**UNITED STATESSECURITIES 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 March 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 smallbusiness issuer as specified in its charter)

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

 

**(702) 932-4560**

(Issuer’s telephone number)

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13 or15 (d) of the Exchange Act during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ý   No o

 

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On May 10, 2005, there were 18,738,446shares 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 –  March 31, 2005                                        |   |
|                           |                                                                                     |   |
|                           | Consolidated  Statements of Operations – Three Months Ended March 31, 2005 and 2004 |   |
|                           |                                                                                     |   |
|                           | Consolidated  Statements of Operations – Nine Months Ended March 31, 2005 and 2004  |   |
|                           |                                                                                     |   |
|                           | Consolidated Statements of  Cash Flows – Nine Months Ended March 31, 2005 and 2004  |   |
|                           |                                                                                     |   |
|                           | Notes  to Consolidated Financial Statements – March 31, 2005                        |   |
|                           |                                                                                     |   |
| Item  2.                       | Management’s  Discussion and Analysis or Plan of Operation                          |   |
|                           |                                                                                     |   |
| Item 3.                        | Controls  and Procedures                                                                 |   |
|                           |                                                                                     |   |
|                           |                                                                                     |   |
| Part II. Other Information     |                                                                                     |
|                           |                                                                                     |   |
| Item 1.                        | Legal Proceedings                                                                        |   |
|                           |                                                                                     |   |
| Item 2.                        | Unregistered Sales of  Equity Securities and Use of Proceeds                             |   |
|                           |                                                                                     |   |
| Item 3.                        | Defaults upon  Senior Securities                                                         |   |
|                           |                                                                                     |   |
| Item  4.                       | Submission  of Matters to a Vote of Security Holders                                     |   |
|                           |                                                                                     |   |
| Item 5.                        | Other Information                                                                        |   |
|                           |                                                                                     |   |
| Item 6.                        | Exhibits and Reports on  Form 8-K                                                        |   |
|                           |                                                                                     |   |
|                           | Signatures                                                                               |   |

 

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***PART I – FINANCIAL INFORMATION***

 

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

 

**MediCor, Ltd.**

**Consolidated Balance Sheet**

**March 31, 2005**

**(Unaudited)**

 
| **Assets**                                                                                                                                         |   |        |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|------------|
|                                                                                                                                               |   |        |       |
| Current assets:                                                                                                                                    |   |        |       |
|                                                                                                                                               |   |        |       |
| Cash                                                                                                                                               |   | $           | 1,954,719  |   |
| Receivables, less allowance for doubtful  accounts of $1,297,133                                                                                   |   | 6,075,848   |       |
| Notes receivable, less allowance for  doubtful accounts of $2,358,325                                                                              |   | —      |       |
| Inventories                                                                                                                                        |   | 3,867,623   |       |
| Prepaid expenses and other current assets                                                                                                          |   | 55,683      |       |
|                                                                                                                                               |   |        |       |
| Total current assets                                                                                                                               |   | 11,953,873  |       |
| Property, plant and equipment, net                                                                                                                 |   | 2,813,017   |       |
| Leased property under capital leases, net                                                                                                          |   | 2,610,383   |       |
| Goodwill and other intangibles, net                                                                                                                |   | 40,648,679  |       |
| Deposits                                                                                                                                           |   | 100,163     |       |
| Other assets                                                                                                                                       |   | 655,705     |       |
|                                                                                                                                               |   |        |       |   |
| Total assets                                                                                                                                       |   | $           | 58,781,820 |   |
|                                                                                                                                               |   |        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                      |   |        |       |
|                                                                                                                                               |   |        |       |
| Current liabilities:                                                                                                                               |   |        |       |
|                                                                                                                                               |   |        |       |
| Notes payable                                                                                                                                      |   | $           | 1,946,256  |   |
| Note payable to related party                                                                                                                      |   | 46,770,649  |       |
| Accounts payable                                                                                                                                   |   | 6,178,807   |       |
| Obligations under capital leases                                                                                                                   |   | 189,050     |       |
| Accrued expenses and other current  liabilities                                                                                                    |   | 3,373,523   |       |
| Payroll taxes payable                                                                                                                              |   | 733,590     |       |
| Interest payable to related party                                                                                                                  |   | 2,401,315   |       |
|                                                                                                                                               |   |        |       |
| Total current liabilities                                                                                                                          |   | 61,593,190  |       |
|                                                                                                                                               |   |        |       |
| Long-term convertible debentures                                                                                                                   |   | 400,000     |       |
| Long-term notes payable                                                                                                                            |   | 11,899,110  |       |
| Long-term obligations under capital leases                                                                                                         |   | 2,195,045   |       |
| Long-term accrued liabilities                                                                                                                      |   | 1,856,773   |       |
|                                                                                                                                               |   |        |       |
| Total liabilities                                                                                                                                  |   | 77,944,118  |       |
|                                                                                                                                               |   |        |       |
| Commitments and contingencies (Note V)                                                                                                             |   |        |       |
|                                                                                                                                               |   |        |       |
| Preferred shares subject to mandatory  redemption requirements                                                                                     |   | 11,289,029  |       |
|                                                                                                                                               |   |        |       |
| Stockholders’ equity (deficit)                                                                                                                |   |        |       |
|                                                                                                                                               |   |        |       |
| Common shares, $.001 par value, 100,000,000  shares authorized, 18,166,354 shares issued, 18,146,056 shares outstanding  and 20,298 shares retired |   | 18,112      |       |
|                                                                                                                                               |   |        |       |
| Additional paid in capital - common stock                                                                                                          |   | 17,807,900  |       |
| Deferred compensation                                                                                                                              |   | (53,000     | )          |
| Accumulated (deficit)                                                                                                                              |   | (48,035,552 | )          |
| Accumulated other comprehensive income  (loss)                                                                                                     |   | (188,787    | )          |
|                                                                                                                                               |   |        |       |
| Stockholders’ equity (deficit)                                                                                                                |   | (30,451,327 | )          |
|                                                                                                                                               |   |        |       |   |
| Total liabilities and stockholders’ equity                                                                                                    |   | $           | 58,781,820 |   |

 

Seeaccompanying notes to unaudited consolidated financial statements

 

2

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**MediCor, Ltd.**

**Consolidated Statements of Income and Comprehensive Income**

**Three Months Ended March 31, 2005 and 2004**

**(Unaudited)**

 
| ** **                                             | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|
| Net sales                                              |       | $          | 7,130,409  |       | $          | 363,741 |   |
| Cost of sales                                          |       | 4,838,448  |       | 117,815    |       |
| Return of consigned inventory previously  written down |       | —     |       | (32,025    | )          |
|                                                   |       |       |       |       |       |
| Gross profit                                           |       | 2,291,961  |       | 277,951    |       |
|                                                   |       |       |       |       |       |
| Operating Expenses:                                    |       |       |       |       |       |
| Selling, general and administrative  expenses          |       | 4,371,063  |       | 2,264,520  |       |
| Research and development                               |       | 680,895    |       | 946,626    |       |
|                                                   |       |       |       |       |       |
| Operating income / (loss)                              |       | (2,759,997 | )          | (2,933,195 | )          |
|                                                   |       |       |       |       |       |
| Net interest expense / (income)                        |       | 1,152,087  |       | 312,585    |       |
|                                                   |       |       |       |       |       |
| Income / (loss) before income taxes                    |       | (3,912,084 | )          | (3,245,780 | )          |
| Income tax expense (benefit)                           |       | —     |       | —     |       |
|                                                   |       |       |       |       |       |
| Net income / (loss)                                    |       | (3,912,084 | )          | (3,245,780 | )          |
| Preferred dividends deemed                             |       | —     |       |       |       |
| Preferred dividends in arrears Series A  Preferred 8%  |       | 215,749    |       | —     |       |
|                                                   |       |       |       |       |       |
| Net loss attributable to common  stockholders          |       | (4,127,833 | )          | (3,245,780 | )          |
|                                                   |       |       |       |       |       |
| Other comprehensive income / (loss), net of  tax:      |       |       |       |       |       |
| Foreign currency translation adjustments               |       | 7,469      |       | —     |       |
|                                                   |       |       |       |       |       |
| Comprehensive income / (loss)                          |       | $          | (4,120,364 | )          | $          | (3,245,780 | ) |
|                                                   |       |       |       |       |       |
| Earnings per share data:                               |       |       |       |       |       |
| Weighted average shares, basic and diluted             |       | 18,146,056 |       | 17,604,113 |       |
| Basic and diluted                                      |       |       |       |       |       |
| Net loss per share                                     |       | $          | (0.23      | )          | $          | (0.18 | ) |

 

3

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**MediCor, Ltd.**

**Consolidated Statements of Income and Comprehensive Income**

**Nine Months Ended March 31, 2005 and 2004**

**(Unaudited)**

 
| ** **                                             | ** ** | **2005**    | ** **  | **2004**   | ** ** |
|--------------------------------------------------------|------------|-------------|-------------|------------|------------|
| Net sales                                              |       | $           | 19,418,722  |       | $          | 1,006,622 |   |
| Cost of sales                                          |       | 11,572,713  |        | 260,510    |       |
| Return of consigned inventory previously  written down |       | (350        | )           | (56,175    | )          |
|                                                   |       |        |        |       |       |
| Gross profit                                           |       | 7,846,359   |        | 802,287    |       |
|                                                   |       |        |        |       |       |
| Operating Expenses:                                    |       |        |        |       |       |
| Selling, general and administrative  expenses          |       | 13,544,476  |        | 5,131,484  |       |
| Research and development                               |       | 1,882,084   |        | 1,380,577  |       |
|                                                   |       |        |        |       |       |
| Operating income / (loss)                              |       | (7,580,201  | )           | (5,709,774 | )          |
|                                                   |       |        |        |       |       |
| Net interest expense / (income)                        |       | 3,681,570   |        | 797,953    |       |
|                                                   |       |        |        |       |       |
| Income / (loss) before income taxes                    |       | (11,261,771 | )           | (6,507,727 | )          |
| Income tax expense (benefit)                           |       | 282,316     |        | 1,737      |       |
|                                                   |       |        |        |       |       |
| Net income / (loss)                                    |       | (11,544,087 | )           | (6,509,464 | )          |
| Preferred dividends deemed                             |       | 260,172     |        |       |       |
| Preferred dividends in arrears Series A  Preferred 8%  |       | 645,059     |        | —     |       |
|                                                   |       |        |        |       |       |
| Net loss attributable to common  stockholders          |       | (12,449,318 | )           | (6,509,464 | )          |
|                                                   |       |        |        |       |       |
| Other comprehensive income / (loss), net of  tax:      |       |        |        |       |       |
| Foreign currency translation adjustments               |       | (188,787    | )           | —     |       |
|                                                   |       |        |        |       |       |
| Comprehensive income / (loss)                          |       | $           | (12,638,105 | )          | $          | (6,509,464 | ) |
|                                                   |       |        |        |       |       |
| Earnings per share data:                               |       |        |        |       |       |
| Weighted average shares, basic and diluted             |       | 18,112,930  |        | 17,566,142 |       |
| Basic and diluted                                      |       |        |        |       |       |
| Net loss per share                                     |       | $           | (0.69       | )          | $          | (0.37 | ) |

 

4

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**MediCor, Ltd.**

**Consolidated Statements of Cash Flows**

**Nine Months Ended March 31, 2005 and 2004**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                | ** ** | **2005**    | ** **  | **2004**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                                                                                                                                 |       |        |        |       |       |
| Net loss                                                                                                                                                                                                  |       | $           | (11,732,874 | )          | $          | (6,509,464 | ) |
| Adjustments to reconcile net loss to net  cash utilized by operating activities:                                                                                                                          |       |        |        |       |       |
| Depreciation and amortization                                                                                                                                                                             |       | 835,657     |        | 367,609    |       |
| Provision for doubtful accounts                                                                                                                                                                           |       | 3,138,008   |        | (3,319,523 | )          |
| Inventory write down                                                                                                                                                                                      |       | 350         |        | 56,175     |       |
| Non-employee stock options                                                                                                                                                                                |       | 144,383     |        | 22,928     |       |
| Employee preferred stock                                                                                                                                                                                  |       | 80,000      |        | —     |       |
| Directors restricted common stock                                                                                                                                                                         |       | 53,000      |        | —     |       |
| Changes in operating assets and liabilities                                                                                                                                                               |       |        |        |       |       |
| Receivables                                                                                                                                                                                               |       | (1,982,967  | )           | 3,320,957  |       |
| Notes receivable                                                                                                                                                                                          |       | (2,053,897  | )           | 27,384     |       |
| Inventories                                                                                                                                                                                               |       | (470,108    | )           | (31,049    | )          |
| Prepaid expenses and other current assets                                                                                                                                                                 |       | 689,804     |        | (38,459    | )          |
| Goodwill                                                                                                                                                                                                  |       | (617,675    | )           | —     |       |
| Deposits                                                                                                                                                                                                  |       | 617,675     |        | (600,000   | )          |
| Other assets                                                                                                                                                                                              |       | (625,611    | )           | (39,600    | )          |
| Bank overdraft                                                                                                                                                                                            |       | —      |        | (128,387   | )          |
| Accounts payable                                                                                                                                                                                          |       | 126,665     |        | 131,875    |       |
| Accrued expenses and other current  liabilities                                                                                                                                                           |       | 394,379     |        | (66,392    | )          |
| Payroll taxes payable                                                                                                                                                                                     |       | 236,329     |        | 10,503     |       |
| Interest payable                                                                                                                                                                                          |       | 1,893,353   |        | 358,232    |       |
| Long term accrued liabilities                                                                                                                                                                             |       | —      |        | 15,770     |       |
| Net cash provided by (utilized) operating  activities                                                                                                                                                     |       | (9,273,529  | )           | (6,421,441 | )          |
|                                                                                                                                                                                                      |       |        |        |       |       |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                                                                                                                                 |       |        |        |       |       |
| Payments for property, plant and equipment                                                                                                                                                                |       | (805,721    | )           | (24,583    | )          |
| Payments for purchase of Laboratoires  Eurosilicone S.A., net of cash acquired                                                                                                                            |       | (12,760,150 | )           | —     |       |
| Payments for purchase of Deramedics, net of  cash aquired                                                                                                                                                 |       | (75,000     | )           | —     |       |
| Net cash provided by (utilized) investing  activites                                                                                                                                                      |       | (13,640,871 | )           | (24,583    | )          |
|                                                                                                                                                                                                      |       |        |        |       |       |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                                                                                                                                 |       |        |        |       |       |
| Principal payments under capital lease  obligation                                                                                                                                                        |       | (226,289    | )           | —     |       |
| Proceeds from issuance of convertible  debentures                                                                                                                                                         |       | —      |        | 1,350,000  |       |
| Proceeds from issuance of short term debt                                                                                                                                                                 |       | 19,491,043  |        | 5,125,600  |       |
| Proceeds from issuance of long term debt                                                                                                                                                                  |       | 10,786,063  |        |       |       |
| Payments on convertible debentures                                                                                                                                                                        |       | (200,000    | )           |       |       |
| Receipts on short term debt                                                                                                                                                                               |       | —      |        | 102,230    |       |
| Payments on short term debt                                                                                                                                                                               |       | (6,160,251  | )           | (140,251   | )          |
| Issuance of preferred stock                                                                                                                                                                               |       | 1,172,271   |        | —     |       |
| Issuance of common stock                                                                                                                                                                                  |       | 29,977      |        | 11,489     |       |
| Purchase of treasury stock                                                                                                                                                                                |       | —      |        | (39,999    | )          |
| Net cash provided by (utilized) financing  activities                                                                                                                                                     |       | 24,892,814  |        | 6,409,069  |       |
|                                                                                                                                                                                                      |       |        |        |       |       |
| **EFFECT ON EXCHANGE RATE CHANGES ON CASH**                                                                                                                                                               |       | (188,787    | )           | —     |       |
|                                                                                                                                                                                                      |       |        |        |       |       |
| Net increase in cash                                                                                                                                                                                      |       | 1,789,627   |        | (36,955    | )          |
| Cash at beginning of period                                                                                                                                                                               |       | 165,092     |        | 50,631     |       |
| **CASH AT END OF PERIOD**                                                                                                                                                                                 |       | $           | 1,954,719   |       | $          | 13,676 |   |
|                                                                                                                                                                                                      |       |        |        |       |       |
| **SUPPLEMENTAL DISCLOSURE OF NON-CASH  ACTIVITIES**                                                                                                                                                       |       |        |        |       |       |
|                                                                                                                                                                                                      |       |        |        |       |       |
| Conversion of short-term debt to preferred  stock                                                                                                                                                         |       | $           | 250,000     |       | $          | — |   |
| Conversion of short-term debt to common  stock                                                                                                                                                            |       | $           | 75,000      |       |       |   |
| Issuance of preferred stock to  employees/consultants                                                                                                                                                     |       | $           | 80,000      |       | $          | — |   |
| Issuance of common stock to directors                                                                                                                                                                     |       | $           | 53,000      |       |       |   |
|                                                                                                                                                                                                      |       |        |        |       |       |
| The Company purchased all of the capital  stock of Laboratories Euorsilcone S.A.S. for $43,297,915. In conjunction with  the acquisition, liabilities were assumed as follows:                            |       |        |        |       |       |
| Fair value of assets acquired                                                                                                                                                                             |       | $           | 15,870,718  |       |       |   |
| Goodwill                                                                                                                                                                                                  |       | $           | 36,392,429  |       |       |   |
| Cash paid for capital stock                                                                                                                                                                               |       | $           | (43,297,915 | )          |       |   |
| Liabilities assumed                                                                                                                                                                                       |       | $           | (8,965,232  | )          |       |   |
|                                                                                                                                                                                                      |       |        |        |       |       |
| 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                                                                                                                                                                                       |       | $           | —      |       |       |   |
|                                                                                                                                                                                                      |       |        |        |       |       |
| A capital lease obligation of $262,496 was  incurred when the Company entered into a lease for new vehicles.                                                                                              |       |        |        |       |       |
|                                                                                                                                                                                                      |       |        |        |       |       |
| **SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION**                                                                                                                                                     |       |        |        |       |       |
| Cash paid during the period for:                                                                                                                                                                          |       |        |        |       |       |
|                                                                                                                                                                                                      |       |        |        |       |       |
| Interest                                                                                                                                                                                                  |       | $           | 1,948,429   |       | $          | 390,701 |   |
| Taxes                                                                                                                                                                                                     |       | $           | —      |       | $          | 1,737 |   |

 

Seeaccompanying notes to unaudited consolidated financial statements

 

5

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**MEDICOR LTD. NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS March 31, 2005**

 

**Note A - Description of Business**

 

 MediCor Ltd. (the “Company” or “MediCor”) is aglobal health care company that acquires, develops, manufactures and marketsproducts primarily for the aesthetic, plastic surgery and dermatologymarkets.  Current products include breast implant products and scarmanagement products.  The Company’sbreast implant products are currently sold in approximately 85 countries, butare not sold in the United States or Canada. Our products are sold primarily in foreign (non-U.S.) countries andforeign sales are currently about 95% of total sales, with Brazil accountingfor about 15% of sales.  Revenue fromscar management products accounts for less than 7% of total sales.  The Company sells its products to hospitals,surgical centers and physicians primarily through distributors, as well asthrough direct sales personnel.  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.  MediCor’sobjective is to be a leading supplier of selected international medical devicesand technologies.  To achieve thisstrategy, MediCor intends to build upon and expand its business lines,primarily in the aesthetic, plastic and reconstructive surgery and dermatologymarkets.  MediCor intends to accomplishthis growth through the expansion of existing product lines and offerings andthrough the acquisition of companies and other assets, including intellectualproperty rights and distribution rights.

 

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

 

*Principles of Consolidation*

 

Theconsolidated financial statements include the accounts of the Company and allof its subsidiaries in which a controlling interest is maintained.  All inter-company accounts and transactionshave been eliminated.  Certain prior period amounts in previously issuedfinancial statements have been reclassified to conform to the current periodpresentation.  The consolidated financial statements have been prepared inUnited States dollars.*****Critical Accounting Policiesand Use of Estimates*****

 

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

 

##### ***RevenueRecognition***

##### *** ***

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

 

6

----

 

##### ***theCompany’s industry, the Company also recognizes revenue when the products arewithdrawn from consignment inventory in hospitals, clinics and doctors’offices.  The Company does not offerprice protection to its third-party distributors and customers and acceptproduct returns only if the product is defective.  Appropriate reserves are established foranticipated returns and allowances are based on product return history.  The Company believes its estimate foranticipated returns is a “critical accounting estimate” because it requires theCompany to estimate returns and, if actual returns vary, it could have amaterial impact on reported sales and results of operations.  Historically the Company’s estimates of returnrates have not fluctuated from the actual returns by more than 1% to 2%.***

##### *** ***

*Allowancefor Doubtful Accounts*

 

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

##### *** ***

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

##### *** ***

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

##### *** ***

##### ***Propertyand 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 basedupon the estimated useful lives of the assets or the term of the lease,whichever is shorter.  Significantimprovements and betterments are capitalized, while maintenance and repairs arecharged to operations as incurred.  Assetretirements and dispositions are accounted for in accordance with Statement ofFinancial Accounting Standards No. 144, “Accounting for the Impairment andDisposal of Long Lived Assets” (“SFAS No. 144”), as described below.

 

##### ***Accountingfor Long-Lived Assets***

##### *** ***

##### ***TheCompany accounts for long-lived assets, other than goodwill, in accordance withthe provisions of SFAS No. 144, which supersedes SFAS No. 121 “Accounting forthe Impairment of Long-Lived Assets and for Long-Lived Assets to be disposedof.”  This statement creates oneaccounting model, based on the framework established in SFAS No. 121, to beapplied to all long-lived assets including discontinued operations.  Adoption of this statement had no materialeffect on the financial position or results of operations.  SFAS No. 144 requires, among other things,that an entity review its long-lived assets and certain related intangibles forimpairment whenever changes in circumstances indicate that the carrying amountof an asset may not be fully recoverable.***  The Company believes the estimateof its valuation of long-lived assets is a “critical accounting estimate” becauseif circumstances arose that led to a decrease in the valuation, it could have amaterial impact on the Company’s results of operations.  With the exception of the third-partypurchase agreements which were written off in June 2004, as described in Note Jto the financial statements included in our annual report on Form 10-KSB, theCompany does not believe that any other changes have taken place.

##### *** ***

##### ***Goodwilland Other Intangible Assets***

##### *** ***

##### ***Goodwillrepresents the excess of the purchase price over the estimated fair value ofidentified assets the businesses acquired. Other intangible assets are recordedat fair value and amortized over periods ranging from three to 17 years.  The Company adopted SFAS No. 142, “Goodwilland Other Intangible Assets” in January 2002. As a result,***

 

7

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##### ***goodwillis no longer amortized, but is subject to a transitional impairment analysisand is tested for impairment on an annual basis.  The test for impairment involves the use ofestimates related to the fair values of the business operations with whichgoodwill is associated and is usually based on a market value approach.  Other intangible assets are amortized usingthe straight-line method over their estimated useful lives and are evaluatedfor impairment under SFAS No. 144.***

##### *** ***

##### ***ProductReplacement Programs***

##### *** ***

##### ***IIIAcquisition Corp. d/b/a PIP.America (“PIP.America”), a subsidiary of theCompany in the U.S., provides a product replacement program to surgeons fordeflations of breast implant products for a period of ten (10) years from thedate of implantation.  For eachdeflation, the surgeon receives financial assistance plus a free implant replacement.  Management estimated the amount of potentialfuture product replacement claims based on statistical analysis.  Expected future obligations are determinedbased on the history of product shipments and claims and are discounted to acurrent value, and this amount is reserved. Changes to actual claims, interest rates or other estimations could havea material impact on the statistical calculation which could materially impactthe Company’s reserves and results of operations.  Although these products are not currentlybeing sold (because they are in the process of obtaining FDA approval, as more fullydescribed below), they were sold under a distribution agreement prior toNovember 2000 and a reserve for product replacements is maintained for theproducts sold in prior years. ended Eurosilicone, a subsidiary of the Companylocated in France, has not to date provided a product replacement program orany similar program.  Historically, ithas also solely relied on third-party distributors.  As a result, Eurosilicone does not maintain areserve.***

##### *** ***

##### ***For thenine months ended March 31, 2005, PIP.America has paid $1,746,052 with respectto settlements under its product replacement program for products previouslysold under its distribution agreement with***Poly Implants Protheses S.A. (“PIP”), a third-partymanufacturer of breast implants. Due to PIP.America’s agreement with PIP, this amount has been recordedunder the revolving promissory note as described in Note G, and therefore doesnot impact our reserve listed below.  Asof March 31, 2005 PIP.America’s product replacement program reserve consistedof:

 
| ** **                                        | ** ** | **Product  Replacement Reserve** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
|                                              |       |                             |       |
| Balance at June 30, 2004                          |       | $                                | 2,057,991  |   |
| Accruals for warranties issued during the  period |       | —                           |       |
| Settlements incurred during the period            |       | —                           |       |
|                                              |       |                             |       |
| Balance at March 31, 2005                         |       | $                                | 2,057,991  |   |

 

##### ***Shippingand Handling Costs***

##### *** ***

##### ***Shippingand handling costs incurred by the Company are included under cost of sales.***

##### *** ***

##### ***Researchand Development***

##### *** ***

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

##### *** ***

##### ***Stock-BasedCompensation***

##### *** ***

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 OpinionNo. 25, “Accounting for Stock Issued to Employees, (“APB Opinion No. 25”)in accounting for stock options issued to 

 

8

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employees. Under APB Opinion No. 25,compensation expense, if any, is recognized as the difference between theexercise price and the fair value of the common stock on the measurement date,which is typically the date of grant, and is recognized over the serviceperiod, which is typically the vesting period.

 

TheCompany accounts for options and warrant grants to non-employees using theguidance prescribed by SFAS No. 123, Financial Accounting Standards Board(“FASB”) Interpretation No. 44, “Accounting for Certain Transactions InvolvingStock Compensation, and Interpretation of APB No. 25,” and Emerging IssueTask Force (“EITF”) No. 96-18, Accounting for Equity Instruments That AreIssued to Other Than Employees for Acquiring, or In Conjunction with Selling,Goods, or Services, (“EITF No. 96-18”) whereby the fair value of such optionand warrant grants are measured using the Fair Value Based Method at theearlier of the date at which the non-employee’s performance is completed or aperformance commitment is reached.

 

## ***The following table illustratesthe effect on net income and earnings per share if the Company had applied thefair value recognition provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation,” to stock-based employee compensation including the requireddisclosures of SFAS No. 148, “Accounting for Stock-Based Compensation –Transition and Disclosure – and Amendment of FASB Statement No. 123” (“SFAS No.148”).***

## *** ***

| ** **                                                                                                                                     | ** ** | **Nine Months Ended  March 31, 2005** | ** **  | **Nine Months Ended  March 31, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|-------------|---------------------------------------|------------|
|                                                                                                                                           |       |                                  |        |                                  |       |
| Net Loss, as reported                                                                                                                          |       | $                                     | (12,449,318 | )                                     | $          | (6,509,464 | ) |
|                                                                                                                                           |       |                                  |        |                                  |       |
| Add: Total stock-based non-employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | 145,875                               |        | —                                |       |
|                                                                                                                                           |       |                                  |        |                                  |       |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects  |       | (819,000                              | )           | (331,006                              | )          |
| Pro forma net loss                                                                                                                             |       | $                                     | (13,122,443 | )                                     | $          | (6,840,470 | ) |
|                                                                                                                                           |       |                                  |        |                                  |       |
| Loss per share:                                                                                                                                |       |                                  |        |                                  |       |
| Basic and diluted - as reported                                                                                                                |       | $                                     | (0.69       | )                                     | $          | (0.37 | ) |
|                                                                                                                                           |       |                                  |        |                                  |       |
| Basic and diluted - pro forma                                                                                                                  |       | $                                     | (0.72       | )                                     | $          | (0.39 | ) |

## *** ***

Thesepro forma amounts may not be representative of future disclosures since theestimated fair value of stock options is amortized to expense over the vesting period,and additional options may be granted in future years.

 

Theestimated fair value of each MediCor option granted is calculated using theBlack-Scholes pricing model.  Theweighted average assumptions used in the model were as follows:

 
| ** **                    | ** ** | **2005** | ** ** | **2004**  | ** ** |
|-------------------------------|------------|----------|------------|-----------|------------|
|                          |       |     |       |      |       |
| Risk-free interest rate       |       | 3.50     | %          | 6.00-6.50 | %          |
| Expected years until exercise |       | 7 Years  |       | 3-4 Years |       |
| Expected stock volatility     |       | 50.0     | %          | 0.0       | %          |
| Dividend yield                |       | 0        | %          | 0         | %          |

 

9

----

 

##### ***IncomeTaxes***

##### *** ***

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 available evidence,it is more likely than not that some portion or all of the deferred tax assetswill not be realized.  The valuationallowance should be sufficient to reduce the deferred tax asset to the amountthat is more likely than not to be realized.

 

##### ***Effectsof Recent Accounting Pronouncements***

##### *** ***

InDecember 2003, the SEC adopted SAB No. 104 which codifies, revises, andrescinds certain sections of SAB No. 101, “Revenue Recognition,” in order tomake this interpretive guidance consistent with current authoritativeaccounting and auditing guidance and SEC rules and regulations.  The changes in SAB No. 104 did not have amaterial impact on the Company’s financial position or results of operations.

 

InMarch 2004, FASB approved the consensus reached on the EITF Issue No. 03-01, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments” (“EITF No. 03-01”).  Theobjective of this Issue is to provide guidance for identifying impairedinvestments. EITF No. 03-01 also provides new disclosure requirements forinvestments that are deemed to be temporarily impaired.  The accounting provisions of EITF No. 03-01are effective for all reporting periods beginning after June 15, 2004, whilethe disclosure requirements are effective only for annual periods ending afterJune 15, 2004.  The Company has evaluatedthe impact of the adoption of EITF No. 03-01 and do not believe it will besignificant to our results of operations or financial position.

 

InJuly 2004, FASB released draft abstract EITF Issue No. 04-08, “The Effect ofContingently Convertible Debt on Diluted Earnings per Share” (“EITF No. 04-08”),for comment.  The objective of EITF No.04-08 is to provide guidance for whether contingently convertible debtinstruments should be included in diluted earnings per share calculations.  The draft abstract reflects the EITF’stentative conclusion that contingently convertible debt should be included indiluted earnings per share calculations regardless of whether or not thetrigger price has been reached.  In itsSeptember meeting, the EITF confirmed the July conclusion, and the guidancebecomes effective December 15, 2004.  The Companyt does not believe the impactof EITF No. 04-08 will be significant to its results of operations or financialposition.  The Company expects to adopt the guidance in the quarter endedMarch 31, 2005.

 

InNovember 2004, the FASB issued SFAS No. 151, “Inventory Costs—AnAmendment of ARB No. 43, Chapter 4” (“SFAS No. 151”).  SFAS No. 151 requires abnormal amounts of idlefacility expense, freight, handling costs, and wasted material be recognized ascurrent-period charges.  In addition,SFAS 151 requires that allocation of fixed production overheads to thecosts of conversion be based on the normal capacity of the productionfacilities.  This statement is applicableto fiscal years beginning after June 15, 2005.  The Company does not anticipate the adoptionof SFAS 151 will have a material impact on its financial position or resultsfrom operations.

 

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 becomes effective for the Company January 1, 2006 as the Company is currently a small business issuer.

 

**Note C – Interim Reporting**

 

Theaccompanying unaudited consolidated financial statements for the three- and nine-monthperiods ended March 31, 2005 and March 31, 2004, have been prepared inaccordance with accounting principles generally accepted in 

 

10

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theUnited States for interim financial information and with instructions toForm 10-QSB and Item 310 of Regulation S-B.  Accordingly, theydo not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements.  In the opinion of management, all adjustments (consistingonly of normal recurring accruals, unless otherwise indicated) considerednecessary for a fair presentation of the results of operations for theindicated periods have been included.  Certain amounts recorded inprevious periods have been reclassified to conform to the current periodpresentation.  Operating results for the nine months ended March 31, 2005are not necessarily indicative of the results for the full fiscal year.

 

**Note D – Major Customers**

 

During the three and nine months ended March 31,2005, two different distributor customers accounted for 13% and 15%, respectively,of the Company’s consolidated revenue.  Revenuerelated to these two distributors for the three and nine months ended March 31,2004 is not comparable due to the acquisition of Eurosilicone.

 

**Note E – Cash and Cash Equivalents**

 

All highly liquid investments with original maturitiesof three months or less at the date of purchase are considered to be cashequivalents.

 

**Note F – Accounts Receivable**

 

Accounts receivable at March 31, 2005 consisted of:

 

 
| ** **                      | ** ** | **March 31, 2005** | ** ** |
|---------------------------------|------------|--------------------|------------|
|                            |       |               |       |
| Accounts receivable             |       | $                  | 7,372,981  |   |
| Allowance for doubtful accounts |       | (1,297,133         | )          |
|                            |       |               |       |
| Total                           |       | $                  | 6,075,848  |   |

 

Changes in allowance for doubtful accounts are asfollows:

 
| Balance July 1, 2004    |   | $         | 213,021   |   |
|-------------------------|--------|-----------|-----------|--------|
| Provisions / (recovery) |   | 1,084,112 |      |
| Write-offs              |   | —    |      |
| Balance March 31, 2005  |   | $         | 1,297,133 |   |

 

**Note G – Notes Receivable**

 

Notes receivable at March 31, 2005 consisted of:

 
| ** **                      | ** ** | **March 31, 2005** | ** ** |
|---------------------------------|------------|--------------------|------------|
|                            |       |               |       |
| Notes receivable                |       | $                  | 2,358,325  |   |
| Allowance for doubtful accounts |       | (2,358,325         | )          |
|                            |       |               |       |
| Total                           |       | $                  | —     |   |

 

11

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

 

**Note H – Inventories**

 

Inventoriesat March 31, 2005 consisted of:

 
| ** **      | ** ** | **March 31, 2005** | ** ** |
|-----------------|------------|-------------------------|------------|
|            |       |                    |       |   |
| Raw Materials   |       | $                       | 842,859    |   |
| Work in Process |       | 339,349                 |       |
| Finished Goods  |       | 2,685,415               |       |
|            |       |                    |       |   |
| Total           |       | $                       | 3,867,623  |   |

 

**Note I - Property and Equipment**

 

Propertyand equipment at March 31, 2005 consisted of:

 
| ** **                            | ** ** | **March 31, 2005** | ** ** |
|---------------------------------------|------------|-------------------------|------------|
|                                  |       |                    |       |   |
| Automobiles                           |       | $                       | 86,043     |   |
| Computer Equipment and tools and dies |       | 362,592                 |       |
| Furniture, Fixtures and equipment     |       | 455,907                 |       |
| Land and buildings                    |       | 2,260,800               |       |
| Leasehold Improvements                |       | 107,748                 |       |
| Machinery and equipment               |       | 343,956                 |       |
|                                  |       |                    |       |
| Subtotal                              |       | 3,617,046               |       |
| Accumulated depreciation              |       | (804,028                | )          |
|                                  |       |                    |       |
| Total                                 |       | $                       | 2,813,018  |   |

 

Depreciationexpense was $107,733 for the three months ended March 31, 2005 and $33,320 forthe three months ended March 31, 2004.  Depreciationexpense was $391,648 for the nine months ended March 31, 2005 and $99,084 forthe same period a year ago.  The increasefor the three and nine-month periods is due to the depreciation of the acquiredassets of Eursolicone.

 

12

----

 

**Note J – Goodwill and Other Intangibles**

 

Goodwilland other intangibles as of March 31, 2005 consisted of:

 
| ** **                                                                 | ** ** | **March 31, 2005** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------|------------|
|                                                                       |       |                    |       |
| Goodwill                                                                   |       | $                       | 38,010,107 |   |
| Distribution Agreements, Non-Compete and  Other                            |       | 425,418                 |       |
| Patents                                                                    |       | 3,100,000               |       |
|                                                                       |       |                    |       |
| Subtotal                                                                   |       | 41,535,525              |       |
|                                                                       |       |                    |       |
| Accumulated Amortization - Goodwill                                        |       | (41,973                 | )          |
| Accumulated Amortization - Distribution  Agreements, Non-Compete and Other |       | (242,376                | )          |
| Accumulated Amortization - Patents                                         |       | (602,497                | )          |
|                                                                       |       |                    |       |
| Subtotal                                                                   |       | (886,846                | )          |
|                                                                       |       |                    |       |
| Total                                                                      |       | $                       | 40,648,679 |   |

 

Amortizationexpense for the three months ended March 31, 2005 was $84,799, compared to $87,883for the prior period ended March 31, 2004. The amortization for the nine months ended March 31, 2005 was $259,814,compared to $268,525 with the prior period ended March 31, 2004.

 

Theestimated amortization expense for the next five years consists of:

 
| ** **              | ** ** | **March 31, 2006** | ** ** | **March 31, 2007** | ** ** | **March 31, 2008** | ** ** | **March 31, 2009** | ** ** | **March 31, 2010** | ** ** |
|-------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
|                    |       |                    |       |                    |       |                    |       |                    |       |                    |       |
| Distribution Agreements |       | 22,500                  |       | 22,500                  |       | 22,500                  |       | 22,500                  |       | 22,500                  |       |
| Patents                 |       | 295,029                 |       | 295,029                 |       | 295,029                 |       | 295,029                 |       | 295,029                 |       |
|                    |       |                    |       |                    |       |                    |       |                    |       |                    |       |
| Total                   |       | $                       | 317,529    |                    | $          | 317,529                 |       | $                       | 317,529    |                    | $          | 317,529 |   | $ | 317,529 |   |
|                         |            |                         |            |                         |            |                         |            |                         |            |                         |            |  |  |  |  |  |

 

13

----

 

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

 

Thefollowing is an analysis of the leased property under capital leases by majorclasses.  All of this property is locatedin France as a part of our Eurosilicone subsidiary:

 
| ** **               | ** ** | **March 31, 2005** | ** ** |
|--------------------------|------------|-------------------------|------------|
|                     |       |                    |       |   |
| Buildings                |       | $                       | 2,395,637  |   |
| Vehicles                 |       | 398,941                 |       |
| Subtotal                 |       | 2,794,578               |       |
|                     |       |                    |       |
| Accumulated Depreciation |       | (184,195                | )          |
|                     |       |                    |       |
| Subtotal                 |       | (184,195                | )          |
|                     |       |                    |       |
| Total                    |       | $                       | 2,610,383  |   |

 

Depreciationexpense was $64,882 for the three months ended March 31, 2005 and $184,195 forthe nine months ended March 31, 2005.

 

Thefollowing is a schedule by years of future minimum lease payments under capitalleases that have initial or remaining noncancelable lease terms in excess ofone year as of March 31, 2005:

 
| **Year ended March 31,**   | ** ** | **Amount** | ** ** |
|---------------------------------|------------|------------|------------|
|                            |       |       |       |   |
| 2006                            |       | $          | 469,342    |   |
| 2007                            |       | 453,840    |       |
| 2008                            |       | 432,520    |       |
| 2009                            |       | 405,232    |       |
| 2010                            |       | 336,480    |       |
| Later years                     |       | 733,764    |       |
| Total minimum payments required |       | $          | 2,831,178  |   |

 

**Note L – Deposits and Other Assets**

 

Depositsat March 31, 2005 totaled $100,163.  Theseare security deposits on office leases and with local utility companies.

 

Otherassets consisted of security investments of $32,100 and debt acquisition costs of$623,605 at March 31, 2005.

 

14

----

 

**Note M – Accrued Expenses**

 

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

 
| ** **                  | ** ** | **March 31, 2005** | ** ** |
|-----------------------------|------------|-------------------------|------------|
|                        |       |                    |       |   |
| Consulting                  |       | $                       | 296,647    |   |
| Wages and paid leave        |       | 1,501,709               |       |
| Product replacement reserve |       | 718,574                 |       |
| Other                       |       | 856,593                 |       |
|                        |       |                    |       |   |
| Total                       |       | $                       | 3,373,523  |   |

 

Consultingfees consisted of amounts relating to a consulting agreement.  Other accrued expenses included interest and legalexpenses.

 

Long-termaccrued liabilities at March 31, 2005 consisted of:

 
| ** **                  | ** ** | **March 31, 2005** | ** ** |
|-----------------------------|------------|-------------------------|------------|
|                        |       |                    |       |   |
| Legal settlement            |       | $                       | 517,356    |   |
| Product replacement reserve |       | 1,339,417               |       |
|                        |       |                    |       |   |
| Total                       |       | $                       | 1,856,773  |   |

 

**Note N – Convertible Debentures**

 

Long-termconvertible debentures at March 31, 2005 were $400,000.  These convertible debentures are convertibleafter one year and at the 18-month, 24-month, 30-month and 36-month anniversaryof the issuance date at the holder’s discretion to shares of the Company’scommon stock at a price equal to the greater of $5.00 or seventy-five percent(75%) of the daily weighted average trading price per share of the Company’scommon stock over a period of twenty (20) trading days prior to the conversiondate.  These convertible debenturesmature between April 2006 and August 2006.

 

Duringthe quarter ended March 31, 2005, we did not incur any costs relating to theseconvertible debentures.

 

**Note O – Notes Payable**

 

## ***Short-term notes payable of $1,946,256at March 31, 2005 consisted of several notes which ranged from $26,855 to $1,854,320with annual interest rates of between 3.39% and 8%.   The Company also has an outstanding balanceat March 31, 2005 of $46,770,649 under a note payable to an affiliate, asdescribed in Note P.***

## *** ***

Duringthe quarter ended March 31, 2005, the Company drew an additional $3,965,559from a bank term loan for the performance payments to the previous shareholdersas described in Note V.  The short-termportion of this debt is $566,508 and the remaining $3,399,051 will be requiredto be paid back in the next six years.

 

15

----

 

## ***Long-term notes payable consistedof a bank term loan in the amount of $11,125,919 for a term of seven years denominatedin Euros with an annual interest rate based on nine-month Libor plus 2.25%.  The variable interest rate as of March 31,2005 was 4.46%.  In addition, we have severalnotes which ranged from $13,427 to $333,133 with terms of between twenty-onemonths and four years, with annual rates of interest between 3.39% 5.25%.***

## *** ***

Futurematurities of long-term debt are as follows:

 
| **Year ended March 31,** | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
|                          |       |       |       |
| 2006                          |       | $          | 2,181,780  |   |
| 2007                          |       | 2,118,288  |       |
| 2008                          |       | 2,018,161  |       |
| 2009                          |       | 1,872,623  |       |
| 2010                          |       | 1,854,320  |       |
|                          |       |       |       |
| Subtotal                      |       | 10,045,172 |       |
|                          |       |       |       |
| Payments over five years      |       | 1,854,320  |       |
|                          |       |       |       |
| Total                         |       | $          | 11,899,492 |   |

 

**Note P – Related Party Transactions**

 

International Integrated Industries, LLC (“LLC”) isa family holding company in which the chairman of the Company, Mr. Donald K.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 $46,770,649 at March 31, 2005.  Theoutstanding balance of the note payable accrues interest at an annual interestrate of ten percent (10%) per annum.  Duringthe three months ended March 31, 2005, LLC advanced $2,670,000 to the Company,of which none was repaid.  For the ninemonths ended March 31, 2005, LLC advanced $17,890,000 to the Company, of which$5,435,752 was repaid.  Interest expenserelating to this note payable was $1,117,931 for the three months ended March31, 2005 and $3,810,338 for the nine months ended March 31, 2005.  The unpaid liability for these expenses isincluded in the Company’s note payable to affiliates, which is contained in thefinancial statements presented herein. The Company had a commitment from LLC to fund operating shortfalls asnecessary for fiscal 2005.

 

In October 2003, the Company entered into a reimbursementagreement with a company controlled by its chairman for the reimbursement ofexpenses incurred in the operation of its private plane when used for MediCorbusiness.  The reimbursement agreement iseffective for expenses incurred for MediCor business purposes.  The Company recognized a total of $163,406for the three months ended March 31, 2005 and $806,062 for the nine monthsended March 31, 2005 in expenses pursuant to the reimbursement agreement.  All expenses recognized pursuant to the reimbursementagreement have been included by the Company in selling, general, andadministrative expenses.  In June 2004,MediCor replaced this reimbursement agreement with a dry lease agreement effectiveJune 1, 2004.  Under this agreement, onlycosts directly tied to MediCor’s use of the plane asset are reimbursable to thelessor.  All other operating costs (suchas fuel, pilot wages, food, etc.) will be paid directly by the Company orthrough a disbursement agent to those third parties and only when the plane isused for MediCor business purposes.

 

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 notedconsist of:

 
| ** **                                            | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
|                                                  |       |                    |       |                    |       |   |   |
| Current                                               |       | $                       | (4,180,684 | )                       | $          | (1,109,653 | ) |
| Deferred                                              |       | (218,165                | )          | (87,152                 | )          |
|                                                  |       |                    |       |                    |       |
| Total Benefit                                         |       | $                       | (4,398,849 | )                       | $          | (1,196,805 | ) |
| Less allowance for realization of deferred  tax asset |       | (4,681,165              | )          | (1,196,805              | )          |
|                                                  |       |                    |       |                    |       |   |   |
| Total Tax Expense                                     |       | $                       | 282,316    |                    | $          | — |   |

 

The current tax expense for the quarter ended March31, 2005 resulted from income tax paid on a foreign subsidiary.  As of March 31, 2005, the Company recorded anallowance of $16,047,153 against certain future tax benefits, the realizationof which is currently uncertain.  Thedeferred differences related to certain accounts receivable, accruedwarranties, and depreciation/amortization not currently deductible as expensesunder Internal Revenue Service provisions. Although the Company recorded this allowance to the deferred tax assets,the Company may still utilize the future tax benefits from net operating lossesfor 20 years from the year of the loss to the extent of future taxableincome.  The estimated net operatinglosses for tax purposes of approximately $25 million will expire over severalyears ending in 2024.

 

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

 
| ** **                                             | ** ** | **March 31, 2005** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|
|                                                   |       |                    |       |   |
| Computed expected income tax  asset/(liability) at 34% |       | $                       | 4,463,000  |   |
| Adjustments                                            |       |                    |       |
| Net operating loss                                     |       | 10,325,250              |       |
| Allowance for bad debt                                 |       | 368,598                 |       |
| Warranty reserve                                       |       | 699,717                 |       |
| Depreciation and amortization                          |       | 190,588                 |       |
|                                                   |       |                    |       |   |
| Income tax benefit                                     |       | $                       | 16,047,153 |   |
| Less allowance for realization of deferred  tax asset  |       | (16,047,153             | )          |
|                                                   |       |                    |       |   |
| 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 (“SeriesA Preferred”) on July 5, 2004.  The SeriesA Preferred has a par value of $.001 per share with a liquidation preference of$1,000 per share.  In the event ofliquidation, shareholders of the Series A Preferred shall be entitled toreceive priority as to distribution over common stock.  The Series A Preferred stock is convertibleinto common stock at any time at a conversion price of $3.85 per share untilJune 30, 2010, subject to potential adjustment in the event certain EBITDA orcommon stock value targets are not met.  OnJune 30, 2011 all unconverted shares to common stock will be subject to amandatory redemption.  The redemptionprice of $1,000 per share plus $1,000 per whole share for all accrued andunpaid paid-in-kind dividends and any other accrued and unpaid dividends,whether or not declared which amount will be payable by the Company in cash.  At March 31, 2005, the Company had outstandingan aggregate of 10,937 shares, issued for aggregate consideration of $10,937,000.

 

17

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**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:

 
| ** **                                          | ** ** | **Nine Months Ended  March 31, 2005** | ** **  | **Nine Months Ended  March 31, 2004** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------|-------------|--------------------------------------------|------------|
| ** **                                          | ** ** | **Income  (Numerator)**                    | ** **  | **Shares  (Denominator)**                  | ** ** | **Per-Share  Amount** | ** ** | **Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per-Share  Amount** | ** ** |
| Net Income (Loss) before preferred stock  dividends |       | (11,544,087                                | )           |                                       |       |   |   | (6,509,464 | ) |   |   |   |   |
| Less: Preferred stock dividends                     |       | 905,231                                    |        |                                       |       |   |   | — |   |   |   |   |   |
| Basic EPS                                           |       | (12,449,318                                | )           | 18,112,930                                 |       | (0.69 | ) | (6,509,464 | ) | 17,566,142 |   | (0.37 | ) |
| Effect of dilutive securities                       |       | —                                     |        |                                       |       |   |   |   |   |   |   |   |   |
| Diluted EPS                                         |       | $                                          | (12,449,318 | )                                          | 18,112,930 |   | (0.69 | ) | $ | (6,509,464 | ) | 17,566,142 |   | (0.37 | ) |
|                                                     |            |                                            |             |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

Commonequivalent shares of 5,367,261 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 for and related informationis summarized below:

 
| ** **                                 | ** ** | **Options** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|--------------------------------------------|------------|-------------|------------|--------------------------------------|------------|
|                                       |       |        |       |                                 |       |
| Outstanding Options at June 30, 2004  |       | 2,121,152   |       | $                                    | 3.11       |   |
|                                       |       |        |       |                                 |       |   |
| Granted                                    |       | 390,000     |       | $                                    | 3.40       |   |
| Exercised                                  |       | —      |       | $                                    | 0.00       |   |
| Cancelled                                  |       | (62,134     | )          | $                                    | 1.61       |   |
|                                       |       |        |       |                                 |       |   |
| Outstanding Options at March 31, 2005 |       | 2,449,018   |       | $                                    | 3.19       |   |
|                                       |       |        |       |                                 |       |
| Options exercisable at end of period       |       | 688,138     |       | $                                    | 2.84       |   |

 

18

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Thefollowing table summarizes information about employee stock options outstandingat March 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                |       | 799,018                |       | 4.8 |   | $ | 1.75 |   | 350,430 |   | $ | 1.67 |   |
| $3.00 -  $3.80                |       | 650,000                |       | 6.1 |   | $ | 3.44 |   | 96,875 |   | $ | 3.48 |   |
| $4.15 - $4.30                 |       | 1,000,000              |       | 6.1 |   | $ | 4.24 |   | 220,833 |   | $ | 4.24 |   |

 

## ***The following table illustratesthe effect on net income and earnings per share if the Company had applied thefair value recognition provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation,” to stock-based employee compensation including the requireddisclosures of SFAS No. 148, “Accounting for Stock-Based Compensation –Transition and Disclosure – and Amendment of FASB Statement No. 123” (“SFAS No.148”).***

 
| ** **                                                                                                                                     | ** ** | **Nine Months Ended  March 31, 2005** | ** **  | **Nine Months Ended  March 31, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|--------------------------------------------|------------|
|                                                                                                                                           |       |                                       |        |                                       |       |
| Net Loss, as reported                                                                                                                          |       | $                                          | (12,449,318 | )                                          | $          | (6,509,464 | ) |
|                                                                                                                                           |       |                                       |        |                                       |       |
| Add: Total stock-based non-employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | 145,875                                    |        | —                                     |       |
|                                                                                                                                           |       |                                       |        |                                       |       |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects  |       | (819,000                                   | )           | (331,006                                   | )          |
|                                                                                                                                           |       |                                       |        |                                       |       |   |   |
| Pro forma net loss                                                                                                                             |       | $                                          | (13,122,443 | )                                          | $          | (6,840,470 | ) |
|                                                                                                                                           |       |                                       |        |                                       |       |
| Loss per share:                                                                                                                                |       |                                       |        |                                       |       |
| Basic and diluted - as reported                                                                                                                |       | $                                          | (0.69       | )                                          | $          | (0.37 | ) |
|                                                                                                                                           |       |                                       |        |                                       |       |
| Basic and diluted - pro forma                                                                                                                  |       | $                                          | (0.72       | )                                          | $          | (0.39 | ) |

 

Thesepro forma amounts may not be representative of future disclosures since theestimated fair value of stock options is amortized to expense over the vestingperiod, and additional options may be granted in future years.

 

Theestimated fair value of each MediCor option granted is calculated using theBlack-Scholes pricing model.  Theweighted average assumptions used in the model were as follows:

 
| ** **                    | ** ** | **2005** | ** ** | **2004**  | ** ** |
|-------------------------------|------------|----------|------------|-----------|------------|
|                          |       |     |       |      |       |
| Risk-free interest rate       |       | 3.50     | %          | 6.00-6.50 | %          |
| Expected years until exercise |       | 7 Years  |       | 3-4 Years |       |
| Expected stock volatility     |       | 50.0     | %          | 0.0       | %          |
| Dividend yield                |       | 0        | %          | 0         | %          |

 

19

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TheCompany also has outstanding warrants to purchase 80,776 shares of common stockthat were issued to consultants in connection with consulting agreements.  Warrants were granted between 1999 and 2001at prices between $.08 and $1.61.  All suchwarrants granted had an exercise price equal to the market value of theunderlying common stock on the date of grant.

 

## ***Note U - Business SegmentInformation***

## *** ***

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.  Revenues from customers and distributorsattributable to various foreign countries outside the U.S were material.  Sales in foreign (non-U.S.) countries arecurrently about 95% of total sales, with the largest country accounting forabout 15% of sales.  Additionally, asignificant amount of revenues and costs are Euro denominated.  Long-lived assets attributable to variousforeign countries outside the U.S. were material and equaled about $39 million,located in France.  Amounts attributableto the U.S. were approximately $4 million.

 

**Note V – Commitments and Contingencies**

 

TheCompany has received a written commitment from LLC, an affiliate of its chairman,to provide sufficient cash to fund any operating loss through April 1, 2006.  The same entity has provided the Company anaggregate of over $62 million in funding from the Company’s inceptionthrough March 31, 2005.  The futurefunding may take the form of debt or equity or a combination thereof.

 

Pursuantto an Asset Purchase Agreement signed April 25, 2002, one of the Company’ssubsidiaries agreed to acquire substantially all of the assets of aprivately-held United States medical products distributor, HutchisonInternational, Inc.  Pursuant to anamendment dated October 16, 2003 to the Asset Purchase Agreement, thepurchase price was amended to equal the deposits made by the Company’ssubsidiary as of October 16, 2003, plus an additional agreed payment incash at closing and issuance of MediCor Ltd. equity at closing.  The closing was conditioned upon thedistributor acquiring necessary governmental approvals for commercialization inthe United States of the products to be distributed.  The Company’s subsidiary is no longerobligated to make additional deposits against the purchase price, but it hascommitted to fund all future expenses associated with obtaining requiredgovernment approvals.  As of June 30,2004, the Company booked a reserve for the entire deposit, due to variousuncertainties related to this third-party distributor.  In a subsequent event, as described in Note X,the Company completed the purchase of selected assets and liabilities of privately-held Hutchison International,Inc.

 

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.Americahad $3,444,802 of accounts receivable from the manufacturer, representingamounts owed to PIP.America under the terms of the distribution agreement.  These amounts have been fully reserved for,with an allowance for doubtful account, due to the lack of payment anduncertain prospect of collection.  EffectiveMarch 30, 2004, PIP.America and the manufacturer amended the distributionagreement to provide for, among other things, transferring administration,funding and ownership of the pre-market approval application process to PIP.America.  In conjunction with this change, PIP.America forgavecertain amounts owed by the manufacturer, and the parties amended the pricingterms.  The amendments obligate PIP.Americato fund the ongoing clinical and regulatory costs and expenses.  The amount and timing of these costs isunknown and may be material.  Thelikelihood and timing of obtaining FDA approval are also uncertain.  Concurrently, the manufacturer issued to PIP.Americaa revolving promissory note for certain sums to come due to PIP.America basedon PIP.America’s and the manufacturer’s administration of product replacementand product replacement related claims.  Theprincipal amount under the note as of March 31, 2005 was $2,358,325.

 

20

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Asmore fully described under Note W, the Company’s Eurosilicone Holdings SASsubsidiary may be committed to make additional performance payments to theprevious shareholders of Eurosilicone, over the next two years, in connectionwith revenue targets.  These payments might be as high as €3,000,000 foreach year.  Eurosilicone Holdings planson funding these amounts under the commitments of the bank loan described underNote O.  For the quarter ended March 31, such a payment was made andfunded under the bank loan agreement in the amount of $3,965,559.

 

InOctober 1999, June 2000 and July 2003, separate but related complaints werefiled by 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. 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.  Plaintiffs claim, amongother things, that PIP.America and its chairman tortiously interfered with thatagreement and with plaintiffs’ other alleged rights as lenders, investors,shareholders, quasi-shareholders or employees of PIP/USA or other entities. Inaddition to monetary damages and injunctive relief, plaintiffs seek toreinstate the alleged distribution agreement between PIP/USA and PIP-France andinvalidate PIP.America’s distributor relationship with PIP-France.  It is PIP.America’s position that the Kwartinlitigations are within the scope of the indemnification agreements.

 

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

 

PeggyWilliams v. PIP/USA, Inc., Case No. 03 CH 9654, Jessica Fischer Schnebel,et al. v. PIP/USA, Inc., Case No. 03CH07239, Dawn Marie Cooper, et al. v.PIP/USA, Inc., Case No. 03CH11316, Miriam Furman, et al. v. PIP/USA, Inc.,Case No. 03CH10832 and Karen S. Witt, et al. v. PIP/USA, Inc., Case No.03CH12928 were filed in the Circuit Court of Cook County, Chancery Division, inor around July 2003.  Counsel forJessica Fischer Schnebel, et al. v. PIP/USA, Inc., Case No. 03CH07239amended her class action complaint to include plaintiffs from the other fourcases, and each of the others has been voluntarily dismissed.  The consolidated amended complaint containscounts alleging product liability, breach of the implied warranties ofmerchantability and fitness for a particular purpose, violation of the IllinoisConsumer Fraud Act and third-party beneficiary status.  Unspecified monetary damages, exemplarydamages and attorneys fees and costs are sought. PIP.America has filed a motionseeking to dismiss all counts but the third-party beneficiary claim.  Plaintiffs have received several extensions torespond to the motion to dismiss – first to take depositions of PIP.Americapersonnel, then to serve written discovery and then to digest PIP.America’sanswers to written discovery.  Depositions of Medicor personnel have beentaken, and PIP.America is currently in the process of answering writtendiscovery.  Plaintiffs will likely respond to the motion to dismiss byroughly July 31, 2005, and a ruling on the motion should come by September2005.  PIP.America has tendered thisconsolidated case to Poly Implant Protheses, S.A. (PIP-France) for defense andindemnity, and in late November 2004, PIP-France agreed to accept thattender.  All other single-case Illinois litigation has been settled for *de minimis* amounts.

 

OnDecember 23, 2004, Europlex, a Mexican company, purported to file a lawsuitagainst Eurosilicone SAS, one of our French subsidiaries, in the AvignonCommercial Court in France, alleging that Eurosilicone implicitly terminated adistribution agreement between the parties by failing to deliver productsordered by Europlex pursuant to the agreement, among other allegations.  As a result of these allegations, Europlexclaims damages in amount of approximately $4,000,000 Euros.  Eurosilicone SAS believes the suit is withoutmerit and intends to defend against the alleged claims vigorously.

 

21

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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 upon the merits of eachlawsuit and against certification of any class.  While MediCor and its subsidiaries aredesirous to honor their respective obligations under their product replacementprograms, the purported class action case above includes two distinctlydifferent types of claims.  The first ofthese arise from products sold by PIP/USA, Inc., with whom neither MediCor norany of its affiliates are affiliated.  Thiscompany sold implants manufactured by Poly Implants Protheses, S.A. prior toPIP.America’s entry into the U.S. market, which occurred in late 1999.  Because PIP.America did not sell theseproducts, PIP.America similarly did not provide a product replacement programfor or warrant these products.  The nextclaims arise from products sold by PIP.America and associated to the productreplacement program administered by PIP.America.  With respect to claims arising from productssold by PIP.America, PIP.America is administering and fulfilling itsobligations to its customers in the ordinary course of business, and for whichit has taken appropriate reserves.  Otherthan a limited, $500 portion of certain of its own product replacement claimsthat it is administering, PIP.America is indemnified by PIP/USA, Inc., PolyImplants Protheses, S.A., and Poly Implants Protheses, S.A.’s President, JeanClaude Mas, personally, from all claims, including those asserted above.

 

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

 

MediCorand its subsidiaries have been and will continue to be periodically named as adefendant in other lawsuits in the normal course of business, including productliability and product warranty claims.  Litigation,particularly product liability litigation, can be expensive and disruptive tonormal business operations and the results of complex proceedings can be verydifficult to predict.  Claims againstMediCor or its subsidiaries have been and are periodically reviewed withcounsel in the ordinary course of business.  The Company presently believes it or its subsidiarieshave meritorious defenses in all lawsuits in which MediCor or its subsidiariesare defendants, subject to the subsidiaries’ continuing product replacementobligations, which the subsidiaries intend to continue to satisfy. While it isnot possible to predict the outcome of these matters, the Company believes thatthe costs associated with them will not have a material adverse impact on its 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 $120,919 and $94,144 for the three monthsended March 31, 2005 and 2004, respectively.  For the nine months ended March 31, 2005 leaseexpenses were $393,026 compared to $282,192 for the nine months ending March31, 2004.  Future minimum operating leasepayments are approximated as follows:

 
| **Year ended March 31,** | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
|                          |       |       |       |
| 2006                          |       | 244,662    |       |
| 2007                          |       | 209,072    |       |
| 2008                          |       | 75,884     |       |

 

**Note W – Acquisitions**

 

On July 5, 2004, the Company,through its Eurosilicone Holdings SAS subdisiary, acquired all of the capitalstock of Eurosilicone, a privately-held medical device manufacturer based in Apt,France.  The primary reasons foracquiring Eurosilicone include its historical sales, cash flow and market shareof the breast implant industry, its manufacturing facilities and its productline.  Due to the relatively low bookvalue of its current and fixed assets, as compared to the purchase price, thisresulted in a significant amount of goodwill. There was no allocation of this amount to intangible assets, because nopatents were acquired and the other relevant assets (e.g., customer-related,marketing-related, contracts) were initially determined to be insignificant andimmaterial. However, the Company is continuing to evaluate this in detail andanticipates that it will determine and place a fair value upon completion of 

 

22

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such valuation.  Until completion of such evaluation, theCompany cannot currently estimate any purchase price allocations.  The financing for the acquisition was providedprimarily by additional loans from International Integrated Industries, LLC, anaffiliate of the Company’s chairman.  TheCompany may also be obligated to make additional performance payments based onrevenue targets over the next two years.

 

Thefinancial statements reflect various purchase price allocations.  In accordance with SFAS No. 141, “BusinessCombinations” (“SFAS No. 141”), the total purchase price was allocated to thetangible and intangible assets of Eurosilicone based upon their estimated fairvalues at the acquisition date with the excess purchase price allocated togoodwill.  The purchase accountingadjustments made are based upon currently available information.  Accordingly, the actual adjustments recordedin connection with the final purchase price allocation may be updated accordingSFAS No. 141, and any such changes may be material.

 

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

 
| ** **                                      | ** ** | **Book Value of  Assets Acquired /  Liabilities Assumed** | ** ** | **Purchase Price  Adjustments** | ** ** | **Preliminary  Fair Value** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| Cash and cash equivalents                       |       | $                                                         | 1,929,698  |                            | $          | —                      |       | $ | 1,929,698 |   |
| Accounts receivable                             |       | 5,625,350                                                 |       | (672,563                        | )**(a)**   | 4,952,787                   |       |
| Inventory                                       |       | 2,654,043                                                 |       | 639,936                         | **(c)**    | 3,293,979                   |       |
| Other current assets                            |       | 96,909                                                    |       | —                          |       | 96,909                      |       |
|                                            |       |                                                      |       |                            |       |                        |       |
| Total current assets                            |       | 10,306,000                                                |       | (32,627                         | )          | 10,273,373                  |       |
|                                            |       |                                                      |       |                            |       |                        |       |
| Property, plant and equipment                   |       | 2,367,354                                                 |       | —                          |       | 2,367,354                   |       |
| Leased property under capital leases            |       | 2,532,208                                                 |       | —                          |       | 2,532,208                   |       |
| Goodwill                                        |       | —                                                    |       | 32,426,870                      | **(d)**    | 32,426,870                  |       |
|                                            | ** ** | ** **                                                |       | 3,965,559                       | **(f)**    | 3,965,559                   |       |
| Other long term assets                          |       | 481,981                                                   |       | —                          |       | 481,981                     |       |
|                                            |       |                                                      |       |                            |       |                        |       |   |   |   |
| Total assets                                    |       | $                                                         | 15,687,543 |                            | $          | 36,359,802                  |       | $ | 52,047,345 |   |
|                                            |       |                                                      |       |                            |       |                        |       |
| Accounts payable                                |       | 2,774,978                                                 |       | —                          |       | 2,774,978                   |       |
| Notes Payable                                   |       | 367,742                                                   |       | —                          |       | 367,742                     |       |
| Obligations under capital leases                |       | 554,217                                                   |       | —                          |       | 554,217                     |       |
| Other current liabilities                       |       | 1,607,362                                                 |       | 204,480                         | **(c)**    | 1,811,842                   |       |
| Long term notes payable                         |       | 745,304                                                   |       | —                          |       | 745,304                     |       |
| Long term obligations under capital leases      |       | 1,977,991                                                 |       | —                          |       | 1,977,991                   |       |
| Long term accrued liabilities                   |       | —                                                    |       | 517,356                         | **(c)**    | 517,356                     |       |
| Shareholders’ equity                       |       | 7,659,949                                                 |       | (7,659,949                      | )**(b)**   | —                      |       |
|                                            | ** ** |                                                      | ** ** | 39,332,356                      | **(e)**    | 39,332,356                  |       |
|                                            | ** ** |                                                      | ** ** | 3,965,559                       |       | 3,965,559                   |       |
| Total Liabilities and Shareholders’ equity |       | $                                                         | 15,687,543 |                            | $          | 36,359,802                  |       | $ | 52,047,345 |   |

 

In accordance with SFAS No.142, goodwill will not be amortized and will be tested for impairment at leastannually.  The amounts contained in thepurchase price allocation may change as additional information becomes availableregarding the assets and liabilities acquired. The purchase price allocations are expected to be finalized before the yearended June 30, 2005.  Any change in thefair value of the net assets will change the amount of the purchase priceallocable to goodwill.  There was noallocation to intangible assets because no patents were acquired and the otherrelevant assets (e.g., customer-related, marketing-related, contracts) wereinitially determined to be insignificant and immaterial.  However, the Company is continuing to evaluatethis in detail and anticipates that it will determine and place a fair valueupon completion of such valuation.  Untilcompletion of such evaluation, the Company cannot currently estimate anypurchase price allocations.

 

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The following adjustmentshave been reflected in the balance sheet.

 

(a)          To record an additional allowance for doubtful accounts as of theacquisition.  In addition, to record areserve against a short-term non-liquid deposit.

 

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

 

(c)          Reflects several one-time reserves as of the acquisition date, relatingto inventory previously not recognized of $639,936.  Also includes a legal settlement with acommercial agent for $517,536 incurred as contingency of the acquisition and anadditional accrual for employee and product litigation of $204,480.

 

(d)         To reflect goodwill.

 

(e)          To record the purchase price of Eurosilicone.

 

(f)            To record performance payment required underthe acquisition agreement which had occurred during the quarter ending March31, 2005.  Please see Note V for thepossibility of additional performance payments.

 

The following unauditedpro-forma financial information reflects the condensed consolidated results ofoperations of the Company as if the acquisition had taken place on July 1,2003.  The pro-forma financialinformation is not necessarily indicative of the results of operations had thetransaction been effected on July 1, 2003.

 
| ** **                               | ** ** | **For the Nine Months Ended  March 31,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| Net sales                                |       | $                                             | 19,418,722 |   | $ | 16,226,327 |   |
| Net income / (loss)                      |       | (12,638,105                                   | )          | (4,610,891 | ) |
| Diluted (loss) earnings per common share |       | (0.70                                         | )          | (0.26 | ) |
|                                          |            |                                               |            |  |  |  |  |

 

OnAugust 27, 2004, the Company completed the acquisition of privately-held Dermatological MedicalProducts and Specialties, S.A. de C.V., a distributor of aesthetic, plastic andreconstructive surgery devices in Mexico.

 

**Note X – Subsequent Events**

 

OnApril 25, 2005, one of the Company’s subsidiries completed the purchase of selectedassets 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 will not have a significant impact on the operating resultsof the Company, since the operations have no existing revenue—pending FDAapproval of the products.  The various agreements call for payments in theform of stock and cash of about $3,375,000 as follows:  cash payments of$625,000 and 366,667 shares of MediCor Ltd. common stock valued at $7.50, subjectto future adjustment based on actual trading prices following approval formarketing the products in the United States.

 

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

 

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

 

**OVERVIEW**

 

MediCor Ltd. is a global health care company thatacquires, develops, manufactures and markets products primarily for theaesthetic, plastic surgery and dermatology markets.  Current productsinclude breast and other implants and scar management products.  Ourproducts are sold in foreign countries (non-U.S.) and are currently about 95%of total sales, with Brazil accounting for about 15% of sales.  Revenue from scar management productsaccounts for less than 7% of total sales. We sell our products to hospitals, surgical centers and physiciansprimarily through distributors, as well as through direct sales personnel.

 

**CompanyHistory and Business Strategy**

 

MediCor was founded in 1999by chairman of the board Donald K. McGhan, the founder and former chairman andchief executive officer of Inamed Corporation, McGhan Medical and McGhanLimited. MediCor’s objective is to be a leading supplier of selectedinternational medical devices and technologies.

 

To achieve our objective, weintend to build upon and expand our business lines, primarily in the aesthetic,plastic and reconstructive surgery and dermatology markets. Because of ourmanagement team’s experience in these target markets, and in particular thebreast implant market, we focused our strategy from the outset on acquiring therights to products or their manufacture in the breast implant market so we cancompete as one of the world leaders in this market. We intend to continue toaccomplish our intended growth through the expansion of existing product linesand offerings and through the acquisition of companies and other assets,including intellectual property rights and distribution rights.

 

Implementation of ourexpansion and acquisition strategy commenced in 1999, when we were presentedwith the opportunity to be appointed a distributor for the Poly ImplantsProtheses, S.A., or PIP, pre-filled saline breast implant in North America. In1999, PIP appointed our III Acquisition Corp. subsidiary (which does businessunder the trade name PIP.America) a distributor for PIP products in NorthAmerica. At the time, these products were being sold, as were other breastimplants, under an exclusion from pre-market approval requirements provided byUnited 

 

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States Food and DrugAdministration, or FDA, regulations. Prior to May 2000, PIP.America distributedin the United States pre-filled saline breast implants manufactured by PIP, onboth a direct and a consigned inventory basis. As of May 2000, the FDA notifiedPIP.America and PIP that further direct sales to customers by PIP.America wouldbe suspended until the FDA reviewed and approved the clinical study beingconducted by PIP. Pursuant to a voluntary withdrawal from the market, sales ofPIP products ceased in November 2002 pending final pre-market approval, or PMA,clearance. PIP managed the PMA process until March 2004, when PIP.Americaamended its agreement with PIP and amended financial and managementresponsibility for completing the PMA process. In this capacity PIP.Americawill be responsible for funding the completion of the clinical trial andmanaging the submission of PMA data. As a result of the amended agreement,PIP.America acquired ownership of the PMA. As sole owner of the PMA, we willhave exclusive control of all U.S. distribution of products approved under thePMA. PIP.America’s distribution agreement with PIP is a customary agreement ofits type under which PIP.America purchases breast implants from PIP at agreedprices and is then free to resell that product at prices determined by PIP.America.

 

In 2001, we consideredrelated product lines that were in our target markets and were revenueproducing. We identified HPL Biomedical, Inc., which was operating under thename Biodermis. It was active in the specialty field of scar management andpost-operative care products. Consistent with our business strategy, weacquired Biodermis through a stock acquisition. Historic sales of this productline have been less than $2 million per year, with single customers accountingfor as much as 25% in 2003 and 8% in 2004. As a result of this concentration,Biodermis has experienced sales changes as large customers have altered theirordering patterns. Biodermis anticipates that these fluctuations will diminishif its efforts to diversify its customer base are successful.

 

In April 2002, we identifiedan opportunity to potentially distribute in the United States inflatable salinebreast implants.  We determined thisopportunity was consistent with our business strategy, and we agreed to acquiresubstantially all of the assets of Hutchison International, Inc., theprivately-held exclusive U.S. breast implant distributor for the Biosil Limitedinflatable saline breast implants. As in the case of PIP’s products, these werealso available in the United States prior to May 2000. We closed theacquisition of Hutchison’s assets, which involved assets that wereinsignificant in amount, in April 2005 for $250,000 in cash and 366,667 sharesof our common stock. Concurrently, our MediCor Aesthetics subsidiary, withHutchison as a nominal party, entered into a direct exclusive distributionrelationship with Biosil for distribution of its saline filled breast implantsin the United States. We are now working with the manufacturer to obtain thenecessary governmental approvals for distribution of these products in the UnitedStates. In connection with this acquisition transaction, we assumed thedistributor’s financial and management responsibility for completing theclinical trial and various aspects of the PMA process. Although the timing ofregulatory approval for either the PIP or Biosil implants is uncertain, webelieve that if we are successful in working with these manufacturers to bringone or both of these products into the United States our business will bepositively affected.

 

Commencing in 2002 andconcluding in 2003, we also investigated and acquired patents related to newmaterials with potential for use as fill material for breast implants which webelieve may be useful in one or more of our target markets. We determined thatacquiring this proprietary technology while it was available for sale was alsoconsistent with our business strategy. We acquired that technology through thepurchase of the stock of its owner in exchange for 600,000 shares of our commonstock and currently have that technology in our research and developmentprogram as part of our new products strategy. Although we believe successfuldevelopment and instruction of a new generation of breast implants would findmarket acceptance, there can be no assurance when, if ever, we will commercializeproducts from that intellectual property.

 

In early 2003, we determinedthat being a company that filed periodic reports (including financialinformation) with the Securities and Exchange Commission, and whose stock wastherefore under certain circumstances and limitations available to be traded,was consistent with our business strategy. We believed it potentiallypositioned us to use securities as consideration for acquisitions and preparedus for rapid growth and the requisite financing flexibility we believed wewould need. In February 2003, our International Integrated Incorporatedsubsidiary entered into an agreement of merger with a Delaware corporation,Scientio, Inc., in which MediCor became the surviving parent, and a reportingentity.

 

Over the next year wecontinued to pursue the advancement of the PMAs for the PIP and Biosil productsand sought other acquisition opportunities that had been in our focus since ourinception in 1999.

 

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Through late 2003 and intoearly 2004 we negotiated the transaction to acquire Eurosilicone, which wecompleted in July 2004. Through this acquisition, we acquired the manufacturingcapacity to market breast implants throughout the world, subject only toregulatory constraints. We believe this acquisition is pivotal to our businessstrategy. The continuing Eurosilicone management has successfully achievedregistrations for their products throughout the world. In addition, severalmembers of the MediCor management team and executives of our subsidiaries haveexperience in obtaining regulatory approvals and registrations for implantablemedical devices for aesthetic medicine throughout the world, including theUnited States. This experience was gained during former employment with leadingcompanies in the aesthetic medicine sector, including having led the effortsfor the 2000 approval of saline breast implants by the U.S. FDA. We believethat Eurosilicone will have a material, positive impact on our sales and cash flow.

 

Following our Eurosiliconeacquisition, we also began implementing our strategy of regional sales andmarketing oversight and distributor management. In September 2004, we acquiredDermatological Medical Products and Specialties, S.A. de C.V., a small medicaldevice distributor in Mexico to become part of MediCor Latin America, S.A. deC.V. We effected the acquisition, which involved assets that were insignificantin amount, primarily to acquire a corporate presence in Mexico and to hire itstwo owners and principal employees, who are now employed by MediCor LatinAmerica as managers and by Dermatalogical Medical Products as commissionedsales personnel. These two employees had previously distributed products forone of our competitors in the Mexican breast implant market. At the time of ouracquisition, the company was distributing other medical products for othermanufacturers. Following the acquisition, Dermatological Medical Productsceased distributing these products to focus on becoming our second distributorin Mexico (supplementing our existing non-exclusive distributor) and MediCorLatin America is managing distribution of our products throughout Mexico,Central America and South America. As in other regions of the world, ourEurosilicone and Biodermis subsidiaries have one or more distributors in all ofour target countries. For example, Eurosilicone had prior to our acquiring itand continues to have distributors in 15 Central and South American countries.As we have done in this region, we intend to put in place in other regionsidentified by us a regional manager or managers to support and manage, andparticipate directly in, distribution of our products.

 

**Products**

 

Currently,MediCor has two main product lines:

 

•                  breast and otherimplants for aesthetic, plastic and reconstructive surgery; and

•                  scar managementproducts.

 

***Breast and other implant products***

 

Our primary product line isbreast implants. With the acquisition of Eurosilicone in 2004, we have jumpedfrom no current sales to become the third largest breast implant manufacturerin the world. Sales in foreign (non-U.S.) countries are currently about 95% oftotal sales, with the largest country accounting for about 15% of sales.Eurosilicone also manufactures a broad line of other implant products targetedto the aesthetic, cosmetic and reconstructive markets, including gluteal, calf,pectoral, malar and testicular implants, as well as external breast prosthesis.These other products account for approximately 5% of total sales. The financingfor the Eurosilicone acquisition was primarily provided through additionalloans from International Integrated Industries, LLC, an affiliate of MediCor’schairman, as more fully described in the financial statements and notes.

 

Prior to May 2000, throughour III Acquisition Corp. subsidiary, which does business under the trade namePIP.America, we distributed in the United States pre-filled saline breastimplants manufactured by Poly Implants Protheses, S.A., or PIP, on both adirect and a consigned inventory basis. As of May 2000, the United States Foodand Drug Administration notified PIP.America and PIP that further direct salesto customers by PIP.America would be suspended until the FDA reviewed andapproved the clinical study being conducted by PIP. Pursuant to a voluntarywithdrawal from the market, sales of PIP.America products ceased in November of2002 pending final pre-market approval, or PMA, clearance.  PIP.America and MediCor are currentlyconducting the clinical study and 

 

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it is in a monitoring phase. The likelihoodand timing of obtaining FDA approval are uncertain as is the timing ofcommercialization in the United States.

 

In April 2002 we agreed toacquire and in April 2005 we acquired substantially all of assets of HutchisonInternational, Inc., the privately-held exclusive U.S. breast implantdistributor whose principal product line consists of inflatable saline breastimplants manufactured by Biosil Limited. As in the case of PIP’s products,these were also available in the United States prior to May 2000. We are nowworking with Biosil Limited to prepare a PMA application for these products.The likelihood and timing of obtaining FDA approval are uncertain as is thetiming of commercialization in the United States.

 

***Scar Management Products***

 

Biodermis, one of oursubsidiaries, is an innovator in the scar management market and a leader inthis technology that is indicated for use in the prevention and management ofvisible scar tissue known as keloid and hypertrophic scars. TheBiodermisproducts achieve therapeutic results by encapsulating the scar tissue with asoft, malleable, semi-occlusive polymer in the form of sheets and ointmentsthat are believed to mimic the natural barrier function of the skin, improvingthe condition and appearance of scars. In the United States, the products aremarketed under the names EpiDermTM silicone gel sheetingand XeragelTMsilicone ointment. Internationally, the sameproducts are also marketed 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-basedproduct for use in reducing the pain, discomfort and burning sensationfrequently associated with procedures of the skin typically aimed at reducingfine lines and wrinkles and to eliminate or reduce the signs of aging, such aslaser resurfacing, chemical peels and micro-dermabrasion.

 

Additionally, a portion ofBiodermis’ revenue is derived from original equipment manufacturing of scarmanagement and post-operative care products for other medical device companieswho then sell the products under their own brand names.  To assure quality control and properregulatory compliance, Biodermis retains all responsibilities related to theFDA and European CE-mark certification and regulatory compliance related tomanufacturing activities. Some of these companies are allowed to compete forsales in similar markets and for similar 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 reported amounts ofrevenues and expenses during the reporting period.  On an on-going basis,we evaluate our estimates and judgments, including those related to revenuerecognition, inventories, adequacy of allowances for doubtful accounts,valuation of long-lived assets and goodwill, income taxes, litigation andwarranties.  We base our estimates on historical and anticipated resultsand trends and on various other assumptions that we believe are reasonableunder the circumstances, including assumptions as to future events.  Thepolicies discussed below are considered by management to be critical to anunderstanding of our financial statements. These estimates form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources.  By their nature, estimates are subject to an inherent degree ofuncertainty.  Actual results may differ from 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.

 

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**RESULTS OF OPERATIONS**

 

***Sales***

 

Sales for the three monthsended March 31, 2005 equaled $7,130,409, an increase of $6,766,668 as comparedto the prior year quarter.  For the ninemonths ended March 31, 2005 sales were $19,418,722, an increase of $18,412,100versus the same period a year ago.  Thesales of our subsidiary Eurosilicone, acquired on July 5, 2004, drove theincrease in sales versus the prior year periods.  On a pro forma basis, salesfor the three months ended March 31, 2005, increased by about $558,497 or8%.  Excluding the estimated impact offoreign exchange rates, this growth was approximately 6%.  On a pro forma basis, sales for the ninemonths ended March 31, 2005, increased by about $3.1 million or approximately20% versus the prior year period. Excluding the estimated impact of foreign exchange rates, the growthrate was 17%.  The growth between periodswas attributable to strong unit sales resulting from continued sales effortsand strong demand.

 

***Cost of Sales***

 

Cost of sales as a percentage of net sales for thethree months ended March 31, 2005 were approximately 68% compared toapproximately 24% during the same period in 2004. For the nine months endedMarch 31, 2005 cost of sales as a percentage of net sales was approximately60%.  During the same period in 2004 costof sales as a percentage of net sales were approximately 26% which excludes anadjustment for consigned inventory that was returned of $56,175.  The majority of the costs associated with theproduction of our product are recurring. The overall increase in cost of sales and gross profit for the three andnine month periods were driven by the acquisition of Eurosilicone, specificallydue to higher labor, raw material costs and increased quality controlcosts.  Normally, we expect that cost ofsales will remain relatively constant on a percentage basis of approximately45% to 50%.

 

***Selling,General and Administrative***

 

Selling, general and administrative (“SG&A”)expenses increased to $4,371,063 for the three months ended March 31, 2005, ascompared to $2,264,520 during the same period in 2004, driven by the costs fromthe operations of Eurosilicone, which was not included in the prior yearperiod.  One of the largest increases wasdriven by bad debt reserve of $920,024, which consisted of a $582,063 reserveof our note with Poly Implants Protheses S.A. After reviewing our note with Poly Implants Protheses, we concluded thattheir financial condition warranted a reserve. In addition, $337,961 of our accounts receivable was reserved for twodistributors of Eurosilicone, although we continue to seek payment for all ofour receivables.  In addition, thethree-month increase can be attributed to an increase in payroll and payrollrelated expenses of $907,346 and consulting expense of $300,971.  Of all SG&A expenses, about half wererecurring charges.

 

For the nine months ended March 31, 2005, SG&Aexpenses increased to $13,544,476 as compared to $5,131,484 for the same perioda year ago, driven by the costs from the operations of  Eurosilicone, which was not included in theprior year period.  The increase can be attributedto an additional reserve for the Poly Implants Protheses S.A. note of$2,040,062 and a $321,863 for our accounts receivable distributors.  In addition, there were increases in payrolland payroll related items of $2,360,195, travel related expense of$597,607,depreciation and amortization expense of $557,904, commission expenseof $494,557, legal fees of $441,127, accounting fees of $289,640, costs relatedto acquisitions of $225,000, employee and business insurance of $203,351,non-employee stock option expense of $145,875, and other various SG&A costsof $444,053.  Of all SG&A expenses,about 60% were recurring items.  Thereason for the level of SG&A expenses relative to revenue are due to normalstart up period costs and costs associated with establishing and maintaining afixed infrastructure.  As our businessand sales increase, we anticipate that recurring SG&A expenses willincrease in absolute dollars, but decrease as a percentage of sales.

 

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***Research andDevelopment***

 

Researchand development in the recent quarter ending March 31, 2005 was $680,895, ascompared to $946,626 for the comparable period in 2004.  The decrease of$265,731 is primarily attributable to a net reduction of lower spendingassociated with the saline breast implant clinical trials.  Costsassociated with the Biosil product fell by $378,884, which was offset by anincrease in costs for the PIP product of $113,153.

 

Researchand development in the nine months ended March 31, 2005 was $1,882,084, ascompared to $1,380,557 for the comparable period in 2004.  The increase of$501,527 is primarily attributable to a net increase of higher spendingassociated with the saline breast implant clinical trials.  Costs associatedwith the Biosil product rose by $125,000, accompanied by an increase in costsfor the PIP product of $376,527.  Weexpect that research and development expenses will decrease once we receiverequired government approvals, but will increase as we bring new products tomarket or existing products to new markets.

 

***InterestExpense***

 

Interest expense increased to $1,610,692 for thethree months ended March 31, 2005, compared to $312,585 in same period in theprior year.  Interest expense increasedto $4,140,175 for the nine months ended March 31, 2005, as compared to $797,953for the nine months ended March 31, 2004. Interest expense consists primarily of interest related toborrowings.  The change in interest expense was primarily due to asignificant increase in the average principal note payable to related partybalances incurred as a result of the Eurosilicone acquisition.

 

***Net Loss***

 

Net loss for the three months ended March 31, 2005increased to $4,127,833 from $3,245,780 for the comparable period in theprevious year.  Net loss increased form $6,509,464 reported in the ninemonths ended March 31, 2004 period to $12,449,318 for the nine months endedMarch 31, 2005.  The decline was due tohigher selling costs, general and administrative expenses, research and developmentand interest expense.  Basic and dilutedloss per share was ($0.23) for the three month period ended March 31, 2005compared to ($0.18) for the comparable period last year.  Basic and diluted loss per share was ($0.69)for the nine months end March 31, 2005 compared to ($0.37) for the comparableperiod last year.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Cash flow from operations during the nine monthsended March 31, 2005 was ($9,273,529) as impacted by selling, general andadministrative continued startup costs, research and development and interestexpense.  On July 5, 2004, we completedthe acquisition of Eurosilicone, which had a net effect on our investingactivities of ($12,760,150).  To completethe acquisition we borrowed an additional $11,000,000 from LLC.  In connection with indebtedness to LLC, weentered into a credit facility with BNP Paribas.  Under that facility we initially drewapproximately $9,014,680 of which $5,000,000 was repaid to LLC.  On March 21, 2005 we drew an additional$3,965,559 from the BNP Paribas note to pay the fiscal 2005 performance paymentto the sellers of Eurosilicone as per the acquisition agreement.  The remaining balance of available creditunder the BNP Paribas facility is tied to performance payments we may have to maketo the sellers under the Eurosilicone acquisition agreement during fiscal 2006and 2007.

 

In a subsequent event, as noted in Note X, wecompleted the purchase of substantially all of the assets of privately-held Hutchison International,Inc.  As part of this acquisition we wereobligated to pay $250,000 in cash, which we borrowed from LLC.

 

Our ability to make payments to refinance our debtand to fund planned capital expenditures and operations will depend on ourability to secure additional significant financing and generate sufficient cashin the future.  Currently, we have only 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. Under our asset purchase agreement relating to one of those productlines, we have an obligation to make additional cash payments on closing ofthat transaction (which only occurs following FDA approval of the application).Thus, 

 

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wehave no obligation to close this transaction or make this payment unless theproduct is cleared for marketing in the United States.  We expect we will be able to make thatpayment from available cash or from the proceeds of affiliate debt, provided bysuch date we have not concluded a third-party financing.

 

We have historically raised funds to support ouroperating expenses and capital requirements through sales of equity or debtsecurities or through other credit arrangements, including borrowing from ouraffiliates.  Our existing cash, cash equivalents and cash generated fromoperations, including the operations of Eurosilicone, will be insufficient tomeet our anticipated cash needs for the next 12 months.  To satisfy ourliquidity requirements, we will need to raise additional funds.  To theextent additional sales of equity or debt securities are insufficient tosatisfy our liquidity requirements, we plan on being able to obtain anynecessary additional funds through the incurrence of additional indebtedness toour affiliates.  We have received a written commitment from, LLC, anaffiliate of our chairman, to provide sufficient cash to fund any operatingexpenses and capital expenditures through April 1, 2006.  The same entityhas provided to us over $62 million in funding through March 31, 2005. This historic funding has been a combination of equity and debt.  The outstanding debt is a revolving creditfacility 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 compound interest.  It is payable on demand.  As a result, it can be called at any time,and for any reason.  From time to time inconnection with our other fund-raising activities, International Integrated hasconverted some of the debt to equity along side third-party investors.  There is no obligation or understanding thatany such conversions will occur.  We arepresently seeking to refinance some or all of the LLC indebtedness from a combinationof third-party indebtedness, equity and possible conversions of debt toequity.  We may or may not besuccessful.  In the interim, any futurefunding from LLC may take the form of debt or equity or a combination thereof.

 

We expect our operatinglosses to continue through the end of fiscal 2005. We anticipate that we willneed $1.75 million for the remaining three months of fiscal 2005 for PMAapplication costs and negative operating cash flows. We anticipate that we willneed between $6.0 and $8.0 million in additional liquidity to cover negativecash flow in fiscal 2006. In addition, to the extent we want to pursueadditional acquisitions, we expect that we will need additional financing. Wedo not presently have any commitments for such financing and it may not beavailable when we need it, on terms acceptable to us or at all. The lack ofadequate financing could adversely affect our ability to effect acquisitions.Our Eurosilicone Holdings subsidiary may be required to make a performancepayment of up to €3 million to the sellers in each of fiscal 2006 and 2007under the Eurosilicone acquisition agreement. If these payments are requiredand Eurosilicone Holdings does not otherwise have sufficient funds fromdividends or distributions from Eurosilicone, Eurosilicone Holdings intends todraw the necessary funds from its credit facility with BNP Paribas, which wasestablished in part specifically to provide a back-up funding source for theseperformance payments. Eurosilicone has positive cash flow that is sufficient tofund all of its operational and projected capital needs. As a result, and withthe bank financing of the possible performance payments, we do not expectEurosilicone to have any additional liquidity needs.

 

Our revenues are primarilydenominated in U.S. dollars and in Euros, with U.S. dollars accounting forapproximately 50% of total revenues. Our expenses are primarily denominated inU.S. dollars, with the exception certain of Eurosilicone’s operating expenses.We have a net foreign exchange exposure impact of approximately 10% of oursales, which is primarily attributable to the Euro. We do not currently hedgeagainst foreign exchange risk and do not have any plan to do so in theimmediate future.

 

**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” within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934.  Words such as “anticipate,”“believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,”“possible,” “project,” “should,” “will,” and similar words and expressions,identify forward looking statements. These forward-looking statements involve important risks anduncertainties that could materially alter results in the future from thoseexpressed in any forward-looking statements made by us or on our behalf.  We caution you that forward-lookingstatements are only predictions and that actual events or results may differmaterially.  In evaluating thesestatements, you should specifically consider the factors described below that 

 

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couldcause actual events or results to differ materially. We assume no obligationand do not intend to update these forward-looking statements, except asrequired by law.

 

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

 

We currently are dependant on establishing ormaintaining rights to distribute in the United States breast implant productsmanufactured by third-parties.  We arecurrently seeking to renegotiate the terms of one such agreement.  We may not be able to establish or maintainthese rights on acceptable terms or at all. If we fail to establish or maintain these rights, we may not be able tosell breast implant products in the United States for a number of years, if atall.

 

***If clinical trials for our products are unsuccessfulor delayed, we will be unable to meet our anticipated development andcommercialization 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 theclinical trials;

•   unforeseen safety issues;

•   uncertainties with oractions of our collaborative partners or suppliers;

•   slower than expectedpatient recruitment;

•   difficulties in recognizingtechnical or laboratory data and clinical data;

•   difficulties in patientretention; and

•   government or regulatorydelays.

 

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

 

***If we are unable to develop, gain regulatory approvalfor and market new products and technologies, we will not achieve meaningfulrevenue and may experience a decrease in demand for our products or ourproducts could become obsolete.***

 

The medical device industry is highly competitiveand is subject to significant and rapid technological change and marketshifts.  We believe that our ability to respond quickly to consumer needsor advances in medical technologies, without compromising product quality, willbe crucial to our success.  We are continually engaged in productdevelopment and improvement programs to establish and improve our competitiveposition.  We cannot, however, guarantee that we will be successful inenhancing our existing products or products we have in development or clinicaltrials.  Nor can we guarantee that wewill be successful in developing new products or technologies that will timelyachieve regulatory approval or receive market acceptance.  Once developed, we must 

 

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alsotimely obtain regulatory approval for our products, the failure of which maycause our products to be obsolete once regulatory approval is granted.  Two of our competitors are in the advancedstage of obtaining regulatory approval for their silicone filled breastimplants, while we have not started the regulatory process for such products inthe United States.  This could put us ata significant market disadvantage in the United States market.  The lack of United States regulatory approvalfor our products, in the face of our competitors’ approvals, may also adverselyaffect us in non-United States markets.

 

***If changes in the economy and consumer spendingreduce consumer demand for our products or our products in development, oursales and profitability will suffer.***

 

Breast augmentation and reconstruction and otheraesthetics procedures are elective procedures.  Other than insurancereimbursement for post-mastectomy reconstructive surgery that is available insome cases, breast augmentations and other cosmetic procedures are nottypically covered by insurance.  Adversechanges in the economy may cause consumers to reassess their spending choicesand reduce the demand for cosmetic surgery.  This shift could have anadverse effect on our projected future sales and profitability.

 

***Our business will be negatively impacted if we cannotobtain additional financing.***

 

To accomplish our plans to conduct our currentoperations, to expand our current product lines and markets and to purchase newcompanies, products and intellectual property, we need substantial additionalcapital, which we may not be able to obtain.  We currently havesignificant debt that must be serviced. While we have to date been funded in substantial part from financingfrom an affiliate of our chairman, we do not anticipate this funding sourcewill provide sufficient capital to finance our intended growth strategy, and weexpect that we will need significant external financing to accomplish ourgoals.  Our primary lender is an affiliate of our chairman and may alsoseek payment of its debt on an accelerated basis, which we would be unlikely tobe able to do. We have in the past and will likely in the future negotiate withpotential equity and debt providers to obtain additional financing, but thisadditional financing may not be available on terms that are acceptable to us,or at all.  If adequate funds are not available, or are not available onacceptable terms, our ability to operate our business or implement ourexpansion and growth plans will be significantly impaired.  In addition, the financial terms of any suchfinancing, if obtainable, may be dilutive to existing stockholders.

 

***We rely on our chairman forcontinued capital funding, management direction and strategic planning and wedo not presently have any alternative funding or a management transition planin place.***

 

Werely on our chairman, Donald K. McGhan, for our continued capital funding,management direction and strategic planning. Mr. McGhan’s positions as principal lender, principal shareholder,chairman of our board of directors and a member of our four-person executivecommittee.  Consequently, Mr. McGhan hassubstantial influence over significant corporate transactions of our company,including acquisitions that we may pursue. Although we have no written charter, our executive committee, however,generally functions on the basis of consensus, though Mr. McGhan’s multipleroles and significant financial and stockholder stake are typicallyconsidered.  To date, we have not had anyevent where Mr. McGhan has sought to or exercised any type of unilateralcontrol over us, though there can be no assurance that this will not happen inthe future.  In addition, Mr. McGhan’sunique position in the industry as founding or establishing the plastic surgerybusiness of the two principal competitors, Mentor and Inamed, presents a uniquestrength but the loss of Mr. McGhan’s services or financial support to ourcompany could materially and adversely affect our operations.  We do not presently have a written or otherwell-established management or financing transition plan in the event we wereto lose the services or financial support of Mr. McGhan.

 

***Because we have only a limited operating history andour business strategy calls for significant growth through new products andacquisitions, there is significant uncertainty about our business and prospects*****.**

 

MediCor and its subsidiaries have only beenoperating since 1999.  Although our Biodermis operation has been inexistence for a longer period of time, it has only operated under MediCor’smanagement since its acquisition in 2001.  Significantly, during much ofour history we have also been prevented from selling our primary existing 

 

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product,breast implants, in the U.S. market due to the FDA’s 2000 call for a pre-marketapproval for those products.   As a result, all of our revenues priorto the Eurosilicone acquisition were derived from our scar managementproducts.  Revenue generated by our Biodermis subsidiary has not beensignificant, and we do not expect more than modest internal growth in thatsegment As a result, our existing business platform is not necessarilyindicative of our future business or prospects.

 

***MediCor and its prospects must be considered in lightof the risks, expenses and difficulties frequently encountered by companies inan early stage of development, particularly companies in rapidly evolvingmarkets such as the medical device market.***

 

Risks for our business include the uncertaintiesassociated with developing and implementing our business strategy as describedin “Company History and Business Strategy” as we grow and the management ofboth internal and acquisition-based growth.  This is particularly acuteduring the rapid growth phase of a business, such as we are currentlyexperiencing and in a rapidly changing 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.

 

***We are subject to substantial government regulation,which could materially adversely affect our business.***

 

The production and marketing of our products andintended products and our research and development, pre-clinical testing andclinical trial activities are subject to extensive regulation and review bynumerous governmental authorities, both in the U.S. and abroad.  Most ofthe medical devices we sell or intend to sell or develop must undergo rigorouspre-clinical testing and clinical trials and an extensive regulatory approvalprocess before they can be marketed.  This process makes it longer, moreuncertain and more costly to bring the products to market, and some of theseproducts may not be approved, or, once approved, they may be recalled. The pre-marketing approval process can be particularly expensive, uncertain andlengthy.   Many devices for which FDAapproval has been sought by other companies have never been approved formarketing.  In addition to testing andapproval procedures, extensive regulations also govern marketing,manufacturing, distribution, labeling, and record-keeping procedures.  Ifwe or our suppliers or collaborative partners do not comply with applicableregulatory requirements, this could result in warning letters, non-approval,suspensions of regulatory approvals, civil penalties and criminal fines,product seizures and recalls, operating restrictions, injunctions, and criminalprosecution.

 

Delays in or rejection of FDA or other governmententity approval of new products would adversely affect our business. Delays or rejection may be encountered due to, among other reasons, governmentor regulatory delays, lack of efficacy during clinical trials, unforeseensafety issues, slower than expected rate of patient recruitment for clinicaltrials, inability to follow patients after treatment in clinical trials,inconsistencies between pre-clinical or early clinical trial results andresults obtained in later clinical trials, varying interpretations of datagenerated by clinical trials, or changes in regulatory policy during the periodof product development in the U.S. and abroad.  In the U.S., there hasbeen a continuing trend of more stringent FDA oversight in product clearanceand enforcement activities, causing medical device manufacturers to experiencelonger approval cycles, more uncertainty, greater risk, and higherexpenses.  Internationally, there is a risk that we or our suppliers orcollaborative partners may not be successful in meeting the quality standardsor other certification requirements.  Even if regulatory approval of a productis granted, this approval may entail limitations on uses for which the productmay be labeled and promoted. It is possible, for example, that we or oursuppliers or collaborative partners may not receive FDA approval to market ourcurrent or future products for broader or different applications or to marketupdated products that represent extensions of our, our suppliers’ orcollaborative partners’ basic technology.  In addition, we or oursuppliers or collaborative partners may not receive export or import approvalfor products in the future, and countries to which products are to be exportedmay not approve them for import.

 

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***Government regulation of manufacturing of medicaldevices is expensive and time consuming for manufacturers and may result inproduct unavailability or recalls.***

 

Medicaldevice manufacturing facilities also are subject to continual governmentalreview and inspection.  The FDA has stated publicly that compliance withmanufacturing regulations will be scrutinized more strictly.  Agovernmental authority may challenge our or our suppliers’ or collaborativepartners’ compliance with applicable federal, state and foreignregulations.  In addition, any discovery of previously unknown problemswith products or facilities may result in restrictions on the product or thefacility, including withdrawal of the product from the market or otherenforcement actions.

 

***If we are unable to avoid significant productliability claims or product recalls, we may be forced to pay substantial damageawards and other expenses that could exceed our reserves and any applicableinsurance 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 breast implant products entails significant risk ofproduct liability claims due to potential allegations of possible diseasetransmission and other health factors, rupture or other product failure. Somebreast implant manufacturers that suffered these types of claims in the pasthave been forced to cease operations or even to declare bankruptcy. We may alsoface a substantial risk of product liability claims from other products we maychoose to sell. In addition to product liability claims, we may in the futureneed to recall or issue field corrections related to our products due tomanufacturing deficiencies, labeling errors, or other safety or regulatoryreasons. 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 of potential product warranty claims relatingto products distributed by us in the United States through our productreplacement programs discussed in our Business section.

 

We do not presently have liability insurance toprotect us from the costs of claims for damages due to the use or recall of ourproducts, except that our Biodermis subsidiary carries a limited amount ofproduct liability insurance related to its products.  We may in the futureseek additional insurance, which will be limited in both circumstance ofcoverage and amount.  Recent premium increases and coverage limitations,including specifically limitations or prohibitions by insurers on insurancecovering breast implant manufacturers, may make this insurance uneconomic oreven unavailable.  However, even if we obtain or increase insurance, oneor more product liability claims or recall orders could exceed any coverage wemay hold.  If we continue to have limited or no coverage or our insurancedoes not provide sufficient coverage, product liability claims or recalls couldresult in losses in excess of our reserves.

 

***Lawsuits, including those seeking class actionstatus, may, if successful, cause us to incur substantial liability, includingdamage awards and significant legal fees that may exceed our reserves.***

 

Lawsuits have been filed naming us or one of oursubsidiaries, the French manufacturer from which we purchase breast implantproducts, and the U.S. distributor of those same products who preceded oursubsidiary in the U.S. market.  In thesesuits the plaintiffs have sought or currently seek, among other things, classaction status for claims, including claims for breach of warranty.  The claims arise from products distributed bothbefore and after our subsidiary that distributed the products came intoexistence.  Although certain of theclaims arise from products distributed by the other distributor prior to oursubsidiary coming into existence, we have still been named as a defendant.  While we have reserved an amount equal to theoutstanding product replacement claims for claims arising from products oursubsidiary did distribute, the plaintiffs are seeking to hold us responsiblefor more damages.  There can be noassurance we can terminate the litigation as to our subsidiary for reservedamounts.  Although our subsidiary isindemnified by three separate entities, including Poly Implants Protheses,S.A., the French manufacturer, PIP/USA, Inc. the previous distributor, and Mr.Jean Claude Mas, personally, there can be no assurance this indemnity willprotect us, as there is no guarantee the French manufacturer, the previousdistributor, or Mr. Mas will, or is able to, honor the indemnification theyhave provided.

 

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If we are unsuccessful in defending against theclaims involved in these suits, or if class action status is achieved, and theindemnification were to prove non-reliable, we could be responsible forsignificant damages above the reserves and available assets needed to satisfysuch a judgment.

 

***Our Eurosilicone operation doesnot carry product liability or similar insurance and may expose us toadditional risk.***

 

Our French Eurosilicone subsidiary has not in thepast and does not presently have 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 UnitedStates, 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.  If Eurosilicone were toinstitute a product replacement program outside the United States or if thelitigation experience outside the United States were to change significantly,our Eurosilicone subsidiary would be exposed to additional potentialliability.  Although we have policies ofcarefully observing corporate formalities and otherwise seeking to preserve theprotection of the corporate form, there can be no assurance that some or all ofthese potential liabilities will not expose us or our other subsidiaries topotential liabilities as well.

 

***If we suffer negative publicity concerning the safetyof our products, our sales may be harmed and we may be forced to withdrawproducts.***

 

Physicians and potential patients may have a numberof concerns about the safety of our products and proposed products, whethersuch concerns have a basis in generally accepted science or peer-reviewedscientific research or not.  Negative publicity—whether accurate orinaccurate—about our products, based on, for example, news about breast implantlitigation or regulatory actions, could materially reduce market acceptance ofour products and could result in product withdrawals.  In addition, significant negative publicitycould result in an increased number of product liability claims, whether or notthese claims have a basis in fact.

 

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

 

Our present growth strategy is based in significantpart on the acquisition of other companies, products and technologies that meetour criteria for strategic fit, geographic presence, revenues, profitability,growth potential and operating strategy.  The successful implementation ofthis strategy depends on our ability to identify suitable acquisitioncandidates finance acquisitions, acquire companies and assets on acceptableterms and integrate their operations successfully.

 

We may not be able to identify suitable acquisitioncandidates in our desired product or geographic areas or we may not be able toacquire identified candidates on acceptable terms.  Moreover, in pursuingacquisition opportunities we will likely compete with other companies withgreater financial and other resources.  Competition for these acquisitiontargets likely could also result in increased prices of acquisition targets anda diminished pool of companies and assets available for acquisition.

 

Acquisitions also involve a number of other risks,including the risks of acquiring undisclosed or undesired liabilities, acquiredin-process technology, stock compensation expense and increased compensationexpense resulting from newly hired employees, the diversion of managementattention, potential disputes with the sellers of one or more acquired entitiesand the possible failure to retain key acquired personnel.  Clientsatisfaction or performance problems with an acquired business or product linecould also have a negative impact on our reputation as a whole, and anyacquired entity or assets could significantly under-perform relative to ourexpectations.  Our ability to meet these challenges has not beenestablished through repeated acquisitions.

 

We expect that, at least for the foreseeable future,we will be required to use cash consideration for acquisitions.  We likelywill be required to obtain significant third-party financing to accomplishthese acquisitions.  

 

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Thisfinancing may not be available on acceptable terms, if at all.  The termsof any such financing may be dilutive to existing stockholders.

 

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

 

Some aspects of ourbusiness, such as acquisitions, distribution agreements with third parties andproduct research and development, including regulatory approvals andcompliance, have significant and sometimes unpredictable events that can resultin material financial and accounting events, including reserves, write-offs andlitigation. For example, in our Eurosilicone acquisition, we made an aggregateof $621,201 in negative purchase accounting adjustments, we have incurred atotal of $5,866,562 in reserves and write-offs in connection with ourPIP.America subsidiary’s distribution agreement with PIP because of pastuncertainties regarding PIP’s ability to pay its portion of the productreplacement program for its products distributed in the United States, andEurosilicone is party to litigation with one of its distributors in whichdamages of €4 million are alleged. These aspects of our business, such asacquiring companies and technologies, establishing and administeringdistributor relationships and developing new products, are part of our businessstrategy. As a result of the significance of these events, their unpredictabletiming and frequency and the variance in structure and outcome, these eventsand their financial impact are unpredictable and can create materialfluctuations in our financial results.

 

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

 

Our success depends in part on our ability to obtainpatents or rights to patents, protect trade secrets, operate without infringingupon the proprietary rights of others, and prevent others from infringing onour patents, trademarks and other intellectual property rights.  We willbe able to protect our intellectual property from unauthorized use by thirdparties only to the extent that it is covered by valid and enforceable patents,trademarks and licenses and we are able to enforce those rights.  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 ownor license from others may not provide adequate protection againstcompetitors.  In addition, our pendingand future patent applications may fail to result in patents being issued.  Also, those patents that are issued may notprovide us with adequate proprietary protection or competitive advantages againstcompetitors with similar technologies.  Moreover, the laws of certainforeign countries do not protect our intellectual property rights to the sameextent as do the laws of the United States.

 

In addition to patents and trademarks, we rely ontrade secrets and proprietary know-how.  We seek protection of theserights, in part, through confidentiality and proprietary informationagreements.  These agreements may not provide meaningful protection oradequate remedies for violation of our rights in the event of unauthorized useor disclosure of confidential and proprietary information.  Failure toprotect our proprietary rights could seriously impair our competitive position.

 

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

 

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

 

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

 

We currently rely on a single supplier for siliconeraw materials used in many of our products.  We only have an oralagreement with this supplier to transfer the necessary formulations to us inthe event that it cannot meet our 

 

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requirements.  We cannot guarantee that this agreement willbe enforceable or that we would be able to produce a sufficient amount ofquality silicone raw materials in a timely manner.   We will alsodepend on a sole or limited number of third-party manufacturers for siliconebreast implants to be distributed by us in the North America market.

 

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

 

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

 

•    foreign governmentregulation of medical devices;

•    product liabilityclaims;

•    new export licenserequirements;

•    political or economicinstability in our target markets;

•    trade restrictions;

•    changes in tax lawsand tariffs;

•    inadequate protectionof intellectual property rights in some countries;

•    managing foreigndistributors, manufacturers and staffing;

•    managing foreignbranch offices; and

•    foreign currencytranslations.

 

If these risks actually materialize, our sales tointernational customers, as well as those domestic customers who use productsmanufactured abroad, may decrease or our supplier or manufacturing costs maymaterially increase.

 

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

 

Our success will depend upon our ability to attractand retain key managerial, financial, technical, selling and marketingpersonnel.  The lack of key personnel might significantly delay or preventthe achievement of our development and strategic objectives.  We do notmaintain 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 MediCor.  We are currently in theprocess of building 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 highlyskilled employees in our industry is high, and we cannot be certain that wewill be successful in recruiting or retaining these personnel.  We may also face litigation from competitorswith hiring personnel formerly employed by them.

 

***MediCor’s future growth will place a significantstrain on our managerial, operational, financial and other resources.***

 

Our success will depend upon our ability to manageour internal and acquisition-based growth effectively.  This will requirethat we continue to implement and improve our operational, administrative andfinancial and accounting systems and controls and continue to expand, train andmanage our employee base.  We anticipate that we will need to hire andretain numerous additional employees and consultants for both internal andacquisition-based growth for some time.  Integration of these employeesand consultants and employee and consultant loss in the process will requiresignificant management attention and resources.  Our systems, procedures,controls and personnel may not 

 

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beadequate to support our future operations and our management may not be able toachieve the rapid execution necessary to exploit the market for our businessmodel.

 

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

 

We have in the past and may in the future enter intosupply, collaborative or consulting arrangements with third parties to supplyor develop products.  These arrangements may not produce or providesuccessful products.  If we fail to establish these arrangements, thenumber of products from which we could receive future revenues will be limited.

 

Our dependence on supply, collaborative orconsulting arrangements with third parties subjects us to a number ofrisks.  These arrangements may not be on terms favorable to us. Agreements with suppliers may limit our supply of products or require us topurchase products we can not profitably sell. They may also restrict our ability to market or distribute otherproducts.  Agreements with consultants orcollaborative partners typically allow the third parties significant discretionin electing whether or not to pursue any of the planned activities.  Wecannot with certainty control the amount and timing of resources our suppliers,collaborative partners or consultants may devote to our products and thesethird parties may choose to pursue alternative products.  These thirdparties also may not perform their obligations as expected.  Businesscombinations, significant changes in their business strategy, or their accessto financial resources may adversely affect a supplier’s, partner’s orconsultant’s willingness or ability to complete its obligations under thearrangement.   Moreover, we could become involved in disputes withour suppliers, partners or consultants, which could lead to delays or terminationof the arrangements and time-consuming and expensive litigation or arbitration.

 

***Our quarterly operating results are subject tosubstantial fluctuations and any failure to meet financial expectations for anyfiscal quarter may disappoint securities analysts and investors and could causeour stock price to decline*****.**

 

Our quarterly operating results may varysignificantly due to a combination of factors, many of which are beyond ourcontrol. These factors include:

 

•                  changes in demand forour products;

•                  our ability to meet thedemand for our products;

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

•                  existing and increasedcompetition;

•                  our ability to competeagainst significantly larger and better funded competitors;

•                  the number, timing,pricing and significance of new products and product introductions andenhancements by us and our competitors;

•                  our ability to develop,introduce and market new and enhanced versions of our products on a timelybasis;

•                  changes in pricingpolicies by us and our competitors;

•                  the timing ofsignificant orders and shipments;

•                  regulatory approvals orother regulatory action affecting new or existing products;

•                  litigation with respectto product liability claims or product recalls and any insurance covering suchclaims or recalls; and

•                  general economicfactors.

 

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

 

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

 

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. Presentlywe have authorized 45,000 shares of preferred stock in one series, Series A8.0% Convertible Preferred Stock, or our series A preferred stock, 10,937 ofwhich were outstanding on March 31, 2005. Our series A preferred stock has, andother classes of our preferred stock we may issue in the future will have,priority over our common stock in the event of liquidation or dissolution. Inthe event of our liquidation or dissolution, our then-outstanding preferredstock (including series A preferred stock) will have priority of payment overall shares of our common stock. Preferred stock also generally has priority onpayment of dividends over common stock. Our series A preferred stock has thispriority, meaning that no dividends may be paid on our common stock unless allaccrued dividends on our series A preferred stock have been paid. Each holderof convertible preferred stock (such as our series A preferred stock) may alsogenerally, at the holder’s option, convert the preferred stock into commonstock at any time. We cannot predict whether, or to what extent, holders ofconvertible preferred stock will convert to common stock. Preferred stock mayalso provide that the holders thereof may participate with the holders ofcommon stock on dividends or liquidation. This may have the effect ofsubstantially diluting the interest of the common stock holders. Our series Apreferred stock is not a participating preferred stock, though it isconvertible into our common stock.

 

Ourseries A preferred stock is presently convertible into shares of our commonstock at a price of $3.85 per share of common stock based on the initial $1,000liquidation preference per share of series A preferred stock.  Our shares of series A preferred stock alsovote on an as-converted basis, have the right to elect two of our sevenauthorized directors and have special voting rights on specified significanttransactions or events.  The certificateof designation for the series A preferred stock includes a provision that ifthe market capitalization of our common stock does not reach certain levels orif there is not a specified liquidity event by June 30, 2008, then theliquidation preference of our series A preferred stock will be increasedpursuant to the formula, capped at 83% of the original liquidation preferenceof the originally issued series A preferred stock.

 

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

 

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

 

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

 

As of the quarter ended March 31, 2005, management,with the participation of the chief executive and financial officers, carriedout an evaluation of the effectiveness of our disclosure controls andprocedures pursuant to Exchange Act Rule 15d-15.  Based upon thatevaluation, the chief executive officer and the chief financial officer believethat, as of end of the fiscal quarter covered by this report, our disclosurecontrols and procedures were effective in making known to them materialinformation relating to MediCor (including its consolidated subsidiaries)required to be included in this report.  As of the end of our fiscal yearended June 30, 2004, management adopted formal disclosure controls andprocedures which were employed in the preparation of this report.

 

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Disclosure controls and procedures, no matter howwell designed and implemented, can provide only reasonable assurance ofachieving an entity’s disclosure objectives.  The likelihood of achievingthese objectives is affected by limitations inherent in disclosure controls andprocedures.  These include the fact that human judgment in decision-makingcan be faulty and that breakdowns in internal control can occur because ofhuman failures such as simple errors or mistakes or intentional circumventionof established processes.  Management will review our disclosure controlsand procedures periodically to determine their effectiveness and to considermodifications or additions to them.

 

***PART II – OTHER INFORMATION***

 

***ITEM 1. LEGAL PROCEEDINGS***

 

InOctober 1999, June 2000 and July 2003, separate but related complaints werefiled by 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. 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 Corporation (“PIP.America”) andits chairman tortiously interfered with that agreement and with plaintiffs’other alleged rights as lenders, investors, shareholders, quasi-shareholders oremployees of PIP/USA or other entities. In addition to monetary damages andinjunctive relief, plaintiffs seek to reinstate the alleged distributionagreement between PIP/USA and PIP-France and invalidate PIP.America’sdistributor relationship with PIP-France. It is PIP.America’s position that theKwartin litigations are within the scope of the indemnification agreements.

 

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

 

PeggyWilliams v. PIP/USA, Inc., Case No. 03 CH 9654, Jessica Fischer Schnebel,et al. v. PIP/USA, Inc., Case No. 03CH07239, Dawn Marie Cooper, et al. v.PIP/USA, Inc., Case No. 03CH11316, Miriam Furman, et al. v. PIP/USA, Inc.,Case No. 03CH10832 and Karen S. Witt, et al. v. PIP/USA, Inc., Case No.03CH12928 were filed in the Circuit Court of Cook County, Chancery Division, inor around July 2003. Counsel for Jessica Fischer Schnebel, et al. v.PIP/USA, Inc., Case No. 03CH07239 amended her class action complaint toinclude plaintiffs from the other four cases, and each of the others has beenvoluntarily dismissed. The consolidated amended complaint contains countsalleging product liability, breach of the implied warranties of merchantabilityand fitness for a particular purpose, violation of the Illinois Consumer FraudAct and third-party beneficiary status. Unspecified monetary damages, exemplarydamages and attorneys fees and costs are sought. PIP.America has filed a motionseeking to dismiss all counts but the third-party beneficiary claim. Plaintiffshave received several extensions to respond to the motion to dismiss – first totake depositions of PIP.America personnel, then to serve written discovery andthen to digest PIP.America’s answers to written discovery.  Depositions ofMedicor personnel have been taken, and PIP.America is currently in the processof answering written discovery.  Plaintiffs will likely respond to themotion to dismiss by roughly July 31, 2005, and a ruling on the motion shouldcome by September of 2005. PIP.America has tendered this consolidated case toPoly Implant Prostheses, S.A. (PIP-France) for defense and indemnity, and in lateNovember 2004, PIP-France agreed to accept that tender.  All othersingle-case Illinois litigation has been settled for *de minimis* amounts.

 

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 On December 23, 2004, Europlex, a Mexicancompany, purported to file a lawsuit against Eurosilicone SAS, one of ourFrench subsidiaries, in the Avignon Commercial Court in France, alleging thatEurosilicone implicitly terminated a distribution agreement between the partiesby failing to deliver products ordered by Europlex pursuant to the agreement,among other allegations. As a result of these allegations, Europlex claimsdamages in amount of approximately $4,000,000 Euros. We believe the suit iswithout merit and intend to defend against the alleged claims vigorously.

 

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 upon the merits of eachlawsuit and against certification of any class. While MediCor and itssubsidiaries are desirous to honor their respective obligations under ourproduct replacement programs, the purported class action case above includestwo distinctly different types of claims. The first of these arise fromproducts sold by PIP/USA, Inc., with whom neither MediCor nor any of itsaffiliates are affiliated. This company sold implants manufactured by PolyImplants Protheses, S.A. prior to PIP.America’s entry into the U.S. market,which occurred in late 1999. Because PIP.America did not sell these products,PIP.America similarly did not warrant these products. The next claims arisefrom products sold by PIP.America and associated to the product replacementprogram administered by PIP.America. With respect to claims arising fromproducts sold by PIP.America, PIP.America is administering and fulfilling itsobligations to its customers in the ordinary course of business, and for whichit has taken appropriate reserves. Other than a limited, $500 portion ofcertain of its own product replacement claims that it is administering,PIP.America is indemnified by PIP/USA, Inc., Poly Implants Protheses, S.A., andPoly Implants Protheses, S.A.’s President, Jean Claude Mas, personally, fromall claims, including those asserted above.

 

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

 

MediCorand its subsidiaries have been and will continue to be periodically named as adefendant in other lawsuits in the normal course of business, including productliability and product warranty claims. Litigation, particularly productliability litigation, can be expensive and disruptive to normal businessoperations and the results of complex proceedings can be very difficult topredict. Claims against MediCor or its subsidiaries have been and areperiodically reviewed with counsel in the ordinary course of business. Wepresently believe we or our subsidiaries have meritorious defenses in alllawsuits in which we or our subsidiaries are defendants, subject to thesubsidiaries’ continuing product replacement obligations, which thesubsidiaries intend to continue to satisfy. While it is not possible to predictthe outcome of these matters, we believe that the costs associated with themwill not have a material adverse impact on our business, results of operationsor financial position.

 

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

 

*** ***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

 

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***ITEM 6.  EXHIBITS AND REPOR******TS ON FORM 8-K***

 

**(a)  Exhibits**

 

See Exhibit Index at Page 45.

 

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

 

On February 14, 2005, MediCor filed a Current Report on Form 8-K announcing the Company’s earnings for the quarter ending December 31, 2004.

 

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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:  | May  16, 2005 | By:                     | /s/  Theodore R. Maloney |   |
|   |          |                    | Theodore  R. Maloney |   |
|   |          |                    | Chief  Executive Officer |   |
|   |          |                    |   |   |
| Date:  | May  16, 2005 | By:                     | /s/  Thomas R. Moyes |   |
|   |          |                    | Thomas  R. Moyes |   |
|   |          |                    | Chief  Financial Officer |   |

 

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EXHIBIT INDEX

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                          |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------|
| 10.1             |       | Addendum  to Promissory Note made by MediCor Ltd. in favor of International Integrated  Industries, LLC, filed herewith. |
| 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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