Medicor 10QSB 2006 Q3 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 March 31, 2006
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	(IRS Employer
of incorporation or organization)	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 May 12, 2006, there were 23,734,641shares of common stock outstanding.

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

MEDICOR LTD.

INDEX

Part I. Financial Information
Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheet – March 31, 2006
	Consolidated Statements of Operations – Three Months Ended March 31, 2006 and 2005
	Consolidated Statements of Operations – Nine months Ended March 31, 2006 and 2005
	Consolidated Statements of Cash Flows – Nine months Ended March 31, 2006 and 2005
	Notes to Consolidated Financial Statements – March 31, 2006
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Controls and Procedures
Part II. Other Information
Item 1.	Legal Proceedings
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
	Signatures

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PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MediCor Ltd.

Consolidated Balance Sheet

March 31, 2006

(Unaudited)

Assets
Current assets:
Cash and cash equivalents	$	724,744
Accounts receivable, net of allowance of $1,173,675	7,511,114
Notes receivable, net of allowance of $3,386,109	—
Inventories	5,049,291
Prepaid expenses and other current assets	137,118
Total current assets	13,422,267
Property and equipment, net	4,976,997
Goodwill and other intangible assets, net	42,378,849
Deposits	1,145,720
Other assets	501,423
Total assets	$	62,425,255
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	8,381,982
Accrued expenses and other current liabilities	3,997,227
Short-term note payable	16,818
Note payable to related party	60,686,257
Interest payable to related party	7,420,643
Current portion of long-term debt	2,871,212
Total current liabilities	83,374,139
Long-term debt, net of current portion	11,481,036
Total liabilities	94,855,175
Commitments and contingencies (Note T)
Preferred shares subject to mandatory redemption requirements	6,810,258
Stockholders’ equity (deficit)
Common shares, $0.001 par value, 100,000,000 shares authorized, 21,114,939 shares issued, 21,094,641 shares outstanding and 20,298 shares retired	21,061
Additional paid-in capital	27,570,016
Accumulated deficit	(65,562,602		)
Accumulated other comprehensive loss	(1,268,653		)
Stockholders’ deficit	(39,240,178		)
Total liabilities and stockholders’ equity	$	62,425,255

See accompanying notes to unaudited consolidated financial statements

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MediCor Ltd.

Consolidated Statements of Operations

Three Months Ended March 31, 2006 and 2005

(Unaudited)

	2006			2005
Net sales	$	7,878,064		$	7,130,409
Cost of sales	4,679,951			4,838,448
Gross profit	3,198,113			2,291,961
Operating expenses:
Selling, general and administrative
Salaries and wages	1,147,269			1,070,157
Other	3,515,693			3,300,906
Research and development	1,084,124			680,895
Operating loss	(2,548,973		)	(2,759,997		)
Non-operating expenses:
Net interest expense	1,531,370			1,152,087
Loss (gain) on foreign exchange transactions	(88,089		)	2,889
Loss before income taxes	(3,992,254		)	(3,914,973		)
Income tax benefit	(307,772		)	—
Net loss	(3,684,482		)	(3,914,973		)
Preferred dividends
Preferred dividends deemed	—			—
Preferred dividends in arrears Series A Preferred 8%	127,351			215,749
Net loss attributable to common stockholders	$	(3,811,833	)	$	(4,130,722	)
Net loss per share of common stock, basic and diluted	$	(0.18	)	$	(0.23	)
Weighted average number of shares outstanding, basic and diluted	20,766,268			18,146,056

See accompanying notes to unaudited consolidated financial statements

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MediCor Ltd.

Consolidated Statements of Operations

Nine Months Ended March 31, 2006 and 2005

(Unaudited)

	2006			2005
Net sales	$	20,521,373		$	19,418,722
Cost of sales	13,500,691			11,572,363
Gross profit	7,020,682			7,846,359
Operating expenses:
Selling, general and administrative
Salaries and wages	4,519,296			3,407,126
Other	7,806,299			10,137,350
Research and development	2,569,837			1,882,084
Operating loss	(7,874,750		)	(7,580,201		)
Non-operating expenses:
Net interest expense	4,308,645			3,681,570
Loss (gain) on foreign exchange transactions	19,529			(218,774		)
Loss before income taxes	(12,202,924		)	(11,042,997		)
Income tax expense (benefit)	(167,691		)	282,316
Net loss	(12,035,233		)	(11,325,313		)
Preferred dividends
Preferred dividends deemed	—			260,172
Preferred dividends in arrears Series A Preferred 8%	379,115			645,059
Net loss attributable to common stockholders	$	(12,414,348	)	$	(12,230,544	)
Net loss per share of common stock, basic and diluted	$	(0.61	)	$	(0.68	)
Weighted average number of shares outstanding, basic and diluted	20,484,105			18,112,930

See accompanying notes to unaudited consolidated financial statements

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MediCor Ltd.

Consolidated Statements of Cash Flows

Nine Months Ended March 31, 2006 and 2005

(Unaudited)

	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(12,035,233	)	$	(11,325,313	)
Adjustments to reconcile net loss to net cash utilized by operating activities
Depreciation and amortization	1,306,063			835,657
Provision for doubtful accounts	415,587			3,138,008
Inventory write down	—			350
Non-employee stock options	95,784			144,383
Employee preferred stock	—			80,000
Directors’ restricted common stock	26,500			53,000
Increase (decrease) in cash flows from changes in operating assets and liabilities, excluding the effects of acquisitions
Accounts receivable, net	(751,700		)	(1,982,967		)
Notes receivable	(607,525		)	(2,053,897		)
Inventories	(1,172,456		)	(470,108		)
Prepaid expenses and other current assets	95,692			689,804
Goodwill	—			(617,675		)
Deposits	(1,049,540		)	617,675
Other assets	117,493			(625,611		)
Accounts payable	2,290,594			126,665
Accrued expenses and other current liabilities	(441,910		)	630,708
Interest payable	3,810,735			1,893,353
Non-current accrued liabilities	(517,356		)	—
Net cash used in operating activities	(8,417,272		)	(8,865,968		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment	(308,848		)	(805,721		)
Acquisition of Laboratoires Eurosilicone S.A., net of cash acquired	—			(12,760,150		)
Acquisition of Deramedics, net of cash acquired	—			(75,000		)
Net cash utilized in investing activites	(308,848		)	(13,640,871		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt	10,630,000			19,491,043
Proceeds from issuance of long-term debt	336,381			10,786,063
Proceeds from issuance of common stock	598,239			29,977
Proceeds from issuance of preferred shares subject mandatory redemption requirements	—			1,172,271
Payments on convertible debentures	(50,000		)	(200,000		)
Payments on short-term debt	(477,232		)	(5,872,912		)
Payments on long-term debt	(2,376,322		)	(513,628		)
Payments of preferred shares dividends	(13,805		)	—
Net cash provided by financing activities	8,647,261			24,892,814
EFFECT OF TRANSLATION ON CASH AND CASH EQUIVALENTS	(1,031,196		)	(596,348		)
CHANGE IN CASH AND CASH EQUIVALENTS
Net increase (decrease) in cash and cash equivalents	(1,110,055		)	1,789,627
Cash and cash equivalents at beginning of period	1,834,799			165,092
Cash and cash equivalents at end of period	$	724,744		$	1,954,719

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	2006		2005
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Conversion of short-term debt to preferred stock	$	—	$	250,000
Conversion of long-term debt to common stock	$	50,000	$	75,000
Issuance of preferred stock to employees and consultants	$	—	$	80,000
Issuance of preferred stock in lieu of dividends	$	237,000	$	—
Issuance of common stock to directors	$	—	$	53,000
The Company purchased all of the capital stock of Laboratories Eurosilicone S.A. for $43,297,915. In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired	$	—	$	15,870,718
Goodwill	$	—	$	36,392,429
Less: Liabilities assumed	$	—	$	(8,965,232	)
Cash paid for capital stock	$	—	$	43,297,915
Included in the fair value of assets acquired and liabilities assumed was $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
Less: Liabilities assumed	$	—	$	—
Cash paid for capital stock	$	—	$	75,000
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the period for:
Interest	$	653,361	$	1,948,429
Income taxes	$	484,823	$	—

See accompanying notes to unaudited consolidated financial statements

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MEDICOR LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2006

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 and reconstructive 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 17% of sales. Breast implant and other implant products account for about 94% of total sales for the quarter ended March 31, 2006, while scar management products contributed approximately 6% 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 Corporation. 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

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product is defective. Appropriate reserves are established for anticipated returns and allowances are based on product return history and expectation. 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 might 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. 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 16 years. The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” in January 2002. As a result, goodwill is no longer amortized, but is subject to a transitional impairment analysis and is tested 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.

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Product Replacement Programs

Most of the Company’s subsidiaries provide 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 certain surgeons outside of the U.S., the Company provides a product replacement program for the life of the patient, including for competitive implants, for aesthetic dissatisfaction as well as for deflation. For each replacement, the surgeon receives financial assistance plus a free implant. Management has estimated the amount of potential future product replacement claims based on a detailed 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 set aside as an allowance. Changes to actual claims, interest rates and estimates would affect the calculation and could materially impact the Company’s allowance and results of operations. Although breast implant products are not currently being sold in the U.S. (because we are in the process of obtaining FDA approval of them, as more fully described below), they were sold under a distribution agreement prior to November 2000 and an allowance for product replacements is maintained for the products sold in prior years.

For the quarter ended March 31, 2006, PIP.America paid $115,900 with respect to settlements under its product replacement program for products previously sold in the U.S. under its distribution agreement with Poly Implants Protheses S.A. (“PIP”), a third-party manufacturer of breast implants. For the quarter ended March 31, 2006, MediCor Aesthetics paid $2,000 with respect to settlements under its product replacement program for the products previously in the U.S. sold under its distribution agreement between Hutchison International, Inc. and Biosil Limited.

As of March 31, 2006, the Company’s product replacement program allowance consisted of:

	Allowance for Product Replacement
Balance at June 30, 2005	$	1,004,072
Accrual for product replacement program expansion during the period	83,526
Settlements incurred during the period	(701,202		)
Balance at March 31, 2006	$	386,396

Shipping and Handling Costs

Shipping and handling costs incurred by the Company are included in 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

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

On April 14, 2005, the SEC approved a new rule that delays the effective date for SFAS 123(R) to fiscal years beginning after June 15, 2005, thereby rendering it effective as to the Company on July 1, 2006.  The adoption of SFAS 123(R) is expected to have a material impact on the Company’s consolidated net income and earnings per share.

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 effected 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 and nine month periods ended March 31, 2006 and March 31, 2005, 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 March 31, 2006 are not necessarily indicative of the results for the full fiscal year.

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Note D – Major Customers

During the three and nine months ended March 31, 2006, two different distributor customers accounted for 15% and 8%, respectively, of the Company’s consolidated revenue. Revenue related to these two distributors for the three and nine months ended March 31, 2005 was 13% and 12%, 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 March 31, 2006 consisted of:

	March 31, 2006
Accounts receivable	$	8,684,789
Allowance for doubtful accounts	(1,173,675		)
Total	$	7,511,114

Changes in allowance for doubtful accounts are as follows:

Balance July 1, 2005	$	1,365,613
Provisions	101,811
Write-offs / (recoveries)	(293,749		)
Balance March 31, 2006	$	1,173,675

Note G – Notes Receivable

Notes receivable at March 31, 2006 consisted of:

	March 31, 2006
Notes receivable	$	3,386,109
Allowance	(3,386,109		)
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 provided for as an allowance, due to the lack of past payments and uncertain prospect of collection.

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Note H – Inventories

Inventories at March 31, 2006 consisted of:

	March 31, 2006
Raw materials	$	1,113,563
Work in process	305,973
Finished goods	3,629,755
	$	5,049,291

Note I - Property and Equipment

Property and equipment at March 31, 2006 consisted of:

	March 31, 2006
Buildings	$	4,051,498
Machinery and equipment	1,697,721
Furniture and fixtures	475,926
Land	138,945
Leasehold improvements	107,748
Property and equipment, gross	6,471,837
Less: Accumulated depreciation and amortization	(1,494,840		)
Property and equipment, net	$	4,976,997

Depreciation and amortization expense was $169,240 for the three months ended March 31, 2006 and $107,733 for the three months ended March 31, 2005. Depreciation and amortization expense was $494,175 for the nine months ended March 31, 2006 and $391,648 for the same period a year ago.

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Note J – Goodwill and Other Intangible Assets

Goodwill and other intangible assets as of March 31, 2006 consisted of:

	December 31, 2005
Goodwill	$	33,227,999
Customer-related intangibles	4,402,080
Supply agreements and other intangibles	3,673,146
Patents	3,000,000
Distribution and non-compete agreements	355,000
Trademarks and trade names	117,974
Intangible assets, gross	44,776,198
Accumulated amortization - goodwill	(41,973		)
Accumulated amortization - customer-related intangibles	(1,436,093		)
Accumulated amortization - supply agreements and other intangibles	(5,000		)
Accumulated amortization - patents	(640,328		)
Accumulated amortization - distribution agreements and non-compete	(244,315		)
Accumulated amortization - trademarks and trade names	(29,640		)
Accumulated amortization	(2,397,350		)
Intangible assets, net	$	42,378,849

Amortization expense for the three months ended March 31, 2006 was $275,530 compared to $84,799 for the prior period ended March 31, 2005. The amortization for the nine months ended March 31, 2006 was $811,888, compared to $259,814 with the prior period ended March 31, 2005.

The supply agreement and other intangibles are purchase price adjustments that were a result of the acquisition selected assets of Hutchison International, Inc. The Company is continuing to evaluate these intangible assets 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 estimated amortization expense for the next five years consists of:

	Twelve months ending
	March 31, 2007		March 31, 2008		March 31, 2009		March 31, 2010		March 31, 2011
Customer-related intangibles	$	813,755	$	813,755	$	813,755	$	813,755	$	610,316
Distribution agreements	22,500		22,500		22,500		22,500		20,625
Patents	236,902		236,902		236,902		236,902		236,902
Trademarks and trade names	10,979		10,979		10,979		10,979		10,979
Other	—		—		—		—		—
Total	$	1,084,136	$	1,084,136	$	1,084,136	$	1,084,136	$	878,823

14

Note K – Deposits and Other Assets

Deposits at March 31, 2006 totaled $1,145,720. The Company has $144,522 in security deposits on office leases, with local utility companies and $1,001,196 in expenses incurred during the acquisition process of Biosil Limited and Nagor Limited.

Other assets consisted of debt acquisition costs of $501,423 at March 31, 2006.

Note L – Accrued Expenses

Accrued expenses and other current liabilities at March 31, 2006 consisted of:

	March 31, 2006
Wages, paid leave and payroll related taxes	$	2,633,933
Legal settlement	750,000
Product replacement reserve	386,396
Other	226,898
	$	3,997,227

The Company entered into a settlement with Europlex, S.A. de C.V, agreeing to extinguish and release all claims, in exchange for future payments totaling $750,000 as described in Note U. Other accrued expenses included interest and other legal expenses.

Note M –Debt

Long-term debit consisted of the following amounts:

	March 31, 2006
Variable 6-month EURIBOR plus 2.25% euro-denominated note, with maturity in September 2011	$	11,252,746
Convertible debentures	250,000
Obligations under capital leases	2,392,735
Other notes	473,585
	14,369,066
Less: current maturities	(2,888,030		)
Long-term debt	$	11,481,036

In September 2004, MediCor’s ES Holdings subsidiary entered into an arrangement with a financial institution to borrow up to €16,400,000, at an interest rate of six-month EURIBOR plus 2.25%, to fund payments due to the sellers of Eurosilicone, a company acquired by MediCor in July 2004. The last borrowing is scheduled for 2007 and scheduled repayments complete in September 2011. As of March 31, 2006, the outstanding principal was €9,318,041.

Convertible debentures at March 31, 2006 were $250,000. These convertible debentures are convertible, at the holder’s discretion, after one year and at the 18-month, 24-month, 30-month and 36-month anniversary of the issuance date 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, and thus are all reported within the current portion of long-term debt. During the quarter ended March 31, 2006, we did not incur any costs relating to these convertible debentures.

15

MediCor has several capital leases. Substantially all of these lease obligations reside with the Company’s Eurosilicone subsidiary and are leases of facilities and vehicles. In addition, MediCor has several other notes, with outstanding principal balances ranging from $16,818 to $198,565 and annual interest rates ranging from 3.39% to 8.0%. (The Company also has an outstanding balance of $60,686,257 on a short-term note payable to an affiliate. See Note O.)

As of March 31, 2006, MediCor had $501,423 of unamortized financing costs recorded in other assets. These costs are being amortized straight-line over the life of the related note. This note matures in September 2011.

Payments due on capital lease obligations as of March 31, 2006 are as follows:

	Amount
April 2006 - March 2007	$	610,694
April 2007 - March 2008	407,856
April 2008 - March 2009	368,789
April 2009 - March 2010	320,125
April 2010 - March 2011	273,855
Later years	1,077,130
Total minimum payments required	3,058,449
Less: Amount representing interest	(665,714		)
Present value (principal) of capital lease obligations	2,392,735
Less: Current portion of capital lease obligations	(470,879		)
Long term portion of capital lease obligations	$	1,921,856

Principal payments due on long-term debt as of March 31, 2006, other than capital lease obligations, are as follows:

	Amount
April 2006 - March 2007	$	2,163,487
April 2007 - March 2008	2,034,649
April 2008 - March 2009	1,901,823
April 2009 - March 2010	1,875,458
April 2010 - March 2011	1,875,458
Later years	1,875,458
Total minimum payments required	11,726,331
Less: Amount representing interest	(2,167,151		)
Present value (principal) of long-term debt	$	9,559,180
Less: Current portion
Long term portion of long-term debt other than capital lease obligations

16

The current portion of long-term debt is as follows:

	Amount
Current portion of capital lease obligations	$		470,879
Convertible debentures	250,000
Current portion of other long-term debt	2,150,333
	$	2,871,212

Short-term note payable was $16,818 at March 31, 2006.

Note N – 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 $60,686,257 at March 31, 2006. 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 March 31, 2006, LLC advanced $3,355,000 to the Company, of which $40,073 was repaid. For the nine months ended March 31, 2006, LLC advanced $10,630,000 to the Company, of which $477,232 was repaid. Interest expense relating to this note payable was $1,453,181 for the three months ended March 31, 2006 and $4,210,734 for the nine months ended March 31, 2006, of which $400,000 had been 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 April 1, 2007.

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 only for expenses incurred for MediCor business purposes. The Company recognized a total expense of $97,650 for the three months ended March 31, 2006 and $355,260 for the nine months ended March 31, 2006 pursuant to the reimbursement agreement. This amount represents approximately 10.2% of the quarterly operating costs of the entity and 9.3% of the nine months’ operating costs of the entity. 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 expense of $101,048 for three months ended March 31, 2006 and $342,085 for the nine months ended 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.

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Note O – 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 consisted of:

	March 31, 2006			March 31, 2005
Current
Net loss	$	(3,472,273	)	$	(4,136,781	)
Foreign income tax expense (benefit) on unconsolidated subsidiaries	(167,691		)	282,316
	(3,639,964		)	(3,854,465		)
Deferred
Allowance for bad debts	141,300			368,598
Allowance for product replacement	216,855			699,717
Depreciation and amortization	444,061			190,588
	802,216			1,258,903
Total benefit	(2,837,748		)	(2,595,562		)
Valuation provision for realization of deferred tax asset	2,670,057			2,877,878
Total tax expense (benefit)	$	(167,691	)	$	282,316

The current tax expense for the nine months ended March 31, 2006 resulted from income tax paid by a foreign subsidiary. As of March 31, 2006, the Company recorded an allowance of $21,187,065 against certain future tax benefits, the realization of which is currently uncertain. The deferred differences related to certain accounts receivable, write-offs, provisions for product replacement, and depreciation and amortization expense 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:

	March 31, 2006
Computed expected income tax liability at 34%	$	(3,472,273	)
Adjustments
Net operating loss	16,402,856
Provision for bad debts	1,550,327
Provision for product replacement	671,892
Depreciation and amortization expense	694,149
Income tax benefit	$	15,846,951
Valuation allowance for realization of deferred tax asset	(15,846,951		)
Deferred tax asset, net	$	—

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Note P – 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 $0.001 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 shares not yet converted 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, will be payable by the Company in cash. At March 31, 2006, the Company had outstanding an aggregate of 6,456 shares, issued for aggregate consideration of $6,810,258.

Note Q – 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:

	Nine Months Ended March 31, 2006						Nine Months Ended March 31, 2005
	Income			Shares	Per-Share Amount		Income			Shares	Per-Share Amount
	(Numerator)			(Denominator)			(Numerator)			(Denominator)
Net income (loss) before preferred stock dividends	(12,035,233		)				(11,325,313		)
Less: Preferred stock dividends	379,115						905,231
Basic EPS	(12,414,348		)	20,484,105	(0.61	)	(12,230,544		)	18,112,930	(0.68	)
Effect of dilutive securities	—						—
Diluted EPS	$	(12,414,348	)	20,484,105	(0.61	)	$	(12,230,544	)	18,112,930	(0.68	)

Common equivalent shares of 2,996,405 have been excluded from the computation of diluted earnings per share because their effect would be anti-dilutive.

Note R – 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 and related information is summarized below:

	Options		Weighted Average Exercise Price
Options outstanding at June 30, 2005	4,315,757		$	3.28
Granted	160,000		3.10
Exercised	(235,043	)	1.92
Cancelled	—		—
Options outstanding at March 31, 2006	4,240,714		$	3.33
Options exercisable at end of period	1,267,179		$	3.17

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The following table summarizes information about employee stock options outstanding at March 31, 2006:

Outstanding					Exercisable
Range of Exercise Prices	Number of Options	Weighted Average Remaining Years of Contractual Life	Weighted Average Exercise Price		Number of Options	Weighted Average Exercise Price
$1.00 - $2.01	800,714	3.4	$	1.76	342,179	$	1.76
$3.00 - $3.80	2,340,000	5.1	$	3.46	650,000	$	3.46
$4.15 - $4.30	1,100,000	5.1	$	4.23	275,000	$	4.23

Note S - 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 March 31, 2006, sales from breast and other implant products were approximately 94% of total sales, whereas sales from scar management products were approximately 6% 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 17% 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 $36 million, all located in France. Amounts attributable to the U.S. were approximately $7 million.

Note T – 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 April 1, 2007. The same entity has provided the Company an aggregate of over $77 million in funding from the Company’s inception through March 31, 2006. 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 provided 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 amounts and timing of these future costs are 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 March 31, 2006 was $3,386,109.

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 N.

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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. All of the cases above have been consolidated for all pre-trial purposes, but not for trial. 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.

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. Counsel for Jessica Fischer Schnebel, et al. v. PIP/USA, Inc., Case No. 03CH07239 amended her class action complaint to include plaintiffs from the other four cases, and each of the others was voluntarily dismissed. The consolidated second amended complaint contained 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. Unspecified monetary damages, exemplary damages and attorneys fees and costs had been sought. On January 26, 2006, PIP.America won dismissal of all counts in these cases but the third-party beneficiary claims. Plaintiffs have amended and refilled their complaint against PIP.America. Poly Implants Protheses, S.A., a defendant in the Schnebel litigation, has agreed that it will indemnify PIP.America for any losses it may suffer as a result of the Illinois litigation.

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

In July, 2005, IP Resources Limited, a UK-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 certain European Patent licensed by IP Resources, Inc. known as “Implantable prosthesis device”, Patent #0 174 141 B1, and seeks damages of $3 million Euros. The case is in the preliminary stages and the company believes it does not infringe on the 0 174 141 B1 patent and is prepared to wage a vigorous defense based on both the validity of the patent and upon the merits of the claims.

Though it is not yet possible to predict the outcome of the cases described above, MediCor and its subsidiaries, as applicable, have denied plaintiffs’ allegations and are vigorously defending themselves in each lawsuit. MediCor and its subsidiaries have been 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.

21

The Company has operating leases for office, manufacturing and warehouse facilities under various terms expiring from 2007 to 2010. Lease expenses amounted to $113,643 and $120,919 for the three months ended March 31, 2006 and 2005, respectively. For the nine months ended March 31, 2006, lease expenses were $302,118 compared to $393,026 for the nine months ending March 31, 2005. Future minimum operating lease payments are approximated as follows:

Year ending March 31,	Amount
2007	383,633
2008	254,703
2009	183,077

Note U – 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 acquired from 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.

22

The following table summarizes the components of the total purchase price and the allocation as of the date of acquisition and updated as of March 31, 2006:

	Book Value of Assets Acquired / Liabilities Assumed		Purchase Price Adjustments			Preliminary Fair Value
Employee advances	$	39,782	$	—		$	39,782
Inventory	372,061		(372,061		)	—		(a)
Property and equipment	1,492		(1,492		)	—		(b)
Intangibles	—		3,243,146			3,243,146		(c)
Total assets	$	413,335	$	2,869,593		$	3,282,928
Short-term product replacement allowance	195,750		87,175			282,925		(d)
Book value of net assets	217,585		(217,585		)	—		(e)
Purchase price			3,000,003			3,000,003		(e)
Total liabilities and shareholders’ equity	$	413,335	$	2,869,593		$	3,282,928

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 current market for the product 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 one year of acquisition.

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

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

Note V – Subsequent Events

On April 26, 2006 the Company raised $50 million in a private placement. The financing involved the sale of senior secured convertible notes and warrants to purchase a total of 29,166,667 shares of common stock. Concurrently, Sirius Capital LLC, a private equity investment fund affiliated with the Company’s Chairman and founder, Donald K. McGhan, converted $37.5 million of outstanding loans to the Company into an unsecured subordinated convertible note, with similar terms as the senior secured convertible notes, and a warrant to purchase a total of 21,875,000 shares of common stock. The debt is convertible into shares of common stock at a price of $4.00 per share and the warrants are exercisable at a price of $4.50 per share, subject in each case to customary anti-dilution adjustments.  $31,710,693 of the Company’s remaining debt held by International Integrated Industries, LLC was subordinated to the new senior notes.

On April 28, 2006, the Company acquired privately-held Biosil Limited and Nagor Limited, a manufacturer and distributor of aesthetic, plastic and reconstructive surgery devices.  The terms of the transaction were a payment of £13 million in cash at closing, two subsequent payments of £3.5 million each, and 2.64 million shares of the Company’s common stock, issued at closing.

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

This Quarterly Report on Form 10-QSB, including the following “Management’s Discussion and Analysis of Financial Condition and results of Operations,” 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, denial or rescission of approval; delay, termination 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, including expiration or termination of agreements; 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 $0.001 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 and reconstructive 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. Breast implant and other implant products account for about 94% of total sales for the quarter ended March 31, 2006, while scar management products contributed approximately 6% of total sales. Brazil accounted for about 17% of total breast implant and other implant 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 Corporation 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.

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Breast and other implant products

Our primary product line is breast and other implants, accounting for about 94% of total sales for the three months ended March 31, 2006 and 93% for the nine months ended March 31, 2006. 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 17% 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 prostheses, which collectively account for approximately 4% of total sales.  The financing for the Eurosilicone acquisition was provided primarily through 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.  We have already addressed some of the observations arising from the FDA review of the application, and the four-year interval clinical trial data are currently being analyzed by the FDA.  These data, together with our responses to any unaddressed observations, will be submitted as a PMA amendment following completion of that FDA analysis.  Although we now anticipate submitting the appropriate data in response to the FDA’s observations and guidance in the first half of 2006, 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.  Timing for submission of the completed PMA application is presently uncertain but is not expected to occur during 2006 due to the need to collect, update and verify the clinical data.  As a result, there can be no assurance of timing, review or decision concerning any resulting PMA application.  Although we are not the manufacturer of these products, we do and will continue to provide technical and other assistance with the clinical trials and regulatory efforts.

Scar Management Products

HPL Biomedical, one of our subsidiaries, competes under the name Biodermis 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 6% of total sales for the three months ended March 31, 2006 and 7% for the nine months ended March 31, 2006.  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™ and Pro-Sil™ silicone ointments.  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 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 medical device company 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 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,

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including those related to revenue recognition, inventories, adequacy of allowances for doubtful accounts and product replacement, valuation of long-lived assets and goodwill, income taxes, and litigation.  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 and product replacement, valuation of long-lived assets and goodwill, income taxes, and litigation.

RESULTS OF OPERATIONS

Sales

Sales for the three months ended March 31, 2006 equaled $7,878,064, an increase of $747,655 or 10% as compared to the prior year quarter.  This growth rate was negatively impacted by unfavorable foreign exchange rates by approximately 4%.  Unit growth drove this increase, offset by a decrease in unit prices.  Most of the sales growth was driven by the Latin America region.

For the nine months ended March 31, 2006 sales were $20,521,373, an increase of $1,102,651or 6% versus the same period a year ago.  This growth rate was negatively impacted by unfavorable foreign exchange rates by approximately 2%.  Unit growth drove this increase, offset by a decrease in unit prices. The increase in sales for the period was primarily attributable to sales growth in Latin America and other regions, which was then partially offset by a slight decline in European and Asia Pacific sales of breast implants caused by competition and weaker economic conditions in that region.  The Company’s historical sales growth rate over the most recent four quarters, including the current quarter, was about 7%, and the impact of foreign exchange was immaterial.

Cost of Sales

Cost of sales as a percentage of net sales for the three months ended March 31, 2006 was approximately 59% compared to approximately 68% during the same period in 2005.  For the nine months ended March 31, 2006 cost of sales as a percentage of net sales was approximately 66% compared to 60% during the same period in 2005.  The majority of the cost associated with the production of our product is recurring.  The resulting increase in gross margin for the three months ended March 31, 2006 from about 32% to about 41% and the decrease in gross margin for the nine months ended March 31, 2006 from 40% to 34% was primarily attributable to the decrease in average selling prices of breast implants as described above.  Additionally, an increase in regulatory and quality control costs as well as production labor contributed to the decline in gross margin for the nine months ending March 31, 2006.  These additional costs arose because the Company has initiated ongoing programs to increase production and improve manufacturing efficiencies and quality systems, which we believe will enable us to increase production and lower future unit cost of sales.  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 66%.

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Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased to $4,662,962 for the three months ended March 31, 2006, as compared to $4,371,063 during the same period in 2005.  The increase can be attributed to payroll related expenses of $540,023; printing expense of $166,149; additional amortization and deprecation of $142,455; and advertising fees of $104,189 and other various expenses of $43,888. These were offset by a reduction in bad debt expense of $704,805.  Of all SG&A expenses, the majority were recurring charges for this quarter.

For the nine months ended March 31, 2006, SG&A decreased to $12,325,595 as compared to $13,544,476 during the same period a year ago.  The decrease can be attributed to a vendor settlement of $983,558 relieving accounts payable recorded in a prior period; lower bad debt expense of $840,561; a bad debt recovery of $672,663; a reduction in product replacement expense of $637,808; a reversal of $517,536 in long-term accrued liability previously provided for in a prior period and lower commission expense of $234,987. These were offset by an increase in payroll $1,337,365; a legal settlement of $1,000,000; additional amortization and depreciation expense of $371,066; travel related expenses of $281,247; advertising fees of $179,970; and other expenses of $79,657. Of all SG&A expenses, the majority were recurring charges for this period.

Research and Development Expenses

Research and development expenses in the recent quarter ending March 31, 2006 were $1,084,124, as compared to $680,895 for the comparable period in 2005.  For the nine months ended March 31, 2006, research and development expenses increased to $2,569,839 as compared to $1,882,084 for the same period a year ago.  The increase of $687,755 is primarily attributable to a net increase in spending associated with the saline breast implant clinical trials.  Costs associated with the PIP product were $241,822 and costs relating to the development of other product lines were $445,933.  We expect that research and development expenses will decrease once we receive required government approvals, but may increase as we bring new products to market or existing products to new markets.

Interest Expense

Interest expense increased to $1,531,370 for the three months ended March 31, 2006, compared to $1,152,087 in same period in the prior year.  Interest expense increased to $4,308,645 for the nine months ended March 31, 2006, as compared to $3,681,570 for the nine months ended March 31, 2005.  Interest expense consists primarily of interest related to borrowings.  The change in interest expense was primarily due to an increase in the average principal balance on the note payable to related party.

Net Loss

Net loss before preferred dividends for the three months ended March 31, 2006 increased to $3,684,482 from $3,914,973 for the comparable period in the previous year.  Net loss before preferred dividends increased from $11,325,313 reported in the nine months ended March 31, 2005 period to $12,035,233 for the nine months ended March 31, 2006.  The change was due to higher selling costs, research and development and interest expense, which was then partially offset by a decrease in general and administrative expenses.  Basic and diluted loss per share was $0.20 for the three month period compared to $0.23 for the comparable period last year. Basic and diluted loss per share was $0.61 for the nine month period compared to $0.68 for the comparable period last year.

LIQUIDITY AND CAPITAL RESOURCES

Cash used in operations during the nine months ended March 31, 2006 was $9,700,232 as impacted by selling, general and administrative expenses, continued startup costs, research and development expenses and interest expense. Our investing activities of $308,848 were 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 accounted as operating expenses.

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Historically, we have 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 twelve months.  To satisfy our liquidity requirements, we will need to raise additional funds. To the extent that additional sales of equity or debt securities are insufficient to satisfy our liquidity requirements, we plan 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 April 1, 2007. The same entity has provided to us over $77 million in funding through March 31, 2006.  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 alongside 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 through 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.  Under the Eurosilicone acquisition agreement, our ES 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. If these payments are required and ES Holdings does not otherwise have sufficient funds from dividends or distributions from Eurosilicone, ES Holdings intends to seek to draw the necessary funds from its credit facility with BNP Paribas, which was established in part 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 a third-party, such as a bank, to provide additional 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 April 1, 2007.

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 do not currently hedge against foreign exchange risk and do not have any plan to do so in the immediate future.

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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.  In the case of our agreement with Biosil, we are operating together with Biosil under an expired agreement.  If we do not conclude our acquisition of Biosil, there is no certainty that we would retain any rights under this agreement.  Our relations with the other manufacturer have from time to time been contentious, and there is no assurance that we will be able to maintain those distribution 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 or pre-market approval applications 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. We must also prepare and submit pre-market approval applications, based on data from this testing and these trials to appropriate regulatory authorities. Conducting clinical trials and preparing and submitting pre-market approval applications are lengthy, time-consuming and expensive processes.

Completion of clinical trials may take several years or more.  Our commencement and rate of completion of clinical trials, and our submission of pre-market approval applications, 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 or criticisms, 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, questions about data integrity and changes in regulatory policy during the period of product development and questions about data integrity.  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.

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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 in developing or enhancing products we have in development or clinical trials.  Nor can we guarantee that we will successfully develop new products or technologies that will timely achieve necessary safety and efficacy and regulatory approval or receive market acceptance.  Once developed, we must timely obtain regulatory approval for our products.  The failure to obtain this approval in a timely manner can jeopardize any chance of approval due to the age or integrity of data and 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.  There is also no assurance that we will obtain regulatory approval for our current saline filled breast implant products or any other products in the U.S.  These regulatory and marketing conditions 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 conduct our ongoing operations, expand our product lines and markets, and purchase new companies, products and intellectual property, we have to date needed substantial third-party capital.  As a result, we currently have significant debt that must be serviced.  Prior to our recent third-party financing, which we closed in April 2006, we had been funded in substantial part by an affiliate of our chairman.  We do not anticipate that this funding source will provide capital to finance our intended growth strategy in the future, and we expect that if and to the extent we need additional financing to accomplish our future goals we will have to seek other sources.  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 otherwise available, or are not available on acceptable terms, our ability to implement desired expansion and growth plans may be 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 a significant lender, and he is our 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.

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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 merit.

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

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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 provisions, 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 provisions, 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 $7,243,691 in provisions 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.  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 it 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

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increased costs to us.  Our operations and financial results alsod 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.  We are also particularly vulnerable to suppliers of heavily regulated products, such as breast implants, to consistently and timely produce high-quality products.  If they do not, our business will suffer immediately and likely materially.  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

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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 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

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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 allowances.

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 have purchased 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 provided 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 the provided 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 that 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 allowances 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.  However, 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 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.

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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 or criticisms of data generated by clinical trials, questions about data integrity from clinical trials, ageing of data, or changes in regulatory policy during the period of product development in the United States and abroad.  We currently face these regulatory risks with respect to our submitted and pending PMA applications.  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 our collaborative partners’ basic technology.  In addition, we or our suppliers, or our 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 which 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.

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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 5,681,757 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 1,676,897 shares of our common stock at any time, and outstanding convertible debentures may be converted into an aggregate of 50,000 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, we were required to delay this application process due to the pendency of an acquisition.  There can be no assurance that our common stock will be approved for listing in the future once we reinitiate the application process, 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 that 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

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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, 6,456 shares 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

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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 12,529,782 shares of common stock, hold securities convertible into 1,031,948 shares of common stock, and have been granted options to purchase an additional 1,492,322 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 16,635,813 shares of our common stock, our officers and directors would own approximately 72% 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 $60,686,257 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.

Of the four members of MediCor’s Executive Committee, we have entered into employment agreements with Messrs. Theodore Maloney, Jim McGhan and Paul Kimmel.  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 Kimmel, 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 March 31, 2006, 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 March 31, 2006 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

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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

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.  All of the cases above have been consolidated for all pre-trial purposes, but not for trial.  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.

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.  Counsel for Jessica Fischer Schnebel, et al. v. PIP/USA, Inc., Case No. 03CH07239 amended her class action complaint to include plaintiffs from the other four cases, and each of the others was voluntarily dismissed.  The consolidated second amended complaint contained 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.  Unspecified monetary damages, exemplary damages and attorneys fees and costs had been sought.  On January 26, 2006, PIP.America won dismissal of all counts in these cases but the third-party beneficiary claims.  Plaintiffs have amended and refilled their complaint against PIP.America.  Poly Implants Protheses, S.A., a defendant in the Schnebel litigation, has agreed that it will indemnify PIP.America for any losses it may suffer as a result of the Illinois litigation.

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

In July, 2005, IP Resources Limited, a UK-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 certain European Patent licensed by IP Resources, Inc. known as “Implantable prosthesis device”, Patent #0 174 141 B1, and seeks damages of $3 million Euros. The case is in the preliminary stages and the company believes it does not infringe on the 0 174 141 B1 patent and is prepared to wage a vigorous defense based on both the validity of the patent and upon the merits of the claims.

Though it is not yet possible to predict the outcome of the cases described above, MediCor and its subsidiaries, as applicable, have denied plaintiffs’ allegations and are vigorously defending themselves in each lawsuit.  MediCor and its subsidiaries have been 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

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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.

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 43.

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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:	May 15, 2006	By:
			/s/ Theodore R. Maloney
			Theodore R. Maloney
			Chief Executive Officer
Date:	May 15, 2006	By:	/s/ Paul R. Kimmel
			Paul R. Kimmel
			Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description
10.1	Non-Employee Directors’ Deferral Plan
31.1	Principal Executive Officer Certification Pursuant To 17 C.F.R. Section 240.13a-14(a)
31.2	Principal Financial Officer Certification Pursuant To 17 C.F.R. Section 240.13a-14(a)
32.1	Principal Executive Officer Certification Pursuant To 18 U.S.C. Section 1350
32.2	Principal Financial Officer Certification Pursuant To 18 U.S.C. Section 1350

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