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                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                            ------------------------

                                   FORM 10-K

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
      ACT OF 1934:

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

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

                         COMMISSION FILE NUMBER 1-9741

                               INAMED CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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                    DELAWARE                                        59-0920629
          (STATE OR OTHER JURISDICTION                           (I.R.S. EMPLOYER
       OF INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.)
          5540 EKWILL STREET, SUITE D
           SANTA BARBARA, CALIFORNIA                                  93111
    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                        (ZIP CODE)
</TABLE>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 692-5400

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

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              TITLE OF EACH CLASS                      NAME OF EXCHANGE ON WHICH REGISTERED
              -------------------                      ------------------------------------
<S>                                              <C>
     COMMON STOCK, PAR VALUE $.01 PER SHARE                   NASDAQ NATIONAL MARKET
</TABLE>

       SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:  NONE

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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  [X]  No  [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [ ]

     The aggregate market value of voting stock held by non-affiliates as of
March 19, 2001 was $270.3 million.

  On March 19, 2001, there were 20,677,091 shares of Common Stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

     The information required by Part III is incorporated by reference to a
definitive proxy statement to be filed by the Registrant not later than April
30, 2000 pursuant to Regulation 14A.

                        This document contains 63 pages.

                     Exhibit index located on pages 25-27.

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                               INAMED CORPORATION

                           ANNUAL REPORT ON FORM 10-K
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                               TABLE OF CONTENTS

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                                   PART I
Item 1.   Business....................................................     2
Item 2.   Properties..................................................    12
Item 3.   Legal Proceedings...........................................    12
Item 4.   Submission of Matters to a Vote of Security Holders.........    12

                                  PART II
Item 5.   Market for the Company's Common Stock and Related
          Stockholder Matters.........................................    14
Item 6.   Selected Financial Data.....................................    14
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................    16
Item 7a.  Quantitative and Qualitative Disclosures about Market
          Risk........................................................    24
Item 8.   Financial Statements and Supplementary Data.................    24
Item 9.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure....................................    24

                                  PART III
Item 10.  Directors and Officers of the Company.......................    24
Item 11.  Executive Compensation......................................    25
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management..................................................    25
Item 13.  Certain Relationships and Related Transactions..............    25

                                  PART IV
Item 14.  Exhibits, Financial Statement Schedule, and Current Reports
          on Form 8-K.................................................    25
Signatures............................................................    28
Financial Statements..................................................   F-1
Financial Statement Schedule..........................................   S-1
</TABLE>

THIS ANNUAL REPORT ON FORM 10-K INCLUDES CERTAIN FORWARD-LOOKING INFORMATION
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT INVOLVE
RISK AND UNCERTAINTY, INCLUDING CERTAIN ASSUMPTIONS REGARDING THE FUTURE
PERFORMANCE OF THE COMPANY. ACTUAL RESULTS AND TRENDS MAY DIFFER MATERIALLY
DEPENDING UPON A VARIETY OF FACTORS, INCLUDING, WITHOUT LIMITATION, MARKET
DEMAND FOR THE COMPANY'S SERVICES, PRICING TRENDS IN THE MARKETS IN WHICH THE
COMPANY OPERATES, THE COMPANY'S ABILITY TO SUCCESSFULLY EXECUTE ITS INTERNAL
PERFORMANCE PLANS, THE CYCLICAL NATURE OF THE COMPANY'S BUSINESS AND THE IMPACT
OF ANY GOVERNMENT REGULATION. FURTHER, CUSTOMER COMMITMENTS UNDER THEIR
CONTRACTS WITH THE COMPANY ARE BASED ON CUSTOMERS' ESTIMATES OF THEIR FUTURE
REQUIREMENTS.

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                                     PART I

ITEM 1.  BUSINESS

     Inamed Corporation (the "Company") is a global surgical and medical device
company engaged in the development, manufacturing and marketing of products for
the plastic and reconstructive surgery, aesthetic medicine and obesity markets.
Inamed sells a variety of lifestyle products used to make people look younger
and more attractive, including breast implants for cosmetic augmentation and
collagen-based facial implants to correct facial wrinkles and to improve lip
definition. Inamed also sells products which address women's health issues,
including breast implants for reconstructive surgery following a mastectomy, and
devices which treat severe obesity and urinary incontinence.

GENERAL

     The Company operates through the following three business units:

     McGhan Medical Corporation serves the North American aesthetic medicine and
reconstructive surgery markets. This unit develops, manufactures and sells
plastic and reconstructive surgery (PRS) products (primarily saline-filled
breast implants and tissue expanders), as well as facial aesthetic products
(primarily collagen-based facial implants). It sells to plastic surgeons,
dermatologists, cosmetic surgeons and other medical practitioners in the United
States and Canada through a sales force consisting of approximately 89
company-employed representatives and managers. In 1999, the Company completed
the integration of the U.S. and Canadian business and operations of Collagen
Aesthetics, Inc. (Collagen Aesthetics) into McGhan Medical.

     Inamed International Corp. serves the international aesthetic medicine and
reconstructive surgery markets. Through its subsidiaries, this unit develops,
manufactures and sells PRS products (primarily silicone gel-filled breast
implants and tissue expanders), as well as selling facial aesthetic products
(primarily collagen-based and HylaForm(R) facial implants). It sells to plastic
surgeons, dermatologists, cosmetic surgeons, and other medical practitioners
through a sales force consisting of some 50 company-employed representatives in
the largest countries in Europe, as well as Japan and Australia, plus a network
of distributors in approximately 60 countries in Europe, the Middle East,
Central and South America and the Asia/Pacific region. Its subsidiaries include
McGhan Limited which is engaged in manufacturing, as well as direct sales
organizations in the United Kingdom, France, Germany, Italy, Spain, Japan and
Australia. During 2000, the Company discontinued the active operations of its
subsidiary in The Netherlands.

     BioEnterics Corporation is engaged in the development, production and
marketing of medical devices to treat obesity. BioEnterics' primary product is
the LAP-BAND(R) Adjustable Gastric Banding System, which is now being sold
throughout Europe, Australia and elsewhere. BioEnterics' amended application for
pre-marketing approval (PMA) of its LAP-BAND(R) System is now pending before the
U.S. Food and Drug Administration (FDA).

RECENT DEVELOPMENTS

     In February 2000, the Company's BioEnterics subsidiary completed the
submission of its PMA application for the LAP-BAND(R) Adjustable Gastric Banding
System. In March 2000, the FDA accepted this PMA application for filing. In June
2000, an FDA advisory panel recommended against approving the application in its
then-current form, and recommended certain amendments. In December 2000,
BioEnterics submitted the amendments. The FDA has now initiated its review of
the amendments. No assurance can be given that the FDA will grant a PMA for the
LAP-BAND(R) System.

     On May 10, 2000, the FDA announced that it had approved McGhan Medical's
application for PMA of four styles of saline-filled breast implants for use in
augmentation and reconstructive surgery. These products were previously
available in the U.S. marketplace as 510(k) devices.

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     In October 2000, the Company took assignment to all U.S. and foreign
patents and related rights held by Medical Products Development, Inc. relating
to a texturing process for the shells used in several of its lines of breast
implants and tissue expanders, and settled related litigation.

     In October 2000, the Company purchased a 15% equity interest in
Reconstructive Technologies, Inc., of Mountain View, California, and took an
exclusive, worldwide license to all of RTI's intellectual property for the rapid
in vivo expansion of human skin. Under the licensed technology, which is still
in pre-clinical development, a microprocessor-controlled pump would be used in
tandem with the Company's existing line of tissue expanders to accelerate skin
expansion following burns or breast cancer surgery. U.S. marketing of RTI's
fluid cycling technology linked with our tissue expanders would require FDA
approval.

     In March 2001, the Company announced that the FDA had approved the
expansion of McGhan Medical's IDE clinical study of its Style 410
silicone-filled breast implant to a full-scale pivotal study. The product, which
is the predominant breast implant sold by McGhan Ltd., has been sold
commercially outside the U.S. since 1994. The Company expects this study to
serve as the basis for a PMA application to market the product commercially in
the U.S.

PRODUCTS

  Breast Implants and Related Products

     Inamed is a leading global manufacturer and marketer of breast implants,
with a diverse product line consisting of a variety of shapes, sizes and
textures. The Company's breast implants consist of a silicone elastomer shell
filled with either saline solution or silicone gel. This shell can consist of
either a smooth or textured surface, which generally is chosen by the surgeon.
The Company markets its breast implants under the tradename McGhan(R) and the
trademarks BioCell(R), MicroCell(R) and Biocurve(TM). The Company's breast
implants are available in an aggregate of over 200 products to meet the
Company's customers' preferences and needs.

     Breast implants are placed under either a woman's breast tissue or pectoral
muscle. If the implant is saline-filled, it is usually inserted empty and then
filled and positioned. Silicone gel-filled implants are inserted pre-filled.

     Saline-filled breast implants.  Inamed markets and distributes
saline-filled breast implants in the U.S. and abroad for use in breast
augmentation for cosmetic reasons and for reconstructive surgery following
mastectomy. The U.S. market is the primary consumer of saline-filled breast
implants.

     Silicone gel-filled breast implants.  Inamed markets and distributes
silicone gel-filled breast implants primarily in Europe, Latin, Central & South
America, Australia and Asia. The Company currently has the CE Mark for marketing
its silicone gel-filled products in the European Community.

     Tissue Expanders.  The Company develops, manufactures and markets a line of
tissue expanders for breast reconstruction and other specialty applications. The
tissue expander is surgically implanted under the skin at a site where new
tissue is desired and is filled incrementally over several weeks or months with
saline solution. The increased pressure under the skin results in tissue
expansion and growth to generate an increase in skin surface. The tissue
expanders are commonly used in the first stage of two-stage breast
reconstruction to create additional tissue at the mastectomy site. In addition,
the Company makes and sells a line of tissue expanders that are used for
purposes other than breast implant surgery, including as an alternative to skin
grafting to cover burn scars and to correct birth defects.

  Facial Enhancement Products

     The Company offers a line of facial enhancement products designed to
improve facial appearance by smoothing wrinkles, scars and enhancing the
definition of facial structure. The Company's primary products in this area are
the Zyderm(R) and Zyplast(R) collagen-based facial implants. The Company also
distributes products manufactured by third parties, including solid silicone
implants, Hylaform(R) gel and SoftForm(R) implant.

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     Zyderm(R) and Zyplast(R) Implants.  Zyderm(R) and Zyplast(R) implants are
injectable formulations of collagen sourced from an exclusive, domestic
closed-herd of cows. Zyderm(R) implants were formulated especially for people
with fine line wrinkles or superficial facial contour defects. These implants
are particularly effective in smoothing delicate frown and smile lines and fine
creases that develop at the corners of the eyes and above and below the lips,
and can also help correct some kinds of shallow scars. Zyplast(R) implants are
designed to treat deeper depressions and can be used for more pronounced contour
problems, such as deeper scars, lines and furrows, and for areas upon which more
force is exerted, such as the corners of the mouth. The implants take on the
texture and appearance of human tissue and are subject to similar stresses and
aging processes. Consequently, supplemental treatments are necessary to maintain
the desired result. Because the products are derived from a non-human source, a
skin test must be performed with a requisite 30-day period to observe the
possibility of allergic reaction in the recipient. Zyderm(R) and Zyplast(R)
received their CE Marks in June 1995, allowing for marketing in the European
Community. The FDA granted PMA applications for Zyderm(R) in July 1981 and for
Zyplast(R) in June 1985, allowing for marketing in the U.S. The Company's
Zyderm(R) and Zyplast(R) line of collagen-based products are the only facial
injectable products currently marketed that have been approved for marketing in
the U.S. by the FDA.

     Hylaform(R) Gel.  Hylaform(R) gel is an injectable product for same-day
treatment of facial wrinkles and scars, which can be used without a skin
sensitivity test. The Company obtained exclusive marketing and distribution
rights to Hylaform(R) gel from BioMatrix, Inc. in selected international markets
and has the option to acquire the U.S. distribution rights in the future.
Hylaform(R) gel received a CE Mark in November 1995 allowing marketing in the
European community.

  Obesity Products

     The Company develops, manufactures and markets devices for the treatment of
obesity through its BioEnterics Corporation subsidiary.

     The Company's LAP-BAND(R) Adjustable Gastric Banding System is designed to
provide minimally invasive long-term treatment of severe obesity and is used as
an alternative to gastric bypass surgery or stomach stapling. The LAP-BAND(R)
System consists of an adjustable silicone elastomer band which is
laparoscopically placed around the upper part of the stomach through a small
incision, creating a small pouch at the top of the stomach. This slows down the
passage of food and makes the patient feel fuller sooner. The LAP-BAND(R) System
procedure is adjustable and reversible. The LAP-BAND(R) System has achieved
acceptance in Europe as well as Australia and other countries, with
approximately 55,000 units sold since 1993. In the U.S., BioEnterics'
application for PMA of the LAP-BAND(R) System is currently under review by the
FDA.

  Other Products.

     Contigen(R), the Company's collagen product used to treat urinary
incontinence, the involuntary loss of urine from the bladder due to intrinsic
sphincter deficiency, through its McGhan Medical and Inamed International
subsidiaries. Contigen(R), the Company's collagen product used to treat urinary
incontinence, is injected into the tissues of and adjacent to the urethra and/or
bladder neck. This increases tissue bulk and subsequently joins the urethral
lumen to alleviate urinary incontinence. The Contigen(R) treatment cycle may
require multiple injections at the start of treatment and may require
supplementary injections over time. The Company obtained approval from the FDA
to market Contigen(R) in September 1993 for the treatment of urinary
incontinence. The Company has granted C.R. Bard exclusive worldwide marketing
and distribution rights to Contigen(R), which is currently marketed in the U.S.
C.R. Bard has received reimbursement codes for Contigen(R) and is expected to
commence marketing in several European nations, Latin America, Japan, Australia
and Canada.

     BioEnterics' Intragastric Balloon (BIB(R)) System is a short-term therapy,
designed for patients who must reduce weight either in preparation for surgery
or for moderately obese patients in conjunction with a diet and behavior
modification program. Currently distributed outside the United States only, the
BIB(R) System is a

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silicone elastomer balloon which is filled with saline after insertion into the
patient. The Company expects to begin clinical trials for the BIB(R) System in
the United States in 2001.

SALES AND MARKETING

  Physician Marketing Efforts

     U.S. Sales Organizations.  In the U.S., McGhan Medical sells its products
to plastic and reconstructive surgeons, cosmetic surgeons, facial and oral
surgeons, dermatologists, out-patient surgery centers and hospitals through its
staff of direct sales people. As of December 31, 2000, McGhan Medical had
approximately 70 direct sales representatives in the U.S. and Canada. In the
U.S., at present, BioEnterics' sales are limited to enrolled clinical
investigators who are general surgeons and/or specialists in laproscopy.
BioEnterics has a sales staff of approximately 5 in contemplation of a possible
U.S. launch in 2001.

     International Sales Organization.  Inamed sells its products directly and
through independent distributors in more than 70 countries worldwide, including
countries in Europe, Latin, Central and South America, Australia and Asia. These
sales are managed through regional sales and marketing employees and, in some
countries, through a direct sales force. As of December 31, 2000 the Company's
international direct sales force consisted of approximately 50 direct sales
representatives, including approximately 10 devoted exclusively to BioEnterics'
business.

     The Company reinforces its sales and marketing program with telemarketing,
which is designed to increase sales through follow-up on leads and the
distribution of product information to potential customers. The Company
supplements its marketing efforts with appearances at trade shows,
advertisements in trade journals, sales brochures, and national media. In
addition, the Company sponsors symposiums and educational programs to
familiarize surgeons with the leading techniques and methods of using its
products.

COMPETITION

  Breast Implant Products

     Inamed competes in the U.S. breast implant market with Mentor Corporation.
Internationally, the Company competes with several manufacturers, including
Mentor Corporation, Poly Implant Prostheses (PIP), Nagor, Silimed and
Laboratories Sebbin.

     The Company believes that the principal factors permitting its products to
compete effectively are high-quality product consistency, product design,
management's knowledge of and sensitivity to market demands, plastic surgeons'
familiarity with its products and their respective brand names, and its ability
to identify, develop and, if appropriate, license, patented products embodying
new technologies.

  Facial Enhancement Products

     The Company's injectable products compete in the dermatology and plastic
surgery markets with substantially different treatments, such as laser
treatments, chemical peels, fat injections, gelatin- or cadaver-based collagen
products, dermabrasion, botulinum toxin injections and face lifts. In addition,
several companies are engaged in research and development activities examining
the use of collagen and other biomaterials for the correction of soft tissue
defects.

  Obesity and Other Products

     The LAP-BAND(R) System competes primarily with the Swedish Adjustable
Gastric Band in Europe, Latin America, and Australia. This band is manufactured
by Obtech Medical A.G., a Swiss company. The LAP-BAND(R) System competes with
other adjustable bands in some European countries, and also competes with
surgical obesity procedures, including gastric bypass, vertical banded
gastroplasty, and biliopancreatic diversion. No adjustable bands are
commercially available in the U.S. and the Company is not aware of the
initiation of clinical studies of other adjustable bands in the U.S.

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     Contigen(R) competes with comparable bulking agents and some surgical
procedures, including sling procedures, bladder neck suspension and insertion of
bone anchors.

PRODUCT DEVELOPMENT

     The Company has a qualified staff of over 50 doctorates, scientists,
engineers and technicians working on material technology and product design as
part of the Company's research and development efforts. In addition, the Company
is directing its research and development toward new and improved products based
on scientific advances in technology and medical knowledge, together with
qualified input from the surgical profession. For the periods ending December
31, 2000, 1999 and 1998, the Company had research and development expenses of
$9.9 million, representing approximately 4% of net sales, $10.3 million,
representing approximately 6% of net sales and $9.4 million, representing 7% of
net sales, respectively.

PATENTS AND LICENSE AGREEMENTS

     The Company currently owns or has exclusive licenses covering more than 90
patents and patent applications throughout the world. Certain of the Company's
patents pertaining to the Company's facial aesthetic application products are
licensed to it under an agreement with Cohesion Technologies, Inc. An exclusive,
worldwide, perpetual, fully paid-up license to the assigned patents and patent
applications in the fields of human aesthetic products, technologies and
treatments is held by the Company.

     The Company's policy is to actively seek patent protection for its products
and manufacturing processes when appropriate. The Company manufactures and
markets its products both under its own patents and under its license agreements
with other parties. The Company also has license agreements allowing other
companies to manufacture products using some of the Company's technology in
exchange for royalties and other compensation or benefits. The Company also has
patents relating to its breast implant products, tissue expanders, injection
ports and valve systems, and obesity and general surgery products.

     Although the Company believes its patents are valuable, its knowledge and
experience, creative product development and marketing staff and its trade
secret information with respect to manufacturing processes, materials and
product design, have been equally important in maintaining the Company's
proprietary product lines. As a condition of employment, the Company requires
all employees to execute a confidentiality agreement relating to proprietary
information and patent rights.

MANUFACTURING

     The Company manufactures in Santa Barbara, Carpinteria and Fremont,
California; San Jose, Costa Rica; and in Arklow, County Wicklow, Ireland. Inamed
owns or has exclusive licenses for more than 90 patents in the United States and
overseas. Inamed is among the leading manufacturers of products for the markets
it serves. In all cases, Inamed is subject to direct or indirect competition.
Most Inamed products involve expertise in product development, manufacturing and
marketing.

  Breast Implants and Related Products

     The Company's breast implant and related tissue expander products are
manufactured by the Company's subsidiaries, McGhan Medical Corporation in the
Company's Santa Barbara, California facilities; San Jose, Costa Rica facility;
and McGhan Limited in the Company's Arklow, Ireland facility. The Company began
manufacturing some of its breast implant products in Costa Rica in late 2000.
The Company has no material backlog for these products. The Company manufactures
its devices and products in a controlled environment utilizing specialized
equipment for precision measurement, quality control, packaging and
sterilization. The Company's quality control procedures begin with the Company's
suppliers meeting the Company's standards of compliance. The Company's in-house
quality control procedures begin upon the receipt of raw components and
materials and continue throughout production, sterilization, final packaging,
warehousing and shipment. The Company maintains quality control and production
records of each product manufactured and encourages the return of any defective
units for analysis.

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     The Company's manufacturing activities for U.S. sales are subject to FDA
regulations and guidelines, and the Company's products and manufacturing
procedures are continually monitored or reviewed by the FDA. The quality system
at the Company's McGhan Medical facilities in Santa Barbara was inspected by the
FDA on April 5 through April 14, 2000, as part of the Company's saline-filled
breast implant PMA application, and found to be in essential compliance with
applicable quality system regulations. The quality system at the Company's
McGhan Medico facilities in Costa Rica was inspected by the FDA on October 23
through October 26, 2000, as part of the Company's application for a PMA
amendment, and found to be in essential compliance with applicable quality
system regulations.

     Since the 1992 moratorium by the FDA on silicone gel-filled breast implants
and the ensuing litigation, traditional major commercial suppliers of silicone
raw materials have ceased to supply implant or medical grade materials to
medical device manufacturers, including the Company. Under guidelines
established by the FDA, the Company has been successful in using other companies
to meet its silicone raw material needs.

     In late 1998, the Company entered into a strategic alliance with a
privately-held specialty chemical company, whereby that company has become the
Company's exclusive supplier of silicone raw materials. This alliance includes
favorable long-term pricing and closer technical support for initiatives like
the Company's just-in-time inventory and new product development. The Company
may experience periodic disruptions in its source of supply or the quantities
needed due to regulatory or other factors, including production problems at
suppliers' facilities.

  Facial Enhancement Products

     Zyderm(R) and Zyplast(R), implants, the Company's primary collagen-based
injectable products, are manufactured at the Company's Fremont, California
facility. The Company uses a patented viral inactivation process for its
collagen-based products to promote both safety and quality. The production
processes use readily available chemicals and enzymes and bovine dermis sourced
from cows as the source of collagen. Since 1987, the hides have been sourced
from a domestic closed herd, in an effort to prevent contamination of the
Company's collagen-based products. The Company believes that the supply of raw
materials and processing materials for its manufacturing operations can be
purchased from other sources. The collagen-based products have refrigerated
shelf lives of 36 months. The Company typically ships products to physicians as
orders on an express delivery basis and has no material backlog.

     The Company's manufacturing facility for collagen-based products is subject
to regulatory requirements and periodic inspection by regulatory authorities,
including the FDA and foreign entities. The quality system at the Company's
Fremont facilities was last inspected by the FDA on June 15 through June 30,
1998, as part of the FDA's normal inspection program, and found to be in
essential compliance with applicable quality system regulations. In addition,
these facilities were inspected by TUV Product Services on March 27-29, 2000,
and were recertified as being in compliance with applicable standards set forth
in ISO 9001, EB 46001 and ISO 13486, permitting the Company to continue to sell
these products in the European Community.

     Hylaform(R) gel, silicone facial implants and the SoftForm(R) implant are
manufactured by third parties. Therefore, the Company is dependent on these
third parties to manufacture and supply these products to us as required.

  Obesity Products

     The Company's obesity treatment products are manufactured by its
subsidiary, BioEnterics Corporation, at its facility in Carpinteria, California.
In 1999, the quality systems at this facility were recertified and in 2000 a
surveillance audit was successfully completed to permit BioEnterics to continue
to sell its products in the European Community. In December 1999, during the
Company's voluntary participation in an FDA reengineering feasibility study, the
FDA evaluated BioEnterics' facilities for compliance with HACCP criteria and
found such facilities to be in substantial compliance.

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  Other Products

     Contigen(R) is manufactured at the Company's Fremont, California facility,
where Zyderm(R) and Zyplast(R) are also produced.

GOVERNMENT REGULATIONS

  United States

     Application and Clearance Procedures

     The FDA and corresponding state and foreign agencies regulate the clinical
testing, manufacture and sale of medical devices, including labeling,
advertising and record keeping. Most of the Company's products manufactured or
sold in the U.S. are classified as medical devices subject to regulation by the
FDA.

     Unless an exemption applies, each medical device that the Company wishes to
market in the U.S. must receive either a 510(k) clearance or a PMA from the FDA
under the Federal Food, Drug, and Cosmetic Act. The FDA's 510(k) clearance
process usually takes three to nine months but can last longer. The FDA's PMA
process generally requires from one to three years or more. The Company may not
be able to obtain 510(k) clearance or a PMA for products it proposes to market.

     The FDA decides whether a device must undergo either the 510(k) clearance
or a PMA process based upon statutory criteria. These criteria include the level
of risk that the FDA perceives is associated with the device and a determination
of whether the product is within a type that is similar to devices that are
already legally marketed. Those devices deemed to pose relatively less risk are
placed in either Class I or Class II. Class II devices generally require the
manufacturer to submit a premarket notification requesting 510(k) clearance
unless an exemption applies. Some Class I devices may also require 510(k)
clearance.

     A 510(k) clearance will be granted if the submitted information establishes
that the proposed device is "substantially equivalent" to a "predicate device,"
a legally marketed Class I or Class II medical device, or a preamendment Class
III medical device that was in commercial distribution before May 28, 1976 for
which the FDA has not called for PMAs. The FDA may determine that the proposed
device is not substantially equivalent to a predicate device, or that additional
information is needed before it is deemed substantially equivalent to a
predicate device or that additional information is needed before a substantial
equivalence determination can be made.

     Devices deemed by the FDA to pose greater risk, or to be novel devices
lacking a legally marketed predicate, are placed in Class III and are required
to undergo the PMA process. A PMA application must contain the results of
clinical trials, the results of all relevant bench tests, laboratory and animal
studies, a complete description of the device and its components, and a detailed
description of the methods, facilities and controls used to manufacture the
device. The FDA's review time is often significantly extended by FDA requests
for additional information or clarification of information already provided in
the submission. Modifications to a device that is the subject of an approved
PMA, its labeling or its manufacturing site or process may require approval by
the FDA of PMA supplements or new PMAs. The PMA process can be expensive,
uncertain and lengthy, and a number of devices for which FDA approval has been
sought by other companies have never been approved for marketing.

     If human clinical trials of a device are required in order to obtain
adequate safety, performance and/or efficacy data, and the device presents a
"significant risk" to the patient, the sponsor of the trial, usually the
manufacturer or the distributor of the device, will have to file an
Investigational Device Exemption (IDE) application prior to commencing the human
clinical trials necessary to complete a PMA application. The IDE application
must be supported by data, typically including the results of animal and
laboratory testing. If the IDE application is approved by the FDA and the study
protocol is approved by one or more appropriate Institutional Review Boards,
human clinical trials may begin at a specific number of investigational sites
with a specific number of patients, as approved by the FDA. If the device
presents a "nonsignificant risk" to the patient, a sponsor may begin the
clinical trial after obtaining approval for the study by one or more appropriate
Institutional Review Boards without the need for FDA approval. Sponsors of U.S.
clinical trials are permitted to charge for investigational devices distributed
in the course of the study provided
                                        8
<PAGE>   10

that compensation does not exceed recovery of the costs of manufacture,
research, development and handling. An IDE supplement must be submitted and
approved by the FDA and appropriate Institutional Review Boards before a sponsor
or investigator may make a change to the investigational plan that may affect
its scientific soundness or the rights, safety or welfare of human subjects. The
FDA can disapprove an IDE or withdraw an IDE approval if there is reason to
believe that the risks to subjects are not outweighed by the anticipated
benefits, or if the sponsor fails to comply with applicable requirements or
conditions of approval.

     The continuing trend of more stringent FDA oversight in product clearance
and enforcement activities has caused medical device manufacturers to experience
longer approval cycles, more uncertainty, greater risk and higher expenses.
Failure to obtain, or delays in obtaining, the required regulatory approvals for
new products could hurt the Company's business, as could product recalls. In
addition, the Company may not receive FDA approval to market its current
products for broader or different applications or to market separate products
that represent extensions of the Company's basic technology. In addition, it is
possible that the FDA will promulgate additional regulations restricting the
sale of the Company's present or proposed products.

     A majority of the Company's products are classified as Class III devices,
including all of the injectable bovine collagen-based products, breast implant
products and obesity treatment products. All of the products described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations, Products," other than Hylaform(R) gel, the LAP-BAND(R) System and
the Company's silicone gel-filled breast implants, have been approved or cleared
for commercial sale in the U.S.

     In the ongoing process of compliance with applicable laws and regulations,
the Company has incurred, and will continue to incur, substantial costs that
relate to laboratory and clinical testing of new products, data preparation and
filing of documents in the proper outline or format required by the FDA.
However, pursuant to FDA action in the second half of 1999, the FDA required any
manufacturer wishing to continue to market saline-filled implants in the U.S. to
file an application for pre-market approval of such products by November 17,
1999. McGhan Medical was among the three manufacturers of saline-filled breast
implants whose PMA applications were accepted for filing and, in accordance with
FDA regulations, each of the three applications was referred to an FDA advisory
panel on general and plastic surgery. The advisory panel met in open session on
March 1-3, 2000 to consider the applications and ultimately recommended FDA
approval of two of them, including the Company's application for PMA of its
saline-filled breast implants, and recommended FDA disapproval of the third
application filed by PIP. On May 10, 2000, the FDA granted approval to McGhan
Medical to market its four styles of saline-filled breast implants. Subject to
post approval conditions the Company continues to conduct the pivotal clinical
trial of its saline-filled breast implants.

     In February 2000, the Company's BioEnterics subsidiary completed the
submission of its PMA application for the LAP-BAND(R) Adjustable Gastric Banding
System. The application included the 2-year results of the company's U.S.
clinical trials, enrollment for which opened under an investigational device
exemption (IDE) in 1995 and closed in 1998 with approximately 300 participants.
In March 2000, the FDA accepted this PMA application for filing. In June 2000,
an FDA advisory panel recommended against approving the application in its
then-current form, and recommended certain amendments, including the provision
of 3-year clinical study results. In December 2000, BioEnterics submitted the
amendments, including the requested 3-year clinical study results. The FDA has
now initiated its review of the amendments and, absent a need for further
amendment, should act on the amended PMA application for this product not later
than the second quarter of 2001. No assurance can be given that FDA will grant
PMA of the LAP-BAND(R) System within this time frame or at all. In 1999 and
2000, the FDA approved two additional clinical studies for the LAP-BAND(R)
System, providing for the enrollment of up to 640 additional patients and less
stringent follow-up than the original study.

     Pursuant to an IDE granted by the FDA, in April 1999, McGhan Medical
commenced enrollment for a core clinical trial in preparation for a potential
PMA filing on its silicone gel-filled implants for augmentation, reconstruction
and revision uses. As of June 2000, enrollment in this study was closed with
nearly 1,000 participants. Patient follow-up and data collection is ongoing as
the basis for a future PMA application to market the product commercially in the
U.S.

                                        9
<PAGE>   11

     In March 2001, the FDA approved the expansion of McGhan Medical's IDE
clinical study of its Style 410 silicone-filled breast implant to a full-scale
pivotal study. The original feasibility study was approved on September 8, 2000.
Enrollment in the U.S. study will be increased from 25 to 940 patients and will
serve as the basis for a PMA application to market the product commercially in
the U.S. The product, which is already the predominant breast implant sold by
McGhan Ltd., has been sold commercially outside the U.S. since 1994. The Style
410 is a shaped implant with a textured surface and uses Cohesil(R) silicone gel
fill. It is available in a family of profiles of specific proportions of width,
height, and anterior projection. The Cohesil(R) gel fill improves the ability to
design and manufacture shaped breast implants. The cohesive nature of the
Cohesil(R) gel fill serves to maintain implant shape with a single lumen
construction rather than the double lumen construction required with standard
silicone gel fill. The potential for reduced silicone migration of Cohesil(R)
gel in the event of implant rupture remains to be established.

     In 1994, the FDA granted LipoMatrix, Inc., a former subsidiary of Collagen
Aesthetics, an IDE for the Trilucent breast implant. LipoMatrix began a pilot
study for this product in December 1994 and a pivotal study in September 1996.
Enrollment in the pivotal study was stopped in June 1997, owing to planned
changes in the product which would result in the need for a new pivotal study.
The Company continues to follow up on the women who received this product in the
U.S. and Canada as per protocol. In addition, the Company has committed, subject
to certain conditions, to pay for the explantation of the Trilucent product for
any participant in these studies who wishes to have an explantation.

     Manufacturing Regulations and Reporting Requirements

     In addition to the foregoing application and clearance procedures, the
Company must comply with the current Quality Systems Regulation in order to
receive FDA approval to market new products and to continue to market current
products. Manufacturers of medical devices for marketing in the U.S. are
required to adhere to detailed Quality Systems Regulation requirements, which
include testing, control and documentation. Manufacturers must also comply with
Medical Device Reporting requirements that a company report to the FDA any
incident in which its product may have caused or contributed to a death or
serious injury. If a malfunction does not result in death or serious injury, a
manufacturer must report whether a recurring malfunction would be likely to
cause or contribute to death or serious injury. Labeling and promotional
activities are subject to scrutiny by the FDA and state regulatory agencies and,
in some circumstances, by the Federal Trade Commission. FDA enforcement policy
prohibits the marketing of approved medical devices for unapproved ("off label")
uses. Manufacturers of medical devices must also report to the FDA any notices
of corrections or removals of marketed products, and submit periodic reports for
PMA products. Investigational products are also subject to reporting
requirements, such as reporting of deaths or serious injuries, periodic
reporting, and special reports as may be required by the FDA.

     The Company's business units are registered with the FDA as manufacturers
of medical devices. The Company is subject to routine inspection by the FDA and
state agencies for compliance with Quality Systems Regulation requirements,
Medical Device Reporting requirements and other applicable regulations. The
Company's facilities and manufacturing processes also have been inspected
periodically by the State of California and other agencies, and remain subject
to audit from time to time. The Company believes that it is in substantial
compliance with all applicable federal and state regulations. Nevertheless, the
FDA or a state agency may not agree with the Company or the Company's Quality
Systems Regulation compliance may be challenged at some subsequent point in
time. Enforcement of Quality Systems Regulation has increased significantly in
the last several years, and the FDA has stated publicly that compliance will be
scrutinized more strictly. In the event that the Company is deemed to be in
noncompliance with FDA regulations, to the extent that the Company is unable to
convince the FDA or state agency of the adequacy of the Company's compliance,
the FDA or state agency has the power to assert penalties or remedies, including
injunction or temporary suspension of shipment until compliance is achieved.
Noncompliance may also lead to a recall of a product. These penalties or
remedies could have a materially adverse effect on the Company's business,
financial condition and results of operations.

                                        10
<PAGE>   12

  International

     Medical device laws and regulations similar to those in the U.S. are also
in effect in many of the countries to which the Company exports or sells its
products. These range from comprehensive device approval requirements for some
or all of the Company's medical device products to requests for product data or
certifications.

     Some countries have historically permitted human studies earlier in the
product development cycle than U.S. regulations permit. Other countries, such as
Japan, have requirements similar to those of the U.S. Disparities in the
regulation of medical devices may result in more rapid product clearance in some
countries than in others.

     The primary regulatory environment in Europe is that of the European
Community which consists of 15 countries encompassing most of the major
countries in Europe. Other countries, such as Switzerland, have voluntarily
adopted laws and regulations that mirror those of the European Community with
respect to medical devices. The European Community has adopted numerous
directives and standards regulating the design, manufacture, clinical trial,
labeling, and adverse event reporting for medical devices. The principal rules
pertaining to medical devices in the European Community are found in the
European Medical Devices Directive, 93/42/EC.

     Devices that comply with requirements of a relevant directive will be
entitled to bear CE conformity marking, indicating that the device conforms with
the essential requirements of the applicable directive and, accordingly, can be
commercially distributed throughout the European Community. The method of
assessing conformity varies depending on the class of the product, but normally
involves a combination of self-assessment by the manufacturer and a third-party
assessment by a notified body. This third-party assessment may consist of an
audit of the manufacturer's quality system, review of a technical file or
specific testing of the manufacturer's products. An assessment by a notified
body in one country within the European Community is required in order for a
manufacturer to commercially distribute the product in the European Community.
The Company may not be successful in meeting the European quality standards or
other certification requirements. The Company currently has the CE Mark for its
saline-filled and silicone gel-filled breast implants. Zyderm(R) and Zyplast(R)
received CE Mark on June 23, 1995, Contigen(R) on October 26, 1995, Hylaform(R)
on November 2, 1995 and SoftForm(R) on September 22, 1997.

     While no additional pre-market approvals for individual European Community
countries are required prior to the marketing of a device bearing CE Mark in
most European Community countries, practical complications with respect to
market introduction may occur. For example, differences among countries have
arisen with regard to labeling requirements. In addition, advertising and
promotion of medical devices are governed primarily by national laws, subject to
certain general European Community directives on advertising. Some countries
also maintain registries or other special systems for particular types of
devices, including breast implants.

     Unapproved devices subject to 510(k) clearance or PMA requirements intended
solely for export may be exported legally without FDA approval provided certain
requirements are met. However, the Company must, among other things, notify the
FDA and meet the importing country's requirements. The Company may not receive
FDA export approval when this approval is necessary and countries to which the
devices are to be exported may not approve the devices for import. Failure to
receive import approval from other countries, or to obtain Certificates of
Exportability when required, or to meet the FDA's export requirements or to
obtain FDA export approval when required to do so, could have a material adverse
effect on the Company's business, financial condition and results of operations.

THIRD PARTY REIMBURSEMENT

     In the U.S., healthcare providers that purchase medical devices such as
Contigen(R) generally rely on third-party payors, principally federal Medicare,
state Medicaid and private health insurance plans to reimburse all or part of
the cost of the procedure in which the device is used. This reimbursement is
typically made at a fixed rate. In October 1998, a federal law was signed that
mandates nationwide insurance coverage

                                        11
<PAGE>   13

of reconstructive surgery following a mastectomy. Historically, not all
insurance providers covered this procedure. Outside the U.S., reimbursement may
be available, but the programs vary on a country-by-country basis.

PRODUCT REPLACEMENT PROGRAMS

     The Company makes every effort to conduct its product development,
manufacturing, marketing, and service and support activities with careful regard
for the consequences to patients. As with any medical device manufacturer,
however, the Company occasionally receives communications from surgeons or
patients with respect to various products claiming the products were defective,
lost volume and/or have resulted in injury to the patient. In the case of a
deflation of the Company's saline-filled breast implant products sold and
implanted in the U.S., in most cases the Company's ConfidencePlus(TM) program
provides product replacement and some financial assistance for surgical
procedures required within ten years of implantation. Implants sold and
implanted elsewhere are subject to a similar program, although no surgical
expenses are covered. The Company does not warrant any level of aesthetic result
and, as required by government regulation, makes extensive disclosure concerning
the risks of its products and implantation surgery. In the case of breast
implants, these include capsular contracture, infection and scarring. In the
case of its facial implants, these include tissue necrosis if injected
improperly.

GEOGRAPHIC SEGMENT DATA

     A description of the Company's net sales, operating income (loss) and
identifiable assets within the United States and internationally, is detailed in
Note 10 of the notes to the consolidated financial statements, attached as
Exhibit (a)(1).

EMPLOYEES

     As of December 31, 2000, Inamed had approximately 1,150 employees in active
service, of which approximately 850 were in the U.S. and approximately 300 were
at international operations. Except for employees at the Company's manufacturing
facility in Arklow, Ireland, none of the Company's employees are represented by
a labor union.

ITEM 2.  PROPERTIES

     The Company leases all of its office, manufacturing and distribution
facilities as follows: Carpinteria, California (51,000 square feet), Fremont,
California (61,000 square feet), Santa Barbara, California (225,000 square
feet), New York, New York (3,100 square feet), Arklow, County Wicklow, Ireland
(63,000 square feet), and San Jose, Costa Rica (23,000 square feet). The square
footage for Santa Barbara, California includes two manufacturing facilities,
Santa Barbara (120,000) and Los Carneros (105,000). In 2001, 46,000 square feet
of the Santa Barbara space will be vacated.

     The Company leases office and warehouse space ranging from 1,500 square
feet to 4,000 square feet for international sales offices, located in Australia,
France, Germany, Italy, Japan, Spain and the United Kingdom. The Company
believes its facilities are generally suitable and adequate to accommodate its
current operations.

ITEM 3.  LEGAL PROCEEDINGS

     See Financial statement footnote number 13.

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

     On May 17, 2000, the Company held its annual stockholders' meeting (the
"Meeting"), whereby the stockholders (i) elected seven directors and (ii)
amended the Company's Certificate of Incorporation to increase the authorized
number of shares of the Company's common stock from 25 million to 50 million;
(iii) ratified the Company's 1999 Senior Officer Stock Option Plan; (iv)
approved the Company's 2000

                                        12
<PAGE>   14

Employee Stock Option Plan; (v) approved the Company's 2000 Employee Stock
Purchase Plan; (vi) approved the Company's 2000 Senior Management Bonus Plan;
and (vii) ratified the appointment of Arthur Andersen, LLP as the Company's
independent accountants for fiscal year 2000. The vote on such matters was as
follows:

1. ELECTION OF DIRECTORS

<TABLE>
<CAPTION>
                                               TOTAL VOTE FOR    TOTAL VOTE WITHHELD
                                                EACH NOMINEE      FROM EACH NOMINEE
                                               --------------    -------------------
<S>                                            <C>               <C>
Richard G. Babbitt...........................    16,295,595             4,000
James E. Bolin...............................    16,295,595             4,000
Malcolm R. Currie, Ph.D. ....................    16,295,595             4,000
John F. Doyle................................    16,295,595             4,000
Ilan K. Reich................................    16,295,595             4,000
Mitchell S. Rosenthal, M.D. .................    16,295,595             4,000
David A. Tepper..............................    16,295,595             4,000
</TABLE>

2. AMENDMENT TO COMPANY'S CERTIFICATE OF INCORPORATION

<TABLE>
<S>                                                        <C>
For......................................................  16,155,501
Against..................................................     138,523
Abstaining...............................................       5,571
Broker Non-Votes.........................................           0
</TABLE>

3. RATIFICATION OF COMPANY'S 1999 SENIOR OFFICER STOCK OPTION PLAN

<TABLE>
<S>                                                        <C>
For......................................................  12,138,515
Against..................................................     288,517
Abstaining...............................................      21,771
Broker Non-Votes.........................................   3,850,792
</TABLE>

4. APPROVAL OF COMPANY'S 2000 EMPLOYEE STOCK OPTION PLAN

<TABLE>
<S>                                                        <C>
For......................................................  11,443,824
Against..................................................     986,549
Abstaining...............................................      18,430
Broker Non-Votes.........................................   3,850,792
</TABLE>

5. APPROVAL OF COMPANY'S 2000 EMPLOYEE STOCK PURCHASE PLAN

<TABLE>
<S>                                                        <C>
For......................................................  12,398,450
Against..................................................      31,019
Abstaining...............................................      19,334
Broker Non-Votes.........................................   3,850,792
</TABLE>

6. APPROVAL OF COMPANY'S 2000 SENIOR MANAGEMENT BONUS PLAN

<TABLE>
<S>                                                        <C>
For......................................................  12,286,325
Against..................................................     139,665
Abstaining...............................................      22,813
Broker Non-Votes.........................................   3,850,792
</TABLE>

                                        13
<PAGE>   15

7. APPOINTMENT OF ARTHUR ANDERSEN, LLP AS THE COMPANY'S INDEPENDENT ACCOUNTANTS
   FOR FISCAL YEAR 2000

<TABLE>
<S>                                                        <C>
For......................................................  16,265,320
Against..................................................      25,465
Abstaining...............................................       8,810
</TABLE>

                                    PART II

ITEM 5.  MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

     The Company's common stock has been trading on the NASDAQ National Market
under the symbol IMDC since September 30, 1999. From June 11, 1997 to September
29, 1999, the Company's common stock was traded on the OTC Bulletin Board. On
March 19, 2001, the Company had 552 stockholders of record. The Company's common
stock price at the close of business on March 19, 2001 was $21.375 per share.

     The table below sets forth the high and low bid prices of the Company's
common stock for the periods indicated. Quotations reflect prices between
dealers, do not reflect retail markups, markdowns or commissions, and may not
necessarily represent actual transactions. No cash dividends have been paid by
the Company during such periods.

<TABLE>
<CAPTION>
                                                              HIGH       LOW
                                                              ----       ---
<S>                                                           <C>        <C>
1999
1st Quarter.................................................  $15        $ 9 5/8
2nd Quarter.................................................  $17 1/8    $ 2
3rd Quarter.................................................  $29 1/2    $14 5/8
4th Quarter.................................................  $46 3/4    $24 1/16

2000
1st Quarter.................................................  $52 1/4    $31 1/8
2nd Quarter.................................................  $50        $34
3rd Quarter.................................................  $41 3/8    $27 5/8
4th Quarter.................................................  $33 9/16   $19 11/16
</TABLE>

     The Company has never paid a cash dividend. It is the current policy of the
Company to retain earnings to finance the growth and development of its
business. Therefore, the Company does not anticipate paying cash dividends on
its common stock in the foreseeable future. In addition, the Company's ability
to pay cash dividends is restricted by the Company's credit facility. Any future
determination to pay cash dividends will be at the discretion of the Company's
board of directors and will be dependent upon the Company's financial condition,
operating results, capital requirements and other factors as the board of
directors deems relevant.

ITEM 6.  SELECTED FINANCIAL DATA

     The following financial information is qualified by reference to, and
should be read in conjunction with, the Company's Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained elsewhere in this
report. The selected consolidated financial information presented below is
derived from the Company's audited Consolidated Financial Statements for each of
the five years through the period ended December 31, 2000. The Company completed
its acquisition of Collagen on September 1, 1999. The results of operations of
Collagen are included in the Company's operating results from the date of
acquisition.

                                        14
<PAGE>   16

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                        -------------------------------------------------------
                                         2000       1999(1)       1998        1997        1996
                                        ------      -------      ------      ------      ------
                                                 (IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                                     <C>         <C>          <C>         <C>         <C>
Statement of operations data:
Net sales.............................   240.1       189.3        131.6       106.4        93.4
Cost of goods sold....................    66.4        57.6         48.0        37.7        35.3
                                        ------      ------       ------      ------      ------
  Gross profit........................   173.7       131.7         83.6        68.7        58.1
                                        ------      ------       ------      ------      ------
Operating expenses:
  Marketing...........................    53.5        43.1         33.3        30.0        25.1
  General and administrative..........    48.8        31.7         27.8        33.2        31.3
  Research and development............     9.9        10.3          9.4         8.9         5.7
  Restructuring expense...............      --          --          4.2          --          --
  Amortization of intangible assets...     9.3         2.9          0.4         0.2          --
                                        ------      ------       ------      ------      ------
  Total operating expenses............   121.5        88.0         75.1        72.3        62.1
  Operating profit (loss).............    52.2        43.7          8.5(2)     (3.6)       (4.0)
Other Income (Expense):
  Litigation settlement...............      --          --           --       (28.1)         --
  Net interest and other financing
     expense..........................   (10.5)      (13.1)        (3.8)       (6.2)       (4.3)
  Foreign currency transaction gains
     (losses).........................     2.6         0.3          0.7        (1.8)        0.1
  Royalty income and other............     7.0         1.4           --          --          --
                                        ------      ------       ------      ------      ------
Other Income (Expense)................    (0.9)      (11.4)        (3.1)      (36.1)       (4.2)
Income (loss) before income tax
  expense (benefit) and extraordinary
  charges.............................    51.3        32.3          5.4       (39.7)       (8.2)
Income tax expense (benefit)..........    14.3        (6.5)(3)     (8.4)(4)     1.9(5)      3.2(6)
                                        ------      ------       ------      ------      ------
Net income (loss) before extraordinary
  charges.............................    37.0        38.8         13.8       (41.6)      (11.4)
Extraordinary charges.................      --          --         (1.8)         --          --
                                        ------      ------       ------      ------      ------
Net income (loss).....................    37.0        38.8         12.0       (41.6)      (11.4)
                                        ======      ======       ======      ======      ======
Net income (loss) per share of common
  stock
Basic.................................   $1.81      $ 2.51       $ 1.15      $(4.97)     $(1.46)
Diluted...............................   $1.61      $ 2.03       $ 0.92      $(4.97)     $(1.46)
Weighted average common shares
  outstanding (basic).................    20.4        15.5         10.4         8.4         7.8
Weighted average common shares
  outstanding (diluted)...............    23.0        19.1         14.2         8.4         7.8
</TABLE>

                                        15
<PAGE>   17

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                -----------------------------------------------
                                                 2000      1999       1998      1997      1996
                                                ------    -------    ------    ------    ------
                                                                 (IN MILLIONS)
<S>                                             <C>       <C>        <C>       <C>       <C>
Balance sheet data:
Working capital (deficiency)..................    50.8       42.8      (1.0)      6.5       4.5
Total assets..................................   385.9      309.4      80.7      58.8      65.9
Long term debt................................    98.6       77.2        --        --        --
Convertible and other long-term debt, net of
  current installments........................      --         --      27.8      23.6      34.6
Subordinated long-term debt, related party....      --         --        --       8.8        --
Stockholders' equity (deficiency).............   167.5      134.1     (15.6)    (46.7)    (9.9)
</TABLE>

---------------
(1) The consolidated financial statements include the operations of Collagen
    Aesthetics, Inc. from September 1, 1999 to December 31, 1999.

(2) Includes restructuring expense of $4.2.

(3) Includes reversal of $15.5 allowance on the deferred tax asset.

(4) Reflects the recognition of an $8.0 deferred tax asset based on future
    short-term income projections.

(5) Includes a provision of $1.0 for the conversion of foreign intercompany
    accounts to equity.

(6) Includes the recording of a $2.0 valuation allowance on domestic deferred
    tax assets.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

RESULTS OF OPERATIONS

     Set forth below is a table which shows the individual components of the
Company's actual results of operations as a percent of net sales for each of the
periods indicated.

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                              2000      1999      1998
                                                              ----      ----      ----
<S>                                                           <C>       <C>       <C>
Net sales...................................................  100%      100%      100%
Gross profit................................................   72%       70%       64%
Marketing expenses..........................................   22%       23%       25%
General and administrative expenses.........................   20%       18%       21%
Research and development expenses...........................    4%        5%        7%
Total operating expenses (excluding restructuring
  expense)..................................................   51%       46%       54%
Operating income (loss) (excluding restructuring expense)...   22%       23%       10%
Net interest and other financing expense....................    4%        7%        3%
Income (loss) before income taxes and extraordinary
  charges...................................................   21%       17%        4%
Net income..................................................   15%       20%        9%
</TABLE>

  Comparison of Years Ended December 31, 2000 and 1999

     Net Sales.  Net sales for 2000 reached $240.1 million, exceeding the prior
year by $50.8 million or 27% over net sales for the same period in 1999. This
increase was primarily the result of the Collagen acquisition, accounting for
$47.5 million of the increase, while the base business increased $3.3 million.
Foreign exchange effects, lead by the declining Euro, adversely impacted net
sales by approximately three percentage points.

     Net sales in the U.S. accounted for 62% of total net sales for 2000 as
compared to 64% for 1999. International net sales accounted for 38% of total net
sales for 2000 as compared to 36% of total net sales for 1999.

     Cost of Goods Sold and Gross Margin.  Cost of goods sold, as a percentage
of net sales, decreased to 28% for 2000 as compared to 30% for 1999. Gross
profit for 2000 was $173.7 million, reflecting an increase of $42 million or 32%
over 1999. Sales related to the Collagen acquisition were the primary
contributor to the

                                        16
<PAGE>   18

increase in gross margin with an increase of $34.2 million, while the base
business increased $7.8 million. For 2000, gross profit as a percentage of net
sales improved by two percentage points, reaching 72% of net sales compared to
70% in the prior year. This margin gain was driven by manufacturing efficiency
improvements, increased volume through the factories and pricing discipline.

     Marketing, General and Administrative and Research and Development
Expenses.  Marketing, general and administrative and research and development
expenses for 2000 were $112.2 million, compared to $85.1 million in 1999. This
increase is primarily related to the Collagen acquisition. As a percentage of
sales, selling, general and administrative expenses were 47% for 2000 as
compared to 45% for 1999. This increase related to several one time charges
including, pre-operating costs for Costa Rica, an increase in the warranty
reserve, as well as higher legal expenses.

     Interest Expense.  Net interest and other financing expense totaled $10.5
million in 2000, reflecting a decrease of $2.6 million or 20% from 1999.
Included in the 2000 interest expense is a $2.2 million one-time financing
charge related to the retirement of the bridge loan used to finance the
acquisition of Collagen. Included in 1999 interest expense are two one time
charges, $5.2 million to amortize fee paid in connection with the bridge loan
and a one-time financing charge of $2.2 million incurred in connection with the
funding of the breast implant class action settlement.

     Foreign Currency Exchange Gains and Losses.  Foreign currency gains
increased from $0.3 million in 1999 to $2.6 million in 2000. This increase was
primarily attributable to a favorable derivative position that the Company
settled in the Fourth Quarter of 2000.

     Royalty Income and Other.  Royalty income increased from $1.4 million in
1999 to $7.0 million in 2000. The increase primarily relates to royalties from
the acquired Collagen business.

     Income Taxes.  Income taxes were accrued at $14.3 million in 2000 using a
worldwide effective tax rate of 28%. In 1999 the Company recognized a net tax
benefit of $7.2 million as the Company eliminated the valuation allowance on its
deferred tax asset.

     Net Income and Earning per share.  Net income for 2000 was $37.0 million or
$1.61 per diluted share, compared to $38.8 million of $2.03 per diluted share in
the prior year. The prior year did not include a provision for income taxes for
reasons noted above.

  Comparison of Years Ended December 31, 1999 and 1998

     Net Sales.  Net sales for 1999 were $189.3 million, reflecting an increase
of $57.7 million or 44% over net sales for the same period in 1998. This
increase is attributable to 19% growth in base business sales plus the inclusion
of four months of Collagen net sales, totaling $33 million.

     Net Sales in the U.S. accounted for 64% of total net sales for both 1999
and 1998. International net sales accounted for 36% of total net sales for both
1999 and 1998.

     Cost of Goods Sold.  Cost of goods sold, as a percentage of net sales,
decreased to 30% for 1999 as compared to 36% for 1998. This decrease reflects
improved capacity utilization due to increased sales, improvements in product
mix, and a focus on cost reduction measures.

     Gross Profit.  Gross profit for 1999 was $131.7 million, reflecting an
increase of $48.1 million or 58% over 1998. For 1999, gross profit as a
percentage of net sales improved by six percentage points, reaching 70% of net
sales compared to 64% in the prior year. Margins increased primarily due to
increased production efficiencies and increased volume in all business units,
along with increased sales volumes of higher margin products for the
reconstructive surgery markets.

     Marketing Expenses.  Selling expenses for 1999 were $43.1 million, compared
to $33.3 million in 1998. As a percentage of sales, selling expenses were 23%
for 1999 as compared to 25% for 1998. Management's goals of growing sales and
reducing costs, which included the restructuring of the company during 1998 and
a strong cost containment focus, resulted in a controlled growth in selling
expenditures in 1999.

                                        17
<PAGE>   19

     General and Administrative Expenses.  General and administrative expenses
for 1999 were $32.9 million, up $5.1 million or 18% from 1998. The acquisition
of Collagen Aesthetics Inc., and incremental administrative expense acquired,
account for approximately $3.5 million of this increase. The additional $1.6
million increase came primarily from staffing upgrades. As a percentage of
sales, general and administrative expenses decreased by four percentage points,
due primarily to the increased operating leverage arising from higher sales.

     Research and Development Expenses.  Research and development expenses were
$10.3 million for 1999, up by $0.9 million or 10% from 1998. Research and
development expenses consist of ongoing new product development costs as well as
necessary regulatory and clinical costs associated with testing and approving
new product introductions.

     Operating Income.  The Company's operating income for 1999 totaled $43.7
million, an increase of $35.2 million or 414% over 1998. This increase reflects
the successful implementation of the restructuring program initiated in 1998 and
the continuing strength of the Company's core product lines.

     Interest Expense.  Net interest and other financing expense totaled $13.1
million in 1999, reflecting an increase of $9.3 million or 245% from 1998. This
increase is primarily attributable to the financing of the Collagen acquisition.
Interest expenses for 1999 includes $5.2 million to amortize fees paid in
connection with the bridge loan used to acquire Collagen and a one-time
financing charge of $2 million incurred to fund the breast implant class action
settlement. Without these charges, net interest and other financing expenses
would have been $5.9 million for 1999.

     Foreign Currency Exchange Gains and Losses.  During the second quarter of
1999, the Company converted current non-U.S. intercompany debts among the
Company's subsidiaries to the capital of the respective subsidiaries. This
minimized the Company's exposure to foreign currency transaction gains and
losses. For 1999, the Company's foreign exchange translation resulted in a
marginal gain of $0.3 million as compared to a $0.7 million gain for 1998.

     Income Taxes and Earnings Per Share.  The Company eliminated the valuation
allowance on the deferred tax asset in 1999. In order to provide investors with
a perspective on its earnings per share on a normalized basis, assuming the
Company accrued taxes at a 33% effective rate, and excluding $5.2 million of
interest expense in 1999 arising from the financing fees associated with the
Collagen acquisition, the Company's earnings for 1999 would have been $1.62 per
basic share and $1.30 per diluted share.

LIQUIDITY AND CAPITAL RESOURCES

  Liquidity

     Net cash provided by operations was $66.1 million before expenditures
relating to the integration of Collagen Asethetics Inc. This compares to $49.0
million provided by operations in 1999. Positive cash from operations was offset
by $18.5 million used in investing activities of which $12.5 million related to
fixed asset expenditures associated with new manufacturing facilities, computer
equipment and building renovations. The remaining $6.0 million related to
investments in our strategic partners, Arthrocare Corporation and Reconstructive
Technologies, Inc. In 2000, cash used by financing activities was $5.0 million
and included the repurchase of $7.7 million in common stock.

     In 2000 the Company repurchased 0.3 million shares of common stock at an
average price of $28.16 per share, as authorized by the Company's Board of
Directors.

     Capital Resources.  In 2000, the Company refinanced the remaining $77.0
million bridge loan that was obtained to finance the Collagen acquisition, with
a new credit facility comprised of a five-year term loan of $82.5 million and a
revolving credit line of $25.0 million.

     The term loan and advances under the revolving facility will bear interest
at the rate of either (i) the one, two, three or six-month London Interbank
Offered Rate (LIBOR) plus an applicable margin of 3.00% to 3.50% or (ii) prime
rate plus an applicable margin of 2.00% to 2.50%. The applicable margin is
subject to change based on the Company's consolidated leverage ratio. The term
of the loan agreement is five years and

                                        18
<PAGE>   20

the term loan and revolving loans are guaranteed on a senior basis by all of the
Company's material U.S. subsidiaries and secured by a lien on substantially all
of the assets of the Company and its material U.S. subsidiaries.

     Capital Expenditures.  Expenditures on property and equipment approximated
$12.5 million in 2000, compared to $6.1 million in 1999. The increase from 1999
to 2000 primarily related to the expenditures associated with new manufacturing
facilities.

     At present, the Company's projected level of capital expenditures for 2001
and 2002 would exceed the negative covenant on such expenditures contained in
the Company's current bank credit agreement. The Company is currently
negotiating an amendment to this agreement, permitting the Company to make
capital expenditures in accordance with its projected 2001-2002 plan. If the
Company does not enter into such an amendment, or otherwise obtain a waiver, an
event of default would occur under the current bank credit agreement.

     Significant Fourth Quarter Adjustments, 1999

     During the fourth quarter of the year ended December 31, 1999, the Company
released the remaining $7.2 million allowance on its deferred tax asset.

     Significant Fourth Quarter Adjustments, 1998

     During the fourth quarter of the Company's 1998 fiscal year, the Company
recorded significant adjustments which increased net income by $6.2 million. The
adjustments were to recognize an extraordinary charge of $1.8 million for the
issuance of warrants in the restructuring of the Company's 11% notes which
occurred in the fourth quarter. In addition, an income tax benefit of $8 million
was established to recognize a portion of the benefit expected to be received
from the Company's net operating loss carryforward.

  Impact of Inflation

     Management believes that inflation has had a negligible effect on
operations. The Company believes that it can offset inflationary increases in
the cost of materials and labor by increasing sales prices and improving
operating efficiencies.

  Risks and Uncertainties

     The following risks and uncertainties should be considered in evaluating
the Company's business, operating results, financial results and future
prospects.

THE COMPANY HAS BEEN PARTY TO SIGNIFICANT BREAST IMPLANT LITIGATION IN THE PAST
AND MAY BE PARTY TO THIS TYPE OF LITIGATION IN THE FUTURE

     The Company faces an inherent business risk of exposure to product
liability claims alleging that the use of its technology or products has
resulted in adverse health effects. The risks of litigation exist even with
respect to products that have received or in the future may receive regulatory
approval for commercial sale. If the Company is unable to avoid significant
product liability claims, its business could be materially harmed. 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 and product recalls. See Legal Proceedings Section.

THE COMPANY'S PRODUCTS EXPOSE IT TO LIABILITIES THAT MAY NOT BE ADEQUATELY
COVERED BY INSURANCE AND THE COMPANY'S FINANCIAL RESULTS MAY SUFFER

     In addition to the risks the Company faces from product liability claims,
the Company is subject to the inherent risk that a government authority or third
party may require the Company to recall one or more of its products. The Company
has liability insurance that would cover a claim relating to the use or recall
of its
                                        19
<PAGE>   21

products under a limited number of circumstances. In addition, one or more
product liability claims against the Company could exceed its insurance
coverage. In the event liability insurance would not sufficiently cover a
product liability claim or recall, these events could have a material adverse
effect on the Company's business, financial condition and results of operations.
Adequate product liability insurance may not continue to be available, either at
existing or increased levels of coverage, on commercially reasonable terms or at
all. Even if a claim is covered by insurance, the costs of defending a product
liability, negligence or other action, and the assessment of damages in excess
of insurance coverage, could entail significant expense and damage the Company's
reputation. The Company cannot assure you that its insurance will be broad
enough to protect the Company against all future claims, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.

THE COMPANY IS A PARTY TO WORLDWIDE LITIGATION AND CLAIMS ARISING FROM THE
TRILUCENT BREAST IMPLANT AND ITS RESERVES AND INSURANCE MAY BE INADEQUATE TO
COVER THESE EXPENSES

     The Company faces substantial expenses for the cost of explantations,
potential and actual bodily injury claims and other expenses relating to the
Trilucent breast implant. While the Company believes it has a strong motion to
dismiss certain of the U.S. actions brought against it on grounds of
inconvenient forum, these motions, of their nature, are addressed to the sound
discretion of the court and could fail. Further, the Company has been named in a
putative class action brought by a U.S. patient who obtained the Trilucent
implants in a clinical study. That action is not susceptible to dismissal on
grounds of inconvenient forum and, while each participant in the U.S. and
Canadian clinical studies executed a broad informed consent as a condition to
participation, those consents may not bar the maintenance of at least certain
claims against the Company which are not pre-empted by federal law. In addition,
while the Company has succeeded in negotiating a claims settlement protocol in
the United Kingdom, as an alternative to litigation there, women are free to
"opt out" of this program and to bring individual actions for personal injuries
and financial loss. Also, by operation of U.K. law, the release granted to the
Company under its settlement protocol is necessarily provisional; each
participating claimant reserves the right to pursue a future claim against the
Company should she develop cancer or reproductive abnormalities. In addition,
the Company will have Trilucent-related liability in other jurisdictions, in the
European Community and elsewhere. To date, those expenses have been immaterial
but they could grow in the future. Moreover, pursuant to agreements with the
United Kingdom Medical Devices Agency, the Company is currently funding
Trilucent-related scientific research and patient monitoring, including a
clinical follow-up study in the U.K. The scientific research now being conducted
by the Trilucent Advisory Panel, in the areas of histopathology, genotoxicity
and adduct formation, among others, or future research performed by this or
another panel, could reveal that the risk to human health of the Trilucent
implant is greater than is currently believed. Thus, although the Company had
reserves at December 31, 2000 of $26.8 million and product liability and medical
expense reimbursement insurance of in excess of $65 million, these reserves and
insurance policies may be inadequate to cover all known and unknown
Trilucent-related contingent liabilities. In addition, the insurance companies
that are funding these policies are doing so subject to various reservations of
rights. They could seek to recoup, and recoup, the amounts advanced in further
litigation with the Company.

NEGATIVE PUBLICITY CONCERNING THE SAFETY OF OUR PRODUCTS COULD HARM SALES OR
RESULT IN PRODUCT WITHDRAWALS WHETHER SUCH PUBLICITY HAS A BASIS IN GENERALLY
ACCEPTED SCIENTIFIC FACT OR NOT

     Physicians and potential patients may have a number of concerns about the
safety of our products, including our breast implants and collagen-based facial
injections, whether such concerns have a basis in generally accepted science or
peer-reviewed scientific research or not. The responses of potential and actual
patients, surgeons and physicians, legislative, regulatory and/or other
government actors, members of the news media and/or others to information about
actual, potential or imagined complications from the Company's products, such as
information concerning bovine spongiform encephalopathy (BSE) and/or
Creutzfeldt-Jacob disease, could result in negative publicity, could materially
reduce market acceptance of its products and/or could result in product
withdrawals, on the basis of accepted scientific doctrine, the precautionary
                                        20
<PAGE>   22

principle, speculation or otherwise. These responses or investigations, and
potential resulting negative publicity, may have a material adverse effect on
the Company's business, financial condition, operations and prospects and/or on
the market price of the Company's stock. In addition, significant negative
publicity could result in an increased number of product liability claims
against the Company, whether they have a basis in scientific fact or not.

THE COMPANY'S QUARTERLY OPERATING RESULTS ARE SUBJECT TO SUBSTANTIAL
FLUCTUATIONS AND SHOULD NOT BE RELIED ON AS AN INDICATION OF THE COMPANY'S
FUTURE RESULTS

     The Company's quarterly operating results may vary significantly due to a
combination of factors, many of which are beyond its control. These factors
include:

     - demand for the Company's products, which historically has been the
       highest in the second quarter;

     - the Company's ability to meet the demand for its products;

     - increased competition;

     - the number, timing and significance of new products and product
       introductions and enhancements by the Company and its competitors;

     - the Company's ability to develop, introduce and market new and enhanced
       versions of its products on a timely basis;

     - changes in pricing policies by the Company and its competitors;

     - the timing of significant orders and shipments; and

     - general economic factors.

     Based upon all of the foregoing, the Company believes that quarterly
revenues and operating results may vary significantly in the future and that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.

CHANGES IN THE ECONOMY AND CONSUMER SPENDING COULD ADVERSELY AFFECT THE
COMPANY'S ABILITY TO SELL ITS PRODUCTS

     Breast augmentations and collagen-based implants and injections 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. Significant or
incremental adverse changes in the overall pace of the economy (or the
perception that such changes are occurring or are about to occur) may cause
consumers to reassess their spending choices and reduce the demand for cosmetic
surgery. This shift could have an adverse effect on the Company's ability to
sell its products and could materially harm the Company's business.

IF THE COMPANY IS UNABLE TO CONTINUE TO DEVELOP AND MARKET NEW PRODUCTS, AND
TECHNOLOGIES, THE COMPANY MAY EXPERIENCE A DECREASE IN DEMAND FOR ITS PRODUCTS
OR ITS PRODUCTS COULD BECOME OBSOLETE

     The Company believes that a crucial factor in the success of a new product
is obtaining the applicable regulatory approvals and marketing the new product
quickly to respond to new user needs or advances in medical technologies,
without compromising product quality. The Company is continually engaged in
product development and improvement programs. The Company cannot assure you that
it will be successful in enhancing existing products or developing new products
or technologies that will timely achieve regulatory approval or receive market
acceptance.

                                        21
<PAGE>   23

THE COMPANY DEPENDS ON A SINGLE SUPPLIER FOR ITS SILICONE RAW MATERIALS AND THE
LOSS OF THIS SUPPLIER COULD ADVERSELY AFFECT THE COMPANY'S ABILITY TO
MANUFACTURE MANY OF ITS PRODUCTS

     The Company currently relies on a single supplier for silicone raw
materials used in many of its products. Although the Company has an agreement
with this supplier to transfer the necessary formulations to the Company in the
event that this supplier cannot meet its requirements, the Company cannot assure
you that it will be able to timely produce a sufficient amount of quality
silicone raw materials, if at all. The loss of this supplier could have a
material adverse effect on the Company's business, financial condition and
results of operations.

THE COMPANY'S ABILITY TO SELL BOVINE COLLAGEN-BASED PRODUCTS COULD BE ADVERSELY
AFFECTED IF THE COMPANY EXPERIENCES PROBLEMS WITH THE CLOSED HERD OF DOMESTIC
CATTLE FROM WHICH IT DERIVES THESE PRODUCTS

     The Company relies on two closed herds of domestic cattle that are kept
apart from all other cattle for the production of its bovine collagen-based
products. In the event of material diminution in the size of these herds, the
Company would have a limited ability to quickly increase its supply of
acceptable cattle and bovine-based products from a similarly segregated source.
The diminution in size or infection of the Company's cattle could have a
material adverse effect on its ability to sell bovine collagen-based products
and, as a result, a material adverse effect on the Company's business, financial
condition, operations or prospects.

THE COMPANY'S INTERNATIONAL BUSINESS EXPOSES IT TO A NUMBER OF RISKS

     More than one-third of the Company's net sales are derived from
international operations. Accordingly, any material decrease in foreign sales
may have a material adverse effect on the Company's business, financial
condition and results of operations. Most of the Company's international sales
are denominated in U.S. dollars, euros or yen. Depreciation or devaluation of
the local currencies of countries where the Company sells its products may
result in its products becoming more expensive in local currency terms, thus
reducing demand. The Company manufactures some of its breast implant products in
Ireland and began manufacturing some breast implant products in Costa Rica in
late 2000. Therefore, some of the Company's operating expenses are denominated
in currencies other than the U.S. dollar. The Company cannot assure you that it
will not experience unfavorable currency fluctuation effects in future periods,
which could have an adverse effect on its operating results. The Company's
operations and financial results also may be significantly affected by other
international factors, including:

     - the imposition of additional foreign government controls or regulations
       on medical devices;

     - new export license requirements;

     - political instability, inflation or negative economic growth in the
       Company's target markets;

     - trade restrictions;

     - changes in tariffs; and

     - difficulties in managing international operations.

THE COMPANY IS SUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION, WHICH COULD
MATERIALLY ADVERSELY AFFECT ITS BUSINESS

     The production and marketing of the Company's products and its ongoing
research and development, preclinical testing and clinical trial activities are
subject to extensive regulation and review by numerous governmental authorities
both in the U.S. and abroad. Most of the medical devices the Company develops
must undergo rigorous preclinical and clinical testing and an extensive
regulatory approval process administered by the Food and Drug Administration
under the Food, Drug, and Cosmetic Act and comparable foreign authorities before
they can be marketed. Unless an exemption applies, each medical device that the
Company wishes to market in the U.S. must receive either a "510(k)" clearance or
a premarket approval (PMA) from
                                        22
<PAGE>   24

the FDA. In order to be commercially distributed throughout the European
Community, a medical device must bear a CE conformity marking, indicating that
it conforms with the essential requirements of the applicable European Medical
Devices Directive. These regulations govern the testing, marketing and
registration of new medical devices, in addition to regulating manufacturing
practices, labeling and record keeping procedures. This process makes it longer,
harder and more costly to bring the Company's products to market, and the
Company cannot assure you that any of its products will be approved. If the
Company does not comply with applicable regulatory requirements it can result in
warning letters, non-approval, suspensions of regulatory approvals, civil
penalties and criminal fines, product seizures and recalls, operating
restrictions, injunctions and criminal prosecution.

     Delays in or rejection of FDA approval of the Company's products may be
encountered due to, among other reasons, regulatory review of each new device
application or product license application the Company submit, as well as
changes in regulatory policy during the period of product development both in
the U.S. and abroad. 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. Further, for a marketed product, its manufacturer and the facilities
in which the product is manufactured are subject to continual review and
inspection. Later discovery of previously unknown problems with a product,
manufacturer or facility may result in restrictions on the product, manufacturer
or facility, including withdrawal of the product from the market or other
enforcement actions.

FUTURE LEGISLATION OR REGULATIONS RELATING TO THE COMPANY OR ITS PRODUCTS COULD
MATERIALLY ADVERSELY AFFECT THE COMPANY'S BUSINESS

     If any national healthcare reform or other legislation or regulations are
passed that impose limits on the number or type of medical procedures that may
be performed or that have the effect of restricting a physician's ability to
select specific products for use in his or her procedures, it could have a
material adverse effect on the demand for the Company's products. In the U.S.,
there have been, and the Company expects that there will continue to be, a
number of federal and state legislative proposals and regulations to implement
greater governmental control on the healthcare industry. These proposals create
uncertainty as to the future of the Company's industry and may have a material
adverse effect on its ability to raise capital or to form collaborations, and
the enactment of these reforms could have a material adverse effect on the
Company's business, financial condition and results of operations. In a number
of foreign markets, the pricing and profitability of healthcare products are
subject to governmental influence or control. In addition, legislation or
regulations that impose restrictions on the price that may be charged for
healthcare products or medical devices may adversely affect the Company's
business, financial condition and results of operations. From time to time,
legislation or regulatory proposals are introduced and discussed which could
alter the review and approval process relating to medical device products.

HISTORICALLY, THE COMPANY'S STOCK PRICE HAS BEEN VOLATILE AND ITS TRADING VOLUME
HAS BEEN LOW

     The market prices for securities of medical device companies have
historically been highly volatile. Broad market fluctuations may have a material
adverse effect on the market price of the Company's common stock. The trading
price of the Company's common stock has been, and may be, subject to wide
fluctuations in response to a number of factors, many of which are beyond the
Company's control. These factors include:

     - quarter-to-quarter variations in the Company's operating results;

     - the results of testing, technological innovations or new commercial
       products by the Company or its competitors;

     - governmental regulations, rules and orders;

     - general conditions in the healthcare, medical device or plastic surgery
       industries;

     - changes in the Company's earnings estimates by securities analysts;

                                        23
<PAGE>   25

     - developments concerning patents or other proprietary rights; and

     - litigation or public concern about the safety of the Company's products.

     Historically, the daily trading volume of the Company's common stock was
relatively low. On September 30, 1999, the Company's common stock began trading
on the NASDAQ National Market. Since that time, the average trading volume of
the Company's common stock has increased. The Company cannot assure you that an
active public market for its common stock will be sustained or that the average
trading volume will remain at present levels or increase.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     In the normal course of business, operations of the Company are exposed to
fluctuations in interest rates and foreign currencies. These fluctuations can
vary the cost of financing, and operations of the Company.

     Based on the Company's overall interest rate exposure at December 31, 2000
primarily variable rate debt, a hypothetical 10 percent change in interest rates
applied to the fair value of the financial instruments as of May 31, 2000, would
have no material impact on earnings, cash flows or fair values of interest rate
risk sensitive instruments over a one-year period. During the year the Company
entered into agreements converting approximately $30 million of floating rate
debt to fixed rate to hedge interest rate exposures.

     The Company's foreign currency risk exposure results form fluctuating
currency exchange rates, primarily the U.S. Dollar against the European
currencies. The Company faces transactional currency exposures that arise when
its foreign subsidiaries (or the Company itself) enter into transactions,
generally on an intercompany basis, denominated in currencies other than their
local currency. The Company also faces currency exposure that arises from
translating the results of its global operations to the U.S. dollar at exchange
rates that have fluctuated from the beginning of the period. Generally, the
Company has not used financial derivatives to hedge against fluctuations in
currency exchange rates. Based on the Company's overall exposure for foreign
currency at December 31, 2000, a hypothetical 10 percent change in foreign
currency rates would not have a material impact on the Company's balance sheet,
net sales, net income or cash flows over a one-year period. From time to time
the Company enters into agreements to hedge certain foreign currency exposures
on commitments. There were no significant open positions at year-end.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Financial Statements begin on page F-1.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

     On April 13, 2000, BDO Seidman, LLP resigned as independent certified
public accountants and were replaced by Arthur Andersen, LLP.

     In a May 3, 2000 letter to the SEC, BDO stated that during its review of
the Company's interim statements for the quarter ended June 30, 1999, BDO
questioned the impact of the "anti-dilution" provisions in certain officer
warrant agreements on the number of shares issuable upon exercise of the
warrants. When BDO and the Company's management were unable to agree as to the
intent of the officer warrant agreements, the matter was brought to the
attention of the Company's Board of Directors. The Board of Directors resolved
the matter to BDO's satisfaction.

                                    PART III

ITEM 10.  DIRECTORS AND OFFICERS OF THE COMPANY

     The information required in this item is incorporated herein by reference
to portions of the Proxy Statement for Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission within 120 days of the close
of the fiscal year ended December 31, 2000.

                                        24
<PAGE>   26

ITEM 11.  EXECUTIVE COMPENSATION

     The information required in this item is incorporated herein by reference
to portions of the Proxy Statement for Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission within 120 days of the close
of the fiscal year ended December 31, 2000.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required in this item is incorporated herein by reference
to portions of the Proxy Statement for Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission within 120 days of the close
of the fiscal year ended December 31, 2000.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required in this item is incorporated herein by reference
to portions of the Proxy Statement for Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission within 120 days of the close
of the fiscal year ended December 31, 2000.

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND CURRENT REPORTS ON FORM
8-K

     (a)(1)  Financial Statements

<TABLE>
            <S>     <C>                                                           <C>
            (a)(1)  Consolidated Financial Statements:
                    Reports of Independent Accountants..........................  F-1
                    Consolidated Balance Sheets as of December 31, 2000 and
                      1999......................................................  F-3
                    Consolidated Statements of Income for the years ended
                      December 31, 2000, 1999 and 1998..........................  F-4
                    Consolidated Statements of Stockholders' Equity (Deficiency)
                      for the years ended December 31, 2000, 1999 and 1998......  F-5
                    Consolidated Statements of Cash Flows for the years ended
                      December 31, 2000, 1999 and 1998..........................  F-6
                    Notes to Consolidated Financial Statements..................  F-8

            (a)(2)  Consolidated Financial Statement Schedules
                    Schedule II -- Valuation and Qualifying Accounts............  S-2
                    All other schedules are omitted because the required information
                      is not present or is not required.

            (a)(3)  Exhibits
</TABLE>

     The following exhibits are filed as part of this Annual Report on Form
10-K:

<TABLE>
<CAPTION>
EXHIBIT
  NO.                             DESCRIPTION
-------                           -----------
<C>       <S>
  2.1     Agreement and Plan of Merger dated as of December 22, 1998
          by and between Inamed Corporation and Inamed Corporation
          (Delaware). (Incorporated herein by reference to Exhibit 2.1
          of the Registrant's Current Report on Form 8-K filed with
          the Commission on December 30, 1998.)
  2.2     Agreement and Plan of Merger, dated as of July 31, 1999, by
          and among Inamed Corporation, Inamed Acquisition Corporation
          and Collagen Aesthetics, Inc. (Incorporated herein by
          reference to Exhibit (c)(1) to Schedule 14D-1 filed by
          Inamed Corporation and Inamed Acquisition Corporation with
          the Commission on August 4, 1999.)
</TABLE>

                                        25
<PAGE>   27

<TABLE>
<CAPTION>
EXHIBIT
  NO.                             DESCRIPTION
-------                           -----------
<C>       <S>
  3.1     Registrant's Restated Certificate of Incorporation, as
          amended December 22, 1998. [Incorporated herein by reference
          to Exhibit 3.1 of the Registrant's Annual Report on Form
          10-K for the year ended December 31, 1998 (Commission File
          No. 1-9741).]
  3.2     Registrant's By-Laws, as amended December 22, 1998
          [Incorporated herein by reference to Exhibit 3.2 of the
          Registrant's Annual Report on Form 10-K for the year ended
          December 31, 1998 (Commission File No. 1-9741).]
  4.1     Specimen Stock Certificate for Inamed Corporation Common
          Stock, par value $0.01 per share. [Incorporated herein by
          reference to Exhibit 3.3 of the Company's Annual Report on
          Form 10-K for the year ended December 31, 1995 (Commission
          File No. 0-7101).]
  4.2     Form of Registration Rights Agreement. (Incorporated herein
          by reference to Exhibit 10.6 of the Company's Financial
          Report on Form 10-K for the year ended December 31, 1997.)
  4.3     Registration Rights Agreement, dated as of September 30,
          1998. (Incorporated herein by reference to Exhibit 99.10 of
          the Company's Current Report on Form 8-K filed with the
          Commission on October 15, 1998.)
  4.4     Registration Rights Agreement by and between Inamed
          Corporation and Santa Barbara Bank and Trust, as trustee,
          dated as of November 5, 1998. (Incorporated herein by
          reference to Exhibit 99.9 of the Company's Current Report on
          Form 8-K filed with the Commission on November 19, 1998.)
  4.5     Amended and Restated Rights Agreement, dated as of November
          16, 1999, by and between Inamed Corporation and U.S. Stock
          Transfer Corporation, as Rights Agent. (Incorporated herein
          by reference to Exhibit 4.1 of the Registrant's Current
          Report on Form 8-K filed with the Commission on November 19,
          1999.)
  4.6     Form of Amendment No. 1 to Amended and Restated Rights
          Agreement, dated as of December 22, 1999, by and among
          Inamed Corporation, Appaloosa Management L.P. and U.S. Stock
          Transfer Corporation, as Rights Agent. (Incorporated by
          reference to Exhibit 4.1 of the Registrant's Current Report
          on Form 8-K filed with the Commission on December 30, 1999.)
 10.1     Form of Inamed Corporation 4% Convertible Debenture.
          (Incorporated herein by reference to Exhibit 10.5 of the
          Company's Financial Report on Form 10-K for the year ended
          December 31, 1996.)
 10.2     Form of Convertible Debenture Agreement. (Incorporated
          herein by reference to Exhibit 10.7 of the Company's
          Financial Report on Form 10-K for the year ended December
          31, 1996.)
 10.3     Loan Agreement, dated as of September 1, 1999, by and among
          Inamed Corporation and Inamed Acquisition Corporation, as
          Borrowers, the Initial Lenders named therein, as Initial
          Lenders, and Ableco Finance LLC, as Administrative Agent.
          (Incorporated herein by reference to Exhibit 4.1 of the
          Registrant's Current Report on Form 8-K filed with the
          Commission on September 15, 1999.)
 10.4     Employment Agreement, dated January 23, 1998, by and between
          Richard G. Babbitt and Inamed Corporation and other related
          agreements. (Incorporated herein by reference to Exhibit
          10.1 of the Registrant's Current Report on Form 8-K filed
          with the Commission on November 19, 1999.)
 10.5     Employment Agreement, dated January 22, 1998, by and between
          Ilan K. Reich and Inamed Corporation and other related
          agreements. (Incorporated by reference to Exhibit 10.2 of
          the Registrant's Current Report on Form 8-K filed with the
          Commission on November 19, 1999.)
 10.6     Form of Warrant for Senior Executive Officers. (Incorporated
          by reference to Exhibit 10.3 of the Registrant's Current
          Report on Form 8-K filed with the Commission on November 19,
          1999).
 21       Registrant's Subsidiaries.
 23.1     Consent of Arthur Andersen, LLP.
 23.2     Consent of BDO Seidman, LLP.
</TABLE>

                                        26
<PAGE>   28

<TABLE>
<CAPTION>
EXHIBIT
  NO.                             DESCRIPTION
-------                           -----------
<C>       <S>
 99.1     Order and Final Judgment Certifying Inamed Settlement Class,
          Approving Class Settlement, and Dismissing Claims against
          Inamed and Released Parties dated February 1, 1999.
          [Incorporated herein by reference to Exhibit 99.1 of the
          Company's Financial Report on Form 10-K for the year ended
          December 31, 1998 (Commission File No. 1-9741).]
</TABLE>

     (b) Current Reports on Form 8-K

        Form 8-K dated January 6, 2000
        Form 8-K dated February 4, 2000
        Form 8-K dated February 9, 2000
        Form 8-K dated February 14, 2000
        Form 8-K dated March 27, 2000
        Form 8-K dated April 17, 2000
        Form 8-K dated April 20, 2000
        Form 8-K dated May 5, 2000
        Form 8-K dated June 6, 2000
        Form 8-K dated June 23, 2000
        Form 8-K dated July 28, 2000
        Form 8-K dated August 2, 2000
        Form 8-K dated October 4, 2000
        Form 8-K dated October 16, 2000

                                        27
<PAGE>   29

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 30, 2001.

                                          INAMED CORPORATION

                                          By: /s/    MICHAEL J. DOTY
                                            ------------------------------------
                                                Michael J. Doty, Senior Vice
                                                President and Chief Financial
                                               Officer (Principal Financial and
                                                     Accounting Officer)

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

<TABLE>
<C>                                                  <S>                                <C>

              /s/ RICHARD G. BABBITT                 Chairman of the Board of           March 30, 2001
---------------------------------------------------    Directors and Chief Executive
                Richard G. Babbitt                     Officer (Principal Executive
                                                       Officer)

                /s/ JAMES E. BOLIN                   Director                           March 30, 2001
---------------------------------------------------
                  James E. Bolin

           /s/ MALCOLM R. CURRIE, PH.D.              Director                           March 30, 2001
---------------------------------------------------
             Malcolm R. Currie, Ph.D.

                 /s/ JOHN F. DOYLE                   Director                           March 30, 2001
---------------------------------------------------
                   John F. Doyle

          /s/ MITCHELL S. ROSENTHAL, M.D.            Director                           March 30, 2001
---------------------------------------------------
            Mitchell S. Rosenthal, M.D.

                /s/ DAVID A. TEPPER                  Director                           March 30, 2001
---------------------------------------------------
                  David A. Tepper
</TABLE>

                                        28
<PAGE>   30

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Inamed Corporation:

     We have audited the accompanying consolidated balance sheet of Inamed
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2000,
and the related consolidated statements of income, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

     We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Inamed Corporation and
subsidiaries as of December 31, 2000, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.

                                          Arthur Andersen LLP

New York, New York
January 25, 2001

                                       F-1
<PAGE>   31

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Stockholders and Board of Directors
Inamed Corporation and Subsidiaries:

     We have audited the accompanying consolidated balance sheet of Inamed
Corporation and Subsidiaries as of December 31, 1999 and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows for each of the two years in the period ended December 31, 1999. We
have also audited the schedule listed in the accompanying index for the same
periods. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
and schedule are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements and schedule. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and schedule. We
believe that our audits provide a reasonable basis for our opinion.

     In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Inamed
Corporation and Subsidiaries at December 31, 1999 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the schedule presents fairly, in all
material respects, the information set forth therein for each of the two years
in the period ended December 31, 1999.

                                          BDO Seidman, LLP

New York, New York
January 21, 2000

                                       F-2
<PAGE>   32

                      INAMED CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                      YEARS ENDED DECEMBER 31, 2000, 1999
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              ----------------
                                                               2000      1999
                                                              ------    ------
<S>                                                           <C>       <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 22.3    $ 17.5
  Trade accounts receivable, net of allowances for doubtful
     accounts and returns of $7.1 and $6.4..................    40.3      44.4
  Inventories, net..........................................    34.8      25.3
  Prepaid expenses and other current assets.................     6.0       4.9
  Deferred income taxes.....................................    18.8      32.8
                                                              ------    ------
  Total current assets......................................   122.2     124.9
Net property and equipment..................................    26.3      24.1
Goodwill -- Collagen, net of amortization of $7.4 and
  $1.8......................................................   155.2     139.1
Patents and license agreements, net of amortization of $1.0
  and $0....................................................    48.5      11.5
Investments and other assets (see note 5)...................    33.7       9.8
                                                              ------    ------
Total assets................................................  $385.9    $309.4
                                                              ======    ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current debt..............................................  $ 11.2       1.1
  Accounts payable..........................................    22.0      16.7
  Income taxes payable......................................     8.8      18.7
  Accrued liabilities and other (see note 5)................    29.4      45.6
                                                              ------    ------
  Total current liabilities.................................    71.4      82.1
Long-term debt and capital leases...........................    98.6      77.2
Other Long Term Liabilities.................................    48.4      16.0
Stockholders' equity:
  Common stock, $.01 par value. authorized 50.0 and 25.0
     shares; issued 20.6 and 20.2; outstanding 20.3 and
     20.2...................................................     0.2       0.2
  Additional paid-in capital................................   161.8     152.8
  Accumulated other comprehensive loss......................    (7.8)     (4.0)
  Retained earnings (accumulated deficit)...................    22.1     (14.9)
  Less: cost of common stock in treasury (0.3 shares).......    (8.8)       --
                                                              ------    ------
  Stockholders' equity......................................   167.5     134.1
                                                              ------    ------
Total liabilities and stockholders' equity..................  $385.9    $309.4
                                                              ======    ======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       F-3
<PAGE>   33

                      INAMED CORPORATION AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                               2000      1999      1998
                                                              ------    ------    ------
<S>                                                           <C>       <C>       <C>
Net sales...................................................  $240.1    $189.3    $131.6
Cost of goods sold..........................................    66.4      57.6      48.0
                                                              ------    ------    ------
  Gross profit..............................................   173.7     131.7      83.6
                                                              ------    ------    ------
Operating expenses:
  Marketing.................................................    53.5      43.1      33.3
  General and administrative................................    48.8      31.7      27.8
  Research and development..................................     9.9      10.3       9.4
  Restructuring expense.....................................      --        --       4.2
  Amortization of intangible assets.........................     9.3       2.9       0.4
                                                              ------    ------    ------
  Total operating expenses..................................   121.5      88.0      75.1
  Operating profit..........................................    52.2      43.7       8.5
Other income (expense):
  Net interest expense and debt costs.......................   (10.5)    (13.1)     (3.8)
  Foreign currency transaction gains........................     2.6       0.3       0.7
  Royalty income and other..................................     7.0       1.4        --
                                                              ------    ------    ------
Other expense...............................................    (0.9)    (11.4)     (3.1)
Income before income tax expense (benefit) and extraordinary
  charges...................................................    51.3      32.3       5.4
Income tax expense (benefit)................................    14.3      (6.5)     (8.4)
                                                              ------    ------    ------
Income before extraordinary charges.........................    37.0      38.8      13.8
Extraordinary charges.......................................      --        --      (1.8)
                                                              ------    ------    ------
Net income..................................................  $ 37.0    $ 38.8    $ 12.0
                                                              ======    ======    ======
</TABLE>

<TABLE>
<CAPTION>
Income before extraordinary charges per share of common stock
<S>                                                            <C>       <C>       <C>
  Basic.....................................................   $ 1.81    $ 2.51    $ 1.33
  Diluted...................................................   $ 1.61    $ 2.03    $ 1.05
Loss from extraordinary charges per share of common stock
  Basic.....................................................   $   --    $   --    $(0.18)
  Diluted...................................................   $   --    $   --    $(0.13)
Net income per share of common stock
  Basic.....................................................   $ 1.81    $ 2.51    $ 1.15
  Diluted...................................................   $ 1.61    $ 2.03    $ 0.92
Weighted average shares outstanding:
  Basic.....................................................     20.4      15.5      10.4
  Diluted...................................................     23.0      19.1      14.2
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       F-4
<PAGE>   34

                      INAMED CORPORATION AND SUBSIDIARIES

          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                        ACCUMULATED      RETAINED                     TOTAL
                                                          ADDITIONAL       OTHER         EARNINGS     TREASURY    STOCKHOLDERS'
                                        COMMON             PAID-IN     COMPREHENSIVE   (ACCUMULATED     STOCK        EQUITY
                                        SHARES   AMOUNT    CAPITAL     INCOME (LOSS)     DEFICIT)     PURCHASES     (DEFICIT)
                                        ------   ------   ----------   -------------   ------------   ---------   -------------
<S>                                     <C>      <C>      <C>          <C>             <C>            <C>         <C>
BALANCE, JANUARY 1, 1998..............    8.9     $0.1      $ 19.0         $(0.2)         $(65.5)       $ 0.0        $(46.7)
Comprehensive income:
  Net income..........................                                                      12.0                       12.0
  Translation adjustment..............                                       0.5                                        0.5
  Total comprehensive income..........                                                                                 12.5
Issuance of common stock (conversions
  of debt to equity)..................    2.0                 15.2                                                     15.2
Issuance of common stock..............    0.1                  0.6                                                      0.6
Issuance of Warrants & Options........                         2.8                                                      2.8
                                         ----     ----      ------         -----          ------        -----        ------
BALANCE, DECEMBER 31, 1998............   11.0      0.1        37.6           0.3           (53.5)         0.0         (15.6)
Comprehensive income:
  Net income..........................                                                      38.8                       38.8
  Translation adjustment..............                                      (4.3)                                      (4.3)
  Total comprehensive income..........                                                                                 34.5
Issuance of common stock (exercise of
  stock options and warrants).........    0.4                                                                            --
Issuance of common stock (conversions
  of debt to equity)..................    1.7      0.0        10.7                                                     10.7
Issuance of common stock (exercise of
  warrants)...........................    3.7      0.1        23.2                                                     23.2
Issuance of common stock (equity
  offering)...........................    3.0      0.0        78.3                                                     78.3
Issuance of common stock (settlement
  of litigation)......................    0.4                  3.0                                                      3.0
                                         ----     ----      ------         -----          ------        -----        ------
BALANCE, DECEMBER 31, 1999............   20.2      0.2       152.8          (4.0)          (14.7)         0.0         134.1
Comprehensive income:
  Net income..........................                                                      37.0                       37.0
  Translation adjustment..............                                      (3.8)                                      (3.8)
  Total comprehensive income..........                                                                                 33.2
Repurchase of common stock............                                                                   (8.8)         (8.8)
Compensation expense on options.......                         1.6                                                      1.6
Tax benefit of option exercises.......                         5.2                                                      5.2
Issuance of common stock (exercise of
  stock options and warrants).........    0.4                  2.2                                                      2.2
                                         ----     ----      ------         -----          ------        -----        ------
BALANCE, DECEMBER 31, 2000............   20.6     $0.2      $161.8         $(7.8)         $ 22.3        $(8.8)       $167.5
                                         ====     ====      ======         =====          ======        =====        ======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       F-5
<PAGE>   35

                      INAMED CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                              2000      1999     1998
                                                              -----    ------    -----
<S>                                                           <C>      <C>       <C>
Cash flows from operating activities:
Net income..................................................  $37.0    $ 38.8    $12.0
  Net cash provided by operating activities:
    Depreciation and amortization...........................   12.3       7.5      3.8
    Non-cash compensation...................................    1.6       0.2      0.2
    Provision (benefits) for doubtful accounts, notes and
     returns................................................    0.7      (0.1)     0.9
    Changes in assets and liabilities:
      Trade accounts receivable.............................   (0.1)     (8.3)    (9.7)
      Inventories...........................................  (11.2)      1.4      5.7
      Prepaid expenses and other current assets.............    1.3      (2.8)    (0.2)
      Deferred income taxes.................................   11.8      (4.3)    (9.7)
      Other assets..........................................    6.1      (0.6)    (0.6)
      Accounts payable......................................    5.2      (2.3)     0.6
      Income taxes payable..................................    3.7        --       --
      Acquisition and integration costs.....................  (13.3)    (19.7)      --
      Trilucent costs.......................................  (21.8)       --       --
      Acquired liabilities and other long term..............   (2.3)     19.5     (0.4)
                                                              -----    ------    -----
         Net cash provided by operating activities..........   31.0      29.3      2.6
                                                              -----    ------    -----
Cash flows from investing activities:
  Disposal of fixed assets..................................     --        --      1.6
  Purchase of Collagen, net of cash acquired................     --    (138.0)      --
  Investment in ATS, Arthrocare and RTI.....................   (6.0)    (10.0)      --
  Purchase of property and equipment........................  (12.5)     (6.1)    (3.6)
                                                              -----    ------    -----
         Net cash used in investing activities..............  (18.5)   (154.1)    (2.0)
                                                              -----    ------    -----
Cash flows from financing activities:
  Increases in long-term debt...............................   82.5     155.0      0.7
  Increases in leases and notes payable.....................    5.0        --      8.0
  Principal repayment of notes payable and long-term debt...  (85.9)   (120.4)      --
  Increase in related party, net............................     --        --      1.1
  Grants received, gross....................................     --       0.8      0.3
  Issuance of common stock..................................    2.2     102.4      0.1
  Redemption of common stock................................     --      (3.0)      --
  Acquisition of treasury shares............................   (7.7)       --       --
                                                              -----    ------    -----
Net cash (used in) provided by financing activities.........   (3.9)    134.8     10.2
                                                              -----    ------    -----
Effect of exchange rate changes on cash.....................   (3.8)     (4.3)    (0.9)
Net increase in cash and cash equivalents...................    4.8       5.7      9.9
Cash and cash equivalents at beginning of year..............   17.5      11.8      1.9
Cash and cash equivalents at end of year....................  $22.3    $ 17.5    $11.8
                                                              =====    ======    =====
Supplemental disclosure of cash flow information:
  Cash paid during the year for:
    Interest................................................  $13.5    $ 12.7    $ 4.6
    Income taxes............................................  $ 5.2    $  1.7    $ 1.1
</TABLE>

                                       F-6
<PAGE>   36

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

  Year ended December 31, 2000:

     The Company recognized an income tax benefit of $5.2 million related to the
exercise of stock options.

     The Company recorded a $28.6 million intangible asset as part of the
purchase of various patents from Medical Products Development, Inc. and recorded
a corresponding amount of debt.

  Year ended December 31, 1999:

     The Company issued 1,717,000 shares of common stock and recorded a
corresponding $10.7 million reduction of junior secured notes.

  Year ended December 31, 1998:

     The Company issued 1,112,173 shares of common stock and recorded a
corresponding $4.1 million reduction of convertible debt in connection with the
4% Convertible Debentures converted to equity.

     The Company issued 66,117 shares of common stock as payment of $0.3 million
of accrued debt costs related to the 1997 default of certain financial covenants
related to the $6.2 Convertible Debenture.

     The Company issued 16,052 shares of common stock and recorded a
corresponding $0.1 million reduction of convertible notes payable in connection
with the 11% Convertible Notes converted to equity.

     The Company issued 90,744 shares of common stock and recorded a
corresponding $0.5 million reduction of royalties payable.

     The Company issued $25.5 million of notes payable and 426,323 shares of
redeemable common stock at an aggregate stated value of $3.0 million and
recorded a corresponding $28.5 million reduction in the accrued litigation
settlement.

                                       F-7
<PAGE>   37

                               INAMED CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

NOTE 1 -- DESCRIPTION OF BUSINESS

     Inamed Corporation's subsidiaries are organized into three business units
(for financial reporting purposes all business units are considered to be one
segment): U.S. Plastic Surgery and Aesthetic Medicine (consisting primarily of
McGhan Medical Corporation, which develops, manufactures and sells medical
devices and components for breast implants and facial aesthetics); BioEnterics
Corporation, which develops, manufactures and sells medical devices and
associated instrumentation to the bariatric and general surgery fields; and
International (consisting primarily of a manufacturing company based in
Ireland -- McGhan Limited and sales subsidiaries in various countries, including
The Netherlands, Germany, Italy, United Kingdom, France, Spain, Australia and
Japan, which sell products for both the plastic, aesthetics and bariatric
surgery fields).

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Principles of Consolidation --

     The consolidated financial statements include the accounts of the Company
and its subsidiaries after elimination of all significant intercompany accounts
and transactions.

  Reclassifications --

     Certain items in the prior years' consolidated financial statements have
been reclassified to conform to the fiscal 2000 presentation.

  Use of Estimates --

     The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amount of assets and liabilities and
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. Actual results could differ from those estimates.

  Cash and cash equivalents --

     Cash and cash equivalents consist principally of cash in banks and highly
liquid debt instruments purchased with original maturities of three months or
less.

  Fair Value of Financial Instruments --

     The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value due to their short-term maturities. The amounts presented
for other long-term liabilities also approximate fair value.

  Inventories --

     Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) convention. The Company provides a provision for obsolescence
based upon historical experience.

                                       F-8
<PAGE>   38
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

  Current Vulnerability Due to Certain Concentrations --

     The Company has limited sources of supply for certain raw materials, which
are significant to its manufacturing process. A change in suppliers could cause
a delay in manufacturing and a possible loss of sales, which would adversely
affect operating results.

  Property and Equipment --

     Property, plant and equipment are carried at cost and are depreciated on a
straight-line basis over estimated useful lives. The Company depreciates
property and equipment from five to ten years and amortizes the leasehold
improvements over their estimated useful lives or lives of the leases, whichever
is shorter.

  Accounting for Long Lived Assets --

     The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
to be Disposed Of" ("SFAS 121"). This statement establishes financial accounting
and reporting standards for the impairment of long-lived assets and certain
identifiable intangibles, and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. SFAS 121 requires, among other things, that an entity reviews 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. The Company does not believe that any such changes have
taken place.

  Revenue Recognition --

     Revenue from product sales is recognized upon shipment. Appropriate
reserves are established for anticipated returns and allowances, based on
product history, which are deducted from revenue in arriving at net sales.

  Stock-Based Compensation --

     The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." In
accordance with the provisions of SFAS 123, the Company has elected the
disclosure only provisions related to employee stock options and follows the
provisions of Accounting Principals Board Opinion No. 25 ("APB 25") in
accounting for stock options issued to employees. Under APB 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.

  Foreign Currency Translation --

     Assets and liabilities of foreign subsidiaries are translated into U.S
Dollars using the exchange rates in effect at the balance sheet date. Results of
their operations are translated using the average exchange rates during the
period. The resulting foreign currency translation adjustment is included in
stockholders' equity as a component of accumulated other comprehensive income
(loss). Transaction gains and losses are recorded in the consolidated statement
of income.

                                       F-9
<PAGE>   39
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

  Income Taxes --

     The Company applies the deferred method of accounting for income taxes
whereby deferred taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates to differences between
financial statements carrying amounts and the tax bases of existing assets and
liabilities.

  Recent Pronouncements --

     In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 (as amended by SFAS No. 137) is effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000.

     During December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
No. 101 expresses the views of the SEC staff in applying generally accepted
accounting principles to certain revenue recognition issues. The Company has
concluded that the implementation of this SAB will not have a material impact on
its financial position or its results of operations.

     During March 2000, the FASB issued interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," which clarifies the
application of Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" ("APB25"), regarding (a) the definition of an employee for
purposes of applying APB Opinion No. 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. Interpretation No. 44 is effective on July 1,
2000. Certain events as defined by Interpretation No. 44, may require earlier
consideration if they occurred after December 15, 1998 of January 12, 2000,
depending on the event, although no financial statement effect would be
recognized until July 1, 2000. The effects of applying Interpretation No. 44 are
recognized prospectively. Management has reviewed its stock compensation events
and determined none qualify as those covered by Interpretation No. 44 that would
require early consideration.

  Foreign Exchange Forward Contracts --

     The Company enters into various foreign exchange forward purchase contracts
to hedge foreign currency fluctuations in transactions denominated in foreign
currencies, thereby limiting the Company's risk that would otherwise result from
changes in exchange rates. Gains and losses associated with currency rate
changes are recorded in translation gain (loss) in the consolidated statement of
income.

  Product Warranties --

     The provision for product warranty is recorded based on actuarial amounts.

NOTE 3 -- COLLAGEN ACQUISITION

     On September 1, 1999, the Company acquired Collagen Aesthetics, Inc.,
("Collagen") a designer, developer, manufacturer and marketer of products that
treat defective, diseased, traumatized or aging human tissue. The fair value of
assets acquired and liabilities assumed was $243.l million and $82.6 million
respectively, which includes identifiable intangible assets of $13.9 million.
The principal acquired products, Zyderm(R) and Zyplast(R) collagen-based facial
implants, are used in aesthetic applications for the correction of
                                       F-10
<PAGE>   40
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

scars and facial wrinkles due to aging. Collagen's products are used by plastic
surgeons, dermatologists and other physicians for elective surgical and
non-surgical therapies to remedy aging and defective facial tissue.

     The Collagen acquisition has been accounted for by the purchase method of
accounting and accordingly, the results of operations of Collagen since
September 1, 1999 have been included in the accompanying consolidated financial
statements.

     The aggregate purchase price for the Collagen acquisition was approximately
$160.5 million, including the cancellation of employee stock options and
expenses. The Company funded the acquisition with a bridge loan facility of $155
million plus cash on hand. At the same time, cash on hand was used to retire $17
million of pre-existing debt.

     The acquired goodwill is being amortized on a straight-line basis over 30
years.

     The summarized unaudited pro forma results of operations set forth below
for the years ended December 31, 1999 and 1998 assume the acquisition occurred
as of the beginning of the earliest period presented.

<TABLE>
<CAPTION>
                                                              1999     1998
                                                              -----    -----
<S>                                                           <C>      <C>
Net sales...................................................  242.5    206.1
Net Income before extraordinary items.......................   29.9     (3.3)
Net Income (Loss)...........................................   29.9     (5.1)
Net income (loss) per share of common stock:
  Basic.....................................................   1.76    (0.40)
  Diluted...................................................   1.45    (0.41)
</TABLE>

     Pro forma adjusted net income (loss) per common share may not be indicative
of actual results, primarily because the pro forma earnings include historical
results of Collagen and do not reflect any cost savings or potential sales
erosion that may result from the Company's integration efforts.

ACQUISITION AND INTEGRATION COSTS

     In connection with the acquisition of Collagen, the Company assessed and
formulated plans to restructure certain operations. These plans included the
closure of certain offices and foreign subsidiaries, severance and other
employee termination costs. The objective of the plans was to reduce overhead
expenses. The accrual of these costs, as well as the legal and other
professional fees associated with the acquisition and integration plans, were
recorded as an increase to goodwill.

     Also in connection with the Collagen acquisition, management provided
reserves related to Collagen's Trilucent breast implants (See Note 13). The
provision represents management's best estimate based on current information of
the most likely costs, and provides for additional current and future
anticipated expenses related to ongoing clinical follow-up for multi-year
studies in the U.S. and Europe, explantations of the Trilucent implant where
required, litigation expenses which may not be covered by insurance, scientific
studies and a patient surveillance program in the U.K.

     During 1999, the Company accrued for $53.2 million related to the
acquisition costs and Trilucent reserves of which $19.7 million was paid through
December 31, 1999. As of December 31, 1999, these reserves, less amounts paid
through year end, totaled $33.5 and were included in Accrued Liabilities and
Other ($26.3) and Other Long-Term Liabilities ($7.2) in the accompanying balance
sheet as of December 31, 1999.

                                       F-11
<PAGE>   41
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

     During 2000, the Company finalized the allocation of the Collagen purchase
price which increased goodwill by $22.0 million. Of the $22.0, $19.0 ($31.7 less
tax benefits of $12.7) related to the Trilucent breast implants, $2.0 related to
acquisition and integration costs and the remaining $1.0 million related to
other assets and liabilities. Additionally, the Company made payments of $35.1
against these reserves during fiscal 2000. As of year-end, total remaining
reserves related to the Collagen acquisition totaled $34.1 and were included in
Accrued Liabilities and Other ($12.3) and Other Long-Term Liabilities ($21.8) in
the accompanying balance sheet as of December 31, 2000.

NOTE 4 -- NET INCOME PER SHARE

     The Company accounts for net income per common share in accordance with the
provisions of SFAS No. 128, basic net income per share is calculated by dividing
income available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted net income per share is calculated
by dividing income available to common shareholders by the weighted-average
number of common and dilutive common equivalent shares outstanding during the
period.

                       COMPUTATION OF PER SHARE EARNINGS

<TABLE>
<CAPTION>
                                                 YEAR ENDED      YEAR ENDED      YEAR ENDED
                                                DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                    2000            1999            1998
                                                ------------    ------------    ------------
<S>                                             <C>             <C>             <C>
Diluted:
Net income -- Basic...........................      37.0            38.8            12.0
Interest and convertible debt assuming
  conversion at beginning of year.............       0.0             0.0             1.1
                                                   -----           -----           -----
Net income -- Diluted.........................      37.0            38.8            13.1
                                                   =====           =====           =====
Weighted average shares outstanding --Basic...      20.4            15.5            10.4
Shares outstanding assuming conversion of
  Convertible Debt............................                                       3.3
  Stock options and warrants..................       2.6(1)          3.6(1)          0.5(1)
                                                   -----           -----           -----
Weighted average shares
  outstanding -- Diluted......................      23.0            19.1            14.2
Per share amount
  Basic.......................................     $1.81           $2.51           $1.15
  Diluted.....................................     $1.61           $2.03           $0.92
</TABLE>

---------------
(1) The calculation excludes 0.5, 0.2 and 2.7 options that are anti-dilutive for
    the years ended December 31, 2000, 1999, 1998 respectively.

                                       F-12
<PAGE>   42
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

NOTE 5 -- OTHER BALANCE SHEET DATA

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              --------------
                                                              2000     1999
                                                              -----    -----
<S>                                                           <C>      <C>
Inventories are summarized as follows:
Raw materials...............................................    7.8      7.4
Work in progress............................................    6.0      7.2
Finished goods..............................................   22.4     13.5
                                                              -----    -----
Gross Inventory.............................................   36.2     28.1
Less allowance for obsolescence.............................   (1.4)    (2.8)
                                                              -----    -----
Net Inventory...............................................   34.8     25.3
Property and equipment, at cost:
Machinery and equipment.....................................   29.4     21.5
Furniture and fixtures......................................    2.8      6.4
Leasehold improvements......................................   16.0     14.6
                                                              -----    -----
Gross property and equipment................................   48.2     42.5
Less accumulated depreciation and amortization..............  (21.9)   (18.4)
                                                              -----    -----
Net property and equipment..................................   26.3     24.1
                                                              =====    =====
Investments and other assets:
Notes receivable, net of allowances of $0.5 and $0.5........    2.6      2.7
Investment at cost..........................................    5.7       --
Other intangibles, net......................................    1.4      1.7
Deferred charges............................................    3.3       --
Deferred income taxes -- long term..........................   19.5       --
Other assets................................................    1.2      5.4
                                                              -----    -----
Total Investments and other assets..........................   33.7      9.8
                                                              =====    =====
Accrued liabilities and other:
Salaries, wages, and payroll taxes..........................    9.1      8.4
Acquisition and integration costs...........................    7.0     16.1
Royalties payable...........................................    1.3      4.8
Acquired liabilities........................................    5.3      7.7
Other.......................................................    6.7      8.6
                                                              -----    -----
Total accrued liabilities and other.........................   29.4     45.6
                                                              =====    =====
</TABLE>

                                       F-13
<PAGE>   43
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

NOTE 6 -- DEBT AND CAPITAL LEASES

     Debt is summarized as follows:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              ---------------
                                                               2000     1999
                                                              ------    -----
<S>                                                           <C>       <C>
Variable % 5 year Term Note, maturing January 2005 interest
  payable quarterly(a)......................................    81.7       --
Variable % 5 year Revolver, maturing January 2005 interest
  payable quarterly(a)......................................     5.0       --
6% 4 year MPDI Note, maturing January 2004 interest payable
  annually(b)...............................................    22.6       --
12% Bridge Notes payable, maturing May 2000 interest payable
  monthly(c)................................................      --     77.0
Capital lease obligations, collateralized by related
  equipment, and other notes payable........................     0.5      1.3
                                                              ------    -----
                                                               109.8     78.3
Less, current installments..................................   (11.2)    (1.1)
Long term debt..............................................  $ 98.6    $77.2
                                                              ======    =====
</TABLE>

---------------
 (a) On February 1, 2000, the Company refinanced the remaining $77.0 million
     bridge loan that was obtained to finance the Collagen acquisition, with a
     new credit facility comprised of a five-year term loan of $82.5 million and
     a revolving credit line of $25.0 million.

     The term loan and advances under the revolving facility bears interest at
     the rate of either (i) the one, two, three or six-month London Interbank
     Offered Rate (LIBOR) plus an applicable margin ranging from 3.00% to 3.50%
     or (ii) prime rate plus an applicable margin ranging from 2.00% to 2.50%.
     The interest rate as of December 31, 2000 was 9.68%. The applicable margin
     is subject to change based on the Company's consolidated leverage ratio.
     The term of the loan agreement is five years and the term loan, revolving
     loan are guaranteed on a senior basis by all of the Company's material U.S.
     subsidiaries and secured by a lien on substantially all of the assets of
     the Company and its material U.S. subsidiaries.

     During the third quarter of fiscal 2000 the Company amended its five-year
     term loan to allow for the purchase of common stock not to exceed $25
     million between August 21, 2000 and February 1, 2005. In addition the
     Company may spend an amount in excess of $25 million in the event that
     consolidated domestic net income for the preceding two fiscal years exceeds
     $100 million.

     Net interest and other financing expenses for 2000 include $2.2 million
     incurred in connection with the early retirement of debt in connection with
     the bridge loan for the Collagen acquisition.

(b) As part of the purchase of various texturing patents from Medical Products
    Development, Inc. (MPDI) completed in 2000, the company was obligated to pay
    $30.0 million, $6.0 million of which was paid in the fourth quarter of 2000.
    An additional $10.0 million is payable in 2001 and the remainder is due from
    2002 through 2004. These amounts are included in patents and license on the
    accompanying balance sheet.

 (c) In September 1999 the Company issued senior secured bridge notes in an
     aggregate principal amount of $155.0 million. The proceeds, in addition to
     $23.8 million of cash on hand, were used to acquire Collagen Aesthetics,
     Inc. and repay $17.0 million of Company debt.

     The bridge notes were secured by perfected first priority liens on, and
security interests in, substantially all of the assets of the Company,
substantially all of the stock and assets of the Company's domestic
subsidiaries, including the stock and assets of Collagen and its domestic
subsidiaries, and 65% of the

                                       F-14
<PAGE>   44
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

outstanding capital stock of the Company's foreign subsidiaries. They were
guaranteed on a senior basis by all of the Company's material U.S. subsidiaries,
including Collagen and its material U.S. subsidiaries.

     The bridge notes bore interest initially at a margin of 600 basis points
over the 30-day London Interbank Offered Rate (LIBOR). Under the applicable loan
agreements, the margin increased 100 basis points on the three-month anniversary
of the issuance.

     In connection with the bridge loan facility, the Company paid financing
fees of $5.4 million (3 1/2 points on principal), which were amortized as the
bridge notes were paid down. Under the terms of the facility, the Company was
permitted to prepay the bridge notes, at par plus accrued interest plus $1.6
million (an additional point on principal). The Company accrued this additional
point and amortized it as the bridge notes were paid down. As of December 31,
1999 the Company had unamortized financing costs of $2.0 million recorded in
prepaid expenses and other current assets and has expensed $5.0 million, which
is recorded in net interest expense and debt cost.

     In November 1999, the Company completed a public offering of 2.95 million
primary shares of common stock and 500,000 secondary shares on behalf of selling
shareholders, at $29 per share. The net proceeds to the Company of $78 million
were used to retire a comparable amount of the bridge loan.

     The aggregate payment of debt and capital leases as of December 31, 2000
are as follows:

<TABLE>
<S>                                                           <C>
Year ending December 31:
  2001......................................................  $ 11.2
  2002......................................................     5.9
  2003......................................................     5.8
  2004......................................................    63.4
  2005......................................................    24.8
                                                              ------
                                                              $111.1
Less amounts representing interest..........................    (1.3)
                                                              ------
                                                              $109.8
                                                              ======
</TABLE>

                                       F-15
<PAGE>   45
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

NOTE 7 -- INCOME TAXES

     The provision for income taxes may be summarized as follows:

<TABLE>
<CAPTION>
                                                              FOR THE YEAR ENDED
                                                                 DECEMBER 31,
                                                              ------------------
                                                               2000       1999
                                                              -------    -------
<S>                                                           <C>        <C>
Current
  Federal...................................................   $(0.3)     $ 0.0
  State and Local...........................................     0.9        0.0
  Foreign...................................................     4.9        2.4
                                                               -----      -----
                                                               $ 5.5      $ 2.4
                                                               -----      -----
Deferred
  Federal...................................................   $ 6.7      $(7.6)
  State and Local...........................................     1.1       (1.3)
  Foreign...................................................     1.0        0.0
                                                               -----      -----
                                                               $ 8.8      $(8.9)
                                                               =====      =====
Provision for income taxes                                     $14.3      $(6.5)
                                                               =====      =====
</TABLE>

The domestic and foreign components of income before provision for income taxes
were $31.0 and $20.3, respectively for the year ended December 31, 2000, and
$14.6 and $17.7, respectively for the year ended December 31, 1999.

Income tax benefit for 1998 of $8.4 primarily pertains to a $12.7 reduction of
the valuation allowance on deferred tax assets.

The provision for income taxes differs from the amounts computed by applying the
applicable Federal statutory rate due to the following:

<TABLE>
<CAPTION>
                                                              FOR THE YEAR ENDED
                                                                 DECEMBER 31,
                                                              -------------------
                                                               2000        1999
                                                              -------    --------
<S>                                                           <C>        <C>
Provision for Federal income taxes at the statutory rate....   $17.4      $ 11.0
State and local income taxes, net of federal benefit........     1.4         1.9
Amortization of Goodwill....................................     1.9         0.7
Benefit of lower foreign tax brackets.......................    (1.0)       (4.6)
Benefit of Federal tax refunds..............................    (4.3)        0.0
Benefit of Foreign Sales Corporation........................    (0.8)        0.0
Tax credits.................................................    (0.6)        0.0
Other.......................................................     0.3         0.0
Change in Valuation Allowance...............................     0.0       (15.5)
                                                               -----      ------
Provision for income taxes..................................   $14.3      $ (6.5)
                                                               =====      ======
</TABLE>

The 1998 tax benefit differs from the amount computed using the Federal
statutory income tax rate due to the utilization of NOL's to offset current
years taxable income and the recording of a $8.0 deferred tax asset.

                                       F-16
<PAGE>   46
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

The principal items that comprise the Company's net deferred tax assets and
liabilities as of December 31, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                              AS OF DECEMBER 31,
                                                              -------------------
                                                               2000        1999
                                                              -------     -------
<S>                                                           <C>         <C>
DEFERRED TAX ASSETS
Other Allowances............................................   $ 3.3       $14.0
Accrued liabilities.........................................    18.9         3.9
Depreciable and amortizable assets..........................     4.6         0.0
Net Operating Losses and credits............................    14.2        13.9
Other Deferred Costs........................................     1.4         0.4
Uniform capitalization adjustments..........................     1.2         0.6
                                                               -----       -----
          Total Deferred Tax Assets.........................    43.6        32.8
DEFERRED TAX LIABILITIES
Unrealized foreign currency gains...........................    (0.8)        0.0
License Agreement...........................................    (4.9)        0.0
Other.......................................................     0.0        (1.5)
                                                               -----       -----
          Total Deferred Tax Liabilities....................    (5.7)       (1.5)
                                                               -----       -----
NET DEFERRED TAX ASSET......................................   $37.9       $31.3
                                                               =====       =====
</TABLE>

Provision has not been made for U.S. or additional foreign taxes on
undistributed earnings of foreign subsidiaries. Those earnings have been, and
will continue to be, permanently reinvested, but could become subject to
additional tax if they were remitted as dividends, were loaned to the Company or
a U.S. affiliate, or if the Company should sell the stock of its foreign
subsidiaries. Were the Company to repatriate earnings, planning would be done to
minimize the total tax liability. The cumulative amount of reinvested earnings
was approximately $18.0 million at December 31, 2000.

For federal income tax purposes the Company currently has a federal net
operating loss of $25.4 million that begins to expire in 2019. The Company also
has federal tax credit carryforwards of approximately $3.5 million that will
expire in various years beginning in 2008. If the Company has a change in
ownership as defined in Internal Revenue Code sec.382, use of these carryforward
amounts could be limited.

For state income tax purposes, the Company has net operating loss and credit
carryforwards of approximately $10.5 and $1.5 million as of December 31, 2000.

The Company released the $15.5 million valuation allowance on the deferred tax
asset at December 31, 1999 based on future short-term income projections and
profitable operations.

NOTE 8 -- STOCKHOLDERS EQUITY -- (Share and per share data shown actual)

During the second quarter of 1999, the Company completed a $31.1 million equity
financing, in which 5,440,000 new shares of common stock were issued to various
holders of $5.50 and $7.50 warrants in exchange for the payment of $20.4 million
of cash and the surrender of $10.7 million of 11% junior secured notes.
Virtually all of the holders of warrants who were eligible to exercise at this
time participated in the transaction. The Company also received $3 million of
cash from its noteholders, which was used to purchase on their behalf the
426,000 shares of common stock held by the court-appointed escrow agent. All of
those 5.8 million shares of common stock contain a legend that restricts
transferability absent compliance with or an exemption under Rule 144 (after the
one-year holding period) or an effective registration statement. In addition,
the

                                       F-17
<PAGE>   47
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

Company incurred a one-time $2.0 million finance charge against earnings in
connection with the exercise of warrants to fund the litigation settlement (see
Note 13).

     In April 1997 and continuing through January 1998, an entity controlled by
the Company's former Chairman loaned $9.9 million to the Company to provide it
with working capital to fund its operations. In July 1998, the Company and its
former chairman agreed to convert all of this debt (including accrued interest
computed at 10.5% per annum) into 860,000 shares of the Company's common stock
and a warrant to purchase 260,000 shares of the Company's common stock at $12.40
per share. At the time, the Company's common stock was trading at approximately
$7.50 per share.

STOCK OPTIONS

     The Company has adopted several stock option plans. At December 31, 2000,
under the terms of all director, officer and employee plans, 2,550,000 shares of
common stock were reserved for issuance.

     Activity under these plans for the years ended December 31, 2000, 1999 and
1998:

<TABLE>
<CAPTION>
                                               2000                          1999                          1998
                                    ---------------------------   ---------------------------   ---------------------------
                                                    WGTD. AVG.                    WGTD. AVG.                    WGTD. AVG.
                                       SHARES       EXER. PRICE      SHARES       EXER. PRICE      SHARES       EXER. PRICE
                                    -------------   -----------   -------------   -----------   -------------   -----------
                                    (IN MILLIONS)                 (IN MILLIONS)                 (IN MILLIONS)
<S>                                 <C>             <C>           <C>             <C>           <C>             <C>
Options outstanding at beginning
  of year.........................       1.3          $15.07           0.5          $ 5.95           0.1           $2.46
Granted...........................       0.5           40.94           0.9           19.16           0.4            6.18
Exercised.........................      (0.1)           6.59          (0.1)           6.00           0.0            1.45
                                        ----                          ----                           ---
Options outstanding at end of
  year............................       1.7           23.32           1.3           15.07           0.5            5.95
                                        ====                          ====                           ===
Options exercisable at end of
  year............................       0.5           14.10           0.1            5.75           0.1            2.63
                                        ====                          ====                           ===
Weighted average fair value of
  options granted.................                    $21.63                        $ 8.34                         $2.35
</TABLE>

     The following table summarizes information about stock options outstanding
at December 31, 2000:

<TABLE>
<CAPTION>
                                       OPTIONS OUTSTANDING                          OPTIONS EXERCISABLE
                       ---------------------------------------------------    -------------------------------
                                            WEIGHTED
      RANGE OF                              AVERAGE            WEIGHTED                           WEIGHTED
      EXERCISE            NUMBER           REMAINING           AVERAGE           NUMBER           AVERAGE
       PRICES           OUTSTANDING     CONTRACTUAL LIFE    EXERCISE PRICE     EXERCISABLE     EXERCISE PRICE
---------------------  -------------    ----------------    --------------    -------------    --------------
                       (IN MILLIONS)                                          (IN MILLIONS)
<S>                    <C>              <C>                 <C>               <C>              <C>
$1.45                       0.0               5.15              $ 1.45             0.0             $ 1.45
6.50                        0.3               8.01                6.50             0.2               6.50
13 to 16.88                 0.4               8.49               15.44             0.1              15.34
20 to 24.75                 0.5               8.72               22.15             0.2              22.04
33.19 to 45.375             0.5               8.90               40.82             0.0               0.00
                            ---               ----              ------             ---             ------
                            1.7               8.55              $23.32             0.5             $14.10
                            ===               ====              ======             ===             ======
</TABLE>

     The Company applies APB No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations in accounting for its employee stock
options.

     Under the accounting provisions of FASB Statement 123, the Company's net
income and earnings per share would have been reduced to the following pro forma
amounts for 2000, 1999 and 1998

                                       F-18
<PAGE>   48
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                              2000     1999     1998
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Proforma net income.........................................  $32.6    $36.2    $10.6
Proforma net income per common share:
  Basic.....................................................  $1.60    $2.34    $1.02
  Diluted...................................................  $1.42    $1.90    $0.75
</TABLE>

     The Company estimates the fair value of each stock option and warrant at
the grant date by using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 2000: no dividends
paid for all years; expected volatility of 75%; risk-free interest rate of
5.85%; and expected lives ranging from 0.58 years to 10 years. For 1999: no
dividends paid for all years; expected volatility of 34.4%; risk-free interest
rates ranging from 5.82% to 4.9%; and expected lives ranging from 2 years to 10
years. For 1998: no dividends paid for all years; expected volatility of 34.8%;
risk-free interest rates ranging from 5.71% to 4.06%; and expected lives ranging
from 0.58 years to 9 years

     The exercise price of all options outstanding under the stock option plans
range from $1.45 to $45.375 per share. All options exercised in 2000, 1999 and
1998 were exercised at a price range from $1.45 to $15.50. At December 31, 2000,
there were 156,500 shares available for future grant under these plans. In
certain instances, the Company has granted options at strike prices which were,
below the fair market value of the common stock at the date of grant. In each
such case, the Company recorded compensation expense for the difference between
the fair market value and the exercise price of the related outstanding options.

     In 1993, the Company adopted a Non-Employee Director Stock Option plan (the
"1993 Plan") which authorized the Company to issue up to 150,000 shares of
common stock to directors who are not employees of or consultants to the Company
and who are thus not eligible to receive stock option grants under the Company's
stock option plans. Pursuant to the 1993 Plan, each non-employee director is
automatically granted an option to purchase 5,000 shares of common stock on the
date of his or her initial appointment or election as a director, and an option
to purchase an additional 5,000 shares of common stock on each anniversary of
his or her initial grant date providing he or she is still serving as a
director. The exercise price per share is the fair market value per share on the
date of grant. The options are exercisable for ten (10) years after the option
grant date and vest in full one year from grant date. In 2000, 1999 and 1998
options to purchase 25,000, 30,000 and 0 shares respectively were issued under
the 1993 Plan. At December 31, 2000 there were 60,000 options available for
future grant under the 1993 Plan.

     In 1998, the Company adopted a non-qualified stock option plan (the "1998
Plan"). Under the terms of the 1998 Plan, 450,000 shares of common stock were
reserved for issuance to key employees. In 1998, 440,000 options to purchase
shares were granted to approximately 70 employees under the 1998 Plan at $6.50
per share. The options are exercisable for ten (10) years after the option grant
date and vest ratably over three (3) years. No options were granted in 2000 or
1999 under the 1998 Plan. At December 31, 2000, there were 51,500 options
available for future grant under the 1998 Plan.

     In 1999, the Company adopted a non-qualified stock option program (the
"1999 Program"). Under the terms of the 1999 Program, 900,000 shares of common
stock have been reserved for issuance to key employees. In 1999, options to
purchase 900,000 shares were granted to 21 officers of the Company and its
subsidiaries and a $0.2 million compensation charge was recorded. The majority
of the 900,000 options were issued out of money at exercise prices of $15.50
(382,832 options), $20.00 (283,334 options) and $24.75 (233,834 options). The
options are exercisable for ten (10) years after the option grant date and vest
ratably over three (3) years.

     In 1999, the Company adopted a Director Stock Election Plan (the "Stock
Election Plan"). Under the terms of the Stock Election Plan, non-employee
directors are allowed the opportunity to receive shares of

                                       F-19
<PAGE>   49
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

common stock in lieu of cash compensation owed to them as a result of their
service on the Company's Board of Directors. Under the terms of the Stock
Election Plan, 50,000 shares of common stock have been reserved for issuance to
non-employee directors. In 1999, no shares were issued under the Stock Election
Plan. In 2000, 2,662 shares were issued to three non-employee directors under
the Stock Election Plan.

     In 2000, the Company, adopted the 2000 Employee Stock Option Plan. The 2000
Option Plan currently authorizes the issuance of a maximum of 550,000 shares of
the Company's Common Stock pursuant to the exercise of Options granted
thereunder. All options issued under the 2000 Option Plan vest ratably,
one-third per year on the first, second and third anniversaries of their
issuance. In 2000, substantially all 505,000 Options issued under this plan are
exercisable at $40.94 per share, the closing price of the Common Stock as quoted
on the NASDAQ National Market on January 3, 2000, the date on which all such
Options were issued. None of the seven most highly compensated participants in
the Company's 1999 Option Program is a current participant in the 2000 Option
Plan.

     In January 2000, the Board of Directors of the Company adopted the 2000
Employee Stock Purchase Plan. The 2000 Stock Purchase Plan is intended to assist
the Company in securing and retaining key employees by allowing them to
participate in the ownership and growth of the Company through the grant of
certain rights to purchase shares of the Company's Common Stock at a discount of
15% from the fair market value of the shares. The granting of such rights serves
as partial consideration and gives key employees an additional inducement to
remain in the service of the Company and its subsidiaries and provides them with
an increased incentive to work toward the Company's success.

     Under the Employee Stock Purchase Plan, each eligible employee will be
permitted to purchase shares of the common stock through regular payroll
deductions and/or cash payments in an amount equal to 1% to 15% of the
employee's compensation for each payroll period. The fair market value of the
shares of common stock which may be purchased by any employee under this or any
other Inamed Corporation plan that is intended to comply with Section 423 of the
Internal Revenue Code during any calendar year may not exceed $25,000.

     The 2000 Employee Stock Purchase Plan provides for a series of consecutive
offering periods that generally will be six months long. Offering periods
generally will commence on January 1 and July 1 of each year during the term of
the plan. During each offering period, participating employees will be able to
purchase shares of common stock with payroll deductions at a purchase price
equal to 85% of the fair market value of the common stock at either the
beginning of each offering period or the end of each offering period, whichever
price is lower. Under terms of the 2000 Stock Purchase Plan, 200,000 shares of
common stock have been reserved for issuance to employees. In 2000, 34,223
shares were purchased by approximately 300 participating employees under the
Plan.

WARRANTS

     The Company issued no warrants in 2000. In 1999, 0.1 million warrants were
issued at a weighted average exercise price of $12.76, fair market value of $0.1
million and an expiration date of 2009. In 1998 6.0 million warrants were issued
at a weighted average exercise price of $5.83, fair market value of $5.5 million
and expiration dates of 2002 to 2008. During 2000, 1999 and 1998, the Company
has recorded $1.6, $0.1 and $0.3 million respectively of compensation expense
for warrants issued to executives.

NOTE 9 -- EMPLOYEE BENEFIT PLANS

     Effective January 1, 1990, the Company adopted a 401(k) Defined
Contribution Plan (the "Plan") for all U.S. employees. Participants may
contribute to the Plan and the Company may, at its discretion, match a

                                       F-20
<PAGE>   50
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

percentage of the participant's contribution as specified in the Plan's
provisions. Participants direct their own investments.

     Effective February 1, 1990, McGhan Limited (Ireland) adopted a Defined
Contribution Plan for all non-production employees. Upon commencement of
service, these employees become eligible to participate in the plan and
contribute to the plan up to 5% of their compensation. The Company's matching
contribution is equal to 10% of the participant's compensation. The employee is
immediately and fully vested in the Company's contribution. The Company's
contributions to the plan approximated $0.2, $0.2 and $0.3 million for the years
ended December 31, 2000, 1999 and 1998, respectively.

     Certain other foreign subsidiaries sponsor defined benefit or defined
contribution plans. The remaining plans, covering approximately 80 non-U.S.
employees, were instituted at various times during 1991 through 1997 and the
accumulated assets and obligations are immaterial. These plans are funded
annually according to plan provisions with aggregate contributions of $0.1, $0.3
and $0.2 million for the years ended December 31, 2000, 1999 and 1998,
respectively.

NOTE 10 -- GEOGRAPHIC INFORMATION

<TABLE>
<CAPTION>
                                                U.S.      INTERNATIONAL    ELIMINATION    CONSOLIDATED
                                               -------    -------------    -----------    ------------
<S>                                            <C>        <C>              <C>            <C>
Year ended December 31, 2000
  Net sales to unaffiliated customers........  $ 149.5       $ 90.6                          $240.1
  Intersegment sales.........................  $   8.2       $  9.8          $(18.0)         $  0.0
                                               -------       ------          ------          ------
  Total net sales............................  $ 157.7       $100.4          $(18.0)         $240.1
                                               =======       ======          ======          ======
  Segment operating profit...................  $  56.9       $ 30.8                          $ 87.7
                                               =======       ======                          ======
  General corporate expenses.................  $ (12.0)                                      $(12.0)
  Depreciation and amortization..............  $ (12.3)      $ (1.6)                         $(13.9)
  Net interest expense.......................                                                $(10.5)
                                                                                             ------
  Profit before income taxes and
     extraordinary charges...................  $  22.1       $ 29.2                          $ 51.3
                                               =======       ======                          ======
  Total Long-Lived Assets....................  $ 217.8       $ 19.3                          $237.1
                                               =======       ======                          ======
Year ended December 31, 1999
  Net sales to unaffiliated customers........  $ 121.0       $ 68.3                          $189.3
  Intersegment sales.........................  $   2.8       $ 11.3          $(14.1)         $  0.0
                                               -------       ------          ------          ------
  Total net sales............................  $ 123.8       $ 79.6          $(14.1)         $189.3
                                               =======       ======          ======          ======
  Segment operating profit...................  $  42.1       $ 19.4                          $ 61.5
                                               =======       ======                          ======
  General corporate expenses.................  $  (8.6)                                      $ (8.6)
  Depreciation and amortization..............  $  (6.1)      $ (1.4)                         $ (7.5)
</TABLE>

                                       F-21
<PAGE>   51
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                U.S.      INTERNATIONAL    ELIMINATION    CONSOLIDATED
                                               -------    -------------    -----------    ------------
<S>                                            <C>        <C>              <C>            <C>
  Net interest expense.......................                                                $(13.1)
                                                                                             ------
  Profit before income taxes and
     extraordinary charges...................  $  14.3       $ 18.0                          $ 32.3
                                               =======       ======                          ======
  Total Long-Lived Assets....................  $ 157.0       $  9.4                          $166.4
                                               =======       ======                          ======
Year ended December 31, 1998
  Net sales to unaffiliated customers........  $  84.1       $ 47.5                          $131.6
  Intersegment sales.........................  $   3.4       $ 34.8          $(38.2)         $  0.0
                                               -------       ------          ------          ------
  Total net sales............................  $  87.5       $ 82.3          $(38.2)         $131.6
                                               =======       ======          ======          ======
  Segment operating profit...................  $  19.1       $  4.8                          $ 23.9
                                               =======       ======                          ======
  General corporate expenses.................  $  (6.8)                                      $ (6.8)
  Restructuring expense......................                                                $ (4.2)
  Depreciation and amortization..............  $  (2.7)      $ (1.1)                         $ (3.8)
  Net interest expense.......................                                                $ (3.8)
                                                                                             ------
  Profit before income taxes and
     extraordinary charges...................  $   5.2       $  0.1                          $  5.3
                                               =======       ======                          ======
  Total Long-Lived Assets....................  $   7.3       $  6.5                          $ 13.8
                                               =======       ======                          ======
</TABLE>

     The international classification above includes The Netherlands, United
Kingdom, Italy, France, Germany, Ireland, Spain, Japan and Australia. The
individual operations are included in the international classification.

     For the purpose of this footnote long-lived assets includes property and
equipment and intangible assets.

NOTE 11 -- CONTINGENCIES AND COMMITMENTS

     In October 1999, a license and distribution agreement between ArthroCare
Corporation and Collagen Aesthetics, Inc., was amended. The Company has
worldwide rights to market ArthroCare's Coblation(TM) Cosmetic Surgery System
and related products using ArthroCare's patented radio frequency ("RF")
technology. Pursuant to the agreement, the Company now has exclusive rights to
sell such technology, among others, to all physicians in the fields of
dermatology, cosmetic and aesthetic surgery to the extent permitted by the FDA.
ArthroCare retains responsibility for manufacturing and product development.
Pursuant to the parties' agreements, Collagen has to date paid ArthroCare $2.0
million in licensing fees and must make certain minimum purchases and must pay
certain minimum royalties in the annual periods following FDA approval of a
licensed product for general dermatological use for skin resurfacing and wrinkle
reduction. In addition, in the future, the Company would owe ArthroCare $0.5
million on completion of a satisfactory disposable wand, $2.0 million on FDA
approval of a licensed product for general dermatological use for skin
resurfacing and wrinkle reduction, and a running royalty on the sale of the
disposable wands. Such FDA approval was received in March 2000. Under the
agreement, ArthroCare is also to supply a microdermabrasion product and an RF
liposuction product, FDA approval of which increases the above minimum purchase
and royalty requirements.

     In May 1999, the Company entered into a strategic alliance with Advanced
Tissue Sciences, Inc. ("ATS") under which the Company licenses for development,
marketing and sales five of ATS's human-based, tissue-engineered products for
surgical applications. As of December 31, 1999, the Company's total

                                       F-22
<PAGE>   52
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

investment in the ATS strategic alliance was $10 million and is included in
other assets. Of this amount, $7.2 million was paid for licensing rights and the
remainder was paid for an aggregate of 1.3 million shares of common stock, and
warrants to purchase common stock, of ATS at a blended purchase and exercise
price of $8.90 per share. The Company is also obligated to pay ATS an additional
$2.0 million milestone payment for each of the marketed products that receives
FDA approval, up to $10.0 million in total for all of the products. Finally, ATS
is entitled to royalties from the Company on a sliding scale based on overall
product sales. The Company has agreed to hold any investment in ATS common stock
until at least October 2002.

     The license payments made to date to ArthroCare and Advanced Tissue are
being amortized over the estimated lives of the license agreements. All royalty
payments under these arrangements will be expensed as marketing costs.

     The Company leases facilities under operating leases. The leases are
generally on an all-net basis, whereby the Company pays taxes, maintenance and
insurance. Leases that expire are expected to be renewed or replaced by leases
on other properties. Rent expense aggregated $6.2, $6.7 and $4.6 million for the
years ended December 31, 2000, 1999 and 1998, respectively.

     Minimum lease commitments under all noncancelable leases at December 31,
2000 are as follows:

     Year ending December 31:

<TABLE>
<S>                                                           <C>
  2001......................................................  $ 8.3
  2002......................................................    7.9
  2003......................................................    6.7
  2004......................................................    5.8
  2005......................................................    4.9
Thereafter..................................................   18.6
                                                              -----
                                                              $52.2
                                                              =====
</TABLE>

     Deferred grant income represents grants received from the Irish Industrial
Development Authority (IDA) for the purchase of capital equipment and is being
amortized to income over the life of the related assets. Amortization for the
each of years ended December 31, 2000, 1999 and 1998 was less than $0.1 million.
IDA grants are subject to revocation upon a change of ownership or liquidation
of McGhan Limited. If the grant were revoked, the Company would be liable on
demand from the IDA for all sums received and deemed to have been received by
the Company in respect to the grant. In the event of revocation of the grant,
the Company could be liable for the amount of approximately $0.7 million at
December 31, 2000.

     The Company has obtained the right to produce, use and sell patented
technology through various license agreements. The Company pays royalties
ranging from 5% to 10% of the related net sales, depending upon sales levels.
Royalty expense under these agreements was approximately $5.5, $5.3 and $6.6
million for the years ended December 31, 2000, 1999 and 1998, respectively, and
is included in marketing expense. The license agreements expire at the
expiration of the related patents.

     In 1997, the Company signed a distribution agreement with LySonix Inc., a
subsidiary of MDA, to sell ultrasonic surgery equipment in the European and
Latin American regions. Special incentive discounts were offered to the Company
for the introduction of the product in 1997. Net sales in 1998 and 1999 were
approximately $0.6 million and $0.3 million. In 1998, the terms of the original
agreement were revised so that the Company would obtain the goods on a
consignment basis and not have an obligation with LySonix until the products
were sold. The Company stopped selling LySonix machines in mid-1999.

                                       F-23
<PAGE>   53
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

NOTE 12 -- RELATED PARTY TRANSACTIONS

     From April 1997 until January 1998, International Integrated Industries,
LLC ("Industries"), an entity affiliated with Mr. Donald K. McGhan, lent the
Company an aggregate of $9.9 million, of which $8.8 million was included in
liabilities at December 31, 1997. Prior to February 1998, Mr. McGhan was
Chairman and Chief Executive Officer of the Company.

     After Industries began to lend those monies to the Company, Mr. McGhan
represented to the Board of Directors that those funds were derived from
personal financial resources. In early 1998, however, in connection with Mr.
McGhan's unsuccessful efforts to negotiate a payment schedule for the interest
and principal of the loan, Mr. McGhan for the first time advised other directors
that approximately two-thirds of the monies lent by Industries to the Company
were in fact derived from loans made to Industries by Medical Device Alliance,
Inc. ("MDA"). MDA is a company formed by Mr. McGhan in 1995 primarily to develop
and market various products for use in ultrasonic liposuction; the Company
believes that Mr. McGhan raised at least $20 million for MDA from various
outside investors through private placement transactions. The Company does not
believe those outside investors were apprised of the loans from MDA to
Industries; however, Mr. McGhan has asserted that the investment of those funds
in a medical device company such as the Company was within the permitted scope
of the proposed use of the funds when those investors made their investment. The
Company's Board of Directors has been advised by legal counsel: (a) that the
Company has no responsibility whatsoever to the outside investors in MDA for the
monies which Mr. McGhan arranged to loan Industries, which in turn were loaned
by Industries to the Company, and (b) that Mr. McGhan, as the controlling person
of both MDA and Industries at the times those loans were made, is solely
responsible to the outside investors in MDA for his actions with respect to
those monies. Interest expense with respect to this note totaled $0.5 million
1998.

     In July 1998, the Company and Mr. McGhan agreed to convert, and converted,
all of the $9.9 million lent by Industries (including accrued interest computed
at 10.5% per annum) into 860,000 shares of the common stock of the Company (the
"Restricted Shares") and a warrant to purchase 260,000 shares at $12.40 per
share (the "Warrant"). At the time, the Company's Common Stock was trading at
approximately $7.50 per share. In addition, Mr. McGhan (on behalf of himself and
his affiliates) agreed to a five-year standstill and voting agreement which
restricts their ability to vote, sell or acquire their shares of Common Stock.
Among other things the July 1998 agreement was intended to redress, and
redressed, Mr. McGhan's breaches of fiduciary duty to the Company, committed in
1996-97.

     In 1997, the Company entered into an agreement to sublease from MDA on a
month-to-month basis approximately 5,000 square feet of office space in Las
Vegas for $10 per month. Donald K. McGhan was the Chairman of MDA. In July 1998
the Company vacated that office space. While it continues as a named party under
the lease, in July 1998, Mr. McGhan placed 200,000 shares of Common Stock in
escrow with the Company until such time as the Company is no longer liable under
the terms of the lease. At the current market price for the Company's Common
Stock, the value of the 200,000 shares substantially exceeds the Company's
obligations under the lease.

NOTE 13 -- LITIGATION

BREAST IMPLANT LITIGATION

     Final Settlement on Litigation.  Prior to the final settlement order issued
by the U.S. District Court for the Northern District of Alabama, on February 1,
1999, the Company was a defendant in tens of thousands of state and federal
court lawsuits involving breast implants. As part of that final order, all of
those cases arising from breast implant products (both silicone gel-filled and
saline-filled) that were implanted before June 1,

                                       F-24
<PAGE>   54
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

1993 were consolidated into a mandatory class action settlement and dismissed.
The settlement order became final and non-appealable on March 3, 1999. In May
1999, the Company made the final payment in connection with this settlement from
a $31.1 million equity issuance.

     Current Product Liability Exposure.  Currently, other than the Trilucent(R)
matters discussed below, the Company's product liability litigation relates
largely to saline-filled breast implants that were implanted on or after June 1,
1993. These cases are being handled in the ordinary course of business and do
not have, and are not expected to have, a material financial impact on the
Company. The Company also occasionally receives claims arising from its facial
implant products, both in the U.S. and abroad. These cases are also handled in
the ordinary course and have not had, and are not expected to have, a material
financial impact on the Company.

     Outside the U.S., where the Company has been selling silicone gel-filled
implants without interruption, and where the local tort systems do not encourage
or allow contingency fee arrangements, the Company has had only a minimal number
of product liability lawsuits and no material financial exposure.

     Resolution of 3M Contractual Indemnity Claim.  In connection with the
breast implant litigation, 3M asserted against the Company a contractual
indemnity provision which was part of the August 1984 transaction in which the
Company's McGhan Medical subsidiary purchased 3M's plastic surgery business. To
resolve these claims, on April 16, 1998, the Company entered into a provisional
agreement with 3M under which the Company agreed to seek to obtain releases of
claims asserted against 3M in lawsuits involving breast implants manufactured by
the Company's McGhan Medical subsidiary. The 3M agreement provides for release
of 3M's indemnity claim upon achievement of an agreed minimum number of
conditional releases for 3M.

     Under the terms of the 3M agreement, as later amended in January 1999, the
Company paid $3 million to 3M in February 1999. Also under the terms of the 3M
agreement, the Company assumed limited indemnification obligations to 3M
beginning in the year 2000, subject to a cap of $1 million annually and $3.0 to
$3.9 million in total. For 2000, the Company's total obligation under the 3M
agreement, as amended, was $0.3 million, which amount has been paid in full.

     Ongoing Litigation Risks.  Although the 1999 settlement of the Alabama
breast implant class action has, as a practical matter, ended the Company's
involvement in the current mass product liability litigation in the U.S. over
breast implants, there remain a number of ongoing litigation risks, including:

     - Collateral Attack.  As in all class actions, the Company may be called
       upon to defend individual lawsuits collaterally attacking the settlement
       even though it is now non-appealable. However, the typically permissible
       grounds for those attacks, in general, lack of jurisdiction or
       constitutionally inadequate class notice or representation, are
       significantly narrower than the grounds available on direct appeal. In
       the 2 years since the final settlement of the Alabama class action, no
       case has been brought collaterally attacking the settlement.

     - New Theories of Supposed Liability.  Since the Alabama class action was
       settled, one putative class action has been brought against the Company
       alleging that all its shaped breast implants are defectively designed and
       have caused or will cause injury. While the Company regards this claim as
       frivolous and totally bereft of factual support, putative plaintiffs
       could attempt to pursue this or other new theories of liability.

     - Non-Covered Claims.  The settlement does not include several categories
       of breast implants which the Company will be left to defend in the
       ordinary course through the tort system. These include lawsuits relating
       to breast implants implanted on or after June 1, 1993, and lawsuits in
       foreign jurisdictions. The

                                       F-25
<PAGE>   55
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

       Company regards lawsuits involving post-June 1993 implants (predominantly
       saline-filled implants) as routine litigation manageable in the ordinary
       course of business.

     Breast implant litigation outside of the U.S. has, to date, been minimal,
and the court has, with minor exceptions, rejected efforts by foreign plaintiffs
to file suit in the U.S.

     Trilucent Breast Implant Matters.  When it purchased Collagen Aesthetics
effective September 1, 1999, the Company assumed certain liabilities relating to
the Trilucent breast implant, a soybean oil-filled breast implant which had been
manufactured and distributed by various subsidiaries of Collagen Aesthetics
between 1995 and November 6, 1998. On November 6, 1998, Collagen announced the
sale of its LipoMatrix, Inc. subsidiary, manufacturer of the Trilucent implant,
to Sierra Medical Technologies, Inc. Collagen accounted for LipoMatrix as a
discontinued operation in its 1998 fiscal year. Collagen Aesthetics retained
certain liabilities for Trilucent implants sold prior to November 6, 1998.

     On March 8, 1999, the United Kingdom Medical Devices Agency (MDA) announced
the voluntary suspension of marketing and voluntary withdrawal of the Trilucent
implant in the United Kingdom. The MDA stated that its actions were taken as a
precautionary measure and did not identify any immediate hazard associated with
the use of the product. The MDA further stated that it sought the withdrawal
because it had received "reports of local complications in a small number of
women" who have received those implants, involving localized swelling. The same
notice stated that there "has been no evidence of permanent injury or harm to
general health" as a result of these implants. In March, 1999, Collagen
Aesthetics agreed with the United Kingdom National Health Service that, for a
period of time, it would perform certain product surveillance with respect to
United Kingdom patients implanted with the Trilucent implant and pay for
explants for any United Kingdom women with confirmed Trilucent implant ruptures.
Subsequently, Lipomatrix's notified body in Europe suspended the product's CE
Mark pending further assessment of the long-term safety of the product. Sierra
Medical has since stopped sales of the product. Subsequent to acquiring
Collagen, the Company elected to continue the voluntary program.

     On June 6, 2000, the MDA issued a hazard notice recommending that surgeons
and their patients consider explanting the Trilucent implants even if the
patient is asymptomatic. The MDA also recommended that women avoid pregnancy and
breast-feeding until the explantation. The hazard notice stressed, however,
"that all of the above advise is precautionary. Although there have been reports
of breast swelling and discomfort in some women with these implants, there has
been no clinical evidence of any serious health problems, so far." In fact, any
swelling or inflammation relating to the Trilucent implants appears to resolve
upon explantation.

     Based on the Company's best current estimate, all told approximately
7,000-9,000 women received Trilucent implants until commercial sales ceased in
March 1999; roughly one-half reside in the United Kingdom. In the U.S., a total
of 165 women received Trilucent breast implants in two clinical studies;
enrollment in both studies ended by June 1997.

     Concurrently with the MDA announcement of June 6, 2000, the Company
announced that, through its AEI, Inc. subsidiary, it had undertaken a
comprehensive program of support and assistance for women who have received
Trilucent breast implants, under which it is covering medical expenses
associated with the removal and replacement of those implants for women in the
European Community, the U.S. and other countries.

     Under the Company's program, it pays a fee to any surgeon who conducts an
initial consultation with any Trilucent implantee. It also pays for the
explantation procedure and related costs, and for replacement (non-Trilucent)
implants for women who are candidates for and who desire them. To date,
approximately 88% of the U.K. residents and approximately 67% of the non-U.K.
residents who have requested explantations as a
                                       F-26
<PAGE>   56
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

result of an initial consultation have had them performed. To date, an insurance
company has reimbursed the Company for approximately 50% of these expenses.
Going forward, the insurance company is obligated to reimburse the Company for
not less than 75% of these expenses, up to an aggregate of $50 million in
coverage over five years.

     During and since the third quarter of 2000, the Company and certain of its
subsidiaries, among others, were served with a total of four (4)
Trilucent-related lawsuits, brought by the same plaintiffs' counsel in federal
district court in San Francisco, California (the "Federal Trilucent Actions").
Three of the Federal Trilucent Actions (the "Foreign Plaintiff Cases") were
brought by women alleged to reside in the U.K. In one case, Rachel Kerr vs.
Collagen Aesthetics, Inc., et al., the plaintiff seeks to certify an
international class of Trilucent implant recipients alleged to include over
9,000 women. Each of the Inamed defendants, and other parties, have moved to
dismiss each of the Foreign Plaintiff Cases on the grounds that the U.K.
provides an adequate remedy, has a much greater interest in the controversy and
is a more convenient forum. These and related motions to dismiss are scheduled
to be heard by the court in April, 2001. All parties have opposed a conditional
order transferring these cases to the Alabama proceeding. The fourth Federal
Trilucent Action, Deborah Vaernes vs. Inamed Corporation, et al., is a putative
class action brought on behalf of the approximately 200 women who received
Trilucent breast implants as part of a clinical trial in the U.S. The
defendants' time to answer or move against this pleading has been extended to
April, 2001. To date, by agreement, no discovery has been propounded or provided
in any of the Federal Trilucent Actions, other than limited discovery in
connection with the dismissal motions in the Foreign Plaintiff Cases.

     Also during and since the third quarter of 2000, the Company and its
subsidiaries have received notices of claim from European women, the vast
majority of them U.K. residents, seeking compensation for general and special
damages arising from "unnecessary" or "premature" surgery conducted to remove
the Trilucent implants and other injuries. In November, 2000, with the consent
and approval of its insurers, AEI, Inc., on behalf of itself, its affiliates and
insurers, entered into a settlement protocol with the lead solicitor for the
U.K. claimants. The protocol affords a fixed level of compensation to qualified
claimants who, in an uncomplicated surgical procedure, have had their Trilucent
breast implants explanted in reliance on the June 6, 2000 MDA hazard notice. The
protocol also affords a mechanism for the efficient resolution of any claims
alleging that the early explantation of Trilucent implants involved serious
surgical complications or resulted in a medical condition which required either
extended hospitalization or extended home care. To date, approximately 50% of
the U.K. women who have had their Trilucent implants explanted since June 6,
2000, represented by more than 90 different solicitors, have sought compensation
through the settlement protocol. To date, no such woman has brought civil
proceedings. Recently, the Company entered into a "Trilucent Claims Settlement
Protocol Interim Funding and Non-Waiver Agreement" under which, subject to a
full reservation of rights by all parties, the Company's carriers agreed to fund
up to $20 million of settlement protocol payments, on condition that the Company
make pro-rata copayments of up to $2 million and satisfy a $0.4 million
self-insured retention (the "SIR"). The Company has satisfied the SIR and, to
date, both the Company and the carriers have funded the settlement protocol as
agreed.

     To date, Trilucent-related legal activity in other countries has been
comparatively minimal. The Company has received a sufficient number of claims in
Spain that a settlement protocol there may be warranted. The Company has
received approximately 15 Trilucent-related claims in Germany.

     By agreement with the MDA, the Company is currently funding additional
scientific research and patient monitoring relating to Trilucent.

     As of December 31, 2000, the Company had in excess of $27.1 million of
reserves to cover potential future expenses and liabilities arising from
Trilucent, and in excess of $65.0 million in insurance coverage for product
liability claims or medical expenses incurred by women with Trilucent breast
implants.
                                       F-27
<PAGE>   57
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

     While it is possible that the Company's future Trilucent-related
liabilities may ultimately exceed this level of insurance coverage and reserves,
based upon the information and analyses currently available to the Company, the
Company believes that such a scenario is unlikely.

  Patent and License Litigation

     In February 1999, the Company and certain of its subsidiaries were named as
respondents in an arbitration commenced by Dr. Lubomyr I. Kuzmak at the American
Arbitration Association. Dr. Kuzmak alleged that, as of the date of filing of
the arbitration, he was owed approximately $0.4 million in unpaid royalties
under a license agreement covering the Company's U.S. patents in the field of
gastric banding naming Dr. Kuzmak as an inventor. In the past, the Company
worked with Dr. Kuzmak, through the Company's subsidiary BioEnterics, in the
development and improvement of gastric banding technology. The Company denied
all of the material allegations raised by Dr. Kuzmak and asserted affirmative
defenses and counterclaims, including noninfringement, invalidity and
unenforceability for inequitable conduct before the U.S. Patent and Trademark
Office.

     In addition, in February 1999, the Company filed an action in the U.S.
District Court for the Central District of California against Dr. Kuzmak (the
"California action") seeking a declaratory judgment of invalidity,
unenforceability and non-infringement of the patents to which Dr. Kuzmak claims
ownership. On or about January 24, 2000, the parties, by their attorneys,
executed a letter agreement to settle and resolve all matters between them and
adjourned the arbitral hearing without a new date. Dr. Kuzmak thereafter denied
that the letter agreement was enforceable; however, he has not sought to reopen
the arbitration. In February 2000, the California action was dismissed for lack
of personal jurisdiction. Given Dr. Kuzmak's position regarding the January 24,
2000 letter agreement, in April 2000 the Company took an appeal from the
dismissal of the California action; the appeal has been argued and is now under
consideration by the Federal Circuit Court of Appeals (the "Federal Circuit
appeal"). Also in April 2000, the Company brought suit against Dr. Kuzmak in
federal district court in New Jersey (where he maintains his principal
residence), among other things for a declaration of the enforceability of the
January 24, 2000 letter agreement. Dr. Kuzmak has moved to dismiss the New
Jersey action. That case has been administratively stayed pending determination
of the Federal Circuit appeal. Irrespective of the enforceability of the January
24, 2000 settlement agreement, the Company does not believe that this action
could have a material adverse impact on its business, results of operations,
financial position or prospects.

     In January 1999, Medical Products Development Inc. ("MPDI") instituted an
action against the Company's subsidiary McGhan Medical Corporation in the U.S.
District Court for the Central District of California. MPDI alleged that McGhan
Medical infringed on some of its U.S. patents and breached an agreement between
McGhan Medical and MPDI that exclusively licensed those patents to McGhan
Medical. Those patents pertain to the textured surface of the silicone shell
used in the Company's breast implants and the methods of making those textured
shells.

     In October 2000, the Company settled the MPDI action (See Note 6), and took
assignment to all of the patents in dispute and to all related rights to
improvements and the like, for $30 million in principal amount payable through
2004. The action has been dismissed with prejudice.

     In May 1998, Societe Anonyme de Development des Utilisations du Collagene
(SADUC) commenced an arbitration under the rules of the International Chamber of
Commerce against Collagen Corporation under a technology license and human
collagen supply agreement between the parties. Following the spin-off of
Cohesion Technologies, Inc., Collagen Corporation changed its name to Collagen
Aesthetics, Inc., a wholly-owned subsidiary of the Company. SADUC is ultimately
owned by Rhone-Poulenc. SADUC seeks recovery for alleged lost profits and
royalties for Collagen Corporation's allegedly wrongful termination of the
                                       F-28
<PAGE>   58
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

agreement as well as compensation for confidential information allegedly
misappropriated by Collagen Corporation, including the assignment to SADUC of
certain Collagen Corporation patents allegedly disclosing and claiming processes
allegedly developed by SADUC. SADUC seeks approximately $4.5 million in
termination damages and $2.1 million as losses for breach of the contractual
confidentiality obligations, plus ongoing royalties. Collagen Corporation has
denied all material allegations, as it is Collagen Corporation's belief that
SADUC breached the agreement by being unable and unwilling to supply the
specified product at the contract price. In addition, Collagen Corporation has
stated that its patents do not disclose or claim any of SADUC's allegedly
confidential information, and that SADUC's allegedly confidential information
was neither novel nor useful. Accordingly, Collagen Corporation seeks rescission
of the agreement and restitution to it of all amounts paid and the costs
incurred by it in attempting to perform under the agreement. The resolution of
this arbitration may require the Company to pay damages or require these patents
to be assigned to SADUC. An evidentiary hearing on the liability issues raised
in this case began in March 2000 and concluded in 2000. A hearing as to
liability only was held in February 2001. The Company believes it has strong
defenses to SADUC's allegations and is defending itself vigorously, and does not
believe that this action could have a material adverse impact on its business,
results of operations, financial position or prospects.

     The Company is also party to a lawsuit filed in 1998 in the Superior Court
of the State of California, County of Los Angeles known as Chieftain LLC, et al.
vs. Medical Device Alliance, Inc. The currently operative complaint contains 16
causes of action, three of which are alleged against the Company and McGhan
Medical. Other co-defendants include the former chairman of Inamed, Donald K.
McGhan, his wife and children, entities with which Mr. McGhan remains affiliated
including International Integrated Industries, LLC ("Industries") and Wedbush
Morgan Securities, Inc., a securities firm at which Mr. McGhan holds margin
accounts. The operative complaint purports to allege direct and derivative
claims on behalf of shareholders of Medical Device Alliance, Inc. ("MDA") for
unspecified damages. In February 2000, the Company and McGhan Medical filed a
demurrer to the currently operative complaint. In March 2000, the Court granted
that motion in part. The operative complaint purports to allege that prior to
his February 1998 resignation as an officer and director of the Company, Donald
K. McGhan improperly diverted $9.9 million of MDA funds to the Company, and that
after his resignation, Mr. McGhan and the Company conspired to defraud MDA when
these funds were repaid. The Company believes that the operative complaint is
bereft of support, both factually and legally. The action has since been
administratively stayed owing to the pendency of settlement proceedings in
related litigation involving the same parties pending in state court in Las
Vegas, Nevada. The Company believes it has strong defenses to the plaintiffs'
allegations in this case and is defending itself vigorously, and does not
believe that this action could have a material adverse impact on its business,
results of operations, financial position or prospects.

     McGhan Medical is also party to a putative class action filed in 2000 in
the District Court of Pottawatomie County, Oklahoma, known as Brown, et al. vs.
Mentor Corp. and McGhan Medical Corp. The complaint, allegedly brought on behalf
of all U.S. residents who have received shaped or "teardrop" implants
manufactured by Mentor or McGhan, alleges that these implants could spin or
rotate, causing pain or injury. In March 2000, the defendants removed the action
to federal court, and McGhan Medical answered the complaint, denying its
essential charges and asserting numerous affirmative defenses. In April, 2000,
plaintiffs moved to remand, alleging non-compliance with the "amount in
controversy" requirement for federal diversity jurisdiction. In April, 2000, the
Judicial Panel on Multidistrict Litigation issued a conditional order
transferring the case to the Northern District of Alabama. Mentor and the
plaintiffs have moved to vacate that order on the grounds that the case is not
sufficiently related to the silicone gel cases. In May 2000, Mentor filed a
motion to transfer this case to federal court in Kansas, where another, similar
case is pending against Mentor only. The Alabama court is to hear argument on
these procedural issues in late March, 2001. The Company believes that the
operative complaint in this action is frivolous and intends to defend itself

                                       F-29
<PAGE>   59
                               INAMED CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 2000, 1999 AND 1998
                      (IN MILLIONS, EXCEPT PER SHARE DATA)

vigorously, and does not believe that this action could have a material adverse
impact on its business, results of operations, financial position or prospects.

     The Company is involved in various legal actions arising in the ordinary
course of business, the majority of which involve product liability claims
alleging personal injuries and economic harm as a result of ruptures in saline
filled breast implants. In the Company's experience, claimants typically do not
allege that the release of saline solution causes any chronic condition or
systemic disease.

NOTE 14 -- QUARTERLY SUMMARY OF OPERATIONS  -- (Unaudited)

     The following is a summary of selected quarterly financial data for 2000
and 1999:

<TABLE>
<CAPTION>
                                                                          QUARTER
                                                             ----------------------------------
                                                             FIRST    SECOND    THIRD    FOURTH
                                                             -----    ------    -----    ------
<S>                                                          <C>      <C>       <C>      <C>
Net Sales:
  2000.....................................................   60.3     67.6      54.3     57.9
  1999.....................................................   37.6     42.2      44.0     65.5
  1998.....................................................   30.1     36.9      32.1     32.5
Gross Profit:
  2000.....................................................   44.6     48.5      39.2     41.4
  1999.....................................................   25.7     30.1      31.3     44.6
  1998.....................................................   17.8     25.9      20.2     19.7
Net Income:
  2000.....................................................    8.0     16.2       7.6      5.2
  1999.....................................................    7.5      9.1       8.5     13.7
  1998.....................................................   (1.3)     3.8      (0.4)     9.9
Net Income per share:
  2000 Basic...............................................   0.40     0.79      0.37     0.26
  2000 Diluted.............................................   0.34     0.69      0.33     0.23
  1999 Basic...............................................   0.65     0.62      0.50     0.74
  1999 Diluted.............................................   0.57     0.54      0.44     0.64
  1998 Basic...............................................  (0.14)    0.38     (0.04)    0.87
  1998 Diluted.............................................  (0.14)    0.30     (0.04)    0.72
</TABLE>

  Significant Fourth Quarter Adjustments, 1999

     During the fourth quarter of the year ended December 31, 1999, the Company
released the remaining $7.2 million allowance on its deferred tax asset.

  Significant Fourth Quarter Adjustments, 1998

     During the fourth quarter of the year ended December 31, 1998, the Company
recorded significant adjustments which increased net income by $6.2 million. The
adjustments were as follows:

<TABLE>
<S>                                                             <C>
Extraordinary charge for issuance of Warrants...............    $(1.8) million
Income Tax Benefit..........................................    $  8.0 million
</TABLE>

     The Company incurred the extraordinary charge in relation to the
restructuring of the Company's 11% junior subordinated notes, which occurred in
the fourth quarter of 1998.

     An income tax benefit was established to recognize a portion of the benefit
expected to be received from the Company's substantial net operating loss
carryforward.

                                       F-30
<PAGE>   60

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Inamed Corporation:

     We have audited in accordance with auditing standards generally accepted in
the United States, the financial statements of Inamed Corporation included in
this Form 10-K and have issued our report thereon dated January 25, 2001. Our
audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the Exhibit Listing is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

                                          Arthur Andersen LLP

New York, New York
January 25, 2001

                                       S-1
<PAGE>   61

                                                                     SCHEDULE II

                      INAMED CORPORATION AND SUBSIDIARIES

                       VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
                                              BEGINNING OF                                    END OF
                                             PERIOD BALANCE    ADDITIONS    DEDUCTIONS    PERIOD BALANCE
                                             --------------    ---------    ----------    --------------
<S>                                          <C>               <C>          <C>           <C>
Year ended December 31, 2000:
  Allowance for returns....................        4.6            0.4                           5.0
  Allowance for doubtful accounts..........        1.8            1.0          (0.7)            2.1
  Allowance for obsolescence...............        2.8            0.1           1.5             1.4
  Self-insurance accrual...................        5.1            7.6          (4.3)            8.4
  Allowance for doubtful Notes.............        0.5                                          0.5
Year ended December 31, 1999:
  Allowance for returns....................        4.8                          0.2             4.6
  Allowance for doubtful accounts..........        1.4            0.4                           1.8
  Allowance for obsolescence...............        1.2            1.6                           2.8
  Valuation allowance for deferred tax
     assets................................       15.5                         15.5             0.0
  Self-insurance accrual...................        3.6            1.5                           5.1
  Allowance for doubtful Notes.............        0.5                                          0.5
  Litigation reserve.......................        5.7                          5.7             0.0
Year ended December 31, 1998:
  Allowance for returns....................        4.4            0.4                           4.8
  Allowance for doubtful accounts..........        0.9            0.5                           1.4
  Allowance for obsolescence...............        1.5                          0.3             1.2
  Valuation allowance for deferred tax
     assets................................       28.1                         12.6            15.5
  Self-insurance accrual...................        3.6                                          3.6
  Allowance for doubtful Notes.............        0.5                                          0.5
  Litigation reserve.......................       37.3                         31.6             5.7
</TABLE>

                                       S-2