**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM10-QSB**

 

| **(Mark One)**                                                                                                                                                |   |                                                                                                               |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                    |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|                                                                                                                                                          |   |                                                                                                               |
| **For the Quarterly Period Ended March 31, 2004**                                                                                                        |
|                                                                                                                                                          |   |                                                                                                               |
| **or**                                                                                                                                                        |
|                                                                                                                                                          |   |                                                                                                               |
| **o**                                                                                                                                                         |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                          |   |                                                                                                               |
| **For the transition period  from          to          ** |

 

**Commission file number 000-50442**

 

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

 

Checkwhether the issuer (1) filed all reports required to be filed bySection 13 or 15 (d) of the Exchange Act during the past 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.  Yes ý****No **o**

 

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OnMay 12, 2004, there were 18,045,265 shares of common stock outstanding.

 

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

 

 

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**MEDICOR LTD.**

 

# **INDEX**

# ** **

| Part I. Financial  Information |                                                                                          |
|--------------------------------|-----------------------------------------------------------------------------------------------|
|                           |                                                                                          |
| Item  1.                       | Consolidated  Financial Statements (Unaudited)                                                |   |   |
|                           |                                                                                          |   |   |
|                           | Consolidated Balance Sheet –  March 31, 2004                                        |   |   |
|                           |                                                                                          |   |   |
|                           | Consolidated  Statements of Operations – Three Months Ended March 31, 2004 and 2003 |   |   |
|                           |                                                                                          |   |   |
|                           | Consolidated Statements of  Operations - Nine Months Ended March 31, 2004 and 2003       |   |   |
|                           |                                                                                          |   |   |
|                           | Consolidated  Statements of Cash Flows - Nine Months Ended March 31, 2004 and 2003       |   |   |
|                           |                                                                                          |   |   |
|                           | Notes  to Consolidated Financial Statements – March 31, 2004                        |   |   |
|                           |                                                                                          |   |   |
| Item  2.                       | Management’s  Discussion and Analysis or Plan of Operation                               |   |   |
|                           |                                                                                          |   |   |
| Item 3.                        | Controls and  Procedures                                                                      |   |   |
|                           |                                                                                          |   |   |
| Part II. Other Information     |                                                                                          |   |
|                           |                                                                                          |   |
| Item 1.                        | Legal Proceedings                                                                             |   |   |
|                           |                                                                                          |   |   |
| Item 2.                        | Changes in Securities                                                                         |   |   |
|                           |                                                                                          |   |   |
| Item 3.                        | Defaults upon  Senior Securities                                                              |   |   |
|                           |                                                                                          |   |   |
| Item  4.                       | Submission  of Matters to a Vote of Security Holders                                          |   |   |
|                           |                                                                                          |   |   |
| Item 5.                        | Other Information                                                                             |   |   |
|                           |                                                                                          |   |   |
| Item 6.                        | Exhibits and  Reports on Form 8-K                                                             |   |   |
|                           |                                                                                          |   |   |
|                           | Signatures                                                                                    |   |   |

 

2

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***PART I – FINANCIAL INFORMATION***

 

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

 

MediCor, Ltd.

ConsolidatedBalance Sheet

March 31, 2004

(Unaudited)

 
| **Assets**                                                                                                                               |   |        |       |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|------------|
|                                                                                                                                     |   |        |       |
| Current Assets:                                                                                                                          |   |        |       |
| Cash                                                                                                                                     |   | $           | 13,676     |   |
| Receivables, less allowance for doubtful  accounts of $167,691                                                                           |   | 192,200     |       |
| Inventories                                                                                                                              |   | 114,702     |       |
| Prepaid expenses and other current assets                                                                                                |   | 144,687     |       |
| Total Current Assets                                                                                                                     |   | 465,265     |       |
|                                                                                                                                     |   |        |       |
| Property, plant and equipment, net                                                                                                       |   | 273,984     |       |
| Goodwill and other intangibles, net                                                                                                      |   | 4,158,144   |       |
| Deposits                                                                                                                                 |   | 5,683,000   |       |
| Other assets                                                                                                                             |   | 83,482      |       |
| Total assets                                                                                                                             |   | $           | 10,663,875 |   |
|                                                                                                                                     |   |        |       |
| **Liabilities and  Stockholders’ Equity**                                                                                           |   |        |       |
|                                                                                                                                     |   |        |       |
| Current Liabilities:                                                                                                                     |   |        |       |
|                                                                                                                                     |   |        |       |
| Short term convertible debentures                                                                                                        |   | $           | 275,000    |   |
| Notes payable                                                                                                                            |   | 250,000     |       |
| Note payable to related party                                                                                                            |   | 11,896,942  |       |
| Accounts payable                                                                                                                         |   | 2,127,420   |       |
| Accrued expenses and other current  liabilities                                                                                          |   | 1,498,158   |       |
| Payroll taxes payable                                                                                                                    |   | 35,178      |       |
| Interest payable                                                                                                                         |   | 2,541       |       |
| Interest payable to related party                                                                                                        |   | 686,216     |       |
| Total Current Liabilities                                                                                                                |   | 16,771,455  |       |
|                                                                                                                                     |   |        |       |
| Long-term convertible debentures                                                                                                         |   | 1,650,000   |       |
| Long-term accrued liabilities                                                                                                            |   | 1,429,367   |       |
| Total liabilities                                                                                                                        |   | 19,850,822  |       |
|                                                                                                                                     |   |        |       |
| Commitments and contingencies (Note R)                                                                                                   |   |        |       |
|                                                                                                                                     |   |        |       |
| Stockholders’ equity (deficit)                                                                                                      |   |        |       |
|                                                                                                                                     |   |        |       |
| Common shares, $.001 par value, 100,000,000  shares authorized, 17,604,113 issued and outstanding, net of 20,298 treasury  shares at par |   | 17,604      |       |
| Capital in excess of par value                                                                                                           |   | 16,996,818  |       |
| Accumulated (deficit)                                                                                                                    |   | (26,201,369 | )          |
| Stockholders’ equity (deficit)                                                                                                      |   | (9,186,947  | )          |
| Total liabilities and stockholders’ equity                                                                                          |   | $           | 10,663,875 |   |

 

3

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MediCor, Ltd.

Consolidated Statements of Operations

Three Months EndedMarch 31, 2004 and 2003

(Unaudited)

 
|                                                   |   | **2004**   |       | **2003**   |   |
|--------------------------------------------------------|--------|------------|------------|------------|--------|
| Net sales                                              |   | $          | 363,741    |       | $      | 453,623 |   |
| Cost of sales                                          |   | 117,815    |       | 185,158    |   |
| Return of consigned inventory previously  written down |   | (32,025    | )          | —     |   |
|                                                   |   |       |       |       |   |
| Gross profit                                           |   | 277,951    |       | 268,465    |   |
|                                                   |   |       |       |       |   |
| Operating Expenses:                                    |   |       |       |       |   |
| Selling, general and administrative  expenses          |   | 2,264,520  |       | 1,154,127  |   |
| Research and development                               |   | 946,626    |       | 22,349     |   |
|                                                   |   |       |       |       |   |
| Operating Loss                                         |   | (2,933,195 | )          | (908,011   | )      |
| Other income (expense):                                |   |       |       |       |   |
| Net interest expense                                   |   | 312,585    |       | 192,904    |   |
|                                                   |   |       |       |       |   |
| Loss before income taxes                               |   | (3,245,780 | )          | (1,100,915 | )      |
| Income taxes                                           |   | —     |       | 870        |   |
|                                                   |   |       |       |       |   |
| Net Loss                                               |   | (3,245,780 | )          | (1,101,785 | )      |
| Preferred dividends                                    |   | —     |       | 24,827     |   |
|                                                   |   |       |       |       |   |
| Net loss attributable to common  stockholders          |   | $          | (3,245,780 | )          | $      | (1,126,612 | ) |
|                                                   |   |       |       |       |   |
| Earnings per share data:                               |   |       |       |       |   |
| Weighted average shares, basic and diluted             |   | 17,604,113 |       | 15,911,938 |   |
| Basic and diluted                                      |   |       |       |       |   |
| Net loss per share                                     |   | $          | (0.18      | )          | $      | (0.07 | ) |

 

4

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MediCor, Ltd.

Consolidated Statements of Operations

Nine MonthsEnded March 31, 2004 and 2003

(Unaudited)

 
|                                                   |   | **2004**   |       | **2003**   |   |
|--------------------------------------------------------|--------|------------|------------|------------|--------|
| Net sales                                              |   | $          | 1,006,622  |       | $      | 1,285,903 |   |
| Cost of sales                                          |   | 260,510    |       | 724,153    |   |
| Return of consigned inventory previously  written down |   | (56,175    | )          | (193,725   | )      |
|                                                   |   |       |       |       |   |
| Gross profit                                           |   | 802,287    |       | 755,475    |   |
|                                                   |   |       |       |       |   |
| Operating Expenses:                                    |   |       |       |       |   |
| Selling, general and administrative  expenses          |   | 5,131,484  |       | 3,351,964  |   |
| Research and development                               |   | 1,380,577  |       | 67,203     |   |
|                                                   |   |       |       |       |   |
| Operating Loss                                         |   | (5,709,774 | )          | (2,663,692 | )      |
| Other income (expense):                                |   |       |       |       |   |
| Net interest expense                                   |   | 797,953    |       | 288,205    |   |
|                                                   |   |       |       |       |   |
| Loss before income taxes                               |   | (6,507,727 | )          | (2,951,897 | )      |
| Income taxes                                           |   | 1,737      |       | 870        |   |
|                                                   |   |       |       |       |   |
| Net Loss                                               |   | (6,509,464 | )          | (2,952,767 | )      |
| Preferred dividends                                    |   | —     |       | 147,852    |   |
|                                                   |   |       |       |       |   |
| Net loss attributable to common  stockholders          |   | $          | (6,509,464 | )          | $      | (3,100,619 | ) |
|                                                   |   |       |       |       |   |
| Earnings per share data:                               |   |       |       |       |   |
| Weighted average shares, basic and diluted             |   | 17,566,142 |       | 15,016,766 |   |
| Basic and diluted                                      |   |       |       |       |   |
| Net loss per share                                     |   | $          | (0.37      | )          | $      | (0.21 | ) |

 

5

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MediCor, Ltd.

ConsolidatedStatements of Cash Flows

Nine Months EndedMarch 31, 2004 and 2003

(Unaudited)

 
|                                                                             |   | **2004**   |       | **2003**   |   |
|----------------------------------------------------------------------------------|--------|------------|------------|------------|--------|
|                                                                             |   |       |       |       |   |
| **CASH FLOWS FROM  OPERATING ACTIVITIES:**                                       |   |       |       |       |   |
| Net loss                                                                         |   | $          | (6,509,464 | )          | $      | (2,952,767 | ) |
| Adjustments to reconcile net loss to net  cash utilized by operating activities: |   |       |       |       |   |
| Depreciation and amortization                                                    |   | 367,609    |       | 128,989    |   |
| Provision for doubtful accounts                                                  |   | (3,319,523 | )          | —     |   |
| Inventory write down                                                             |   | 56,175     |       | —     |   |
| Loss on disposal of property, plant and  equipment                               |   | 22,928     |       | —     |   |
| Changes in operating assets and liabilities                                      |   |       |       |       |   |
| Receivables                                                                      |   | 3,320,957  |       | (385,654   | )      |
| Notes receivable                                                                 |   | 27,384     |       | (36,331    | )      |
| Inventories                                                                      |   | (31,049    | )          | (13,634    | )      |
| Prepaid expenses and other current assets                                        |   | (38,459    | )          | (49,479    | )      |
| Other assets                                                                     |   | (39,600    | )          | —     |   |
| Bank overdraft                                                                   |   | (128,387   | )          | —     |   |
| Accounts payable                                                                 |   | 131,875    |       | 32,988     |   |
| Accrued expenses and other current  liabilities                                  |   | (66,392    | )          | (245,596   | )      |
| Payroll taxes payable                                                            |   | 10,503     |       | 12,085     |   |
| Interest payable                                                                 |   | 358,232    |       | 177,618    |   |
| Long term accrued liabilities                                                    |   | 15,770     |       | 84,493     |   |
| Net cash utilized by operating activities                                        |   | (5,821,441 | )          | (3,247,288 | )      |
|                                                                             |   |       |       |       |   |
| **CASH FLOWS FROM  INVESTING ACTIVITIES:**                                       |   |       |       |       |   |
| Purchases of property, plant, equipment and  patents                             |   | (24,583    | )          | (3,108,615 | )      |
| Increase in deposits                                                             |   | (600,000   | )          | (2,104,325 | )      |
| Net cash utilized by investing activities                                        |   | (624,583   | )          | (5,212,940 | )      |
|                                                                             |   |       |       |       |   |
| **CASH FLOWS FROM  FINANCING ACTIVITIES:**                                       |   |       |       |       |   |
| Proceeds from issuance of convertible  debentures                                |   | 1,350,000  |       | 410,000    |   |
| Proceeds from issuance of short term debt                                        |   | 5,125,600  |       | 5,880,944  |   |
| Receipts on short term debt                                                      |   | 102,230    |       |       |   |
| Payments on short term debt                                                      |   | (140,251   | )          | (763,185   | )      |
| Issuance of common stock                                                         |   | 11,489     |       | 3,130,194  |   |
| Purchase of treasury stock                                                       |   | (39,999    | )          | —     |   |
| Issuance of preferred stock                                                      |   | —     |       | —     |   |
| Dividends paid                                                                   |   | —     |       | (147,852   | )      |
| Net cash provided by financing activities                                        |   | 6,409,069  |       | 8,510,101  |   |
|                                                                             |   |       |       |       |   |
| Net increase (decrease) in cash                                                  |   | (36,955    | )          | 49,873     |   |
| Cash at beginning of period                                                      |   | 50,631     |       | 17,249     |   |
|                                                                             |   |       |       |       |   |
| **CASH AT END OF  PERIOD**                                                       |   | $          | 13,676     |       | $      | 67,122 |   |
|                                                                             |   |       |       |       |   |
| **SUPPLEMENTAL  DISCLOSURE OF NON-CASH ACTIVITIES**                              |   |       |       |       |   |
| Conversion of short-term convertible  debentures to common stock                 |   | $          | 75,000     |       | — |   |
|                                                                             |   |       |       |       |   |
| **SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION**                            |   |       |       |       |   |
| Cash paid during the nine months for:                                            |   |       |       |       |   |
|                                                                             |   |       |       |       |   |
| Interest                                                                         |   | $          | 390,701    |       | $      | 48,750 |   |
| Taxes                                                                            |   | $          | 1,737      |       | $      | 870 |   |

 

See accompanying notes tounaudited financial statements.

 

6

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**MEDICORLTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004(Unaudited)**

**Note A -Business Activity**

 

MediCor Ltd. (the “Company”or “MediCor”) was incorporated in December 2000.  The Companyacquires, develops, manufactures and markets products for medical specialtiesin aesthetic plastic and reconstructive surgery, and dermatology markets. Products include surgically implantable prostheses for aesthetic plastic andreconstructive surgery and scar management products.  The Company’sproducts are sold worldwide to hospitals, surgery centers and physiciansthrough various distributors and direct sales personnel.

 

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

 

**Basis ofPresentation**

 

On February 7, 2003, SCMerger Corp., Ltd., a British Virgin Islands company and wholly ownedsubsidiary of the Company, merged with and into International IntegratedIncorporated, a British Virgin Islands company (“III”), with III as thesurviving entity.  The February 7,2003 merger has been accounted for as a reverse acquisition.  In accordance with Statement of FinancialAccounting Standards No. 141, for accounting purposes III has been treated asthe continuing reporting entity that acquired Scientio, Inc. (the Company’sformer name).  Therefore, the reportsfiled by the Company after the reverse acquisition parallel the financialreporting required under generally accepted accounting principles as if IIIwere the legal successor to Scientio, Inc.’s reporting obligation as of thedate of the merger.  The QuarterlyReport on Form 10-QSB is filed based on the fiscal year of III, the accountingacquirer.  

 

**Principlesof Consolidation**

 

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

 

**Use ofEstimates**

 

Financial statementsprepared in accordance with accounting principles generally accepted in the UnitedStates require management to make estimates and judgments that affect amountsand disclosures reported in the financial statements.  Actual resultscould differ from those estimates.

 

##### **Revenue Recognition**

 

The Company generally recognizes revenue from product sales uponsurgical implantation for consigned items and upon shipment for all others,provided that no significant post-delivery obligations remain and collection ofthe resulting receivable is reasonably assured.  When significant post-delivery obligations exist, revenue isdeferred until such obligations are fulfilled. MediCor allows credit for products returned within its policyterms.  Such returns are estimated andan allowance for product returns is recorded at the time of sale as necessary.

 

7

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**Receivables**

 

The Company has reserved $167,691 against certain receivables due toissues regarding collectibility.  TheCompany intends to pursue all avenues to collect on amounts due.

#####  

##### **Product Warranties**

 

III Acquisition Corp. d/b/a PIP.America (“PIP.America”), a subsidiaryof the Company, provides a product replacement program to surgeons fordeflations for a period of ten (10) years from the date of implantation.  For each deflation, the surgeon receivesfinancial assistance plus a free replacement. Management estimated the amount of potential future product replacementclaims based on statistical analysis. Expected future obligations are determined based on the history ofproduct shipments and claims and are discounted to a current value.  Changes to actual claims and interest ratescould have a material impact on the statistical calculation which couldmaterially impact the Company’s reported expenses and results of operations.

#####  

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

 

The Company accounts for long-lived assets, other than goodwill, inaccordance with the provisions of SFAS No. 144, “Accounting for the Impairmentand Disposal of Long Lived Assets,” which supersedes SFAS No. 121 “Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to bedisposed of.”  This statement createsone accounting 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 its 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 does not believe that any such changes have taken place.

#####  

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

 

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

#####  

##### **Shares and Share Amounts**

 

Effective as ofFebruary 7, 2003, the Company merged with III.  All references in the financial statements to the number ofshares and per share amounts have been retroactively restated to reflect theincreased number of common stock outstanding.

 

**Effects ofRecent Accounting Pronouncements**

 

In June 2001, theFinancial Accounting Standards Board issued SFAS No. 141, “BusinessCombination” and SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 141 is effective as of July 1,2001 and SFAS No. 142 is effective January 2002 for companies havingfiscal years beginning after December 15, 2001.  Under SFAS No. 142, goodwill will not be amortized, but will besubject to impairment testing.  TheCompany adopted SFAS No. 141 and SFAS No. 142 effective for the fiscal yearbeginning July 1, 2002.  TheCompany has evaluated SFAS No. 141 and has determined that it will not have aneffect on the Company’s March 31, 2004 consolidated financialstatements.  The absence of goodwillamortization as a result of adopting SFAS No. 142 did not have a materialeffect on the Company’s consolidated results of operations or financialposition.  There was no indication that goodwillwas impaired.

 

In August 2001, the Financial Accounting Standards Board issuedSFAS No. 143, “Accounting for Asset Retirement Obligations,” which addressesthe financial accounting and reporting for obligations associated

 

8

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with the retirement of tangible long-lived assets and the associatedasset retirement costs.  SFAS No. 143 iseffective for fiscal years beginning after June 15, 2002.  The Company has determined that SFAS No. 143will not have an effect on the Company’s March 31, 2004 financialstatements.

 

In October 2001, theFinancial Accounting Standards Board issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” This statement replaces SFAS No.121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed of,” and provisions of Accounting Principles BoardOpinion (“APB”) No. 30, “Reporting of Results of Operations-Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual, andInfrequently Occurring Events and Transactions” for the disposal of segments ofa business.  This statement creates oneaccounting model, based on the framework established in SFAS No. 121, to beapplied to all long-lived assets including discontinued operations.  SFAS No. 144 is effective for fiscal yearsbeginning after December 15, 2001. Adoption of SFAS No. 144 in the first quarter of fiscal 2003 had noimpact on the Company’s consolidated results of operations or financialposition.

 

In April 2002, theFinancial Accounting Standards Board issued SFAS No. 145, “Rescission of FASBStatements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.” The most significant provisions of this statement relate to therescission of Statement No. 4, “Reporting Gains and Losses from Extinguishmentof Debt;” and it also amends other existing authoritative pronouncements tomake various technical corrections, clarify meanings, or describe theirapplicability under changes conditions. Under this new statement, any gain or loss on extinguishment of debtthat was classified as an extraordinary item in prior periods that does notmeet certain defined criteria as an extraordinary item in prior periods must bereclassified.  This statement iseffective for financial statements issued on or after May 15, 2002.  The Company has completed an evaluation ofSFAS No. 145, and has determined that it will not have an effect on theconsolidated financial statements.

 

In June 2002, theFinancial Accounting Standards Board issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” This statement requires companies to recognize costs associated with exitor disposal activities when they are incurred rather than at the date of acommitment to an exit or disposal plan. Statement No. 146 is to be applied prospectively to exit or disposalactivities initiated after December 31, 2002.  Adoption of this statement did not have a material effect on theCompany’s consolidated results of operations or financial position.

 

In November 2002, theFASB issued Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers,” which clarifies disclosure and recognition / measurement requirementsrelated to certain guarantees.  Thedisclosure requirements are effective for financial statements issued afterDecember 15, 2002 and the recognition and measurement requirements areeffective on a prospective basis for guarantees issued or modified afterDecember 31, 2002.  The adoption ofFI N45 did not have a material impact on the Company’s financial position,results of operations or cash flows.

 

OnDecember 31, 2002, the Financial Accounting Standards Board issued FASBStatement No. 148, “Accounting forStock-Based Compensation - Transition and Disclosure.”  Statement148 amends FASB Statement No. 123, “Accountingfor Stock-Based Compensation,” to provide alternative methods oftransition to Statement 123’s fair value method of accounting for stock-basedemployee compensation.  Statement 148 also amends the disclosureprovisions of Statement 123 and APB Opinion No. 28, “Interim Financial Reporting,” to require disclosure in thesummary of significant accounting policies of the effects of an entity’saccounting policy with respect to stock-based employee compensation on reportednet income and earnings per share in annual and interim financialstatements.  While the Statement does not amend Statement 123 to requirecompanies to account for employee stock options using the fair value method,the disclosure provisions of Statement 148 are applicable to all companies withstock-based employee compensation, regardless of whether they account for thatcompensation using the fair value method of Statement 123 or the intrinsicvalue method of Opinion 25.  StatementNo. 148 is effective for fiscal years ending after December 15,2002.  The Company will continue to account for stock-based employeecompensation under the intrinsic value method of Opinion 25 but adopted thedisclosure provisions of

 

9

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StatementNo. 148 in the fourth quarter of fiscal 2003.  Adoption of this standarddid not have a material effect on the Company’s consolidated results ofoperations or financial position.

 

InJanuary 2003, the FASB issued Interpretation No. 46, “Consolidation ofVariable Interest Entities.”  A variableinterest entity (“VIE”) is one where the contractual or ownership interest inan entity change with changes in the entity’s net asset value.  This interpretation requires theconsolidation of a VIE by the primary beneficiary, and also requires disclosureabout VIEs where an enterprise has a significant variable interest but is notthe primary beneficiary.  At theeffective date, the Company has not acquired an interest in any VIEs.

 

InApril 2003, the FASB issued SFAS No. 149 “Amendment of Statement 133 onDerivative Instruments and Hedging Activities.”  SFAS No. 149 establishes accounting and reporting standards forderivative instruments and for hedging activities.  This statement is effective for contracts entered into ormodified after June 30, 2003.  TheCompany has determined that adoption of SFAS No. 149 will not have a materialeffect on the Company’s financial position or results of operations.

 

InMay 2003, The FASB issued statement number No. 150 “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities andEquity,”  effective for financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective at the beginning of the first interim period beginning afterSeptember 15, 2003.  Adoption ofthis standard did not have a material effect on the Company’s consolidatedresults of operations of financial position.

 

**Note C – Interim Reporting**

 

Theaccompanying unaudited consolidated financial statements for the three andnine-month periods ended March 31, 2004 and March 31, 2003 have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and with instructions toForm 10-QSB and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  In the opinion of management, alladjustments (consisting only of normal recurring accruals, unless otherwiseindicated) considered necessary for a fair presentation of the results ofoperations for the indicated periods have been included.  Certain amounts recorded in previous periodshave been reclassified to conform to the current period presentation.  Operating results for the nine months endedMarch 31, 2004 are not necessarily indicative of the results for the fullfiscal year.

 

**Note D – Major Customer.**

 

During the three and nine months endedMarch 31, 2003 approximately 25% of the Company’s consolidated revenue wasattributable to one customer while revenue related to that same customer forthe three and nine months ended March 31, 2004 was 7%.

 

**Note E –Cash & Cash Equivalents**

 

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

 

**Note F –Accounts Receivable and Notes Receivable**

 

Accountsreceivable at March 31, 2004 consisted of:

 

10

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|                            |   | **March 31,  2004** |    |
|---------------------------------|--------|--------------------------|---------|
|                            |   |                     |    |
| Accounts receivable             |   | $                        | 359,891 |   |
| Allowance for doubtful accounts |   | (167,691                 | )       |
|                            |   |                     |    |
| Total                           |   | $                        | 192,200 |   |

 

The Company’s PIP.America subsidiary is party to adistribution agreement with Poly Implants Protheses S.A., a third-partymanufacturer, which provides for the sale by the Company of certain surgicallyimplantable prostheses inNorth America.  At March 30, 2004,the Company had $3,444,802 of accounts receivable from the manufacturer,representing amounts owed to the Company under the terms of the distributionagreement.  These amounts have beenfully reserved for, with an allowance for doubtful account, due to the lack ofpayment and uncertain prospect of collection. Effective March 30, 2004, the Company and the manufacturer amendedthe distribution agreement whereas the Company forgave certain amounts owed bythe manufacturer in return for the transference of the premarket approvalapplication.  See Note R.

 

Changesin allowance for doubtful accounts are as follows:

 
| Balance January 1, 2004 |   | $          | 3,384,999 |   |
|------------------------------|--------|------------|-----------|--------|
| Provisions/(recovery)        |   | (3,217,308 | )         |
| Write-offs                   |   | —     |      |
| Balance March 31, 2004  |   | $          | 167,691   |   |

 

**Note G –Inventories**

 

Inventories are stated atthe lower of cost or market, cost determined by the first-in, first-out (FIFO)method.  The Company writes down its inventory for estimated obsolescenceor unmarketable inventory equal to the difference between the cost of inventoryand the estimated market value based upon assumptions about future demand andmarket conditions.

 

Inventories atMarch 31, 2004 consisted of:

 
|           |   | **March 31,  2004** |    |
|----------------|--------|--------------------------|---------|
|           |   |                     |    |
| Raw Materials  |   | $                        | 101,676 |   |
| Finished Goods |   | 13,026                   |    |
|           |   |                     |    |
| Total          |   | $                        | 114,702 |   |

 

The 2002 value of consignedinventory of implants in physician offices on the books of the PIP.Americasubsidiary of the Company was uncertain. A voluntary withdrawal of such inventory from the market was initiatedsubsequent to June 30, 2002 in conjunction with an agreement reachedbetween the FDA and PIP.America. Accordingly, the Company wrote down such inventory to a fair marketvalue of zero as of June 30, 2002. During the nine months ended March 31, 2004, inventory previouslywritten down to a fair market value of zero was returned to the manufacturerfor credit.

 

11

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**Note H -Property and Equipment**

 

Property and equipment isstated at cost.  Depreciation is based on the useful lives of theproperties and computed using the straight-line method.  Buildings aredepreciated over 30 years, furniture and equipment over 3 to 10 years andleasehold improvements over the shorter of their estimated remaining lives orlease term.  Significant improvements and betterments are capitalized,while maintenance and repairs are charged to operations as incurred.

 

Property and equipment atMarch 31, 2004 consisted of:

 
|                                  |   | **March 31,  2004** |    |
|---------------------------------------|--------|--------------------------|---------|
|                                  |   |                     |    |
| Leasehold Improvements                |   | $                        | 107,748 |   |
| Furniture, Fixtures and equipment     |   | 338,050                  |    |
| Computer Equipment and tools and dies |   | 186,820                  |    |
|                                  |   |                     |    |
| Subtotal                              |   | 632,618                  |    |
| Accumulated depreciation              |   | (358,634                 | )       |
|                                  |   |                     |    |
| Total                                 |   | $                        | 273,984 |   |

 

Depreciation expense was$33,320 for the three months ended March 31, 2004 and $27,242 for thethree months ended March 31, 2003. For the nine months ended March 31, 2004 depreciation expense was$99,084 and $59,846 for the same period a year ago.

 

**Note I – Goodwill and Other Intangibles**

 

Goodwill represents the excess of the purchase price over the estimatedfair value of the identified assets (including other intangible assets) andliabilities assumed in the acquisition of HPL Biomedical, Inc. d/b/a Biodermis(“Biodermis”).  The Company adopted SFASNo. 142 and no longer amortized goodwill. Other intangible assets are recorded at fair value and amortized overperiods ranging from 3 to 17 years.

 

Goodwill and other intangibles as of March 31, 2004 consisted of:

 
|                     |   | **March 31,  2004** |      |
|--------------------------|--------|--------------------------|-----------|
|                     |   |                     |      |
| Goodwill                 |   | $                        | 1,221,793 |   |
| Distribution Agreements  |   | 225,000                  |      |
| Non-compete              |   | 130,000                  |      |
| Patents                  |   | 3,100,000                |      |
| Other                    |   | 20,501                   |      |
|                     |   |                     |      |
| Subtotal                 |   | 4,697,294                |      |
| Accumulated amortization |   | (539,150                 | )         |
|                     |   |                     |      |
| Total                    |   | $                        | 4,158,144 |   |

 

Amortization for the threemonths ended March 31, 2004 was $87,883 compared to $17,118 for the sameperiod a year ago.  The amortization forthe nine months ended March 31, 2004 was $268,525 compared to $69,142 fromthe prior period ending March 31, 2003. The increase in amortization for both periods can be attributed to thepurchase of patents in March 2003.

 

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**Note J – Deposits**

 

Deposits at March 31, 2004 totaled $5,683,000.  In 2000, the Company obtained the right topurchase a 7.5% common equity interest in a third-party manufacturer from itsfounder for $3,750,000.  In 2000, theCompany made a non-refundable deposit of $1,883,000 against the purchaseprice.  The Company is under noobligation to fund the remainder of the payment or the exercise the purchase right.  The remaining deposit balance of $3,800,000is related to an asset purchase agreement described in Note R.

 

**Note K – Accrued Expenses**

 

Accrued expenses and other current liabilities at March 31, 2004consisted of:

 
|                        |   | **March 31,  2004** |      |
|-----------------------------|--------|--------------------------|-----------|
|                        |   |                     |      |
| Consulting                  |   | $                        | 752,500   |   |
| Product replacement reserve |   | 388,991                  |      |
| Other                       |   | 356,667                  |      |
|                        |   |                     |      |
| Total                       |   | $                        | 1,498,158 |   |

 

Consulting fees consisted of amounts relating to a consultingagreement.

 

Other accrued expenses included salaries and employee benefits, legal,research and development and other miscellaneous accrued expenses.

 

Long-term accrued liabilities of $1,429,367 at March 31, 2004consisted of product replacement reserves.

 

**Note L – Convertible Debentures**

 

Short-term convertible debentures at March 31, 2004 were $275,000.  These convertible debentures pay 10%interest.  Interest is prepaid andamortized over the life of the convertible debenture.  The convertible debentures are convertible within one year at theholder’s discretion to shares of Company common stock at a price of $4.02.  These convertible debentures mature betweenJanuary and December 2004.

 

Long-term convertible debentures at March 31, 2004 were$1,650,000.  The convertible debenturesare convertible after one year and at the 18-month, 24-month, 30-month and36-month anniversary of the issuance date at the holder’s discretion to sharesof Company common stock at a price equal to the greater of $5.00 orseventy-five percent (75%) of the daily weighted average trading price pershare of the Company’s common stock over a period of twenty (20) trading daysprior to the conversion date.  Theseconvertible debentures mature between April 2006 and March 2007.

 

**Note M –Related Party Transactions**

 

International Integrated Industries, LLC (“LLC”) is a company in whichthe Company’s Chairman has a controlling interest.  Neither the Company nor any of its subsidiaries has any directownership in LLC.  LLC acted on behalfof the Company by funding significant expenses incurred for which the Companyhas a revolving loan agreement as shown on the Company’s Balance Sheet of$11,896,942 at March 31, 2004.  Theoutstanding balance of the note payable accrues interest at an annual interestrate of ten percent (10%).  During thethree months ended March 31, 2004, LLC advanced $2,527,000 to the Company,none of which was repaid.  Interestexpense relating to this note payable was $686,216 for the nine months endedMarch 31, 2004.  The unpaidliability for these expenses are included in the Company’s note payable toaffiliates, which is contained in the financial statements presentedherein.  The Company had a commitmentfrom LLC to fund operating shortfalls as necessary for the period presented.

 

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InOctober 2003, the Company entered into a Reimbursement Agreement with acompany controlled by the Company’s Chairman, Mr. Donald K. McGhan, for thereimbursement of expenses incurred in the operation of its private plane whenused for MediCor business.  TheReimbursement Agreement is effective for expenses incurred for MediCor businesspurposes.  The Company recognized atotal of $493,103 for the nine months ended March 31, 2004 in expensespursuant to the Reimbursement Agreement. All expenses recognized pursuant to the Reimbursement Agreement havebeen included by the Company in selling, general, and administrative expenses.

 

**Note N –Federal Income Taxes**

 

The benefit for income taxes reflected in the Consolidated Statementsof Operations for the Company for the periods noted consist of:

 
|                                                  |   | **March 31,  2004** |       | **March 31,  2003** |   |
|-------------------------------------------------------|--------|--------------------------|------------|--------------------------|--------|
|                                                  |   |                     |       |                     |   |
| Current                                               |   | $                        | 2,213,218  |                     | $      | 1,004,000 |   |
| Deferred                                              |   | 81,848                   |       | 4,436,888                |   |
|                                                  |   |                     |       |                     |   |
| Total Benefit                                         |   | 2,295,066                |       | 5,440,888                |   |
| Less allowance for realization of deferred  tax asset |   | $                        | (2,295,066 | )                        | $      | (5,440,888 | ) |
|                                                  |   |                     |       |                     |   |
| Benefit Net                                           |   | $                        | —     |                     | $      | — |   |

 

As of March 31, 2004 and June 30, 2003, the Company recordedallowances of $8,787,290 and $6,492,224 respectively, against certain futuretax benefits, the realization of which is currently uncertain.  The deferred differences related to certainaccounts receivable, accrued warranties, and depreciation/amortization notcurrently deductible as expenses under IRS provisions.  Although the Company recorded this allowanceto the deferred tax assets, the Company may still utilize the future taxbenefits from net operating losses for 20 years from the year of the loss tothe extent of future taxable income. The estimated net operating losses for tax purposes of approximately $15million will expire over several years ending in 2023.

 

Primary components of the deferred tax asset at the periods noted wereapproximately as follows:

 
|                                                   |   | **March 31,  2004** |      | **June 30,  2003** |   |
|--------------------------------------------------------|--------|--------------------------|-----------|-------------------------|--------|
|                                                   |   |                     |      |                    |   |
| Computed expected income tax  asset/(liability) at 34% |   | $                        | 2,213,218 |                    | $      | 1,814,778 |   |
| Adjustments                                            |   |                     |      |                    |   |
| Net operating loss                                     |   | 4,732,842                |      | 2,918,064               |   |
| Allowance for bad debt                                 |   | 1,150,900                |      | 1,071,617               |   |
| Warranty reserve                                       |   | 618,242                  |      | 624,677                 |   |
| Depreciation and amortization                          |   | 72,088                   |      | 63,088                  |   |
|                                                   |   |                     |      |                    |   |
| Income tax benefit                                     |   | $                        | 8,787,290 |                    | $      | 6,492,224 |   |
| Less allowance for realization of deferred  tax asset  |   | (8,787,290               | )         | (6,492,224              | )      |
|                                                   |   |                     |      |                    |   |
| Deferred tax asset, net                                |   | $                        | —    |                    | $      | — |   |

 

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**Note O –Loss per Share**

 

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

 
|                                          |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|-----------------------------------------------|--------|-----------------------------------------|--------|----------------------------------------|--------|
|                                          |   | **2004**                                |   | **2003**                               |   | **2004** |   | **2003** |   |
|                                          |   |                                    |   |                                   |   |   |   |   |   |
| Weighted average outstanding shares: basic    |   | 17,604,113                              |   | 15,911,938                             |   | 17,566,142 |   | 15,016,766 |   |
| Common equivalent shares                      |   | —                                  |   | —                                 |   | — |   | — |   |
| Weighted average outstanding shares:  diluted |   | 17,604,113                              |   | 15,911,938                             |   | 17,566,142 |   | 15,016,766 |   |

 

Certain common equivalentshares have been excluded from the computation of diluted earnings per sharebecause their effect would be anti-dilutive.

 

**Note P – Stock Options and Warrants**

 

The Company has a stock option plan for key employees andconsultants.  There were 1,242,680shares reserved for issuance pursuant to the Company’s stock option plan and upto 6,000,000 shares were reserved for issuance pursuant to stand-alone optionsgranted in connection with employment agreements.  The Company accounts for those plans under the recognition andmeasurement principles of APB Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations. No stock-based employee compensation cost is reflected in net income, asall options granted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.

 

The Company’s share option activity and related information issummarized below:

 
|                                       |   | **Nine  Months Ended March 31, 2004** |   |
|--------------------------------------------|--------|--------------------------------------------|--------|
|                                       |   | **Options**                                |   | **Weighted  Average  Exercise Price** |   |
|                                       |   |                                       |   |   |   |
| Options outstanding at beginning of period |   | 3,038,358                                  |   | $ | 0.93 |   |
| Granted                                    |   | 680,000                                    |   | $ | 1.16 |   |
| Exercised                                  |   | (77,667                                    | )      | $ | 0.08 |   |
| Cancelled                                  |   | (77,668                                    | )      | $ | 1.47 |   |
|                                       |   |                                       |   |   |   |
| Options outstanding at end of period       |   | 3,563,023                                  |   | $ | 1.10 |   |
|                                       |   |                                       |   |   |   |
| Options exercisable at end of period       |   | 2,051,852                                  |   | $ | 0.54 |   |

 

The following table summarizes information about stock optionsoutstanding at March 31, 2004:

 

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| **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** |   |
|                          |   |                   |   |   |   |   |   |   |   |   |   |
| $0.05 -  $0.10                |   | 1,528,497              |   | 1.5 |   | $ | 0.08 |   | 1,528,497 |   | $ | 0.08 |   |
| $1.00 -  $2.01                |   | 1,774,526              |   | 4.6 |   | $ | 1.60 |   | 561,900 |   | $ | 1.80 |   |
| $3.00 -  $3.80                |   | 260,000                |   | 6.7 |   | $ | 1.32 |   | 65,000 |   | $ | 3.73 |   |

 

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

 
|                                                                                                                                          |   | **Nine  Months Ended  March 31, 2004** |       | **Nine  Months Ended  March 31, 2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|------------|---------------------------------------------|--------|
|                                                                                                                                          |   |                                        |       |                                        |   |
| Net Loss, as reported                                                                                                                         |   | $                                           | (6,509,464 | )                                           | $      | (3,100,619 | ) |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | (331,006                                    | )          | (152,562                                    | )      |
|                                                                                                                                          |   |                                        |       |                                        |   |
| Pro forma net loss                                                                                                                            |   | $                                           | (6,840,470 | )                                           | $      | (3,253,181 | ) |
|                                                                                                                                          |   |                                        |       |                                        |   |
| Loss per share:                                                                                                                               |   |                                        |       |                                        |   |
| Basic and diluted                                                                                                                             |   | $                                           | (0.37      | )                                           | $      | (0.21 | ) |
|                                                                                                                                          |   |                                        |       |                                        |   |
| Basic and diluted - pro forma                                                                                                                 |   | $                                           | (0.39      | )                                           | $      | (0.22 | ) |

 

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:

 
|                          |   | **2004**  |   | **2003**  |   |
|-------------------------------|--------|-----------|--------|-----------|--------|
|                          |   |      |   |      |   |
| Risk-free interest rate       |   | 3.50      | %      | 6.00-6.50 | %      |
| Expected years until exercise |   | 2-6 Years |   | 3-4 Years |   |
| Expected stock volatility     |   | 0.0       | %      | 0.0       | %      |
| Dividend yield                |   | 0         | %      | 0         | %      |

 

The Company also issued warrants to purchase 80,776 shares of commonstock to consultants in connection with consulting agreements.  Warrants were granted between 1999 and 2001at prices between

 

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$.08 and $1.61.  All warrantsgranted had an exercise price equal to the market value of the underlyingcommon stock on the date of grant.

 

**Note Q - Business Segment Information**

##  

The Company is a corporate entity with a number of wholly-owned,autonomous subsidiaries which operate as single business units in multiplegeographic locations within the U.S. and internationally in the medical devicetechnology segment of the medical/health care market, and, as such, does nothave multiple segments to report. Revenues from customers attributable to any individual foreign countrywere not material.

 

**Note R – Commitments and Contingencies**

 

The Company has received awritten commitment from International Integrated Industries, LLC, an affiliateof the Company’s chairman, to provide sufficient cash to fund any operatingloss through March 31, 2005.  Thesame entity has provided the Company an aggregate of over $28 million infunding from the Company’s inception through March 31, 2004.  The future funding may take the form of debtor equity or a combination thereof.

 

Pursuant to an AssetPurchase Agreement signed April 25, 2002, the Company agreed to acquiresubstantially all of the assets of a privately-held United States medicalproducts distributor.  Pursuant to anamendment dated October 16, 2003 to the Asset Purchase Agreement, thepurchase price was amended to equal the deposits made by the Company as ofOctober 16, 2003, plus an additional agreed payment in cash at closing andissuance of MediCor Ltd. equity at closing. The closing is conditioned upon the distributor acquiring necessarygovernmental approvals for commercialization in the United States of theproducts to be distributed, which the Company currently anticipates will occurbefore the end of the first quarter of fiscal 2005.  The Company is no longer obligated to make additional depositsagainst the purchase price, but the Company has committed to fund all futureexpenses associated with obtaining required government approvals.

 

The Company’s PIP.America subsidiary is party to adistribution agreement with Poly Implants Protheses S.A., a third-partymanufacturer, which provides for the sale by the Company of certain surgicallyimplantable prostheses inNorth America.  Previously, themanufacturer was undertaking the process of securing FDA approval for theseproducts.   At March 30, 2004, theCompany had $3,444,802 of accounts receivable from the manufacturer,representing amounts owed to the Company under the terms of the distributionagreement.  These amounts have beenfully reserved for, with an allowance for doubtful account, due to the lack ofpayment and uncertain prospect of collection.

 

EffectiveMarch 30, 2004, the Company 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 theCompany’s subsidiary.  In conjunctionwith this change, the Company forgave certain amounts owed by the manufacturer,and the parties amended the pricing terms.

 

Theamendments obligate the Company to fund the ongoing clinical and regulatorycosts and expenses.  The amount andtiming of these costs is unknown and may be material.  Because the Company has just undertaken management of theapplication process, the likelihood and timing of obtaining FDA approval arealso uncertain.

 

Concurrently,the manufacturer issued to the Company a revolving promissory note for certainsums to come due to the Company based on the Company’s and the manufacturer’sadministration of product warranty and product warranty related claims.  The note bears interest at the rate of6.75%.  The principal amount under thenote as of March 30, 2004 was $0.

 

InOctober 1999, June 2000 and July 2003, separate but relatedcomplaints were filed by Saul and Ruth Kwartin, Steven M. Kwartin, and Robertand Nina Kwartin respectively, and various other unnamed

 

17

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plaintiffs, against the Company’s PIP.America subsidiary asco-defendant with PIP/USA, Inc. and Poly Implants Protheses, S.A., eachunaffiliated with MediCor, and Jean Claude Mas and our chairman, Donald K.McGhan personally, in the Circuit Court of Miami-Dade County, Florida.

 

Initially,two cases were filed in October 1999, Case No. 99-25227-CA-01 and Case No.00-14665-CA-01.  Of the two, Case No.99-25227 was dismissed.  The sameplaintiffs then, in June 2000, filed Case No. 0322537-CA-27, allegingsimilar claims to those included in the dismissed case.  In June 2003, another member of thesame family filed Case No. 03-15006-CA-09, again alleging similar claims, buton their own behalf.  Plaintiffs are allmembers of one family who purport to be shareholders of PIP/USA, Inc. suingderivatively on its behalf, and seeking to rescind various transactions betweenPIP.America and Poly Implants Protheses, S.A. and seek to impose liabilityagainst PIP.America and its co-defendants for unspecified monetary damagesarising out of alleged tortious and other purported wrongful acts concerningalleged relationships between plaintiffs, PIP/USA, Inc. and Poly ImplantsProtheses, S.A.  In the third case,filed in 2003, MediCor is named but has not yet been served, but doesanticipate being served.

 

PeggyWilliams v. PIP/USA, Inc., Case No. 03 CH 9654, Jessica Fischer Schnebel, etal. v. PIP/USA, Inc., Case No. 03CH07239, Dawn Marie Cooper, et al. v. PIP/USA,Inc., Case No. 03CH11316, Miriam Furman, et al. v. PIP/USA, Inc., Case No.03CH10832 and Karen S. Witt, et al. v. PIP/USA, Inc., Case No. 03CH12928 werefiled in the Circuit Court of Cook County, Chancery Division, in or aroundJuly 2003.  Counsel for JessicaFischer Schnebel, et al. v. PIP/USA, Inc., Case No. 03CH07239 amended her classaction complaint to include plaintiffs from the other four cases, and each ofthe others has been voluntarily dismissed. The consolidated amended complaint contains counts alleging productliability, breach of the implied warranties of merchantability and fitness fora particular purpose, violation of the Illinois Consumer Fraud Act andthird-party beneficiary status. Unspecified monetary damages, exemplary damages and attorneys fees andcosts are sought.  A motion seeking todismiss all counts but the third-party beneficiary claim has been filed and aruling is expected soon.  PIP.Americahas tendered this case to Poly Implant Prostheses, S.A., for defense andindemnity.

 

SalinasI. Landers, et al. v. Poly Implants Protheses, S.A., et al., Case No. CV 030377was filed in June 2003 in the Superior Court of San Luis Obispo County,California.  Plaintiffs purport to sueon behalf of themselves and an alleged class of persons allegedly similarlysituated for unspecific monetary damages, exemplary damages, attorneys’ feesand costs and injunctive relief for alleged breach of express warranty andalleged violations of California’s Song-Beverly Consumer Warranty Act andUnfair Competition Law.   PIP.Americafiled a demurrer to the action, which was denied by the Court.  PIP.America has now filed an answer to thecomplaint.  Poly Implant Prostheses,S.A., has also filed an answer to the complaint, and written discovery is inthe initial stages.  A case managementhearing occurred on May 5, 2004, at which time the court scheduled a date tohear arguments for and against class certification.  PIP.America has tendered this case to Poly Implant Prostheses,S.A., for defense and indemnity.

 

MarshaDicken, et al. v. PIP/USA, Inc., et al., Case No. 2003-05588, was filed inJanuary 2003 in the District Court of Harris County, Texas.  Plaintiffs purport to sue on behalf ofthemselves and an alleged class of persons allegedly similarly situated foralleged strict liability, breach of express warranty, breach of impliedwarranties, violation of Section 402B of the Restatement (Second) ofTorts, negligence, misrepresentations, and violation of Texas’ Deceptive TradePractices Act with respect to implant products.  Plaintiffs seek an unspecified amount in alleged compensatorydamages, additional statutory damages, interest, attorneys’ fees and costs.  The lawsuit is in the discovery phase and nohearing has been held, or order entered, concerning class certification.   PIP.America has filed motions seeking todismiss certain claims in a summary judgment proceeding.  The court has scheduled a pretrialconference to be held in June 2004, and has specified that a trial datewill be set shortly thereafter. PIP.America has tendered this case to Poly Implant Prostheses, S.A., fordefense and indemnity.

 

Thoughit is not yet possible to predict the outcome of any of the cases describedabove, 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 are desirous to honor theirrespective obligations under warranty provisions, all three purported classaction cases above include two distinctly different types of claims.  The first of these arise from products soldby 

 

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PIP/USA,Inc., with whom neither MediCor nor any of its affiliates are affiliated.  This company sold implants manufactured byPoly Implants 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 similarlydid not warrant these products.  Thenext claims arise from products sold by PIP.America and warranted byPIP.America.  With respect to claimsarising from products sold by PIP.America, PIP.America is administering andfulfilling its obligations to its customers in the ordinary course of business,and for which it has taken appropriate reserves.  Other than certain of its own warranty claims that it isadministering, PIP.America is indemnified by PIP/USA, Inc., Poly ImplantsProtheses, S.A., and Poly Implants Protheses, S.A.’s President, Jean ClaudeMas, personally, from all claims, including those asserted above.  PIP.America either already has, or is in theprocess of, asserting its indemnification claims and, in the event of anadverse judgment in any case, PIP.America intends to seek the benefits of thisindemnity.  As a result, the Companybelieves the costs associated with these matters will not have a materialadverse impact on the Company’s business, results of operations or financialposition.

 

TheCompany and its subsidiaries have been and will continue to be periodicallynamed as a defendant in other lawsuits in the normal course of business,including product liability and product warranty claims.  Litigation, particularly product liabilitylitigation, can be expensive and disruptive to normal business operations andthe results of complex legal proceedings can be very difficult to predict.  Claims against the Company or itssubsidiaries have been and are periodically reviewed with counsel in theordinary course of business.  TheCompany presently believes it or its subsidiaries have meritorious defenses inall lawsuits in which the Company or any of its subsidiaries are defendants,subject to the subsidiaries’ continuing warranty obligations, which thesubsidiaries intend to continue to satisfy. While it is not possible to predict the outcome of these matters, webelieve that the costs associated with them will not have a material adverseimpact on the Company’s business, results of operations or financial position.

 

The Company leased office,manufacturing and warehouse facilities and office equipment under variousterms.  Lease expenses amounted to$94,144 and $116,147 for the three months ended March 31, 2004 and 2003,respectively.  For the nine months endedMarch 31, 2004 lease expenses were $282,192 compared to $413,934 for thenine months ending March 31, 2003. Future minimum lease payments are approximated as follows:

 
| **Year ended March 31,** |   | **Amount** |   |
|-------------------------------|--------|------------|--------|
|                          |   |       |   |
| 2005                          |   | 226,652    |   |
| 2006                          |   | 235,484    |   |
| 2007                          |   | 244,662    |   |
| 2008                          |   | 207,602    |   |
| 2009                          |   | 18,788     |   |

 

**Note S****– Subsequent Event**

** **

On May 17, 2004, the Company agreed to acquire allof the capital stock of Laboratories Eurosilicone S.A., a privately-heldmedical device manufacturer based in Apt, France.  The closing of the acquisition is subject to obtaining necessaryfinancing and other customary closing conditions.  The Company has incurred and agreed to certain deposits and feesin connection with the closing of this acquisition. On May 19, 2004, theCompany filed a Current Report on Form 8-K relating to this event.

 

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***ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION`***

 

ThisQuarterly Report on Form 10-QSB, including the following “Management’sDiscussion and Analysis or Plan of Operation,” contains forward-lookingstatements that involve risks and uncertainties, as well as assumptions that,if they ever materialize or prove incorrect, could cause the results of theCompany to differ materially from those expressed or implied by suchforward-looking statements.  All statements other than statements 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 plans; any statements regarding future economicconditions or performance; any statements of belief or intention; and any statementsof assumptions underlying any of the foregoing.  Factors that may causesuch differences include, but are not limited to: increased competition;changes in product demand; changes in market acceptance; new productdevelopment; United States Food and Drug Administration (“FDA”) approval orrescission of approval; delay or rejection of new or existing products; changesin agreements with governmental agencies; changes in government regulation;supply of raw materials; changes in reimbursement practices; adverse results oflitigation; the performance of contracts by suppliers, customers and partners;employee management issues; the challenge of managing asset levels, includinginventory; the difficulty of aligning expense levels with revenue changes; andother risks that are described herein and that are otherwise described fromtime to time in the Company’s reports and other documents filed with theSecurities and Exchange Commission, including those contained in “Factors thatMay Affect Future Results” set forth below in “Management’s Discussion andAnalysis or Plan of Operation.”  The Company assumes no obligation anddoes not intend to update these forward-looking statements, except as requiredby law.

 

**OVERVIEW**

 

MediCoracquires, develops, manufactures and markets products for medical specialtiesin aesthetic, plastic and reconstructive surgery and dermatology markets. Products include surgically implantable prostheses for aesthetic, plastic andreconstructive surgery and scar management products.  Our products aresold worldwide to hospitals, surgery centers and physicians through variousdistributors and direct sales personnel.

 

MediCorhas two main product lines –

 

•       surgically implantable prostheses foraesthetic plastic and reconstructive surgery; and

•       scar management products.

 

***Breast Aesthetics***

 

Currently,we are awaiting the required FDA clearance to sell saline breast implants inthe United States.  These products are typically sold on both a direct anda consigned inventory basis.

 

***Scar ManagementProducts***

 

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

 

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**APPLICATIONOF CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

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

 

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

 

**RESULTS OFOPERATIONS**

 

***Sales***

 

Salesfor the three months ended March 31, 2004 decreased $89,882 from $453,623 to$363,741 for the same period in 2003. For the nine months ended March 31,2004 sales decreased $279,281, from $1,285,903 to $1,006,622. The 20% decreasefor the three months ended March 31, 2004 and the 22% decrease for thenine months ended March 31, 2004 was driven by lower unit sales, primarilydue to the decrease of orders from one large customer.

 

***Cost of Sales***

 

Costof sales as a percentage of net sales for the three- and nine-month periodsended March 31, 2004 were approximately 32% for each compared toapproximately 26% during the same periods in 2003.  This excludes abenefit of $32,025 for the three months ended March 31, 2004 and a benefitof $56,175 for the nine months ended March 31, 2004 from a return ofconsigned inventory previously written down. The overall reduction in cost of sales for the three- and nine-monthperiods was due to lower sales, as well as overall higher per unit salesreflecting a change in product mix. Normally, we expect that cost of sales will remain relatively constanton a percentage basis of approximately 35% to 40%.

 

***Selling, Generaland Administrative***

 

Selling,general and administrative expenses increased 96% to $2,264,520 for the threemonths ended March 31, 2004, as compared to $1,154,127 during the sameperiod in 2003.  For the nine monthsended March 31, 2004, selling, general and administrative expenses were$5,131,484 compared to $3,351,964 for the same period a year ago, a 53%increase.  The overall increase for thethree- and nine-month periods can be attributed to increases in payroll andpayroll related expenses; depreciation and amortization; travel, andamortization of commissions related to convertible debentures. In addition theCompany experienced a decrease in expenditures of rent and professional fees.  As our business and sales increase, weanticipate that SG&A expenses will increase in absolute dollars, butdecrease as a percentage of sales.

 

***Research andDevelopment***

 

Researchand development in the recent quarter ending March 31, 2004 was $946,626compared to $22,349 for the same period in 2003.  For the nine months ended March 31, 2004 research anddevelopment expenses equaled $1,380,577, as compared to $67,203 for the sameperiod in 2003.   The increase for thethree- and nine-month

 

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periods was driven by our commitment to fund all future expensesassociated with obtaining required government approvals for saline breastimplant products.  We expect thatresearch and development expenses will decrease once we receive requiredgovernment approvals.

 

***Interest Expense***

 

Interestexpense increased to $797,953 for the nine months ended March 31, 2004,compared to $288,205 in same period in the prior year.  Interest expense consists primarily ofinterest related to borrowings.  The change in interest expense wasprimarily due to an increase in the average principal note payable to relatedparty balances and an increase in convertible debentures.

 

***Net Loss***

 

Netloss for the three months ended March 31, 2004 increased to $3,245,780from $1,126,612 in the comparable period in the year.  Net loss increasedfrom $3,100,619 reported in the previous nine months to $6,509,464 for the ninemonths ended March 31, 2004.  Thedecline was due to lower sales, higher selling, general and administrativeexpenses,  research and development andinterest expense.  Basic and dilutedloss per share was ($0.18) for current three month period compared to ($0.07)for the comparable period last year. Net losses are primarily attributableto the substantial costs associated with facilitating FDA pre-market approvalsfor products sought to be sold by MediCor and limited sales of our currentproducts.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Ourability to make payments to refinance our debt and to fund planned capitalexpenditures and operations will depend on our ability to secure additionalsignificant financing and generate sufficient cash in the future.  Becausewe have only limited product sales and will not be in a position to materiallyincrease sales until the FDA issues a pre-market approval relating to one ormore of the products sought to be sold by us, we have historically raised fundsto support our operating expenses and capital requirements through sales ofequity or debt securities or through other credit arrangements, includingborrowing from our affiliates.  Our existing cash, cash equivalent andcash generated from operations will be insufficient to meet our anticipatedcash needs for the next 12 months.  To satisfy our liquidity requirements,we will need to raise additional funds.  To the extent additional sales ofequity or debt securities are insufficient to satisfy our liquidityrequirements, we expect that we will be able to obtain any necessary additionalfunds through the incurrence of additional indebtedness to ouraffiliates.  We have received a written commitment from InternationalIntegrated Industries, LLC, an affiliate of our chairman, to provide sufficientcash to fund any operating expenses and capital expenditures throughMarch 31, 2005.  The same entity has provided to us over $28 millionin funding from our formation through March 31, 2004.  The futurefunding may take the form of debt or equity or a combination thereof.

 

**FACTORS THAT MAY AFFECT FUTURE RESULTS**

 

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

 

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***If clinical trials for our products are unsuccessful or delayed, wewill be unable to meet our anticipated development and commercializationtimelines.***

 

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

 

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

 

•                  lack of efficacy during the clinical trials;

•                  unforeseen safety issues;

•                  slower than expected patient recruitment; and

•                  government or regulatory delays.

 

Theresults from pre-clinical testing and early clinical trials are often not predictiveof results obtained in later clinical trials.  A number of new productshave shown promising results in clinical trials, but subsequently failed toestablish sufficient safety and efficacy data to obtain necessary regulatoryapprovals.  Data obtained from pre-clinical and clinical activities aresusceptible to varying interpretations, which may delay, limit or preventregulatory approval.  In addition, regulatory delays or rejections may beencountered as a result of many factors, including perceived defects in thedesign of the clinical trials and changes in regulatory policy during theperiod of product development.  Any delays in, or termination of, ourclinical trials or clinical trials of our collaborative partners or supplierswill adversely affect our development and commercialization timelines, whichwould adversely affect our future sales and profitability.

 

***Our products may not gain market acceptance among physicians, patientsand the medical community generally.***

 

Thedegree of market acceptance of any medical device or other product that wedevelop or market will depend on a number of factors, including demonstratedclinical efficacy and safety, cost-effectiveness, potential advantages overalternative products, and our marketing and distribution capabilities. The relative size of our company may also affect market acceptance of ourproducts.  Physicians will not recommend our products until clinical dataor other factors demonstrate their safety and efficacy compared to othercompeting products.  Even if the clinical safety and efficacy of ourproducts is established, physicians may elect not to recommend them for anynumber of other reasons, including whether our products best meet theparticular needs of the individual patient and their overall evaluation of ourcompany.

 

***If we are unable to develop, gain regulatory approval for and marketnew products and technologies, we will not achieve meaningful revenue and mayexperience a decrease in demand for our products or our products could becomeobsolete.***

 

Themedical device industry is highly competitive and is subject to significant andrapid technological change.  We believe that our ability to respondquickly to consumer needs or advances in medical technologies, withoutcompromising product quality, will be crucial to our success.  We arecontinually engaged in product development and improvement programs toestablish and improve our competitive position.  We cannot, however,guarantee that we will be successful in enhancing our existing products orproducts we have in development or clinical trials.  Nor can we guarantee that we will be successful in developing newproducts or technologies that will timely achieve regulatory approval orreceive market acceptance.

 

***If changes in the economy and consumer spending reduce consumer demandfor our products or our products in development, our sales and profitabilitywill suffer.***

 

Breastaugmentation and reconstruction and other aesthetics procedures are electiveprocedures.  Other than U.S. federally mandated insurance reimbursementfor post-mastectomy reconstructive surgery, breast augmentations and othercosmetic procedures are not typically covered by insurance.  Adverse changes in the economy may cause

 

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consumers to reassess their spending choices and reduce the demand forcosmetic surgery.  This shift could have an adverse effect on ourprojected future sales and profitability.

 

***Our ability to expand our business will be significantly limited if wecannot obtain additional financing.***

 

Toaccomplish our plans to expand our current product lines and markets and topurchase new companies, products and intellectual property, we need substantialadditional capital, which we may not be able to obtain.  While we have todate been funded in substantial part from financing from an affiliate of ourchairman, we do not anticipate this funding source will provide sufficientcapital to finance our intended growth strategy and that we will need significantexternal financing to accomplish our goals.  We are currently negotiatingwith potential equity and debt providers to obtain additional financing, butthis additional financing may not be available on terms that are favorable tous, or at all.  If adequate funds are not available, or are not availableon acceptable terms, our ability to implement our expansion and growth planswill be significantly impaired.  Inaddition, the financial terms of any such financing, if obtainable, may bedilutive to existing stockholders.

 

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

 

MediCorand its subsidiaries have only been operating since 1999.  Although ourBiodermis operation has been in existence for a longer period of time, it hasonly operated under MediCor’s management since its acquisition in 2001. Significantly, during much of our history we have also been prevented fromselling our primary existing product, saline-filled breast implants, in theU.S. market due to the FDA’s 2000 call for a pre-market approval for thatproduct.   As a result, all of our current revenues have been derivedfrom our scar management products.  Revenue generated by our Biodermissubsidiary has not been significant, and we do not expect more than modestinternal growth in that segment.  Our business plans call for significantexpansion into other markets that in the future will constitute the significantmajority of our sales and income.  As a result, our existing businessplatform is not necessarily indicative of our future business or prospects.

 

***MediCor and its prospects must be considered in light of the risks,expenses and difficulties frequently encountered by companies in an early stageof development, particularly companies in rapidly evolving markets such as themedical device market.***

 

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

 

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

 

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

 

Delaysin or rejection of FDA or other government entity approval of new productswould adversely affect our business.  Delays or rejection may beencountered due to, among other reasons, government or regulatory delays,

 

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lack of efficacy during clinical trials, unforeseen safety issues,slower than expected rate of patient recruitment for clinical trials, inabilityto follow patients after treatment in clinical trials, inconsistencies betweenearly clinical trial results and results obtained in later clinical trials,varying interpretations of data generated by clinical trials, or changes inregulatory policy during the period of product development in the U.S. andabroad.  In the U.S., there has been a continuing trend of more stringentFDA oversight in product clearance and enforcement activities, causing medicaldevice manufacturers to experience longer approval cycles, more uncertainty,greater risk, and higher expenses.  Internationally, there is a risk thatwe or our suppliers or collaborative partners may not be successful in meetingthe quality standards or other certification requirements.  Even ifregulatory approval of a product is granted, this approval may entaillimitations on uses for which the product may be labeled and promoted. It ispossible, for example, that we or our suppliers or collaborative partners maynot receive FDA approval to market our current or future products for broaderor different applications or to market updated products that representextensions of our, our suppliers’ or collaborative partners’ basictechnology.  In addition, we or our suppliers or collaborative partnersmay not receive export or import approval for products in the future, andcountries to which products are to be exported may not approve them for import.

 

***Government regulation of manufacturing of medical devices is expensiveand time consuming for manufacturers and may result in product unavailabilityor 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 product liability claims orproduct recalls, we may be forced to pay substantial damage awards and otherexpenses that could exceed our reserves and any applicable insurance coverage.***

 

Wehave in the past been, currently are, and may in the future be subject toproduct liability claims alleging that the use of our technology or productshas resulted in adverse health effects.  These claims may be brought evenwith respect to products that have received, or in the future may receive,regulatory approval for commercial sale.  In particular, the manufactureand sale of breast implant products entails significant risk of productliability claims due to potential allegations of possible disease transmissionand other health factors, rupture or other product failure.  Some breastimplant manufacturers that suffered these types of claims in the past have beenforced 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 productliability claims, we may in the future need to recall or issue fieldcorrections related to our products due to manufacturing deficiencies, labelingerrors, or other safety or regulatory reasons.

 

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

 

***Certain lawsuits filed seek class action status and may, if successful,cause us to incur substantial liability, including damage awards andsignificant legal fees that may exceed our reserves.***

 

Threelawsuits have been filed naming us or one of our subsidiaries, the Frenchmanufacturer from which we purchase breast implant products, and the U.S.distributor of those same products who preceded our subsidiary in the U.S.market.  In these suits the plaintiffsseek, among other things, class action status for claims, including claims forbreach of warranty   The claims arisefrom products distributed both before and after our subsidiary that

 

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distributed the products came into existence.  Although certain of the claims arise from products distributed bythe other distributor prior to our subsidiary coming into existence, we havestill been named as a defendant.  Whilewe have reserved an amount equal to the outstanding warranty claims for claimsarising from products our subsidiary did distribute, the plaintiffs are seekingto hold us responsible for more damages. There can be no assurance we can terminate the litigation as to oursubsidiary for reserved amounts. Although our subsidiary is indemnified 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 noassurance this indemnity will protect us, as there is no guarantee the Frenchmanufacturer, the previous distributor, or Mr. Mas will, or is able to, honorthe indemnification they have provided.

 

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

 

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

 

Physiciansand potential patients may have a number of concerns about the safety of ourproducts and proposed products, whether such concerns have a basis in generallyaccepted science or peer-reviewed scientific research or not.  Negativepublicity—whether accurate or inaccurate—about our products, based on, forexample, news about breast implant litigation or regulatory actions, couldmaterially reduce market acceptance of our products and could result in productwithdrawals.  In addition, significantnegative publicity could result in an increased number of product liabilityclaims, whether or not these claims have a basis in fact.

 

***Because a key component of our growth strategy is based on successfullymaking acquisitions and otherwise diversifying our product offerings, we areexposed to numerous risks associated with acquisitions, diversification andrapid growth.***

 

Akey component of our growth strategy is the acquisition of other companies,products and technologies that meet our criteria for strategic fit, geographicpresence, revenues, profitability, growth potential and operatingstrategy.  The successful implementation of this strategy depends on ourability to identify suitable acquisition candidates, acquire companies andassets on acceptable terms and integrate their operations successfully.

 

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

 

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

 

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

 

***If our intellectual property rights do not adequately protect ourproducts or technologies, others could compete against us more directly.***

 

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Oursuccess depends in part on our ability to obtain patents or rights to patents,protect trade secrets, operate without infringing upon the proprietary rightsof others, and prevent others from infringing on our patents, trademarks andother intellectual property rights.  We will be able to protect our intellectualproperty from unauthorized use by third parties only to the extent that it iscovered by valid and enforceable patents, trademarks and licenses and we areable to enforce those rihgts.  Patent protection generally involvescomplex legal and factual questions and, therefore, enforceability andenforcement of patent rights cannot be predicted with certainty.  Patents, if issued, may be challenged,invalidated or circumvented.  Thus, any patents that we own or licensefrom others may not provide adequate protection against competitors.  In addition, our pending and future patentapplications may fail to result in patents being issued.  Also, those patents that are issued may notprovide us with adequate proprietary protection or competitive 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.

 

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

 

***If third parties claim we are infringing their intellectual propertyrights, we could suffer significant litigation or licensing expenses or beprevented from marketing our products.***

 

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

 

***We depend on a limited number of suppliers for certain raw materialsand the loss of any supplier could adversely affect our ability to manufacturemany of our products.***

 

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

 

***Our international business exposes us to a number of risks.***

 

Asignificant part of our current sales are and a significant part of ourprojected future sales will be derived from international operations.  Inaddition, we anticipate having material international suppliers and operations,including, potentially, manufacturing operations.  Accordingly, we will beexposed to risks associated with international operations, including risksassociated with re-valuation of the local currencies of countries where wepurchase or sell our products or conduct business, which may result in ourpurchased products becoming more expensive to us in U.S. dollar terms or soldproducts becoming more expensive in local currency terms, thus reducing demand,or in increased costs to us.  Our operations and financial results alsomay be significantly affected by other international factors, including:

 

•                  foreign government regulation of medicaldevices;

•                  product liability claims;

•                  new export license requirements;

•                  political or economic instability in ourtarget markets;

•                  trade restrictions;

•                  changes in tax laws and tariffs;

•                  inadequate protection of intellectualproperty rights in some countries;

 

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•                  managing foreign distributors, manufacturersand staffing; and

•                  managing foreign branch offices.

 

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

 

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

 

Oursuccess will depend upon our ability to attract and retain key managerial,financial, technical, selling and marketing personnel.  The lack of keypersonnel might significantly delay or prevent the achievement of ourdevelopment and strategic objectives.  We do not maintain key man lifeinsurance on any of our employees. Other than certain of our executives who are parties to employmentagreements, none of our employees is under any obligation to continue providingservices to MediCor.  We are currently in the process of building ourmanagement and technical staffs.  We believe that our success will dependto a significant extent on the ability of our key personnel, including the newmanagement and technical staffs, to operate effectively, both individually andas a group.  Competition for highly skilled employees in our industry ishigh, and we cannot be certain that we will be successful in recruiting orretaining these personnel.

 

***MediCor’s future growth will place a significant strain on ourmanagerial, operational, financial and other resources.***

 

Oursuccess will depend upon our ability to manage our internal andacquisition-based growth effectively.  This will require that we continueto implement and improve our operational, administrative and financial andaccounting systems and controls and continue to expand, train and manage ouremployee base.  We anticipate that we will need to hire and retain numerousadditional employees and consultants for both internal and acquisition-basedgrowth for some time.  Integration of these employees and consultants andemployee and consultant loss in the process will require significant managementattention and resources.  Our systems, procedures, controls and personnelmay not be adequate to support our future operations and our management may notbe able to achieve the rapid execution necessary to exploit the market for ourbusiness model.

 

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

 

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

 

Ourdependence on supply, collaborative or consulting arrangements with thirdparties subjects us to a number of risks.  These arrangements may not beon terms favorable to us.  Agreements with suppliers may limit our supplyof products or require us to purchase products we can not profitably sell.  They may also restrict our ability to marketor distribute other products. Agreements with consultants or collaborative partners typically allowthe third parties significant discretion in electing whether or not to pursueany of the planned activities.  We cannot with certainty control theamount and timing of resources our suppliers, collaborative partners orconsultants may devote to our products, and these third parties may choose topursue alternative products.  These third parties also may not performtheir obligations as expected.  Business combinations, significant changesin their business strategy, or their access to financial resources mayadversely affect a supplier’s, partner’s or consultant’s willingness or abilityto complete its obligations under the arrangement.   Moreover, wecould become involved in disputes with our suppliers, partners or consultants,which could lead to delays or termination of the arrangements and time-consumingand expensive litigation or arbitration.

 

***Our quarterly operating results are subject to substantial fluctuationsand any failure to meet financial expectations for any fiscal quarter maydisappoint securities analysts and investors and could cause our stock price todecline*****.**

 

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

 

•                  changes in demand for our products;

•                  our ability to meet the demand for ourproducts;

•                  existing and increased competition;

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

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

•                  our ability to develop, obtain regulatoryapproval for, introduce and market new and enhanced versions of our products ona timely basis;

•                  changes in pricing policies by us and ourcompetitors;

•                  the timing of significant orders andshipments;

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

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

•                  general economic factors.

 

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

 

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

 

Asof the quarter ended March 31, 2004, management, with the participation ofthe chief executive and financial officers, carried out an evaluation of theeffectiveness of our disclosure controls and procedures pursuant to ExchangeAct Rule 15d-15.  Based upon that evaluation, the chief executive officerand the chief financial officer believe that, as of end of the fiscal quartercovered by this report, our disclosure controls and procedures were effectivein making known to them material information relating to MediCor (including itsconsolidated subsidiaries) required to be included in this report.  As ofthe end of our fiscal year ended June 30, 2003, management adopted formaldisclosure controls and procedures which were employed in the preparation ofthis report.

 

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

 

***PART II – OTHER INFORMATION***

 

***ITEM 1.  LEGAL PROCEEDINGS***

 

InOctober 1999, June 2000 and July 2003, separate but relatedcomplaints were filed by Saul and Ruth Kwartin, Steven M. Kwartin, and Robertand Nina Kwartin respectively, and various other unnamed plaintiffs, againstthe Company’s PIP.America subsidiary as co-defendant with PIP/USA, Inc. andPoly Implants Protheses, S.A., each unaffiliated with MediCor, and Jean ClaudeMas and our chairman, Donald K. McGhan personally, in the Circuit Court ofMiami-Dade County, Florida.

 

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Initially,two cases were filed in October 1999, Case No. 99-25227-CA-01 and Case No.00-14665-CA-01.  Of the two, Case No.99-25227 was dismissed.  The sameplaintiffs then, in June 2000, filed Case No. 0322537-CA-27, allegingsimilar claims to those included in the dismissed case.  In June 2003, another member of thesame family filed Case No. 03-15006-CA-09, again alleging similar claims, buton their own behalf.  Plaintiffs are allmembers of one family who purport to be shareholders of PIP/USA, Inc. suingderivatively on its behalf, and seeking to rescind various transactions betweenPIP.America and Poly Implants Protheses, S.A. and seek to impose liabilityagainst PIP.America and its co-defendants for unspecified monetary damagesarising out of alleged tortious and other purported wrongful acts concerningalleged relationships between plaintiffs, PIP/USA, Inc. and Poly ImplantsProtheses, S.A.  In the third case,filed in 2003, MediCor is named but has not yet been served, but doesanticipate being served.

 

PeggyWilliams v. PIP/USA, Inc., Case No. 03 CH 9654, Jessica Fischer Schnebel, etal. v. PIP/USA, Inc., Case No. 03CH07239, Dawn Marie Cooper, et al. v. PIP/USA,Inc., Case No. 03CH11316, Miriam Furman, et al. v. PIP/USA, Inc., Case No.03CH10832 and Karen S. Witt, et al. v. PIP/USA, Inc., Case No. 03CH12928 werefiled in the Circuit Court of Cook County, Chancery Division, in or aroundJuly 2003.  Counsel for JessicaFischer Schnebel, et al. v. PIP/USA, Inc., Case No. 03CH07239 amended her classaction complaint to include plaintiffs from the other four cases, and each ofthe others has been voluntarily dismissed. The consolidated amended complaint contains counts alleging productliability, breach of the implied warranties of merchantability and fitness for aparticular purpose, violation of the Illinois Consumer Fraud Act andthird-party beneficiary status. Unspecified monetary damages, exemplary damages and attorneys fees andcosts are sought.  A motion seeking todismiss all counts but the third-party beneficiary claim has been filed and aruling is expected soon.  PIP.Americahas tendered this case to Poly Implant Prostheses, S.A., for defense andindemnity.

 

SalinasI. Landers, et al. v. Poly Implants Protheses, S.A., et al., Case No. CV 030377was filed in June 2003 in the Superior Court of San Luis Obispo County,California.  Plaintiffs purport to sueon behalf of themselves and an alleged class of persons allegedly similarlysituated for unspecific monetary damages, exemplary damages, attorneys’ fees andcosts and injunctive relief for alleged breach of express warranty and allegedviolations of California’s Song-Beverly Consumer Warranty Act and UnfairCompetition Law.   PIP.America filed ademurrer to the action, which was denied by the Court.  PIP.America has now filed an answer to thecomplaint.  Poly Implant Prostheses,S.A., has also filed an answer to the complaint, and written discovery is inthe initial stages.  A case managementhearing occurred on May 5, 2004, at which time the court scheduled a date tohear arguments for and against class certification.  PIP.America has tendered this case to Poly Implant Prostheses,S.A., for defense and indemnity.

 

MarshaDicken, et al. v. PIP/USA, Inc., et al., Case No. 2003-05588, was filed inJanuary 2003 in the District Court of Harris County, Texas.  Plaintiffs purport to sue on behalf ofthemselves and an alleged class of persons allegedly similarly situated foralleged strict liability, breach of express warranty, breach of impliedwarranties, violation of Section 402B of the Restatement (Second) ofTorts, negligence, misrepresentations, and violation of Texas’ Deceptive TradePractices Act with respect to implant products.  Plaintiffs seek an unspecified amount in alleged compensatorydamages, additional statutory damages, interest, attorneys’ fees andcosts.  The lawsuit is in the discoveryphase and no hearing has been held, or order entered, concerning classcertification.   PIP.America has filedmotions seeking to dismiss certain claims in a summary judgmentproceeding.  The court has scheduled apretrial conference to be held in June 2004, and has specified that atrial date will be set shortly thereafter. PIP.America has tendered this case to Poly Implant Prostheses, S.A., fordefense and indemnity.

 

Thoughit is not yet possible to predict the outcome of any of the cases describedabove, 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 are desirous to honor theirrespective obligations under warranty provisions, all three purported classaction cases above include two distinctly different types of claims.  The first of these arise from products soldby PIP/USA, Inc., with whom neither MediCor nor any of its affiliates areaffiliated.  This company sold implantsmanufactured by Poly Implants Protheses, S.A. prior to PIP.America’s entry intothe U.S. market, which occurred in late 1999. Because PIP.America did not sell these products, PIP.America similarlydid not warrant these products.  Thenext claims arise from products sold by PIP.America and warranted byPIP.America.  With respect to claimsarising from products sold by PIP.America, PIP.America is administering andfulfilling its obligations to its customers in the ordinary course of business,and for which it has taken appropriate reserves.  Other than certain of its own warranty

 

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claims that it is administering, PIP.America is indemnified by PIP/USA,Inc., Poly Implants Protheses, S.A., and Poly Implants Protheses, S.A.’sPresident, Jean Claude Mas, personally, from all claims, including thoseasserted above.  PIP.America eitheralready has, or is in the process of, asserting its indemnification claims and,in the event of an adverse judgment in any case, PIP.America intends to seekthe benefits of this indemnity.  As aresult, the Company believes the costs associated with these matters will nothave a material adverse impact on the Company’s business, results of operationsor financial position.

 

TheCompany and its subsidiaries have been and will continue to be periodicallynamed as a defendant in other lawsuits in the normal course of business,including product liability and product warranty claims.  Litigation, particularly product liabilitylitigation, can be expensive and disruptive to normal business operations andthe results of complex legal proceedings can be very difficult to predict.  Claims against the Company or itssubsidiaries have been and are periodically reviewed with counsel in theordinary course of business.  TheCompany presently believes it or its subsidiaries have meritorious defenses inall lawsuits in which the Company or any of its subsidiaries are defendants,subject to the subsidiaries’ continuing warranty obligations, which thesubsidiaries intend to continue to satisfy. While it is not possible to predict the outcome of these matters, we believethat the costs associated with them will not have a material adverse impact onthe Company’s business, results of operations or financial position.

 

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

 

During the quarter endedMarch 31, 2004, we granted options covering 240,000 shares of common stockto new employees.   The offer and saleof the options and the underlying shares were exempt from registration pursuantto section 4(2) of the Securities Act.

 

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

 

None

 

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

 

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

 

***ITEM 5.  OTHER INFORMATION***

 

None

 

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***ITEM 6.  EXHIBITS AND REPORTS ONFORM 8-K***

 

**(a) Exhibits**

 

SeeExhibit Index at Page 34

 

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

 

Noreports on Form 8-K were filed during the quarter for which this report isfiled.

 

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**SIGNATURES**

 

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

 

 
|   |          |   | ***MEDICOR LTD.*** |
|--------|---------------|--------|-------------------------|
|   |          |   | (Registrant)            |
|   |
| Date:  | May  19, 2004 |   | By:                     | /s/  Theodore R Maloney |
|   |          |   |                    | Theodore  R. Maloney  Chief Executive Officer |
|   |          |   |                    |   |
| Date:  | May  19, 2004 |   | By:                     | /s/  Thomas R. Moyes |
|   |          |   |                    | Thomas  R. Moyes  Chief Financial Officer |

 

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EXHIBITINDEX

 
| **Exhibit  No.** |   | **Description**                                                                              |
|------------------|--------|----------------------------------------------------------------------------------------------|
| 10.1*            |   | Form  of Amended Distribution Agreement                                                      |
| 10.2*            |   | Form  of Promissory Note                                                                     |
| 31.1             |   | Principal  Executive Officer Certification Pursuant To 17 C.F.R.  Section 240.15d-14(a) |
| 31.2             |   | Principal  Financial Officer Certification Pursuant To 17 C.F.R.  Section 240.15d-14(a) |
| 32.1             |   | Principal  Executive Officer Certification Pursuant To 18 U.S.C. Section 1350           |
| 32.2             |   | Principal  Financial Officer Certification Pursuant To 18 U.S.C. Section 1350           |

 

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*                                         Certain portions of this Exhibit, for whichconfidential treatment has been requested, have been redacted and filedseparately with the Securities and Exchange Commission.

 

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