**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 December 31, 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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| **MEDICOR  LTD.**                                                  |
|--------------------------------------------------------------------|
| (Exact name of small  business issuer as specified in its charter) |
|                                                               |   |   |
| **Delaware**                                                       | ** ** | **14-1871462** |
| (State or other  jurisdiction  of incorporation or organization)   |   | (IRS Employer  Identification No.) |
|                                                               |   |   |
|                                                               |   |   |
|                                                               |   |   |
| **4560 S.  Decatur Blvd., Suite 300**                         | ** ** | ** ** |
| **Las  Vegas, Nevada**                                             | ** ** | **89103** |
| (Address of principal  executive offices)                          |   | (Zip Code) |
|                                                               |   |   |
| **(702) 932-4560**                                            |
| (Issuer’s telephone  number)                                  |

 

Check whether the issuer (1) filed all reports required to befiled by Section 13 or 15 (d) of the Exchange Act during the past 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  ý**    **No  o

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o**    **No  ý

 

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On February 3, 2005,there were 20,844,187 shares of common stock outstanding.

 

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

 

 

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**MEDICORLTD.**

# ** **

# **INDEX**

 
| Part I.  Financial Information |   |
|-------------------------------------|--------|
|                                |   |   |   |
| Item  1.                            |   | Consolidated  Financial Statements (Unaudited) |   |
|                                |   |   |   |
|                                |   | Consolidated  Balance Sheet – December 31, 2005 |   |
|                                |   |   |   |
|                                |   | Consolidated  Statements of Operations – Three Months Ended December 31, 2005 and 2004 |   |
|                                |   |   |   |
|                                |   | Consolidated  Statements of Operations – Six Months Ended December 31, 2005 and 2004 |   |
|                                |   |   |   |
|                                |   | Consolidated  Statements of Cash Flows – Six Months Ended December 31, 2005 and 2004 |   |
|                                |   |   |   |
|                                |   | Notes  to Consolidated Financial Statements – December 31, 2005 |   |
|                                |   |   |   |
| Item 2.                             |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                |   |   |   |
| 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**

**December 31,2005**

**(Unaudited)**

 
| **Assets**                                                                                                                                         | ** ** | ** **  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|
|                                                                                                                                               |       |        |       |
| Current  assets:                                                                                                                                   |       |        |       |
|                                                                                                                                               |       |        |       |
| Cash                                                                                                                                               |       | $           | 1,005,763  |   |
| Receivables,  net of allowance of $1,001,443                                                                                                       |       | 6,461,136   |       |
| Notes  receivable, net of allowance of $3,252,832                                                                                                  |       | —      |       |
| Inventories                                                                                                                                        |       | 4,649,859   |       |
| Prepaid  expenses and other current assets                                                                                                         |       | 163,974     |       |
| Total  current assets                                                                                                                              |       | 12,280,732  |       |
| Property and  equipment, net                                                                                                                       |       | 1,174,010   |       |
| Leased  property under capital leases, net                                                                                                         |       | 3,829,023   |       |
| Goodwill and  other intangibles, net                                                                                                               |       | 41,674,416  |       |
| Deposits                                                                                                                                           |       | 1,060,412   |       |
| Other assets                                                                                                                                       |       | 526,760     |       |
| Total assets                                                                                                                                       |       | $           | 60,545,353 |   |
|                                                                                                                                               |       |        |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                     |       |        |       |
|                                                                                                                                               |       |        |       |
| Current  liabilities:                                                                                                                              |       |        |       |
|                                                                                                                                               |       |        |       |
| Notes  payable                                                                                                                                     |       | $           | 2,220,164  |   |
| Note payable  to related party                                                                                                                     |       | 57,371,330  |       |
| Accounts  payable                                                                                                                                  |       | 6,488,506   |       |
| Obligations  under capital leases                                                                                                                  |       | 452,511     |       |
| Accrued  expenses and other current liabilities                                                                                                    |       | 3,457,609   |       |
| Payroll  taxes payable                                                                                                                             |       | 1,332,192   |       |
| Interest  payable to related party                                                                                                                 |       | 6,267,462   |       |
| Convertible  debentures                                                                                                                            |       | 250,000     |       |
| Total  current liabilities                                                                                                                         |       | 77,839,774  |       |
|                                                                                                                                               |       |        |       |
| Long-term  notes payable                                                                                                                           |       | 9,429,712   |       |
| Long-term  obligations under capital leases                                                                                                        |       | 2,021,520   |       |
| Total  liabilities                                                                                                                                 |       | 89,291,006  |       |
|                                                                                                                                               |       |        |       |
| Commitments  and contingencies (Note V)                                                                                                            |       |        |       |
|                                                                                                                                               |       |        |       |
| Preferred  shares subject to mandatory redemption requirements                                                                                     |       | 6,810,258   |       |
|                                                                                                                                               |       |        |       |
| Stockholders’  equity (deficit)                                                                                                               |       |        |       |
| Common  shares, $.001 par value, 100,000,000 shares authorized, 20,614,031 shares  issued, 20,593,733 shares outstanding and 20,298 shares retired |       | 20,560      |       |
| Additional  paid in capital                                                                                                                        |       | 27,596,588  |       |
| Deferred  compensation                                                                                                                             |       | (79,500     | )          |
| Accumulated  (deficit)                                                                                                                             |       | (61,770,499 | )          |
| Accumulated  other comprehensive income (loss)                                                                                                     |       | (1,323,060  | )          |
| Stockholders’  equity (deficit)                                                                                                               |       | (35,555,911 | )          |
| Total  liabilities and stockholders’ equity                                                                                                   |       | $           | 60,545,353 |   |

 

See accompanying notes to unauditedconsolidated financial statements

 

3

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**MediCor,Ltd.**

**Consolidated Statements of Operations and Comprehensive Income/ (Loss)**

**ThreeMonths Ended December 31, 2005 and 2004**

**(Unaudited)**

 
| ** **                                                 | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------------------------|------------|------------|------------|------------|------------|
| Net sales                                                  |       | $          | 6,981,294  |       | $          | 6,145,254 |   |
| Cost of  sales                                             |       | 4,874,748  |       | 3,180,430  |       |
|                                                       |       |       |       |       |       |
| Gross profit                                               |       | 2,106,546  |       | 2,964,824  |       |
|                                                       |       |       |       |       |       |
| Operating  expenses:                                       |       |       |       |       |       |
| Selling,  general and administrative                       |       |       |       |       |       |
| Salaries and  wages                                        |       | 2,085,601  |       | 1,263,942  |       |
| Other                                                      |       | 1,997,966  |       | 4,238,097  |       |
| Research and  development                                  |       | 573,148    |       | 567,475    |       |
|                                                       |       |       |       |       |       |
| Operating  loss                                            |       | (2,550,169 | )          | (3,104,690 | )          |
|                                                       |       |       |       |       |       |
| Net interest  expense                                      |       | 1,322,972  |       | 1,260,044  |       |
|                                                       |       |       |       |       |       |
| Loss before  income taxes                                  |       | (3,873,141 | )          | (4,364,734 | )          |
| Income tax  expense (benefit)                              |       | 268,571    |       | (58,595    | )          |
|                                                       |       |       |       |       |       |
| Net loss                                                   |       | (4,141,712 | )          | (4,306,139 | )          |
| Preferred  dividends deemed                                |       | —     |       | 154,468    |       |
| Preferred  dividends in arrears Series A Preferred 8% |       | 127,764    |       | 220,554    |       |
|                                                       |       |       |       |       |       |
| Net loss  attributable to common stockholders              |       | (4,269,476 | )          | (4,681,161 | )          |
|                                                       |       |       |       |       |       |
| Other  comprehensive loss, net of tax:                     |       |       |       |       |       |
| Foreign  currency translation adjustments                  |       | (1,360,898 | )          | (6,562     | )          |
|                                                       |       |       |       |       |       |
| Comprehensive  loss                                        |       | $          | (5,630,374 | )          | $          | (4,687,723 | ) |
|                                                       |       |       |       |       |       |
| Net loss per  share of common stock, basic and diluted     |       | $          | (0.21      | )          | $          | (0.26 | ) |
|                                                       |       |       |       |       |       |
| Weighted  average shares, basic and diluted                |       | 20,356,417 |       | 18,116,198 |       |

 

See accompanying notes to unauditedconsolidated financial statements

 

4

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**MediCor,Ltd.**

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

**Six MonthsEnded December 31, 2005 and 2004**

**(Unaudited)**

 
| ** **                                                 | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------------------------|------------|------------|------------|------------|------------|
| Net sales                                                  |       | $          | 12,643,309 |       | $          | 12,288,313 |   |
| Cost of  sales                                             |       | 8,820,740  |       | 6,733,915  |       |
|                                                       |       |       |       |       |       |
| Gross profit                                               |       | 3,822,569  |       | 5,554,398  |       |
|                                                       |       |       |       |       |       |
| Operating  expenses:                                       |       |       |       |       |       |
| Selling,  general and administrative                       |       |       |       |       |       |
| Salaries and  wages                                        |       | 3,372,027  |       | 2,288,502  |       |
| Other                                                      |       | 4,290,606  |       | 6,884,911  |       |
| Research and  development                                  |       | 1,485,713  |       | 1,201,189  |       |
|                                                       |       |       |       |       |       |
| Operating  loss                                            |       | (5,325,777 | )          | (4,820,204 | )          |
|                                                       |       |       |       |       |       |
| Net interest  expense                                      |       | 2,777,275  |       | 2,529,483  |       |
|                                                       |       |       |       |       |       |
| Loss before  income taxes                                  |       | (8,103,052 | )          | (7,349,687 | )          |
| Income tax  expense (benefit)                              |       | 140,081    |       | 282,316    |       |
|                                                       |       |       |       |       |       |
| Net loss                                                   |       | (8,243,133 | )          | (7,632,003 | )          |
| Preferred  dividends deemed                                |       | —     |       | 260,172    |       |
| Preferred  dividends in arrears Series A Preferred 8% |       | 251,764    |       | 429,310    |       |
|                                                       |       |       |       |       |       |
| Net loss  attributable to common stockholders              |       | (8,494,897 | )          | (8,321,485 | )          |
|                                                       |       |       |       |       |       |
| Other  comprehensive loss, net of tax:                     |       |       |       |       |       |
| Foreign  currency translation adjustments                  |       | (1,085,603 | )          | (196,256   | )          |
|                                                       |       |       |       |       |       |
| Comprehensive  loss                                        |       | $          | (9,580,500 | )          | $          | (8,517,741 | ) |
|                                                       |       |       |       |       |       |
| Net loss per  share of common stock, basic and diluted     |       | $          | (0.42      | )          | $          | (0.46 | ) |
|                                                       |       |       |       |       |       |
| Weighted  average shares, basic and diluted                |       | 20,346,091 |       | 18,089,308 |       |

 

See accompanying notes tounaudited consolidated financial statements

 

5

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**MediCor,Ltd.**

**Consolidated Statements of Cash Flows**

**Six MonthsEnded December 31, 2005 and 2004**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                                                                                                                |       |       |       |       |       |
| Net loss                                                                                                                                                                                                  |       | $          | (9,580,500 | )          | $          | (7,828,259 | ) |
| Adjustments  to reconcile net loss to net cash utilized by operating activities:                                                                                                                          |       |       |       |       |       |
| Depreciation  and amortization                                                                                                                                                                            |       | 861,293    |       | 483,369    |       |
| Provision  for doubtful accounts                                                                                                                                                                          |       | 110,078    |       | 2,195,686  |       |
| Inventory  write down                                                                                                                                                                                     |       | —     |       | 350        |       |
| Loss on  disposal of property and equipment                                                                                                                                                               |       | —     |       | —     |       |
| Non-employee  stock options                                                                                                                                                                               |       | 55,930     |       | 119,375    |       |
| Employee  preferred stock                                                                                                                                                                                 |       | —     |       | 80,000     |       |
| Directors  restricted common stock                                                                                                                                                                        |       | 53,000     |       | 26,500     |       |
| Changes in  operating assets and liabilities, excluding effects of acquisitions                                                                                                                           |       |       |       |       |       |
| Receivables                                                                                                                                                                                               |       | 470,510    |       | (1,447,974 | )          |
| Notes  receivable                                                                                                                                                                                         |       | (474,248   | )          | (1,492,094 | )          |
| Inventories                                                                                                                                                                                               |       | (773,024   | )          | (524,860   | )          |
| Prepaid  expenses and other current assets                                                                                                                                                                |       | 68,836     |       | 588,429    |       |
| Goodwill                                                                                                                                                                                                  |       | —     |       | (617,675   | )          |
| Deposits                                                                                                                                                                                                  |       | (964,232   | )          | 617,675    |       |
| Other assets                                                                                                                                                                                              |       | 92,156     |       | (629,918   | )          |
| Accounts  payable                                                                                                                                                                                         |       | 397,118    |       | 148,880    |       |
| Accrued  expenses and other current liabilities                                                                                                                                                           |       | 121,872    |       | (906,815   | )          |
| Income tax  payable                                                                                                                                                                                       |       | —     |       | —     |       |
| Payroll  taxes payable                                                                                                                                                                                    |       | 270,861    |       | 407,422    |       |
| Interest  payable                                                                                                                                                                                         |       | 2,657,554  |       | 775,422    |       |
| Long term  accrued liabilities                                                                                                                                                                            |       | (517,356   | )          | —     |       |
| Net cash  used in operating activities                                                                                                                                                                    |       | (7,150,152 | )          | (8,004,487 | )          |
|                                                                                                                                                                                                      |       |       |       |       |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                                                                                                                |       |       |       |       |       |
| Payments for  property and equipment                                                                                                                                                                      |       | (230,271   | )          | (282,827   | )          |
| Payments for  purchase of Laboratoires Eurosilicone S.A., net of cash acquired                                                                                                                            |       | —     |       | (8,800,727 | )          |
| Payments for  purchase of Deramedics, net of cash acquired                                                                                                                                                |       | —     |       | (75,000    | )          |
| Net cash  provided by (utilized) investing activites                                                                                                                                                      |       | (230,271   | )          | (9,158,554 | )          |
|                                                                                                                                                                                                      |       |       |       |       |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                                                                                                                |       |       |       |       |       |
| Principal  payments under capital lease obligations                                                                                                                                                       |       | (334,565   | )          | (262,867   | )          |
| Proceeds  from issuance of short term debt                                                                                                                                                                |       | 7,275,000  |       | 16,520,500 |       |
| Proceeds  from issuance of long term debt                                                                                                                                                                 |       | —     |       | 7,333,407  |       |
| Payments on  convertible debentures                                                                                                                                                                       |       | —     |       | (200,000   | )          |
| Payments on  short term debt                                                                                                                                                                              |       | (1,932,817 | )          | (6,160,251 | )          |
| Issuance of  common stock                                                                                                                                                                                 |       | 458,166    |       | 4,969      |       |
| Issuance of  preferred shares subject mandatory redemption requirements                                                                                                                                   |       | —     |       | 1,172,271  |       |
| Net cash  provided by financing activities                                                                                                                                                                |       | 5,465,784  |       | 18,408,029 |       |
|                                                                                                                                                                                                      |       |       |       |       |       |
| **EFFECT  ON EXCHANGE RATE CHANGES ON CASH**                                                                                                                                                              |       | (1,085,603 | )          | (191,269   | )          |
|                                                                                                                                                                                                      |       |       |       |       |       |
| **CHANGE  IN CASH AND CASH EQUIVALENTS**                                                                                                                                                                  |       |       |       |       |       |
| Net increase  (decrease) in cash and cash equivalents                                                                                                                                                     |       | (829,036   | )          | 1,053,719  |       |
| Cash and  cash equivalents at beginning of period                                                                                                                                                         |       | 1,834,799  |       | 165,092    |       |
|                                                                                                                                                                                                      |       |       |       |       |       |
| Cash at end  of period                                                                                                                                                                                    |       | $          | 1,005,763  |       | $          | 1,218,811 |   |
|                                                                                                                                                                                                      |       |       |       |       |       |
| **SUPPLEMENTAL  DISCLOSURE OF NON-CASH ACTIVITIES**                                                                                                                                                       |       |       |       |       |       |
|                                                                                                                                                                                                      |       |       |       |       |       |
| Conversion  of short-term debt to preferred stock                                                                                                                                                         |       | $          | —     |       | $          | 250,000 |   |
| Conversion  of long-term debt to common stock                                                                                                                                                             |       | $          | 50,000     |       | $          | 75,000 |   |
| Issuance of  preferred stock to employees/consultants                                                                                                                                                     |       | $          | —     |       | $          | 80,000 |   |
| Issuance of  preferred stock in lieu of dividends                                                                                                                                                         |       | $          | 237,000    |       |       |   |
| Issuance of  common stock to directors                                                                                                                                                                    |       | $          | 53,000     |       | $          | 26,500 |   |
|                                                                                                                                                                                                      |       |       |       |       |       |
| The Company  purchased all of the capital stock of Laboratories Eurosilicone S.A.S. for  $43,297,915. In conjunction with the acquisition, liabilities were assumed as  follows:                          |       |       |       |       |       |
| Fair value  of assets acquired                                                                                                                                                                            |       | $          | —     |       | $          | 15,870,718 |   |
| Goodwill                                                                                                                                                                                                  |       | $          | —     |       | $          | 32,211,067 |   |
| Cash paid  for capital stock                                                                                                                                                                              |       | $          | —     |       | $          | (39,332,356 | ) |
| Liabilities  assumed                                                                                                                                                                                      |       | $          | —     |       | $          | (8,749,429 | ) |
|                                                                                                                                                                                                      |       |       |       |       |       |
| 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                                                                                                                                                                                                  |       | $          | 213,959    |       | $          | 1,678,124 |   |
| Income Taxes                                                                                                                                                                                              |       | $          | 484,823    |       | $          | — |   |

 

See accompanying notes to unauditedconsolidated financial statements

 

6

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**MEDICORLTD. NOTES TO UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS December 31, 2005**

 

**Note A - Description of Business**

 

MediCor Ltd. (the “Company”or “MediCor”) is a global health care company that acquires, develops,manufactures and markets products primarily for the aesthetic, plastic surgeryand dermatology markets.  Currentproducts include breast implant products, other implants and scar managementproducts.  The Company’s breast implantproducts are currently sold in approximately 85 countries, but are not sold inthe United States or Canada.  Ourproducts are sold primarily in foreign (non-U.S.) countries and foreign salesare currently about 95% of total sales, with the largest country (Brazil) accountingfor about 15% of sales.  Breast implantand other implant products account for about 93% of total sales for the quarterended December 31, 2005, while scar management products contributedapproximately 7% of total sales. The Company sells its products to hospitals,surgical centers and physicians primarily through distributors, as well asthrough direct sales personnel.

 

MediCor was founded in 1999by chairman of the board Donald K. McGhan, the founder and former chairman andchief executive officer of Inamed Corporation and McGhan Medical.  MediCor’s objective is to be a leadingsupplier 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 Significant AccountingPolicies**

 

*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 and Use ofEstimates*****

 

The preparation of financial statements inaccordance with accounting principles generally accepted in the United Statesof America requires the Company to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and disclosureof contingent assets and liabilities.  Onan on-going basis, the Company evaluates its estimates and judgments, includingthose related to revenue recognition, inventories, adequacy of allowances fordoubtful accounts, valuation of long-lived assets and goodwill, income taxes,litigation and warranties.  The Companybases its estimates on historical and anticipated results and trends and onvarious other assumptions that the Company believes are reasonable under thecircumstances, including assumptions as to future events.  The policies discussed below are consideredby management to be critical to an understanding of the Company’s financialstatements.  These estimates form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources.  By their nature, estimates are subject to aninherent degree of uncertainty.  Actualresults may differ from those estimates.

 

*Revenue Recognition*

##### *** ***

##### ***The Company recognizes product revenue, net of sales discounts, returnsand allowances, in accordance with Staff Accounting Bulletin No. 104, “RevenueRecognition” (“SAB No. 104”) and Statement of Financial AccountingStandards No. 48, “Revenue Recognition When Right of Return Exists” (“SFASNo. 48”).  These statementsestablish that revenue can be recognized when persuasive evidence of anarrangement exists, delivery has occurred and all significant contractualobligations have been satisfied, the fee is fixed or determinable, andcollection is considered probable.  TheCompany recognizes revenue upon delivery of product to third-party distributorsand customers and does not allow for bill-and-hold sales.  Due to the widespread holding of consignmentinventory in the Company’s industry, the Company also recognizes revenue whenthe products are withdrawn from consignment inventory in hospitals, clinics anddoctors’ offices.  The***

 

7

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##### ***Company does not offer price protection to its third-party distributorsand customers and accepts product returns only if the product isdefective.  Appropriate reserves areestablished for anticipated returns and allowances are based on product returnhistory.  The Company believes itsestimate for anticipated returns is a “critical accounting estimate” because itrequires the Company to estimate returns and, if actual returns vary, it couldhave a material impact on reported sales and results of operations.  Historically the Company’s estimates ofreturn rates have not deviated from the actual returns by more than 1% to 2%.***

 

*Allowance for Doubtful Accounts*

##### *** ***

##### ***MediCor maintains allowances for doubtful accounts for estimated lossesresulting from the inability of some of its customers to make requiredpayments.  The allowances for doubtfulaccounts are based on the analysis of historical bad debts, customercredit-worthiness, past transaction history with the customer, current economictrends, and changes in customer payment terms. If the financial condition of MediCor’s customers were to deteriorate,adversely affecting their ability to make payments, additional allowances maybe required.***

##### *** ***

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

##### *** ***

##### ***Inventories are stated at the lower of cost or market using thefirst-in, first-out (“FIFO”) method.  TheCompany may write down its inventory for estimated obsolescence or unmarketableinventory equal to the difference between the cost of inventory and the estimatedmarket value based upon assumptions 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. Amortization of leasehold improvements is based upon the estimateduseful lives of the assets 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 anddispositions are accounted for in accordance with Statement of FinancialAccounting Standards No. 144, “Accounting for the Impairment and Disposalof Long Lived Assets” (“SFAS No. 144”), as described below.

##### *** ***

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

##### *** ***

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

##### *** ***

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

##### *** ***

##### ***Goodwill represents the excess of the purchase price over the estimatedfair value of identified assets the businesses acquired. Other intangibleassets are recorded at fair value and amortized over periods ranging from threeto 16 years.  The Company adopted SFAS No. 142,“Goodwill and 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.***

 

8

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

 

III Acquisition Corp. d/b/aPIP.America (“PIP.America”) and MediCor Aesthetics, subsidiaries of the Companyin the U.S., provides a product replacement program to surgeons for deflationsof breast implant products for a period of ten (10) years from the date ofimplantation.  For each deflation, thesurgeon receives financial assistance plus a free implant replacement.Management estimated the amount of potential future product replacement claimsbased on statistical analysis.  Expectedfuture obligations are determined based on the history of product shipments andclaims and are discounted to a current value, and this amount is set aside asan allowance.  Changes to actual claims,interest rates or other estimations could have a material impact on the statisticalcalculation which could materially impact the Company’s allowance and resultsof operations.  Although these productsare not currently being sold (because we are in the process of obtaining FDAapproval of them, as more fully described below), they were sold under a distributionagreement prior to November 2000 and an allowance for product replacementsis maintained 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 anallowance 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 anallowance 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 allowances and results ofoperations.

 

For the quarter ended December 31,2005, PIP.America paid $325,925 with respect to settlements under its productreplacement program for products previously sold under its distributionagreement with Poly Implants Protheses S.A. (“PIP”), a third-party manufacturerof breast implants.  For the quarterended December 31, 2005, MediCor Aesthetics paid $12,800 with respect tosettlements under its product replacement program for the products previouslysold under its distribution agreement between Hutchison International, Inc.and Biosil Limited.

 

As of December 31,2005, the Company’s product replacement program allowance consisted of:

 

| ** **                                                           | ** ** | **Product  Replacement Allowance** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------|------------|
|                                                                 |       |                               |       |
| Balance at June 30, 2005                                        |       | $                                  | 1,004,072  |   |
| Accrual for product replacement program  expansion during the period |       | 83,526                             |       |
| Settlements incurred during the period                               |       | (728,000                           | )          |
|                                                                 |       |                               |       |
| Balance at December 31, 2005                                    |       | $                                  | 359,598    |   |

 

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

##### *** ***

##### ***Shipping and handling costs incurred by the Company are included incost of sales.***

##### *** ***

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

##### *** ***

##### ***Research and development costs are expensed by the Company as incurred,including the costs of clinical studies and other regulatory approvalactivities.***

##### *** ***

##### ***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 is typicallythe vesting period.

 

9

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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 TransactionsInvolving Stock Compensation, and Interpretation of APB No. 25,” andEmerging Issue Task Force (“EITF”) No. 96-18, “Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring, or In Conjunctionwith Selling, Goods, or Services” (“EITF No. 96-18”), whereby the fairvalue of such option and warrant grants are measured using the Fair Value BasedMethod at the earlier of the date at which the non-employee’s performance iscompleted or a performance 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 Recent Accounting Pronouncements***

 

In December 2004, FASB issued Statement of Financial Accounting Standards SFAS No. 123R, Share-Based Payment, which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services.  A key provision of this statement is the requirement of a public entity to measure the cost of employee services received in exchange for an award of equity instruments (including stock options) based on the grant date fair value of the award.  That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (i.e., the requisite service period or vesting period).  This standard became effective for the Company January 1, 2006 and will affect the financial statements starting in the third fiscal period of 2006.

 

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. 154requires retrospective application to prior periods’ financial statements of avoluntary change in accounting principle, unless it is impracticable to doso.  This pronouncement also requiresthat a change in the method of depreciation, amortization, or depletion forlong-lived, non-financial assets be accounted for as a change in accountingestimate that is effected 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 accounting changes and corrections oferrors made in fiscal years beginning after December 15, 2005.  The Statement does not change the transitionprovisions of any existing accounting pronouncements, including those that arein a transition phase as of the effective date of SFAS No. 154.  The Company intends to apply the provisionsof this statement effective July 1, 2006.

 

**Note C – Interim Reporting**

 

The accompanying unaudited consolidated financialstatements for the three and six-month periods ended December 31, 2005 andDecember 31, 2004, have been prepared in accordance with accountingprinciples generally accepted in the United States for interim financialinformation and with instructions to Form 10-QSB and Item 310 ofRegulation S-B.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  In the opinion ofmanagement, all adjustments (consisting only of normal recurring accruals,unless otherwise indicated) considered necessary for a fair presentation of theresults of operations for the indicated periods have been included. Certain amounts recorded in previous periods have been reclassified to conformto the current period presentation.  Operating results for the threemonths ended December 31, 2005 are not necessarily indicative of theresults for the full fiscal year.

 

10

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**Note D – Major Customers**

 

During the three and six months ended December 31,2005, two different distributor customers accounted for 15% and 12%,respectively, of the Company’s consolidated revenue.  Revenue related to these two distributors forthe three and six months ended December 31, 2004 was 10% and 11%,respectively.

 

**Note E – Cash and Cash Equivalents**

 

All highly liquidinvestments with original maturities of three months or less at the date ofpurchase are considered to be cash equivalents.

 

**Note F – Accounts Receivable**

 

Accounts receivable at December 31,2005 consisted of: 

 
| ** **                      | ** ** | **December 31, 2005** | ** ** |
|---------------------------------|------------|----------------------------|------------|
|                            |       |                       |       |
| Accounts receivable             |       | $                          | 7,462,579  |   |
| Allowance for doubtful accounts |       | (1,001,443                 | )          |
|                            |       |                       |       |
| Total                           |       | $                          | 6,461,136  |   |

 

Changes in allowance fordoubtful accounts are as follows:

 
| Balance July 1,  2005     |   | $        | 1,365,613 |   |
|--------------------------------|--------|----------|-----------|--------|
| Provisions / (recovery)        |   | (672,563 | )         |
| Write-offs                     |   | 308,393  |      |
| Balance December 31, 2005 |   | $        | 1,001,443 |   |

 

**Note G – Notes Receivable**

 

Notes receivable at December 31,2005 consisted of: 

 
| ** **       | ** ** | **December 31, 2005** | ** ** |
|------------------|------------|----------------------------|------------|
|             |       |                       |       |
| Notes receivable |       | $                          | 3,252,832  |   |
| Allowance        |       | (3,252,832                 | )          |
|             |       |                       |       |
| Total            |       | $                          | —     |   |

 

Poly Implants ProthesesS.A. (“PIP”), a third-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 toPIP.America based on PIP.America’s and the manufacturer’s administration ofproduct replacement and product replacement related claims.  These amounts have been fully provided for,as an allowance due to the lack of past payments and uncertain prospect ofcollection.

 

11

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**Note H – Inventories**

 

Inventories at December 31, 2005 consisted of:

 
| ** **      | ** ** | **December 31, 2005** | ** ** |
|-----------------|------------|----------------------------|------------|
|            |       |                       |       |
| Raw materials   |       | $                          | 869,934    |   |
| Work in process |       | 624,157                    |       |
| Finished goods  |       | 3,155,768                  |       |
|            |       |                       |       |
|            |       | $                          | 4,649,859  |   |

 

**Note I - Property and Equipment**

 

Property and equipment (excluding property heldunder capital leases) at December 31, 2005 consisted of: 

 
| ** **                                       | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|
|                                             |       |                       |       |
| Machinery and equipment                          |       | $                          | 1,286,456  |   |
| Furniture and fixtures                           |       | 471,939                    |       |
| Land                                             |       | 130,813                    |       |
| Leasehold improvements                           |       | 107,748                    |       |
|                                             |       |                       |       |
| Property and equipment, gross                    |       | 1,996,956                  |       |
| Less:  Accumulated depreciation and amortization |       | (822,946                   | )          |
|                                             |       |                       |       |
| Property and equipment, net                      |       | $                          | 1,174,010  |   |

 

Depreciation and amortization expense was $84,145for the three months ended December 31, 2005 and $141,825 for the threemonths ended December 31, 2004. Depreciation and amortization expense was $176,004 for the six monthsended December 31, 2005 and $308,354 for the same period a year ago.

 

12

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**Note J****–****Goodwill and Other Intangible Assets**

 

Goodwill and other intangible assets as of December 31,2005 consisted of:

| ** **                                                          | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------|------------|
|                                                                |       |                       |       |
| Goodwill                                                            |       | $                          | 32,615,091 |   |
| Customer-related intangibles                                        |       | 4,317,683                  |       |
| Supply agreements and other intangibles                             |       | 3,373,146                  |       |
| Patents                                                             |       | 3,000,000                  |       |
| Distribution and non-compete agreements                             |       | 355,000                    |       |
| Trademarks and trade names                                          |       | 115,908                    |       |
|                                                                |       |                       |       |
| Intangible assets, gross                                            |       | 43,776,828                 |       |
|                                                                |       |                       |       |
| Accumulated amortization - goodwill                                 |       | (41,973                    | )          |
| Accumulated amortization - customer-related  intangibles            |       | (1,209,069                 | )          |
| Accumulated amortization - supply  agreements and other intangibles |       | (5,000                     | )          |
| Accumulated amortization - patents                                  |       | (581,103                   | )          |
| Accumulated amortization - distribution  agreements and non-compete |       | (238,690                   | )          |
| Accumulated amortization - trademarks and  trade names              |       | (26,577                    | )          |
|                                                                |       |                       |       |
| Accumulated amortization                                            |       | (2,102,412                 | )          |
|                                                                |       |                       |       |
| Intangible assets, net                                              |       | $                          | 41,674,416 |   |

 

Amortizationexpense for the three months ended December 31, 2005 was $265,324,compared to $87,508 for the prior period ended December 31, 2004.  The amortization for the six months ended December 31,2005 was $536,358, compared to $175,015 with the prior period ended December 31,2004.

 

Thesupply agreement and other intangibles are purchase price adjustments that werea result of the acquisition selected assets of Hutchison International, Inc.The Company is continuing to evaluate these intangible assets in detail andanticipates that it will determine and place a fair value upon completion ofsuch valuation by June 30, 2006. Until completion of such evaluation, the Company cannot currentlyestimate any purchase price allocations. The Company does expect that a majority of the intangibles will berelated to the distribution agreement with Biosil Limited.

 

Theestimated amortization expense for the next five years consists of:

 
| ** **                    | ** ** | **Twelve months ending**   | ** ** |
|-------------------------------|------------|----------------------------|------------|
| ** **                    | ** ** | **December 31, 2006** | ** ** | **December 31, 2007** | ** ** | **December 31, 2008** | ** ** | **December 31, 2009** | ** ** | **December 31, 2009** | ** ** |
|                          |       |                       |       |   |   |   |   |   |   |   |   |
| Customer-related  intangibles |       | $                          | 406,878    |   | $ | 610,316 |   | $ | 610,316 |   | $ | 610,316 |   | $ | 610,316 |   |
| Distribution  agreements      |       | 11,250                     |       | 16,875 |   | 16,875 |   | 16,875 |   | 16,875 |   |
| Patents                       |       | 118,451                    |       | 177,677 |   | 177,677 |   | 177,677 |   | 177,677 |   |
| Trademarks  and trade names   |       | 5,490                      |       | 8,235 |   | 8,235 |   | 8,235 |   | 8,235 |   |
| Other                         |       | —                     |       | — |   | — |   | — |   | — |   |
|                          |       |                       |       |   |   |   |   |   |   |   |   |
| Total                         |       | $                          | 542,068    |   | $ | 813,102 |   | $ | 813,102 |   | $ | 813,102 |   | $ | 813,102 |   |

 

13

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**Note K – Property Held under Capital Leases**

 

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

 
| ** **                     | ** ** | **December 31, 2005** | ** ** |
|--------------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | ** **                 | ** ** |
| Buildings                      |       | $                          | 3,973,830  |   |
| Vehicles                       |       | 341,334                    |       |
| Copier                         |       | 24,138                     |       |
|                           |       |                       |       |
| Subtotal                       |       | 4,339,301                  |       |
|                           |       |                       |       |
| Less: Accumulated depreciation |       | (510,278                   | )          |
|                           |       |                       |       |
| Subtotal                       |       | (510,278                   | )          |
|                           |       |                       |       |
| Total                          |       | $                          | 3,829,023  |   |

 

Depreciationexpense was $79,688 for the three months ended December 31, 2005 ascompared to $66,121 for the three months ended December 31, 2004.  The depreciation for the six months ended December 31,2005 was $148,931 as compared to $119,313 for the six months ended December 31,2004.

 

Thefollowing is a schedule by year of future minimum lease payments undercapital leases that have initial or remaining noncancelable lease terms inexcess of one year as of December 31, 2005:

 
| **Year ending  December 31,**                  | ** ** | **Amount** | ** ** |
|-----------------------------------------------------|------------|------------|------------|
|                                                |       |       |       |
| 2006                                                |       |       | $          | 550,132 |   |
| 2007                                                |       |       | 412,863    |   |
| 2008                                                |       |       | 371,150    |   |
| 2009                                                |       |       | 328,863    |   |
| 2010                                                |       |       | 285,572    |   |
| Later years                                         |       | 1,059,096  |       |
|                                                |       |       |       |
| Total minimum payments required                     |       | 3,007,676  |       |
| Less: Amount representing interest                  |       | (533,645   | )          |
| Present value of the minimum lease payments         |       | 2,474,031  |       |
|                                                |       |       |       |
| Less: Current portion of capital lease  obligations |       | (452,511   | )          |
|                                                |       |       |       |
| Long term portion of capital lease  obligations     |       | $          | 2,021,520  |   |

 

**Note L – Deposits and Other Assets**

 

Depositsat December 31, 2005 totaled $1,060,412. The Company has $121,077 in security deposits on office leases, withlocal utility companies; an agreement with a former distributor of Eurosiliconeto purchase back their inventory for $300,000 and $639,335 in expenses incurredduring the acquisition process of Biosil Limited and Nagor Limited.

 

Otherassets consisted of debt acquisition costs of $526,760 at December 31,2005.

 

14

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**Note M – Accrued Expenses**

 

Accruedexpenses and other current liabilities at December 31, 2005 consisted of:

 
| ** **                  | ** ** | **December 31, 2005** | ** ** |
|-----------------------------|------------|----------------------------|------------|
| Wages and paid leave        |       | $                          | 1,161,350  |   |
| Legal settlement            |       | 1,000,000                  |       |
| Product replacement reserve |       | 359,598                    |       |
| Other                       |       | 936,661                    |       |
|                        |       |                       |       |
|                        |       | $                          | 3,457,609  |   |

 

TheCompany entered into a settlement with Europlex, S.A. de C.V, agreeing toextinguish and release all claims, in exchange for future payments totaling$1,000,000 as described in Note V.  Otheraccrued expenses included interest and other legal expenses.

 

**Note N – Convertible Debentures**

 

Convertibledebentures at December 31, 2005 were $250,000.  Theseconvertible debentures are convertible, at the holder’s discretion,after one year and at the 18-month, 24-month, 30-month and 36-month anniversaryof the issuance date to shares of the Company’s common stock at a price equalto the greater of $5.00 or seventy-five percent (75%) of the daily weightedaverage trading price per share of the Company’s common stock over a period oftwenty (20) trading days prior to the conversion date.  These convertible debentures mature between June 2006and August 2006.

 

Duringthe quarter ended December 31, 2005, we did not incur any costs relatingto these convertible debentures.

 

**Note O – Notes Payable**

 

Short-termnotes payable of $2,220,164 at December 31, 2005 consisted of severalnotes which ranged from $66,673 to $1,839,459 with annual interest rates ofbetween 3.39% and 8%.   The Company alsohas an outstanding balance at December 31, 2005 of $57,371,330 under anote payable to an affiliate, as described in Note P.

 

Long-termnotes payable consisted of a bank term loan in the amount of $9,197,295 for aterm of six years denominated in euros with an annual interest rate based onsix month LIBOR plus 2.25%.  The variableinterest rate as of December 31, 2005 was 4.89%.  In addition, we have several notes whichranged from $11,680 to $155,832 with terms of between 13 and 29 months, withannual rates of interest between 3.39% and 5.25%.

 

Futureminimum payments on long-term debt obligation (not including capital leases)are as follows:

 
| **Year ending December 31,** | ** ** | **Amount** | ** ** |
|-----------------------------------|------------|------------|------------|
| 2007                              |       | $          | 2,014,980  |   |
| 2008                              |       | 1,896,355  |       |
| 2009                              |       | 1,839,459  |       |
| 2010                              |       | 1,839,459  |       |
| 2011                              |       | 1,839,459  |       |
|                              |       |       |       |
|                              |       | $          | 9,429,712  |   |

 

15

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**Note P – Related Party Transactions**

 

International Integrated Industries, LLC (“LLC”) isa family holding company in which the chairman of the Company, Mr. DonaldK. McGhan, has a controlling interest. Neither the Company nor any of its subsidiaries has any direct ownershipin LLC.  LLC acted on behalf of theCompany by funding significant expenses incurred for which the Company has arevolving loan agreement as shown on the Company’s Consolidated Balance Sheetof $57,371,330 at December 31, 2005. The outstanding balance of the note payable accrues interest at anannual interest rate of ten percent (10%) per annum.  During the three months ended December 31,2005, LLC advanced $2,875,000 to the Company, of which $437,159 wasrepaid.  For the six months ended December 31,2005, LLC advanced $7,275,000 to the Company, of which $437,159 wasrepaid.  Interest expense relating tothis note payable was $1,437,120 for the three months ended December 31,2005 and $2,757,553 for the six months ended December 31, 2005, of which$100,000 had been paid.  The unpaidliability for these expenses is included in the Company’s note payable toaffiliates, which is contained in the financial statements presented herein.  The Company has a commitment from LLC to fundoperating shortfalls as necessary through January 1, 2007.

 

In October 2003, the Company entered into areimbursement agreement with Global Aviation Delaware, LLC, a companycontrolled by its chairman, for the reimbursement of expenses incurred in theoperation of its private plane when used for MediCor business.  The reimbursement agreement is effective onlyfor expenses incurred for MediCor business purposes.  The Company recognized a total expense of $12,400for the three months ended December 31, 2005 and $257,610 for the sixmonths ended December 31, 2005 pursuant to the reimbursementagreement.  This amount representsapproximately 7.4% of the quarterly operating costs of the entity and 13.1% ofthe six months’ operating costs of the entity. The Company has no minimum guarantees or guarantee of debt for thiscompany.   All expenses recognizedpursuant to the reimbursement agreement have been included by the Company inselling, general, and administrative expenses. Under this agreement, only costs directly tied to MediCor’s use of theplane asset are reimbursable to the owner. All other operating costs (such as fuel, pilot wages, food, etc.) arepaid directly by the Company through a service agreement we have with NexGenManagement, a company controlled by the Company’s chairman.  All disbursements to this agent occur onlywhen the plane is used for MediCor business purposes.  The Company recognized a total expense of$68,839 for three months ended December 31, 2005 and $241,037 for the sixmonths ended 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.

 

16

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**Note Q – Federal Income Taxes**

 

The Company follows FAS 109 for reporting incometaxes. The income taxexpense (benefit) reflected in theConsolidated Statements of Operations for the Company for the periods notedconsisted of:

 
| ** **                                                 | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Current                                                    |       |                       |       |                       |       |
|                                                       |       |                       |       |                       |       |
| Net loss                                                   |       | $                          | (1,758,067 | )                          | $          | (1,328,474 | ) |
| Foreign  income tax expense on unconsolidated subsidiaries |       | 140,081                    |       | 340,911                    |       |
|                                                       |       | (1,617,986                 | )          | (987,563                   | )          |
| Deferred                                                   |       |                       |       |                       |       |
|                                                       |       |                       |       |                       |       |
| Allowance  for bad debts                                   |       | 37,426                     |       | 67,269                     |       |
| Product  replacement reserve                               |       | 206,973                    |       | —                     |       |
| Depreciation  and amortization                             |       | 292,840                    |       | 25,500                     |       |
|                                                       |       | 537,239                    |       | 92,769                     |       |
|                                                       |       |                       |       |                       |       |
| Total benefit                                              |       | (1,080,747                 | )          | (894,794                   | )          |
| Valuation provision for realization of  deferred tax asset |       | 1,220,828                  |       | 1,235,705                  |       |
|                                                       |       |                       |       |                       |       |
| Total tax expense                                          |       | $                          | 140,081    |                       | $          | 340,911 |   |

 

The current tax expense for the quarter ended December 31,2005 resulted from income tax paid on a foreign subsidiary.  As of December 31, 2005, the Companyrecorded an allowance of$19,737,836 against certain future taxbenefits, the realization of which is currently uncertain.  The deferred differences related to certainaccounts receivable, accrued warranties, and depreciation/amortization notcurrently deductible as expenses under Internal Revenue Serviceprovisions.  Although the Companyrecorded this allowance to the deferred tax assets, the Company may stillutilize the future tax benefits from net operating losses for 20 years from theyear of the loss to the extent of future taxable income.  The estimated net operating losses for taxpurposes of approximately $25 million will expire over several years ending in2024.

 

Primary components of the deferred tax assets at theperiods noted were approximately as follows: 

 
| ** **                                                 | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------------------------|------------|----------------------------|------------|
| Computed  expected income tax liability at 34%        |       | $                          | (1,758,067 | ) |
| Adjustments                                                |       |                       |       |
| Net  operating loss                                        |       | 16,402,856                 |       |
| Allowance  for bad debt                                    |       | 1,446,454                  |       |
| Product  replacement reserve                               |       | 662,010                    |       |
| Depreciation  and amortization                             |       | 542,928                    |       |
|                                                       |       |                       |       |
| Income tax benefit                                         |       | $                          | 17,296,181 |   |
| Valuation allowance for realization of  deferred tax asset |       | (17,296,181                | )          |
|                                                       |       |                       |       |
| Deferred tax asset, net                                    |       | $                          | —     |   |
|                                                            |            |                            |            |  |  |

 

**Note R – Preferred Stock**

 

The Company authorized a series of 45,000 shares ofpreferred stock designated as Series A 8.0% Convertible Preferred Stock (“Series APreferred”) on July 5, 2004.  The Series APreferred has a par value of $.001 per share with a liquidation

 

17

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preference of $1,000 per share.  In the event of liquidation, shareholders ofthe Series A Preferred shall be entitled to receive priority as todistribution over common stock.  The Series APreferred stock is convertible into common stock at any time at a conversionprice of $3.85 per share until June 30, 2010, subject to potentialadjustment in the event certain EBITDA or common stock value targets are notmet.  On June 30, 2011, all sharesnot yet converted 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, will be payable by the Company in cash.  At December 31, 2005, the Company hadoutstanding an aggregate of 6,456 shares, issued for aggregate consideration of$6,810,258.

 

**Note S – Loss per Share**

 

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

 
| ** **                                          | ** ** | **Six Months Ended  December 31, 2005** | ** ** | **Six Months Ended  December 31, 2004** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                          | ** ** | **Income  (Numerator)**                      | ** ** | **Shares  (Denominator)**                    | ** ** | **Per-Share  Amount** | ** ** | **Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per-Share  Amount** | ** ** |
|                                                |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Net Income  (Loss) before preferred stock dividends |       | (8,243,133                                   | )          |                                         |       |   |   | (7,632,003 | ) |   |   |   |   |
| Less: Preferred stock dividends                     |       | 251,764                                      |       |                                         |       |   |   | 689,482 |   |   |   |   |   |
|                                                |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Basic EPS                                           |       | (8,494,897                                   | )          | 20,346,091                                   |       | (0.42 | ) | (8,321,485 | ) | 18,089,308 |   | (0.46 | ) |
|                                                |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Effect of dilutive securities                       |       | —                                       |       |                                         |       |   |   | — |   |   |   |   |   |
|                                                |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Diluted EPS                                         |       | $                                            | (8,494,897 | )                                            | 20,346,091 |   | (0.42 | ) | $ | (8,321,485 | ) | 18,089,308 |   | (0.46 | ) |
|                                                     |            |                                              |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |

 

Commonequivalent shares of 3,700,413 have been excluded from the computation ofdiluted earnings per share because their effect would be anti-dilutive.

 

**Note T – Stock Options and Warrants**

 

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

 
|                                           |   | **Options** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|------------------------------------------------|--------|-------------|------------|--------------------------------------|------------|
|                                           |   |        |       |                                 |       |
| Outstanding Options at June 30, 2005      |   | 4,315,757   |       | $                                    | 3.28       |   |
|                                           |   |        |       |                                 |       |
| Granted                                        |   | 160,000     |       | 3.10                                 |       |
| Exercised                                      |   | (235,043    | )          | 1.92                                 |       |
| Cancelled                                      |   | —      |       | —                               |       |
| Outstanding Options at December 31,  2005 |   | 4,240,714   |       | $                                    | 3.33       |   |
|                                           |   |        |       |                                 |       |
| Options exercisable at end of period           |   | 1,232,179   |       | $                                    | 3.17       |   |

 

18

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Thefollowing table summarizes information about employee stock options outstandingat December 31, 2005:

 
| **Outstanding**               | ** ** | **Exercisable**        | ** ** |
|-------------------------------|------------|------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number of  Options** | ** ** | **Weighted  Average  Remaining  Years of  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                          |       |                   |       |   |   |   |   |   |   |   |   |
| $1.00 -  $2.01                |       | 800,714                |       | 3.6 |   | $ | 1.75 |   | 342,179 |   | $ | 1.76 |   |
| $3.00 -  $3.80                |       | 2,340,000              |       | 5.2 |   | $ | 3.46 |   | 615,000 |   | $ | 3.47 |   |
| $4.15 -  $4.30                |       | 1,100,000              |       | 5.4 |   | $ | 4.23 |   | 275,000 |   | $ | 4.23 |   |

 

**Note U - Business Segment Information**

 

TheCompany is a corporate entity with a number of wholly-owned, autonomoussubsidiaries which operate as single business units in a single industrysegment across multiple geographic locations within the U.S. andinternationally and, as such, does not have multiple segments to report.  For the three months ended December 31,2005, sales from breast and other implant products were approximately 94% oftotal sales, whereas sales from scar management products were approximately 6%of total sales.  Revenues from customersand distributors attributable to various foreign countries outside the U.S werematerial and equaled about 95% of total sales, with the largest country(Brazil) accounting for about 15% of sales. Additionally, a significant amount of revenues and costs are eurodenominated.  Long-lived assetsattributable to various foreign countries outside the U.S. were material andequaled about $37 million, all located in France.  Amounts attributable to the U.S. wereapproximately $6 million.

 

**Note V – Commitments and Contingencies**

 

TheCompany has received a written commitment from LLC, an affiliate of itschairman, to provide sufficient cash to fund any operating loss through January 1,2007.  The same entity has provided the Companyan aggregate of over $74 million in funding from the Company’s inceptionthrough December 31, 2005.  Thefuture funding may take the form of debt or equity or a combination thereof.

 

TheCompany’s PIP.America subsidiary has a distribution agreement with PolyImplants Protheses S.A. (“PIP”), a third-party manufacturer of breast implantslocated in France.  This agreement coversthe sale by PIP.America of PIP’s saline, pre-filled breast implant products inNorth America, although no sales were reported in the year ending June 30,2004 because these products are not currently approved for distribution inNorth America.  Previously, themanufacturer was undertaking the process of securing FDA approval for theseproducts.  At March 30, 2004,PIP.America had $3,444,802 of accounts receivable from the manufacturer,representing amounts owed to PIP.America under the terms of the distributionagreement.  These amounts have been fullyprovided for, with an allowance for doubtful account, due to the lack of paymentand uncertain prospect of collection. Effective March 30, 2004, PIP.America and the manufacturer amendedthe distribution agreement to provide for, among other things, transferringadministration, funding and ownership of the pre-market approval applicationprocess to PIP.America.  In conjunctionwith this change, PIP.America forgave certain amounts owed by the manufacturer,and the parties amended the pricing terms. The amendments obligate PIP.America to fund the ongoing clinical andregulatory costs and expenses.  Theamounts and timing of these future costs are unknown and may be material.  The likelihood and timing of obtaining FDAapproval are also uncertain. Concurrently, the manufacturer issued to PIP.America a revolvingpromissory note for certain sums to come due to PIP.America based onPIP.America’s and the manufacturer’s administration of product replacement andproduct replacement related claims.  Theprincipal amount under the note as of December 31, 2005 was $3,252,832.

 

TheCompany’s Eurosilicone Holdings SAS subsidiary may be committed to makeadditional performance payments to the previous shareholders of Eurosilicone,over the next two years, in connection with revenue targets.  Thesepayments might be

 

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ashigh 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.

 

InOctober 1999, Case No. 99-25227-CA-01 June 2000 Case No. 00-14665-CA-01,and July 2003, Case No. 0322537-CA-27, separate but relatedcomplaints were filed by Saul and Ruth Kwartin, Steven M. Kwartin, and Robertand Nina Kwartin respectively, against our PIP.America subsidiary asco-defendant with PIP/USA, Inc. and Poly Implants Protheses, S.A., eachunaffiliated with MediCor, and Jean Claude Mas, Jyll Farren-Martin and ourchairman, 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.  All of thecases above have been consolidated for all pre-trial purposes, but not fortrial.  The Kwartin family members’claims are primarily premised on allegations that plaintiffs are shareholdersof PIP/USA, Inc. (“PIP/USA”) or have statutory and common law rights ofshareholders of PIP/USA as a result of loans or investments allegedly made toor into PIP/USA or a third party or under an alleged employment agreement.  Plaintiffs allege that, as a result, theyhave certain derivative or other rights to an alleged distribution agreementbetween Poly Implants Prostheses, S.A. (“PIP-France”) and PIP/USA.  Plaintiffs claim, among other things, thatIII Acquisition Corporation dba PIP.America (“PIP.America”) and its chairmantortiously interfered with that agreement and with plaintiffs’ other allegedrights as lenders, investors, shareholders, quasi-shareholders or employees ofPIP/USA or other entities. In addition to monetary damages and injunctive relief,plaintiffs seek to reinstate the alleged distribution agreement between PIP/USAand PIP-France and invalidate PIP.America’s distributor relationship withPIP-France.

 

PeggyWilliams v. PIP/USA, Inc., Case No. 03 CH 9654, Jessica FischerSchnebel, et al. v. PIP/USA, Inc., Case No. 03CH07239, Dawn MarieCooper, et al. v. PIP/USA, Inc., Case No. 03CH11316, Miriam Furman,et al. v. PIP/USA, Inc., Case No. 03CH10832 and Karen S. Witt, et al.v. PIP/USA, Inc., Case No. 03CH12928 were filed in the Circuit Courtof Cook County, Chancery Division, in or around July 2003.  Counsel for Jessica Fischer Schnebel, et al.v. PIP/USA, Inc., Case No. 03CH07239 amended her class actioncomplaint to include plaintiffs from the other four cases, and each of theothers was voluntarily dismissed.  Theconsolidated second amended complaint contained counts alleging productliability, breach of the implied warranties of merchantability and fitness fora particular purpose, violation of the Illinois Consumer Fraud Act and third-partybeneficiary status.  Unspecified monetarydamages, exemplary damages and attorneys fees and costs had been sought.  On January 26, 2006, PIP.America wondismissal of all counts in these cases but the third-party beneficiaryclaims.  Plaintiffs have until March 9,2006 to file new complaints against PIP.America.  If new complaints are held valid, and ajudgment or settlement against PIP.America results, Poly Implants Protheses,S.A., a defendant in the Schnebel litigation, has agreed that it will indemnifyPIP.America for any losses it may suffer as a result of the Illinoislitigation.

 

Asit relates to cases involving Poly Implants Protheses, S.A., 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 products manufactured by PIP-France.  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, we believe thecosts associated with these matters will not have a material adverse impact onour business, results of operations or financial position.

 

InJuly, 2005, IP Resources Limited, a UK-based company filed an action againstour subsidiary, Eurosilicone, SAS in the Marseille Civil Court (*Tribunal de Grande Instance*), Marseille, France. Thecomplaint alleges Eurosilicone infringed upon a certain European Patentlicensed by IP Resources, Inc. known as “*Implantableprosthesis device*”, Patent# *0 174 141 B1,*and seeks damages of $3 million Euros. The case is in thepreliminary stages and the company believes it does not infringe on the0 174 141 B1 patent and is prepared to wage a vigorous defensebased on both the validity of the patent and upon the merits of the claims.

 

Europlex,S.A. de C.V., a Mexican company, filed suit on December 23, 2004, againstour subsidiary, Eurosilicone S.A.S, in Avignon Commercial Court in France. Thesuit alleged Eurosilicone unlawfully terminated Europlex’ right to distributeEurosilicone breast implants in Mexico and sought damages of approximately €4,000,000 Euros.  On October 12,2005, Eurosilicone and Europlex entered into a settlement, agreeing toextinguish and release all claims, in exchange for future payments totaling$1,000,000 and an agreement in which MediCor Latin America, a subsidiary ofMediCor Ltd., would acquire all the remaining inventory of Europlex.

 

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Thoughit is not yet possible to predict the outcome of the cases described above,MediCor and its subsidiaries, as applicable, have denied plaintiffs’allegations and are vigorously defending themselves in each lawsuit.  MediCor and its subsidiaries have been andwill continue to be periodically named as a defendant in other lawsuits in thenormal course of business, including product liability and product warrantyclaims.  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.

 

TheCompany has operating leases for office, manufacturing and warehouse facilitiesunder various terms expiring from 2007 to 2008. Lease expenses amounted to $100,678 and $23,790 for the three monthsended December 31, 2005 and 2004, respectively.  For the six months ended December 31,2005, lease expenses were $188,475 compared to $272,107 for the six monthsending December 31, 2004.  Futureminimum operating lease payments are approximated as follows:

 
| **Year ending December 31,** | ** ** | **Amount** | ** ** |
|-----------------------------------|------------|------------|------------|
|                              |       |       |       |
| 2006                              |       | 242,317    |       |
| 2007                              |       | 251,776    |       |
| 2008                              |       | 37,088     |       |

 

**Note W – Acquisitions**

 

OnApril 25, 2005, one of the Company’s subsidiaries completed the purchaseof selected assets and liabilities of privately-heldHutchison International, Inc., a third-party distributor of breastimplants products in the United States for Biosil Limited.  The completion of this transaction allowedthe Company to, among other things, negotiate and ultimately enter into anexclusive distribution agreement directly with Biosil Limited for its breastimplants in the United States.  Theacquisition itself did not have a significant impact on the operating resultsof the Company, since the operations have no existing revenue—pending FDAapproval of the products.  The various agreements called for payments inthe form of stock and cash of about $3,000,003 as follows:  cash paymentsof $250,000 and 366,667 shares of MediCor Ltd. common stock valued at $7.50,subject to future adjustment based on actual trading prices following approvalfor marketing the products in the United States.

 

Thepurchase price resulted in a significant amount in other intangible assets andthe Company is continuing to evaluate this in detail and anticipates that itwill determine and place a fair value upon completion of such valuation by June 30,2006.  Until completion of suchevaluation, the Company cannot currently estimate any purchase priceallocations.  The Company does expectthat a majority of the intangibles will be related to the distributionagreement with Biosil Limited.

 

Thefinancial statements reflect various purchase price allocations.  In accordance with SFAS No. 141, “BusinessCombinations” (“SFAS No. 141”), the total purchase price was allocated tothe tangible and intangible assets acquired from Hutchison International, Inc.based upon their estimated fair values at the acquisition date.  The purchase accounting adjustments made arebased upon currently available information. Accordingly, the actual adjustments recorded in connection with thefinal purchase price allocation may be updated according SFAS No. 141, andany such changes may be material.

 

21

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Thefollowing table summarizes the components of the total purchase price and theallocation as of the date of acquisition and updated as of December 31, 2005:

 
| ** **                                      | ** ** | **Book  Value of  Assets Acquired /  Liabilities Assumed** | ** ** | **Purchase  Price  Adjustments** | ** ** | **Preliminary  Fair Value** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| Employee advances                               |       | $                                                          | 39,782     |                             | $          | —                      |       | $ | 39,782 |   |
| Inventory                                       |       | 372,061                                                    |       | (372,061                         | )          | —                      | (a)        |
| Property 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 allowance        |       | 195,750                                                    |       | 87,175                           |       | 282,925                     | (d)        |
| Book value of net assets                        |       | 217,585                                                    |       | (217,585                         | )          | —                      | (e)        |
| Purchase price                                  |       |                                                       |       | 3,000,003                        |       | 3,000,003                   | (e)        |
|                                            |       |                                                       |       |                             |       |                        |       |
| Total liabilities and shareholders’ equity |       | $                                                          | 413,335    |                             | $          | 2,869,593                   |       | $ | 3,282,928 |   |

 

Theamounts contained in the purchase price allocation may change as additionalinformation becomes available regarding the assets and liabilitiesacquired.  The purchase price allocationsare expected to 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 anypossible changes in purchase price allocations.

 

----

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

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

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

(d)           Reflects additional amounts for allowanceassociated with product replacement program.

(e)           To record the purchase price, as follows:$250,000 of cash and $2,750,003 in the form of common stock in MediCor (366,667shares), which exceeds the book value of purchased net assets by $2,782,418.

 

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***ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS***

 

ThisQuarterly Report on Form 10-QSB, including the following “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,”contains forward-looking statements that involve risks and uncertainties, aswell 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 and industrysegment growth and demand and acceptance of new and existing products anyprojections of sales, earnings, revenue, margins or other financial items; anystatements of the plans, strategies and objectives of management for futureoperations, including the execution of acquisition or marketing plans; anystatements regarding future economic conditions or performance; any statementsof belief or 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, denial or rescission of approval; delay, termination orrejection of new or existing products; changes in agreements with governmentalagencies; changes in government regulation; supply of raw materials; changes inreimbursement practices; adverse results of litigation; the performance ofcontracts by suppliers, customers and partners, including expiration ortermination of agreements; employee management issues; the challenge ofmanaging asset levels, including inventory; the difficulty of aligning expenselevels with revenue changes; and other risks that are described herein and thatare otherwise described from time to time in the Company’s reports and otherdocuments filed with the Securities and Exchange Commission, including thosecontained in “Factors that May Affect Future Results” set forth below in“Management’s Discussion and Analysis or Plan of Operation.”  The Companyassumes no obligation and does not intend to update these forward-lookingstatements, except as required by law. In the following “Management’s Discussion and Analysis or Plan of Operation,”the terms “MediCor,” “we,” “us” and “our” refer to MediCor Ltd. and itsconsolidated subsidiaries, as appropriate in the context, and, unless thecontext otherwise requires, “common stock” refers to the common stock, parvalue $.001 per share, of MediCor Ltd.

 

**OVERVIEW**

 

MediCorLtd. is a global health care company that acquires, develops, manufactures andmarkets products primarily for the aesthetic, plastic surgery and dermatologymarkets.  Current products include breast and other implants and scarmanagement products.  Our products are sold in foreign countries(non-U.S.) and foreign sales are currently about 95% of total sales.  Breast implant and other implant productsaccount for about 93% of total sales for the quarter ended December 31, 2005,while scar management products contributed approximately 7% of totalsales.  Brazil accounted for about 13% oftotal breast implant and other implant sales. We sell our products to hospitals, surgical centers and physiciansprimarily through distributors, as well as through direct sales personnel.

** **

**CompanyHistory 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 otherimplants for aesthetic, plastic and reconstructive surgery; and

•      scar managementproducts.

 

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***Breast and other implant products***

 

Our primary product line isbreast and other implants, accounting for about 94% of total sales for thethree months ended December 31, 2005 and 94% for the six months ended December31, 2005. With the acquisition of Eurosilicone in July 2004, we have become thethird largest breast implant manufacturer in the world in terms of sales, withan estimated 17% of the non-U.S. market. Sales in foreign (non-U.S.) countries are currently about 95% of totalsales, with the largest country accounting for about 15% of sales.  Eurosilicone also manufactures a broad lineof other implant products targeted for the aesthetic, cosmetic andreconstructive markets, including gluteal, calf, pectoral, malar and testicularimplants, as well as external breast prostheses, which collectively account forapproximately 4% of total sales.  Thefinancing for the Eurosilicone acquisition was provided primarily through loansfrom International Integrated Industries, LLC, an affiliate of MediCor’schairman, as more fully described in the financial statements and notes.

 

Our strategy to gain entryinto the U.S. saline filled breast implant market relies upon our contractualagreements with independent parties with whom we are working to obtain FDAapproval of their PMA applications.  ThePMA application for the Biosil Limited inflatable saline breast implant hasbeen submitted in module format.  We havealready addressed some of the observations arising from the FDA review of theapplication, and the four-year interval clinical trial data is currently beinganalyzed by the FDA.  This data, togetherwith our responses to any unaddressed observations will be submitted as a PMAamendment following completion of that FDA analysis.  Although we now anticipate submitting theappropriate data in response to the FDA’s observations and guidance in thefirst half of 2006, there can be no assurance of timing, review or decisionconcerning the PMA application.  We arealso continuing to work with Poly Implants Protheses, S.A. (“PIP”) infurtherance of the PMA application for PIP’s pre-filled saline breastimplant.  We are currently assisting inthe collection of appropriate data through its ongoing clinical trial.  We intend to submit the PMA application tothe FDA upon satisfactory completion of data collection and analysis.  Timing for submission of the completed PMAapplication is presently uncertain but is not expected to occur during 2006 dueto the need to collect, update and verify the clinical data.  As a result, there can be no assurance oftiming, review or decision concerning any resulting PMA application.  Although we are not the manufacturer of theseproducts, we do and will continue to provide technical and other assistancewith the clinical trials and regulatory efforts.

 

***Scar Management Products***

 

HPL Biomedical, one of oursubsidiaries, competes under the name Biodermis in the scar management marketand distributes products used in the prevention and management of visible scartissue known as keloid and hypertrophic scars. Sales from these productscontributed about 6% of total sales for the three months ended December 31,2005 and 6% for the six months ended December 31, 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 XeragelTM and Pro-SilTM silicone ointment.  Internationally, the same products are alsomarketed under the names TopiGelTM and DermaSofTM.

 

Biodermis’ secondary productlines 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 manufacturing of scar managementand post-operative care products for other medical device companies who thensell the products under their own brand names. To assure quality control and proper regulatory compliance, Biodermisretains all responsibilities related to the FDA and European CE-markcertification and regulatory compliance related to manufacturingactivities.  Some of these medical devicecompany customers are allowed to compete for sales in similar markets and forsimilar customers against Biodermis’ distributors and direct sales staff.

 

**APPLICATION OF CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

Management’s Discussion and Analysis or Plan ofOperation addresses MediCor’s consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States.  The preparation of these financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the 

 

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reportedamounts of revenues and expenses during the reporting period.  On anon-going basis, we evaluate our estimates and judgments, including thoserelated to revenue recognition, inventories, adequacy of allowances fordoubtful accounts, valuation of long-lived assets and goodwill, income taxes,litigation and warranties.  We base our estimates on historical andanticipated results and trends and on various other assumptions that we believeare reasonable under the circumstances, including assumptions as to futureevents.  The policies discussed below are considered by management to becritical 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 identified the critical accountingpolicies to be those related to revenue recognition, adequacies of allowancesfor doubtful accounts, valuation of long-lived assets and goodwill, incometaxes, litigation and warranties.

 

**RESULTS OF OPERATIONS**

 

***Sales***

 

Sales for the three monthsended December 31, 2005 equaled $6,981,294, an increase of $836,040 or 14% ascompared to the prior year quarter.  Thisgrowth rate was negatively impacted by unfavorable foreign exchange rates byapproximately 2%.  Unit growth drove thisincrease, offset by a decrease in unit prices. Most of the sales growth was driven by the Latin America region.

 

For the six months endedDecember 31, 2005 sales was $12,643,309, an increase of $354,996 or 3% versusthe same period a year ago.  This growthrate was negatively impacted by unfavorable foreign exchange rates byapproximately 3%.  Unit growth drove thisincrease, offset by a decrease in unit prices. The increase in sales for theperiod was primarily attributable to sales growth in Latin America and otherregions, which was then partially offset by a slight decline in European andAsia Pacific sales of breast implants caused by competition and weaker economicconditions in that region.  The Company’shistorical sales growth rate over the most recent four quarters, including thecurrent quarter, was about 8%, and the impact of foreign exchange wasimmaterial.

 

***Cost of Sales***

 

Cost of sales as a percentage of net sales for thethree months ended December 31, 2005 was approximately 70% compared toapproximately 52% during the same period in 2004.  For the six months ended December 31, 2005cost of sales as a percentage of net sales were approximately 70% compared to55% during the same period in 2004.  Themajority of the costs associated with the production of our product arerecurring.  The resulting decrease ingross margin for the three months ended December 31, 2005 from about 48% toabout 30% and the six months ended December 31, 2005 from 45% to 30% wasprimarily attributable to the decrease in average selling prices of breastimplants as described above. Additionally, an increase in production labor and quality control costscontributed to the decline in gross margin for the quarter ending December 31,2005.  These additional costs arosebecause the Company has initiated ongoing programs to improve manufacturingefficiencies and quality systems, which we believe will enable us to increaseproduction and lower future unit cost of sales. Based on our historical review of costs, we expect that cost of sales inthe future will remain in line on a percentage basis with this historic levelof approximately 66%.

 

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

 

Selling, general and administrative (“SG&A”)expenses decreased to $4,083,567 for the three months ended December 31, 2005,as compared to $5,502,039 during the same period in 2004.  The decrease can be attributed to a vendorsettlement of $983,558 relieving accounts payable; lower bad debt expense of$954,888; a bad debt recovery of $672,663; a reduction in product replacementexpense of $241,469; a decline in accounting fees of $240,141; lower commissionexpense of $94,747 and a reduction in other various expenses of $275,604.  These were offset by a legal settlement of$1,000,000 in addition to an increase in payroll of $549,882 and acquisitionexpense of $494,716.  Of all SG&A, themajority of the expenses were recurring charges for this quarter.

 

For the six months ended December 31, 2005, SG&Adecreased to $7,662,633 as compared to $9,173,413 during the same period a yearago.  The decrease can be attributed to avendor settlement of $983,558 relieving accounts payable recorded in a priorperiod; lower bad debt expense of $820,214; a bad debt recovery of $672,663; areduction in product replacement expense of $608,744; a reversal of $517,536 inlong-term accrued liability previously provided for in a prior period and lowercommission expense of $290,490. These were offset by a legal settlement of$1,000,000 in addition to an increase in payroll $797,342; travel relatedexpenses of $274,484; amortization and depreciation expense of $258,611 andother expenses of $51,988. Of all SG&A, the majority of the expenses wererecurring charges for this period.

 

***Research andDevelopment Expenses***

 

Researchand development expenses in the recent quarter ending December 31, 2005 were$573,148, as compared to $567,475 for the comparable period in 2004.  Forthe six months ended December 31, 2005, research and development expensesincreased to $1,485,713 as compared to $1,201,189 for the same period a yearago.  The increase of $284,524 isprimarily attributable to a net increase in spending associated with the salinebreast implant clinical trials.  Costs associated with the PIP productwere $180,859 and costs relating to the development of other product lines were$103,665.  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.

 

***InterestExpense***

 

Interest expense increased to $1,322,972 for thethree months ended December 31, 2005, compared to $1,260,044 in same period inthe prior year.  Interest expenseincreased to $2,777,275 for the six months ended December 31, 2005, as comparedto $2,529,483 for the six months ended December 31, 2004.  Interest expense consists primarily of interestrelated to borrowings.  The change in interest expense was primarily dueto an increase in the average principal balance on the note payable to relatedparty.

 

***Net Loss***

 

Net loss beforepreferred dividends for the three months ended December 31, 2005 decreased to $4,141,712 from $4,306,139for the comparable period in the previous year.  Net loss increased from $7,632,003reported in the six months ended December 31, 2004 period to $8,243,133 for thesix months ended December 31, 2005.  Thechange was due to higher selling costs, research and development and interestexpense, which was then offset by a decrease in general and administrativeexpenses.  Basic and diluted loss pershare was $(0.21) for the three month period compared to $(0.26) for the comparableperiod last year. Basic and diluted loss per share was $(0.42) for the sixmonth period compared to $(0.46) for the comparable period last year.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Cash used in operationsduring the six months ended December 31, 2005 was $7,150,152 as impacted byselling, general and administrative expenses, continued startup costs, researchand development expenses and interest expense. Our investing activities of$230,271 was due to the acquisition of additional fixed assets.

 

Our ability to make paymentsto refinance our debt and to fund planned capital expenditures and operationswill depend on our ability to secure additional significant financing andgenerate sufficient cash in the future. Currently, we have only

 

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limited product sales in theUnited States and will not be in a position to materially increase UnitedStates sales until the FDA issues a pre-market approval relating to one or moreof the products sought to be sold by us. We are currently funding activities for two pre-market approvalapplications, which are operating expenses.

 

Historically, we have raisedfunds to support our operating expenses and capital requirements through salesof equity or debt securities or through other credit arrangements, includingborrowing from our affiliates.  Ourexisting cash, cash equivalents and cash generated from operations, includingthe operations of Eurosilicone, will be insufficient to meet our anticipatedcash needs for the next twelve months. To satisfy our liquidity requirements, we will need to raise additionalfunds. To the extent that additional sales of equity or debt securities areinsufficient to satisfy our liquidity requirements, we plan to obtain anynecessary additional funds through the incurrence of additional indebtedness toour affiliates.  We have received awritten commitment from International Integrated Industries, LLC, an affiliateof our chairman, to provide sufficient cash to fund any operating expenses andcapital expenditures through January 1, 2007. The same entity has provided tous over $74 million in funding through December 31, 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 tryto remain current on payments of interest so as not to incur compoundinterest.  It is payable on demand. As aresult, it can be called at any time and for any reason.  From time to time in connection with ourother fund-raising activities, International Integrated has converted some ofthe debt to equity alongside third-party investors.  There is no obligation or understanding thatany such conversions will occur.

 

We are presently seeking torefinance some or all of the International Integrated indebtedness through acombination of third-party indebtedness, equity and possible conversions ofdebt to equity.  We may or may not be successful.  In the interim, any future funding fromInternational Integrated may take the form of debt or equity or a combinationthereof.  We expect our operating lossesto continue and anticipate that we will need between $6.0 and $8.0 million inadditional liquidity 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.  Under the Eurosilicone acquisition agreement,our ES Holdings SAS subsidiary may be required to make a performance payment ofup to €3 million to the sellers in each of fiscal 2006 and 2007. If thesepayments are required and ES Holdings does not otherwise have sufficient fundsfrom dividends or distributions from Eurosilicone, ES Holdings intends to seekto draw the necessary funds from its credit facility with BNP Paribas, whichwas established in part to provide a back-up funding source for theseperformance payments.  AlthoughEurosilicone has positive cash flow, it may or may not be sufficient to fundall of its projected operational, working capital, financial and otherobligations.  As a result, we expect thatfrom time to time Eurosilicone may have any additional liquidity needs whichmay require MediCor or a third-party, such as a bank, to provide additionalfinancing.  As described above we have awritten commitment from International Integrated Industries, LLC, to providesufficient cash to fund any operating expenses and capital expenditures throughJanuary 1, 2007.

 

Our revenues are primarilydenominated in U.S. dollars and in euros, with U.S. dollars accounting forapproximately 50% of total revenues.  Ourexpenses are primarily denominated in U.S. dollars, with the exception ofcertain operating expenses of Eurosilicone. We do not currently hedge against foreign exchange risk and do not haveany plan to do so in the immediate future.

 

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**FACTORS THAT MAY AFFECT FUTURE RESULTS**

 

Certain statements contained in this QuarterlyReport on Form 10-QSB, and other written and oral statements made fromtime to time by us, do not relate solely to historical facts.  These statements are considered“forward-looking statements.”  Words suchas “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,”“intend,” “may,” “plan,” “possible,” “project,” “should,” “will,” and similarwords and expressions, identify forward looking statements.  These forward-looking statements involveimportant risks and uncertainties that could materially alter results in thefuture from those expressed in any forward-looking statements made by us or onour behalf.  We caution you thatforward-looking statements are only predictions and those actual events orresults may differ materially.  Inevaluating these statements, you should specifically consider the factorsdescribed below that could cause actual events or results to differmaterially.  We assume no obligation anddo not intend to update these forward-looking statements, except as required bylaw.

 

***If we are unable to maintain satisfactoryagreements with third-party manufactures to distribute saline filled breastimplants in the United States, we may not be able to distribute those productsin the United States.***

 

We currently are dependenton maintaining rights to distribute in the United States breast implantproducts manufactured by third parties. In the case of our agreement with Biosil, we are operating together withBiosil under an expired agreement.  If wedo not conclude our acquisition of Biosil, there is no certainty that we wouldretain any rights under this agreement. Our relations with the other manufacturer have from time to time beencontentious, and there is no assurance that we will be able to maintain thosedistribution rights on acceptable terms or at all.  If we fail to maintain these rights, we maynot be able to sell breast implant products in the United States for a numberof years, if at all.

 

***If clinical trials for our products areunsuccessful or delayed, we will be unable to meet our anticipated developmentand commercialization timelines.***

 

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

 

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

 

•      lack of efficacy during the clinical trials;

•      unforeseen safety 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 from pre-clinical testing and earlyclinical trials are often not predictive of results obtained in later clinicaltrials.  A number of new products have shown promising results in clinicaltrials, but subsequently failed to establish sufficient safety and efficacy datato obtain necessary regulatory approvals.  Data obtained from pre-clinicaland clinical activities are susceptible to varying interpretations, which maydelay, limit or prevent regulatory approval.  In addition, regulatorydelays or rejections may be encountered as a result of many factors, includingperceived defects in the design of the clinical trials, changes in regulatorypolicy during the period of product development and questions about dataintegrity.  Any delays in, or termination of, our clinical trials orclinical trials of our collaborative partners or suppliers will adverselyaffect our development and commercialization timelines, which would adverselyaffect our future sales and profitability.

 

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

 

The medical device industryis highly competitive and is subject to significant and rapid technologicalchange. We believe that our ability to respond quickly to consumer needs oradvances in medical technologies, without compromising product quality, will becrucial to our success.  We arecontinually engaged in product development and improvement programs toestablish and improve our competitive position. We cannot, however, guarantee that we will be successful in enhancingour existing products or in developing or enhancing products we have indevelopment or clinical trials.  Nor canwe guarantee that we will successfully develop new products or technologiesthat will timely achieve necessary safety and efficacy and regulatory approval orreceive market acceptance.  Once developed,we must timely obtain regulatory approval for our products.  The failure to obtain this approval in atimely manner can jeopardize any chance of approval due to the age or integrityof data and may cause our products to be obsolete once regulatory approval isgranted.  Two of our competitors are inthe advanced stage of obtaining regulatory approval for their silicone filledbreast implants in the United States, while we have not started the regulatoryprocess for those products in the U.S. There is also no assurance that we will obtain regulatory approval forour current saline filled breast implant products or any other products in theU.S.  These regulatory and marketingconditions put us at a significant disadvantage in the U.S. market.  The lack of U.S. regulatory approval for ourproducts, in the face of our competitors’ approvals, may also adversely affectus in foreign markets.

 

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

 

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

 

***Our ability to expand our businesswill be significantly limited if we cannot obtain additional financing******.***

 

To accomplish our plans toconduct our current operations, to expand our current product lines and marketsand to purchase new companies, products and intellectual property, we needsubstantial additional capital, which we may not be able to obtain. Wecurrently have significant debt that must be serviced.  While we have to date been funded insubstantial 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 for continuedcapital funding, management direction and strategic planning and we do notpresently have any alternative funding or a management transition plan inplace.***

 

We rely on our chairman,Donald K. McGhan, for our continued capital funding, management direction andstrategic planning.  Mr. McGhan is ourprincipal lender, principal stockholder, chairman of our board of directors anda member of our four-person executive committee.  Consequently, Mr. McGhan has substantialinfluence over significant corporate transactions, including acquisitions thatwe may pursue.  Although we have nowritten charter, our executive committee generally functions on the basis ofconsensus, though Mr. McGhan’s multiple roles and significant financial andstockholder stake are typically considered. To date, we have not had any event where Mr. McGhan has sought to orexercised any type of unilateral control over us, though there can be noassurance that this will not happen in the future.  The loss of Mr. McGhan’s services orfinancial support to our company could materially and adversely affect ouroperations.  We do not presently have 

 

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a written or otherwell-established management or financing transition plan in the event we wereto lose the services or financial support of Mr. McGhan.

 

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

 

MediCor and its subsidiarieshave only been operating since 1999. Although our Biodermis and Eurosiliconeoperations have been in existence for longer periods of time, Biodermis hasonly operated under our management since its acquisition in 2001 andEurosilicone has only operated under MediCor’s management since its acquisitionin July 2004.  Significantly, during muchof our history we have also been prevented from selling our primary existingproduct, breast implants, in the U.S. market due to the FDA’s 2000 call for aPMA for those products.  As a result, allof our revenues prior to the Eurosilicone acquisition were derived primarilyfrom our scar management products. Revenue generated by our Biodermis subsidiary has not been significant,and we do not expect more than modest internal growth in that segment.  As a result, our historic business platformis not necessarily indicative of our future business or prospects.

 

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

 

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

 

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

 

Physicians and potentialpatients may have a number of concerns about the safety of our products andproposed products, whether such concerns have a basis in generally acceptedscience 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 merit.

 

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

 

Our present growth strategyis based in significant part on the acquisition of other companies, productsand technologies that meet our criteria for strategic fit, geographic presence,revenues, profitability, growth potential and operating strategy.  The successful implementation of this strategydepends on our ability to identify suitable acquisition candidates financeacquisitions, acquire companies and assets on acceptable terms and integratetheir operations successfully.

 

We may not be able toidentify suitable acquisition candidates in our desired product areas or we maynot be able to acquire identified candidates on acceptable terms.  Moreover, in pursuing acquisitionopportunities we will likely compete with other companies with greaterfinancial 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.

 

Acquisitions also involve anumber of other risks, including the risks of acquiring undisclosed orundesired liabilities, acquired in-process technology, stock compensationexpense and increased compensation expense resulting from newly hiredemployees, the diversion of management attention, potential disputes with thesellers of one or more acquired entities and the possible failure to retain keyacquired personnel.  Client satisfactionor performance problems with an acquired business or product line could alsohave a negative impact on our reputation as a whole, and any acquired entity orassets could 

 

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significantly under-performrelative to our expectations.  Ourability to meet these challenges has not been established through repeatedacquisitions.

 

We expect that, at least forthe foreseeable future, we will be required to use primarily cash considerationfor acquisitions.  We likely will berequired to obtain significant third-party financing to accomplish theseacquisitions.  This financing may not beavailable on acceptable terms, if at all. The terms of any such financing may be dilutive to existingstockholders.

 

***Acquisitions, distribution agreement terms,product research and development, and regulatory approvals and compliance canresult in significant provisions, write-offs and litigation.***

 

Some aspects of our business,such as acquisitions, distribution agreements with third parties and productresearch and development, including regulatory approvals and compliance, havesignificant and sometimes unpredictable events that can result in materialfinancial and accounting events, including provisions, write-offs andlitigation.  For example, in ourEurosilicone acquisition, we made an aggregate of $754,463 in negative purchaseaccounting adjustments, we have incurred a total of $6,700,042 in provisionsand write-offs in connection with our PIP.America subsidiary’s distributionagreement with PIP because of past uncertainties regarding PIP’s ability to payits portion of the product replacement program for its products distributed inthe United States.  These aspects of ourbusiness, such as acquiring companies and technologies, establishing andadministering distributor relationships and developing new products, are partof our business strategy.  As a result ofthe significance of these events, their unpredictable timing and frequency andthe variance in structure and outcome, these events and their financial impactare unpredictable and can create material fluctuations in our financialresults.

 

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

 

Our success depends in parton our ability to obtain patents or trademarks or rights to patents ortrademarks, protect trade secrets, operate without infringing upon theproprietary rights of others, and prevent others from infringing on ourpatents, trademarks and other intellectual property rights.  We will be able to protect our intellectualproperty from unauthorized use by third parties only to the extent that it iscovered by valid and enforceable patents, trademarks and licenses and we areable to enforce those rights.  Patentprotection generally involves complex legal and factual questions and,therefore, enforceability and enforcement of patent rights cannot be predictedwith certainty.  Patents, if issued, maybe challenged, invalidated or circumvented. Thus, any patents that we own or license from others may not provideadequate protection against competitors. In addition, our pending and future patent applications may fail toresult in patents being issued.  Also,those patents that are issued may not provide us with adequate proprietaryprotection or competitive advantages against competitors with similartechnologies.  Moreover, the laws ofcertain foreign countries do not protect our intellectual property rights tothe same extent as do the laws of the United States.

 

In addition to patents andtrademarks, our intellectual property includes trade secrets and proprietaryknow-how.  We seek protection of thisintellectual property primarily through confidentiality and proprietaryinformation 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 of suppliersfor certain raw materials and the loss of any supplier could adversely affectour ability to manufacture many of our products.***

 

We currently rely on asingle supplier for silicone raw materials used in many of our products.  We only have an oral supply agreement withthis supplier which includes an understanding that they will transfer thenecessary formulations to us in the event that it cannot meet ourrequirements.  We cannot guarantee thatthis 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 exposes us to anumber of risks.***

 

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

 

• foreign government regulation of medicaldevices;

• product liability claims;

• new export license requirements;

• political or economic instability in ourtarget markets;

• trade restrictions;

• changes in tax laws and tariffs;

• inadequate protection of intellectualproperty rights in some countries;

• managing foreign distributors, manufacturersand staffing;

• managing foreign branch offices; and

• foreign currency translations.

 

If these risks actuallymaterialize, our sales to international customers, as well as those domesticcustomers that use products manufactured abroad, may decrease or our supplieror manufacturing costs may materially increase.

 

***Our failure to attract and retain keymanagerial, technical, selling and marketing personnel could adversely affectour business.***

 

Our success will depend uponour ability to attract and retain key managerial, financial, technical, sellingand marketing personnel.  The lack of keypersonnel might significantly delay or prevent the achievement of ourdevelopment and strategic objectives. Although we maintain a key man policy on two of our Eurosiliconemanagers for the benefit of our commercial bank lenders, we do not maintain anyother 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 keypersonnel, including the new management and technical staffs, to operateeffectively, both individually and as a group. Competition for highly skilled employees in our industry is high, and wecannot be certain that we will be successful in recruiting or retaining thesepersonnel.  We may also face litigationfrom competitors with hiring personnel formerly employed by them.

 

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

 

Our success will depend uponour ability to manage our internal and acquisition-based growtheffectively.  This will require that wecontinue to implement and improve our operational, administrative and financialand accounting systems and controls and continue to expand, train and manageour employee base.  We anticipate that wewill need to hire and retain numerous additional employees and consultants forboth internal and acquisition-based growth for some time.  Integration of these employees andconsultants and employee and consultant loss in the process will require significantmanagement attention and resources.  Oursystems, procedures, controls and personnel may not be adequate to support ourfuture operations and our management may not be able to achieve the rapidexecution necessary to exploit the market for our business model.

 

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

 

We have in the past and mayin the future enter into supply, collaborative or consulting arrangements withthird parties to supply or develop products. These arrangements may not produce or provide successful products.  If we fail to establish these arrangements,the number of products from which we could receive future revenues will belimited.  Our dependence on supply,collaborative or consulting arrangements with third parties subjects us to anumber of risks.  These arrangements maynot be on terms favorable to us.  We arealso particularly vulnerable to suppliers of heavily regulated products, suchas breast implants, to consistently and timely produce high-qualityproducts.  If they do not, our businesswill suffer immediately and likely materially. Agreements with suppliers may limit our supply of products or require usto purchase products we can not profitably sell.  They may also restrict our ability to marketor distribute other products.  Agreementswith consultants or collaborative partners typically allow the third partiessignificant discretion in electing whether or not to pursue any of the plannedactivities.  We cannot with certaintycontrol the amount and timing of resources our suppliers, collaborativepartners or consultants may devote to our products and these third parties maychoose to pursue alternative products. These third parties also may not perform their obligations asexpected.  Business combinations,significant changes in their business strategy, or their access to financialresources may adversely affect a supplier’s, partner’s or consultant’swillingness or ability to complete its obligations under the arrangement.  Moreover, we could become involved indisputes with our suppliers, partners or consultants, which could lead todelays or termination of the arrangements and time-consuming and expensivelitigation or arbitration.

 

***Our quarterly operating results are subjectto substantial fluctuations and any failure to meet financial expectations forany fiscal quarter may disappoint securities analysts and investors and couldcause our stock price to decline.***

 

Our quarterly operatingresults may vary significantly due to a combination of factors, many of whichare beyond our control.  These factorsinclude:

 

• changes in demand for our products;

• our ability to meet the demand for ourproducts;

• movement in various foreign currencies,primarily the euro and the U.S. dollar;

• existing and increased competition;

• our ability to compete against significantlylarger and better funded competitors;

• the number, timing, pricing and significanceof new products and product introductions and enhancements by us and ourcompetitors;

• our ability to develop, introduce and marketnew and enhanced versions of our products on a timely basis;

• changes in pricing policies by us and ourcompetitors;

• the timing of significant orders andshipments;

• regulatory approvals or other regulatoryaction affecting new or existing products;

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

• general economic factors.

 

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

 

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***If we are unable to avoid significantproduct liability claims or product recalls, we may be forced to paysubstantial damage awards and other expenses that could exceed our reserves andany applicable insurance coverage.***

 

Inthe past, the breast implant manufacturing industry has been subject tosignificant 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 of breastimplant products entails significant risk of product liability claims due topotential 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 productliability claims, we may in the future need to recall or issue field correctionsrelated to our products due to manufacturing deficiencies, labeling errors, orother safety or regulatory reasons. Product liability claims, relating to alleged product defects, aredistinguishable from product warranty claims, which relate to allegations thatproducts do not meet warranties of merchantability or fitness for a particularpurpose.  We address the substance ofpotential product warranty claims relating to products distributed by usthrough our product replacement programs discussed above in this Item 1,“Business.”

 

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

 

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

 

Lawsuits have been filednaming us or one of our subsidiaries, the French manufacturer from which wehave purchased breast implant products, and the U.S. distributor of those sameproducts 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 provided 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 theprovided amounts.  Although oursubsidiary is indemnified by three separate entities, including Poly ImplantsProtheses, S.A., the French manufacturer, PIP/USA, Inc. the previousdistributor, and Mr. Jean Claude Mas, personally, there can be no assurancethis indemnity will protect us, as there is no guarantee that the Frenchmanufacturer, the previous distributor, or Mr. Mas will, or is able to, honorthe indemnification they have provided. If our subsidiary is unsuccessful in defending against the claimsinvolved in these suits, or if class action status is achieved, and theindemnification were to prove non-reliable, our subsidiary could be responsiblefor significant damages above the allowances and available assets needed tosatisfy such a judgment.

 

***Our Eurosilicone operation does not carryproduct liability or similar insurance and may expose us to additional risk.***

 

Our French Eurosiliconesubsidiary has not in the past had a formal or informal product replacement orany similar program.  It also does nothave a history of product-related litigation. We believe this is in part due to not selling products in the United States,which historically has been much more litigious than the rest of theworld.  Eurosilicone also has in the pastrelied on third-party distributors in countries where sales occur to supportthose products.  Eurosilicone recentlybegan introducing a product replacement program on a country-by-countrybasis.  The institution of this productreplacement program outside the United States or significant changes inlitigation experience outside the United States may expose our Eurosiliconesubsidiary to additional potential liability. Although we have policies of carefully observing corporate 

 

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formalities and otherwiseseeking to preserve the protection of the corporate form, there can be noassurance that some or all of these potential liabilities will not expose us orour other subsidiaries to potential liabilities as well.

 

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

 

Our commercial successdepends significantly on our ability to operate without infringing the patentsand other proprietary rights of others. However, regardless of our intent, our technologies may infringe thepatents or violate other proprietary rights of third parties.  In the event of such infringement orviolation, we may face litigation and may be prevented from pursuing productdevelopment or commercialization.

 

***We are subject to substantial governmentregulation, which could adversely affect our business.***

 

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

 

***Delays in or rejection of FDA or othergovernment entity approval of new products would adversely affect our business.***

 

Delays or rejection may beencountered due to, among other reasons, government or regulatory delays, lackof efficacy during clinical trials, unforeseen safety issues, slower thanexpected rate of patient recruitment for clinical trials, inability to followpatients after treatment in clinical trials, inconsistencies between earlyclinical trial results and results obtained in later clinical trials, varyinginterpretations of data generated by clinical trials, questions about dataintegrity from clinical trials, ageing of data, or changes in regulatory policyduring the period of product development in the United States and abroad.  We currently face these regulatory risks withrespect to our submitted and pending PMA applications.  In the United States, there has been acontinuing trend of more stringent FDA oversight in product clearance andenforcement activities, causing medical device manufacturers to experiencelonger approval cycles, more uncertainty, greater risk, and higher expenses.  Internationally, there is a risk that we orour suppliers or collaborative partners may not be successful in meeting thequality standards or other certification requirements. Even if regulatoryapproval of a product is granted, this approval may entail limitations on usesfor which the product may be labeled and promoted.  It is possible, for example, that we or oursuppliers or collaborative partners may not receive FDA approval to market ourcurrent or future products for broader or different applications or to marketupdated products that represent extensions of our, our suppliers’, or ourcollaborative partners’ basic technology. In addition, we or our suppliers, or our collaborative partners may notreceive export or import approval for products in the future, and countries towhich products are to be exported may not approve them for import.

 

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

 

Medical device manufacturingfacilities also are subject to continual governmental review andinspection.  The FDA has stated publiclythat compliance with manufacturing regulations will be scrutinized morestrictly.  A governmental authority maychallenge 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 materials resultsin contamination or injury, we could suffer significant financial loss.***

 

Our manufacturing andresearch activities involve the controlled use of hazardous materials.  We cannot eliminate the risk of accidentalcontamination or injury from these materials. In the event of an accident or environmental discharge, we may be heldliable for any resulting damages, which may exceed our financial resources.

 

***It is unlikely that we will issue dividendson our common stock in the foreseeable future.***

 

Wehave never declared or paid dividends on our common stock and do not intend topay dividends in the foreseeable future. The payment of dividends in the future will be at the discretion of ourboard of directors.  Therefore, aninvestor who purchases our common stock, in all likelihood, will only realize aprofit on its investment if the market price of our common stock increases invalue.

 

***We will sell additional equity securitiesin the future which will be at undetermined prices and will reduce thepercentage of our equity owned by our existing stockholders.***

 

In the future we will selladditional shares of our common stock, or other securities convertible into orotherwise entitling the holder to purchase our common stock.  In the future we will also issue additionaloptions to purchase our common stock to our employees, possibly including ourexecutive officers, and our directors, and possibly to consultants andvendors.  We also intend to issue sharesof our common stock in connection with acquisitions or other commercialtransactions and to holders of outstanding debt, including holders that areaffiliates.  All such sales and issuancesof our common stock, other equity securities, and warrants and options topurchase our common stock will be at presently undetermined prices, which maybe lower than prices at which other holders of common stock purchased suchshares and dilutive to those holders and which will reduce the percentage ofour equity owned by our existing stockholders. These issuances may also adversely affect prevailing market prices forour common stock.

 

***The exercise of outstanding options andconversion rights will dilute the percentage ownership of our stockholders, andany sales in the public market of shares of our common stock underlying theseoptions and conversion rights may adversely affect prevailing market prices forour common stock.***

 

As of the date of thisfiling, there are outstanding options to purchase an aggregate of 6,189,375shares of our common stock at per share exercise prices ranging from $0.08 to$4.30.  Furthermore, outstanding sharesof our series A preferred stock may be converted into 1,676,897 shares of ourcommon stock at any time, and outstanding convertible debentures may beconverted into an aggregate of 50,000 shares of our common stock at anytime.  In addition, we may issueadditional shares of our common stock in respect of dividends paid onoutstanding shares of our series A preferred stock.  The exercise of such outstanding options andconversion rights will dilute the percentage ownership of our stockholders, andany sales in the public market of shares of our common stock underlying suchoptions and conversion rights may adversely affect prevailing market prices forour common stock.

 

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

 

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

 

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

 

Our common stock is quotedon the OTC Bulletin Board.  The OTC BulletinBoard is an inter-dealer, over-the-counter market that provides significantlyless liquidity than the Nasdaq Stock Market or national or regional exchanges,such as the New York Stock Exchange 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 the AmericanStock Exchange, we were required to delay this application process due to thependency of an acquisition.  There can beno assurance that our common stock will be approved for listing in the futureonce we reinitiate the application process, and our stated intention to seek tolist our common stock on the Exchange may itself adversely affect investors’willingness to trade our stock unless and until such listing.  The SEC’s order handling rules, which applyto Nasdaq-listed securities, do not apply to securities quoted on the OTCBulletin Board.  Quotes for stocksincluded on the OTC Bulletin Board are not listed in newspapers.  Therefore, prices for securities tradedsolely on the OTC Bulletin Board may be difficult to obtain and holders ofshares of our common stock may have been unable to resell their shares at ornear their original acquisition price, or at any price.  If our common stock is approved for listingon the American Stock Exchange, because we will have no prior trading historyon the Exchange, there also can be no way to determine the prices or volumes atwhich our common stock would trade on the Exchange if it were so listed.  Holders of shares of our common stock may notbe able to resell their shares at or near their original acquisition price, orat any price.

 

***We have been subject to the penny stockregulations and will continue to be unless and until our common stock is listedon a national securities exchange or quoted on the Nasdaq Stock Market.***

 

SEC regulations requireadditional disclosure relating to the market for penny stocks in connectionwith 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 penny stockmarket 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 outstanding preferredstock or future preferred stock may negatively affect the value of our commonstock.***

 

We have the authority toissue an aggregate of 20,000,000 shares of preferred stock which may be issuedby our board of directors with such preferences, limitations and relativerights as our board may determine without a vote of our stockholders.  Presently, we have authorized 45,000 sharesof preferred stock in one series, Series A 8.0% Convertible Preferred Stock,6,456 shares of which were outstanding on the date of this filing.  Our series A preferred stock has, and otherclasses of our preferred stock we may issue in the future will have, priorityover our common stock in the event of liquidation or dissolution.  In the event of our liquidation ordissolution, our then-outstanding preferred stock (including series A preferredstock) will have priority of payment over all shares of our common stock.  Preferred stock also generally has priorityon payment of dividends over common stock. Our series A preferred stock has this priority, meaning that nodividends may be paid on our common stock unless all accrued dividends on ourseries A preferred stock have been paid. Each holder of convertible preferred stock (such as our series Apreferred stock) may also generally, at the holder’s option, convert thepreferred stock into common stock at any time. We cannot predict whether, or to what extent, holders of convertible preferredstock will convert to common stock. Preferred stock may also provide that the holders thereof mayparticipate with

 

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the holders of common stock on dividends or liquidation.  This may have the effect of substantiallydiluting the interest of the common stock holders.  Our series A preferred stock is not aparticipating preferred stock, though it is convertible into our common stock.

 

Our series A preferred stockis presently convertible into shares of our common stock at a price of $3.85per share of common stock based on the initial $1,000 liquidation preferenceper share of series A preferred stock. Our series A preferred stock also votes on an as-converted basis has theright to elect two of our seven authorized directors and has special votingrights on specified significant transactions or events.  The certificate of designation for the seriesA preferred stock includes a provision that if certain EBITDA or common stockvalue targets are not met by June 30, 2008, then the liquidation preference ofour series A preferred stock will be increased pursuant to a formula, capped atan additional 83% of the original liquidation preference of the originallyissued series A preferred stock.

 

The perceived risk ofdilution or any actual dilution occasioned by the conversion of our series Apreferred stock, any other future series of preferred stock and/or issuance ofawards under our 1999 stock compensation program may discourage persons frominvesting in our common stock or cause our stockholders to sell their shares,which would contribute to the downward movement in stock price of our commonstock.  New investors could also requirethat their investment be on terms at least as favorable as the terms of ourseries A preferred stock (or another series of preferred stock) due to thepotential negative effect of the dilution on a potential investment.  In addition, downward pressure on the tradingprice of our common stock could encourage investors to engage in short sales,which would further contribute to downward pressure on the price of our commonstock.

 

The rights, preferences,powers and limitations of our series A preferred stock, as well as those of anyfuture series of preferred stock as may be established, may have the effect ofdelaying, deterring, or preventing a change of control of our company.

 

***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.***

 

Our certificate ofincorporation limits the liability of directors and officers to the maximumextent permitted by Delaware law.  Inaddition, our certificate of incorporation authorizes us to obligate ourcompany to indemnify our present and former directors and officers for actionstaken by them in those capacities to the maximum extent permitted by Delawarelaw.  Our bylaws require us to indemnifyeach present or former director or officer, to the maximum extent permitted byDelaware law, in the defense of any proceeding to which he or she is made, orthreatened to be made, a party by reason of his or her service to us.  In addition, we may be obligated to fund thedefense 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 our commonstock by our management and others and termination of employment agreements wehave entered into with our executive and other officers could negatively affectthe market price of our common stock because they discourage open marketpurchases of our common stock by purchasers who might seek to secure control ofMediCor.***

 

Our officers and directorsas a group currently own an aggregate of 12,353,421 shares of common stock,hold securities convertible into 1,034,028 shares of common stock, and havebeen granted options to purchase an additional 2,004,749 shares of commonstock.  Not all of these options can beexercised immediately and the options are exercisable at prices ranging from$1.50 to $4.30 per share.  We may in thefuture issue additional shares of common stock, or securities exercisable foror convertible into common stock, to our officers or directors.

 

If our executive officersand directors exercised all their options and converted all of the securitiesbeneficially owned by them into an aggregate of 15,392,198 shares of our commonstock, our officers and directors would own approximately 59% of ourthen-outstanding common stock.  Thisconcentration of ownership would probably insure our management’s continuedcontrol of MediCor.

 

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In addition, InternationalIntegrated Industries, LLC, an affiliate of our chairman, currently holdsapproximately $57,371,330 of our debt. If some or all of that debt were converted into our common stock,International Integrated could own a substantial percentage of our outstandingcommon stock.  This additionalconcentration of ownership of our common stock could further discourage personsfrom making open market purchases of our common stock for the purpose ofsecuring a controlling interest in MediCor and thereby prevent increases in themarket price of our common stock.

 

Of the four members ofMediCor’s Executive Committee, we have entered into employment agreements withMessrs. Theodore Maloney, Jim McGhan and Thomas Moyes.  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 to suchperson an amount equal to three months’ compensation or compensation throughthe date our long-term disability policy begins paying benefits, asapplicable.  Thesetermination-of-employment agreements may discourage persons from making open marketpurchases of our common stock for the purpose of securing a controllinginterest in MediCor.

 

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

 

As of the quarter ended December 31, 2005,management, with the participation of the chief executive and financialofficers, carried out an evaluation of the effectiveness of our disclosurecontrols and procedures pursuant to Exchange Act Rule 13a-15.  Based 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 December 31, 2005 that have materially affected or are likely tomaterially affect our internal control over financial reporting.

 

Management of MediCor is responsible forestablishing 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 in accordancewith 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 published financialstatements.  Disclosure controls andprocedures, no matter how well designed and implemented, can provide onlyreasonable assurance of achieving an entity’s disclosure objectives.  The likelihood of achieving such objectivesis affected by limitations inherent in disclosure controls and procedures.  These include the fact that human judgment indecision-making can be faulty and that breakdowns in internal control can occurbecause of human failures such as simple errors or mistakes or intentional circumventionof the established process.  Managementwill continue to review our disclosure controls and procedures periodically todetermine their effectiveness and to consider modifications or additions tothem.

 

***PART II – OTHER INFORMATION***

 

***ITEM 1. LEGAL PROCEEDINGS***

 

InOctober 1999, Case No. 99-25227-CA-01 June 2000 Case No. 00-14665-CA-01, andJuly 2003, Case No. 0322537-CA-27, separate but related complaints were filedby Saul and Ruth Kwartin, Steven M. Kwartin, and Robert and Nina Kwartinrespectively, against our PIP.America subsidiary as co-defendant with PIP/USA,Inc. and Poly Implants Protheses, S.A., each unaffiliated with MediCor, andJean Claude Mas, Jyll Farren-Martin and our chairman, personally, in theCircuit Court of Miami-Dade County, Florida. Also in September 2003, another member of the same family filed Case No.03-15006-CA-09, again alleging similar claims on his own behalf.  All of the cases above have been consolidatedfor all pre-trial purposes, but not for trial. The Kwartin family members’ claims are primarily premised on allegationsthat plaintiffs are shareholders of PIP/USA, Inc. (“PIP/USA”) or have statutoryand common law rights of shareholders of PIP/USA as a result of loans orinvestments 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.  Plaintiffsclaim, among other things, that III Acquisition

 

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Corporation dba PIP.America (“PIP.America”) and its chairman tortiouslyinterfered with that agreement and with plaintiffs’ other alleged rights aslenders, investors, shareholders, quasi-shareholders or employees of PIP/USA orother entities. In addition to monetary damages and injunctive relief,plaintiffs seek to reinstate the alleged distribution agreement between PIP/USAand PIP-France and invalidate PIP.America’s distributor relationship withPIP-France.

 

PeggyWilliams v. PIP/USA, Inc., Case No. 03 CH 9654, Jessica Fischer Schnebel, etal. 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. 03CH10832and Karen S. Witt, et al. v. PIP/USA, Inc., Case No. 03CH12928 were filed inthe Circuit Court of Cook County, Chancery Division, in or around July2003.  Counsel for Jessica FischerSchnebel, et al. v. PIP/USA, Inc., Case No. 03CH07239 amended her class actioncomplaint to include plaintiffs from the other four cases, and each of theothers was voluntarily dismissed.  Theconsolidated second amended complaint contained counts alleging productliability, breach of the implied warranties of merchantability and fitness fora particular purpose, violation of the Illinois Consumer Fraud Act andthird-party beneficiary status. Unspecified monetary damages, exemplary damages and attorneys fees andcosts had been sought.  On January 26,2006, PIP.America won dismissal of all counts in these cases but thethird-party beneficiary claims. Plaintiffs have until March 9, 2006 to file new complaints againstPIP.America.  If new complaints are heldvalid, and a judgment or settlement against PIP.America results, Poly ImplantsProtheses, S.A., a defendant in the Schnebel litigation, has agreed that itwill indemnify PIP.America for any losses it may suffer as a result of theIllinois litigation.

 

Asit relates to cases involving Poly Implants Protheses, S.A., PIP.America isindemnified by PIP/USA, Inc., Poly Implants Protheses, S.A., and Poly ImplantsProtheses, S.A.’s President, Jean Claude Mas, personally, from, among otherthings, claims arising from products manufactured by PIP-France.  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, we believe thecosts associated with these matters will not have a material adverse impact onour business, results of operations or financial position.

 

InJuly, 2005, IP Resources Limited, a UK-based company filed an action againstour subsidiary, Eurosilicone, SAS in the Marseille Civil Court (*Tribunal de Grande Instance*), Marseille, France. Thecomplaint alleges Eurosilicone infringed upon a certain European Patentlicensed by IP Resources, Inc. known as “*Implantable prosthesisdevice*”, Patent# *0 174 141 B1,*and seeks damages of $3 million Euros. The case is in thepreliminary stages and the company believes it does not infringe on the0 174 141 B1 patent and is prepared to wage a vigorous defensebased on both the validity of the patent and upon the merits of the claims.

 

Europlex,S.A. de C.V., a Mexican company, filed suit on December 23, 2004, against oursubsidiary, Eurosilicone S.A.S, in Avignon Commercial Court in France. The suitalleged Eurosilicone unlawfully terminated Europlex’ right to distributeEurosilicone breast implants in Mexico and sought damages of approximately €4,000,000 Euros.  On October 12, 2005,Eurosilicone and Europlex entered into a settlement, agreeing to extinguish andrelease all claims, in exchange for future payments totaling $1,000,000 and anagreement in which MediCor Latin America, a subsidiary of MediCor Ltd., wouldacquire all the remaining inventory of Europlex.

 

Thoughit is not yet possible to predict the outcome of the cases described above,MediCor and its subsidiaries, as applicable, have denied plaintiffs’allegations and are vigorously defending themselves in each lawsuit.  MediCor and its subsidiaries have been andwill continue to be periodically named as a defendant in other lawsuits in thenormal course of business, including product liability and product warrantyclaims.  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.

 

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***ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS***

 

None

 

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

 

None

 

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

 

During the quarter covered by this report, no matterwas submitted to a vote of security holders through the solicitation of proxiesor otherwise.

 

***ITEM 5.  OTHER INFORMATION***

 

None

 

***ITEM 6.  EXHIBITS***

 

See Exhibit Index at Page     .

 

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SIGNATURES

 

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

 

 

***MEDICOR LTD.***(Registrant)

 

 
| Date:  | February  6, 2006 | By:    | /s/  Theodore R. Maloney                      |   |
|--------|-------------------|--------|-----------------------------------------------|--------|
|   |              |   | Theodore  R. Maloney  Chief Executive Officer |
|   |              |   |                                          |
| Date:  | February  6, 2006 | By:    | /s/  Thomas R. Moyes                          |   |
|   |              |   | Thomas  R. Moyes  Chief Financial Officer     |

 

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EXHIBIT INDEX

 
| **Exhibit  No.** | ** ** | **Description**                                                                        |
|------------------|------------|----------------------------------------------------------------------------------------|
| 31.1             |       | Principal Executive Officer Certification Pursuant  To 17 C.F.R. Section 240.13a-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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