**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington,D.C. 20549**

 

----

 

**FORM 10-QSB**

 
| **(Mark  One)**                                                                                                                                                      |   |                                                                                                         |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                           |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|                                                                                                                                                                 |
| **For the  Quarterly Period Ended September 30, 2003**                                                                                                               |
|                                                                                                                                                                 |
| **or**                                                                                                                                                               |
|                                                                                                                                                                 |
| **o**                                                                                                                                                                |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**     |
|                                                                                                                                                                 |
|                                                                                                                                                                 |
| **For the  transition period  from             to        ** |

 

**Commissionfile number 000-50442**

 

----

 

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

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15 (d) of the Exchange Act during the past 12 months (or for suchshorter 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**

 

----

 

On November 10, 2003, therewere 17,566,833 shares of common stock outstanding.

 

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

 

 

----

 

**MEDICORLTD.**

 

# **INDEX**

 
| Part I. Financial Information |
|-------------------------------|
|                          |   |
| Item 1.                       | Consolidated Financial Statements  (Unaudited) |
|                          |   |
|                          | Consolidated Balance Sheet – September 30, 2003 |
|                          |   |
|                          | Consolidated Statements of Income – Three  Months Ended September 30, 2003 and 2002 |
|                          |   |
|                          | Consolidated Statements of Cash Flows –  Three Months Ended September 30, 2003 and 2002 |
|                          |   |
|                          | Notes to Consolidated Financial Statements  – September 30, 2003 |
|                          |   |
| Item 2.                       | Management’s  Discussion and Analysis or Plan of Operation |
|                          |   |
| Item  3.                      | Controls  and Procedures |
|                          |   |
| Part  II. Other Information   |
|                          |   |
| Item 1.                       | Legal Proceedings |
|                          |   |
| Item 2.                       | Changes in Securities |
|                          |   |
| Item 3.                       | Defaults upon Senior Securities |
|                          |   |
| Item 4.                       | Submission of Matters to a Vote of Security  Holders |
|                          |   |
| Item 5.                       | Other Information |
|                          |   |
| Item 6.                       | Exhibits and Reports on Form 8-K |
|                          |   |
|                          | Signatures |
|                               |  |  |

 

----

 

***PART I – FINANCIAL INFORMATION***

 

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

 

MediCor Ltd.

ConsolidatedBalance Sheet

September 30, 2003

(Unaudited)

 
| **Assets**                                                                                                                               |   |        |       |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|------------|
|                                                                                                                                     |   |        |       |
| Current Assets:                                                                                                                          |   |        |       |
|                                                                                                                                     |   |        |       |
| Cash                                                                                                                                     |   | $           | 126,333    |   |
| Receivables, less allowance for doubtful accounts  of $3,262,322                                                                         |   | 174,451     |       |
| Inventories                                                                                                                              |   | 131,097     |       |
| Prepaid expenses and other current assets                                                                                                |   | 143,942     |       |
|                                                                                                                                     |   |        |       |
| Total Current Assets                                                                                                                     |   | 575,823     |       |
| Property, plant and equipment, net                                                                                                       |   | 335,996     |       |
| Goodwill and other intangibles, net                                                                                                      |   | 4,333,960   |       |
| Deposits                                                                                                                                 |   | 5,633,000   |       |
| Other assets                                                                                                                             |   | 54,579      |       |
|                                                                                                                                     |   |        |       |
| Total assets                                                                                                                             |   | $           | 10,933,358 |   |
|                                                                                                                                     |   |        |       |
| **Liabilities and Stockholders’  Equity**                                                                                           |   |        | ** ** |
|                                                                                                                                     |   |        |       |
| Current Liabilities:                                                                                                                     |   |        |       |
|                                                                                                                                     |   |        |       |
| Bank overdraft                                                                                                                           |   | $           | 27,410     |   |
| Short term convertible debentures                                                                                                        |   | 410,000     |       |
| Notes payable                                                                                                                            |   | 207,758     |       |
| Note payable to related party                                                                                                            |   | 8,491,593   |       |
| Accounts payable                                                                                                                         |   | 1,673,838   |       |
| Accrued expenses and other current liabilities                                                                                           |   | 1,382,201   |       |
| Payroll taxes payable                                                                                                                    |   | 26,456      |       |
| Interest payable to related party                                                                                                        |   | 528,076     |       |
| Interest payable                                                                                                                         |   | 11,587      |       |
|                                                                                                                                     |   |        |       |
| Total Current Liabilities                                                                                                                |   | 12,758,919  |       |
|                                                                                                                                     |   |        |       |
| Long-term convertible debentures                                                                                                         |   | 650,000     |       |
| Long-term accrued liabilities                                                                                                            |   | 1,429,507   |       |
|                                                                                                                                     |   |        |       |
| Total liabilities                                                                                                                        |   | 14,838,426  |       |
|                                                                                                                                     |   |        |       |
| Commitments and contingencies (Note S)                                                                                                   |   |        |       |
|                                                                                                                                     |   |        |       |
| Stockholders’ equity (deficit)                                                                                                      |   |        |       |
|                                                                                                                                     |   |        |       |
| Common shares, $.001 par value, 100,000,000 shares  authorized, 17,548,192 issued and outstanding, net of 20,298 treasury shares  at par |   | 17,548      |       |
| Capital in excess of par value                                                                                                           |   | 16,914,137  |       |
| Accumulated (deficit)                                                                                                                    |   | (20,836,753 | )          |
|                                                                                                                                     |   |        |       |
| Stockholders’ equity (deficit)                                                                                                      |   | (3,905,068  | )          |
|                                                                                                                                     |   |        |       |
| Total liabilities and stockholders’ equity                                                                                          |   | $           | 10,933,358 |   |

 

Seeaccompanying notes to unaudited consolidated financial statements

 

1

----

 

MediCor Ltd.

Consolidated Statements of Operations

Three Months Ended September 30, 2003 and 2002

(Unaudited)

 
|                                                   |   | **2003**   |       | **2002**   |       |
|--------------------------------------------------------|--------|------------|------------|------------|------------|
|                                                   |   |       |       |       |       |
| Net sales                                              |   | $          | 336,340    |       | $          | 419,396 |   |
| Cost of sales                                          |   | 78,213     |       | 145,976    |       |
| Return of consigned inventory previously written  down |   | (22,575    | )          | —     |       |
|                                                   |   |       |       |       |       |
| Gross profit                                           |   | 280,702    |       | 273,420    |       |
| Operating Expenses:                                    |   |       |       |       |       |
| Selling, general and administrative expenses           |   | 1,187,845  |       | 1,241,612  |       |
| Research and development                               |   | 9,125      |       | 21,675     |       |
|                                                   |   | (916,268   | )          | (989,867   | )          |
| Operating Loss                                         |   |       |       |       |       |
| Other income (expense):                                |   |       |       |       |       |
| Net interest expense                                   |   | (228,579   | )          | (18,133    | )          |
|                                                   |   |       |       |       |       |
| Loss before income taxes                               |   | (1,144,847 | )          | (1,008,000 | )          |
| Income taxes                                           |   | —     |       | —     |       |
|                                                   |   |       |       |       |       |
| Net Loss                                               |   | (1,144,847 | )          | (1,008,000 | )          |
| Preferred dividends                                    |   | —     |       | 60,965     |       |
|                                                   |   |       |       |       |       |
| Net loss attributable to common stockholders           |   | $          | (1,144,847 | )          | $          | (1,068,965 | ) |
|                                                   |   |       |       |       |       |
| Earnings per share data:                               |   |       |       |       |       |
| Weighted average shares, basic and diluted             |   | 17,547,156 |       | 14,569,087 |       |
| Basic and diluted                                      |   |       | ** ** |       | ** ** |
| Net loss per share                                     |   | $          | (0.07      | )          | $          | (0.07 | ) |

 

See accompanying notes tounaudited consolidated financial statements

 

2

----

 

MediCor Ltd.

ConsolidatedStatements of Cash Flows

Three Months Ended September 30, 2003 and 2002

(Unaudited)

 
|                                                                             |   | **2003**   |       | **2002**   |       |
|----------------------------------------------------------------------------------|--------|------------|------------|------------|------------|
|                                                                             |   |       |       |       |       |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                       |   |       |       |       |       |
| Net loss                                                                         |   | $          | (1,144,847 | )          | $          | (1,008,000 | ) |
| Adjustments to reconcile net loss to net cash  utilized by operating activities: |   |       |       |       |       |
| Depreciation and amortization                                                    |   | 128,126    |       | 42,118     |       |
| Provision for doubtful accounts                                                  |   | 110,490    |       | 177,875    |       |
| Inventory write down                                                             |   | 22,575     |       | —     |       |
| Loss on disposal of property, plant and equipment                                |   | —     |       | —     |       |
| Changes in operating assets and liabilities                                      |   |       |       |       |       |
| Receivables                                                                      |   | (91,307    | )          | (41,768    | )          |
| Notes receivable                                                                 |   | 27,384     |       | —     |       |
| Inventories                                                                      |   | (13,844    | )          | (13,426    | )          |
| Prepaid expenses and other current assets                                        |   | (37,715    | )          | (22,959    | )          |
| Other assets                                                                     |   | (10,697    | )          | (27,083    | )          |
| Bank overdraft                                                                   |   | (100,977   | )          | —     |       |
| Accounts payable                                                                 |   | (321,707   | )          | (198,859   | )          |
| Accrued expenses and other current liabilities                                   |   | (182,349   | )          | (119,386   | )          |
| Payroll taxes payable                                                            |   | 1,782      |       | (4,175     | )          |
| Interest payable                                                                 |   | 209,138    |       | 14,133     |       |
| Long term accrued liabilities                                                    |   | 15,910     |       | (6,102     | )          |
| Net cash utilized by operating activities                                        |   | (1,388,038 | )          | (1,207,632 | )          |
|                                                                             |   |       |       |       |       |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                       |   |       | ** ** |       | ** ** |
| Purchases of property, plant and equipment                                       |   | —     |       | (3,691     | )          |
| Increase in deposits                                                             |   | (550,000   | )          | (700,000   | )          |
| Net cash utilized by investing activities                                        |   | (550,000   | )          | (703,691   | )          |
|                                                                             |   |       |       |       |       |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                       |   |       |       |       |       |
| Proceeds from issuance of convertible debentures                                 |   | 350,000    |       | 275,000    |       |
| Proceeds from issuance of short term debt                                        |   | 1,715,000  |       | 2,082,425  |       |
| Payments on short term debt                                                      |   | (15,012    | )          | (409,314   | )          |
| Issuance of common stock                                                         |   | 3,751      |       | —     |       |
| Purchase of treasury stock                                                       |   | (39,999    | )          | —     |       |
| Issuance of preferred stock                                                      |   | —     |       | 57,485     |       |
| Dividends paid                                                                   |   | —     |       | (60,965    | )          |
| Net cash provided by financing activities                                        |   | 2,013,740  |       | 1,944,631  |       |
| Net decrease in cash                                                             |   | 75,702     |       | 33,308     |       |
| Cash at beginning of period                                                      |   | 50,631     |       | 17,249     |       |
|                                                                             |   |       |       |       |       |
| **CASH AT END OF PERIOD**                                                        |   | $          | 126,333    |       | $          | 50,557 |   |
|                                                                             |   |       |       |       |       |
| **SUPPLEMENTAL DISCLOSURE OF  NON-CASH ACTIVITIES**                              |   |       |       |       |       |
|                                                                             |   | —     |       | —     |       |
|                                                                             |   |       |       |       |       |
| **SUPPLEMENTAL DISCLOSURE OF CASH  FLOW INFORMATION**                            |   |       |       |       |       |
| Cash paid during the three months for:                                           |   |       |       |       |       |
|                                                                             |   |       |       |       |       |
| Interest                                                                         |   | $          | 28,212     |       | $          | 4,000 |   |
| Taxes                                                                            |   | $          | —     |       | $          | — |   |

 

Seeaccompanying notes to unaudited financial statements.

 

3

----

 

**MEDICOR LTD. NOTES TO CONSOLIDATED FINANCIALSTATEMENTS September 30, 2003**

**(Unaudited)**

 

**Note A - Business Activity**

 

MediCor Ltd.(the “Company” or “MediCor”) was incorporated in December 2000.  TheCompany acquires, develops, manufactures and markets products for medicalspecialties in aesthetic plastic and reconstructive surgery, and dermatologymarkets.  Products include surgically implantable prostheses for aestheticplastic and reconstructive surgery and scar management products.  TheCompany’s products are sold worldwide to hospitals, surgery centers and physiciansthrough various distributors and direct sales personnel.

 

**Note B - Summary of Significant AccountingPolicies**

 

**Basis of Presentation**

 

On February 7,2003, SC Merger 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, 2003merger 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.  

 

**Principles of Consolidation**

 

Theconsolidated financial statements include the accounts of the Company and allof its subsidiaries in which a controlling interest is maintained.  All intercompany accounts and transactionshave been eliminated.  Certain prior year amounts in previously issuedfinancial statements have been reclassified to conform to the current yearpresentation.  The consolidated financial statements have been prepared inUnited States dollars.

 

**Use of Estimates**

 

Financialstatements prepared in accordance with accounting principles generally acceptedin the United States require management to make estimates and judgments thataffect amounts and disclosures reported in the financial statements.  Actualresults could differ from those estimates.

 

4

----

 

**RevenueRecognition**

##### ** **

##### **The Company generally recognizesrevenue from product sales upon surgical implantation for consigned items andupon shipment for all others, provided that no significant post-deliveryobligations remain and collection of the resulting receivable is reasonablyassured.  When significant post-deliveryobligations exist, revenue is deferred until such obligations arefulfilled.  MediCor allows credit forproducts returned within its policy terms. Such returns are estimated and an allowance for product returns isrecorded at the time of sale as necessary.**

 

**Receivables**

 

The Company has reserved$3,262,322 against certain receivables due to issues regardingcollectibility.  The Company intends topursue all avenues to collect on amounts due.

##### ** **

**ProductWarranties**

##### ** **

III Acquisition Corp. d/b/aPIP.America (“PIP.America”), a subsidiary of the Company, provides a warrantyreplacement program to surgeons for deflations for a period of ten (10) yearsfrom the date of implantation.  For eachdeflation, the surgeon receives financial assistance plus a free replacement.Management estimated the amount of potential future warranty claims based onstatistical analysis.  Expected futureobligations are determined based on the history of product shipments and claimsand are discounted to a current value. Changes to actual claims and interest rates could have a material impacton the statistical calculation which could materially impact the Company’sreported expenses and results of operations.

##### ** **

**Accountingfor Long-Lived Assets**

##### ** **

The Company accounts forlong-lived assets, other than goodwill, in accordance with the provisions ofSFAS No. 144, “Accounting for the Impairment and Disposal of Long LivedAssets,” which supercedes SFAS No. 121 “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed of.”  This statement creates one accounting model,based on the framework established in SFAS No. 121, to be applied to alllong-lived assets including discontinued operations.  Adoption of this statement had no material effect on itsfinancial position or results of operations. SFAS No. 144 requires, among other things, that an entity review itslong-lived assets and certain related intangibles for impairment wheneverchanges in circumstances indicate that the carrying amount of an asset may notbe fully recoverable.  The Company doesnot believe that any such changes have taken place.

##### ** **

**Researchand Development**

##### ** **

Research and development costsare expensed by the Company as incurred, including the costs of clinicalstudies and other regulatory approval activities.

 

5

----

 

**Sharesand Share Amounts**

##### ** **

Effective as of February 7,2003, the Company merged with International Integrated Incorporated(“III”).  All references in thefinancial statements to the number of shares and per share amounts have beenretroactively restated to reflect the increased number of common stockoutstanding.

 

**Effects of Recent Accounting Pronouncements**

 

In June 2001,the Financial 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, 2001and SFAS No. 142 is effective January 2002 for companies having fiscal yearsbeginning after December 15, 2001. Under SFAS No. 142, goodwill will not be amortized, but will be subjectto impairment testing.  The Companyadopted SFAS No. 141 and SFAS No. 142 effective for the fiscal year beginningJuly 1, 2002.  The Company has evaluatedSFAS No. 141 and has determined that it will not have an effect on theCompany’s September 30, 2003 consolidated financial statements.  The absence of goodwill amortization as aresult of adopting SFAS No. 142 did not have a material effect on the Company’sconsolidated results of operations or financial position.  There was no indication that goodwill was impaired.

 

In August2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accountingfor Asset Retirement Obligations,” which addresses the financial accounting andreporting for obligations associated with the retirement of tangible long-livedassets and the associated asset retirement costs.  SFAS No. 143 is effective for fiscal years beginning after June15, 2002.  The Company has determinedthat SFAS No. 143 will not have an effect on the Company’s September 30, 2003financial statements.

 

In October2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets.” This statement replacesSFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to be Disposed of,” and provisions of Accounting PrinciplesBoard Opinion (“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,the Financial Accounting Standards Board issued SFAS No. 145, “Rescission ofFASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, andTechnical Corrections.” The most significant provisions of this statementrelate to the rescission of Statement No. 4, “Reporting Gains and Losses fromExtinguishment of Debt;” and it also amends other existing authoritativepronouncements to make various

 

6

----

 

technical corrections, clarifymeanings, or describe their applicability under changes conditions.  Under this new statement, any gain or losson extinguishment of debt that was classified as an extraordinary item in priorperiods that does not meet certain defined criteria as an extraordinary item inprior periods must be reclassified. This statement is effective for financial statements issued on or afterMay 15, 2002.  The Company has completedan evaluation of SFAS No. 145, and has determined that it will not have aneffect on the consolidated financial statements.

 

In June 2002,the Financial Accounting Standards Board issued SFAS No. 146, “Accounting forCosts Associated with Exit or Disposal Activities.”  This statement requires companies to recognize costs associatedwith exit or disposal activities when they are incurred rather than at the dateof a commitment 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 November2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others,” which clarifies disclosure and recognition /measurement requirements related to certain guarantees.  The disclosure requirements are effectivefor financial statements issued after December 15, 2002 and the recognition andmeasurement requirements are effective on a prospective basis for guaranteesissued or modified after December 31, 2002. The adoption of FI N45 did not have a material impact on the Company’sfinancial position, results of operations or cash flows.

 

On December 31, 2002, theFinancial Accounting Standards Board issued FASB Statement No. 148, “Accounting for Stock-Based Compensation -Transition and Disclosure.”  Statement 148 amends FASB StatementNo. 123, “Accounting for Stock-BasedCompensation,” to provide alternative methods of transition to Statement123’s fair value method of accounting for stock-based employeecompensation.  Statement 148 also amends the disclosure provisions ofStatement 123 and APB Opinion No. 28, “InterimFinancial Reporting,” to require disclosure in the summary ofsignificant accounting policies of the effects of an entity’s accounting policywith respect to stock-based employee compensation on reported net income andearnings per share in annual and interim financial statements.  While theStatement does not amend Statement 123 to require companies to account for employeestock options using the fair value method, the disclosure provisions ofStatement 148 are applicable to all companies with stock-based employeecompensation, regardless of whether they account for that compensation usingthe fair value method of Statement 123 or the intrinsic value method of Opinion25. Statement No. 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 Statement No. 148 in the fourth quarter of fiscal2003.  Adoption of this standard did not have a material effect on theCompany’s consolidated results of operations or financial position.

 

7

----

 

In January 2003, the FASBissued Interpretation No. 46, “Consolidation of Variable InterestEntities.”  A variable interest entity(“VIE”) is one where the contractual or ownership interest in an entity changewith changes in the entity’s net asset value. This interpretation requires the consolidation of a VIE by the primarybeneficiary, and also requires disclosure about VIEs where an enterprise has asignificant variable interest but is not the primary beneficiary.  At the effective date, the Company has notacquired an interest in any VIEs.

 

In April 2003, the FASB issuedSFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and HedgingActivities.”  SFAS No. 149 establishesaccounting and reporting standards for derivative instruments and for hedgingactivities.  This statement is effectivefor contracts entered into or modified after June 30, 2003.  The Company has determined that adoption ofSFAS No. 149 will not have a material effect on the Company’s financialposition or results of operations.

 

**Note C– Interim Reporting**

 

The accompanying unauditedconsolidated financial statements for the three- month periods ended September30, 2003 and September 30, 2002 have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial information and with instructions to Form 10-QSB andArticle 10 of Regulation S-X. Accordingly, they do not include all ofthe information and footnotes required by accounting principles generallyaccepted in the United States for complete financial statements. In the opinionof management, all adjustments (consisting only of normal recurring accruals,unless otherwise indicated) considered necessary for a fair presentation of theresults of operations for the indicated periods have been included. Certainamounts recorded in previous periods have been reclassified to conform to thecurrent period presentation. Operating results for the three months endedSeptember 30, 2003 are not necessarily indicative of the results for the fullfiscal year.

 

**Note D – Cash & Cash Equivalents**

 

All highly liquid investments with original maturities of three monthsor less at the date of purchase are considered to be cash equivalents.

 

**Note E – Accounts Receivable and NotesReceivable**

 

Accounts receivable at September 30, 2003 consisted of:

 
| Accounts  receivable             |   | $          | 3,436,773 |   |
|----------------------------------|--------|------------|-----------|--------|
| Allowance  for doubtful accounts |   | (3,262,322 | )         |
|                             |   |       |      |
| Total                            |   | $          | 174,451   |   |

 

8

----

 

PIP.America has a distribution agreement with a third-partymanufacturer (Poly Implants Protheses, S.A.) for certain surgically implantableprosthesis.  As part of the distributionagreement certain expenses are reimbursable to the Company by themanufacturer.  Accounts receivableconsist primarily of reimbursements associated with the PIP.America replacementprogram, clinical study expenses and returned products.

 

Changes in allowance for doubtful accounts are as follows:

 
| Balance July 1, 2003       |   | $       | 3,151,832 |   |
|----------------------------|--------|---------|-----------|--------|
| Provisions/(recovery)      |   | 110,490 |      |
| Write-offs                 |   | —  |      |
| Balance September 30, 2003 |   | $       | 3,262,322 |   |

 

**Note F – Inventories**

 

Inventoriesare stated at the lower of cost or market, cost determined by the first-in,first-out (FIFO) method.  The Company writes down its inventory forestimated obsolescence or unmarketable inventory equal to the differencebetween the cost of inventory and the estimated market value based uponassumptions about future demand and market conditions.

 

Inventories atSeptember 30, 2003 consisted of:

 
| Raw Materials  |   | $      | 118,165 |   |
|----------------|--------|--------|---------|--------|
| Finished Goods |   | 12,932 |    |
|           |   |   |    |
| Total          |   | $      | 131,097 |   |

 

The 2002 valueof consigned inventory of implants in physician offices on the books of thePIP.America subsidiary of the company was uncertain.  A voluntary withdrawal of such inventory from the market wasinitiated subsequent 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.  Duringthe three months ended September 30, 2003, inventory previously written down toa fair market value of zero was returned to the manufacturer for credit.

 

**Note G - Property and Equipment**

 

Property andequipment is stated at cost.  Depreciation is based on the useful lives ofthe properties 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

 

9

----

 

andbetterments are capitalized, while maintenance and repairs are charged tooperations as incurred.

 

Property andequipment at September 30, 2003 consisted of:

 
| Leasehold Improvements                |   | $        | 137,518 |   |
|---------------------------------------|--------|----------|---------|--------|
| Furniture, Fixtures and equipment     |   | 402,421  |    |
| Computer Equipment and tools and dies |   | 136,950  |    |
|                                  |   |     |    |
| Subtotal                              |   | 676,889  |    |
| Accumulated depreciation              |   | (340,893 | )       |
|                                  |   |     |    |
| Total                                 |   | $        | 335,996 |   |

 

Depreciationexpense was $38,744 for the three months ended September 30, 2003 and $25,001for the three months ended September 30, 2002.

 

## **NoteH – Goodwill and Other Intangibles**

 

Goodwill represents the excessof the purchase price over the estimated fair value of the identified assets(including other intangible assets) and liabilities assumed in the acquisitionof HPL Biomedical, Inc. d/b/a Biodermis (“Biodermis”).  The Company adopted SFAS No. 142 and nolonger amortized goodwill.  Otherintangible assets are recorded at fair value and amortized over periods rangingfrom 3 to 17 years.

## ** **

Goodwill and other intangiblesas of September 30, 2003 consisted of:

 
| Goodwill                 |   | $         | 1,219,210 |   |
|--------------------------|--------|-----------|-----------|--------|
| Distribution Agreements  |   | 225,000   |      |
| Non-compete              |   | 130,000   |      |
| Patents                  |   | 3,100,000 |      |
| Other                    |   | 23,083    |      |
|                     |   |      |      |
| Subtotal                 |   | 4,697,293 |      |
| Accumulated amortization |   | (363,333  | )         |
|                     |   |      |      |
| Total                    |   | $         | 4,333,960 |   |

 

The increase in goodwill andother intangibles net was due to the purchase of $3,000,000 of patents relatingto the March 18, 2003 acquisition of all of the outstanding shares of capitalstock of Intellectual Property International Inc., an intellectual propertyholding

 

10

----

 

company, as described in NoteQ, and amortization of patents and other intangibles of $89,382.  Amortization for the three months endedSeptember 30, 2002 was $17,117.

 

**NoteI – Deposits**

 

Deposits at September 30, 2003totaled $5,633,000.  In 2000, theCompany obtained the right to purchase a 7.5% common equity interest in athird-party manufacturer from its founder for $3,750,000.  In 2000, the Company made a non-refundabledeposit of $1,883,000 against the purchase price.  The Company is under no obligation to fund the remainder of thepayment or the exercise the purchase right. The remaining deposit balance of $3,750,000 is related to an assetpurchase agreement described in Note S.

 

**NoteJ – Accrued Expenses**

 

Accrued expenses and othercurrent liabilities at September 30, 2003 consisted of:

 
| Consulting               |   | $       | 842,500   |   |
|--------------------------|--------|---------|-----------|--------|
| Product warranty reserve |   | 404,591 |      |
| Other                    |   | 135,110 |      |
|                     |   |    |      |
| Total                    |   | $       | 1,382,201 |   |

 

Consulting fees consisted ofamounts relating to consulting agreements with key executives.

 

Other accrued expenses includedsalaries and employee benefits, legal and other miscellaneous accrued expenses.

 

Long-term accrued liabilitiesof $1,429,507 at September 30, 2003 consisted of product warranty reserves.

 

**NoteK – Convertible Debentures**

## ** **

Short-term convertibledebentures at September 30, 2003 were $410,000.  These convertible debentures pay 10-15% interest.  Interest is prepaid and amortized over thelife of the convertible debenture.  Theconvertible debentures are convertible within one year at the holder’sdiscretion to shares of Company common stock at a price of $4.02.  These convertible debentures mature betweenOctober 2003 and August 2004. During the three months ended September 30, 2002,$200,000 of short-term convertible debentures were rolled over into a newone-year debenture.

 

Long-term convertibledebentures at September 30, 2003 were $650,000.  The increase of $350,000 was due to issuance of long- termconvertible debentures paying 8% interest. Interest is prepaid and amortized over the life of the convertible debenture.The convertible debentures are convertible after one year and at the 18-month,24-month, 30-

 

11

----

 

month and 36-month anniversaryof the issuance date at the holder’s discretion to shares of Company commonstock at a price equal to the greater of $5.00 or seventy-five percent (75%) ofthe daily weighted average trading price per share of the Company’s commonstock over a period of twenty (20) trading days prior to the conversion date.These convertible debentures mature between April 2006 and August 2006.

## ** **

There were costs of $28,000associated with the above change in long-term convertible debentures, of which$2,074 was amortized. The remaining balance of $25,926 will be amortized overthe life of the long-term convertible debentures.

 

**NoteL – Notes Payable**

 

Notes payable were $207,758 atSeptember 30, 2003 and consisted of the following: $200,000 in one-year notespaying 8% interest and $7,758 in a nine-month term loan with an initialprincipal amount of $30,000 with an interest rate of 15%.  Interest on the 8% notes is payable quarterlyon the last calendar day of the quarter. At maturity, at the holder’s discretion, the 8% notes may be eitherrepaid or converted to shares of Company common stock at a mutually agreed uponprice per share.  The 15% loan wasprovided to a subsidiary of the Company from the spouse of a key employee ofthat subsidiary.

 

**Note M – Related Party Transactions**

 

International IntegratedIndustries, LLC (“LLC”) is a company in which the Company’s Chairman has acontrolling interest.  Neither theCompany nor any of its subsidiaries has any direct ownership in LLC.  LLC acted on behalf of the Company byfunding significant expenses incurred for which the Company has a revolvingloan agreement as shown on the Company’s Balance Sheet of $8,491,593 atSeptember 30, 2003.  The outstandingbalance of the note payable accrues interest at an annual interest rate of tenpercent (10%).  During the three monthsended September 30, 2003, LLC advanced $1,715,000 to the Company, of which nonewas converted to common stock and none was repaid.  Interest expense relating to this note payable was $200,367 forthe three months ended September 30, 2003. The unpaid liability for these expenses are included in the Company’snote payable to affiliates, which is contained in the financial statementspresented herein.  The Company had acommitment from LLC to fund operating shortfalls as necessary for the periodpresented.

 

**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:

 

12

----

 
|                                                  |   | **September  30,2003** |     | **September  30,2002** |   |
|-------------------------------------------------------|--------|------------------------|----------|------------------------|--------|
|                                                  |   |                   |     |                   |   |
| Current                                               |   | $                      | 389,248  |                   | $      | 342,720 |   |
| Deferred                                              |   | 263,086                |     | (4,227                 | )      |
|                                                  |   |                   |     |                   |   |
| Total Benefit                                         |   | 652,334                |     | 338,493                |   |
| Less allowance for realization of deferred  tax asset |   | $                      | (652,334 | )                      | $      | (338,493 | ) |
|                                                  |   |                   |     |                   |   |
| Benefit Net                                           |   | $                      | —   |                   | $      | — |   |

 

As of September 30, 2003 and September 30, 2002, the Company recordedallowances of $6,907,595 and $4,775,371, respectively, against certain futuretax benefits, the realization of which is currently uncertain.  Subsequent to the end of the periods noted,no deferred tax benefits were recorded as assets for taxable losses of theCompany.  The deferred differencesrelated to certain accounts receivable, accrued warranties, anddepreciation/amortization not currently deductible as expenses under IRSprovisions.  Although the Companyrecorded this allowance to the deferred tax assets, the Company may stillutilize the future tax benefits from net operating losses for 20 years from theyear of the loss to the extent of future taxable income.

 

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

 
|                                                   |   | **September  30, 2003** |      | **September  30, 2002** |   |
|--------------------------------------------------------|--------|-------------------------|-----------|-------------------------|--------|
|                                                   |   |                    |      |                    |   |
| Computed expected income tax  asset/(liability) at 34% |   | $                       | 389,248   |                    | $      | 342,720 |   |
| Adjustments                                            |   |                    |      |                    |   |
| Net operating loss                                     |   | 4,732,842               |      | 2,918,064               |   |
| Allowance for bad debt                                 |   | 1,100,233               |      | 1,090,125               |   |
| Warranty reserve                                       |   | 618,184                 |      | 365,206                 |   |
| Depreciation and amortization                          |   | 67,088                  |      | 59,256                  |   |
|                                                   |   |                    |      |                    |   |
| Income tax benefit                                     |   | $                       | 6,907,595 |                    | $      | 4,775,371 |   |
| Less allowance for realization of deferred  tax asset  |   | (6,907,595              | )         | (4,775,371              | )      |
|                                                   |   |                    |      |                    |   |
| Deferred tax asset, net                                |   | $                       | —    |                    | $      | — |   |

 

**Note O – Loss per Share**

 

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

 

13

----

 
|                                          |   | **Three Months  Ended  September 30, 2003** |   | **Three  Months Ended  September 30, 2002** |   |
|-----------------------------------------------|--------|---------------------------------------------|--------|---------------------------------------------|--------|
|                                          |   |                                        |   |                                        |   |
| Weighted average outstanding shares: basic    |   | 17,547,156                                  |   | 14,569,087                                  |   |
| Common equivalent shares                      |   | —                                      |   | —                                      |   |
| Weighted average outstanding shares:  diluted |   | 17,547,156                                  |   | 14,569,087                                  |   |

 

Certain commonequivalent shares have been excluded from the computation of diluted earningsper share because their effect would be anti-dilutive.

 

**NoteP – Stock Options and Warrants**

 

The Company has a stock optionplan for key employees and consultants. There were 1,242,680 shares reserved for issuance pursuant to theCompany’s stock option plan and up to 6,000,000 shares were reserved forissuance pursuant to stand-alone options granted in connection with employmentagreements.  The Company accounts forthose plans under the recognition and measurement principles of APB Opinion No.25, “Accounting for Stock Issued to Employees,” and relatedinterpretations.  No stock-basedemployee compensation cost is reflected in net income, as all options granted underthose plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant.

 

The Company’s share optionactivity and related information is summarized below:

 
|                                       |   | **Three  Months Ended September 30, 2003** |   |
|--------------------------------------------|--------|--------------------------------------------|--------|
|                                       |   | **Options**                                |   | **Weighted  Average  Exercise Price** |   |
|                                       |   |                                       |   |   |   |
| Options outstanding at beginning of period |   | 3,038,356                                  |   | $ | 0.93 |   |
| Granted                                    |   | 320,000                                    |   | $ | 1.26 |   |
| Exercised                                  |   | (46,600                                    | )      | $ | 0.08 |   |
| Cancelled                                  |   | (77,668                                    | )      | $ | 1.47 |   |
|                                       |   |                                       |   |   |   |
| Options outstanding at end of period       |   | 3,234,088                                  |   | $ | 0.96 |   |
|                                       |   |                                       |   |   |   |
| Options exercisable at end of period       |   | 1,947,751                                  |   | $ | 0.44 |   |

 

The following table summarizesinformation about stock options outstanding at September 30, 2003:

 

14

----

 
| **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                 |   | 1,559,563              |   | 2.0 |   | $ | 0.08 |   | 1,550,242 |   | $ | 0.08 |   |
| $1.00 - $2.01                 |   | 1,554,525              |   | 5.1 |   | $ | 1.35 |   | 392,509 |   | $ | 1.80 |   |
| $3.00 - $3.80                 |   | 120,000                |   | 6.8 |   | $ | 0.63 |   | 5,000 |   | $ | 3.80 |   |

 

The following table illustratesthe effect on net income and earnings per share if the Company had applied thefair value recognition provisions of FASB Statement No. 123, “Accounting forStock-Based Compensation,” to stock-based employee compensation including therequired disclosures of FAS 148.

 
|                                                                                                                                                |   | **Three  Months Ended  September 30, 2003** |       | **Three  Months Ended  September 30, 2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|------------|---------------------------------------------|--------|
|                                                                                                                                                |   |                                        |       |                                        |   |
| Net Loss, as reported                                                                                                                               |   | $                                           | (1,144,847 | )                                           | $      | (1,068,965 | ) |
| Deduct:   Total stock-based employee compensation expense determined under fair  value based method for all awards, net of related tax effects |   | (223,701                                    | )          | (36,984                                     | )      |
|                                                                                                                                                |   |                                        |       |                                        |   |
| Pro forma net loss                                                                                                                                  |   | $                                           | (1,368,548 | )                                           | $      | (1,105,949 | ) |
|                                                                                                                                                |   |                                        |       |                                        |   |
| Loss per share:                                                                                                                                     |   |                                        |       |                                        |   |
| Basic and diluted                                                                                                                                   |   | $                                           | (0.07      | )                                           | $      | 0.07 |   |
|                                                                                                                                                |   |                                        |       |                                        |   |
| Basic and diluted - pro forma                                                                                                                       |   | $                                           | (0.08      | )                                           | $      | (0.08 | ) |

 

These pro forma amounts may notbe representative of future disclosures since the estimated fair value of stockoptions is amortized to expense over the vesting period, and additional optionsmay be granted in future years.

 

The estimated fair value ofeach MediCor option granted is calculated using the Black-Scholes pricingmodel. The weighted average assumptions used in the model were as follows:

 

|                          |   | **2003**  |   | **2002**  |   |
|-------------------------------|--------|-----------|--------|-----------|--------|
|                          |   |      |   |      |   |
| 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         | %      |

 

15

----

 

The Company also issuedwarrants to purchase 86,988 shares of common stock to consultants in connectionwith consulting agreements. Warrants were granted between 1999 and 2001 atprices between $.08 and $1.61.  Allwarrants granted had an exercise price equal to the market value of theunderlying common stock on the date of grant.

 

**NoteQ – Acquisitions**

 

On February 7, 2003, SC MergerCorp., Ltd., a British Virgin Islands company and wholly owned subsidiary ofthe Company, merged with and into III, a British Virgin Islands company, withIII as the surviving entity.  The mergerhas been accounted for as a reverse acquisition.  In accordance with Statement of Financial Accounting StandardsNo. 141, for accounting purposes III has been treated as the continuingreporting entity that acquired Scientio, Inc. (the Company's former name).  Therefore, the reports filed by the Companyafter the reverse acquisition parallel the financial reporting required undergenerally accepted accounting principles as if III were the legal successor toScientio, Inc.’s reporting obligation as of the date of the merger.  The Quarterly Report on Form 10-QSB is filedbased on the fiscal year of III, the accounting acquirer.  In the merger, all of the outstanding sharesof capital stock of III were converted into an aggregate of 15,079,439 sharesof common stock of the Company based on a conversion ratio of 1.24268 shares ofCompany common stock for each outstanding share of III capital stock.  As part of the conversion, all outstandingpreferred stock of III was converted into common shares of the Company.  Additionally, 661,900 shares were issued toshareholders of Sciento, Inc. in conjunction with the merger.

 

On March 18, 2003, the Companyacquired all of the outstanding shares of capital stock of IntellectualProperty International Inc., a Delaware corporation (“IPI”), an intellectualproperty holding company, in consideration of the issuance of an aggregate of600,000 shares of the Company’s common stock to the stockholders of IPI.  As a result of the acquisition the Companyacquired patents valued at $3,000,000.

## ** **

**NoteR - Business Segment Information**

## ** **

The Company operates as asingle business in multiple geographic locations within the U.S. andinternationally in the medical device technology segment of the medical/healthcare market, and as such does not have multiple segments to report.  Revenues from customers attributable to anyindividual foreign country were not material.

 

16

----

 

**NoteS – Commitments and Contingencies**

 

The Companyhas received a written commitment from International Integrated Industries,LLC, an affiliate of the Company’s chairman, to provide sufficient cash to fundany operating loss through September 30, 2004. The same entity has provided the Company an aggregate of over $24million in funding from the Company’s inception through September 30, 2003.  The future funding may take the form of debtor equity or a combination thereof.

 

Pursuant to anAsset Purchase 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, the purchaseprice was amended to equal the deposits made by the Company as of October 16,2003, plus an additional agreed payment in cash at closing and the issuance ofMediCor Ltd. equity at closing.  Theclosing is conditioned upon the distributor acquiring necessary governmentalapprovals for commercialization in the United States of the products to bedistributed, which the Company anticipates will occur before the end of thesecond quarter of fiscal 2004.  TheCompany is no longer obligated to make additional deposits against the purchaseprice, but the Company has committed to fund all future expenses associatedwith obtaining required government approvals.

 

In October 1999, June 2000 andJuly 2003, separate but related complaints were filed by Saul Kwartin,  Steven M. Kwartin, and Robert and NinaKwartin respectively, and various other unnamed plaintiffs, against IIIAcquisition Corporation, a Delaware corporation (which operates under thetradename PIP.America), a subsidiary of MediCor, as co-defendant with PIP/USA,Inc. and Poly Implants Protheses, S.A., each unaffiliated with MediCor, andJean Claude Mas and our chairman, personally, in the Circuit Court ofMiami-Dade County, Florida.  In thefirst two cases, plaintiffs purport to be shareholders of PIP/USA, Inc. suingderivatively on its behalf, and seeking to rescind various transactions betweenPIP.America and PIP/USA, Inc. and seek to impose liability against PIP.Americaand its co-defendants for unspecified monetary damages arising out of allegedtortuous and other purported wrongful acts concerning alleged relationshipsbetween plaintiffs, PIP/USA, Inc. and Poly Implants Protheses, S.A.  In the third case, filed in 2003, MediCor isnamed but has not yet been served, but does anticipate being a defendant.

 

Peggy Williams v. PIP/USA, CaseNo. 03 CH 9654, Jessica Fischer Schnebel, et al. v. PIP/USA, Inc., Case No.03CH07239, Dawn Marie Cooper, et al. v. PIP/USA, Inc., Case No. 03CH11316,Miriam Furman, et al. v. PIP/USA, Inc., Case No. 03CH10832 and Karen S. Witt,et al. v. PIP/USA, Inc., Case No. 03CH12928 were filed in the Circuit Court ofCook County, Chancery Division, in or around July 2003.   Counsel for Jessica Fischer Schnebel, etal. v. PIP/USA, Inc., Case No. 03CH07239 has been granted leave to amend theircomplaint to include plaintiffs from the other four cases, after which each ofthe others will be voluntarily dismissed. The matter is set for a status check on November 21, 2003.  The amended complaint will likely take theform of a class action, but we have yet to see what counts will be allegedagainst PIP.America.  It is likely thatunspecific monetary damages, exemplary damages, attorneys fees and costs,

 

17

----

 

injunctive relief and damagesunder the Illinois Consumer Fraud Act will be sought, and that plaintiffs willallege general product liability counts against PIP.America, as they havealleged previously.

 

Salinas I. Landers, etc. et al.v. Poly Implants Protheses, S.A. et al., Case No. CV 030377, was filed in June2003 in the Superior Court of San Luis Obispo County, California.  Plaintiffs purport to sue on behalf ofthemselves and an alleged class of persons allegedly similarly situated forunspecific monetary damages, exemplary damages, attorneys’ fees and costs andinjunctive relief for alleged breach of express warranty and alleged violationsof California’s Song-Beverly Consumer Warranty Act and Unfair Competition Law.   PIP.America is to file an answer to thecomplaint on or before November 7, 2003, which will deny the allegations madeagainst it.  A case managementconference is scheduled for December 7, 2003.

 

Marsha Dicken etc. et al. v.PIP/USA, Inc., et al., Case No. 2003-05588, was filed in or around July 2003 inthe District Court of Harris County, Texas. Plaintiffs purport to sue on behalf of themselves and an alleged classof persons allegedly similarly situated for alleged strict liability, breach ofexpress warranty, breach of implied warranties, violation of Section 402B ofthe Restatement (Second) of Torts, negligence, misrepresentations, andviolation of Texas’ Deceptive Trade Practices Act with respect to implantproducts.  Plaintiffs seek unspecificcompensatory damages, additional statutory damages, interest, attorneys’ feesand costs.  The court has scheduled apretrial conference to be held on June 18, 2004, and has specified that a trialdate will be set shortly thereafter.

 

Though it is not yet possibleto predict the outcome of the cases above, MediCor has denied plaintiffs’allegations and is vigorously defending against certification of any class, andupon the merits of each lawsuit.  Whilewe are desirous to honor our obligations under warranty provisions, we arefully indemnified by PIP/USA, Inc., Poly Implants Protheses, S.A., and PolyImplants Protheses, S.A. President Jean Claude Mas personally, from all claims,including those asserted above, and thus believe the costs associated with suchmatters will not have a material adverse impact on our business, results ofoperations or financial position.

 

We and our subsidiaries havebeen and will continue to be periodically named as a defendant in otherlawsuits in the normal course of our business, including product liability andproduct warranty claims asserted against us. Litigation, particularly product liability litigation, can be expensiveand disruptive to normal business operations and the results of complex legalproceedings can be very difficult to predict. Claims against us have been and are periodically reviewed with counselin the ordinary course of business.  Wepresently believe we have meritorious defenses in all lawsuits in which we orany of our subsidiaries are defendants. While it is not possible to predict the outcome of such matters, webelieve that the costs associated with such matters will not have a materialadverse impact on our business, results of operations.

 

18

----

 

The Companyleased office, manufacturing and warehouse facilities and office equipmentunder various terms.  Lease expensesamounted to $92,985 and $136,611 for the three months ended September 30, 2003and 2002, respectively.  Future minimumlease payments are approximated as follows:

 
| **Year ended  September 30,** |   | **Amount** |   |
|-------------------------------|--------|------------|--------|
|                          |   |       |   |
| 2004                          |   | 223,370    |   |
| 2005                          |   | 231,033    |   |
| 2006                          |   | 240,037    |   |
| 2007                          |   | 249,401    |   |
| 2008                          |   | 117,829    |   |

 

**Note T – Subsequent Events**

 

As discussedin Note S, on October 16, 2003 the Asset Purchase Agreement signed April 25,2002 where the Company agreed to acquire substantially all of the assets of aprivately-held United States medical products distributor was amended.

 

19

----

 

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

 

This Quarterly Report on Form 10-QSB, including thefollowing “Management’s Discussion and Analysis or Plan of Operation,” containsforward-looking statements that involve risks and uncertainties, as well asassumptions that, if they ever materialize or prove incorrect, could cause theresults of the Company to differ materially from those expressed or implied bysuch forward-looking statements.  All statements other than statements ofhistorical fact are statements that could be deemed forward-looking statements,including: statements regarding new and existing products, technologies andopportunities; statements regarding market and industry segment growth anddemand and acceptance of new and existing products any projections of sales,earnings, revenue, margins or other financial items; any statements of theplans, strategies and objectives of management for future operations, includingthe execution of acquisition plans; any statements regarding future economicconditions or performance; any statements of belief or intention; and anystatements of assumptions underlying any of the foregoing.  Factors thatmay cause such differences include, but are not limited to: increasedcompetition; 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**

 

MediCor acquires, develops, manufactures and marketsproducts for medical specialties in aesthetic, plastic and reconstructivesurgery and dermatology markets.  Products include surgically implantableprostheses for aesthetic, plastic and reconstructive surgery and scarmanagement products.  Our products are sold worldwide to hospitals,surgery centers and physicians through various distributors and direct salespersonnel.

 

MediCor has two main product lines –

 

•                                          surgically implantable prostheses foraesthetic plastic and reconstructive surgery; and

•                                          scar management products.

 

***Breast Aesthetics***

 

Currently, we are awaiting the required FDAclearance to sell saline breast implants in the United States.  Theseproducts are typically sold on both a direct and a consigned inventory basis.

 

***Scar ManagementProducts***

 

In the United States, Biodermis distributes itsproducts to dermatologists, dermatological surgeons, aesthetic, plastic andreconstructive surgeons and Obstetric/Gynecologists through a combination of a

 

20

----

 

direct sales force anddistributors.  Internationally, Biodermis distributes to the same fieldsof medicine through approximately 70 distributors in about 50 countries,including Canada and Mexico.

 

**APPLICATION OF CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

Management’s Discussion and Analysis or Plan ofOperation addresses MediCor’s consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States.  The preparation of these financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.  On an on-going basis,we evaluate our estimates and judgments, including those related to revenuerecognition, inventories, adequacy of allowances for doubtful accounts,valuation of long-lived assets and goodwill, income taxes, litigation andwarranties.  We base our estimates on historical and anticipated resultsand trends and on various other assumptions that we believe are reasonableunder the circumstances, including assumptions as to future events.  Thepolicies discussed below are considered by management to be critical to anunderstanding of our financial statements. These estimates form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources.  By their nature, estimates are subject to an inherent degree ofuncertainty.  Actual results may differ from those estimates.

 

Management has identified the critical accountingpolicies to be those related to revenue recognition, inventories, adequacies ofallowances for doubtful accounts, valuation of long-lived assets and goodwill,income taxes, litigation and warranties.

 

**RESULTS OF OPERATIONS**

 

***Sales***

 

Sales for the three months ended September 30, 2003decreased $83,056, from $419,396 to $336,340 for the same period in2002. This 25% decrease was driven by lower unit sales, primarily due tothe timing of orders from one large customer.

 

***Cost of Sales***

 

Cost of sales as a percentage of net sales for thethree months ended September 30, 2003 were approximately 23% compared toapproximately 35% during the same period in 2002. This excludes a benefitof $22,575 from a return of consigned inventory previously written down. Theoverall reduction in costs of sales was due to lower sales, as well as overallhigher per unit sales reflecting a change in product mix. Normally, we expectthat cost of sales will remain relatively constant on a percentage basis ofapproximately 35% to 40%.

 

***Selling, General and Administrative***

 

Selling, general and administrative expensesdecreased 4% to $1,187,845 for the three months ended September 30, 2003, ascompared to $1,241,612 during the same period in 2002.   This was a result of various lower costsincluding rent and professional fees. As our business and sales increase, we anticipate that SG&A expenseswill increase in absolute dollars, but decrease as a percentage of sales.

 

***Research and Development***

 

Research and development expenses in the recentquarter declined $12,555 or 58% from the same period in 2002 due to the timingof various costs.  We expect thatresearch and development expenses will increase as our business matures.

 

21

----

 

***Interest Expense***

 

Interest expense increased to $228,579 for the threemonths ended September 30, 2003, compared to $18,133 in same period in theprior year.  Interest expense consistsprimarily of interest related to borrowings.  The change in interestexpense was primarily due to an increase in the average principal note payableto related party balances and an increase in convertible debentures.

 

***Net Loss***

 

Net loss for the three months ended September 30,2003 increased to $1,144,847 from $1,068,965 in the comparable period in theyear.  The decline was due to lower sales and higher interestexpenses.  Basic and diluted loss pershare was ($0.07) for current three month period compared to ($0.07) for thecomparable period last year.  Net losses are primarily attributable to thesubstantial costs associated with facilitating FDA Pre-Market Approvals forproducts sought to be sold by MediCor and limited sales of our currentproducts.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

Our ability to make payments to refinance our debtand to fund planned capital expenditures and operations will depend on ourability to secure additional significant financing and generate sufficient cashin the future.  Because we have only limited product sales and will not bein a position to materially increase sales until the FDA issues a pre-marketapproval relating to one or more of the products sought to be sold by us, wehave historically raised funds to support our operating expenses and capitalrequirements through sales of equity or debt securities or through other creditarrangements, including borrowing from our affiliates.  Our existing cash,cash equivalent and cash generated from operations will be insufficient to meetour anticipated cash needs for the next 12 months.  To satisfy ourliquidity requirements, we will need to raise additional funds.  To theextent additional sales of equity or debt securities are insufficient tosatisfy our liquidity requirements, we expect that we will be able to obtainany necessary additional funds through the incurrence of additionalindebtedness to our affiliates.  We have received a written commitmentfrom International Integrated Industries, LLC, an affiliate of our chairman, toprovide sufficient cash to fund any operating expenses and capital expendituresthrough September 30, 2004.  The same entity has provided to MediCor over$24 million in funding from our formation through September 30, 2003.  Thefuture funding may take the form of debt or equity or a combination thereof.

 

**FACTORS THAT MAY AFFECT FUTURE RESULTS**

 

Certain statements contained in this QuarterlyReport on Form 10-QSB, and other written and oral statements made fromtime to time by us, do not relate strictly to historical facts. Thesestatements are considered “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. Words such as “anticipate,” “believe,”“could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “possible,”“project,” “should,” or “will,” or similar words or expressions, are intendedto identify forward looking statements. This forward-looking informationinvolves important risks and uncertainties that could materially alter resultsin the future from those expressed in any forward-looking statements made by,or on behalf of, the Company. We caution you that such forward-lookingstatements are only predictions and that actual events or results may differmaterially. In evaluating such statements, you should specifically consider thevarious factors that could cause actual events or results to differ materially,including those factors described below. It is not possible to foresee oridentify all factors affecting our forward-looking statements and you shouldnot consider any list of such factors to be exhaustive. We are under no duty toupdate any forward-looking statements.

 

***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.***

 

We have in the past been, currently are, and may inthe future be subject to product liability claims alleging that the use of ourtechnology or products has resulted in adverse health effects.  Theseclaims may

 

22

----

 

be brought even with respect toproducts that have received, or in the future may receive, regulatory approvalfor commercial sale.  In particular, the manufacture and sale of breastimplant products entails significant risk of product liability claims due topotential allegations of possible disease transmission and other healthfactors, rupture or other product failure.  Other breast implantmanufacturers that suffered such claims in the past have been forced to ceaseoperations or even to declare bankruptcy.  We may also face a substantialrisk of product liability claims from other products we may choose to sell. Inaddition to product liability claims, we may in the future need to recall orissue field corrections related to our products due to manufacturingdeficiencies, labeling errors, or other safety or regulatory reasons.

 

We do not presently have liability insurance toprotect us from the costs of claims for damages due to the use or recall of ourproducts, except that Biodermis carries a limited amount of product liabilityinsurance related to its products.  We may in the future seek additionalinsurance, which will be limited in circumstance of coverage and limited inamount.  Recent premium increases and coverage limitations may make thisinsurance uneconomic.  However, even if we obtain or increase suchinsurance, one or more product liability claims or recall orders could exceedany coverage we may hold.  If we continue to have limited or no coverageor our insurance does not provide sufficient coverage, product liability claimsor recalls could result in material losses in excess of our reserves.

 

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

 

Physicians and potential patients may have a numberof concerns about the safety of our products, whether such concerns have abasis in generally accepted science or peer-reviewed scientific research ornot.  Negative publicity—whether accurate or inaccurate—about ourproducts, based on, for example, news about breast implant litigation, couldmaterially reduce market acceptance of our products and could result in productwithdrawals. In addition, significant negative publicity could result in anincreased number of product liability claims, whether or not these claims havea basis in scientific fact.

 

***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*****.**

 

Our quarterly operating results may varysignificantly due to a combination of factors, many of which are beyond ourcontrol. 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, introduce and marketnew and enhanced versions of our products on a timely basis;

•                  changes in pricing policies by us and ourcompetitors;

•                  the timing of significant orders andshipments;

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

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

•                  general economic factors.

 

As a result, we believe that period-to-periodcomparisons of our results of operations are not necessarily meaningful and youshould not rely upon these comparisons as indications of future performance. These factors may cause our operating results to be below market analysts’expectations in some future quarters, which could cause the market price of ourstock to decline.

 

23

----

 

***If changes in the economy and consumer spending reduce consumer demandfor our products, our sales and profitability will suffer.***

 

Breast augmentation and reconstruction and otheraesthetics procedures are elective procedures.  Other than U.S. federallymandated insurance reimbursement for post-mastectomy reconstructive surgery,breast augmentations and other cosmetic procedures are not typically covered byinsurance. Adverse changes in the economy may cause consumers to reassess theirspending choices and reduce the demand for cosmetic surgery.  This shiftcould have an adverse effect on our future sales and profitability.

 

***If we are unable to develop and market new products and technologies,we may experience a decrease in demand for our products or our products couldbecome obsolete.***

 

The medical device industry is highly competitiveand is subject to significant and rapid technological change.  We believethat our ability to respond quickly to consumer needs or advances in medicaltechnologies, without compromising product quality, will be crucial to oursuccess.  We are continually engaged in product development andimprovement programs to establish and improve our competitive position. We cannot, however, guarantee that we will be successful in enhancing existingproducts or developing new products or technologies that will timely achieveregulatory approval or receive market acceptance.

 

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

 

The degree of market acceptance of any medicaldevice or other product that we develop will depend on a number of factors,including demonstrated clinical efficacy and safety, cost-effectiveness,potential advantages over alternative products, and our marketing anddistribution capabilities.  The relative size of our company may alsoaffect market acceptance of our products.  Physicians will not recommendour products until clinical data or other factors demonstrate their safety andefficacy compared to other competing products.  Even if the clinicalsafety and efficacy of using our products is established, physicians may electnot to recommend using them for any number of other reasons, including whetherour products best meet the particular needs of the individual patient and theiroverall evaluation of our company.

 

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

 

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

 

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

 

•                  lack of efficacy during the clinical trials;

•                  unforeseen safety issues;

•                  slower than expected patient recruitment; and

•                  government or regulatory delays.

 

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

 

24

----

 

trials will materially andadversely affect our development and commercialization timelines, which wouldcause our stock price to decline.

 

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

 

To accomplish our plans to expand our currentproduct lines and markets, purchase new companies, products and intellectualproperty, we need substantial additional capital which we may not be able toobtain.  While we have to date been funded in substantial part fromfinancing from an affiliate of our chairman, we do not anticipate this fundingsource will provide sufficient capital to finance our intended growth strategyand that we will need significant external financing to accomplish ourgoals.  We are currently negotiating with potential equity and debtproviders to obtain additional financing, but this additional financing may notbe available on terms that are favorable to us, or at all.  If adequatefunds are not available, or are not available on acceptable terms, our abilityto implement our expansion and growth plans will be significantly impaired.

 

***Because we have only a limited operating history and our businessstrategy calls for significant growth, there is a limited basis on which tomake an evaluation of our business and prospects*****.**

 

MediCor and its subsidiaries have only beenoperating since 1999.  Although our Biodermis operation has been inexistence for a longer period of time, it has only operated under MediCor’smanagement since its acquisition in 2001.  Significantly, during much ofour history we have also been prevented from selling our primary existingproduct, saline breast implants, in the U.S. market due to the FDA’s 2000 callfor a Pre-Market Approval for that product.   As a result, all of ourcurrent revenues have been derived from our scar management products. Revenue generated by our Biodermis subsidiary has not been significant, and wedo not expect more than modest internal growth in that segment.  Ourbusiness plans call for significant expansion into other markets that in thefuture it will constitute the significant majority of our sales andincome.  As a result, our existing business platform is not necessarilyindicative 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.***

 

Risks for MediCor include the uncertaintiesassociated with developing and implementing an evolving business model and themanagement of both internal and acquisition-based growth.  To addressthese risks, we must continue to develop the strength and quality of ouroperations, maximize the value delivered to customers, respond to competitivedevelopments and continue to attract, retain and motivate qualifiedemployees.  We may not be successful in addressing these challenges.

 

***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.***

 

A key component of our growth strategy is theacquisition of other companies, products and technologies that meet ourcriteria for strategic fit, geographic presence, revenues, profitability,growth potential and operating strategy.  The successful implementation ofthis strategy depends on our ability to identify suitable acquisitioncandidates, acquire companies and assets on acceptable terms and integratetheir operations successfully.

 

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

 

25

----

 

Acquisitions also involve a number of other risks,including the risks of acquiring undisclosed or undesired liabilities, acquiredin-process technology, stock compensation expense and increased compensationexpense resulting from newly hired employees, the diversion of management attention,potential disputes with the sellers of one or more acquired entities and thepossible failure to retain key acquired personnel.  Client satisfaction orperformance problems with an acquired business or product line could also havea negative impact on our reputation as a whole, and any acquired entity orassets could significantly under-perform relative to our expectations. Our ability to meet these challenges has not been established.

 

We expect that, at least for the foreseeable future,we will be required to use cash consideration for acquisitions.  We likelywill be required to obtain significant third-party financing to accomplishthese acquisitions.  This financing may not be available on favorableterms, if at all.  If we issue stock to complete future acquisitions,existing stockholders will experience ownership dilution.

 

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

 

Our success will depend upon our ability to manageour internal and acquisition growth effectively.  This will require thatwe continue to implement and improve our operational, administrative andfinancial and accounting systems and controls and continue to expand, train andmanage our employee base.  We anticipate that we will need to hire andretain numerous additional employees and consultants for both internal andacquisition-based growth for some time.  Integration of these employeesand consultants and employee and consultant loss in the process will requiresignificant management attention and resources.  Our systems, proceduresand controls may not be adequate to support our future operations and ourmanagement may not be able to achieve the rapid execution necessary to exploitthe market for our business model.

 

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

 

We have in the past and may in the future enter intoconsulting or collaborative arrangements with third parties to developproducts.  These arrangements may not produce successful products. If we fail to establish these arrangements, the number of products from whichwe could receive future revenues will be limited.

 

Our dependence on consulting or collaborativearrangements with third parties subjects us to a number of risks.  Thesearrangements may not be on terms favorable to us.  Agreements withconsultants or collaborative partners typically allow the third parties significantdiscretion in electing whether or not to pursue any of the plannedactivities.  We cannot absolutely control the amount and timing ofresources our consultants or collaborative partners may devote to our products,and these third parties may choose to pursue alternative products.  Thesethird parties also may not perform their obligations as expected. Business combinations, significant changes in their business strategy, or theiraccess to financial resources may adversely affect a consultant’s or partner’swillingness or ability to complete its obligations under thearrangement.   Moreover, we could become involved in disputes withour consultants or partners, which could lead to delays or termination of thearrangements and time-consuming and expensive litigation or arbitration.

 

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

 

Our success will depend upon our ability to attractand retain key managerial, financial, technical, selling and marketingpersonnel.  The lack of key personnel might significantly delay or preventthe achievement of our development and strategic objectives.  We do notmaintain key man life insurance on any of our employees, and none of ouremployees is under any obligation to continue providing services toMediCor.  We are currently in the process of building our management andtechnical staffs.  We believe that our success will depend to asignificant extent on the ability of our key personnel, including the new

 

26

----

 

management and technicalstaffs, to operate effectively, both individually and as a group. Competition for highly skilled employees in our industry is high, and we cannotbe certain that we will be successful in recruiting or retaining suchpersonnel.

 

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

 

Our success depends in part on our ability to obtainpatents or rights to patents, protect trade secrets, operate without infringingupon the proprietary rights of others, and prevent others from infringing onour patents, trademarks and other intellectual property rights.  We willbe able to protect our intellectual property from unauthorized use by thirdparties only to the extent that it is covered by valid and enforceable patents,trademarks and licenses.  Patent protection generally involves complexlegal and factual questions and, therefore, enforceability of patent rightscannot 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. Inaddition, our pending and future patent applications may fail to result inpatents being issued. Also, those patents that are issued may not provide uswith adequate proprietary protection or competitive advantages againstcompetitors with similar technologies.  Moreover, the laws of certainforeign countries do not protect our intellectual property rights to the sameextent as do the laws of the United States.

 

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

 

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

 

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

 

***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.***

 

We currently rely on a single supplier for siliconeraw materials used in many of our products.  Although we have an agreementwith this supplier to transfer the necessary formulations to us in the eventthat it cannot meet our requirements, we cannot guarantee that we would be ableto produce a sufficient amount of quality silicone raw materials in a timelymanner.   We will also depend on a sole or limited number ofthird-party manufacturers for silicone breast implants to be distributed by us.

 

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

 

A significant part of our current sales are and asignificant part of our projected future sales will be derived frominternational operations.  In addition, we anticipate having materialinternational operations, including, potentially, manufacturingoperations.  Accordingly, we will be exposed to risks associated withinternational operations, including risks associated with re-valuation of thelocal currencies of countries where we sell our products or conduct business,which may result in our products becoming more expensive in local currency terms,thus reducing demand or in increased costs to us.  Our operations andfinancial results also may be significantly affected by other internationalfactors, including:

 

•                  foreign government regulation of medicaldevices;

•                  product liability claims;

 

27

----

 

•                  new export license requirements;

•                  political or economic instability in ourtarget markets;

•                  trade restrictions;

•                  changes in tax laws and tariffs;

•                  inadequate protection of intellectualproperty rights in some countries;

•                  managing foreign distributors, manufacturersand staffing; and

•                  managing foreign branch offices.

 

If these risks actually materialize, our sales tointernational customers, as well as those domestic customers that use productsmanufactured abroad, may decrease.

 

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

 

The production and marketing of our products andintended products and research and development, pre-clinical testing andclinical trial activities are subject to extensive regulation and review bynumerous governmental authorities both in the U.S. and abroad.  Most ofthe medical devices we intend to sell or develop must undergo rigorouspre-clinical and clinical testing and an extensive regulatory approval processbefore they can be marketed.  This process makes it longer, harder andmore costly to bring the products to market, and some of these products may notbe approved, or, once approved, they may be recalled.  The pre-marketingapproval process can be particularly expensive, uncertain and lengthy, and anumber of devices for which FDA approval has been sought by other companieshave never been approved for marketing. In addition to testing and approvalprocedures, extensive regulations also govern marketing, manufacturing,distribution, labeling, and record-keeping procedures.  If we or ourcollaborative partners do not comply with applicable regulatory requirements,such violations could result in warning letters, non-approval, suspensions ofregulatory approvals, civil penalties and criminal fines, product seizures andrecalls, operating restrictions, injunctions, and criminal prosecution.

 

Delays in or rejection of FDA or other governmententity approval of new products may also adversely affect our business. Such delays or rejection may be encountered due to, among other reasons,government or regulatory delays, lack of efficacy during clinical trials,unforeseen safety issues, slower than expected rate of patient recruitment forclinical trials, inability to follow patients after treatment in clinicaltrials, inconsistencies between early clinical trial results and resultsobtained in later clinical trials, varying interpretations of data generated byclinical trials, or changes in regulatory policy during the period of productdevelopment in the U.S. and abroad.  In the U.S., there has been acontinuing trend of more stringent FDA oversight in product clearance andenforcement activities, causing medical device manufacturers to experiencelonger approval cycles, more uncertainty, greater risk, and higherexpenses.  Internationally, there is a risk that we or our collaborativepartners may not be successful in meeting the quality standards or othercertification requirements.  Even if regulatory approval of a product isgranted, this approval may entail limitations on uses for which the product maybe labeled and promoted. It is possible, for example, that we or ourcollaborative partners may not receive FDA approval to market our currentproducts for broader or different applications or to market updated productsthat represent extensions of our basic technology.  In addition, we or ourcollaborative partners may not receive FDA export approval to export productsin the future, and countries to which products are to be exported may notapprove them for import.

 

Medical device manufacturing facilities alsoare subject to continual governmental review and inspection.  The FDA hasstated publicly that compliance with manufacturing regulations will bescrutinized more strictly.  A governmental authority may challenge our orour collaborative partners’ (including suppliers’) compliance with applicablefederal, state and foreign regulations.  In addition, any discovery of previouslyunknown problems with products or facilities may result in restrictions on theproduct or the facility, including withdrawal of the product from the market orother enforcement actions.

 

28

----

 

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

 

As of the quarter ended September 30, 2003,management, with the participation of the chief executive and financialofficers, carried out an evaluation of the effectiveness of our disclosurecontrols and procedures pursuant to Exchange Act Rule 15d-15.  Based uponthat evaluation, the chief executive officer and the chief financial officerbelieve that, as of end of the fiscal quarter covered by this report, ourdisclosure controls and procedures were effective in making known to themmaterial information relating to MediCor (including its consolidatedsubsidiaries) required to be included in this report.  As of the end ofour fiscal year ended June 30, 2003, management adopted formal disclosurecontrols and procedures which were employed in the preparation of this report.

 

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

 

***PART II******– OTHER INFORMATION***

 

***ITEM 1.  LEGAL PROCEEDINGS***

 

InOctober 1999, June 2000 and July 2003, separate but related complaints werefiled by Saul Kwartin,  Steven M.Kwartin, and Robert and Nina Kwartin respectively, and various other unnamedplaintiffs, against III Acquisition Corporation, a Delaware corporation (whichoperates under the tradename PIP.America), a subsidiary of MediCor, asco-defendant with PIP/USA, Inc. and Poly Implants Protheses, S.A., eachunaffiliated with MediCor, and Jean Claude Mas and our chairman, personally, inthe Circuit Court of Miami-Dade County, Florida.  In the first two cases, plaintiffs purport to be shareholders ofPIP/USA, Inc. suing derivatively on its behalf, and seeking to rescind varioustransactions between PIP.America and PIP/USA, Inc. and seek to impose liabilityagainst PIP.America and its co-defendants for unspecified monetary damagesarising out of alleged tortuous and other purported wrongful acts concerningalleged relationships between plaintiffs, PIP/USA, Inc. and Poly Implants Protheses,S.A.  In the third case, filed in 2003,MediCor is named but has not yet been served, but does anticipate being adefendant.

 

PeggyWilliams v. PIP/USA, Case No. 03 CH 9654, Jessica Fischer Schnebel, et al. v.PIP/USA, Inc., Case No. 03CH07239, Dawn Marie Cooper, et al. v. PIP/USA, Inc.,Case No. 03CH11316, Miriam Furman, et al. v. PIP/USA, Inc., CaseNo. 03CH10832 and Karen S. Witt, et al. v. PIP/USA, Inc., Case No.03CH12928 were filed in the Circuit Court of Cook County, Chancery Division, inor around July 2003.  Counsel forJessica Fischer Schnebel, et al. v. PIP/USA, Inc., Case No. 03CH07239 has beengranted leave to amend their complaint to include plaintiffs from the otherfour cases, after which each of the others will be voluntarily dismissed.  The matter is set for a status check onNovember 21, 2003.  The amendedcomplaint will likely take the form of a class action, but we have yet to seewhat counts will be alleged against PIP.America.  It is likely that unspecific monetary damages, exemplary damages,attorneys fees and costs, injunctive relief and damages under the IllinoisConsumer Fraud Act will be sought, and that plaintiffs will allege generalproduct liability counts against PIP.America, as they have alleged previously.

 

SalinasI. Landers, et al. v. Poly Implants Protheses, S.A., et al., Case No. CV030377, was 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.America isto file an answer to the complaint on or before November 7, 2003, which willdeny the allegations made against it.  Acase management conference is scheduled for December 7, 2003.

 

29

----

 

MarshaDicken etc. et al. v. PIP/USA, Inc., et al., Case No. 2003-05588, was filed inor around July 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) of Torts,negligence, misrepresentations, and violation of Texas’ Deceptive TradePractices Act with respect to implant products.  Plaintiffs seek unspecific compensatory damages, additionalstatutory damages, interest, attorneys’ fees and costs.  The court has scheduled a pretrial conferenceto be held on June 18, 2004, and has specified that a trial date will be setshortly thereafter.

 

Thoughit is not yet possible to predict the outcome of the cases above, MediCor hasdenied plaintiffs’ allegations and is vigorously defending itself againstcertification of any class, and upon the merits of each lawsuit.  While we are desirous to honor ourobligations under warranty provisions, we are fully indemnified by PIP/USA,Inc., Poly Implants Protheses, S.A., and Poly Implants Protheses, S.A.President Jean Claude Mas personally, from all claims, including those assertedabove, and thus believe the costs associated with such matters will not have amaterial adverse impact on our business, results of operations or financialposition.

 

Weand our subsidiaries have been and will continue to be periodically named as adefendant in other lawsuits in the normal course of our business, includingproduct liability and product warranty claims asserted against us.  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 us have been and areperiodically reviewed with counsel in the ordinary course of business.  We presently believe we have meritoriousdefenses in all lawsuits in which we or any of our subsidiaries aredefendants.  While it is not possible topredict the outcome of such matters, we believe that the costs associated withsuch matters will not have a material adverse impact on our business, resultsof operations.

 

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

 

During the quarter endedSeptember 30, 2003, we extended the maturities of $200,000 in principal amountof 10% short-term convertible debentures issued to accreditedinvestors.  The extended debenturesmature in 2004.  The offer and sale ofthe extended debentures was exempt from registration pursuant to section 4(2)of the Securities Act.

 

During the quarter endedSeptember 30, 2003, we issued $350,000 in principal amount of 8% convertibledebentures due 2006 to accredited investors.  The offer and sale of the convertible debentures was exempt fromregistration pursuant to section 4(2) of the Securities Act.

 

During the quarter endedSeptember 30, 2003, we issued options covering 320,000 shares to executiveofficers.   The offer and sale of theoptions and the underlying shares was exempt from registration pursuant tosection 4(2) of the Securities Act.

 

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

 

None

 

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

 

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

 

***ITEM 5.  OTHER INFORMATION***

 

None

 

30

----

 

***ITEM 6.  EXHIBITS******ANDREPORTS ON FORM 8-K***

 

**(a)  Exhibits**

 

See Exhibit Index at Page 33.

 

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

 

No reports on Form 8-K werefiled during the quarter for which this report is filed.

 

31

----

 

**SIGNATURES**

 

 

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

 

 
|        | ***MEDICOR LTD.***       (Registrant) |
|-------------|---------------------------------------------------------------------|
|        |                                                                |   |   |
| Date:       | November  14, 2003                                                  | By: | /s/ Theodore R. Maloney |   |
|        |                                                                |   | Theodore  R. Maloney  Chief Executive Officer |   |
|        |                                                                |   |   |   |
|  Date: | November  14, 2003                                                  | By: | /s/ Thomas R. Moyes |   |
|        |                                                                |   | Thomas  R. Moyes  Chief Financial Officer |   |
|             |                                                                     |  |  |  |  |

 

32

----

 

EXHIBIT INDEX

 
| **Exhibit  No.** |   | **Description**                                                                              |
|------------------|--------|----------------------------------------------------------------------------------------------|
| 4.1              |   | Form of Convertible Debenture Loan Agreement                                                 |
| 4.2              |   | Form of Convertible Debenture                                                                |
| 4.3              |   | Form of Amendment to Convertible Debenture                                                   |
| 4.4              |   | Form of Convertible Debenture Agreement                                                      |
| 4.5              |   | Form of Convertible Debenture                                                                |
| 10.1             |   | Employment Agreement dated October 1, 2003 between  the Registrant and  Jim J. McGhan   |
| 10.2             |   | Option Agreement dated October 27, 2003 between  the Registrant and Jim J. McGhan            |
| 10.3             |   | Employment Agreement dated September 1, 2003  between the Registrant and Theodore R. Maloney |
| 10.4             |   | Option Agreement dated September 2, 2003 between  the Registrant and Theodore R. Maloney     |
| 10.5*            |   | Amendment No. 2 to Asset Purchase Agreement, dated  as of October 16, 2003                   |
| 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                |

 

----

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

 

33

----