Medicor 10QSB 2006 Q1 Quarterly report (small business)

UNITED STATES
SECURITIES 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, 2005

Or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-50442

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 by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

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

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

Transitional Small Business Disclosure Format (Check one): Yes o No o

MEDICOR LTD.

INDEX

Part I. Financial Information

Item 1.	Consolidated Financial Statements (Unaudited)

	Consolidated Balance Sheet—September 30, 2005

	Consolidated Statements of Operations—Three Months Ended September 30, 2005 and 2004

	Consolidated Statements of Cash Flows—Three Months Ended September 30, 2005 and 2004

	Notes to Consolidated Financial Statements—September 30, 2005

Item 2.	Management’s Discussion and Analysis or Plan of Operation

Item 3.	Controls and Procedures

Part II. Other Information

Item 1.	Legal Proceedings

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.	Defaults upon Senior Securities

Item 4.	Submission of Matters to a Vote of Security Holders

Item 5.	Other Information

Item 6.	Exhibits and Reports on Form 8-K

	Signatures

PART I—FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MediCor, Ltd.

Consolidated Balance Sheet

September 30, 2005

(Unaudited)

Assets

Current assets:

Cash	$	879,259
Receivables, less allowance for doubtful accounts of $1,376,075	6,158,961
Notes receivable, less allowance for doubtful accounts of $3,071,980	—
Inventories	4,591,808
Prepaid expenses and other current assets	210,595

Total current assets	11,840,623
Property, plant and equipment, net	1,158,289
Leased property under capital leases, net	3,990,353
Goodwill and other intangibles, net	43,347,150
Deposits	359,980
Other assets	609,775

Total assets	$	61,306,169

Liabilities and Stockholders’ Equity

Current liabilities:

Notes payable	$	2,297,539
Note payable to related party	54,933,489
Accounts payable	6,204,608
Obligations under capital leases	599,964
Accrued expenses and other current liabilities	2,684,191
Payroll taxes payable	1,065,691
Interest payable to related party	4,830,341
Convertible debentures	250,000

Total current liabilities	72,865,823

Long-term notes payable	10,133,528
Long-term obligations under capital leases	2,047,729

Total liabilities	85,047,080

Commitments and contingencies (Note V)

Preferred shares subject to mandatory redemption requirements	6,573,258

Stockholders’ equity (deficit)

Common shares, $.001 par value, 100,000,000 shares authorized, 20,353,455 shares issued, 20,343,157 shares outstanding and 20,298 shares retired	20,333
Additional paid in capital	27,004,686
Accumulated (deficit)	(57,377,026		)
Accumulated other comprehensive income (loss)	37,838

Stockholders’ equity (deficit)	(30,314,169		)

Total liabilities and stockholders’ equity	$	61,306,169

See accompanying notes to unaudited consolidated financial statements

MediCor, Ltd.

Consolidated Statements of Operations and Comprehensive Income / (Loss)

Three Months Ended September 30, 2005 and 2004

(Unaudited)

	2005			2004
Net sales	$	5,662,015		$	6,143,059
Cost of sales	3,945,992			3,553,485

Gross profit	1,716,023			2,589,574

Operating Expenses:
Selling, general and administrative expenses
Salaries and wages expense	1,286,426			1,094,559
Other	2,292,640			2,759,947
Research and development	912,565			633,714

Operating income / (loss)	(2,775,608		)	(1,898,646		)

Net interest expense / (income)	1,454,303			1,269,439

Income / (loss) before income taxes	(4,229,911		)	(3,168,085		)
Income tax expense (benefit)	(128,490		)	340,911

Net income / (loss)	(4,101,421		)	(3,508,996		)
Preferred dividends deemed	—			105,704
Preferred dividends in arrears Series A Preferred 8%	124,000			208,766

Net loss attributable to common stockholders	(4,225,421		)	(3,823,466		)

Other comprehensive income / (loss), net of tax:
Foreign currency translation adjustments	275,295			(6,562		)

Comprehensive income / (loss)	$	(3,950,126	)	$	(3,830,028	)

Loss per share data:
Weighted average shares, basic and diluted	20,335,766			18,062,419
Basic and diluted
Net loss per share	$	(0.21	)	$	(0.21	)

See accompanying notes to unaudited consolidated financial statements

MediCor, Ltd.

Consolidated Statements of Cash Flows

Three Months Ended September 30, 2005 and 2004

(Unaudited)

	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(4,101,421	)	$	(3,515,558	)
Adjustments to reconcile net loss to net cash utilized by operating activities:
Depreciation and amortization	434,867			256,282
Provision for doubtful accounts	303,858			197,852
Inventory write down	—			350
Loss on disposal of property, plant and equipment	—			24,919
Non-employee stock options	27,965			—
Employee preferred stock	—			48,000
Directors restricted common stock	26,500			—
Changes in operating assets and liabilities
Receivables	398,053			164,299
Notes receivable	(293,396		)	(147,639		)
Inventories	(714,973		)	(47,744		)
Prepaid expenses and other current assets	22,215			(4,512		)
Goodwill	—			(617,675		)
Deposits	(263,800		)	617,675
Other assets	9,141			(508,533		)
Accounts payable	113,220			(1,577,503		)
Accrued expenses and other current liabilities	(693,615		)	40,106
Income tax payable	—			538,149
Payroll taxes payable	4,360			165,768
Interest payable	1,220,433			(123,463		)
Long term accrued liabilities	(517,356		)	—
Net cash provided by (utilized) operating activities	(4,023,949		)	(4,489,227		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property, plant and equipment	(110,874		)	(40,339		)
Payments for purchase of Laboratoires Eurosilicone S.A., net of cash acquired	—			(8,800,727		)
Payments for purchase of Deramedics, net of cash aquired	—			(75,000		)
Net cash provided by (utilized) investing activites	(110,874		)	(8,916,066		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligation	(59,397		)	—
Proceeds from issuance of short term debt	4,400,000			15,687,811
Proceeds from issuance of long term debt	—			7,333,407
Payments on convertible debentures	—			(100,000		)
Payments on short term debt	(1,436,615		)	(5,966,515		)
Issuance of common stock	—			4,969
Issuance of preferred shares subject mandatory redemption requirements	—			359,999
Net cash provided by (utilized) financing activities	2,903,988			17,319,671

EFFECT ON EXCHANGE RATE CHANGES ON CASH	275,295			—

Net increase (decrease) in cash	(955,540		)	3,914,378
Cash at beginning of period	1,834,799			165,092

CASH AT END OF PERIOD	$	879,259		$	4,079,470

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES

Conversion of short-term debt to preferred stock	$	—		$	100,000
Conversion of long-term debt to common stock	$	50,000		$	—
Issuance of preferred stock to employees/consultants	$	—		$	48,000

The Company purchased all of the capital stock of Laboratories Euorsilcone S.A.S. for $43,297,915. In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired	$	—		$	45,549,577
Goodwill	$	—		$	—
Cash paid for capital stock	$	—		$	(39,332,356	)
Liabilities assumed	$	—		$	(6,217,221	)

Included in the fair value of assets acquired and liabilities assumed is $2,532,081 for capital lease obligations.

The Company purchased all of the capital stock of Dermatological Medical Products and Specialites, S.A. de C.V. for $75,000. In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired	$	—		$	75,000
Cash paid for capital stock	$	—		$	(75,000	)
Liabilities assumed	$	—		$	—

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:

Interest	$	442,247		$	1,610,350
Taxes	$	2,410		$	—

See accompanying notes to unaudited consolidated financial statements

MEDICOR LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005

Note A—Description of Business

MediCor Ltd. (the “Company” or “MediCor”) is a global health care company that acquires, develops, manufactures and markets products primarily for the aesthetic, plastic surgery and dermatology markets. Current products include breast implant products, other implants and scar management products. The Company’s breast implant products are currently sold in approximately 85 countries, but are not sold in the United States or Canada. Our products are sold primarily in foreign (non-U.S.) countries and foreign sales are currently about 95% of total sales, with the largest country (Brazil) accounting for about 13% of sales. Breast implant and other implant products account for about 91% of total sales for the quarter ended September 30, 2005, while scar management products contributed approximately 9% of total sales. The Company sells its products to hospitals, surgical centers and physicians primarily through distributors, as well as through direct sales personnel.

MediCor was founded in 1999 by chairman of the board Donald K. McGhan, the founder and former chairman and chief executive officer of Inamed Corporation and McGhan Medical. MediCor’s objective is to be a leading supplier of selected international medical devices and technologies. To achieve this strategy, MediCor intends to build upon and expand its business lines, primarily in the aesthetic, plastic and reconstructive surgery and dermatology markets. MediCor intends to accomplish this growth through the expansion of existing product lines and offerings and through the acquisition of companies and other assets, including intellectual property rights and distribution rights.

Note B—Summary of Significant Accounting Policies

Principles of Consolidation

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

Critical Accounting Policies and Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates and judgments, including those related to revenue recognition, inventories, adequacy of allowances for doubtful accounts, valuation of long-lived assets and goodwill, income taxes, litigation and warranties. The Company bases its estimates on historical and anticipated results and trends and on various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. The policies discussed below are considered by management to be critical to an understanding of the Company’s financial statements. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from those estimates.

Revenue Recognition

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

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

Allowance for Doubtful Accounts

MediCor maintains allowances for doubtful accounts for estimated losses resulting from the inability of some of its customers to make required payments. The allowances for doubtful accounts are based on the analysis of historical bad debts, customer credit-worthiness, past transaction history with the customer, current economic trends, and changes in customer payment terms. If the financial condition of MediCor’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances may be required.

Inventories

Inventories are stated at the lower of cost or market using the first-in, first-out (“FIFO”) method. The Company may write down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is recorded on the straight-line basis over the estimated useful lives of the assets, which range from three to ten years. Amortization of leasehold improvements is based upon the estimated useful lives of the assets or the term of the lease, whichever is shorter. Significant improvements and betterments are capitalized, while maintenance and repairs are charged to operations as incurred. Asset retirements and dispositions are accounted for in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment and Disposal of Long Lived Assets” (“SFAS No. 144”), as described below.

Accounting for Long-Lived Assets

The Company accounts for long-lived assets, other than goodwill, in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment and Disposal of Long Lived Assets,” which supersedes SFAS No. 121 “Accounting for the Impairment of Long-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 all long-lived assets including discontinued operations. Adoption of this statement had no material effect on its financial position or results of operations. SFAS No. 144 requires, among other things, that an entity review its long-lived assets and certain related intangibles for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. We believe the estimate of our valuation of Long-Lived Assets is a “critical accounting estimate” because if circumstances arose that led to a decrease in the valuation it could have a material impact on our results of operations. With the exception of the impairment of a patent which was written off in June 2005, as described in Note I to the financial statements included in our annual report on Form 10-KSB, the Company does not believe that any other changes have taken place.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the estimated fair value of identified assets the businesses acquired. Other intangible assets are recorded at fair value and amortized over periods ranging from three to 17 years. The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” in January 2002. As a result, goodwill is no longer amortized, but is subject to a transitional impairment analysis and is tested for impairment on an annual basis. The test for impairment involves the use of estimates related to the fair values of the business operations with which goodwill is associated and is usually based on a market value approach. Other intangible assets are amortized using the straight-line method over their estimated useful lives and are evaluated for impairment under SFAS No. 144.

Product Replacement Programs

III Acquisition Corp. d/b/a PIP.America (“PIP.America”) and MediCor Aesthetics, subsidiaries of the Company in the U.S., provides a product replacement program to surgeons for deflations of breast implant products for a period of ten (10) years from the date of implantation. For each deflation, the surgeon receives financial assistance plus a free implant replacement. Management estimated the amount of potential future product replacement claims based on statistical analysis. Expected future obligations are determined based on the history of product shipments and claims and are discounted to a current value, and this amount is reserved. Changes to actual claims, interest rates or other estimations could have a material impact on the statistical calculation which could materially impact the Company’s reserves and results of operations. Although these products are not currently being sold (because they are in the process of obtaining FDA approval, as more fully described below), they were sold under a distribution agreement prior to November 2000 and a reserve for product replacements is maintained for the products sold in prior years. Eurosilicone, a subsidiary of the Company located in France, prior to July 1, 2005 did not provide a product replacement program or any similar program. Additionally, it had solely relied on third-party distributors. As a result, Eurosilicone did not maintain a reserve in prior years. During the quarter ending September 30, 2005, Eurosilicone began making formal commitments to third-parties for a product replacement program. Consequently, the Company has provided a reserve for this program under the same approach as described above. Changes to actual claims, interest rates or other estimations could have a material impact on the statistical calculation which could materially impact the Company’s reserves and results of operations.

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

As of September 30, 2005, the Company’s product replacement program reserve consisted of:

	Product Replacement Reserve

Balance at June 30, 2005	$	1,004,072
Accruals for product replacements issued during the period	83,526
Settlements incurred during the period	(389,275		)

Balance at September 30, 2005	$	698,323

Shipping and Handling Costs

Shipping and handling costs incurred by the Company are included under cost of sales.

Research and Development

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

Stock-Based Compensation

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

The Company accounts for options and warrant grants to non-employees using the guidance prescribed by SFAS No. 123, Financial Accounting Standards Board (“FASB”) Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation, and Interpretation of APB No. 25,” and Emerging Issue Task Force (“EITF”) No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or In Conjunction with Selling, Goods, or Services” (“EITF No. 96-18”), whereby the fair value of such option and warrant grants are measured using the Fair Value Based Method at the earlier of the date at which the non-employee’s performance is completed or a performance commitment is reached.

Income Taxes

Deferred income tax assets or liabilities are computed based on the temporary differences between the financial statement and income tax bases of assets and liabilities using the statutory marginal income tax rate in effect for the years in which the differences are expected to reverse. Deferred income tax expenses or credits are based on the changes in the deferred income tax assets or liabilities from period to period. A valuation allowance against deferred tax assets is required if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized.

Effects of Recent Accounting Pronouncements

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

Note C—Interim Reporting

The accompanying unaudited consolidated financial statements for the three months ended September 30, 2005 and September 30, 2004, have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals, unless otherwise indicated) considered necessary for a fair presentation of the results of operations for the indicated periods have been included. Certain amounts recorded in previous periods have been reclassified to conform to the current period presentation. Operating results for the three months ended September 30, 2005 are not necessarily indicative of the results for the full fiscal year.

Note D—Major Customers

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

Note E—Cash and Cash Equivalents

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

Note F—Accounts Receivable

Accounts receivable at September 30, 2005 consisted of:

	September 30, 2005

Accounts receivable	$	7,535,036
Allowance for doubtful accounts	(1,376,075		)

Total	$	6,158,961

Changes in allowance for doubtful accounts are as follows:

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

Note G—Notes Receivable

Notes receivable at September 30, 2005 consisted of:

	September 30, 2005

Notes receivable	$	3,071,980
Allowance for doubtful accounts	(3,071,980		)

Total	$	—

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

Note H—Inventories

Inventories at September 30, 2005 consisted of:

	September 30, 2005

Raw Materials	$	928,385
Work in Process	529,055
Finished Goods	3,134,368

Total	$	4,591,808

Note I—Property and Equipment

Property and equipment at September 30, 2005 consisted of:

	September 30, 2005

Machinery and equipment	$	677,729
Furniture, Fixtures and equipment	469,968
Computer Equipment and tools and dies	422,223
Land and buildings	144,972
Leasehold Improvements	107,748
Automobiles	86,043

Subtotal	1,908,683
Accumulated depreciation	(750,394		)

Total	$	1,158,289

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

Note J—Goodwill and Other Intangibles

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

	September 30, 2005

Goodwill	$	33,867,087
Customer-Related Intangibles	4,480,820
Supply Agreements and Other Intangibles	3,373,146
Patents	3,000,000
Distribution Agreements and Non-compete	355,000
Trademarks / Tradenames	120,128

Subtotal	45,196,181

Accumulated Amortization—Goodwill	(41,973		)
Accumulated Amortization—Customer-Related Intangibles	(1,022,361		)
Accumulated Amortization—Supply Agreements and Other Intangibles	(5,000		)
Accumulated Amortization—Patents	(522,514		)
Accumulated Amortization—Distribution Agreements and Non-compete	(233,125		)
Accumulated Amortization—Trademarks / Tradenames	(24,058		)

Subtotal	(1,849,031		)

Total	$	43,347,150

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

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

	September 30, 2006		September 30, 2007		September 30, 2008		September 30, 2009		September 30, 2010

Customer-Related Intangibles	$	610,316	$	610,316	$	610,316	$	610,316	$	610,316
Distribution Agreements	16,875		16,875		16,875		16,875		16,875
Patents	177,677		177,677		177,677		177,677		177,677
Trademarks	8,235		8,235		8,235		8,235		8,235
Other	—		—		—		—		—

Total	$	813,102	$	813,102	$	813,102	$	813,102	$	813,102

Note K—Leased Property under Capital Leases

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

	September 30, 2005

Buildings	$	4,048,143
Vehicles	347,717
Copier	24,138

Subtotal	4,419,997

Accumulated Depreciation	(429,644		)

Subtotal	(429,644		)

Total	$	3,990,353

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

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

Year ended September 30,	Amount

2006	$	509,004
2007	548,729
2008	395,985
2009	358,828
2010	306,995
Later years	1,088,311

Total minimum payments required	$	3,207,852

Note L—Deposits and Other Assets

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

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

Note M—Accrued Expenses

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

	September 30, 2005

Wages and paid leave	$	1,043,209
Other	$	646,012
Product replacement reserve	698,323
Consulting	296,647

Total	$	2,684,191

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

Note N—Convertible Debentures

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

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

Note O—Notes Payable

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

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

Future maturities of long-term debt are as follows:

Year ended September 30,	Amount

2007	$	2,198,141
2008	2,096,265
2009	1,946,374
2010	1,946,374
2011	1,946,374

Total	$	10,133,528

Note P—Related Party Transactions

International Integrated Industries, LLC (“LLC”) is a family holding company in which the chairman of the Company, Mr. Donald K. McGhan, has a controlling interest. Neither the Company nor any of its subsidiaries has any direct ownership in LLC. LLC acted on behalf of the Company by funding significant expenses incurred for which the Company has a revolving loan agreement as shown on the Company’s Consolidated Balance Sheet of $54,933,489 at September 30, 2005. The outstanding balance of the note payable accrues interest at an annual interest rate of ten percent (10%) per annum. During the three months ended September 30, 2005, LLC advanced $4,400,000 to the Company, of which none was repaid. Interest expense relating to this note payable was $1,320,433, of which $100,000 was paid. The unpaid liability for these expenses is included in the Company’s note payable to affiliates, which is contained in the financial statements presented herein. The Company has a commitment from LLC to fund operating shortfalls as necessary through October 1, 2006.

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

Note Q—Federal Income Taxes

The Company follows FAS 109 for reporting income taxes. The income tax expense (benefit) reflected in the Consolidated Statements of Operations for the Company for the periods noted consist of:

	September 30, 2005			September 30, 2004

Current

Net loss	$	(1,351,158	)	$	(1,328,474	)
Foreign income tax expense/ (benefit) on unconsolidated subsidiaries	(128,490		)	340,911
	(1,479,648		)	(987,563		)
Deferred

Allowance for bad debts	103,312			67,269
Product replacement reserve	96,475			—
Depreciation and amortization	20,137			25,500
	219,924			92,769

Total benefit	(1,259,724		)	(894,794		)
Less allowance for realization of deferred tax asset	1,131,234			1,235,705

Total tax expense/ (benefit)	$	(128,490	)	$	340,911

The current tax expense for the quarter ended September 30, 2005 resulted from income tax paid on a foreign subsidiary. As of September 30, 2005, the Company recorded an allowance of $19,648,242 against certain future tax benefits, the realization of which is currently uncertain. The deferred differences related to certain accounts receivable, accrued warranties, and depreciation/amortization not currently deductible as expenses under Internal Revenue Service provisions. Although the

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

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

	September 30, 2005

Computed expected income tax asset/(liability) at 34%	$	1,351,158
Adjustments
Net operating loss	16,402,856
Allowance for bad debt	1,512,339
Product replacement reserve	551,512
Depreciation and amortization	270,225

Income tax benefit	$	20,088,090
Less allowance for realization of deferred tax asset	(20,088,090		)

Deferred tax asset, net	$	—

Note R—Preferred Stock

The Company authorized a series of 45,000 shares of preferred stock designated as Series A 8.0% Convertible Preferred Stock (“Series A Preferred”) on July 5, 2004. The Series A Preferred has a par value of $.001 per share with a liquidation preference of $1,000 per share. In the event of liquidation, shareholders of the Series A Preferred shall be entitled to receive priority as to distribution over common stock. The Series A Preferred stock is convertible into common stock at any time at a conversion price of $3.85 per share until June 30, 2010, subject to potential adjustment in the event certain EBITDA or common stock value targets are not met. On June 30, 2011, all unconverted shares to common stock will be subject to a mandatory redemption. The redemption price of $1,000 per share plus $1,000 per whole share for all accrued and unpaid paid-in-kind dividends and any other accrued and unpaid dividends, whether or not declared which amount will be payable by the Company in cash. At September 30, 2005, the Company had outstanding an aggregate of 6,219 shares, issued for aggregate consideration of $6,573,258.

Note S—Loss per Share

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

	Three Months Ended September 30, 2005						Three Months Ended September 30, 2004
	Income (Numerator)			Shares (Denominator)	Per-Share Amount		Income (Numerator)			Shares (Denominator)	Per-Share Amount

Net Income (Loss) before preferred stock dividends	(4,101,421		)				(3,830,028		)
Less: Preferred stock dividends	124,000						—

Basic EPS	(4,225,421		)	20,335,766	(0.21	)	(3,830,028		)	18,062,419	(0.21	)

Effect of dilutive securities	—

Diluted EPS	$	(4,225,421	)	20,335,766	(0.21	)	$	(3,830,028	)	18,062,419	(0.21	)

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

Note T—Stock Options and Warrants

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

		Weighted Average
	Options	Exercise Price

Outstanding Options at June 30, 2005	3,929,938	$	3.34

Granted	336,111	2.60
Exercised	—	—
Cancelled	—	—

Outstanding Options at September 30, 2005	4,266,049	$	3.28

Options exercisable at end of period	1,251,652	$	3.34

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

Outstanding			Exercisable
		Weighted
		Average
		Remaining	Weighted			Weighted
		Years of	Average			Average
Range of	Number of	Contractual	Exercise		Number of	Exercise
Exercise Prices	Options	Life	Price		Options	Price

$1.00 - $2.01	986,049	6.4	$	1.79	285,819	$	1.89
$3.00 - $3.80	2,180,000	5.6	$	3.48	599,167	$	3.48
$4.15 - $4.30	1,100,000	6.6	$	4.23	366,667	$	4.23

Note U—Business Segment Information

The Company is a corporate entity with a number of wholly-owned, autonomous subsidiaries which operate as single business units in a single industry segment across multiple geographic locations within the U.S. and internationally and, as such, does not have multiple segments to report. For the three months ended September 30, 2005, sales from breast implant and other implants were approximately 91% of total sales, whereas sales from scar management product were approximately 9% of total sales. Revenues from customers and distributors attributable to various foreign countries outside the U.S were material and equaled about 95% of total sales, with the largest country (Brazil) accounting for about 13% of sales. Additionally, a significant amount of revenues and costs are Euro denominated. Long-lived assets attributable to various foreign countries outside the U.S. were material and equaled about $38 million, located in France. Amounts attributable to the U.S. were approximately $6 million.

Note V—Commitments and Contingencies

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

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

The Company’s PIP.America subsidiary has a distribution agreement with Poly Implants Protheses S.A. (“PIP”), a third-party manufacturer of breast implants located in France. This agreement covers the sale by PIP.America of PIP’s saline, pre-filled breast implant products in North America, although no sales were reported in the year ending June 30, 2004 because these products are not currently approved for distribution in North America. Previously, the manufacturer was undertaking the process of securing FDA approval for these products. At March 30, 2004, PIP.America had $3,444,802 of accounts receivable from the manufacturer, representing amounts owed to PIP.America under the terms of the distribution agreement. These amounts have been fully reserved for, with an allowance for doubtful account, due to the lack of payment and uncertain prospect of collection. Effective March 30, 2004, PIP.America and the manufacturer amended the distribution agreement to provide for, among other things, transferring administration, funding and ownership of the pre-market approval application process to PIP.America. In conjunction with this change, PIP.America forgave certain amounts owed by the manufacturer, and the parties amended the pricing terms. The amendments obligate PIP.America to fund the ongoing clinical and regulatory costs and expenses. The amount and timing of these future costs is unknown and may be material. The likelihood and timing of obtaining FDA approval are also uncertain. Concurrently, the manufacturer issued to PIP.America a revolving promissory note for certain sums to come due to PIP.America based on PIP.America’s and the manufacturer’s administration of product replacement and product replacement related claims. The principal amount under the note as of September 30, 2005 was $3,071,980.

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

In October 1999, Case No. 99-25227-CA-01 June 2000 Case No. 00-14665-CA-01, and July 2003, Case No. 0322537-CA-27, separate but related complaints were filed by Saul and Ruth Kwartin, Steven M. Kwartin, and Robert and Nina Kwartin respectively, against our PIP.America subsidiary as co-defendant with PIP/USA, Inc. and Poly Implants Protheses, S.A., each unaffiliated with MediCor, and Jean Claude Mas, Jyll Farren-Martin and our chairman, personally, in the Circuit Court of Miami-Dade County, Florida. Also in September 2003, another member of the same family filed Case No. 03-15006-CA-09, again alleging similar claims on his own behalf. The Kwartin family members’ claims are primarily premised on allegations that plaintiffs are shareholders of PIP/USA, Inc. (“PIP/USA”) or have statutory and common law rights of shareholders of PIP/USA as a result of loans or investments allegedly made to or into PIP/USA or a third party or under an alleged employment agreement. Plaintiffs allege that, as a result, they have certain derivative or other rights to an alleged distribution agreement between Poly Implants Prostheses, S.A. (“PIP-France”) and PIP/USA. Plaintiffs claim, among other things, that III Acquisition Corporation dba PIP.America (“PIP.America”) and its chairman tortiously interfered with that agreement and with plaintiffs’ other alleged rights as lenders, investors, shareholders, quasi-shareholders or employees of PIP/USA or other entities. In addition to monetary damages and injunctive relief, plaintiffs seek to reinstate the alleged distribution agreement between PIP/USA and PIP-France and invalidate PIP.America’s distributor relationship with PIP-France. It is PIP.America’s position that the Kwartin litigations are within the scope of the indemnification agreements. A motion is currently pending to consolidate all of the cases.

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

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

Other than for a limited portion of certain of its own product replacement claims that it is administering, PIP.America is indemnified by PIP/USA, Inc., Poly Implants Protheses, S.A., and Poly Implants Protheses, S.A.’s President, Jean Claude Mas, personally, from, among other things, claims arising from product not distributed by PIP.America. PIP.America either already has, or is in the process of, asserting its indemnification claims and, in the event of an adverse judgment in any case, PIP.America intends to seek the benefits of this indemnity. As a result, the costs associated with these matters are not anticipated to have a material adverse impact on our business, results of operations or financial position.

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

Though it is not yet possible to predict the outcome of the cases described above, MediCor and its subsidiaries, as applicable, are vigorously defending each lawsuit.

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

The Company has operating leases for office, manufacturing and warehouse facilities under various terms expiring from 2007 to 2008. Lease expenses amounted to $87,797 and $248,317 for the three months ended September 30, 2005 and 2004, respectively. Future minimum operating lease payments are approximated as follows:

Year ended September 30,		Amount

2006		240,037
2007		249,401
2008		98,797

Note W—Acquisitions

On April 25, 2005, one of the Company’s subsidiaries completed the purchase of selected assets and liabilities of privately-held Hutchison International, Inc., a third-party distributor of breast implants products in the United States for Biosil Limited. The completion of this transaction allowed the Company to, among other things, negotiate and ultimately enter into an exclusive distribution agreement directly with Biosil Limited for its breast implants in the United States. The acquisition itself did not have a significant impact on the operating results of the Company, since the operations have no existing revenue—pending FDA approval of the products. The various agreements called for payments in the form of stock and cash of about $3,000,003 as follows: cash payments of $250,000 and 366,667 shares of MediCor Ltd. common stock valued at $7.50, subject to future adjustment based on actual trading prices following approval for marketing the products in the United States.

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

Until completion of such evaluation, the Company cannot currently estimate any purchase price allocations. The Company does expect that a majority of the intangibles will be related to the distribution agreement with Biosil Limited.

The financial statements reflect various purchase price allocations. In accordance with SFAS No. 141, “Business Combinations” (“SFAS No. 141”), the total purchase price was allocated to the tangible and intangible assets of Hutchison International, Inc. based upon their estimated fair values at the acquisition date. The purchase accounting adjustments made are based upon currently available information. Accordingly, the actual adjustments recorded in connection with the final purchase price allocation may be updated according SFAS No. 141, and any such changes may be material.

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

	Book Value of
	Assets Acquired /		Purchase Price			Preliminary
	Liabilities Assumed		Adjustments			Fair Value
Employee advances	$	39,782	$	—		$	39,782
Inventory	372,061		(372,061		)	—		(a)
Property, plant and equipment	1,492		(1,492		)	—		(b)
Intangibles	—		3,243,146			3,243,146		(c)

Total assets	$	413,335	$	2,869,593		$	3,282,928

Short-term product replacement reserve	195,750		87,175			282,925		(d)
Shareholder’s equity related to assets acquired	217,585		(217,585		)	—		(e)
Purchase price			3,000,003			3,000,003		(f)

Total liabilities and shareholders’ equity	$	413,335	$	2,869,593		$	3,282,928
	—		—			—

The amounts contained in the purchase price allocation may change as additional information becomes available regarding the assets and liabilities acquired. The purchase price allocations are expected to be finalized before the year ended June 30, 2006. Any change in the fair value of the net assets may change the amount of the purchase price allocable to goodwill. The Company is continuing to evaluate this in detail and anticipates that it will determine and place a fair value upon completion of such valuation. Until completion of such evaluation, the Company cannot currently estimate any possible changes in purchase price allocations.

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

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

(c) Reflects initial determination of value associated with intangibles (specifically the distribution/supply agreement with Biosil). Amount may be impacted by other purchase accounting adjustments and finalization of intangible valuation under SFAS 141 which will be finalized within 1 year of acquisition.

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

(e) To eliminate shareholder’s equity.

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

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

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

OVERVIEW

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

Company History and Business Strategy

MediCor was founded in 1999 by chairman of the board Donald K. McGhan, the founder and former Chairman and Chief Executive Officer of Inamed Corporation, McGhan Medical and McGhan Limited. Our objective is to be a leading supplier of selected international medical devices and technologies. To achieve this objective, we intend to build upon and expand our business lines, primarily in the aesthetic, plastic and reconstructive surgery and dermatology markets. We intend to accomplish this growth through the expansion of existing product lines and offerings and through the acquisition of companies and other assets, including intellectual property rights and distribution rights.

Products

Currently, MediCor has two main product lines:

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

• scar management products.

Breast and other implant products

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

Our strategy to gain entry into the U.S. saline filled breast implant market relies upon our contractual agreements with independent parties with whom we are working to obtain FDA approval of their PMA applications. The PMA application for the Biosil Limited inflatable saline breast implant has been submitted in module format, and we are addressing observations arising from the FDA review of the application. The four-year interval clinical trial data is currently being analyzed and will be submitted as a PMA amendment following completion of that analysis. Although we anticipate submitting the appropriate data in response to the FDA’s observations and guidance in late 2005, there can be no assurance of timing, review or decision concerning the PMA application. We are also continuing to work with Poly Implants Protheses; S.A. (“PIP”) in furtherance of the PMA application for PIP’s pre-filled saline breast implant. We are currently assisting in the collection of appropriate data through its ongoing clinical trial. We intend to submit the PMA application to the FDA upon satisfactory completion of data collection and analysis. Although we anticipate submission of the completed PMA application during 2006, there can be no assurance of timing, review or decision concerning the PMA application. Although we are not the manufacturer we do and will continue to provide technical and other assistance with the clinical trials and regulatory efforts.

Scar Management Products

Biodermis, one of our subsidiaries, competes in the scar management market and distributes products used in the prevention and management of visible scar tissue known as keloid and hypertrophic scars. Sales from these products contributed about 9% of total sales for the three months ended September 30, 2005. The Biodermis products achieve therapeutic results by encapsulating the scar tissue with a soft, malleable, semi-occlusive polymer in the form of sheets and ointments that are believed to mimic the natural barrier function of the skin, improving the condition and appearance of scars. In the United States, the products are marketed under the names EpiDerm™ silicone gel sheeting and Xeragel™silicone ointment. Internationally, the same products are also marketed under the names TopiGel™ and DermaSof™.

Biodermis’ secondary product lines consist mainly of two products, EPIfoam™ and HydroGOLD™. EPIfoam is a silicone backed, polyurethane foam utilized post-lipectomy to assist in recovery and enhance the overall aesthetic appearance following liposuction. HydroGOLD is a hydrogel-based product for use in reducing the pain, discomfort and burning sensation frequently associated with procedures of the skin typically aimed at reducing fine lines and wrinkles and to eliminate or reduce the signs of aging, such as laser resurfacing, chemical peels and micro-dermabrasion. Additionally, a portion of Biodermis’ revenue is derived from original equipment manufacturing of scar management and post-operative care products for other medical device companies who then sell the products under their own brand names. To assure quality control and proper regulatory compliance, Biodermis retains all responsibilities related to the FDA and European CE-mark certification and regulatory compliance related to manufacturing activities. Some of these OEM customers are allowed to compete for sales in similar markets and for similar customers against Biodermis’ distributors and direct sales staff.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis or Plan of Operation addresses MediCor’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventories, adequacy of allowances for doubtful accounts, valuation of long-lived assets and goodwill, income taxes, litigation and warranties. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances,

including assumptions as to future events. The policies discussed below are considered by management to be critical to an understanding of our financial statements. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from those estimates.

Management has identified the critical accounting policies to be those related to revenue recognition, adequacies of allowances 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, 2005 equaled $5,662,015, a decrease of $481,044 or 7.8% as compared to the prior year quarter. The decrease in sales for this quarter was primarily attributable to a decline in European sales of breast implants caused by competition and weaker economic conditions in the region, partially offset by sales growth in all other regions. The Company sold about the same number of units as compared to the prior year quarter, but experienced a decline in average selling prices due to market dynamics including price competition, particularly in Europe. While the Company cannot control the global market conditions, marketing programs specifically targeting to adding value to the Company’s products have been initiated to differentiate its products from its competitors, including the hiring of a European head of sales in September 2005. Based on our historical review of sales and expertise in the breast implant industry, we believe that this sales decline is a short-term situation and that we will be able to increase sales and market share in the long term. The Company’s historical sales growth rate over the recent four quarters, including the recent quarter, was about 9%.

Cost of Sales

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

Selling, General and Administrative

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

Research and Development

Research and development in the recent quarter ending September 30, 2005 was $912,565, as compared to $633,714 for the comparable period in 2004. The increase of $278,851 is primarily attributable to a net increase of higher spending associated with the saline breast implant clinical trials. Costs associated with the PIP product were $104,855 and costs relating to the development of other product lines were $173,996. We expect that research and development expenses will decrease once we receive required government approvals, but will increase as we bring new products to market or existing products to new markets.

Interest Expense

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

Net Loss

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

LIQUIDITY AND CAPITAL RESOURCES

Cash used in operations during the three months ended September 30, 2005 was $4,023,949 as impacted by selling, general and administrative expense, continued startup costs, research and development expense and interest expense. The net effect on our investing activities of ($110,874) was due to the acquisition of additional fixed assets.

Our ability to make payments to refinance our debt and to fund planned capital expenditures and operations will depend on our ability to secure additional significant financing and generate sufficient cash in the future. Currently, we have only limited product sales in the United States and will not be in a position to materially increase United States sales until the FDA issues a pre-market approval relating to one or more of the products sought to be sold by us. We are currently funding activities for two pre-market approval applications which are operating expenses. Under our asset purchase agreement relating to one of those product lines, we have an obligation to make additional cash payments on closing of that transaction (which only occurs following FDA approval of the application). Thus, we have no obligation to close this transaction or make this payment unless the product is cleared for marketing in the United States. We expect we will be able to make that payment from available cash or from the proceeds of affiliate debt, provided by such date we have not concluded a third-party financing.

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

We are presently seeking to refinance some or all of the International Integrated indebtedness from a combination of third-party indebtedness, equity and possible conversions of debt to equity. We may or may not be successful. In the interim, any future funding from International Integrated may take the form of debt or equity or a combination thereof. We expect our operating losses to continue and anticipate that we will need between $6.0 and $8.0 million in additional liquidity to cover negative cash flow in fiscal 2006. In addition, to the extent we want to pursue additional acquisitions, we expect that we will need additional financing. We do not presently have any commitments for such financing and it may not be available when we need it, on terms acceptable to us or at all. The lack of adequate financing could adversely affect our ability to effect acquisitions. Our Eurosilicone Holdings SAS subsidiary may be required to make a performance payment of up to €3 million to the sellers in each of fiscal 2006 and 2007 under the Eurosilicone acquisition agreement. If these payments are required and Eurosilicone Holdings does not otherwise have sufficient funds from dividends or distributions from Eurosilicone, Eurosilicone Holdings intends to draw the necessary funds from its credit facility with BNP Paribas, which was

established in part specifically to provide a back-up funding source for these performance payments. Although Eurosilicone has positive cash flow, it may or may not be sufficient to fund all of its projected operational, working capital, financial and other obligations. As a result, we expect that from time to time Eurosilicone may have any additional liquidity needs which may require MediCor or third-party, such as bank, financing. As described above we have a written commitment from International Integrated Industries, LLC, to provide sufficient cash to fund any operating expenses and capital expenditures through October 1, 2006.

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

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

If we are unable to maintain satisfactory agreements with third-party manufactures to distribute saline filled breast implants in the United States, we may not be able to distribute those products in the United States.

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

If clinical trials for our products are unsuccessful or delayed, we will be unable to meet our anticipated development and commercialization timelines.

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

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

• lack of efficacy during the clinical trials;

• unforeseen safety issues;

• uncertainties with or actions of our collaborative partners or suppliers;

• slower than expected patient recruitment;

• difficulties in patient retention; and

• government or regulatory delays.

The results from pre-clinical testing and early clinical trials are often not predictive of results obtained in later clinical trials. A number of new products have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals. Data obtained from pre-clinical and clinical activities are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, regulatory delays or rejections may be encountered as a result of many factors, including perceived defects in the design of

the clinical trials and changes in regulatory policy during the period of product development. Any delays in, or termination of, our clinical trials or clinical trials of our collaborative partners or suppliers will adversely affect our development and commercialization timelines, which would adversely affect our future sales and profitability.

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

The medical device industry is highly competitive and is subject to significant and rapid technological change. We believe that our ability to respond quickly to consumer needs or advances in medical technologies, without compromising product quality, will be crucial to our success. We are continually engaged in product development and improvement programs to establish and improve our competitive position. We cannot, however, guarantee that we will be successful in enhancing our existing products or products we have in development or clinical trials. Nor can we guarantee that we will be successful in developing new products or technologies that will timely achieve regulatory approval or receive market acceptance. Once developed, we must also timely obtain regulatory approval for our products, the failure of which may cause our products to be obsolete once regulatory approval is granted. Two of our competitors are in the advanced stage of obtaining regulatory approval for their silicone filled breast implants in the United States, while we have not started the regulatory process for those products in the U.S. This could put us at a significant disadvantage in the U.S. market. The lack of U.S. regulatory approval for our products, in the face of our competitors’ approvals, may also adversely affect us in foreign markets.

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

Breast augmentation and reconstruction and other aesthetics procedures are elective procedures. Other than U.S. federally mandated insurance reimbursement for post-mastectomy reconstructive surgery, breast augmentations and other cosmetic procedures are not typically covered by insurance. Adverse changes in the economy may cause consumers to reassess their spending choices and reduce the demand for cosmetic surgery. This shift could have an adverse effect on our projected future sales and profitability.

Our ability to expand our business will be significantly limited if we cannot obtain additional financing.

To accomplish our plans to conduct our current operations, to expand our current product lines and markets and to purchase new companies, products and intellectual property, we need substantial additional capital, which we may not be able to obtain. We currently have significant debt that must be serviced. While we have to date been funded in substantial part by an affiliate of our chairman, we do not anticipate this funding source will provide sufficient capital to finance our intended growth strategy, and we expect that we will need significant external financing to accomplish our goals. Our primary lender is an affiliate of our chairman and may also seek to collect its debt on an accelerated basis, which we would be unlikely to be able to do. We have in the past and will likely in the future negotiate with potential equity and debt providers to obtain additional financing, but this additional financing may not be available on terms that are acceptable to us, or at all. If adequate funds are not available, or are not available on acceptable terms, our ability to operate our business or implement our expansion and growth plans will be significantly impaired. In addition, the financial terms of any such financing, if obtainable, may be dilutive to existing stockholders.

We rely on our chairman for continued capital funding, management direction and strategic planning and we do not presently have any alternative funding or a management transition plan in place.

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

services or financial support to our company could materially and adversely affect our operations. We do not presently have a written or other well-established management or financing transition plan in the event we were to lose the services or financial support of Mr. McGhan.

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

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

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

Risks for our business include the uncertainties associated with developing and implementing an evolving business model and the management of both internal and acquisition-based growth. This is particularly acute in a rapidly evolving market such as the market for medical devices. To address these risks, we must continue to develop the strength and quality of our operations, maximize the value delivered to customers, respond to competitive developments and continue to attract, retain and motivate qualified employees. We may not be successful in addressing these challenges.

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 number of concerns about the safety of our products and proposed products, whether such concerns have a basis in generally accepted science or peer-reviewed scientific research or not. Negative publicity—whether accurate or inaccurate—about our products, based on, for example, news about breast implant litigation or regulatory actions, could materially reduce market acceptance of our products and could result in product withdrawals. In addition, significant negative publicity could result in an increased number of product liability claims, whether or not these claims have a basis in fact.

Because our strategy is based on successfully making acquisitions and otherwise diversifying or expanding our product offerings, we are exposed to numerous risks associated with acquisitions, diversification and rapid growth.

Our present growth strategy is based in significant part on the acquisition of other companies, products and technologies that meet our criteria for strategic fit, geographic presence, revenues, profitability, growth potential and operating strategy. The successful implementation of this strategy depends on our ability to identify suitable acquisition candidates finance acquisitions, acquire companies and assets on acceptable terms and integrate their operations successfully.

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

Acquisitions also involve a number of other risks, including the risks of acquiring undisclosed or undesired liabilities, acquired in-process technology, stock compensation expense and increased compensation expense resulting from newly hired employees, the diversion of management attention, potential disputes with the sellers of one or more acquired entities and the possible failure to retain key acquired personnel. Client satisfaction or performance problems with an acquired business or product line could also have a negative impact on our reputation as a whole, and any acquired entity or assets could

significantly under-perform relative to our expectations. Our ability to meet these challenges has not been established through repeated acquisitions.

We expect that, at least for the foreseeable future, we will be required to use primarily cash consideration for acquisitions. We likely will be required to obtain significant third-party financing to accomplish these acquisitions. This financing may not be available on acceptable terms, if at all. The terms of any such financing may be dilutive to existing stockholders.

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

Some aspects of our business, such as acquisitions, distribution agreements with third parties and product research and development, including regulatory approvals and compliance, have significant and sometimes unpredictable events that can result in material financial and accounting events, including reserves, write-offs and litigation. For example, in our Eurosilicone acquisition, we made an aggregate of $754,463 in negative purchase accounting adjustments, we have incurred a total of $6,700,042 in reserves and write-offs in connection with our PIP.America subsidiary’s distribution agreement with PIP because of past uncertainties regarding PIP’s ability to pay its portion of the product replacement program for its products distributed in the United States, and Eurosilicone is party to litigation with one of its distributors in which damages of €4 million are alleged. These aspects of our business, such as acquiring companies and technologies, establishing and administering distributor relationships and developing new products, are part of our business strategy. As a result of the significance of these events, their unpredictable timing and frequency and the variance in structure and outcome, these events and their financial impact are unpredictable and can create material fluctuations in our financial results.

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

Our success depends in part on our ability to obtain patents or trademarks or rights to patents or trademarks, protect trade secrets, operate without infringing upon the proprietary rights of others, and prevent others from infringing on our patents, trademarks and other intellectual property rights. We will be able to protect our intellectual property from unauthorized use by third parties only to the extent that it is covered by valid and enforceable patents, trademarks and licenses and we are able to enforce those rights. Patent protection generally involves complex legal and factual questions and, therefore, enforceability and enforcement of patent rights cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. Thus, any patents that we own or license from others may not provide adequate protection against competitors. In addition, our pending and future patent applications may fail to result in patents being issued. Also, those patents that are issued may not provide us with adequate proprietary protection or competitive advantages against competitors with similar technologies. Moreover, the laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States.

In addition to patents and trademarks, our intellectual property includes trade secrets and proprietary know-how. We seek protection of this intellectual property primarily through confidentiality and proprietary information agreements with our employees and consultants. These agreements may not provide meaningful protection or adequate remedies for violation of our rights in the event of unauthorized use or disclosure of confidential and proprietary information. Failure to protect our proprietary rights could seriously impair our competitive position.

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

We currently rely on a single supplier for silicone raw materials used in many of our products. We only have an oral supply agreement with this supplier which includes an understanding that they will transfer the necessary formulations to us in the event that it cannot meet our requirements. We cannot guarantee that this agreement will be enforceable or that we would be able to produce a sufficient amount of quality silicone raw materials in a timely manner. We will also depend on a sole or limited number of third-party manufacturers for silicone breast implants to be distributed by us in the North America market.

Our international business exposes us to a number of risks.

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

• foreign government regulation of medical devices;

• product liability claims;

• new export license requirements;

• political or economic instability in our target markets;

• trade restrictions;

• changes in tax laws and tariffs;

• inadequate protection of intellectual property rights in some countries;

• managing foreign distributors, manufacturers and staffing;

• managing foreign branch offices; and

• foreign currency translations.

If these risks actually materialize, our sales to international customers, as well as those domestic customers that use products manufactured abroad, may decrease or our supplier or manufacturing costs may materially increase.

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

Our success will depend upon our ability to attract and retain key managerial, financial, technical, selling and marketing personnel. The lack of key personnel might significantly delay or prevent the achievement of our development and strategic objectives. Although we maintain a key man policy on two of our Eurosilicone managers for the benefit of our commercial bank lenders, we do not maintain any other key man life insurance on any of our employees. Other than certain of our executives who are parties to employment agreements, none of our employees is under any obligation to continue providing services to us. We are continuing to build our management and technical staffs. We believe that our success will depend to a significant extent on the ability of our key personnel, including the new management and technical staffs, to operate effectively, both individually and as a group. Competition for highly skilled employees in our industry is high, and we cannot be certain that we will be successful in recruiting or retaining these personnel. We may also face litigation from competitors with hiring personnel formerly employed by them.

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

Our success will depend upon our ability to manage our internal and acquisition-based growth effectively. This will require that we continue to implement and improve our operational, administrative and financial and accounting systems and controls and continue to expand, train and manage our employee base. We anticipate that we will need to hire and retain numerous additional employees and consultants for both internal and acquisition-based growth for some time. Integration of these employees and consultants and employee and consultant loss in the process will require significant management attention and resources. Our systems, procedures, controls and personnel may not be adequate to support our future operations and our management may not be able to achieve the rapid execution necessary to exploit the market for our business model.

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

We have in the past and may in the future enter into supply, collaborative or consulting arrangements with third parties to supply or develop products. These arrangements may not produce or provide successful products. If we fail to establish these arrangements, the number of products from which we could receive future revenues will be limited. Our dependence on supply, collaborative or consulting arrangements with third parties subjects us to a number of risks. These arrangements may not be on terms favorable to us. Agreements with suppliers may limit our supply of products or require us to purchase products we can not profitably sell. They may also restrict our ability to market or distribute other products. Agreements with consultants or collaborative partners typically allow the third parties significant discretion in electing whether or not to pursue any of the planned activities. We cannot with certainty control the amount and timing of resources our suppliers, collaborative partners or consultants may devote to our products and these third parties may choose to pursue alternative products. These third parties also may not perform their obligations as expected. Business combinations, significant changes in their business strategy, or their access to financial resources may adversely affect a supplier’s, partner’s or consultant’s willingness or ability to complete its obligations under the arrangement. Moreover, we could become involved in disputes with our suppliers, partners or consultants, which could lead to delays or termination of the arrangements and time-consuming and expensive litigation or arbitration.

Our quarterly operating results are subject to substantial fluctuations and any failure to meet financial expectations for any fiscal quarter may disappoint securities analysts and investors and could cause our stock price to decline.

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

• changes in demand for our products;

• our ability to meet the demand for our products;

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

• existing and increased competition;

• our ability to compete against significantly larger and better funded competitors;

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

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

• changes in pricing policies by us and our competitors;

• the timing of significant orders and shipments;

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

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

• general economic factors.

As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and investors should 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 our stock to decline.

If we are unable to avoid significant product liability claims or product recalls, we may be forced to pay substantial damage awards and other expenses that could exceed our reserves and any applicable insurance coverage.

In the past, the breast implant manufacturing industry has been subject to significant litigation alleging product liability. We also have in the past been, currently are, and may in the future be subject to product liability claims alleging that the use of our technology or products has resulted in adverse health effects. These claims may be brought even with respect to products that have received, or in the future may receive, regulatory approval for commercial sale. In particular, the manufacture and sale of breast implant products entails significant risk of product liability claims due to potential allegations of possible disease transmission and other health factors, rupture or other product failure. Some breast implant manufacturers that suffered these types of claims in the past have been forced to cease operations or even to declare bankruptcy. We may also face a substantial risk of product liability claims from other products we may choose to sell. In addition to product liability claims, we may in the future need to recall or issue field corrections related to our products due to manufacturing deficiencies, labeling errors, or other safety or regulatory reasons. Product liability claims, relating to alleged product defects, are distinguishable from product warranty claims, which relate to allegations that products do not meet warranties of merchantability or fitness for a particular purpose. We address the substance of potential product warranty claims relating to products distributed by us in the United States through our product replacement programs discussed above in this Item 1, “Business.”

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

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

Lawsuits have been filed naming us or one of our subsidiaries, the French manufacturer from which we purchase breast implant products, and the U.S. distributor of those same products who preceded our subsidiary in the U.S. market. In these suits the plaintiffs have sought or currently seek, among other things, class action status for claims, including claims for breach of warranty. The claims arise from products distributed both before and after our subsidiary that distributed the products came into existence. Although certain of the claims arise from products distributed by the other distributor prior to our subsidiary coming into existence, we have still been named as a defendant. While we have reserved an amount equal to the outstanding product replacement claims for claims arising from products our subsidiary did distribute, the plaintiffs are seeking to hold our subsidiary responsible for more damages. There can be no assurance we can terminate the litigation as to our subsidiary for reserved amounts. Although our subsidiary is indemnified by three separate entities, including Poly Implants Protheses, S.A., the French manufacturer, PIP/USA, Inc. the previous distributor, and Mr. Jean Claude Mas, personally, there can be no assurance this indemnity will protect us, as there is no guarantee the French manufacturer, the previous distributor, or Mr. Mas will, or is able to, honor the indemnification they have provided. If our subsidiary is unsuccessful in defending against the claims involved in these suits, or if class action status is achieved, and the indemnification were to prove non-reliable, our subsidiary could be responsible for significant damages above the reserves and available assets needed to satisfy such a judgment.

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

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

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

If third parties claim we are infringing their intellectual property rights, we could suffer significant litigation or licensing expenses or be prevented from marketing our products.

Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of others. However, regardless of our intent, our technologies may infringe the patents or violate other proprietary rights of third parties. In the event of such infringement or violation, we may face litigation and may be prevented from pursuing product development or commercialization.

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

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

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

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 for clinical trials, inability to follow patients after treatment in clinical trials, inconsistencies between early clinical trial results and results obtained in later clinical trials, varying interpretations of data generated by clinical trials, or changes in regulatory policy during the period of product development in the United States and abroad. In the United States, there has been a continuing trend of more stringent FDA oversight in product clearance and enforcement activities, causing medical device manufacturers to experience longer approval cycles, more uncertainty, greater risk, and higher expenses. Internationally, there is a risk that we or our suppliers or collaborative partners may not be successful in meeting the quality standards or other certification requirements. Even if regulatory approval of a product is granted, this approval may entail limitations on uses for which the product may be labeled and promoted. It is possible, for example, that we or our suppliers or collaborative partners may not receive FDA approval to market our current or future products for broader or different applications or to market updated products that represent extensions of our, our suppliers’ or collaborative partners’ basic technology. In addition, we or our suppliers or collaborative partners may not receive export or import approval for products in the future, and countries to which products are to be exported may not approve them for import.

Government regulation of manufacturing of medical devices is expensive and time consuming for manufacturers and may result in product unavailability or recalls.

Medical device manufacturing facilities also are subject to continual governmental review and inspection. The FDA has stated publicly that compliance with manufacturing regulations will be scrutinized more strictly. A governmental authority may challenge our or our suppliers’ or collaborative partners’ compliance with applicable federal, state and foreign regulations. In addition, any discovery of previously unknown problems with products or facilities may result in restrictions on the product or the facility, including withdrawal of the product from the market or other enforcement actions.

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

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

It is unlikely that we will issue dividends on our common stock in the foreseeable future.

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

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

In the future we will sell additional shares of our common stock, or other securities convertible into or otherwise entitling the holder to purchase our common stock. In the future we will also issue additional options to purchase our common stock to our employees, possibly including our executive officers, and our directors, and possibly to consultants and vendors. We also intend to issue shares of our common stock in connection with acquisitions or other commercial transactions and to holders of outstanding debt, including holders that are affiliates. All such sales and issuances of our common stock, other equity securities and warrants and options to purchase our common stock, will be at presently undetermined prices, which may be lower than prices at which other holders of common stock purchased such shares and dilutive to those holders, and will reduce the percentage of our equity owned by our existing stockholders. These issuances may also adversely affect prevailing market prices for our common stock.

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

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

The price of our common stock has historically been volatile.

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

Our common stock is thinly traded on the Over-the-Counter Bulletin Board, which may not provide liquidity for our investors.

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

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

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

The terms of our outstanding preferred stock or future preferred stock may negatively affect the value of our common stock.

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

common stock holders. Our series A preferred stock is not a participating preferred stock, though it is convertible into our common stock.

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

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

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

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

Our certificate of incorporation limits the liability of directors and officers to the maximum extent permitted by Delaware law. In addition, our certificate of incorporation authorizes us to obligate our company to indemnify our present and former directors and officers for actions taken by them in those capacities to the maximum extent permitted by Delaware law. Our bylaws require us to indemnify each present or former director or officer, to the maximum extent permitted by Delaware law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to fund the defense costs incurred by our directors and officers. These limitations on recourse against officers and directors and the affirmative protections of officers and directors may limit or restrict actions by or on behalf of the company or stockholders, which could adversely affect the company our stockholders.

Concentration of ownership of our common stock by our management and others and termination of employment agreements we have entered into with our executive and other officers could negatively affect the market price of our common stock because they discourage open market purchases of our common stock by purchasers who might seek to secure control of MediCor.

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

If our executive officers and directors exercised all their options and converted all of the securities beneficially owned by them into an aggregate of 14,960,842 shares of our common stock, our officers and directors would own approximately 65% of our then-outstanding common stock. This concentration of ownership would probably insure our management’s continued control of MediCor.

In addition, International Integrated Industries, LLC, an affiliate of our chairman, currently holds approximately $54,933,489 of our debt. If some or all of that debt were converted into our common stock, International Integrated could

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

We have entered into employment agreements with Messrs. Theodore Maloney, Jim McGhan and Thomas Moyes, three of our executive officers. These agreements provide for payments to them in the event that their employment is terminated by us, including without “good reason” as defined in the agreements. We will pay an amount equal to two times the annual base compensation paid by us to such person plus applicable pro rata bonus amounts in the event of a termination by us without cause, as defined in the agreements, or a termination by the executive for good reason, which includes the occurrence of a change in control, as defined in the agreements. The employment agreements further provide that in the event of the death or disability of any of Messrs. Maloney, McGhan or Moyes, we will pay to such person an amount equal to three months’ compensation or compensation through the date our long-term disability policy begins paying benefits, as applicable. These termination-of-employment agreements may discourage persons from making open market purchases of our common stock for the purpose of securing a controlling interest in MediCor.

ITEM 3. CONTROLS AND PROCEDURES

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

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

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

distribution agreement between PIP/USA and PIP-France and invalidate PIP.America’s distributor relationship with PIP-France. It is PIP.America’s position that the Kwartin litigations are within the scope of the indemnification agreements. A motion is currently pending to consolidate all of the cases.

Though it is not yet possible to predict the outcome of the cases described above, MediCor and its subsidiaries, as applicable, are vigorously defending each lawsuit.

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

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

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

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

See Exhibit Index at Page 40.

SIGNATURES

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

		*MEDICOR LTD.* (Registrant)


Date:	November 14, 2005	By:	/s/ Theodore R. Maloney
			Theodore R. Maloney
			Chief Executive Officer


Date:	November 14, 2005	By:	/s/ Thomas R. Moyes
			Thomas R. Moyes
			Chief Financial Officer

EXHIBIT INDEX

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

Medicor Inactive 10QSB2006 Q1 Quarterly report (small business)

Revenue Recognition

Inventories

Property and Equipment

Accounting for Long-Lived Assets

Goodwill and Other Intangible Assets

Product Replacement Programs

Shipping and Handling Costs

Shipping and handling costs incurred by the Company are included under cost of sales.

Research and Development

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

Stock-Based Compensation

Income Taxes

Effects of Recent Accounting Pronouncements