At September 30, 2005, the Company hadoutstanding an aggregate of 6,219 shares, issued for aggregate consideration of$6,573,258.

 

**Note S—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: 

 
| ** **                                          | ** ** | **Three Months Ended  September 30, 2005** | ** ** | **Three Months Ended  September 30, 2004** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                          | ** ** | **Income  (Numerator)**                         | ** ** | **Shares  (Denominator)**                       | ** ** | **Per-Share  Amount** | ** ** | **Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per-Share  Amount** | ** ** |
|                                                |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Net Income (Loss) before preferred stock  dividends |       | (4,101,421                                      | )          |                                            |       |   |   | (3,830,028 | ) |   |   |   |   |
| Less: Preferred stock dividends                     |       | 124,000                                         |       |                                            |       |   |   | — |   |   |   |   |   |
|                                                |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Basic EPS                                           |       | (4,225,421                                      | )          | 20,335,766                                      |       | (0.21 | ) | (3,830,028 | ) | 18,062,419 |   | (0.21 | ) |
|                                                |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Effect of dilutive securities                       |       | —                                          |       |                                            |       |   |   |   |   |   |   |   |   |
|                                                |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Diluted EPS                                         |       | $                                               | (4,225,421 | )                                               | 20,335,766 |   | (0.21 | ) | $ | (3,830,028 | ) | 18,062,419 |   | (0.21 | ) |
|                                                     |            |                                                 |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |

 

Common equivalent shares of 4,192,790have been excluded from the computation of diluted earnings per share becausetheir effect would be anti-dilutive.

 

16

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**Note T—Stock Options and Warrants**

 

The Company has a stockoption plan for key employees and consultants. There were 4,242,680 shares reserved for issuance pursuant to theCompany’s stock option plan and up to 4,100,000 shares were reserved forissuance pursuant to stand-alone options granted in connection with employmentagreements.  The Company’s employee shareoption activity for and related information is summarized below:

 
| ** **                                      | ** ** | ** **  | ** ** | **Weighted Average** | ** ** |
|-------------------------------------------------|------------|-------------|------------|----------------------|------------|
| ** **                                      | ** ** | **Options** | ** ** | **Exercise Price**   | ** ** |
|                                            |       |        |       |                 |       |
| Outstanding  Options at June 30, 2005      |       | 3,929,938   |       | $                    | 3.34       |   |
|                                            |       |        |       |                 |       |
| Granted                                         |       | 336,111     |       | 2.60                 |       |
| Exercised                                       |       | —      |       | —               |       |
| Cancelled                                       |       | —      |       | —               |       |
|                                            |       |        |       |                 |       |
| Outstanding  Options at September 30, 2005 |       | 4,266,049   |       | $                    | 3.28       |   |
|                                            |       |        |       |                 |       |
| Options  exercisable at end of period           |       | 1,251,652   |       | $                    | 3.34       |   |

 

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

 
| **Outstanding**     | ** ** | **Exercisable** | ** ** |
|---------------------|------------|-----------------|------------|
| ** **          | ** ** | ** **      | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **      | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **      | ** ** | **Remaining** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **          | ** ** | ** **      | ** ** | **Years of** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of**        | ** ** | **Number of**   | ** ** | **Contractual** | ** ** | **Exercise** | ** ** | **Number of** | ** ** | **Exercise** | ** ** |
| **Exercise Prices** | ** ** | **Options**     | ** ** | **Life** | ** ** | **Price** | ** ** | **Options** | ** ** | **Price** | ** ** |
|                |       |            |       |   |   |   |   |   |   |   |   |
| $1.00 - $2.01       |       | 986,049         |       | 6.4 |   | $ | 1.79 |   | 285,819 |   | $ | 1.89 |   |
| $3.00 - $3.80       |       | 2,180,000       |       | 5.6 |   | $ | 3.48 |   | 599,167 |   | $ | 3.48 |   |
| $4.15 - $4.30       |       | 1,100,000       |       | 6.6 |   | $ | 4.23 |   | 366,667 |   | $ | 4.23 |   |

 

**Note U—BusinessSegment Information**

 

The Company is a corporateentity with a number of wholly-owned, autonomous subsidiaries which operate assingle business units in a single industry segment across multiple geographiclocations within the U.S. and internationally and, as such, does not havemultiple segments to report.  For thethree months ended September 30, 2005, sales from breast implant and otherimplants were approximately 91% of total sales, whereas sales from scarmanagement product were approximately 9% of total sales.  Revenues from customers and distributorsattributable to various foreign countries outside the U.S were material andequaled about 95% of total sales, with the largest country (Brazil) accountingfor about 13% of sales.  Additionally, asignificant amount of revenues and costs are Euro denominated.  Long-lived assets attributable to variousforeign countries outside the U.S. were material and equaled about $38 million,located in France.  Amounts attributableto the U.S. were approximately $6 million.

 

**Note V—Commitmentsand Contingencies**

 

The Company has received awritten commitment from LLC, an affiliate of its chairman, to providesufficient cash to fund any operating loss through October 1, 2006.  The same entity has provided the Company anaggregate of over $71 million in

 

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funding from the Company’s inception through September 30,2005.  The future funding may take theform of debt or equity or a combination thereof.

 

The Company’s PIP.Americasubsidiary has a distribution agreement with Poly Implants Protheses S.A. (“PIP”),a third-party manufacturer of breast implants located in France.  This agreement covers the sale by PIP.America ofPIP’s saline, pre-filled breast implant products in North America, although nosales were reported in the year ending June 30, 2004 because theseproducts are not currently approved for distribution in North America.  Previously, the manufacturer was undertakingthe process of securing FDA approval for these products.  At March 30, 2004, PIP.America had$3,444,802 of accounts receivable from the manufacturer, representing amountsowed to PIP.America under the terms of the distribution agreement.  These amounts have been fully reserved for,with an allowance for doubtful account, due to the lack of payment anduncertain prospect of collection.  EffectiveMarch 30, 2004, PIP.America and the manufacturer amended the distributionagreement to provide for, among other things, transferring administration,funding and ownership of the pre-market approval application process to PIP.America.  In conjunction with this change, PIP.America forgavecertain amounts owed by the manufacturer, and the parties amended the pricingterms.  The amendments obligate PIP.Americato fund the ongoing clinical and regulatory costs and expenses.  The amount and timing of these future costs isunknown and may be material.  Thelikelihood and timing of obtaining FDA approval are also uncertain.  Concurrently, the manufacturer issued to PIP.Americaa revolving promissory note for certain sums to come due to PIP.America basedon PIP.America’s and the manufacturer’s administration of product replacementand product replacement related claims.  Theprincipal amount under the note as of September 30, 2005 was $3,071,980.

 

The Company’s EurosiliconeHoldings SAS subsidiary may be committed to make additional performancepayments to the previous shareholders of Eurosilicone, over the next two years,in connection with revenue targets.  These payments might be as high as€3,000,000 for each year, or a total of €6,000,000.  Eurosilicone Holdings SAS plans on fundingthese amounts under the commitments of the bank loan described under Note O.

 

In October 1999, Case No. 99-25227-CA-01June 2000 Case No. 00-14665-CA-01, and July 2003, Case No. 0322537-CA-27,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 Farren-Martinand our chairman, personally, in the Circuit Court of Miami-Dade County, Florida.  Also in September 2003, another memberof the same family filed Case No. 03-15006-CA-09, again alleging similarclaims on his own behalf.  The Kwartinfamily members’ claims are primarily premised on allegations that plaintiffsare shareholders of PIP/USA, Inc. (“PIP/USA”) or have statutory and commonlaw rights of shareholders of PIP/USA as a result of loans or investmentsallegedly made to or into PIP/USA or a third party or under an allegedemployment agreement.  Plaintiffs allegethat, as a result, they have certain derivative or other rights to an allegeddistribution agreement between Poly Implants Prostheses, S.A. (“PIP-France”)and PIP/USA.  Plaintiffs claim, amongother things, that III Acquisition Corporation dba PIP.America (“PIP.America”)and its chairman tortiously interfered with that agreement and with plaintiffs’other alleged rights as lenders, investors, shareholders, quasi-shareholders oremployees of PIP/USA or other entities. In addition to monetary damages and injunctive relief, plaintiffs seekto reinstate the alleged distribution agreement between PIP/USA and PIP-Franceand invalidate PIP.America’s distributor relationship with PIP-France.  It is PIP.America’s position that the Kwartinlitigations are within the scope of the indemnification agreements.  A motion is currently pending to consolidateall of the cases.

 

Peggy Williams v. PIP/USA, Inc.,Case No. 03 CH 9654, Jessica Fischer Schnebel, et al. v. PIP/USA, Inc.,Case No. 03CH07239, Dawn Marie Cooper, et al. v. PIP/USA, Inc., Case No. 03CH11316,Miriam Furman, et al. v. PIP/USA, Inc., Case No. 03CH10832 and KarenS. Witt, et al. v. PIP/USA, Inc., Case No. 03CH12928 were filed inthe Circuit Court of Cook County, Chancery Division, in or around July 2003.  Plaintiffs’ counsel in Jessica FischerSchnebel, et al. v. PIP/USA, Inc., Case No. 03CH07239 amended theircomplaint to include plaintiffs from the other four cases, and each of theothers has been voluntarily dismissed. The consolidated amended complaint seeks class certification andcontains counts alleging product liability, breach of the implied warranties ofmerchantability and fitness for a particular purpose, violation of the IllinoisConsumer Fraud Act and third-party beneficiary status.  Plaintiffs seek unspecified monetary damages,exemplary damages and attorney’s fees and costs.  PIP.America has filed a motion seeking todismiss all counts but the third-party beneficiary claim.  Plaintiffs have filed a written response toPIP.America’s pending motion to dismiss, in which they assert that PIP.Americaand PIP-France entered into a joint venture. PIP.America is in the process of drafting its reply brief, and thehearing date on this motion is anticipated to occur in January 2006.  At the request of the court, PIP.America willoppose

 

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classcertification after the motion to dismiss is ruled upon.  Poly Implants Protheses, S.A., a defendant inthe case, has agreed that it will indemnify PIP.America for any losses PIP.Americamay suffer as a result of the Illinois litigation.

 

Other than for a limitedportion of certain of its own product replacement claims that it isadministering, PIP.America is indemnified by PIP/USA, Inc., Poly ImplantsProtheses, S.A., and Poly Implants Protheses, S.A.’s President, Jean ClaudeMas, personally, from, among other things, claims arising from product notdistributed by PIP.America.  PIP.Americaeither already has, or is in the process of, asserting its indemnification claimsand, in the event of an adverse judgment in any case, PIP.America intends toseek the benefits of this indemnity.  Asa result, the costs associated with these matters are not anticipated to have amaterial adverse impact on our business, results of operations or financialposition.

 

In July 2005, IPResource Limited, a United Kingdom-based company, filed an action against oursubsidiary, Eurosilicone SAS, in the Marseille Civil Court (*Tribunal de Grande Instance*), Marseille, France.  The complaint alleges Eurosilicone infringedupon a European Patent known as “*Implantable prosthesisdevice,*” Patent No. 0 174 141 0 174 141 B1*,*and seeks damages of 3 million Euros.  The case is in the preliminary stages andEurosilicone believes it does not infringe on the 0 174 141 0 174 141 B1patent and intends to vigorously defend the action.  The Company has not recognized any loss as aresult of this contingency.

 

Though it is not yetpossible to predict the outcome of the cases described above, MediCor and itssubsidiaries, as applicable, are vigorously defending each lawsuit.

 

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

 

The Company has operating leasesfor office, manufacturing and warehouse facilities under various terms expiringfrom 2007 to 2008.  Lease expensesamounted to $87,797 and $248,317 for the three months ended September 30,2005 and 2004, respectively.    Future minimum operating lease payments areapproximated as follows:

 
| **Year ended September 30,** | ** ** | **Amount** | ** ** |
|-----------------------------------|------------|------------|------------|
|                              |       |       |       |
| 2006                              |       | 240,037    |       |
| 2007                              |       | 249,401    |       |
| 2008                              |       | 98,797     |       |

 

**Note W—Acquisitions**

 

On April 25, 2005, oneof the Company’s subsidiaries completed the purchase of selected assets andliabilities of privately-held HutchisonInternational, Inc., a third-party distributor of breast implants productsin the United States for Biosil Limited. The completion of this transaction allowed the Company to, among otherthings, negotiate and ultimately enter into an exclusive distribution agreementdirectly with Biosil Limited for its breast implants in the United States.  The acquisition itself did not have asignificant impact on the operating results of the Company, since theoperations have no existing revenue—pending FDA approval of the products. The various agreements called for payments in the form of stock and cash ofabout $3,000,003 as follows:  cash payments of $250,000 and 366,667 sharesof MediCor Ltd. common stock valued at $7.50, subject to future adjustmentbased on actual trading prices following approval for marketing the products inthe United States.

 

The purchase price resultedin a significant amount in other intangible assets and the Company iscontinuing to evaluate this in detail and anticipates that it will determineand place a fair value upon completion of such valuation by June 30, 2006.

 

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Untilcompletion of such evaluation, the Company cannot currently estimate anypurchase price allocations.  The Companydoes expect that a majority of the intangibles will be related to the distributionagreement with Biosil Limited.

 

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

 

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

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

 

The amounts contained in thepurchase price allocation may change as additional information becomesavailable regarding the assets and liabilities acquired.  The purchase price allocations are expectedto be finalized before the year ended June 30, 2006.  Any change in the fair value of the netassets may change the amount of the purchase price allocable to goodwill.  The Company is continuing to evaluate this indetail and anticipates that it will determine and place a fair value uponcompletion of such valuation.  Untilcompletion of such evaluation, the Company cannot currently estimate any possiblechanges in purchase price allocations.

 

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

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

(c)          Reflects initialdetermination of value associated with intangibles (specifically thedistribution/supply agreement with Biosil). Amount may be impacted by otherpurchase accounting adjustments and finalization of intangible valuation underSFAS 141 which will be finalized within 1 year of acquisition.

(d)         Reflects additionalamounts for reserve associated with product replacement program.

(e)          To eliminate shareholder’s equity.

(f)            To record the purchase price, as follows:  $250,000 of cash, and $2,750,003 in the formof common stock in MediCor (366,667 shares).

 

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

 

This Quarterly Report on Form 10-QSB,including the following “Management’s Discussion and Analysis or Plan ofOperation,” contains forward-looking statements that involve risks and uncertainties,as well as assumptions that, if they ever materialize or prove incorrect, couldcause the results of the Company to differ materially from those expressed orimplied by such forward-looking statements.  All statements other thanstatements of historical fact are statements that could be deemedforward-looking statements, including statements regarding new and existingproducts, technologies and opportunities; statements regarding market andindustry segment growth and demand and acceptance of new and existing productsany projections of sales, earnings, revenue, margins or other financial items;any statements of the plans, strategies and objectives of management for futureoperations, including the execution of acquisition or marketing plans; any statementsregarding future economic conditions or performance; any statements of beliefor intention; and any statements of assumptions underlying any of theforegoing.  Factors that may cause such differences include, but are notlimited to: increased competition; changes in product demand; changes in marketacceptance; new product development; United States Food and Drug Administration(“FDA”) approval, or denial or rescission of approval; delay or rejection ofnew or existing products; changes in agreements with governmental agencies;changes in government regulation; supply of raw materials; changes inreimbursement practices; adverse results of litigation; the performance ofcontracts by suppliers, customers and partners; employee management issues; thechallenge of managing asset levels, including inventory; the difficulty ofaligning expense levels with revenue changes; and other risks that aredescribed herein and that are otherwise described from time to time in theCompany’s reports and other documents filed with the Securities and ExchangeCommission, including those contained in “Factors that May Affect FutureResults” set forth below in “Management’s Discussion and Analysis or Plan ofOperation.”  The Company assumes no obligation and does not intend toupdate these forward-looking statements, except as required by law.  In the following “Management’s Discussion andAnalysis or Plan of Operation,” the terms “MediCor,” “we,” “us” and “our” referto MediCor Ltd. and its consolidated subsidiaries, as appropriate in thecontext, and, unless the context otherwise requires, “common stock” refers tothe common stock, par value $.001 per share, of MediCor Ltd.

 

**OVERVIEW**

 

MediCor Ltd. is a globalhealth care company that acquires, develops, manufactures and markets productsprimarily for the aesthetic, plastic surgery and dermatology markets. Current products include breast and other implants and scar managementproducts.  Our products are sold in foreign countries (non-U.S.) and foreignsales are currently about 95% of total sales, with Brazil accounting for about 13%of total breast implant sales.  Breastimplant and other implant products account for about 91% of total sales for thequarter ended September 30, 2005, while scar management products contributedapproximately 9% of total sales.  We sellour products to hospitals, surgical centers and physicians primarily throughdistributors, as well as through direct sales personnel.

 

**Company History and Business Strategy**

 

MediCorwas founded in 1999 by chairman of the board Donald K. McGhan, the founder andformer Chairman and Chief Executive Officer of Inamed Corporation, McGhanMedical and McGhan Limited.  Ourobjective is to be a leading supplier of selected international medical devicesand technologies.  To achieve thisobjective, we intend to build upon and expand our business lines, primarily inthe aesthetic, plastic and reconstructive surgery and dermatology markets. Weintend to accomplish this growth through the expansion of existing productlines and offerings and through the acquisition of companies and other assets,including intellectual property rights and distribution rights.

 

**Products**

 

Currently, MediCor has two main product lines:

 

•                  breast and other implants for aesthetic, plastic andreconstructive surgery; and

•                  scar managementproducts.

 

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***Breast and other implant products***

 

Ourprimary product line is breast implants, accounting for about 91%of total salesfor the three months ended September 30, 2005. With the acquisition ofEurosilicone in July 2004, we have become the third largest breast implantmanufacturer in the world in terms of sales, with an estimated 17% of thenon-U.S. market.  Sales in foreign(non-U.S.) countries are currently about 95% of total sales, with the largestcountry accounting for about 13% of sales. Eurosilicone also manufactures a broad line of other implant productstargeted for the aesthetic, cosmetic and reconstructive markets, includinggluteal, calf, pectoral, malar and testicular implants, as well as externalbreast prosthesis, which collectively account for approximately 4% of totalsales.  The financing for theEurosilicone acquisition was primarily provided through additional loans fromInternational Integrated Industries, LLC, an affiliate of MediCor’s chairman,as more fully described in the financial statements and notes.

 

Ourstrategy to gain entry into the U.S. saline filled breast implant market reliesupon our contractual agreements with independent parties with whom we areworking to obtain FDA approval of their PMA applications.  The PMA application for the Biosil Limitedinflatable saline breast implant has been submitted in module format, and weare addressing observations arising from the FDA review of theapplication.  The four-year intervalclinical trial data is currently being analyzed and will be submitted as a PMAamendment following completion of that analysis.  Although we anticipate submitting theappropriate data in response to the FDA’s observations and guidance in late2005, there can be no assurance of timing, review or decision concerning thePMA application.  We are also continuingto work with Poly Implants Protheses; S.A. (“PIP”) in furtherance of the PMAapplication for PIP’s pre-filled saline breast implant.  We are currently assisting in the collectionof appropriate data through its ongoing clinical trial.  We intend to submit the PMA application tothe FDA upon satisfactory completion of data collection and analysis.  Although we anticipate submission of thecompleted PMA application during 2006, there can be no assurance of timing,review or decision concerning the PMA application.  Although we are not the manufacturer we doand will continue to provide technical and other assistance with the clinicaltrials and regulatory efforts.

 

***Scar ManagementProducts***

 

Biodermis,one of our subsidiaries, competes in the scar management market and distributesproducts used in the prevention and management of visible scar tissue known as keloidand hypertrophic scars. Sales from these products contributed about 9% of totalsales for the three months ended September 30, 2005.  The Biodermis products achieve therapeuticresults by encapsulating the scar tissue with a soft, malleable, semi-occlusivepolymer in the form of sheets and ointments that are believed to mimic thenatural barrier function of the skin, improving the condition and appearance ofscars. In the United States, the products are marketed under the names EpiDermTMsilicone gel sheeting and XeragelTMsilicone ointment.  Internationally, the same products are alsomarketed under the names TopiGelTM and DermaSofTM.

 

Biodermis’secondary product lines consist mainly of two products, EPIfoamTM and HydroGOLDTM.  EPIfoam is a silicone backed, polyurethanefoam utilized post-lipectomy to assist in recovery and enhance the overallaesthetic appearance following liposuction. HydroGOLD is a hydrogel-based product for use in reducing the pain,discomfort and burning sensation frequently associated with procedures of theskin typically aimed at reducing fine lines and wrinkles and to eliminate orreduce the signs of aging, such as laser resurfacing, chemical peels andmicro-dermabrasion.  Additionally, aportion of Biodermis’ revenue is derived from original equipment manufacturingof scar management and post-operative care products for other medical devicecompanies who then sell the products under their own brand names.  To assure quality control and proper regulatorycompliance, Biodermis retains all responsibilities related to the FDA andEuropean CE-mark certification and regulatory compliance related tomanufacturing activities.  Some of these OEMcustomers are allowed to compete for sales in similar markets and for similarcustomers against Biodermis’ distributors and direct sales staff.

 

**APPLICATION OF CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES**

 

Management’s Discussion andAnalysis or Plan of Operation addresses MediCor’s consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States.  The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reportingperiod.  On an on-going basis, we evaluate our estimates and judgments,including those related to revenue recognition, inventories, adequacy ofallowances for doubtful accounts, valuation of long-lived assets and goodwill,income taxes, litigation and warranties.  We base our estimates onhistorical and anticipated results and trends and on various other assumptionsthat we believe are reasonable under the circumstances,

 

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including assumptions as tofuture events.  The policies discussed below are considered by managementto be critical to an understanding of 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 aresubject to an inherent degree of uncertainty.  Actual results may differfrom those estimates.

 

Management has identifiedthe critical accounting policies to be those related to revenue recognition, adequaciesof allowances for doubtful accounts, valuation of long-lived assets andgoodwill, income taxes, litigation and warranties.

 

**RESULTS OF OPERATIONS**

 

***Sales***

 

Salesfor the three months ended September 30, 2005 equaled $5,662,015, adecrease of $481,044 or 7.8% as compared to the prior year quarter.  The decrease in sales for this quarter wasprimarily attributable to a decline in European sales of breast implants causedby competition and weaker economic conditions in the region, partially offsetby sales growth in all other regions.  TheCompany sold about the same number of units as compared to the prior yearquarter, but experienced a decline in average selling prices due to marketdynamics including price competition, particularly in Europe.  While the Company cannot control the globalmarket conditions, marketing programs specifically targeting to adding value tothe Company’s products have been initiated to differentiate its products fromits competitors, including the hiring of a European head of sales in September 2005.  Based on our historical review of sales andexpertise in the breast implant industry, we believe that this sales decline isa short-term situation and that we will be able to increase sales and marketshare in the long term. The Company’s historical sales growth rate over therecent four quarters, including the recent quarter, was about 9%.

 

***Cost ofSales***

 

Cost of sales as apercentage of net sales for the three months ended September 30, 2005 wasapproximately 70% compared to approximately 58% during the same period in 2004.The majority of the costs associated with the production of our product arerecurring.  The resulting decrease inGross Margin from about 42% to about 30% was primarily attributable to thedecrease in average selling prices of breast implants as described above.  Additionally, an increase in production laborand quality control costs contributed to the decline in Gross Margin for thequarter ending September 30, 2005. These additional costs arose because the Company has initiated ongoingprograms to improve manufacturing efficiencies and quality systems, which webelieve will enable us to increase production and lower future cost of salesper unit.  Based on our historical reviewof costs, we expect that cost of sales in the future will remain in line on apercentage basis with this historic level of approximately 56%.

 

***Selling, General and Administrative***

 

Selling, general andadministrative (“SG&A”) expenses decreased to $3,579,066 for the threemonths ended September 30, 2005, as compared to $3,854,506 during the sameperiod in 2004.  The decrease can beattributed to: a reversal of $517,536 in long-term accrued liability for alegal settlement previously reserved for in a prior period; lower acquisitionexpenses of $485,500 and lower other expenses of $147,971.   Thesewere offset by increases in travel related expenses of $314,848; payroll$247,460; amortization and depreciation expense of $178,585 and a bad debtreserve of $134,674. Of all SG&A expenses, about 95% were recurring chargesfor this quarter.

 

***Researchand Development***

 

Research and development in the recent quarterending September 30, 2005 was $912,565, as compared to $633,714 for thecomparable period in 2004.  The increase of $278,851 is primarilyattributable to a net increase of higher spending associated with the salinebreast implant clinical trials.  Costs associated with the PIP productwere $104,855 and costs relating to the development of other product lines were$173,996.  We expect that research anddevelopment expenses will decrease once we receive required governmentapprovals, but will increase as we bring new products to market or existingproducts to new markets.

 

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***InterestExpense***

 

Interest expense increasedto $1,454,303 for the three months ended September 30, 2005, compared to $1,269,439in same period in the prior year. Interest expense consists primarily of interest related toborrowings.  The change in interest expense was primarily due to an increasein the average principal note payable to related party balances.

 

***Net Loss***

 

Net loss for the threemonths ended September 30, 2005 decreased to $3,950,126 from $3,830,028 inthe comparable period in 2004.  The change was due to higher sellingcosts, research and development and interest expense, which was then offset bya decrease in general and administrative expenses.  Basic and diluted loss per share at the quarterended September 30, 2005 was ($.021) as compared to ($0.21) at the quarterended September 30, 2004

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Cashused in operations during the three months ended September 30, 2005 was $4,023,949as impacted by selling, general and administrative expense, continued startupcosts, research and development expense and interest expense. The net effect onour investing activities of ($110,874) was due to the acquisition of additionalfixed assets.

 

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 salesin the United States and will not be in a position to materially increaseUnited States sales until the FDA issues a pre-market approval relating to oneor more of the products sought to be sold by us.  We are currently funding activities for twopre-market approval applications which are operating expenses.  Under our asset purchase agreement relating toone of those product lines, we have an obligation to make additional cashpayments on closing of that transaction (which only occurs following FDAapproval of the application). Thus, we have no obligation to close thistransaction or make this payment unless the product is cleared for marketing inthe United States. We expect we will be able to make that payment fromavailable cash or from the proceeds of affiliate debt, provided by such date wehave not concluded a third-party financing.

 

Wehave historically raised funds to support our operating expenses and capitalrequirements through sales of equity or debt securities or through other creditarrangements, including borrowing from our affiliates.  Our existing cash, cash equivalents and cash generatedfrom operations, including the operations of Eurosilicone, will be insufficientto meet our anticipated cash needs for the next 12 months.  To satisfy our liquidity requirements, we willneed to raise additional funds. To the extent additional sales of equity ordebt securities are insufficient to satisfy our liquidity requirements, we planon being able to obtain any necessary additional funds through the incurrenceof additional indebtedness to our affiliates.  We have received a written commitment fromInternational Integrated Industries, LLC, an affiliate of our chairman, toprovide sufficient cash to fund any operating expenses and capital expendituresthrough October 1, 2006. The same entity has provided to us over $71million in funding through September 30, 2005.  This historic funding has been a combinationof equity and debt.  The outstanding debtis a revolving credit facility with interest accruing at 10% per annum.  We have no set payment terms, though we try toremain current on payments of interest so as not to incur compound interest.  It is payable on demand. As a result, it canbe called at any time, and for any reason.  From time to time in connection with our otherfund-raising activities, International Integrated has converted some of thedebt to equity along side third-party investors.  There is no obligation or understanding thatany such conversions will occur.

 

Weare presently seeking to refinance some or all of the International Integratedindebtedness from a combination of third-party indebtedness, equity andpossible conversions of debt to equity.  Wemay or may not be successful.  In theinterim, any future funding from International Integrated may take the form ofdebt or equity or a combination thereof.  We expect our operating losses to continue andanticipate that we will need between $6.0 and $8.0 million in additionalliquidity to cover negative cash flow in fiscal 2006.  In addition, to the extent we want to pursueadditional acquisitions, we expect that we will need additional financing.  We do not presently have any commitments forsuch financing and it may not be available when we need it, on terms acceptableto us or at all.  The lack of adequatefinancing could adversely affect our ability to effect acquisitions.  Our Eurosilicone Holdings SAS subsidiary maybe required to make a performance payment of up to €3 million to the sellers ineach of fiscal 2006 and 2007 under the Eurosilicone acquisition agreement. Ifthese payments are required and Eurosilicone Holdings does not otherwise havesufficient funds from dividends or distributions from Eurosilicone,Eurosilicone Holdings intends to draw the necessary funds from its creditfacility with BNP Paribas, which was

 

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established in part specifically to provide a back-up funding source forthese performance payments.  Although Eurosiliconehas positive cash flow, it may or may not be sufficient to fund all of itsprojected operational, working capital, financial and other obligations.  As a result, we expect that from time to timeEurosilicone may have any additional liquidity needs which may require MediCoror third-party, such as bank, financing. As described above we have a written commitment from InternationalIntegrated Industries, LLC, to provide sufficient cash to fund any operatingexpenses and capital expenditures through October 1, 2006.

 

Ourrevenues are primarily denominated in U.S. dollars and in Euros, with U.S.dollars accounting for approximately 50% of total revenues.  Our expenses are primarily denominated in U.S.dollars, with the exception of certain operating expenses of Eurosilicone.  We have a net foreign exchange exposure impactof approximately 10% of our sales, which is primarily attributable to the Euro. We do not currently hedge againstforeign exchange risk and do not have any plan to do so in the immediatefuture.

 

**FACTORS THAT MAY AFFECT FUTURE RESULTS**

 

Certain statements containedin this Quarterly Report on Form 10-QSB, and other written and oralstatements made from time to time by us, do not relate solely to historicalfacts.  These statements are considered “forward-lookingstatements.”  Words such as “anticipate,”“believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “possible,”“project,” “should,” “will,” and similar words and expressions, identifyforward looking statements.  Theseforward-looking statements involve important risks and uncertainties that couldmaterially alter results in the future from those expressed in anyforward-looking statements made by us or on our behalf.  We caution you that forward-lookingstatements are only predictions and those actual events or results may differmaterially.  In evaluating thesestatements, you should specifically consider the factors described below thatcould cause actual events or results to differ materially.  We assume no obligation and do not intend toupdate these forward-looking statements, except as required by law.

 

***If we are unable to maintainsatisfactory agreements with third-party manufactures to distribute salinefilled breast implants in the United States, we may not be able to distributethose products in the United States.***

 

Wecurrently are dependent on maintaining rights to distribute in the UnitedStates breast implant products manufactured by third parties.  We may not be able to maintain these rightson acceptable terms or at all.  If wefail to maintain these rights, we may not be able to sell breast implantproducts in the United States for a number of years, if at all.

 

***If clinical trials for our productsare unsuccessful or delayed, we will be unable to meet our anticipateddevelopment and commercialization timelines.***

 

Before obtaining regulatoryapprovals for the commercial sale of any products, we must demonstrate throughpre-clinical testing and clinical trials that our products are safe andeffective for use in humans.  Conducting clinical trials is a lengthy,time-consuming and expensive process.

 

Completion of clinicaltrials may take several years or more.  Our commencement and rate ofcompletion of clinical trials may be delayed by many factors, including:

 

•      lackof efficacy during the clinical trials;

•      unforeseensafety issues;

•      uncertainties with or actions of ourcollaborative partners or suppliers;

•      slower than expected patient recruitment;

•      difficulties in patient retention; and

•      government or regulatory delays.

 

The results frompre-clinical testing and early clinical trials are often not predictive ofresults obtained in later clinical trials.  A number of new products haveshown promising results in clinical trials, but subsequently failed toestablish sufficient safety and efficacy data to obtain necessary regulatoryapprovals.  Data obtained from pre-clinical and clinical activities aresusceptible 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

 

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the clinical trials and changesin regulatory policy during the period of product development.  Any delaysin, or termination of, our clinical trials or clinical trials of ourcollaborative partners or suppliers will adversely affect our development andcommercialization timelines, which would adversely affect our future sales andprofitability.

 

***If we are unable to develop, gainregulatory approval for and market new products and technologies, we will notachieve meaningful revenue and may experience a decrease in demand for our productsor 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 respond quickly toconsumer needs or advances in medical technologies, without compromisingproduct quality, will be crucial to our success.  We are continually engaged in productdevelopment and improvement programs to establish and improve our competitiveposition.  We cannot, however, guaranteethat we will be successful in enhancing our existing products or products wehave in development or clinical trials. Nor can we guarantee that we will be successful in developing newproducts or technologies that will timely achieve regulatory approval orreceive market acceptance.  Oncedeveloped, we must also timely obtain regulatory approval for our products, thefailure of which may cause our products to be obsolete once regulatory approvalis granted.  Two of our competitors arein the advanced stage of obtaining regulatory approval for their siliconefilled breast implants in the United States, while we have not started theregulatory process for those products in the U.S.  This could put us at a significantdisadvantage in the U.S. market.  Thelack of U.S. regulatory approval for our products, in the face of ourcompetitors’ approvals, may also adversely affect us in foreign markets.

 

***If changes in the economy andconsumer spending reduce consumer demand for our products or our products indevelopment, our sales and profitability will suffer.***

 

Breast augmentation andreconstruction and other aesthetics procedures are elective procedures. Other than U.S. federally mandated insurance reimbursement for post-mastectomyreconstructive surgery, breast augmentations and other cosmetic procedures arenot typically covered by insurance. Adverse changes in the economy may cause consumers to reassess theirspending choices and reduce the demand for cosmetic surgery.  This shiftcould have an adverse effect on our projected future sales and profitability.

 

***Our ability toexpand our business will be significantly limited if we cannot obtainadditional 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 been fundedin substantial part by an affiliate of our chairman, we do not anticipate thisfunding source will provide sufficient capital to finance our intended growthstrategy, and we expect that we will need significant external financing toaccomplish our goals.  Our primary lenderis an affiliate of our chairman and may also seek to collect its debt on anaccelerated basis, which we would be unlikely to be able to do.  We have in the past and will likely in thefuture negotiate with potential equity and debt providers to obtain additionalfinancing, but this additional financing may not be available on terms that areacceptable to us, or at all.  If adequatefunds are not available, or are not available on acceptable terms, our abilityto operate our business or implement our expansion and growth plans will besignificantly impaired.  In addition, thefinancial terms of any such financing, if obtainable, may be dilutive toexisting stockholders.

 

***We rely on our chairman forcontinued capital funding, management direction and strategic planning and we donot presently have any alternative funding or a management transition plan inplace.***

 

Werely on our chairman, Donald K. McGhan, for our continued capital funding,management direction and strategic planning. Mr. McGhan is our principal lender, principal stockholder, chairmanof our board of directors and a member of our four-person executivecommittee.  Consequently, Mr. McGhanhas substantial influence over significant corporate transactions, includingacquisitions that we may pursue. Although we have no written charter, our executive committee generallyfunctions on the basis of consensus, though Mr. McGhan’s multiple rolesand significant financial and stockholder stake are typically considered.  To date, we have not had any event where Mr. McGhanhas sought to or exercised any type of unilateral control over us, though therecan be no assurance that this will not happen in the future.  The loss of Mr. McGhan’s

 

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services or financial support to our company could materially andadversely affect our operations.  We donot presently have a written or other well-established management or financingtransition plan in the event we were to lose the services or financial supportof Mr. McGhan.

 

***Because we have only a limitedoperating history and our business strategy calls for significant growththrough new products and acquisitions, there is significant uncertainty aboutour business and prospects.***

 

MediCorand its subsidiaries have only been operating since 1999. Although ourBiodermis and Eurosilicone operations have been in existence for longer periodsof time, Biodermis has only operated under our management since its acquisitionin 2001 and Eurosilicone has only operated under MediCor’s management since itsacquisition in July 2004. Significantly, during much of our history we have also been preventedfrom selling our primary existing product, breast implants, in the U.S. marketdue to the FDA’s 2000 call for a PMA for those products.  As a result, all of our revenues prior to theEurosilicone acquisition were derived primarily from our scar managementproducts.  Revenue generated by ourBiodermis subsidiary has not been significant, and we do not expect more than modestinternal growth in that segment.  As aresult, our historic business platform is not necessarily indicative of ourfuture business or prospects.

 

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

 

Risks for our businessinclude the uncertainties associated with developing and implementing anevolving 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 value deliveredto customers, respond to competitive developments and continue to attract,retain and motivate qualified employees.  We may not be successful inaddressing these challenges.

 

***If we suffer negative publicityconcerning the safety of our products, our sales may be harmed and we may beforced 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.  Negative publicity—whether accurate orinaccurate—about our products, based on, for example, news about breast implantlitigation or regulatory actions, could materially reduce market acceptance ofour products and could result in product withdrawals.  In addition, significant negative publicitycould result in an increased number of product liability claims, whether or notthese claims have a basis in fact.

 

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

 

Ourpresent growth strategy is based in significant part on the acquisition ofother companies, products and technologies that meet our criteria for strategicfit, geographic presence, revenues, profitability, growth potential andoperating strategy.  The successfulimplementation of this strategy depends on our ability to identify suitable acquisitioncandidates finance acquisitions, acquire companies and assets on acceptableterms 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 pursuingacquisition opportunities we will likely compete with other companies withgreater financial and other resources. Competition for these acquisition targets likely could also result inincreased prices of acquisition targets and a diminished pool of companies andassets available for acquisition.

 

Acquisitionsalso involve a number of other risks, including the risks of acquiringundisclosed or undesired liabilities, acquired in-process technology, stockcompensation expense and increased compensation expense resulting from newlyhired employees, the diversion of management attention, potential disputes withthe sellers of one or more acquired entities and the possible failure to retainkey acquired personnel.  Clientsatisfaction or performance problems with an acquired business or product linecould also have a negative impact on our reputation as a whole, and anyacquired entity or assets could

 

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significantly under-perform relative to our expectations.  Our ability to meet these challenges has notbeen established through repeated acquisitions.

 

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

 

***Acquisitions, distribution agreementterms, product research and development, and regulatory approvals andcompliance can result in significant reserves, write-offs and litigation.***

 

Someaspects of our business, such as acquisitions, distribution agreements withthird parties and product research and development, including regulatoryapprovals and compliance, have significant and sometimes unpredictable eventsthat can result in material financial and accounting events, includingreserves, write-offs and litigation.  Forexample, in our Eurosilicone acquisition, we made an aggregate of $754,463 innegative purchase accounting adjustments, we have incurred a total of$6,700,042 in reserves and write-offs in connection with our PIP.Americasubsidiary’s distribution agreement with PIP because of past uncertaintiesregarding PIP’s ability to pay its portion of the product replacement programfor its products distributed in the United States, and Eurosilicone is party tolitigation with one of its distributors in which damages of €4 million arealleged.  These aspects of our business,such as acquiring companies and technologies, establishing and administeringdistributor relationships and developing new products, are part of our businessstrategy.  As a result of the significanceof these events, their unpredictable timing and frequency and the variance instructure and outcome, these events and their financial impact areunpredictable and can create material fluctuations in our financial results.

 

***If our intellectual property rightsdo not adequately protect our products or technologies, others could competeagainst us more directly.***

 

Oursuccess depends in part on our ability to obtain patents or trademarks orrights to patents or trademarks, protect trade secrets, operate withoutinfringing upon the proprietary rights of others, and prevent others frominfringing on our patents, trademarks and other intellectual propertyrights.  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 generally involves complex legal and factual questionsand, therefore, enforceability and enforcement of patent rights cannot bepredicted with certainty.  Patents, ifissued, may be challenged, invalidated or circumvented.  Thus, any patents that we own or license fromothers may not provide adequate protection against competitors.  In addition, our pending and future 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 of certain foreign countries do not protect ourintellectual property rights to the same extent as do the laws of the UnitedStates.

 

Inaddition to patents and trademarks, our intellectual property includes tradesecrets and proprietary know-how.  Weseek protection of this intellectual property primarily through confidentialityand proprietary information agreements with our employees and consultants.  These agreements may not provide meaningfulprotection or adequate remedies for violation of our rights in the event ofunauthorized use or disclosure of confidential and proprietaryinformation.  Failure to protect ourproprietary rights could seriously impair our competitive position.

 

***We depend on a limited number ofsuppliers for certain raw materials and the loss of any supplier couldadversely affect our ability to manufacture many of our products.***

 

Wecurrently rely on a single supplier for silicone raw materials used in many ofour products.  We only have an oralsupply agreement with this supplier which includes an understanding that theywill transfer the necessary formulations to us in the event that it cannot meetour requirements.  We cannot guaranteethat this agreement will be enforceable or that we would be able to produce asufficient amount of quality silicone raw materials in a timely manner.  We will also depend on a sole or limitednumber of third-party manufacturers for silicone breast implants to bedistributed by us in the North America market.

 

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***Our international business exposesus to a number of risks.***

 

Asignificant part of our current sales are and a significant part of ourprojected future sales will be derived from international operations.  In addition, we have and anticipate having inthe future material international suppliers and operations, includingmanufacturing operations.  Accordingly,we are exposed to risks associated with international operations, includingrisks associated with re-valuation of the local currencies of countries wherewe purchase or sell our products or conduct business, which may result in ourpurchased products becoming more expensive to us in U.S. dollar terms or soldproducts becoming more expensive in local currency terms, thus reducing demand andsales of our products, or increased costs to us.  Our operations and financial results also maybe significantly 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;

•      managingforeign branch offices; and

•      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.

 

***Our failure to attract and retainkey managerial, technical, selling and marketing personnel could adverselyaffect our business.***

 

Oursuccess will depend upon our ability to attract and retain key managerial,financial, technical, selling and marketing personnel.  The lack of key personnel might significantlydelay or prevent the achievement of our development and strategic objectives.  Although we maintain a key man policy on twoof our Eurosilicone managers for the benefit of our commercial bank lenders, wedo not maintain any other key man life insurance on any of our employees.  Other than certain of our executives who areparties to employment agreements, none of our employees is under any obligationto continue providing services to us.  Weare continuing to build our management and technical staffs. We believe thatour success will depend to a significant extent on the ability of our key personnel,including the new management and technical staffs, to operate effectively, bothindividually and as a group.  Competitionfor highly skilled employees in our industry is high, and we cannot be certainthat we will be successful in recruiting or retaining these personnel.  We may also face litigation from competitorswith hiring personnel formerly employed by them.

 

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

 

Oursuccess will depend upon our ability to manage our internal andacquisition-based growth effectively. This will require that we continue to implement and improve ouroperational, administrative and financial and accounting systems and controlsand continue to expand, train and manage our employee base.  We anticipate that we will need to hire andretain numerous additional employees and consultants for both internal andacquisition-based growth for some time. Integration of these employees and consultants and employee andconsultant loss in the process will require significant management attentionand 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.

 

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***If our suppliers, collaborativepartners or consultants do not perform, we will be unable to obtain, develop,market or sell products as anticipated and we may be exposed to additionalrisks.***

 

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 providesuccessful products.  If we fail toestablish these arrangements, the number of products from which we couldreceive future revenues will be limited. Our dependence on supply, collaborative or consulting arrangements withthird parties subjects us to a number of risks. These arrangements may not be on terms favorable to us.  Agreements with suppliers may limit oursupply of products or require us to purchase products we can not profitablysell.  They may also restrict our abilityto market or distribute other products. Agreements with consultants or collaborative partners typically allowthe third parties significant discretion in electing whether or not to pursueany of the planned activities.  We cannotwith certainty control the amount and timing of resources our suppliers,collaborative partners or consultants may devote to our products and thesethird parties may choose to pursue alternative products.  These third parties also may not performtheir obligations as expected.  Businesscombinations, significant changes in their business strategy, or their accessto financial resources may adversely affect a supplier’s, partner’s orconsultant’s willingness or ability to complete its obligations under thearrangement.  Moreover, we could becomeinvolved in disputes with our suppliers, partners or consultants, which couldlead to delays or termination of the arrangements and time-consuming andexpensive litigation or arbitration.

 

***Our quarterly operating results aresubject to substantial fluctuations and any failure to meet financialexpectations for any fiscal quarter may disappoint securities analysts andinvestors 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:

 

•      changesin demand for our products;

•      ourability to meet the demand for our products;

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

•      existingand increased competition;

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

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

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

•      changesin pricing policies by us and our competitors;

•      thetiming of significant orders and shipments;

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

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

•      generaleconomic factors.

 

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 may cause our operating resultsto be below market analysts’ expectations in some future quarters, which couldcause the market price of our stock to decline.

 

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***If we are unable to avoidsignificant product liability claims or product recalls, we may be forced topay substantial damage awards and other expenses that could exceed our reservesand any applicable insurance coverage.***

 

In the past, the breast implant manufacturingindustry has been subject to significant litigation alleging product liability.  We also have in the past been, currently are,and may in the future be subject to product liability claims alleging that theuse of our technology or products has resulted in adverse health effects. Theseclaims may be brought even with respect to products that have received, or inthe future may receive, regulatory approval for commercial sale.  In particular, the manufacture and sale ofbreast implant products entails significant risk of product liability claimsdue to potential allegations of possible disease transmission and other healthfactors, rupture or other product failure. Some breast implant manufacturers that suffered these types of claims inthe past have been forced to cease operations or even to declarebankruptcy.  We may also face asubstantial risk of product liability claims from other products we may chooseto sell.  In addition to product liabilityclaims, we may in the future need to recall or issue field corrections relatedto our products due to manufacturing deficiencies, labeling errors, or othersafety or regulatory reasons.  Productliability claims, relating to alleged product defects, are distinguishable fromproduct warranty claims, which relate to allegations that products do not meetwarranties of merchantability or fitness for a particular purpose.  We address the substance of potential productwarranty claims relating to products distributed by us in the United Statesthrough our product replacement programs discussed above in this Item 1, “Business.”

 

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

 

***Lawsuits, including those seekingclass action status, may, if successful, cause us to incur substantialliability, including damage awards and significant legal fees that may exceedour 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 product replacement claims for claims arising from products oursubsidiary did distribute, the plaintiffs are seeking to hold our subsidiaryresponsible for more damages.  There canbe no assurance we can terminate the litigation as to our subsidiary for reservedamounts.  Although our subsidiary is indemnifiedby three separate entities, including Poly Implants Protheses, S.A., the Frenchmanufacturer, PIP/USA, Inc. the previous distributor, and Mr. JeanClaude Mas, personally, there can be no assurance this indemnity will protectus, as there is no guarantee the French manufacturer, the previous distributor,or Mr. Mas will, or is able to, honor the indemnification they haveprovided.  If our subsidiary isunsuccessful in defending against the claims involved in these suits, or ifclass action status is achieved, and the indemnification were to provenon-reliable, our subsidiary could be responsible for significant damages abovethe reserves and available assets needed to satisfy such a judgment.

 

***Our Eurosilicone operation does notcarry product liability or similar insurance and may expose us to additionalrisk.***

 

OurFrench Eurosilicone subsidiary has not in the past had a formal or informalproduct replacement or any similar program. It also does not have a history of product-related litigation.  We believe this is in part due to not sellingproducts in the United States, which historically has been much more litigiousthan the rest of the world.  Eurosiliconealso has in the past relied on third-party distributors in countries wheresales occur to support those products. Eurosilicone recently began introducing a product replacement program ona country-by-country basis.  Theinstitution of this product replacement program outside the United States orsignificant changes in litigation experience outside the United States mayexpose our Eurosilicone subsidiary to additional potential liability.  Although we have policies of carefullyobserving corporate

 

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formalities and otherwise seeking to preserve the protection of thecorporate form, there can be no assurance that some or all of these potentialliabilities will not expose us or our other subsidiaries to potentialliabilities as well.

 

***If third parties claim we areinfringing their intellectual property rights, we could suffer significantlitigation or licensing expenses or be prevented from marketing our products.***

 

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

 

***We are subject to substantialgovernment regulation, which could materially adversely affect 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 United States and abroad.  Most ofthe medical devices we sell or intend to sell or develop must undergo rigorouspre-clinical testing and clinical trials and an extensive regulatory approvalprocess before they can be marketed. This process makes it longer, more uncertain and more costly to bringthe products to market, and some of these products may not be approved, or, onceapproved, they may be recalled.  Thepre-market approval process can be particularly expensive, uncertain andlengthy.  Many devices for which FDAapproval has been sought by other companies have never been approved formarketing.  In addition to testing andapproval procedures, extensive regulations also govern marketing,manufacturing, distribution, labeling, and record-keeping procedures.  If we or our suppliers or collaborativepartners do not comply with applicable regulatory requirements, this couldresult in warning letters, non-approval, suspensions of regulatory approvals,civil penalties and criminal fines, product seizures and recalls, operatingrestrictions, injunctions, and criminal prosecution.

 

***Delays in or rejection of FDA orother government entity approval of new products would adversely affect ourbusiness.***

 

Delaysor rejection may be encountered due to, among other reasons, government orregulatory delays, lack of efficacy during clinical trials, unforeseen safetyissues, slower than expected rate of patient recruitment for clinical trials,inability to follow patients after treatment in clinical trials,inconsistencies between early clinical trial results and results obtained inlater clinical trials, varying interpretations of data generated by clinicaltrials, or changes in regulatory policy during the period of productdevelopment in the United States and abroad. In the United States, there has been a continuing trend of morestringent FDA oversight in product clearance and enforcement activities,causing medical device manufacturers to experience longer approval cycles, moreuncertainty, greater risk, and higher expenses. Internationally, there is a risk that we or our suppliers orcollaborative partners may not be successful in meeting the quality standardsor other certification requirements. Even if regulatory approval of a productis granted, this approval may entail limitations on uses for which the productmay be labeled and promoted.  It ispossible, for example, that we or our suppliers or collaborative partners maynot receive FDA approval to market our current or future products for broaderor different applications or to market updated products that representextensions of our, our suppliers’ or collaborative partners’ basictechnology.  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.

 

***Government regulation of manufacturingof medical devices is expensive and time consuming for manufacturers and mayresult in product unavailability or recalls.***

 

Medicaldevice manufacturing facilities also are subject to continual governmentalreview and inspection.  The FDA has statedpublicly that compliance with manufacturing regulations will be scrutinizedmore strictly.  A governmental authoritymay challenge our or our suppliers’ or collaborative partners’ compliance withapplicable federal, state and foreign regulations.  In addition, any discovery of previouslyunknown problems with products or facilities may result in restrictions on theproduct or the facility, including withdrawal of the product from the market orother enforcement actions.

 

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***If our use of hazardous materialsresults in contamination or injury, we could suffer significant financial loss.***

 

Ourmanufacturing and research activities involve the controlled use of hazardousmaterials.  We cannot eliminate the riskof accidental contamination or injury from these materials.  In the event of an accident or environmentaldischarge, we may be held liable for any resulting damages, which may exceedour financial resources.

 

***It is unlikely that we will issuedividends on our common stock in the foreseeable future.***

 

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

 

***We will sell additional equitysecurities in the future which will be at undetermined prices and will reducethe percentage of our equity owned by our existing stockholders.***

 

Inthe future we will sell additional shares of our common stock, or othersecurities convertible into or otherwise entitling the holder to purchase ourcommon stock.  In the future we will alsoissue additional options to purchase our common stock to our employees,possibly including our executive officers, and our directors, and possibly toconsultants and vendors.  We also intendto issue shares of our common stock in connection with acquisitions or othercommercial transactions and to holders of outstanding debt, including holdersthat are affiliates.  All such sales andissuances of our common stock, other equity securities and warrants and optionsto purchase our common stock, will be at presently undetermined prices, whichmay be lower than prices at which other holders of common stock purchased suchshares and dilutive to those holders, and will reduce the percentage of ourequity owned by our existing stockholders. These issuances may also adversely affect prevailing market prices forour common stock.

 

***The exercise of outstanding optionsand conversion rights will dilute the percentage ownership of our stockholders,and any sales in the public market of shares of our common stock underlyingthese options and conversion rights may adversely affect prevailing marketprices for our common stock.***

 

Asof the date of this filing, there are outstanding options to purchase anaggregate of 6,459,933 shares of our common stock at per share exercise pricesranging from $0.08 to $4.30. Furthermore, outstanding shares of our series A preferred stock may beconverted into 1,615,351 shares of our common stock at any time, andoutstanding convertible debentures may be converted into an aggregate of 70,000shares of our common stock at any time. In addition, we may issue additional shares of our common stock inrespect of dividends paid on outstanding shares of our series A preferredstock.  The exercise of such outstandingoptions and conversion rights will dilute the percentage ownership of ourstockholders, and any sales in the public market of shares of our common stockunderlying such options and conversion rights may adversely affect prevailingmarket prices for our common stock.

 

***The price of our common stock hashistorically been volatile.***

 

Themarket price of our common stock has in the past been, and may in the futurecontinue to be, volatile.  A variety ofevents, including quarter-to-quarter variations in operating results or newsannouncements by us or our competitors as well as market conditions in themedical device industry generally or the breast implant segment of that marketspecifically or changes in earnings estimates by securities analysts may causethe market price of our common stock to fluctuate significantly.  In addition, the stock market has experiencedsignificant price and volume fluctuations which have particularly affected themarket prices of equity securities of many companies and which often have beenunrelated to the operating performance of such companies.  These market fluctuations may adverselyaffect the price of our common stock.

 

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***Our common stock is thinly traded onthe Over-the-Counter Bulletin Board, which may not provide liquidity for ourinvestors.***

 

Ourcommon stock is quoted on the OTC Bulletin Board.  The OTC Bulletin Board is an inter-dealer,over-the-counter market that provides significantly less liquidity than the NasdaqStock Market or national or regional exchanges, such as the New York StockExchange and the American Stock Exchange.  Securities traded on the OTC Bulletin Boardare usually thinly traded, highly volatile, have fewer market makers and arenot followed by analysts.  Although wehave commenced the application process to have our common stock listed on theAmerican Stock Exchange, there can be no assurance that our common stock willbe approved for listing, and our stated intention to seek to list our commonstock on the Exchange may itself adversely affect investors’ willingness totrade our stock unless and until such listing. The SEC’s order handling rules, which apply to Nasdaq-listed securities,do not apply to securities quoted on the OTC Bulletin Board.  Quotes for stocks included on the OTC BulletinBoard are not listed in newspapers. Therefore, prices for securities traded solely on the OTC Bulletin Boardmay be difficult to obtain and holders of shares of our common stock may havebeen unable to resell their shares at or near their original acquisition price,or at any price.  If our common stock isapproved for listing on the American Stock Exchange, because we will have noprior trading history on the Exchange, there also can be no way to determinethe prices or volumes at which our common stock would trade on the Exchange ifit were so listed.  Holders of shares ofour common stock may not be able to resell their shares at or near theiroriginal acquisition price, or at any price.

 

***We have been subject to the pennystock regulations and will continue to be unless and until our common stock islisted on a national securities exchange or quoted on the Nasdaq Stock Market.***

 

SECregulations require additional disclosure relating to the market for pennystocks in connection with trades in any stock defined as a penny stock.  These regulations generally define a pennystock to be an equity security not listed on a national securities exchange orquoted on the Nasdaq Stock Market that has a market price of less than $5.00per share, subject to certain exceptions. Accordingly, we have been subject to the penny stock regulations,including those regulations that require the delivery, prior to any transactioninvolving a penny stock, of a disclosure schedule explaining the pennystock market and the risks associated therewith and which impose various salespractice requirements on broker-dealers who sell penny stocks to persons otherthan established customers and accredited investors (generally, institutionalinvestors).  In addition, under pennystock regulations, the broker-dealer must provide the customer with current bidand offer quotations for the penny stock, the compensation of the broker-dealerand its salesperson in the transaction and monthly account statements showingthe market value of each penny stock held in the customer’s account.  Moreover, broker-dealers who recommend “pennystocks” to persons other than established customers and accredited investorsmust make a special written suitability determination for the purchaser andreceive the purchaser’s written agreement to a transaction prior to sale.  These regulations tend to limit the abilityof broker-dealers to sell our securities and thus the ability of purchasers ofour securities to sell their securities in the secondary market.  Unless and until our common stock is listedon a national securities exchange or quoted on the Nasdaq Stock Market ortrades consistently above $5.00 per share, our common stock will be defined asa penny stock and be subject to these disclosure and trading restrictions.

 

***The terms of our outstandingpreferred stock or future preferred stock may negatively affect the value ofour common stock.***

 

Wehave the authority to issue an aggregate of 20,000,000 shares of preferredstock which may be issued by our board of directors with such preferences,limitations and relative rights as our board may determine without a vote ofour stockholders.  Presently, we haveauthorized 45,000 shares of preferred stock in one series, Series A 8.0%Convertible Preferred Stock, 6,219 of which were outstanding on the date ofthis filing.  Our series A preferredstock has, and other classes of our preferred stock we may issue in the futurewill have, priority over our common stock in the event of liquidation ordissolution.  In the event of ourliquidation or dissolution, our then-outstanding preferred stock (includingseries A preferred stock) will have priority of payment over all shares of ourcommon stock.  Preferred stock also generallyhas priority on payment of dividends over common stock.  Our series A preferred stock has thispriority, meaning that no dividends may be paid on our common stock unless allaccrued dividends on our series A preferred stock have been paid.  Each holder of convertible preferred stock(such as our series A preferred stock) may also generally, at the holder’soption, convert the preferred stock into common stock at any time.  We cannot predict whether, or to what extent,holders of convertible preferred stock will convert to common stock.  Preferred stock may also provide that theholders thereof may participate with the holders of common stock on dividendsor liquidation.  This may have the effectof substantially diluting the interest of the

 

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common stock holders.  Our seriesA preferred stock is not a participating preferred stock, though it isconvertible into our common stock.

 

Ourseries A preferred stock is presently convertible into shares of our commonstock at a price of $3.85 per share of common stock based on the initial $1,000liquidation preference per share of series A preferred stock.  Our series A preferred stock also votes on anas-converted basis has the right to elect two of our seven authorized directorsand has special voting rights on specified significant transactions orevents.  The certificate of designationfor the series A preferred stock includes a provision that if certain EBITDA orcommon stock value targets are not met by June 30, 2008, then theliquidation preference of our series A preferred stock will be increasedpursuant to a formula, capped at an additional 83% of the original liquidationpreference of the originally issued series A preferred stock.

 

Theperceived risk of dilution or any actual dilution occasioned by the conversionof our series A preferred stock, any other future series of preferred stockand/or issuance of awards under our 1999 stock compensation program maydiscourage persons from investing in our common stock or cause our stockholdersto sell their shares, which would contribute to the downward movement in stockprice of our common stock.  New investorscould also require that their investment be on terms at least as favorable asthe terms of our series A preferred stock (or another series of preferredstock) due to the potential negative effect of the dilution on a potentialinvestment.  In addition, downwardpressure on the trading price of our common stock could encourage investors toengage in short sales, which would further contribute to downward pressure onthe price of our common stock.

 

Therights, preferences, powers and limitations of our series A preferred stock, aswell as those of any future series of preferred stock as may be established, mayhave the effect of delaying, deterring or preventing a change of control of ourcompany.

 

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

 

Ourcertificate of incorporation limits the liability of directors and officers tothe maximum extent permitted by Delaware law. In addition, our certificate of incorporation authorizes us to obligateour company to indemnify our present and former directors and officers foractions taken by them in those capacities to the maximum extent permitted byDelaware law.  Our bylaws require us toindemnify each present or former director or officer, to the maximum extentpermitted by Delaware law, in the defense of any proceeding to which he or sheis made, or threatened to be made, a party by reason of his or her service tous.  In addition, we may be obligated tofund the defense costs incurred by our directors and officers.  These limitations on recourse againstofficers and directors and the affirmative protections of officers anddirectors may limit or restrict actions by or on behalf of the company orstockholders, which could adversely affect the company our stockholders.

 

***Concentration of ownership of ourcommon stock by our management and others and termination of employmentagreements we have entered into with our executive and other officers couldnegatively affect the market price of our common stock because they discourageopen market purchases of our common stock by purchasers who might seek tosecure control of MediCor.***

 

Ourofficers and directors as a group currently own an aggregate of 12,100,805shares of common stock, hold securities convertible into 994,807 shares ofcommon stock, and have been granted options to purchase an additional 1,865,230shares of common stock.  Not all of theseoptions can be exercised immediately and the options are exercisable at pricesranging from $1.50 to $4.30 per share. We may in the future issue additional shares of common stock, orsecurities exercisable for or convertible into common stock, to our officers ordirectors.

 

Ifour executive officers and directors exercised all their options and convertedall of the securities beneficially owned by them into an aggregate of 14,960,842shares of our common stock, our officers and directors would own approximately65% of our then-outstanding common stock. This concentration of ownership would probably insure our management’scontinued control of MediCor.

 

Inaddition, International Integrated Industries, LLC, an affiliate of ourchairman, currently holds approximately $54,933,489 of our debt.  If some or all of that debt were convertedinto our common stock, International Integrated could

 

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own a substantial percentage of our outstanding common stock.  This additional concentration of ownership ofour common stock could further discourage persons from making open market purchasesof our common stock for the purpose of securing a controlling interest inMediCor and thereby prevent increases in the market price of our common stock.

 

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

 

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

 

As of the quarter ended September 30,2005, management, with the participation of the chief executive and financialofficers, carried out an evaluation of the effectiveness of our disclosure controlsand procedures pursuant to Exchange Act Rule 13a-15.  Based upon that evaluation, the chiefexecutive officer and the chief financial officer believe that, as of end ofthe fiscal quarter covered by this report, our disclosure controls andprocedures were effective in making known to them material information relatingto MediCor (including its consolidated subsidiaries) required to be included inthis report.  There were no significantchanges in our internal control over financial reporting during the threemonths ended September 30, 2005 that have materially affected or arelikely to materially affect our internal control over financial reporting.

 

Management of MediCor isresponsible for establishing and maintaining effective internal control over financialreporting as is defined in Exchange Act Rule 13a-15(f).  The consolidated financial statements andother information presented in this annual report have been prepared inaccordance with accounting principles generally accepted in the United States.  MediCor’s internal control system wasdesigned to provide reasonable assurance to our management and board ofdirectors regarding the preparation and fair presentation of publishedfinancial statements.  Disclosurecontrols and procedures, no matter how well designed and implemented, canprovide only reasonable assurance of achieving an entity’s disclosureobjectives.  The likelihood of achievingsuch objectives is affected by limitations inherent in disclosure controls andprocedures.  These include the fact thathuman judgment in decision-making can be faulty and that breakdowns in internalcontrol can occur because of human failures such as simple errors or mistakesor intentional circumvention of the established process.  Management will continue to review ourdisclosure controls and procedures periodically to determine theireffectiveness and to consider modifications or additions to them.

 

***PART II—OTHER INFORMATION***

 

***ITEM 1.  LEGAL PROCEEDINGS***

 

In October 1999, Case No. 99-25227-CA-01 June 2000Case No. 00-14665-CA-01, and July 2003, Case No. 0322537-CA-27,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 Farren-Martinand our chairman, personally, in the Circuit Court of Miami-Dade County,Florida.  Also in September 2003,another member of the same family filed Case No. 03-15006-CA-09, againalleging similar claims on his own behalf. The Kwartin family members’ claims are primarily premised on allegationsthat plaintiffs are shareholders of PIP/USA, Inc. (“PIP/USA”) or havestatutory and common law rights of shareholders of PIP/USA as a result of loansor investments allegedly made to or into PIP/USA or a third party or under analleged employment agreement.  Plaintiffsallege that, as a result, they have certain derivative or other rights to analleged distribution agreement between Poly Implants Prostheses, S.A. (“PIP-France”)and PIP/USA.  Plaintiffs claim, amongother things, that III Acquisition Corporation dba PIP.America (“PIP.America”)and its chairman tortiously interfered with that agreement and with plaintiffs’other alleged rights as lenders, investors, shareholders, quasi-shareholders oremployees of PIP/USA or other entities. In addition to monetary damages and injunctive relief, plaintiffs seekto reinstate the alleged

 

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distribution agreement between PIP/USA andPIP-France and invalidate PIP.America’s distributor relationship withPIP-France.  It is PIP.America’s positionthat the Kwartin litigations are within the scope of the indemnification agreements.  A motion is currently pending to consolidateall of the cases.

 

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 KarenS. Witt, et al. v. PIP/USA, Inc., Case No. 03CH12928 were filed inthe Circuit Court of Cook County, Chancery Division, in or around July 2003.  Plaintiffs’ counsel in Jessica FischerSchnebel, et al. v. PIP/USA, Inc., Case No. 03CH07239 amended theircomplaint to include plaintiffs from the other four cases, and each of theothers has been voluntarily dismissed. The consolidated amended complaint seeks class certification and containscounts alleging product liability, breach of the implied warranties ofmerchantability and fitness for a particular purpose, violation of the IllinoisConsumer Fraud Act and third-party beneficiary status.  Plaintiffs seek unspecified monetary damages,exemplary damages and attorney’s fees and costs.  PIP.America has filed a motion seeking todismiss all counts but the third-party beneficiary claim.  Plaintiffs have filed a written response toPIP.America’s pending motion to dismiss, in which they assert that PIP.Americaand PIP-France entered into a joint venture. PIP.America is in the process of drafting its reply brief, and thehearing date on this motion is anticipated to occur in January 2006.  At the request of the court, PIP.America willoppose class certification after the motion to dismiss is ruled upon.  Poly Implants Protheses, S.A., a defendant inthe case, has agreed that it will indemnify PIP.America for any lossesPIP.America may suffer as a result of the Illinois litigation.

 

Other than for a limited portion of certain of itsown product replacement claims that it is administering, PIP.America isindemnified by PIP/USA, Inc., Poly Implants Protheses, S.A., and PolyImplants Protheses, S.A.’s President, Jean Claude Mas, personally, from, amongother things, claims arising from product not distributed by PIP.America.  PIP.America either already has, or is in theprocess of, asserting its indemnification claims and, in the event of anadverse judgment in any case, PIP.America intends to seek the benefits of thisindemnity.  As a result, the costsassociated with these matters are not anticipated to have a material adverseimpact on our business, results of operations or financial position.

 

In July 2005, IP Resource Limited, a UnitedKingdom-based company, filed an action against our subsidiary, EurosiliconeSAS, in the Marseille Civil Court (*Tribunal de GrandeInstance*), Marseille, France. The complaint alleges Eurosilicone infringed upon a European Patentknown as “*Implantable prosthesis device,*” Patent No. 0174 141 0 174 141 B1*,*and seeksdamages of 3 million Euros.  The case isin the preliminary stages and Eurosilicone believes it does not infringe on the0 174 141 0 174 141 B1 patent and intends to vigorously defendthe action.

 

Though it is not yet possible to predict the outcomeof the cases described above, MediCor and its subsidiaries, as applicable, arevigorously defending each lawsuit.

 

MediCor and its subsidiaries have been and willcontinue to be periodically named as a defendant in other lawsuits in thenormal course of business, including product liability and product warrantyclaims.  In the majority of such cases,the claims are dismissed, or settled for de minimis amounts.  Litigation, particularly product liabilitylitigation, can be expensive and disruptive to normal business operations andthe results of complex proceedings can be very difficult to predict.  Claims against MediCor or its subsidiarieshave been and are periodically reviewed with counsel in the ordinary course ofbusiness. We presently believe we or our subsidiaries have meritorious defensesin all lawsuits in which we or our subsidiaries are defendants, subject to thesubsidiaries’ continuing product replacement obligations, which thesubsidiaries intend to continue to satisfy. While it is not possible to predict the outcome of these matters, webelieve that the costs associated with them will not have a material adverseimpact on our business, results of operations or financial position.

 

***ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS***

 

None

 

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

 

None

 

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***ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS***

 

During the quarter coveredby this report, no matter was submitted to a vote of security holders throughthe solicitation of proxies or otherwise.

 

***ITEM 5.  OTHERINFORMATION***

 

None

 

***ITEM 6.  EXHIBITS***

 

See Exhibit Index at Page 40.

 

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SIGNATURES

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and onthe dates indicated.

 

 
|        |                   | ***MEDICOR LTD.***  (Registrant) |
|-------------|------------------------|---------------------------------------|
|        |                   |                                  |   |
|        |                   |                                  |   |
| Date:       | November 14, 2005 | By:                                   | /s/ Theodore R. Maloney |
|        |                   |                                  | Theodore R. Maloney |
|        |                   |                                  | Chief Executive Officer |
|        |                   |                                  |   |
|        |                   |                                  |   |
|  Date: | November 14, 2005 | By:                                   | /s/ Thomas R. Moyes |
|        |                   |                                  | Thomas R. Moyes |
|        |                   |                                  | Chief Financial Officer |

 

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EXHIBIT INDEX

 
| **Exhibit  No.** | ** ** | **Description**                                                                             |
|------------------|------------|---------------------------------------------------------------------------------------------|
| 10.1             |       | Employment Agreement dated April 1, 2005  between the Registrant and Marc S. Sperberg  |
| 10.2             |       | Employment Agreement dated November 7, 2005  between the Registrant and Paul R. Kimmel |
| 31.1             |       | Principal Executive Officer  Certification Pursuant To 17 C.F.R. Section 240.13a-14(a) |
| 31.2             |       | Principal Financial  Officer Certification Pursuant To 17 C.F.R. Section 240.13a-14(a) |
| 32.1             |       | Principal Executive  Officer Certification Pursuant To 18 U.S.C. Section 1350          |
| 32.2             |       | Principal Financial  Officer Certification Pursuant To 18 U.S.C. Section 1350          |

 

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