**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-K**

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)**

**OF**

**THE SECURITIES EXCHANGEACT OF 1934**

**Forthe fiscal year ended December 31, 2005**

**Commission file number 1-9741**

----

**INAMEDCORPORATION**

(Exact name of registrantas specified in its charter)

| **Delaware**                             |       | **59-0920629**      |
|------------------------------------------|------------|---------------------|
| (State or other jurisdiction             |       | (I.R.S. Employer    |
| of incorporation or organization)        |       | Identification No.) |
| **5540 Ekwill Street**                   | ** ** | ** **          |
| **Santa Barbara, California**            |       | **93111-2936**      |
| (Address of principal executive offices) |       | (Zip Code)          |

 

Registrant’s telephone number, including area code:**(805) 683-6761**

----

Securities registered pursuant to Section 12(b) ofthe Act:

**None**

Securities registered pursuant to Section 12(g) ofthe Act:

**CommonStock, par value $0.01 per sharePreferred Stock Purchase Rights, par value $0.01 per share**

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes  x   No  o

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act Yes  o   No  x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes  x   No  o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  o

Indicateby check mark whether the registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):
| x  Large accelerated filer | o  Accelerated filer | o  Non-accelerated filer |
|----------------------------|----------------------|--------------------------|

 

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

The aggregate market valueof voting stock held by non-affiliates as of June 30, 2005 was $2,411.0million, based on the closing sales price on the NASDAQ National Market on thatdate.

On March 17, 2006,there were 36,913,528 shares of the registrant’s common stock outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE:**

Theinformation required by Part III of this Form 10-K isincorporated by reference to the registrant’s definitive proxy statement to befiled with the Securities and Exchange Commission not later than 120 days afterthe conclusion of the registrant’s fiscal year ending December 31, 2005 (April 30,2006) pursuant to Regulation 14A.

 

----

**INAMED CORPORATIONAnnual Report on Form 10-KFor the Fiscal Year Ended December 31, 2005TABLE OF CONTENTS**
|                      | ** ** | ** **                                                                                                     | ** ** | ** ** | **Page** | ** ** |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|------------|----------|------------|
| ** **           | ** ** | **PART I**                                                                                                     |       |       |     |
| Item 1.              |       | Business                                                                                                       |       | 2          |     |
| Item 1A.             |       | Risk Factors                                                                                                   |       | 15         |     |
| Item 1B.             |       | Unresolved Staff Comments                                                                                      |       | 25         |     |
| Item 2.              |       | Properties                                                                                                     |       | 25         |     |
| Item 3.              |       | Legal Proceedings                                                                                              |       | 25         |     |
| Item 4.              |       | Submission of Matters to a  Vote of Security Holders                                                           |       | 29         |     |
| ** **           | ** ** | **PART II**                                                                                                    |       |       |     |
| Item 5.              |       | Market for Inamed’s Common  Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |       | 30         |     |
| Item 6.              |       | Selected Financial Data                                                                                        |       | 31         |     |
| Item 7.              |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operation                     |       | 33         |     |
| Item 7A.             |       | Quantitative and Qualitative  Disclosures about Market Risk                                                    |       | 44         |     |
| Item 8.              |       | Financial Statements and  Supplementary Data                                                                   |       | 44         |     |
| Item 9.              |       | Changes in and Disagreements  with Accountants on Accounting and Financial Disclosure                          |       | 44         |     |
| Item 9A.             |       | Controls and Procedures                                                                                        |       | 44         |     |
| Item  9B.            |       | Other  Information                                                                                             |       | 45         |     |
|                 | ** ** | **PART III**                                                                                              |       |       |     |
| Item 10.             |       | Directors and Executive  Officers of Inamed                                                                    |       | 46         |     |
| Item 11.             |       | Executive Compensation                                                                                         |       | 46         |     |
| Item 12.             |       | Security Ownership of  Certain Beneficial Owners and Management and Related Stockholder Matters                |       | 46         |     |
| Item 13.             |       | Certain Relationships and Related Transactions                                                                 |       | 46         |     |
| Item 14.             |       | Principal Accounting Fees  and Services                                                                        |       | 46         |     |
|                 | ** ** | **PART IV**                                                                                                    |       |       |     |
| Item 15.             |       | Exhibits, Financial  Statement Schedules                                                                       |       | 47         |     |
| Signatures           |       | 52                                                                                                             |       |
| Certifications       |       |                                                                                                           |       |
| Financial Statements |       | F-1                                                                                                            |       |
|                      |            |                                                                                                                |            |            |          |            |  |

 

This report contains trademarks and trade names thatare the property of Inamed Corporation and its subsidiaries, and of othercompanies, as indicated.

In this document, the words “we,” “our,” “ours,” “us,”“the Company” and “Inamed” refer only to Inamed Corporation and itssubsidiaries, not any other person or entity.

1

----

**PART I**

This Annual Report on Form 10-K (includingthe section regarding Management’s Discussion and Analysis of FinancialCondition and Results of Operations) contains forward-looking statementsregarding our business, financial condition, results of operations andprospects. Words such as “may,” “might,” “will,” “should,” “could,” “would,” “predicts,”“potential,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,”“estimates” and similar expressions or variations of such words are intended toidentify forward-looking statements, but are not the exclusive means ofidentifying forward-looking statements in this Annual Report on Form 10-K.Additionally, statements concerning future matters are forward-lookingstatements.

Although forward-looking statements in this AnnualReport on Form 10-K reflect the good faith judgment of ourmanagement, such statements can only be based on facts and factors currentlyknown by us. Consequently, forward-looking statements are inherently subject torisks and uncertainties and actual results and outcomes may differ materiallyfrom the results and outcomes discussed in or anticipated by theforward-looking statements. Factors that could cause or contribute to suchdifferences in results and outcomes include without limitation those discussedunder the heading “Risks and Uncertainties” below, as well as those discussedelsewhere in this Annual Report on Form 10-K. Readers are urged notto place undue reliance on these forward-looking statements, which speak onlyas of the date of this Annual Report on Form 10-K. We undertake noobligation to revise or update any forward-looking statements in order toreflect any event or circumstance that may arise after the date of this AnnualReport on Form 10-K. Readers are urged to carefully review andconsider the various disclosures made in this Annual Report, which attempt toadvise interested parties of the risks and factors that may affect ourbusiness, financial condition, results of operations and prospects.

We file reports with theSecurities and Exchange Commission (“SEC” or “Commission”). We make availableon our website (*www.inamed.com*) free of chargeour Annual Reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to those reports as soonas reasonably practicable after we electronically file such materials with orfurnish them to the SEC. You can also read and copy any materials we file withthe Commission at its’ Public Reference Room at 450 Fifth Street, NW,Washington, DC 20549. You can obtain additional information about the operationof the Public Reference Room by calling the Commission at 1-800-SEC-0330.In addition, the Commission maintains an Internet site (*www.sec.gov*)that contains reports, proxy and information statements, and other informationregarding issuers that file electronically with the Commission, includingInamed.

**ITEM 1.**                BUSINESS

Inamedis a global healthcare company that develops, manufactures, and markets adiverse line of products that enhance the quality of people’s lives. Theseproducts include breast implants for aesthetic augmentation and reconstructivesurgery following a mastectomy, a range of dermal products to correct facialwrinkles, the BioEnterics® LAP-BAND® System designed to treat severe and morbidobesity, and the BioEnterics® Intragastric Balloon (BIB®) system for thetreatment of obesity.

**COMPANY HISTORY**

McGhan Medical Corporation was incorporated in 1974and was a manufacturer of silicone products for plastic and reconstructivesurgery. In 1977, that business was sold to Minnesota Mining and ManufacturingCompany, or 3M. In 1984, a newly formed McGhan Medical Corporation acquired theassets of 3M’s silicone implant product line. In 1985, that corporation becamea subsidiary of a publicly-held company through a merger with First AmericanCorporation, a Florida corporation. In 1986, First American changed its name toInamed Corporation. Inamed formed its BioEnterics Corporation subsidiary in1991, primarily to pursue opportunities in the field of stomach constrictiontechnology. In December 1998,Inamed changed its state of incorporation to Delaware through a reincorporationmerger. 

2

----

InSeptember 1999, Inamed completed its acquisition of Collagen AestheticsInc., which was then a publicly-held corporation which manufactured andmarketed primarily collagen-based dermal fillers and other aesthetics products.In 2001, Inamed renamed its McGhan Medical Corporation subsidiary to InamedMedical Products Corporation, or IMPC, and simplified its structure byconsolidating its U.S. operations into IMPC. BioEnterics Corporation continuesto exist as a holder of the rights to the BioEnterics products, and it hasagreed with other Inamed subsidiaries such as IMPC for the manufacture,distribution, and other support of the BioEnterics product line.

In March 2005, we announced the execution of amerger agreement, by and among us, Medicis Pharmaceutical Corporation(Medicis), and Masterpiece Acquisition Corporation, a wholly-owned subsidiaryof Medicis. Under the merger agreement, we would have been merged with and intoMasterpiece Acquisition Corporation. Under the terms of the transaction, ourstockholders would have received 1.4205 shares of Medicis common stock andthirty dollars in cash for each share of Inamed common stock upon consummationof the proposed merger.

On November 14, 2005, we received a lettercontaining an unsolicited preliminary non-binding proposal from Allergan, Inc.(Allergan) to acquire all outstanding shares of Inamed for a per share considerationof $84.00 in cash or 0.8498 of a share of Allergan common stock, at theelection of the holder, subject to proration such that the total value of theconsideration payable would be $1.45 billion in cash and 17.9 millionshares of Allergan. The proposal stated that it was subject to the satisfactorycompletion of limited due diligence and the execution of a mutually acceptabledefinitive agreement. On November 21, 2005, Allergan filed with the SECthe Schedule TO and the Registration Statement, including the Prospectus, andformally commenced its exchange offer.

On December 13, 2005, we entered into a mergertermination agreement (the “Termination Agreement”) with Medicis andMasterpiece Acquisition, which provides that the Medicis merger agreementterminated effective immediately upon the parties’ execution of the TerminationAgreement and Medicis’ receipt from Inamed of a $90.0 million termination feeand an additional $0.5 million in expense reimbursement fees. We paidthese termination and expense reimbursement fees in full on December 13,2005. On the same date, we also announced that our Board of Directors hadunanimously determined to recommend that our stockholders tender their sharesto Allergan upon execution by us of a definitive agreement and plan of mergerbetween us and Allergan. On December 15, 2005, we announced that our Board ofDirectors had unanimously approved the definitive agreement and plan of merger.

On December 20, 2005 we executed a definitiveagreement and plan of merger with Allergan. Pursuant to the definitive mergeragreement and consistent with the exchange offer previously commenced byAllergan, Allergan will exchange for each outstanding common share of Inamed,either $84.00 in cash or 0.8498 of a share of Allergan common stock, at theelection of the holder. Elections of our stockholders are subject to prorationas described in Allergan's Form S-4 initially filed with the Securities andExchange Commission (SEC) on November 21, 2005, and subsequently amended, sothat 45% of the aggregate shares tendered will be exchanged for cash and 55% ofthe aggregate shares tendered will be exchanged for shares of Allergan commonstock.

On December 20, 2005, we also entered into atermination agreement with Ipsen Ltd. Effective upon the consummation ofAllergan's acquisition of Inamed which occurred March 17, 2006, Ipsen has takenback its rights to the botulinum toxin Type A product ReloxinTM, and we andIpsen have released each other of all obligations under the distributionagreement regarding Reloxin.

The exchange offer expired at 12:00 midnight EasternTime on Friday, March 17, 2006, at which time34,971,207 shares, representing approximately 94.7%, of Inamed’s outstandingcommon stock had been tendered.  AsAllergan has received tenders representing at least 90% of the outstandingInamed common stock, Allergan intends to complete the acquisition through ashort-form merger under Delaware law on March 23, 2006, at which time we willbecome a wholly-owned subsidiary of Allergan. Immediately 

3

----

thereafter, Allerganintends to terminate our registration under the Securities Exchange Act of 1934and delist our common stock from the NASDAQ National Market.

During the twelve monthsended December 31, 2005, Inamed incurred approximately $110.4 million ofcosts related to the merger transactions, primarily for the termination fee toMedicis, legal and other professional fees. Of the $110.4 million,$91.7 million was recorded in merger expense and $18.7 million wasrecorded in selling, general and administrative expenses.

**PRODUCTS AND PRODUCT CANDIDATES**

Inamed has three mainproduct lines—breast aesthetics products and facial aesthetics productsmarketed under Inamed Aesthetics, and obesity intervention products marketedunder Inamed Health. These three lines are considered one segment for financialreporting purposes. See Note 1 of the notes to the consolidated financialstatements.

*Breast Aesthetics*

We develop, manufacture, and market a diverse line ofbreast implants, consisting of a variety of shapes, sizes, and textures. Ourbreast implants consist of a silicone elastomer shell filled with either asaline solution or silicone gel with varying degrees of cohesivity. This shellcan consist of either a smooth or textured surface. We market our breastimplants under the trade names McGhan® and CUI®and the trademarks BioCell®, MicroCell®, BioDimensionalTM, and Inamed®.Our breast implants are available in a large number of variations to meetcustomers’ preferences and needs.

*Saline-FilledBreast Implants.*   We sell saline-filled breastimplants in the U.S. and internationally for use in breast augmentation forcosmetic or revision reasons and for reconstructive surgery. The U.S. market isthe primary consumer of our saline-filled breast implants.

*SiliconeGel-Filled Breast Implants.*   We sell siliconegel-filled breast implants primarily in Europe, the Middle East, Latin America,Australia, New Zealand and Asia. More than 90% of our breast implant salesoutside the U.S. are silicone gel-filled. There are a variety of siliconegel-filled breast implants available in these markets based upon the degrees ofcohesivity of the silicone gel-filler material. Certain of our siliconegel-filled implants are available in the United States under clinical studyprotocols for use in breast reconstruction, augmentation and revision purposes.Silicone gel-filled implants are also available in Canada under restrictedaccess to patients pre-approved by Health Canada.

In the U.S. in June 2000, we completed theimplantation phase of a core clinical study designed to gain U.S. Food and DrugAdministration, or FDA, approval for our silicone gel-filled breast implants.In January 2002 we began submitting the first of several modules to theFDA for the pre-market approval, or PMA, seeking approval of our siliconegel-filled breast implants. The final module and application for the pre-marketapproval process of our silicone gel-filled breast implants, which included thecompleted two years of follow up data requested, was submitted on December 27,2002. In October 2003, the General and Plastic Surgery Advisory Panel, orPanel, of the FDA recommended, with conditions, approval of the Company’s PMAapplication to market gel-filled breast implants in the United States. ThePanel approval, with conditions, was for all indications—breast augmentation,reconstruction and revision. In January, 2004, we received a “Not Approvable”letter from the FDA. The letter outlined the additional information that weneeded to provide prior to the FDA’s further review of our PMA for siliconegel-filled breast implants. According to the letter, submission of therequested information and data will place the PMA in approvable form and allowthe FDA to conduct further review of Inamed’s PMA. In January 2004, theFDA also issued draft guidance for saline, silicone gel, and alternative breastimplants. The guidance provides non-binding recommendations regarding devicedescription, preclinical, clinical, and labeling information that the FDA recommends be presented in a PMA applicationfor saline, silicone gel, and alternative breast implants. In August 2004,Inamed submitted an amendment to the for Pending Silicone 

4

----

Gel-FilledBreast Implants PMA to the FDA. In April 2005, the FDA General and PlasticSurgery Devices Advisory Panel voted to not recommend approval at the timebased on long term safety concerns with one of the devices in the study. At theend of second quarter we amended our submission in accordance to address theissues raised by the Panel and to include additional long term data fromoutside the U.S. In July, we voluntarily decided to cease the availability ofthe Style 153 double lumen device in the adjunct study in the U.S. In September 2005,we received an “approvable” letter with conditions for this pending PMA, and wecontinue to work with the agency to address these conditions which are requiredfor full approval.

Additionally,**in September 2000,the FDA approved a feasibility study for our Style 410 cohesive siliconegel-filled breast implants. In March 2001, we announced that the FDA hadapproved the expansion of the study to a full-scale clinical study. Patientenrollment for this study was completed in the first quarter of 2002 and is nowbeginning the fifth year of the clinical follow up period. In December 2004,we completed submission of the PMA application to the FDA for the Style 410cohesive silicone gel-filled breast implants in the U.S. In March 2005, wereceived a deficiency letter from the FDA in regards to our application.Subsequently, we addressed these deficiencies and completed the filing of asupplement to the PMA application during the fourth quarter of 2005. The Style410 cohesive silicone gel-filled implants are currently the leading sellingbreast implants in Europe.

*Tissue Expanders.*   Wesell a line of tissue expanders for breast reconstruction and as an alternativeto skin grafting to cover burn scars and correct birth defects.

*Facial Aesthetics*

We develop, manufacture, and market dermal fillerproducts designed to improve facial appearance by smoothing wrinkles and scarsand enhancing the definition of facial structure. Our primary facial aestheticsproducts are ZydermTM and ZyplastTM, CosmoDerm® andCosmoPlast®,the Hylaform®product range, Juvéderm®/Hydrafill®product range and CaptiqueTM. In July 2002, we acquired the exclusiverights in the U.S., Canada and Japan to sell Ipsen Limited’s botulinum toxinType A product, branded as Reloxin in the U.S., for all cosmetic indications On December 20, 2005, Inamed also enteredinto a termination agreement with Ipsen Ltd. Effective upon the consummation ofAllergan’s acquisition of Inamed which occurred March 17, 2006, Ipsen hastaken back its rights to the botulinum toxin product Reloxin, and Inamed andIpsen have released each other of all obligations under the distributionagreement regarding Reloxin. In January 2004, we acquired theexclusive rights to sell Juvéderm®in the United States, Canada, and Australia, and the non-exclusive rights tosell the product under a different name in various other countries. In December 2004,the FDA approved CaptiqueTM Injectable gel, a new dermal filler product based onGenzyme Corporation’s non-animal stabilized hyaluronic acid (HA) technology.

*Zydermand Zyplast.*   Zyderm and Zyplast dermal fillersare injectable formulations of bovine collagen. Zyderm implants are formulatedfor people with fine line wrinkles or superficial facial contour defects. Theseimplants are particularly effective in smoothing delicate frown and smilelines, and fine creases that develop at the corners of the eyes and above andbelow the lips, and can also help correct certain shallow scars. Zyplastimplants are designed to treat deeper depressions and can be used for morepronounced contour problems, such as deeper scars, lines and furrows, and forareas upon which more force is exerted, such as the corners of the mouth. Theimplants take on the texture and appearance of human tissue and are subject tosimilar stresses and aging processes. Consequently, supplemental treatments arenecessary to maintain the desired result. Zyderm and Zyplast implants require askin test, with a requisite 30-day period to observe the possibility ofallergic reaction in the recipient. Both of these products are formulated withLidocaine, an anesthetic, to alleviate pain during injection. In the U.S., theFDA approved the PMA for Zyderm in 1981 and for Zyplast in 1985. Zyderm andZyplast were approved for marketing in Europe in 1995.

5

----

*CosmoDermand CosmoPlast.*   CosmoDerm and CosmoPlast dermalfillers are a line of injectable human skin-cell derived collagen products thatInamed licenses from Smith & Nephew, Inc. We received FDAapproval for CosmoDerm and CosmoPlast in March 2003 and received approvalfrom Health Canada in December 2002. We received approval to marketCosmoDerm and CosmoPlast in a number of European countries in 2004. CosmoDermimplants are formulated for people with fine line wrinkles or superficialfacial contour defects. These implants are particularly effective in smoothingdelicate frown and smile lines and fine creases that develop at the corners ofthe eyes and above and below the lips and can also help correct certain shallowscars. CosmoPlast implants are designed to treat deeper depressions and can beused for more pronounced contour problems, such as deeper scars, lines andfurrows, and for areas upon which more force is exerted, such as the corners ofthe mouth. The implants take on the texture and appearance of human tissue andare subject to similar stresses and aging processes. Consequently, supplementaltreatments are necessary to maintain the desired result. CosmoDerm and CosmoPlast**implants do not require a skin test pre-treatment. Both ofthese products are formulated with Lidocaine, an anesthetic, to alleviate painduring injection.

*HylaformGel.**  *Hylaformgel dermal fillers are an avian-based cross-linked hyaluronic acid injectableproduct for the treatment of facial wrinkles and scars. The product is licensedfrom Genzyme Corporation and has been sold in Europe since 1996 and in Canadasince 1998. Hylaform does not require a skin test, so patients can be treatedimmediately. In 2001, two new formulations of Hylaform gel were developed:Hylaform FineLine, designed especially for people with fine line wrinkles orsuperficial facial contour defects, and Hylaform Plus, formulated for treatingdeeper depressions and more pronounced contour problems such as deeper scars,lines, and furrows. We launched Hylaform FineLine and Hylaform Plus in Europein September 2001. In December 2001, Health Canada’s TherapeuticProducts Programme, or HCTPP, granted Genzyme Corporation a Medical DeviceLicense for Hylaform gel. In January 2002, the HCTPP approved bothHylaform Plus and Hylaform FineLine. In April 2004, Inamed receivedapproval from the FDA to market and sell Hylaform gel in the U.S. In October 2004,the FDA granted market approval for Hylaform Plus in the U.S.

*Juvéderm/Hydrafill.*   Juvéderm,a non-animal based cross-linked hyaluronic acid-based dermal filler, isindicated for wrinkle correction, facial contouring, and lip enhancements. In January 2004,we signed a development and distribution agreement with Corneal Group for therights to develop, distribute and market the Juvéderm dermalfillers. These rights also include product line extensions and improvements.This technology is based on the delivery of a homogeneous gel-based hyaluronicacid, as opposed to a particle-gel based hyaluronic acid technology, which isused in other products. Under this agreement, we will have the exclusive rightsto develop, market and distribute the Juvéderm products inthe United States, Canada, and Australia, and non-exclusive rights in France,Spain, the United Kingdom, Italy, Germany and Switzerland. In the non-exclusiveEuropean countries, Inamed has established the brand name, Hydrafill, topromote and market Juvéderm. Currently, Hydrafill is available infive formulations and Juvéderm is also available in fiveformulations, for soft tissue augmentation of varying severities of wrinkles. Juvéderm products arecurrently approved or registered in over 34 countries, including all majorEuropean markets. In these markets Juvéderm/Hydrafilldoes not require a skin test pre-treatment. Distribution of Juvéderm andHydrafill in Canada and key European markets commenced in 2004, and we havefiled for and are awaiting regulatory approval of Juvéderm in Australia. Wefiled the Juvéderm PMA with the FDA in December 2005.

*Captique.**  *Captique dermal filler is a non-animal stabilizedhyaluronic acid injectable product indicated for the correction of moderate tosevere facial wrinkles and scars. The product is licensed from GenzymeCorporation. Captique does not require a skin test, so patients can be treatedimmediately. In December 2004, the FDA granted U.S. market approval forCaptique. We commenced sales of the product in the U.S. in January 2005.

*Reloxin.*   OnDecember 20, 2005, we entered into a termination agreement with Ipsen Ltd.Effective upon the consummation of Allergan’s acquisition of us which occurred March 17,2006, Ipsen has taken 

6

----

back its rights tothe botulinum toxin product Reloxin, and we and Ipsen have released each otherof all obligations under the distribution agreement regarding Reloxin. As aresult of the termination we will receive a $10.0 million payment fromIpsen.

*ObesityIntervention*

We develop, manufacture, and market several devicesfor the treatment of obesity. Our principal product in this market area, theBioEnterics LAP-BAND® System, is designed to provideminimally invasive long-term treatment of severe obesity and is used as analternative to gastric bypass surgery or stomach stapling. The BioEnterics LAP-BANDSystem is an adjustable silicone elastomer band which is laparoscopicallyplaced around the upper part of the stomach through a small incision, creatinga small pouch at the top of the stomach. This slows down the passage of foodand makes the patient feel fuller sooner. Unlike a gastric bypass which ispermanent, the BioEnterics LAP-BAND System procedure is adjustable andreversible.

The LAP-BAND System has achieved widespread acceptancein the United States, Europe, Australia, Latin America, the Middle East, andother countries and regions. In June 2001, the LAP-BAND System wasapproved by the FDA for treatment of severe obesity in adults who have failedmore conservative weight reduction alternatives. Commercial distribution of theBioEnterics LAP-BAND System was initiated in the U.S. in July 2001. In April 2004,we introduced the LAP-BAND VG, which was approved by the FDA in January 2004.The LAP-BAND VG meets the needs of a wider range of patients, allowing us toserve a broader market. The larger band circumference of the LAP-BAND VG servesthose who are physically larger, have thicker gastric walls, or havesubstantial internal fat. Over 200,000 LAP-BAND units have been sold worldwidesince 1993.

We also sell the BioEnterics Intragastric Balloon®,or BIB, System, which is a short-term therapy designed for patients who mustreduce weight in preparation for surgery or for moderately obese patients inconjunction with a long-term comprehensive diet and exercise program. Currentlydistributed only outside the U.S., the BIB is a silicone elastomer balloon thatis filled with saline after insertion into the patient’s stomach.

We also market theBioEnterics Gastric Balloon Suction Catheter, which was introduced in the U.S.in June 2001. It contains a durable silicone balloon used by surgeons tofacilitate pouch sizing and provide gastric suction during laparoscopic gastricsurgery procedures.

*Other Products*

Contigen®is our collagen product used for treatment of urinary incontinence due tointrinsic sphincter deficiency. We obtained approval from the FDA to marketContigen in September 1993. C. R. Bard, Inc. licensed fromus exclusive worldwide marketing and distribution rights to Contigen. We alsoprovide other collagen products for use by other medical manufacturers.

**SALES AND MARKETING**

We sell our products directly and through independentdistributors in approximately 70 countries worldwide. We supplement ourmarketing efforts with appearances at trade shows, advertisements in tradejournals, sales brochures, and national media. In addition, we sponsorsymposiums and educational programs to familiarize surgeons with the leadingtechniques and methods of using our products.

*BreastAesthetics.**  *In theU.S. and Canada, breast aesthetics products are marketed under InamedAesthetics primarily to plastic and reconstructive surgeons, out-patientsurgery centers, and hospitals through our staff of sales representatives. InEurope, our breast aesthetics products are sold by our European subsidiariesthrough their staff of sales representatives as well as third-party agents inthe largest 

7

----

European markets. In otherEuropean markets, in the Middle East, Latin America, Africa, and theAsia-Pacific region, our breast aesthetics products are sold through a networkof distributors.

*FacialAesthetics.**  *Ourfacial aesthetics products are marketed under Inamed Aesthetics primarily toplastic and reconstructive surgeons, hospitals and clinics, as well as tofacial and oral surgeons, and dermatologists. The facial aesthetics productsare sold in most of the same countries and by the same sales organizations thatsell the breast aesthetics products. We have a direct sales force for facialproducts in Japan and Australia.

*Obesity Intervention.**  *Our obesity intervention products are marketed underInamed Health to general, laparoscopic, and bariatric surgeons, and sold tohospitals. In the U.S., obesity intervention products are sold by a sales forceof company-employed representatives and managers. In Europe and Australia, ourHealth products are sold by our subsidiaries through their staff of salesrepresentatives as well as third-party agents. In other European markets, inthe Middle East, Latin America, Africa, and the Asia-Pacific region, our Healthproducts are sold through a network of distributors.

**COMPETITION**

*Breast Aesthetics*

We compete in the U.S. breast implant market withMentor Corporation. We are aware of several companies conducting clinicalstudies of breast implant products in the U.S. Internationally, we compete withseveral manufacturers, including Mentor Corporation, Silimed, MedicorCorporation, Poly Implant Prostheses, Nagor, Laboratories Sebbin, and LPI.

We believe that theprincipal factors permitting our products to compete effectively arehigh-quality product consistency, product design, management’s knowledge of andsensitivity to market demands, an experienced sales force, plastic surgeons’familiarity with our products and brand names, regional warranty programs, andour ability to identify and develop or license patented products embodying newtechnologies.

*Facial Aesthetics*

Our facial productscompete in the dermatology, cosmetic, and plastic surgery markets with otherhyaluronic acid products, substantially different treatments, such as lasertreatments, chemical peels, fat injections, gelatin- or cadaver-based collagenproducts, and botulinum toxin-based products, as well as other polymer-basedinjectibles. In addition, several companies are engaged in research anddevelopment activities examining the use of collagen and other biomaterials forthe correction of soft tissue defects. Internationally, we compete withproducts such as Restylane®, Restylane® Fine Lines, and PerlaneTM (allmanufactured by Q-Med A.B.). Since the first quarter of 2004 we have competedin the U.S. dermal filler market with Restylane® which isdistributed by Medicis Pharmaceutical Corporation.

8

----

*Obesity Intervention*

No gastric bands other than the BioEnterics LAP-BANDSystem are commercially available in the U.S., and we are currently aware ofonly one other company conducting U.S. clinical studies of gastric bands atthis time. Outside the United States, the LAP-BAND System competes primarilywith the Swedish Adjustable Gastric Band (manufactured by Ethicon EndoSurgery,) and the Heliogast Band (manufactured by Helioscopie, S.A., France).There are at least two other gastric bands on the market internationally. TheLAP-BAND System also competes with surgical obesity procedures, includinggastric bypass, vertical banded gastroplasty, and biliopancreatic diversion.

No intragastric balloonsfor the treatment of obesity are commercially available in the U.S. and we arecurrently aware of only one other company outside the U.S., Helioscopie, whichrecently launched the Heliosphere. We are not aware of any published clinicalstudies that support this device’s effectiveness.

**RESEARCH AND DEVELOPMENT**

We have a qualified staffof scientists, engineers, and technicians working on material technology andproduct design as part of our research and development efforts. Our researchand development expense is primarily directed toward supporting the clinicaltrials of our products. In addition, we are directing our research anddevelopment toward new and improved products based on scientific advances intechnology and medical knowledge, together with qualified input from themedical profession. We have incurred research and development expenses of $38.8million, $28.8 million, and $21.5 million for the years ended, December 31,2005, 2004 and 2003, respectively.

**PATENTS,LICENSES, AND RELATED AGREEMENTS**

We currently own or have license and distributionrights to numerous patents, patent applications, trademarks and trademarkapplications throughout the world relating to our product lines.

In addition, we arecurrently engaged in various collaborative ventures for the development,manufacturing, and distribution of current and new products. These projectsinclude the following:

·       Wehave been the distributor and licensee for Genzyme Corporation’s Hylaform®products since 1999, including Hylaform® Plus and Hylaform® FineLine. In December 2004,we entered into an amended and restated agreement with Genzyme Corporation forexclusive U.S. development and distribution rights of Captique, a non-animalbased hyaluronic acid-based dermal filler. We purchase these products fromGenzyme Corporation and pay royalties based on sales.

·       InJanuary 2004, we entered into a development and distribution agreementwith Corneal Group for exclusive rights to develop and distribute in the U.S.,Canada and Australia their non-animal based cross-linked hyaluronic acid-baseddermal filler, marketed as Juvéderm/Hydrafill, as well as non-exclusivedistribution rights in other countries.

·       Wedeveloped injectable collagen for the correction of facial wrinkles andcommenced marketing in early 2003 under the names CosmoDerm® and CosmoPlast® inthe U.S. and Canada for which we are paying royalties on sales.

We had an agreement withAdvanced Tissue Sciences, Inc., or ATS, under which we acquired anexclusive, worldwide license to certain intellectual property for thedevelopment and distribution of certain of ATS’s human-based, tissue-engineeredproducts for surgical applications. Due to the liquidation of ATS, we enteredinto a supply agreement with an affiliate of Smith and Nephew Inc. in March 2003,which provides us, on a going forward basis, the raw materials previouslyprovided by ATS. Smith and Nephew is also licensing to us the intellectualproperty previously licensed to us by ATS. In January 2003, we signed adevelopment agreement with Immucor, Inc. for the 

9

----

production of humancollagen extra-cellular mesh and entered into a supply agreement with them in2004.

In June 2004, we entered into a settlementagreement with Ethicon Endo-Surgery, Inc. pursuant to which, among otherterms, we were granted a worldwide, royalty-bearing, non-exclusive license withrespect to a portfolio of U.S. and international patents applicable toadjustable gastric bands.

We are also a party tolicense agreements allowing other companies to manufacture products using someof our technology in exchange for royalties and other compensation or benefits.Although we believe our patents and patent rights are valuable, our technicalknowledge with respect to manufacturing processes, materials, and productdesign are also valuable. As a condition of employment, we require that allemployees execute a confidentiality agreement relating to our proprietaryinformation and intellectual property rights.

**MANUFACTURING AND RAW MATERIALS**

Our manufacturing facilities are located in Fremont,California; San José, Costa Rica; and in Arklow, Ireland. The majority ofmanufacturing operations at the Santa Barbara, California manufacturinglocation were consolidated into our facilities in Costa Rica and Ireland in2004. See Note 3 of the notes to the consolidated financial statements.

Manufacturing facilitiesproducing medical devices intended for distribution in the U.S. andinternationally are subject to regulation and periodic review by the FDA,European Notified Bodies, and international regulatory authorities. All of ourfacilities are currently approved by the FDA and the relevant notified bodiesto manufacture medical devices for distribution in the U.S. and international markets.

*Breast Aesthetics*

The Inamed quality system and facility in SantaBarbara, California was inspected by the U.S. FDA in February 2004 and February 2005.Our facility in Arklow, Ireland and San Jose, Costa Rica were both inspected bythe FDA in November 2005. All of the inspected quality systems andfacilities were found to be in substantial compliance with U.S. FDAregulations.

Manufacturing facilities producing medical devices inthe state of California are required to be registered by the California Foodand Drug Branch (FDB) of the California Department of Health Services. OurSanta Barbara, California and Fremont, California facilities were bothinspected by the FDB in 2003 and found to be in compliance with applicablestate statutes, and our facility licenses are current.

The quality system and facilities which producemedical devices for sale and distribution in the European Economic Community(EEC) are subject to regulatory requirements of the Medical Devices Directive(MDD) as well as various International (ISO) and European National (EN)standards. In Europe, Notified Bodies are responsible for enforcement of theMDD regulations.

Our quality system and facilities in Santa Barbara,California and San José, Costa Rica were inspected by TÜV Product Services GmbH (a EuropeanNotified Body) in November and October 2005, respectively. Thefacility in Arklow, Ireland was inspected by G-Med (a European Notified Body)in October 2005. All of the quality systems and all facilities were foundto be in compliance with the requirements of the MDD and with applicable ISOstandards (ISO 13485). All Quality System and CE Mark certificates havebeen issued and are current.

These certifications forSanta Barbara, San Jose, and Arklow include ISO 13485:2003, and CouncilDirective 93/42/EEC, the Medical Devices Directive. Additionally, Santa Barbaraand San Jose are certified to the Canadian Medical Devices Regulation (CMDR).

10

----

The Quality System andfacility in Fremont, California was inspected by the Therapeutics GoodsAdministration (Australian Competent Authority) in January 2005 and is incompliance with the Australian Therapeutics Goods (Medical Devices) Regulation.

Our Quality System andfacilities in Fremont and Santa Barbara, California; Arklow, Ireland and San José, Costa Rica were inspected by theU.S. FDA in April, February and November 2005, respectively, and arein compliance with applicable Code of Federal Regulations.

We manufacture breastimplants and related tissue expander products at our facilities in San José, Costa Rica and Arklow, Ireland. Thefacility in Santa Barbara, California remains a back-up manufacturing facilityfor breast implants. We manufacture Inamed Health products at our facility inSan José, Costa Rica andinjectable collagen products at our facility in Fremont, California. Allproducts are manufactured in controlled environments utilizing specializedequipment for precision measurement, quality control, packaging, andsterilization.

In late 1998, we enteredinto a strategic alliance with a privately held specialty chemical company,whereby that company has agreed to act as our exclusive supplier of siliconeraw materials.

*Facial Aesthetics*

Zyderm and Zyplast andCosmoDerm and CosmoPlast implants are manufactured at our facility located inFremont, California.

We use a patented viral inactivation process for theZyderm and Zyplast collagen-based products, which ensures both safety andquality. The production process uses readily available chemicals and enzymesand bovine dermis as the source of collagen. Since 1987, the hides have beensourced from a USDA certified closed herd in Northern California to ensure theprevention of contamination of the bovine collagen based products. The closedherd provides a reliable source of raw material with backup capabilities incase of natural disasters. The bovine collagen-based products have refrigeratedshelf lives of 36 months.

In 2001, we began manufacturing activities for thebioengineered human collagen dermal filler products, CosmoDerm and CosmoPlast.Originally, raw materials for these products were obtained in bulk fromAdvanced Tissue Sciences (ATS) and further processed and packaged at ourFremont, California facility. Due to the liquidation of ATS, in March 2003we entered into a supply agreement with an affiliate of Smith & Nephew, Inc.to provide the raw materials previously provided by ATS. In late 2005, we werenotified that Smith & Nephew were in the process of liquidating theirassets. In January 2003, we signed a development agreement with Immucor, Inc.for the production of human collagen extra-cellular mesh, the raw material forCosmoDerm and CosmoPlast. We entered into a supply agreement with Immucor, Inc.in 2004.

As noted above, medical devices manufactured at ourFremont, California facility, and intended for distribution in the U.S. andinternationally, are subject to regulation and periodic review by the FDA andthe requirements of the EEC MDD regulations, various international and Europeanstandards, and review by a European Notified Body.

Our Fremont manufacturingfacility and quality system was inspected by the FDB in 2003, and by the FDA inApril 2005 and found to be substantially compliant with all applicableregulations. In addition, this facility was inspected by TÜV Product ServiceGmbH in April 2005 and certified to applicable International and Europeanregulations and standards. The Fremont facility is currently certified to ISO 13485:2003;Council Directive 93/42/EEC; MDD and the CMDR.

In addition to theaforementioned facial aesthetics products, we sell facial injectable implantsmanufactured by third parties. These parties are subject to the samegovernmental inspection and regulation as noted above.

11

----

*ObesityIntervention*

Our obesity interventionproducts are manufactured at our facilities in San José, Costa Rica. The FDAand Notified Body inspections and subsequent approvals previously discussedapply to our obesity intervention products as well.

*Other Products*

We produce other collagenproducts at our Fremont, California facility for use by other medicalmanufacturers. Contigen® is manufactured for C. R. Bard, Inc., CoStasis®for Cohesion Technologies, Inc., and Collagraft® and Collagraft® intermediatesare manufactured for NeuColl Inc.

*EnvironmentalCompliance*

Our manufacturing facilities in the U.S. are regulatedby federal, state, and local laws. We believe that our operations are in fullcompliance with all applicable laws and we received no citations or notices ofviolations in 2004 or in 2005. In 2006, we do not expect to incur any materialexpense to maintain our compliance level. Our manufacturing facility in Arklow,Ireland, is regulated by the Irish Environmental Protection Agency, or EPA. TheIrish EPA carries out regular checks and monitors compliance with therequirements of the Integrated Pollution Control License. In 2005, we receivedone notice of non-compliance from the EPA. Revised EPA license conditions havebeen agreed upon with the EPA and we received the final permit to complete theinstallation of the thermal oxidizer.

Our manufacturing facilityin Costa Rica is operated under the jurisdiction of the office of HumanEnvironmental Control within the Ministry of Health. Inamed Costa Rica wasgranted a working permit or license for industrial facilities in August 2000.The permit 0194-2000 has a validity of five years. The current permit wasrenewed under #61 with the industrial classification 3906 and is due January 27,2007. We received no citations or notices of violations from the Costa Rican authoritiesin 2005. We do not expect to incur any material expense to maintain thiscompliance level during 2006.

**GOVERNMENT REGULATION**

Medical devices andbiologics are subject to regulation by the FDA, state agencies and, in varyingdegrees, by foreign government health agencies. These regulations, as well asvarious U.S. federal and state laws, govern the development, clinical testing,manufacturing, labeling, record keeping, and marketing of these products. Themajority of our product candidates must undergo rigorous testing and anextensive government regulatory approval process prior to sale in the U.S. andother countries. The lengthy process of seeking required approvals, and thecontinuing need for compliance with applicable laws and regulations require theexpenditure of substantial resources. Regulatory approval, when and ifobtained, may be limited in scope, and may significantly limit the indicateduses for which a product may be marketed. Approved products and theirmanufacturers are subject to ongoing review, and discovery of previouslyunknown problems with products may result in restrictions on their manufacture,sale, or use, or their withdrawal from the market.

*Regulation ofMedical Devices*

Most of our current products are medical devices intendedfor human use and are subject to regulation by the FDA in the U.S. Unless anexemption applies, each medical device we market in the U.S. must have a 510(k) clearance(a demonstration that the new device is “substantially equivalent” to a devicealready on the market) or a Premarket Approval (PMA) Application in accordancewith the Federal Food, Drug, and Cosmetic Act, as amended. FDA regulationsgenerally require reasonable assurance of safety and effectiveness prior tomarketing, including safety data obtained under approved clinical protocols andrequire compliance with “good manufacturing practices” (GMPs), as verified bydetailed FDA inspections 

12

----

of manufacturingfacilities. These regulations also require reporting of alleged product defectsto the FDA. FDA regulations divide medical devices into three classes.Class I devices are subject to general controls that require compliancewith device establishment registration, product listing, labeling, GMPs andother general requirements. Class II devices are subject to specialcontrols in addition to general controls. Class III devices are subject tothe most extensive regulation and in most cases require submission to the FDAof a PMA application that includes data supporting the safety and effectivenessof the device. Periodic reports must be submitted to the FDA, including anydescriptions of any adverse events reported. The majority of our products areregulated as Class III medical devices.

Products marketed in theEuropean Community must comply with the requirements of the MDD and must beCE-marked. Medical device laws and regulations similar to those described aboveare also in effect in many of the other countries to which we export ourproducts. These range from comprehensive device approval requirements for someor all of our medical device products to requests for product data orcertifications. Failure to comply with these domestic and internationalregulatory requirements could affect our ability to market and sell ourproducts in these countries. The current regulatory status of our products isdiscussed in the “Products and Product Candidates” section above.

*Regulation ofManufacturing*

As a manufacturer ofmedical devices, our manufacturing processes and facilities are subject tocontinuing review by the FDA and various state and international agencies. Theseagencies inspect our quality systems and facilities from time to time todetermine whether we are in compliance with various regulations relating tomanufacturing practices and other requirements. In the U.S., our facilitiesmust comply with the FDA’s Quality System Regulation requirements for GoodManufacturing Practices. For products sold in Europe, we must demonstratecompliance with the ISO 9000 and EN 46000 international quality systemstandards. The regulatory status of our manufacturing facilities is discussedunder “Manufacturing and Raw Materials” above.

*Other Regulations*

We are subject to federal, state, local and foreignenvironmental laws and regulations, including the U.S. Occupational Safety andHealth Act, the U.S. Toxic Substances Control Act, the U.S. ResourceConservation and Recovery Act, and other current and potential future federal,state, or local regulations. Our manufacturing and research and developmentactivities involve the controlled use of hazardous materials, chemicals, andbiological materials, which require compliance with various laws andregulations regarding the use, storage, and disposal of such materials.

We are also subject to various federal and state lawspertaining to health care information and privacy and “fraud and abuse,”including anti-kickback laws and false claims laws. Anti-kickback laws make itillegal to solicit, offer, receive, or pay any remuneration in exchange for, orto induce, the referral of business, including the purchase or prescription ofa particular product. The U.S. federal government has published regulationsthat identify “safe harbors” or exemptions for certain payment arrangementsthat do not violate the anti-kickback statutes. We seek to comply with the safeharbors where possible. Due to the breadth of the statutory provisions and theabsence of guidance in the form of regulations or court decisions addressingsome of our practices, it is possible that our practices might be challengedunder anti-kickback or similar laws. False claims laws prohibit anyone fromknowingly and willingly presenting, or causing to be presented for payment tothird party payors (including Medicare and Medicaid) claims for reimbursedproducts or services that are false or fraudulent, claims for items or servicesnot provided as claimed, or claims for medically unnecessary items or services.Our activities relating to the sale and marketing of our products may besubject to scrutiny under these laws. Violations of fraud and abuse laws may bepunishable by criminal and/or civil sanctions, including fines and civilmonetary penalties, as well as the possibility of exclusion from federal healthcare programs (including Medicare and Medicaid).

13

----

Our present and futurebusiness has been and will continue to be subject to various other laws andregulations.

**THIRDPARTY COVERAGE AND REIMBURSEMENT**

Purchases of breast aesthetics products foraugmentation and facial aesthetics products are generally not reimbursed bygovernment or private insurance carriers. However, since 1998, U.S. federal lawhas mandated nationwide insurance coverage of reconstructive surgery followinga mastectomy, which includes coverage for breast implants. Outside the U.S.,reimbursement for breast implants used in reconstructive surgery following amastectomy may be available, but the programs vary on a country-by-countrybasis.

In the U.S., purchases ofthe LAP-BAND System to treat severe obesity are reimbursed in some states byMedicare. Private insurance coverage currently varies by carrier and geographiclocation. We actively work with major insurance carriers to obtainreimbursement coverage for the product. The older, more established, surgicalprocedures for obesity treatment, including gastric bypass, are generallyreimbursed. Outside theU.S., reimbursement programs vary on a country-by-country basis. In somecountries, both the procedure and product are fully reimbursed by thegovernment healthcare systems for all citizens who need it, and there is nolimit on the number of procedures that can be performed. In other countries,there is complete reimbursement but the number of procedures that can beperformed at each hospital is limited either by the hospital’s overall budgetor by the budget for the type of product.

**PRODUCT REPLACEMENT PROGRAMS**

We conduct our productdevelopment, manufacturing, marketing, and service and support activities withcareful regard for the consequences to patients. As with any medical devicemanufacturer, however, we receive communications from surgeons or patients withrespect to various products claiming the products were defective, lost volume,or have resulted in injury to patients. In the event of a loss of shellintegrity resulting in breast implant rupture or deflation that requiressurgical intervention with respect to our breast implant products sold andimplanted in the U.S., in most cases our ConfidencePlusTM program provideslifetime product replacement and some financial assistance for surgical proceduresrequired within ten years of implantation. Breast implants sold and implantedelsewhere are subject to a similar program. We do not warrant any level ofaesthetic result and, as required by government regulation, make extensivedisclosure concerning the risks of our products and implantation surgery.

**FINANCIALINFORMATION ABOUT GEOGRAPHIC AREAS**

The majority of our salesand long-lived assets are primarily in the U.S. See Note 16 of the notes to theconsolidated financial statements.

**WORKING CAPITAL**

We maintain significant breast aesthetics consignmentinventories, consistent with industry practice. Since a doctor may not be sureof the exact size of breast implant required for implantation and cannot besure that no accidental damage will occur to an implant, the doctor is likelyto order extra quantities and sizes beyond the quantity and size ultimatelyused in surgery.

Otherwise, inventories are managed to a level thatpermits good customer service. Additionally, there are inventory builds priorto launching new products.

Our accounts receivablepayment terms are consistent with normal industry practices, which vary bycustomer class and geographic location.

14

----

**EMPLOYEES**

As of February 28,2006 we had approximately 1,300 employees in active service, of whichapproximately 700 were in the U.S., Canada, and Costa Rica and approximately600 were at other international operations. Except for employees at ourmanufacturing facility in Arklow, Ireland, none of our employees arerepresented by a labor union.

**ITEM 1A.**        RISKFACTORS

Certain statementscontained in this Annual Report on Form 10-K, and other written andoral statements made from time to time by us, do not relate strictly tohistorical facts. These statements are considered “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. Words such as “anticipate,” “believe,” “could,”“estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “possible,” “project,”and “should,” or similar words or expressions, are intended to identify forwardlooking statements. This forward looking information involves important risksand uncertainties that could materially alter results in the future from thoseexpressed in any forward looking statements made by, or on behalf of, us. Wecaution you that such forward-looking statements are only predictions and thatactual events or results may differ materially. In evaluating such statements,you should specifically consider the various factors that could cause actualevents or results to differ materially, including those factors describedbelow. It is not possible to foresee or identify all factors affecting ourforward-looking statements and you should not consider any list of such factorsto be exhaustive. We are under no duty to update any forward-lookingstatements.

**OUR MERGER WITH ALLERGAN MAY NOTHAVE THE BENEFITS WE EXPECT OR MAY DISRUPT OUR BUSINESS.**

The impact of Allergan’sacquisition of Inamed may result in any or all of the following risks: thebusinesses will not be integrated successfully; the anticipated synergies fromthe acquisition may not be fully realized or may take longer to realize thanexpected; and disruption from the acquisition, which could harm relationships withour current customers, employees or suppliers and affect our pricing, spending,third-party relationships and revenues.

**IF WE ARE UNABLE TO AVOIDSIGNIFICANT PRODUCT LIABILITY CLAIMS, PRODUCT RECALLS, OR INDEMNIFICATIONCLAIMS, WE MAY BE FORCED TO PAY SUBSTANTIAL DAMAGE AWARDS, CLAIMS, ANDOTHER EXPENSES THAT COULD EXCEED OUR ACCRUALS AND INSURANCE COVERAGE.**

We have in the past been, currently are, and may inthe future be subject to product liability claims alleging that the use of ourtechnology or products has resulted in adverse health effects. These claims maybe brought even with respect to products that have received, or in the futuremay receive, regulatory approval for commercial sale. In particular, themanufacture and sale of breast implant products entails significant risk ofproduct liability claims due to potential allegations of possible diseasecausation, transmission, complications and other health factors, rupture,deflation or other product failure. Other breast implant manufacturers thatsuffered such claims in the past have been forced to cease operations or evento declare bankruptcy. We also face a substantial risk of product liabilityclaims from our obesity intervention products and our facial aestheticsproducts. In addition to product liability claims, we may in the future need torecall or issue field corrections related to our products due to manufacturingdeficiencies, labeling errors, or other safety or regulatory reasons. We have,from time to time, entered into indemnification agreements with health carepractitioners with respect to certain clinical research studies. Pursuant tothese agreements, we have agreed to indemnify the health care practitionersfrom third-party claims (in addition to product liability claims) resultingfrom or arising out of these studies.

15

----

At present, except for some of our products used incurrent clinical trials, we have no third-party liability insurance to protectus from the damages and the costs of claims for damages due to the use orrecall of our products or indemnification claims. Product liability claims,recall orders or indemnification claims could result in material losses.

In addition, we continue to incur substantial costsand expenses as a result of our liabilities related to the Trilucent breastimplant. Our Trilucent costs and expenses derive in part from the programannounced by us on June 6, 2000, and include, among other things,continuing expenses of our explantation program, regulatory compliance,scientific and other investigative studies, bodily injury and financial lossclaims, and related legal and defense costs. While we have insurance for someof these expenses and have also established accruals for them in addition toour insurance program, the combined amount of our insurance and accruals may beinsufficient to cover all our future Trilucent-related liabilities. In 2002, wecame to final settlements with each of our two insurers for product liabilityclaims arising from the Trilucent implant. Under one settlement with MEDMARCCasualty Insurance Company, MEDMARC paid $6.0 million in cash to us in January 2003,$1.5 million cash to us in May 2003, and, effective November 16,2002, agreed to make a policy with a limit of $10.0 million available to us fordefense and indemnification of Trilucent-related bodily injury claims worldwide.The policy does not cover claims filed against us after November 7, 2005. Thispolicy was fully used as of June 30, 2004.  Under the second settlement, AISLIC, an AIGcompany, agreed to make an excess policy with a limit of $10.0 millionavailable to us for the indemnification of non-U.S. Trilucent claims. There wasapproximately $1.6 million remaining under this commitment at December 31,2005.

In addition, at December 31, 2005, we had anaccrual for future Trilucent claims, costs, and expenses of approximately $4.0million and insurance of $1.6 million, or $2.4 million, net of insurance. Whilewe currently believe this amount is adequate, it is possible that our futureTrilucent-related liabilities could exceed this amount. Further, the existinginsurance coverage is subject to a number of conditions. Thus, our accruals andliability insurance coverage under the foregoing insurance policies may beinadequate to cover our future Trilucent-related liabilities, including ourTrilucent-related bodily injury claims and other contingent liabilities.

Under the program announced on June 6, 2000, wehave, through our AEI Inc. subsidiary, undertaken a comprehensive program ofsupport and assistance for women who received Trilucent breast implants, underwhich we are covering medical expenses associated with the removal andreplacement of those implants for the approximately 8,500 women who receivedthem. To date, we believe that virtually all of the United Kingdom residentsand more than 95% of the women in the rest of the world who had these implantshave had them removed. The product was not sold commercially in the UnitedStates. Prior to February 15, 2005, an insurance company honored itscommitment under an insurance policy to reimburse us for most of the medicalexpenses incurred in connection with this explantation program. As of February 15,2005, this policy expired in accordance with its terms. Despite the expirationof this policy, we have continued to pay for the explantations of certainTrilucent recipients and may do so in the future. Hence it is possible that wecould incur material liabilities for Trilucent-related explantation expenses inthe future for which we will not have insurance coverage.

Recipients of the Trilucent implants have alsoasserted claims and brought legal proceedings against the Company, AEI (anaffiliate of the Company), other affiliated and unaffiliated entities, andpersons alleging bodily injury and financial loss as a result of theimplantation and explantation of  theirTrilucent implants.  To date, we havebeen able to resolve these claims within our accruals and with insuranceproceeds. In the United Kingdom and Spain, we entered into protocols underwhich women who have had their Trilucent implants removed since June 6,2000 applied for certain fixed levels of compensation, or obtained anindependent, binding determination of their damages, without proof of defect orlegal causation. In the United Kingdom, while we have been successful insettling the vast majority of claims, we have yet to finally adjudicateapproximately 50 claims in which women in the U.K. are claiming serious 

16

----

medical complications fromtheir Trilucent explantation procedure. See Part I, Item 3 Legal Proceedings. In Spain, although approximately 336women have accepted our protocol, approximately 63 have commenced individuallegal proceedings (approximately 39 of which are still pending) and a Spanishconsumer union has commenced a single action in which it alleges that itrepresents 41 Spanish Trilucent explantees. More than 790 Spanish women wereexplanted and hence more than 300 have yet to make claims for bodily injury orfinancial loss (although we have already paid for their explants). The claims ofmany of these women may now be time-barred under Spanish law. In addition, inthe second quarter of 2005, for the first time an appellate court in Spainissued a decision holding that Trilucent beast implants were not “defective”within the meaning of Spanish product liability law and dismissed a €60,000award issued by the lower court. While this ruling is a positive developmentfor Inamed, it may not be followed by other Spanish appellate courts or couldbe modified or be found to be inapplicable to other cases filed in the Madriddistrict. In the third quarter of 2005, we terminated the voluntary settlementprotocols under which Trilucent explantees in the U.K. and Spain could obtaincompensation without proof of defect or legal causation. We did so because, inthe opinion of our counsel, it is unlikely that women who are seekingexplantation at this late date could be doing so in reliance on the June 6,2000 Hazard Notice. However, while we believe that there will be relatively fewnew Trilucent bodily injury claims in the future, we may in fact receive newTrilucent bodily injury claims and may attempt to settle them rather thanlitigate them in order to conserve resources.

We are also facing Trilucent related claims and legalproceedings in Germany, Belgium, Italy and other countries. In Germany, whereas many as 1,500 to 2,000 women are believed to have been implanted withTrilucent,  approximately 950 have beenexplanted, but only approximately 130 have made claims for bodily injury orfinancial loss (although we have already paid for their explants). By reason ofadverse publicity concerning Trilcuent and the announced closure of ourexplantation program, we have continued to receive Trilucent-related bodilyinjury claims in Germany, Belgium, Italy and other European countries.

In addition, under U.K.and Spanish law, the release granted to us under our settlement protocol isnecessarily provisional, and each participating claimant reserves the right topursue a future claim should she develop cancer or reproductive abnormalities. OnAugust 4, 2004, the Trilucent Scientific Advisory Panel (TSAP) delivered areport to the successor entity to the MDA in the United Kingdom, known as theMHRA. In its report, issued after more than three years of research, the TSAPconcluded that there is no scientific evidence that Trilucent implants pose asignificant systemic risk to human health but that the removal of the implantson precautionary grounds was and is appropriate. Although our regulator in theU.K. has determined that no further studies of Trilucent are currentlyrequired, we  could also be obligated tofund scientific or epidemiologic research, or incur expenses for medicalmonitoring, that are in excess of the spending levels which are currentlyforecast. As a result of these and other factors, the total amount of accrualsand insurance available to address our future Trilucent-related liabilities maybe insufficient and we may need to make additional provisions for Trilucentrelated liabilities in the future.

**WE ARE SUBJECT TO SUBSTANTIALGOVERNMENT REGULATION, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS.**

The production andmarketing of our products and our ongoing research and development,pre-clinical testing and clinical trial activities are subject to extensiveregulation and review by numerous governmental authorities both in the U.S. andabroad. Most of the products we develop must undergo rigorous pre-clinical andclinical testing and an extensive regulatory approval process before they can bemarketed. This process makes it longer, harder and more costly to bring ourproducts to market, and we cannot guarantee that any of our products will beapproved, or, once approved, not recalled. The pre-marketing approvalprocess and biologic license application process can be particularly expensive,uncertain and lengthy, and a number of products for which FDA approval has beensought by other companies have never been approved for marketing. In additionto testing and approval procedures, 

17

----

extensiveregulations also govern marketing, manufacturing, distribution, labeling, andrecord-keeping procedures. If we do not comply with applicable regulatoryrequirements, such violations could result in warning letters, non-approval,suspensions of regulatory approvals, civil penalties and criminal fines,product seizures and recalls, operating restrictions, injunctions, and criminalprosecution.

Delays in or rejection ofFDA or other government entity approval of our new products may also adverselyaffect our business. Such delays or rejection may be encountered due to, amongother reasons, government or regulatory delays, lack of efficacy duringclinical trials, unforeseen safety issues, slower than expected rate of patientrecruitment for clinical trials, inability to follow patients after treatmentin clinical trials, inconsistencies between early clinical trial results andresults obtained in later clinical trials, varying interpretations of datagenerated by clinical trials, or changes in regulatory policy during the periodof product development in the U.S. and abroad. In the U.S., there has been acontinuing trend of more stringent FDA oversight in product clearance andenforcement activities, causing manufacturers to experience longer approvalcycles, more uncertainty, greater risk, and higher expenses.

On April 11, 2005,the General and Plastic Surgery Advisory Panel (Panel) of the FDA recommendedby a five to four vote the non-approval to the FDA of our Pre-Market Approval(PMA) application to market responsive silicone gel-filled breast implants inthe U.S. After consideration of the outcome of the Panel meeting and inconsultation with the FDA, we modified our responsive gel PMA by separatingdata for 8 round style investigational device and the shaped Style 153investigational devices. This PMA modification also included new 10 to 12 yearEuropean data for these styles. We also decided to voluntarily end theavailability of the Style 153 as an investigational device in clinical studies.The Style 153 accounted for approximately $3.4 million (less than 1%) of ourtotal revenues in 2004.

On September 21,2005, we announced that we received an “approvable letter” from the FDA for ourresponsive silicone gel-filled breast implants. The approvable letter stipulatesa number of conditions that we must comply with in order to receive FDAapproval to market and sell responsive silicone gel-filled breast implants inthe U.S. An “approvable letter” is one of several intermediate steps in the FDAreview process of new products. If we do not meet the conditions of our “approvableletter”, then we may not be permitted to market and sell silicone breastimplants in the U.S., which could harm our financial results and prospects. Inaddition, our principal competitor in the U.S, Mentor Corporation, announcedthat it received an “approvable letter” from the FDA for its siliconegel-filled breast implants on July 28, 2005. If Mentor is approved tomarket and sell silicone breast implants in the U.S before us, Mentor’ssilicone-gel filled breast implants would then be the only approved siliconeimplants in the U.S., which could provide Mentor with a competitive advantageover us the U.S. breast implant market, at least in the short term.

Internationally, there is a risk that we may not besuccessful in meeting applicable quality standards or other certificationrequirements. Even if regulatory approval of a product is granted, thisapproval may entail limitations on uses for which the product may be labeledand promoted. It is possible, for example, that we may not receive FDA approvalto market our current products for broader or different applications or tomarket updated products that represent extensions of our basic technology. Inaddition, we may not receive FDA export approval to export our products in thefuture, and countries to which products are to be exported may not approve themfor import.

Our manufacturing facilities also are subject tocontinual governmental review and inspection. The FDA has stated publicly thatcompliance with manufacturing regulations will be scrutinized more strictly. Agovernmental authority may challenge our compliance with applicable federal,state and foreign regulations. In addition, any discovery of previously unknownproblems with one of our products or facilities may result in restrictions onthe product or the facility, including withdrawal of the product from themarket or other enforcement actions.

From time to time,legislative or regulatory proposals are introduced that could alter the reviewand approval process relating to our products. It is possible that the FDA orother governmental authorities 

18

----

willissue additional regulations further restricting the sale of our present orproposed products. Any change in legislation or regulations that govern thereview and approval process relating to our current and future products couldmake it more difficult and costly to obtain approval for new products, or toproduce, market, and distribute existing products.

**IF WE SUFFER NEGATIVE PUBLICITY CONCERNINGTHE SAFETY OF OUR PRODUCTS, OUR SALES MAY BE HARMED AND WE MAY BEFORCED TO WITHDRAW PRODUCTS.**

Physicians and potentialand existing patients may have a number of concerns about the safety of ourproducts, including our breast implants, obesity intervention products andfacial dermal fillers, whether such concerns have a basis in generally acceptedscience or peer-reviewed scientific research or not. Negative publicity—whetheraccurate or inaccurate—about our products, based on, for example, news aboutbreast implant litigation or regulatory activities, new government regulation,or bovine spongiform encephalopathy (BSE) or Creutzfeldt-Jacob, or “mad cow”disease, could materially reduce market acceptance of our products and couldresult in product withdrawals. In addition, significant negative publicitycould result in an increased number of product liability claims, whether or notthese claims have a basis in scientific fact.

**OUR QUARTERLY OPERATING RESULTS ARESUBJECT TO SUBSTANTIAL FLUCTUATIONS AND ANY FAILURE TO MEET FINANCIALEXPECTATIONS FOR ANY FISCAL QUARTER MAY DISAPPOINT SECURITIES ANALYSTS ANDINVESTORS AND COULD CAUSE OUR STOCK PRICE TO DECLINE.**

Our quarterlyoperating results have fluctuated in the past and may vary significantly in thefuture due to a combination of factors, many of which are beyond our control.These factors include:

·       changesin demand for our products;

·       ourability to meet the demand for our products;

·       on-goingand increased competition;

·       thenumber, timing, pricing and significance of new products and productintroductions and enhancements by us and our competitors;

·       regulatoryapprovals or non-approvals obtained either by us or a competitor;

·       ourability to develop, introduce and market new products and enhanced versions ofour existing products on a timely basis;

·       changesin pricing policies by us or our competitors;

·       eventsrelated to the proposed acquisition by Allergan and/or the operating results orstock price of Allergan;

·       merger-relatedexpenses if the merger with Allergan is not consummated;

·       thetiming of significant orders and shipments;

·       regulatoryapprovals or other regulatory action affecting new or existing products;

·       litigationwith respect to product liability, intellectual property, and other claims orproduct recalls and any insurance covering such claims or recalls; and

·       generaleconomic factors, such as foreign exchange rates.

As a result, we believethat period-to-period comparisons of our results of operations are notnecessarily meaningful and you should not rely upon these comparisons asindications of future 

19

----

performance.These factors may cause our operating results to be below securities analysts’expectations in some future quarters, which could cause the market price of ourstock to decline.

**IF CHANGES IN THE ECONOMY ANDCONSUMER SPENDING REDUCE CONSUMER DEMAND FOR OUR PRODUCTS, OUR SALES ANDPROFITABILITY WILL SUFFER.**

Breast augmentation and reconstruction, facial dermalfillers, and obesity intervention are elective procedures. Other than U.S.federally mandated insurance reimbursement for post-mastectomy reconstructivesurgery, breast augmentations and other cosmetic procedures are not typicallycovered by insurance. Adverse changes in the economy may cause consumers toreassess their spending choices and reduce the demand for cosmetic surgery.This shift could have an adverse effect on our sales and profitability.

Reimbursement for obesitysurgery, including use of our products, is available to various degrees in mostof our international markets. In the United States, reimbursements by insuranceplans are increasing, but reimbursement is not widely available to all insuredpatients at this time. Adverse changes in the economy could have an adverseeffect on consumer spending and governmental health care resources. This shiftcould have an adverse effect on the sales and profitability of our obesityintervention business.

**IF WE ARE UNABLE TO CONTINUE TODEVELOP AND MARKET NEW PRODUCTS AND TECHNOLOGIES, WE MAY EXPERIENCE ADECREASE IN DEMAND FOR OUR PRODUCTS OR OUR PRODUCTS COULD BECOME OBSOLETE.**

The health care industry is highly competitive and issubject to significant and rapid technological change. We believe that ourability to respond quickly to consumer needs or advances in medicaltechnologies, without compromising product quality, is crucial to our success.We are continually engaged in product development and improvement programs tomaintain and improve our competitive position. We cannot, however, guaranteethat we will be successful in enhancing existing products or developing newproducts or technologies that will timely achieve regulatory approval orreceive market acceptance.

There is also a risk that our products may not gainmarket acceptance among physicians, patients and the medical communitygenerally. The degree of market acceptance of any medical device or otherproduct that we develop will depend on a number of factors, includingdemonstrated clinical efficacy and safety, cost-effectiveness, potentialadvantages over alternative products, and our marketing and distributioncapabilities. Physicians will not recommend our products until clinical data orother factors demonstrate their safety and efficacy compared to other competingproducts. Even if the clinical safety and efficacy of using our products isestablished, physicians may elect not to recommend using them for any number ofother reasons, including whether our products best meet the particular needs ofthe individual patient.

Our products compete with a number of other productsmanufactured by major health care companies, and may also compete with newproducts currently under development by others. If our new products do notachieve significant market acceptance, or if our current products are not ableto continue competing successfully in the changing market, our revenue andearnings may not grow as much as expected or may even decline.

20

----

**IF CLINICAL TRIALS FOR OUR PRODUCTSARE UNSUCCESSFUL OR DELAYED, WE WILL BE UNABLE TO MEET OUR ANTICIPATEDDEVELOPMENT AND COMMERCIALIZATION TIMELINES, WHICH COULD CAUSE OUR STOCK PRICETO DECLINE.**

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

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

·       lackof efficacy during the clinical trials;

·       unforeseensafety issues;

·       slowerthan expected patient recruitment; and

·       governmentor regulatory delays.

The results frompre-clinical testing and early clinical trials are often not predictive ofresults obtained in later clinical trials. A number of new products have shownpromising results in clinical trials, but subsequently failed to establishsufficient safety and efficacy data to obtain necessary regulatory approvals.Data obtained from pre-clinical and clinical activities are susceptible tovarying interpretations, which may delay, limit or prevent regulatory approval.In addition, regulatory delays or rejections may be encountered as a result ofmany factors, including perceived defects in the design of the clinical trialsand changes in regulatory policy during the period of product development. Anydelays in, or termination of, our clinical trials will materially and adverselyaffect our development and commercialization timelines, which would cause ourstock price to decline.

**IF OUR COLLABORATIVE PARTNERS DONOT PERFORM, WE WILL BE UNABLE TO DEVELOP AND MARKET PRODUCTS AS ANTICIPATED.**

We have entered into collaborative arrangements withthird parties to develop and market certain products. We cannot assure you thatthese collaborations will produce successful products. If we fail to maintainour existing collaborative arrangements or fail to enter into additionalcollaborative arrangements, the number of products from which we could receivefuture revenues would decline.

Our dependence oncollaborative arrangements with third parties subjects us to a number of risks.These collaborative arrangements may not be on terms favorable to us.Agreements with collaborative partners typically allow partners significantdiscretion in electing whether or not to pursue any of the planned activities.We cannot control the amount and timing of resources our collaborative partnersmay devote to products based on the collaboration, and our partners may chooseto pursue alternative products. Our partners may not perform their obligationsas expected. Business combinations, significant changes in a collaborativepartner’s business strategy, or its access to financial resources may adverselyaffect a partner’s willingness or ability to complete its obligations under thearrangement. Moreover, we could become involved in disputes with our partners,which could lead to delays or termination of the collaborations andtime-consuming and expensive litigation or arbitration. Even if we fulfill ourobligations under a collaborative agreement, our partner can terminate theagreement under certain circumstances. If any collaborative partner were toterminate or breach our agreement with it, or otherwise fail to complete itsobligations in a timely manner, our chances of successfully commercializingproducts would be materially and adversely affected.

21

----

**OUR FAILURE TO ATTRACT AND RETAINKEY MANAGERIAL, TECHNICAL, SELLING AND MARKETING PERSONNEL COULD ADVERSELYAFFECT OUR BUSINESS**

Our success depends upon our retention of keymanagerial, technical, selling and marketing personnel. The loss of the servicesof key personnel might significantly delay or prevent the achievement of ourdevelopment and strategic objectives. We do not maintain key person lifeinsurance on any of our employees, and none of our employees is under anyobligation to continue providing services to Inamed.

We must continue toattract, train and retain managerial, technical, selling and marketingpersonnel. Competition for such highly skilled employees in our industry ishigh, and we cannot be certain that we will be successful in recruiting orretaining such personnel. We also believe that our success depends to asignificant extent on the ability of our key personnel to operate effectively,both individually and as a group. If we are unable to identify, hire andintegrate new employees in a timely and cost-effective manner, our operatingresults may suffer.

**IF OUR INTELLECTUAL PROPERTY RIGHTSDO NOT ADEQUATELY PROTECT OUR PRODUCTS OR TECHNOLOGIES, OTHERS COULD COMPETEAGAINST US MORE DIRECTLY, WHICH WOULD HURT OUR PROFITABILITY.**

Our success depends in part on our ability to obtainpatents or rights to patents, protect trade secrets, operate without infringingupon the proprietary rights of others, and prevent others from infringing onour patents, trademarks and other intellectual property rights. We will be ableto protect our intellectual property from unauthorized use by third partiesonly to the extent that it is covered by valid and enforceable patents,trademarks and licenses. Patent protection generally involves complex legal andfactual questions and, therefore, enforceability of patent rights cannot bepredicted with certainty. Patents, if issued, may be challenged, invalidated orcircumvented. Thus, any patents that we own or license from others may notprovide adequate protection against competitors. In addition, our pending andfuture patent applications may fail to result in patents being issued. Also,those patents that are issued may not provide us with adequate proprietaryprotection or competitive advantages against competitors with similartechnologies. Moreover, the laws of certain foreign countries do not protectour intellectual property rights to the same extent as do the laws of theUnited States.

In addition to patents andtrademarks, we rely on trade secrets and proprietary know-how. We seekprotection of these rights, in part, through confidentiality and proprietaryinformation agreements. These agreements may not provide meaningful protectionor adequate remedies for violation of our rights in the event of unauthorizeduse or disclosure of confidential and proprietary information. Failure toprotect our proprietary rights could seriously impair our competitive position.

**IF THIRD PARTIES CLAIM WE AREINFRINGING THEIR INTELLECTUAL PROPERTY RIGHTS, WE COULD SUFFER SIGNIFICANTLITIGATION OR LICENSING EXPENSES OR BE PREVENTED FROM MARKETING OUR PRODUCTS.**

Our commercial successdepends significantly on our ability to operate without infringing the patentsand other proprietary rights of others. However, regardless of our intent, ourtechnologies may infringe the patents or violate other proprietary rights ofthird parties. In the event of such infringement or violation, we may facelitigation, become subject to damages, and may be prevented from sellingexisting products and pursuing product development or commercialization. Atpresent, we are a party in one such matter. See Part I, Item 3. LegalProceedings, Patents and License Litigation, *MandersMatter*.

22

----

**WE DEPEND ON A SOLE OR LIMITEDNUMBER OF SUPPLIERS FOR CERTAIN PRODUCTS AND RAW MATERIALS AND THE LOSS OF ANYSUPPLIER COULD ADVERSELY AFFECT OUR ABILITY TO MANUFACTURE AND/OR SELL MANY OFOUR PRODUCTS.**

Loss of any supplier orinterruption of such manufacturing processes could adversely affect our abilityto manufacture and/or sell many of our products. We currently rely on a singlesupplier for silicone raw materials used in many of our products. Although wehave an agreement with this supplier to transfer the necessary formulations tous in the event that it cannot meet our requirements, we cannot guarantee thatwe would be able to produce or obtain a sufficient amount of quality siliconeraw materials in a timely manner. We depend on third party manufacturers forsilicone molded components and silicone facial implants. We also depend onthird party manufacturers for our facial aesthetics product lines with theexclusion of the bovine and human based collagen products. In addition, wecurrently rely on Immucor, Inc. for the supply of human collagen mesh,used in the production of CosmoDerm and CosmoPlast. Additionally, certain ofour manufacturing processes are only performed at one location worldwide.

**OUR ABILITY TO SELL BOVINECOLLAGEN-BASED PRODUCTS COULD BE ADVERSELY AFFECTED IF WE EXPERIENCE PROBLEMSWITH THE CLOSED HERD OF DOMESTIC CATTLE FROM WHICH WE DERIVE THESE PRODUCTS.**

We rely on two closedherds of domestic cattle that are kept apart from all other cattle for theproduction of our bovine collagen-based products. If these herds suffered asignificant reduction or became unavailable to us, we would have a limitedability to access a supply of acceptable bovine collagen from a similarlysegregated source. A significant reduction in the supply of bovine collagencould have a material adverse effect on our ability to sell bovinecollagen-based products.

**OUR INTERNATIONAL BUSINESS EXPOSESUS TO A NUMBER OF RISKS.**

Approximately 40%of our sales are derived from international operations. Accordingly, anymaterial decrease in foreign sales would have a material adverse effect on ouroverall sales and profitability. Most of our international sales aredenominated in U.S. dollars, Euros, or Japanese Yen. Depreciation ordevaluation of the local currencies of countries where we sell our products mayresult in our products becoming more expensive in local currency terms, thusreducing demand. In addition, we manufacture and assemble the majority of ourbreast implant products and obesity intervention products in Ireland and inCosta Rica, therefore a large percentage of our operating expenses aredenominated in currencies other than the U.S. dollar. We cannot guarantee thatwe will not experience unfavorable currency fluctuation effects in futureperiods, which could have an adverse effect on our operating results. Ouroperations and financial results also may be significantly affected by otherinternational factors, including:

·       foreigngovernment regulation of our products;

·       productliability, intellectual property and other claims;

·       newexport license requirements;

·       politicalor economic instability in our target markets;

·       traderestrictions;

·       changesin tax laws and tariffs;

·       inadequateprotection of intellectual property rights in some countries;

·       managingforeign distributors, manufacturers and staffing;

·       managingforeign branch offices; and

23

----

·       competition.

If these risks actuallymaterialize, our sales to international customers, as well as those U.S.customers that use products manufactured abroad, may decrease.

**HEALTHCARE REFORM LEGISLATIONCOULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS.**

If any national healthcarereform or other legislation or regulations are passed that imposes limits onthe number or type of medical procedures that may be performed or that has theeffect of restricting a physician’s ability to select specific products for usein patient procedures, such changes could have a material adverse effect on thedemand for our products. In the U.S., there have been, and we expect that therewill continue to be, a number of federal and state legislative and regulatoryproposals to implement greater governmental control over the healthcareindustry. These proposals create uncertainty as to the future of our industryand may have a material adverse effect on our ability to raise capital or toform collaborations. In a number of foreign markets, the pricing andprofitability of healthcare products are subject to governmental influence orcontrol. In addition, legislation or regulations that impose restrictions onthe price that may be charged for healthcare products or medical devices mayadversely affect our sales and profitability.

**IF OUR USE OF HAZARDOUS MATERIALSRESULTS IN CONTAMINATION OR INJURY, WE COULD SUFFER SIGNIFICANT FINANCIAL LOSS.**

Our manufacturing andresearch activities involve the controlled use of hazardous materials. Wecannot eliminate the risk of accidental contamination or injury from thesematerials. In the event of an accident or environmental discharge, we may beheld liable for any resulting damages, which may exceed our financial resources.

**OUR STOCK PRICE HAS BEEN VOLATILEAND OUR TRADING VOLUME HAS HISTORICALLY BEEN LOWER THAN THAT OF MANY NASDAQLISTED STOCKS.**

The trading priceof our common stock has been, and may be, subject to wide fluctuations inresponse to a number of factors, many of which are beyond our control. Thesefactors include:

·       quarter-to-quartervariations in our operating results;

·       theresults of testing, technological innovations, or new commercial products by usor our competitors;

·       governmentalactions, regulations, rules, and orders;

·       generalconditions in the healthcare, medical device, or plastic surgery industries;

·       changesin earnings estimates by securities analysts;

·       developmentsand litigation concerning patents or other intellectual property rights;

·       litigationor public concern about the safety of our products; and

·       resignationof senior officers.

Historically, the dailytrading volume of our common stock has been relatively low compared to that ofmany other NASDAQ listed stocks. We cannot guarantee that an active publicmarket for our common stock will be sustained or that the average tradingvolume will remain at present levels or increase. In addition, the stock marketin general and the NASDAQ National Market in particular experience significant priceand volume fluctuations. Volatility in the market price for particularcompanies has often 

24

----

beenunrelated or disproportionate to the operating performance of those companies.Broad market factors may seriously harm the market price of our common stock,regardless of our operating performance. In addition, securities class actionlitigation has often been initiated following periods of volatility in themarket price of a company’s securities. A securities class action suit againstus could result in substantial costs, potential liabilities, and the diversionof management’s attention and resources.

**LITIGATION MAY HARM OURBUSINESS OR OTHERWISE DISTRACT OUR MANAGEMENT.**

Substantial, complex orextended litigation could cause us to incur large expenditures and distract ourmanagement. For example, lawsuits by employees, stockholders, customers, orcompetitors could be very costly and substantially disrupt our business. Disputesfrom time to time with such companies or individuals are not uncommon, and wecannot assure you that that we will always be able to resolve such disputes outof court or on terms favorable to us.

**OUR PUBLICLY-FILED SEC REPORTS AREREVIEWED BY THE SEC FROM TIME TO TIME AND ANY SIGNIFICANT CHANGES REQUIRED AS ARESULT OF ANY SUCH REVIEW MAY RESULT IN MATERIAL LIABILITY TO US AND HAVEA MATERIAL ADVERSE IMPACT ON THE TRADING PRICE OF OUR COMMON STOCK.**

The reports ofpublicly-traded companies are subject to review by the SEC from time to timefor the purpose of assisting companies in complying with applicable disclosurerequirements and to enhance the overall effectiveness of companies publicfilings, and comprehensive reviews of such reports are now required at leastevery three years under the Sarbanes-Oxley Act of 2002. SEC reviews may beinitiated at any time. While we believe that our previously filed SEC reportscomply, and we intend that all future reports will comply in all materialrespects with the published rules and regulations of the SEC, we could berequired to modify or reformulate information contained in prior filings as aresult of an SEC review. Any modification or reformulation of informationcontained in such reports could be significant and result in material liabilityto us and have a material adverse impact on the trading price of our commonstock.

**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS

We have no unresolvedstaff comments.

**ITEM 2.**                PROPERTIES

We lease all of our office, manufacturing, anddistribution facilities which are, primarily, as follows: Fremont, California;Santa Barbara, California; Arklow, Ireland; and San José, Costa Rica.

We lease office andwarehouse space ranging from 1,500 square feet to 4,000 square feet forinternational sales offices, located in Canada, Australia, France, Germany,Italy, Japan, Spain, and the United Kingdom. Due to anticipated demand for ourproducts in the next few years, we plan to continue expanding our manufacturingcapacity in Ireland and Costa Rica. We have commenced construction of a newmanufacturing facility in Costa Rica.

**ITEM 3.**                LEGALPROCEEDINGS 

**BREAST IMPLANT LITIGATION**

*Trilucent BreastImplant Matters*

When Inamed purchased Collagen in September 1999,the Company assumed certain liabilities relating to the Trilucent breastimplant, a soybean oil-filled breast implant, which had been manufactured anddistributed by various subsidiaries of Collagen between 1995 and November 1998.In November 1998, Collagen announced the sale of its LipoMatrix, Inc.subsidiary, manufacturer of the Trilucent implant, to 

25

----

Sierra MedicalTechnologies, Inc. Collagen retained certain liabilities for Trilucentimplants sold prior to November 1998.

In March 1999, the United Kingdom Medical DevicesAgency, or MDA, announced the voluntary suspension of marketing and withdrawalof the Trilucent implant in the U.K. The MDA stated that its actions were takenas a precautionary measure and did not identify any immediate hazard associatedwith the use of the product. The MDA further stated that it sought thewithdrawal because it had received “reports of local complications in a smallnumber of women” who had received those implants, involving localized swelling.The same notice stated that there “has been no evidence of permanent injury orharm to general health” as a result of these implants. In March 1999,Collagen agreed with the U.K. National Health Service that, for a period oftime, it would perform certain product surveillance with respect to U.K.patients implanted with the Trilucent implant and pay for explants for any U.K.women with confirmed Trilucent implant ruptures. Subsequently, LipoMatrix’snotified body in Europe suspended the product’s CE Mark pending furtherassessment of the long-term safety of the product. Sierra Medical has sincestopped sales of the product. Subsequent to acquiring Collagen, Inamed electedto continue the voluntary program.

Inamed estimates that approximately 8,000-9,000women received Trilucent implants until commercial sales ceased in March 1999,and approximately half of them reside in the U.K. In the U.S., 165 womenreceived Trilucent breast implants in two clinical studies; enrollment in bothstudies ended by June 1997.

On June 6, 2000, the MDA issued a hazard noticerecommending that surgeons and their patients consider explanting the Trilucentimplants even if the patient is asymptomatic. The MDA also recommended thatwomen avoid pregnancy and breast-feeding until the explantation. The hazardnotice stressed, however, “that all of the above advice is precautionary. Althoughthere have been reports of breast swelling and discomfort in some women withthese implants, there has been no clinical evidence of any serious healthproblems, so far.”

Concurrently with the MDA announcement of June 6,2000, Inamed announced that, through its AEI, Inc. subsidiary, it hadundertaken a comprehensive program of support and assistance for women who havereceived Trilucent breast implants, under which it is covering medical expensesassociated with the removal and replacement of those implants for women in theEuropean Community, the U.S. and other countries. After consulting withcompetent authorities in each affected country, Inamed terminated this supportprogram effective as of March 31, 2005 in all countries other than theU.S. and Canada. Notwithstanding the termination of the general program, theCompany continued to pay for explanations and related expenses in certain casesif a patient justified her delay in having her Trilucent implants removed onmedical grounds or owing to lack of notice. Under this program, Inamed may paya fee to any surgeon who conducts an initial consultation with any Trilucentimplantee. Inamed also pays for the explantation procedure and related costs,and for replacement (non-Trilucent) implants for women who are candidates forand who desire them. To date, virtually all of the U.K. residents and more than95% of the non-U.K. residents who have requested explantations as a result ofan initial consultation have had them performed. To date, an insurance companyhas reimbursed Inamed for approximately 70% of these expenses. As of February 15, 2005, this insuranceexpired.

In 2000-2002, Inamed was sued in variouslitigations in the United States alleging bodily injury caused by Trilucentbreast implants. All of these cases have now been dismissed or settled and, exceptfor one matter recently brought by an individual who received Trilucentimplants in a U.S. clinical trial (and who executed a broadly-worded informedconsent in order to participate in that trial), we are not a party to anyTrilucent related court proceedings in the United States at this time.

Also since the third quarter of 2000, Inamed and itssubsidiaries have received notices of claim from European women, the vastmajority of them residents of the U.K. or Spain, seeking compensation forgeneral and special damages for alleged bodily injuries from Trilucent implants.In November, 2000, with 

26

----

the consent and approvalof its insurers, AEI, Inc., on behalf of itself, its affiliates andinsurers, entered into a settlement protocol with the lead solicitor for theU.K. claimants. The protocol afforded a fixed level of compensation toqualified claimants who, in an uncomplicated surgical procedure, had theirTrilucent breast implants explanted in reliance on the June 2000 MDAhazard notice. The protocol also afforded a mechanism for the efficientresolution of any claims alleging that the early explantation of Trilucentimplants involved serious surgical complications or resulted in a medicalcondition, which required either extended hospitalization or extended home care.More than 95% of the U.K. women who have had their Trilucent implants explantedsince June 2000, represented by more than 90 different solicitors, havesought compensation through the settlement protocol. Effective September 15,2005, Inamed closed the settlement protocol in the UK. To date, the Company hasnot received any civil proceedings in the UK as a result of itsTrilucent-related exposure.

In addition, in Spain, prior to September 30,2005, Inamed offered a protocol similar in structure to the United Kingdomprotocol. During the time that this Spanish protocol was open, the Companyreceived approximately 336 claims. In addition, a Spanish consumer union hascommenced a single action in which the consumer union, Avinesa, alleges that itrepresents 41 Spanish Trilucent explantees. Finally, to date, 63 womenhave commenced individual legal proceedings in court against Inamed, of which39 were still pending as of December 31, 2005. Prior to the issuance of adecision by an Appellate Court sitting in Madrid in the second quarter of 2005,Inamed won approximately one-third, and lost approximately two-thirds of itsTrilucent cases in the lower courts. The average damages awarded in cases theCompany lost were approximately $18,000. In the second quarter of 2005, in acase called *Gomez Martin v. AEI*, for the first timean appellate court in Spain issued a decision holding that Trilucent breastimplants were not “defective” within the meaning of applicable Spanish productliability law and dismissed a €60,000 award issued by thelower court. While this ruling is a positive development for the Company, itmay not be followed by other Spanish appellate courts or could be modified orfound inapplicable to other cases filed in the Madrid district. The Avinesaclass action was filed in the Madrid district. Since the ruling in *Gomez Martin v. AEI*, Inamed has had greater success inwinning the Spanish cases than before the ruling.

In 2002, Inamed came to final settlements with each ofits two insurers for product liability claims arising from the Trilucentimplant. Under one settlement, with MEDMARC Casualty Insurance Company, MEDMARCpaid $6.0 million in cash to Inamed in January 2003, and $1.5 million incash in May 2003, and, effective November 16, 2002, agreed to make apolicy with a limit of $10.0 million available to the Company for defense andindemnification of Trilucent-related bodily injury claims worldwide. As of June 30,2004 Inamed had no remaining coverage under this policy. Under the second settlement,AISLIC, an AIG company, agreed to make an excess policy with a limit of $10.0million available to the Company for the indemnification of non-U.S. Trilucentclaims. There was approximately $1.6 million remaining under this commitment atDecember 31, 2005. As a result of these settlements, Inamed released bothcarriers from any other actual or potential financial claims under the policiesand dismissed all carrier related litigation with prejudice.

By agreement with the MDA, Inamed funded additionalscientific research and patient monitoring relating to Trilucent. On August 4,2004, the Trilucent Scientific Advisory Panel delivered a report to thesuccessor entity to the MDA in the United Kingdom, known as the MRHA. In itsreport, issued after more than three years of research, the TSAP concluded thatthere is no scientific evidence that Trilucent implants pose a significantsystemic risk to human health but that the removal of the implants onprecautionary grounds was and is appropriate.

On September 27,2004, the MHRA issued an update on Trilucent in which it concluded:

1.                the recommendationthat Trilucent breast implants should be removed remains appropriate becauseexposure to local tissue to toxic compounds has been confirmed;

2.                there is no evidencefor local or systemic disease risk once the implants are removed; and

27

----

3.                no further studiesare needed to assess the potential risk of Trilucent breast implants.

In addition, at December 31, 2005, the Companyhad an accrual for future Trilucent claims, costs, and expenses ofapproximately $4.0 millionand insurance of $1.6 million, or $2.4 million, net of insurance.

Based upon the informationand analyses currently available to Inamed, the Company believes that itscurrent accruals and available insurance coverage are sufficient to dischargefuture Trilucent related liabilities; however, there can be no assurances thatfuture Trilucent-related liabilities will not exceed the current accruals andinsurance coverage.

**PATENTS AND LICENSE LITIGATION**

*Manders Matter*

Inamed is a defendant inErnest K. Manders, M.D. v. McGhan Medical Corporation, et al., pending in theU.S. District Court for the Western District of Pennsylvania, Case No. 02-CV-1341.The amended complaint in the Manders case seeks damages for allegedinfringement of a patent allegedly held by Manders in the field of tissueexpanders. We do not believe that we practice the device claimed by Manders orthat we teach the methods he claims. Accordingly, in February 2003, weanswered the complaint, denying its material allegations, and counterclaimedagainst Manders for declarations of invalidity as well as noninfringement. Factdiscovery was completed on July 31, 2004. Expert discovery relating toclaim construction issues was completed in August 2004. Manders haselected to limit his claim for infringement to twelve of the forty-six claimsin his patent. The Court held a Markman hearing on September 23, October 6-7,and 18, 2004. On February 23, 2006, the Court issued its MemorandumOpinion on claim construction. The Court also issued an order setting a status conferencefor April 21, 2006, which will set the schedule for remaining pretrialactivities including a period of time for expert discovery. We intend to defendthis lawsuit vigorously.

**OTHER MATTERS**

*Government Inquiry*

On February 24, 2005,the U.S. Securities and Exchange Commission (SEC) notified Inamed that it hadinitiated a formal private investigation to determine whether Inamed hasviolated federal securities laws. We were not aware of the investigation or anyrelated inquiry prior to that date. We have fully cooperated in theinvestigation. Based upon communications with the SEC Staff, we believe theinvestigation relates to assessing the adequacy of our disclosures regardingone style (Style 153) of our silicone gel-filled breast implant products. Thisparticular style accounted for approximately $3.4 million (less than 1%) of ourtotal revenues in 2004. On September 8, 2005, the SEC Staff notified usthat it intended to recommend to the SEC that the investigation be closedwithout any enforcement action or recommendation. There can be no assurance,however, that the SEC will accept that recommendation or that the scope of theinvestigation will not change or expand. While we believe that our disclosuresregarding our silicone gel-filled breast implant products have been and are incompliance with federal securities laws, there can be no assurance that theinvestigation will not have an adverse effect on Inamed.

*Other*

Inamed is involved in variousother legal actions arising in the ordinary course of business, which mayinvolve product liability claims for bodily injury and/or financial lossarising from the use of our products. These claims have not had, and are notexpected to have, but may have, a material adverse effect on our financialcondition or results of operations.

28

----

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

On December 19, 2005,the Company held its annual stockholders’ meeting, whereby the stockholders (i) electedsix directors each of whose term of office as a director continued after themeeting and (ii) ratified the appointment of KPMG LLP as the independentauditors for the fiscal year ending December 31, 2005. The vote on thesematter was as follows:

(i)           ELECTION OF DIRECTORS

| **Director**                | ** ** | ** ** | ** ** | **Votes For** | ** ** | **Votes  Withheld** | ** ** |
|-----------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|
| Nicholas L. Teti            |       | 31,320,041 |       | 963,968            |       |
| Malcolm R.  Currie, Ph.D    |       | 21,408,019 |       | 10,875,990         |       |
| John C. Miles II            |       | 31,462,581 |       | 821,428            |       |
| Mitchell S.  Rosenthal M.D. |       | 30,916,585 |       | 1,367,424          |       |
| Joy A. Amundson             |       | 31,462,731 |       | 821,278            |       |
| Terry E. Vanderwarker       |       | 31,461,491 |       | 822,518            |       |

 

(ii)          RATIFICATION OF KPMG

| For                               |   | 32,098,301 |   |
|-----------------------------------|--------|------------|--------|
| Against                           |   | 179,355    |   |
| Abstentions and broker  non-votes |   | 6,353      |   |

 

29

----

**PART II**

**ITEM 5.**                MARKETFOR INAMED’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASESOF EQUITY SECURITIES

**MARKET INFORMATION**

On March 17, 2006, we had 312 stockholders ofrecord. Our common stock price at the close of business on March 17, 2006,was $92.67 per share.

The table below sets forth the high and low bid pricesof our common stock for the periods indicated as reported on the NASDAQNational Market under the symbol IMDC. Quotations reflect prices betweendealers, do not reflect retail markups, markdowns or commissions, and may notnecessarily represent actual transactions.

| ** **       | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------|------------|----------|------------|---------|------------|
| *2004*           |       |     |       |    |       |
| 1st Quarter |       | $        | 53.30      |    | 41.70      |   |
| 2nd Quarter |       | 69.80    |       | 52.25   |       |
| 3rd Quarter |       | 64.20    |       | 45.17   |       |
| 4th Quarter |       | 64.09    |       | 47.24   |       |
| *2005*           |       |     |       |    |       |
| 1st Quarter |       | $        | 72.50      |    | 59.30      |   |
| 2nd Quarter |       | 70.80    |       | 57.75   |       |
| 3rd Quarter |       | 78.74    |       | 65.62   |       |
| 4th Quarter |       | 88.65    |       | 69.61   |       |

 

**SECURITIESAUTHORIZED FOR ISSUANCES UNDER EQUITY COMPENSATION PLANS**

See Part III, Item12, “Security Ownership of Certain Beneficial Owners and Management” for thesecurities authorized for issuances under equity compensation plans.

30

----

**ITEM 6.**                SELECTEDFINANCIAL DATA

Thefollowing financial information is qualified by reference to, and should beread in conjunction with, our consolidated financial statements and the notesthereto included in this Annual Report and Part II, Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”contained elsewhere in this Annual Report. The selected consolidated financialinformation presented below is derived from our audited consolidated financialstatements for each of the five years through the period ended December 31,2005.

| ** **                                   | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Statements  of income data:**              |       |                                        |       |   |   |   |   |   |   |   |   |
| Net sales                                    |       | $                                           | 437.8      |   | $ | 384.4 |   | $ | 332.6 |   | $ | 275.7 |   | $ | 238.1 |   |
| Cost of goods  sold                          |       | 120.8                                       |       | 107.8 |   | 98.8 |   | 77.6 | (5) | 67.2 | (5) |
| Gross profit                                 |       | 317.0                                       |       | 276.6 |   | 233.8 |   | 198.1 | (5) | 170.9 | (5) |
| Operating expenses:                          |       |                                        |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative          |       | 188.4                                       | (4)        | 169.8 | (3) | 135.8 |   | 126.7 | (5) | 96.6 | (5) |
| Research and development                     |       | 38.8                                        |       | 28.8 |   | 21.5 |   | 13.6 |   | 12.2 |   |
| Restructuring charges                        |       | (0.7                                        | )          | — |   | — |   | 5.1 |   | 12.0 |   |
| Amortization of intangible assets            |       | 5.4                                         |       | 5.0 |   | 4.0 |   | 4.9 |   | 11.3 | (1) |
| Total operating expenses                     |       | 231.9                                       |       | 203.6 |   | 161.3 |   | 150.3 |   | 132.1 |   |
| Operating income                             |       | 85.1                                        |       | 73.0 |   | 72.5 |   | 47.8 |   | 38.8 |   |
| Other income (expense):                      |       |                                        |       |   |   |   |   |   |   |   |   |
| Net interest income (expense) and debt costs |       | 2.7                                         | (2)        | 0.5 | (2) | (9.4 | ) | (11.7 | ) | (11.7 | ) |
| Foreign currency transaction gains (losses)  |       | (0.6                                        | )          | 0.1 |   | (0.1 | ) | 0.3 |   | (0.4 | ) |
| Merger related charges                       |       | (91.7                                       | )(4)       | — |   | — |   | — |   | — |   |
| Royalty income and other                     |       | 3.8                                         |       | 4.7 |   | 4.2 |   | 5.8 |   | 5.0 |   |
| Total other income (expense), net            |       | (85.8                                       | )          | 5.3 |   | (5.3 | ) | (5.6 | ) | (7.1 | ) |
| Income (loss) before income tax expense      |       | (0.7                                        | )          | 78.3 |   | 67.2 |   | 42.2 |   | 31.7 |   |
| Income tax  expense                          |       | 25.5                                        |       | 15.2 |   | 14.2 |   | 9.3 |   | 10.7 |   |
| Net income (loss)                            |       | $                                           | (26.2      | ) | $ | 63.1 |   | $ | 53.0 |   | $ | 32.9 |   | $ | 21.0 |   |
| Net income (loss) per share of common stock  |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic                                        |       | $                                           | (0.72      | ) | $ | 1.77 |   | $ | 1.54 |   | $ | 1.04 |   | $ | 0.69 |   |
| Diluted                                      |       | $                                           | (0.72      | ) | $ | 1.75 |   | $ | 1.51 |   | $ | 1.00 |   | $ | 0.64 |   |
| Weighted average  shares outstanding:        |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic                                        |       | 36.3                                        |       | 35.6 |   | 34.5 |   | 31.5 |   | 30.3 |   |
| Diluted                                      |       | 36.3                                        |       | 36.0 |   | 35.2 |   | 32.9 |   | 32.6 |   |

----

Note 1—In 2001, Inamed recorded amortization ongoodwill in accordance with APB Opinion No. 17. Beginning January 1,2002, Inamed adopted Statement of Financial Accounting Standard (SFAS)No. 142 and ceased amortizing goodwill.

Note 2—Interest expense decreased in 2004 due to ourdebt refinancing and principal reduction in mid-2003. In addition, webegan investing our excess cash in short-term investments in 2004, whichsignificantly increased our interest income in 2004 and 2005.

Note 3—Selling, general, and administrative includes aone-time legal settlement of $17.2 million with Ethicon relating to a patentinfringement case.

31

----

Note 4—Total merger related fees and expenses of$110.4 million includes $91.7 million in merger related charges and $18.7million in selling, general and administrative expenses. See Note 2 to theaudited consolidated financial statements.

Note 5—Royaltieshave not been reclassified from SG&A to COGS for the years 2001 and 2002.

| ** **                                                       | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                       | ** ** | **(millions)**        | ** ** |
| **Balance  sheet data:**                                         |       |                  |       |   |   |   |   |   |   |   |   |
| Working capital                                                  |       | $                     | 199.3      |   | $ | 190.9 |   | $ | 131.9 |   | $ | 81.4 |   | $ | 63.3 |   |
| Total assets                                                     |       | 548.4                 |       | 570.1 |   | 501.0 |   | 439.4 |   | 400.2 |   |
| Total long-term  debt and capital leases (incl. current portion) |       | 5.0                   |       | 22.5 |   | 32.5 |   | 83.7 |   | 121.0 |   |
| Stockholders’ equity                                        |       | 450.3                 |       | 446.3 |   | 351.5 |   | 232.7 |   | 174.4 |   |
|                                                                  |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

32

----

**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The followingManagement’s Discussion and Analysis (MD&A) is intended to help the readerto better understand the financial condition and results of operations of Inamed.MD&A is provided as a supplement to, and should be read in conjunctionwith, our audited consolidated financial statements and the accompanying notesincluded herein. The following provides a brief description of each section ofour MD&A:

·       *Company and Industry Overview*—provides a general descriptionof our business, our market place, and the basis for most of our revenues andexpenses.

·       *Liquidity and Capital Resources—*provides our historicalsources and uses of cash, existence and timing of cash commitments, and aprospective look into where future cash will be provided and used.

·       *Results of Operations—*provides a consolidated analysis ofthe results of operations for the three years presented in our financialstatements, including prospective information.

·       *Application of Critical Accounting Policies and Estimates*—provides**a discussion on our accounting policiesthat require critical judgments and estimates.

**COMPANY AND INDUSTRY OVERVIEW**

Inamed is a global healthcare company that develops,manufactures and markets a diverse line of products that enhance the quality ofpeoples’ lives. These products include breast implants for aestheticaugmentation and reconstructive surgery, a range of dermal products for use infacial rejuvenation, the LAP-BAND® System designed to treat severe and morbidobesity, and the Bioenterics® BIB® System for the treatment of obesity. Wegenerate approximately 40% of our revenues outside the U.S.

Our primary markets are very competitive and subjectto substantial government regulation. Pricing and market share pressures varyby product line and geographic market. In general, inflationary trends resultin increases in our labor and material costs. In addition, there are foreigncurrency fluctuations and other risks associated with operating on a globalbasis, such as price and currency-exchange controls, import restrictions, andchanging economic, social and political conditions in foreign countries. Weexpect these trends and risks to continue. We will continue to manage theseissues by capitalizing on our market presence, developing innovative products,investing in human resources, improving our manufacturing facilities,leveraging our cost structure, and possibly entering into alliances and otherarrangements.

We derive the majority of our revenues from productsales. We sell our breast aesthetics, facial aesthetics and obesityintervention products in the U.S. to hospitals, clinics and doctors through adirect sales force. Internationally, our products are sold either throughdirect sales forces in countries where we have our own subsidiaries or throughthird party distributors.

We manufacture our products in California, Costa Ricaand Ireland. We also purchase finished products and certain raw materialcomponents from third party manufacturers. The cost of goods sold representsthe cost of third party finished products, raw materials, labor, allocatedoverhead and royalties. Gross margins may fluctuate from period to period dueto changes in the selling prices of our products, the mix of products sold,changes in the cost of third party finished products, raw materials, labor andoverhead, manufacturing efficiencies or inefficiencies, and royalty payments. In2004 and 2003, the cost of goods sold also included accelerated depreciationcharges related to the manufacturing consolidation (see Note 3 to theConsolidated Financial Statements).

Our selling, general and administrative expenseincorporates the expenses of our sales and marketing organization and thegeneral and administrative expenses necessary to support the global corporation.Our 

33

----

sales and marketingexpenses consist primarily of salaries and benefits, commissions, allocatedoverhead and marketing program costs. General and administrative expensesincorporate the costs of finance, human resources, information services, legal,and insurance costs.

Our research and development expenses are comprised ofthe following types of costs incurred in performing research and developmentactivities: salaries and benefits, allocated overhead, clinical trial andrelated clinical manufacturing costs, contract services, consultants and otheroutside costs. We also conduct research on materials technology, product designand product improvement.

In March 2005, we announced the execution of amerger agreement, by and among us, Medicis Pharmaceutical Corporation(Medicis), and Masterpiece Acquisition Corporation, a wholly-owned subsidiaryof Medicis. Under the merger agreement, we would have been merged with and intoMasterpiece Acquisition Corporation. Under the terms of the transaction, our stockholderswould have received 1.4205 shares of Medicis common stock and thirty dollars incash for each share of Inamed common stock upon consummation of the proposedmerger.

On November 14, 2005, we received a lettercontaining an unsolicited preliminary non-binding proposal from Allergan, Inc.(Allergan) to acquire all outstanding shares of Inamed for a per shareconsideration of $84.00 in cash or 0.8498 of a share of Allergan common stock,at the election of the holder, subject to proration such that the total valueof the consideration payable would be $1.45 billion in cash and17.9 million shares of Allergan. The proposal stated that it was subjectto the satisfactory completion of limited due diligence and the execution of amutually acceptable definitive agreement. On November 21, 2005, Allerganfiled with the SEC the Schedule TO and the Registration Statement, includingthe Prospectus, and formally commenced its exchange offer.

On December 13, 2005, we entered into a mergertermination agreement (the “Termination Agreement”) with Medicis andMasterpiece Acquisition Corporation which provides that the Medicis mergeragreement terminated effective immediately upon the parties’ execution of theTermination Agreement and Medicis’ receipt from Inamed of a $90.0 milliontermination fee and an additional $0.5 million in expense reimbursement fees. Wepaid these termination and expense reimbursement fees in full on December 13,2005. On the same date, we also announced that our Board of Directors hadunanimously determined to recommend that our stockholders tender their sharesto Allergan upon execution by us of a definitive agreement and plan of mergerbetween Inamed and Allergan. On December 15, 2005, we announced that our Boardof Directors had unanimously approved the definitive agreement and Plan ofMerger.

On December 20, 2005, we executed a definitiveagreement and plan of merger with Allergan. Pursuant to the definitive mergeragreement and consistent with the exchange offer previously commenced byAllergan, Allergan will exchange for each outstanding common share of Inamed,either $84.00 in cash or 0.8498 of a share of Allergan common stock, at theelection of the holder. Elections of our stockholders are subject to prorationas described in Allergan’s Form S-4 initially filed with theSecurities and Exchange Commission (SEC) on November 21, 2005, andsubsequently amended, so that 45% of the aggregate shares tendered will beexchanged for cash and 55% of the aggregate shares tendered will be exchangedfor shares of Allergan common stock.

On December 20, 2005, we also entered into atermination agreement with Ipsen Ltd. Effective upon the consummation ofAllergan’s acquisition of Inamed which occurred March 17, 2006, Ipsen hastaken back its rights to the botulinum toxin product Reloxin, and we and Ipsenhave released each other of all obligations under the distribution agreementregarding Reloxin. As a result of the termination agreement, we will receive apayment of $10.0 million from Ipsen.

The exchange offer expired at 12:00 midnight EasternTime on Friday, March 17, 2006, at which time 34,971,207 shares,representing approximately 94.7%, of Inamed’s outstanding common stock had been

34

----

tendered. As Allergan hasreceived tenders representing at least 90% of the outstanding Inamed commonstock, Allergan intends to complete the acquisition through a short-form mergerunder Delaware law onMarch 23, 2006, at which time we will become a wholly-owned subsidiary ofAllergan. Immediately thereafter, Allergan intends to terminate ourregistration under the Securities Exchange Act of 1934 and delist our commonstock from the NASDAQ National Market.

During the year ended December 31, 2005, weincurred approximately $110.4 million of costs related to the proposed mergerswith Medicis and Allergan, primarily for termination fees, legal and otherprofessional fees. The $91.7 million termination fee and merger relatedexpenses were recorded as merger related charges. $18.7 million of othermerger-related costs were recorded as selling, general and administrativeexpenses.

In September 2005, we received an “approvableletter” from the FDA for our responsive silicone gel-filled breast implants. The“approvable letter” stipulates a number of conditions that we must comply within order to receive FDA approval to market and sell responsive silicone gelfilled breast implants in the United States. An “approvable letter” is one ofseveral intermediate steps in the FDA review process of new products. Wecontinue to work with the FDA to address the conditions of the letter which arerequired for full approval.

For a further discussionon the status of U.S. and international regulatory approvals, see Part I Item 1.“Business” in this Annual Report on Form 10-K.

**LIQUIDITY AND CAPITAL RESOURCES**

We had cash and cash equivalents of $111.7 million andno short-term investments at December 31, 2005, an aggregate decrease of$18.6 million from $107.2 million of cash and cash equivalents and $23.1million in short-term investments at December 31, 2004. At December 31,2005, approximately $75.5 million of our cash was held internationally whichmay be subject to U.S. income tax if repatriated to the U.S. The decrease during2005 was the result of significant cash payments for merger transaction costs.

Cash used in operations was $8.1 million in 2005compared to cash provided by operations of $70.7 million in 2004. The decreaseis primarily the result of lower net income due to the payment of mergertransaction costs. Thiswas partially offset by an increase in accounts receivable of $15.9 million dueto an increase in sales, as well as an increase in inventory of $9.5 millionprimarily due to due to a build up in anticipation of product launches andproduction timing effects.

Cash provided by operations was $70.7 million in 2004compared to $75.2 million in 2003. The decrease was primarily the result of theEthicon settlement payment. Trade accounts receivable increased $7.2 million in2004 over 2003 due to increased sales. Inventories increased $8.3 million,primarily due to increased facial product inventory in the U.S. We increasedour inventory while we changed suppliers of human collagen mesh to support anytransitional issues as well as to comply with our long-term contract agreements.In addition, we increased inventory to support the launch of new products. Otherassets decreased $6.3 million primarily due to a reduction in our Trilucentinsurance receivable (see Part I, Item, 3. Legal Proceedings, BreastImplant Litigation, Trilucent Breast Implant Matters). Accruals and otherlong-term liabilities decreased $9.3 million primarily due to payments withrespect to our Trilucent liability and a decrease in our deferred tax liabilitydue to timing of payments.

Cash provided by investing activities of $7.2 millionin 2005 consisted of $130.1 million for the purchase of short-term investmentsto earn better rates of interest on our cash, $152.8 million proceeds fromsales and maturities of such investments (this amount reflected the sale of ourentire portfolio of short-term held-to-maturity securities of $54.2 millionnet of unamortized discounts, to pay the Medicis termination fee, seeNote 2 to the audited consolidated financial statements), and $14.5million in capital expenditures, primarily for our plant expansions and ourglobal Enterprise Resource Planning, or ERP, 

35

----

system. Cash used ininvesting activities of $53.2 million in 2004 consisted of $30.2 million forthe purchase of short-term investments, $11.1 million for the purchase ofintangibles, primarily the purchase of license and distribution agreements, and$18.7 million in capital expenditures, primarily for our plant expansions andour global ERP system. In 2003, cash used in investing activities of $16.9million consisted primarily of capital expenditures related to our plantexpansions and our global ERP system.

Cash provided by financing activities in 2005 of $11.1million reflected proceeds of $28.6 million from the issuance of common stockupon the exercise of outstanding stock options and issuances pursuant to theemployee stock purchase plan, offset by long-term debt principal payments of$17.5 million. Cash provided by financing activities for the year 2004 of $4.7million reflected proceeds of $14.7 million from the issuance of common stockupon the exercise of outstanding stock options and issuances pursuant to theemployee stock purchase plan, offset by long-term debt principal payments of$10.0 million. In 2003, cash used in financing activities of $19.4 millionreflected net principal payments of $51.2 million, partially offset by proceedsof $33.2 million from the issuance of common stock upon the exercise ofoutstanding stock options and issuances pursuant to the employee stock purchaseplan.

As of December 31, 2005, we had long-term debt of$5.0 million, all of which is classified in current liabilities. In addition,we had a $35.0 million revolving line of credit, with an initial term expiringin June 2008, which terminated on March 8, 2006. We have utilized$17.8 million of the revolver capacity by having letters of credit issued tocollateralize certain insurance programs. The remaining $17.2 million ofrevolver capacity was unused as of December 31, 2005. The borrowings underthe current credit facilities bear interest at the London Interbank OfferedRate, or LIBOR, plus 2.0%. Due to the additional expense of $110.4 million inmerger related transaction costs, our EBITDA was negative at December 31,2005. Due to this, we were no longer in compliance with our debt covenants and,as a result, paid the remaining $5.0 million balance of our loan in March 2006.The credit agreement has been terminated as of March 8, 2006. Subsequentto the termination of the credit agreement, the letters of credit used tocollateralize certain insurance programs became unsecured. The remainingpayments were previously due in June 2006.

The primary objectives of our investment policy are,in order of priority, preservation of principal, liquidity, and attaining ahigh rate of return. Consequently, our investments are generally of shortduration and high credit quality. We believe that existing funds, cashgenerated from operations, and existing debt financing are adequate to satisfyour working capital and capital expenditure requirements for the foreseeablefuture. Further, we believe that our operating cash flow will be sufficient torepay the existing term loan. However, we may raise additional capital fromtime to time.

Thefollowing summarizes our contractual obligations and other commitments at December 31,2005, and the effect such obligations could have on our liquidity and cash flowin future periods (in millions).

| ** **                                                                               | ** ** | **Payments due by period** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**                                                         | ** ** | ** **                                | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| Long-term debt                                                                           |       | $                                         | 5.0        |   |   | $ | 5.0 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Operating leases                                                                         |       | 52.5                                      |       |   | 7.5 |   |   |   | 11.7 |   |   |   | 10.9 |   |   |   | 22.4 |   |   |
| Purchase  obligations                                                                    |       | 21.3                                      |       |   | 20.8 |   |   |   | 0.5 |   |   |   | — |   |   |   | — |   |   |
| License &  distribution agreements                                              |       | 15.0                                      |       |   | 4.0 |   |   |   | 11.0 |   |   |   | — |   |   |   | — |   |   |
| Other long-term  liabilities reflected on the registrant’s balance sheet under GAAP |       | 26.0                                      |       |   | 6.6 |   |   |   | 6.0 |   |   |   | 4.0 |   |   |   | 9.4 |   |   |
| Total                                                                                    |       | $                                         | 119.8      |   |   | $43.9 |   |   |   | $29.2 |   |   |   | $ | 14.9 |   |   |   | $ | 31.8 |   |   |
|                                                                                          |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The $21.3 million in purchase obligationsprimarily relates to fees due to JP Morgan for services rendered in connectionwith our merger transactions. The actual amounts, if any, and timing of suchpayments will depend upon a variety of factors outside of our control.

36

----

The $15.0 million obligation for license anddistribution agreements relates to various amounts contingently payable tothird parties based on the successful completion of certain milestones relatedto regulatory approvals. The actual amounts, if any, and timing of suchpayments will depend upon a variety of factors outside of our control.

The $26.0 millionobligation for other long-term liabilities consists of long-term and short-termamounts as follows: total other long-term liabilities is $19.4 million; and theshort-term portion of these long-term liabilities is $6.6 million (see Notes 7and 8 to the audited consolidated financial statements for a detaileddescription).

**RESULTS OF OPERATIONS**

Certain items in thissection are presented, utilizing non-GAAP measures, excluding the $110.4million in merger expenses for the year ended December 31, 2005 and the$17.2 million Ethicon settlement as of December 31, 2004. These expensesare outside our normal business operations and therefore not reflective ofunderlying trends in our business. We present these items in a manner that isconsistent with how management views our business. Given that Allergan owns atleast 90% of the outstanding Inamed common stock and intends to complete theacquisition through a short-form merger under Delaware law pursuant to theAllergan merger agreement, Inamed cannot predict with certainty the manner inwhich Inamed’s business will be operated in the future and thus will not beassessing trends relating to Inamed’s business and operations after theconsummation of the merger. Consequently, our historical results may notreflect future trends or results.

***Sales***

| ** **                               | ** ** | ** ** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **                 | ** ** | **Twelve Months Ended December 31,** | ** ** |
|------------------------------------------|------------|------------|------------|----------------------------|------------|------------|------------|----------------------------|------------|------------|------------|----------------------------|------------|----------------------------------------------------------|------------|
| ** **                               | ** ** | ** ** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **                 | ** ** | **2005 vs. 2004**                              | ** ** | **2004 vs. 2003** | ** ** |
| ** **                               | ** ** | **2005**   | ** ** | **Percent of  sales** | ** ** | **2004**   | ** ** | **Percent of  sales** | ** ** | **2003**   | ** ** | **Percent of  sales** | ** ** | **Dollar  change**                                       | ** ** | **Percent  change** | ** ** | **Dollar  change** | ** ** | **Percent  change** | ** ** |
| Inamed Aesthetics—  Breast     |       | $          | 230.9      |                       |       | 53         | %          |                       | $          | 215.8      |       |                       | 56         | %                                                        |       | $ | 177.8 |   |   | 53 | % |   |   | $ | 15.1 |   |   |   | 7 | % |   |   | $ | 38.0 |   |   |   | 21 | % |   |
| Inamed Heatlh—Obesity  intervention |       | 131.2      |       |                       | 30         | %          |       | 88.5                       |       |       | 23         | %                          |       | 63.1                                                     |       |   | 20 | % |   |   | 42.7 |   |   |   | 48 | % |   |   | 25.4 |   |   |   | 40 | % |   |
| Inamed Aesthetics—  Facial          |       | 71.7       |       |                       | 16         | %          |       | 75.6                       |       |       | 20         | %                          |       | 87.2                                                     |       |   | 26 | % |   |   | (3.9 | ) |   |   | (5 | )% |   |   | (11.6 | ) |   |   | (13 | )% |   |
| Other Products                           |       | 4.0        |       |                       | 1          | %          |       | 4.5                        |       |       | 1          | %                          |       | 4.5                                                      |       |   | 1 | % |   |   | (0.5 | ) |   |   | (11 | )% |   |   | — |   |   |   | — |   |   |
| Total                                    |       | $          | 437.8      |                       |       | 100        | %          |                       | $          | 384.4      |       |                       | 100        | %                                                        |       | $ | 332.6 |   |   | 100 | % |   |   | $ | 53.4 |   |   |   | 14 | % |   |   | $ | 51.8 |   |   |   | 16 | % |   |

 

Net sales (net of returns, discounts, and allowances),or sales, for 2005, 2004, and 2003 were affected by foreign exchange ratefluctuations positively by approximately 0%, 3%, and 4%, respectively.

Subsequent to the first quarter of 2005, we operatedunder the terms and conditions of merger agreements with Medicis and Allergan,which may have caused some distraction for all our employees, particularly ouraesthetics sales force.

***Inamed Aesthetics—Breast.***   Growthof breast aesthetics sales for the year ended December 31, 2005 over the sameperiod 2004 was 7% company-wide.  For thefourth quarter of 2005, we had a decline in sales of approximately 3% over thesame quarter in 2004.

The growth for the year was attributed to thecontinued acceptance of aesthetic procedures and favorable demographics.  However, the April 2005 FDA advisory paneldecisions (voting in favor of Mentor Corporation’s PMA and against our PMA)started a period of uncertainty for the U.S. marketing of our responsivesilicone gel breast implants.  In July2005, Mentor Corporation announced that it received an approvable letter fromthe FDA for its responsive silicone gel breast implants.  At the end of 

37

----

the third quarter, wereceived an approvable letter which we believe was substantially equivalent tothat of Mentor Corporation’s.

The fact that each company had approvable letters mayhave caused a slow-down in breast aesthetics procedures during the last half ofthe year as doctors and their patients awaited the final FDA decision on approvalof responsive silicone gel-filled breast implants.  

Internationally, we had higher rates of growth in thefirst three quarters in comparison to the U.S., but competitive pressures inthe EU adversely affected us in the fourth quarter.  In Europe, the Allergan merger may havecaused more distraction than the Medicis merger, because Allergan, unlikeMedicis, has a large European presence.  

***Inamed Health—ObesityIntervention.***   The increase in 2005 and 2004sales was primarily due to the following factors.  Our direct-to-consumer advertising in certainmarkets in the U.S. started to yield significant returns subsequent to thelaunch in the first quarter of 2005. Focus on our key physician account development program continued to befine tuned over the course of the year. Reimbursement for the LAP-BAND procedure continued to expand supportingthe accelerated growth in the second half of the year.  On-going interest in education on LAP-BANDsurgery results in an increasing number of surgeons trained and proctored.  

We believe the mergers did not have as large of animpact on our health sales force.

***Inamed Aesthetics—Facial.***   Facialaesthetics sales experienced a decrease in 2005 and 2004. The primary cause forthis decrease was the continued decline in our collagen product revenues in theU.S. due to increased competition in 2004 and on-going competition and acceptanceof the competitive product, RestylaneTM, in 2005. Our hyaluronic acid-baseddermal fillers could not stem the loss of sales and market share in the U.S. in2004 and 2005. In Europe we continued to grow the Hydrafill product family, ournon-animal, stabilized hyaluronic acid-based dermal filler in the markets inwhich we have rights to distribute.

***Cost of Goods Sold***

| ** ** | ** ** | **Cost of goods  sold** | ** ** | **Percent of  sales** | ** ** | **Gross profit  margin** | ** ** | **Percentage point  change in gross profit margin  over prior year** | ** ** |
|------------|------------|-----------------------------------|------------|----------------------------|------------|-------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| 2005       |       |                              | $          | 120.8                      |       |                          |       | 27.6                                                                                                    | %          |   |   | 72.4 | % |   |   | 0.4 | % |   |
| 2004       |       |                              | $          | 107.8                      |       |                          |       | 28.0                                                                                                    | %          |   |   | 72.0 | % |   |   | 1.7 | % |   |
| 2003       |       |                              | $          | 98.8                       |       |                          |       | 29.7                                                                                                    | %          |   |   | 70.3 | % |   |   |   |   |   |

 

The improvement of grossprofit margins in 2005 and 2004 reflected a favorable product mix.

***Selling, General,and Administrative (SG&A)***

| ** ** | ** ** | **SG&A** | ** ** | **Percent of  sales** | ** ** | **Dollar change  over prior year** | ** ** | **Percent change  over prior year** | ** ** |
|------------|------------|--------------|------------|----------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------|------------|
| 2005       |       | $            | 188.4      |                       |       | 43.0                                              | %          |                                               |       | $ | 18.6 |   |   |   | 11.0 | % |   |
| 2004       |       | $            | 169.8      |                       |       | 44.2                                              | %          |                                               |       | $ | 34.0 |   |   |   | 25.0 | % |   |
| 2003       |       | $            | 135.8      |                       |       | 40.8                                              | %          |                                               |       |   |   |   |   |   |   |   |

 

We have reclassified prior period royalty expense fromselling, general and administrative to cost of goods sold to conform to thecurrent period presentation.

Selling and marketing expenses increased on anabsolute basis and as a percentage of sales for the year ended December 31,2005 over the same period in 2004. The increase is primarily due to the launchof 

38

----

our direct-to-consumercampaign for our obesity intervention products and increased commissionsresulting from LAP-BAND sales.

General and administrative expense increased inabsolute dollars and decreased as a percentage of sales for the year ended December 31,2005 over the same period in 2004. The increase is primarily due to mergerrelated expenses in 2005, and the increase in 2004 is primarily due to a $17.2million charge related to our Ethicon patent settlement and related litigationcosts in the second quarter of 2004.

Included in SG&A for the year ended December 31,2005 is $18.7 million of costs associated with our mergers, consistingprimarily of legal fees and other professional fees. See Part I, Item 1 “Business.”

Excluding themerger-related expenses and the non-recurring Ethicon charge, SG&A wouldhave been 38.8% and 39.7 % of sales for the year ended December 31, 2005and 2004, respectively.

***Research andDevelopment (R&D)***

| ** ** | ** ** | **R&D** | ** ** | **Percent of   sales** | ** ** | **Dollar change  over prior year** | ** ** | **Percent change  over prior year** | ** ** |
|------------|------------|-------------|------------|----------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------|------------|
| 2005       |       | $           | 38.8       |                             |       | 8.9                                               | %          |                                               |       | $ | 10.0 |   |   |   | 34.7 | % |   |
| 2004       |       | $           | 28.8       |                             |       | 7.5                                               | %          |                                               |       | $ | 7.3 |   |   |   | 34.0 | % |   |
| 2003       |       | $           | 21.5       |                             |       | 6.5                                               | %          |                                               |       |   |   |   |   |   |   |   |

 

The majority of ourresearch and development expenses in the year 2005 were related to the clinicaldevelopment programs for the botulinum toxin Type A product, ReloxinTM; ourJuvéderm dermal fillers; and the responsive silicone gel and cohesive siliconegel breast implant clinical trials in the U.S. The increase in R&D expensein 2004 over 2003 was primarily due to the commencement of Phase III of theReloxin trials and clinical investigations for Juvéderm. The majority of theexpenses in 2003 related to the clinical development programs for our Hylaformdermal filler, Reloxin, and the silicone gel and cohesive silicone gel breastimplant clinical trials, and PMA applications as applicable in the U.S.

***Amortization***

In 2005, amortization ofintangible assets was $5.4 million compared to $5.0 million in 2004 and $4.0million in 2003. The increase in 2005 and 2004 was due to the purchase of newintangibles and the commencement of amortization on certain intangibles in mid-2004.

***RestrictedStock Plan***

In2003 we adopted the 2003 Restricted Stock Plan, as amended in 2004, whichauthorizes us to issue shares of common stock to any employee, officer,consultant, or non-employee director. In the second quarter of 2004, thestockholders approved an amendment which increased the number of authorizedshares by 150,000 shares to 300,000 shares. Restricted stock awards may begranted by the Board subject to vesting and any other restrictions (including aperiod during which vested shares may not be sold) as determined by the Boardand stated in an award agreement. Restricted stock may not be sold or otherwisetransferred or pledged until the restrictions lapse or terminate.

| ** **                                  | ** ** | **Authorized  Shares** | ** ** | **Number of  Shares  Issued** | ** ** | **Available for Issuance** | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| The 2003  Restricted Stock Plan, as amended |       |                   | 300,000    |                               |       |                                 | 253,950    |   |   |   | 46,050 |   |   |
|                                             |            |                        |            |                                    |            |                                      |            |  |  |  |  |  |  |

 

39

----

Thefollowing chart summarizes the restricted stock-based compensation charges thathave been included in the following captions of the income statement, for eachof the periods presented (in millions):

| ** **                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cost of goods  sold                  |       | $        | 0.5        |     | $          | 0.3      |       | $ | 0.0 |   |
| Selling, general  and administrative |       | $        | 3.0        |     | $          | 1.8      |       | $ | 0.1 |   |
|                                 |       | $        | 3.5        |     | $          | 2.1      |       | $ | 0.1 |   |

 

The increases for the yearended December 31, 2005 and 2004 are due to additional restricted stockgrants.

***Interest Income (Expense)***

| ** **                 | ** ** | **Twelve Months Ended December 31,**             | ** ** |
|----------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                 | ** ** | **     2005     ** | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** |
| Interest income            |       |                                                                 | $          | 3.8 |   |   |   | $ | 2.0 |   |   |   | $ | 0.8 |   |   |
| Interest expense           |       |                                                                 | (1.1       | ) |   |   | (1.5 | ) |   |   | (10.2 | ) |   |
| Interest income  (expense) |       |                                                                 | $          | 2.7 |   |   |   | $ | 0.5 |   |   |   | $ | (9.4 | ) |   |

 

The increase in interestincome in 2005 and 2004 is related to increased investment balances and therise in interest rates during the year. During the same periods, the decline ininterest expense is related to 1) decreased debt levels, 2) the recognition ofthe $3.6 million of interest expense related to the payoff of our interest rateswap in 2003, and 3) additional interest expense related to the recognition ofdeferred loan fees associated with accelerated principal payments in 2003.

***Foreign Currency***

Foreign currency gains andlosses fluctuate based largely upon the fluctuation of the dollar to the EU Euroand the Japanese Yen.

***RoyaltyIncome and Other***

Royalty income, net ofother expenses, was $3.8 million, $4.7 million, and $4.2 million in 2005, 2004,and 2003, respectively.

***Income TaxExpense***

Our income tax expense was $25.5, $15.2, and $14.2 for2005, 2004, and 2003, respectively. The abnormally high 2005 tax expense inrelation to our loss before tax is due to large amounts of non-deductiblemerger transaction costs. Excluding all non-recurring merger transaction costs,our effective tax rate would have been approximately 24.1%. Excluding thenon-recurring Ethicon charge, the effective tax rate would have beenapproximately 23.1% in 2004. The lower tax rate in 2004 is mainly due to ourEthicon patent settlement in the second quarter which is fully deductible inthe U.S., a high tax rate jurisdiction. We present our effective tax rateexcluding the non-recurring merger transaction costs and the Ethicon settlementbecause they are non-recurring charges that are outside our normal businessoperations which result in significant changes to our effective tax rate.

The lower tax rate of21.1% in 2003 was due to increased economic activity in low tax jurisdictionsand several non-recurring items, including the recognition of additionalforeign net operating loss carryforwards, the write-off of the tax basis ofcertain foreign subsidiaries and the favorable resolution of several taxissues.

40

----

**APPLICATIONOF CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

The preparation offinancial statements in accordance with accounting principles generallyaccepted in the United States of America requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and disclosure of contingent assets and liabilities. On an on-goingbasis, we evaluate our estimates and judgments, including those related torevenue recognition, inventories, adequacy of allowances for doubtful accounts,valuation of long-lived assets and goodwill, income taxes, litigation andwarranties. We base our estimates on historical and anticipated results andtrends and on various other assumptions that we believe are reasonable underthe circumstances, including assumptions as to future events. The policiesdiscussed below are considered by management to be critical to an understandingof our financial statements. These estimates form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. By their nature, estimates are subject toan inherent degree of uncertainty. Actual results may differ from thoseestimates.

*Revenue Recognition*

Our revenue is generated fromthe sale of our products to doctors, hospitals, clinics and independentdistributors. We sell our products through a direct sales force in the U.S. andthrough both a direct sales force and independent distributors internationally.

We recognize product revenue,net of sales discounts, returns and allowances, in accordance with StaffAccounting Bulletin (SAB) No. 104, “Revenue Recognition” and SFAS No. 48“Revenue Recognition When Right of Return Exists.”  Revenue is recognized when all four of thefollowing criteria are met:  (i) persuasiveevidence of an arrangement exists; (ii) delivery has occurred and allsignificant contractual obligations have been satisfied; (iii) the fee isfixed or determinable; and (iv) collection is considered probable. Appropriatereserves are established for anticipated returns and allowances based onhistorical experience. We recognize revenue when title to the product and riskof loss transfer to customers provided there are no remaining performanceobligations required of us or any matters requiring customer acceptance.

We allow for the return ofproduct from doctors, hospitals, and clinics within a specified time frame, andrecord estimated sales returns as a reduction of sales in the same periodrevenue is recognized. We do not provide a right of return on facialproducts. We calculate these salesprovisions based upon historical experience with actual returns. Actual returnsin any future period are inherently uncertain and thus may differ from theestimates. If actual returns differ significantly from the estimates, anadjustment to revenue in the current or subsequent period would be recorded. Substantiallyall of the product returns relate to breast implants. We believe our estimatesfor anticipated returns is a “critical accounting estimate” because it requiresus to estimate returns and, if actual returns vary, it could have a materialimpact on our reported sales and results of operations. Historically, ourestimates of return rates have not fluctuated from the actual returns by morethan 1% to 2%.

A portion of our revenue is generatedfrom consigned inventory of breast implants maintained at doctors, hospitalsand clinics locations. The customer is contractually obligated to maintain aspecific level of inventory and to notify us upon use. For these products,revenue is recognized at the time we are notified by the customer that theproduct has been implanted. Notification is usually through the replenishing ofthe inventory and we periodically review consignment inventories to confirmaccuracy of customer reporting. FDA regulations require tracking the sales ofall implanted products.

Our sales to independentdistributors are conducted under the same revenue recognition criteria as salesvia our direct sales force. Independent distributors do not have explicit orimplicit rights to return product and do not maintain consignment inventory.

41

----

Shipping and handling feesare recognized as a reduction to shipping and handling expense in selling,general and administrative. If recognized in net sales, the increase in salesand gross profit would be less than 1%.

*Inventories*

Inventories are stated atthe lower of cost or market using the first-in, first-out (FIFO) method. Wecapitalize inventory costs associated with certain product candidates prior toregulatory approval, based on our judgment of probable futurecommercialization. As of December 31, 2005, Inamed holds noinventory for product candidates not yet approved by regulatory agencies. Wewrite off inventory for estimated obsolescence or unmarketable inventory orwrite it down to the estimated market value based on assumptions about futuredemand and market conditions. We believe our estimates of inventory values is a“critical accounting estimate” because if actual future demand or marketconditions differ from those projected by us, additional inventory valuationadjustments may be required. In addition, we could be required to expensepreviously capitalized costs related to pre-approval inventory upon a change insuch judgment, due to, among other factors, a decision denying approval of theproduct candidate by the necessary regulatory bodies, which could have amaterial impact on our results of operations.

*Allowance forDoubtful Accounts*

We maintain allowances fordoubtful accounts for estimated losses resulting from the inability of some ofour customers to make required payments. The allowances for doubtful accountsare based on the analysis of historical bad debts, customer credit-worthiness,past transaction history with the customer, current economic trends, andchanges in customer payment terms. We believe our estimates for our allowancefor doubtful accounts is a “critical accounting estimate” because if thefinancial condition of our customers were to deteriorate, adversely affectingtheir ability to make payments, additional allowances may be required, whichcould have a material impact on our results of operations.

*Valuation ofLong-lived Assets and Goodwill*

We account for long-lived assets, other than goodwillin accordance with the provisions of SFAS No. 144, ‘‘Accounting for theImpairment and Disposal of Long Lived Assets.’’ SFAS No. 144 classifies long-lived assets as either (1) to beheld and used, (2) to be disposed of by other than sale, or (3) to bedisposed of by sale. This standard introduces a probability-weighted cash flowestimation approach to deal with situations in which alternative courses ofaction to recover the carrying amount of a long-lived asset are underconsideration or a range is estimated for the amount of possible future cashflows. SFAS No. 144 requires, among other things, that an entity reviewits long-lived assets and certain related intangibles for impairment wheneverchanges in circumstances indicate that the carrying amount of an asset may notbe fully recoverable. Factors we consider important that could trigger animpairment review include substantial operating losses, significant negativeindustry trends and significant changes in how we use an asset. Upon thedetermination that an impairment review is required we would compare the carryingamounts of the long-lived asset to its fair value, which is determined using adiscounted cash flow model. This model requires estimates of our futurerevenues, profits, capital expenditures, working capital and other relevantfactors. We estimate these amounts by evaluating our historical trends, currentbudgets, operating plans, and other industry data. If the assets are consideredto be impaired, the impairment charge is the amount by which the asset’scarrying value exceeds its fair value. As with all cash flow models there is aninherent subjectivity. The assumptions listed above could be different fromactual results which would in turn create a different valuation. If theseassumptions change in the future, we may be required to record impairment chargesfor those assets.

We account for goodwill and other intangible assets inaccordance with SFAS No. 142 ‘‘Goodwill and Other Intangible Assets.’’Under SFAS No. 142, goodwill is not amortized, but is tested forimpairment on 

42

----

an annual basis as of October 31,or more frequently as impairment indicators arise. The test for impairmentinvolves the use of estimates related to the fair values of the businessoperations with which goodwill is associated. In accordance with SFAS No. 142,we evaluate the fair value of the reporting unit in relation to its carryingvalue, including goodwill. As long as the fair value of the reporting unitexceeds its carrying value and no specific circumstances indicate a loss invalue for goodwill, no impairment charge will be recognized. If the fair valueof the reporting unit is less than the carrying value, we will measure theamount of the impairment loss and record an impairment charge based on adiscounted cash flow model. Other intangible assets are amortized using the straight-linemethod over their estimated useful lives, which are periods of up to 21 years. Inaccordance with SFAS No. 142, we reassess the estimated useful livesannually.

We believe the estimate ofour valuation of long-lived assets and goodwill is a ‘‘critical accountingestimate’’ because if circumstances arose that led to a decrease in thevaluation it could have a material impact on our results of operations.

*Income Taxes*

Deferred income tax assetsor liabilities are computed based on the temporary differences between thefinancial statement and income tax bases of assets and liabilities using thestatutory marginal income tax rate in effect for the years in which thedifferences are expected to reverse. Deferred income tax expenses or creditsare based on the changes in the deferred income tax assets or liabilities fromperiod to period. We record a valuation allowance to reduce our deferred taxassets to the amount that we believe is more likely than not to be realized. Weconsider our ability to carryback losses, forecasted earnings, and futuretaxable income and feasible tax planning strategies in determining the need forand amount of a valuation allowance. We believe the estimate of our income tax assets, liabilities andexpense are “critical accounting estimates” because if the actual income taxassets, liabilities and expenses differ from our estimates, the outcome couldhave a material impact on our results of operations.

*Litigation*

We are involved in variouslitigation matters as a claimant and as a defendant. We record any amountsrecovered in these matters when collection is certain. We record liabilitiesfor claims against us when the losses are probable and can be reasonablyestimated. Amounts recorded are based on reviews by outside counsel, in-housecounsel, and management. We believe that our estimate for litigationliabilities is a ‘‘critical accounting estimate’’ because actual amounts maydiffer from estimates and may materially impact our results of operations.

*Product Warranties*

We have accruals for ourwarranty programs for our breast implant sales in the United States, Europe,and certain other countries. We estimate the amount of potential future claimsfrom this warranty based on actuarial analysis. Expected future obligations aredetermined based on the history of product shipments and claims and arediscounted to a current value. The liability is included in both the currentand long-term liabilities in the balance sheet. Substantially all of theproduct warranty liability arises from the U.S. warranty program. The U.S.plan, in most cases, provides lifetime product replacement and one thousand twohundred dollars of financial assistance for surgical procedures within tenyears of implantation. The warranty programs in non-U.S. markets have similarterms and conditions to the U.S. plan. We do not currently offer a warranty onour facial or health products, and therefore no amount is included in theliability for those products. We do not warrant any level of aesthetic resultand, as required by government regulation, make extensive disclosuresconcerning the risks of our products and implantation surgery. We believe thatour estimate for product warranties is a “critical accounting estimate” becauseit requires us to estimate failure rates, claim amounts, and discount rates. Changesto 

43

----

actualclaims and interest rates could have a material impact on the actuarialcalculation which could materially impact our reported expenses and results ofoperations.

*Recent Pronouncements*

In November 2004, theFASB issued SFAS No. 151 “Inventory Costs—An Amendment of ARB No. 43,Chapter 4” (SFAS 151). SFAS 151 requires abnormal amounts of idle facility expense, freight, handling costs, andwasted material be recognized as current-period charges. In addition, SFAS 151requires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities. Thisstatement is applicable to fiscal years beginning after June 15, 2005. TheCompany does not anticipate the adoption of SFAS 151 will have a materialimpact on its financial position or results from operations.

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, Inamed’s operationsare exposed to fluctuations in interest rates and foreign currencies. Thesefluctuations can vary our cost of financing and operations.

Interest Rate Exposure—Based on Inamed’s overallinterest rate exposure at December 31, 2005, which was variable rate debt,a hypothetical 10% change in interest rates applied to the outstanding debt asof December 31, 2005, would have no material impact on earnings, cashflows, or fair values of interest rate risk sensitive instruments over aone-year period.

Foreign Currency Exposure—Inamed’s foreign currencyrisk exposure results from fluctuating currency exchange rates, primarily themovement of the U.S. dollar relative to the Euro and Yen. Inamed’stransactional currency exposures arise when Inamed or one of its subsidiariesenter into transactions denominated in currencies other than their localcurrency. Inamed also faces currency exposure arising from the translation ofthe financial results of Inamed’s global operations into U.S. dollars atexchange rates that have fluctuated during the reporting period.

There were no foreignexchange forward or option contracts at December 31, 2005 or 2004.   Based on Inamed’s overall exposure forforeign currency at December 31, 2005, a hypothetical 10% change inforeign currency rates would not have a material impact on its balance sheet,net income, or cash flows over a one-year period.

**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

The Financial Statementsbegin on page F-1.

**ITEM 9.**                CHANGESIN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM 9A.**        CONTROLS AND PROCEDURES

Under the supervision and with the participation ofour management, including our principal executive officer and principalfinancial officer, we evaluated the effectiveness of our disclosure controlsand procedures, as such term is defined in Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended. Based upon thisevaluation, our principal executive officer and principal financial officerconcluded that our disclosure controls and procedures were effective as of theend of the period covered by this annual report.

44

----

There were no significantchanges in our internal control over financial reporting during the threemonths ended December 31, 2005 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

**Management Report on Internal Control Over FinancialReporting**

Management of Inamed Corporation (“Inamed”) isresponsible for establishing and maintaining effective internal control overfinancial reporting as is defined in the Securities Exchange Act of 1934 Rule 13a-15(f).The consolidated financial statements and other information presented in thisAnnual Report have been prepared in accordance with accounting principlesgenerally accepted in the United States. Inamed’s internal control system wasdesigned to provide reasonable assurance to the Company’s management and boardof directors regarding the preparation and fair presentation of publishedfinancial statements. All internal control systems, no matter how welldesigned, have inherent limitations. Therefore, even those systems determinedto be effective can provide only reasonable assurance with respect to financialstatement preparation and presentation.

Management of Inamed assessed its internal controlover financial reporting as of December 31, 2005 in relation to thecriteria for effective internal control established in “InternalControl-Integrated Framework” issue by the Committee of Sponsoring Organizationsof the Treadway Commission.

Based on this assessment, management determined that,as of December 31, 2005, Inamed maintained effective internal control overfinancial reporting.

KPMG LLP, our independentregistered public accounting firm, has issued an attestation report onmanagement’s assessment of internal control over financial reporting. Thisreport appears on page F-1 of this annual report.

**ITEM 9B**.  OTHERINFORMATION

None.

45

----

**PART III**

**ITEM 10.**         DIRECTORSAND EXECUTIVE OFFICERS OF INAMED

The information requiredin this item is incorporated herein by reference to the information under thecaptions “Elections of Directors”, “Compliance with Section 16(a) ofthe Exchange Act” and “Code of Ethics” of the registrant’s Proxy Statement forAnnual Meeting of Stockholders to be filed with the Securities and ExchangeCommission not later than April 30, 2006.

**ITEM 11.**         EXECUTIVECOMPENSATION

The information requiredin this item is incorporated herein by reference information under the heading “ExecutiveCompensation” of the registrant’s Proxy Statement for Annual Meeting ofStockholders to be filed with the Securities and Exchange Commission not laterthan April 30, 2006.

**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

Theinformation required in this item is incorporated herein by reference theinformation under the captions “Security Ownership of Certain Beneficial Ownersand Management” and “Securities Authorized for Issuances Under EquityCompensation Plans” of the registrant’s Proxy Statement for Annual Meeting ofStockholders to be filed with the Securities and Exchange Commission not laterthan April 30, 2006.

| ** **                                              | ** ** | **Authorized  shares** | ** ** | **Number of  securities to be  issued upon the  exercise of  outstanding  options** | ** ** | **Weighted average  exercise price of  outstanding options** | ** ** | **Number of securities  remaining available for  future issuance** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| The 1993 Plan                                           |       | 225,000                |       |                                                                                                              | 30,000     |                                                                             |       |                                                                                        | $          | 18.45 |   |   |   | — |   |   |
| The 1998 Plan                                           |       | 675,000                |       |                                                                                                              | 53,377     |                                                                             |       |                                                                                        | $          | 58.28 |   |   |   | 27,499 |   |   |
| The 1999 Program                                        |       | 1,350,000              |       |                                                                                                              | 214,917    |                                                                             |       |                                                                                        | $          | 47.18 |   |   |   | 173,665 |   |   |
| The 2000 Option  Plan                                   |       | 2,287,500              |       |                                                                                                              | 629,048    |                                                                             |       |                                                                                        | $          | 45.07 |   |   |   | 15,496 |   |   |
| The 2003 Outside  Director Plan                         |       | 225,000                |       |                                                                                                              | 120,000    |                                                                             |       |                                                                                        | $          | 54.44 |   |   |   | 105,000 |   |   |
| The 2004 Plan                                           |       | 500,000                |       |                                                                                                              | —     |                                                                             |       |                                                                                        | $          | — |   |   |   | 500,000 |   |   |
| Equity compensation plans approved by Stockholders      |       | 5,262,500              |       |                                                                                                              | 1,047,342  |                                                                             |       |                                                                                        | $          | 46.49 |   |   |   | 821,660 |   |   |
| Stand Alone Options, not approved by  Stockholders |       | 2,426,250              |       |                                                                                                              | —     |                                                                             |       |                                                                                        | $          | — |   |   |   | 300,000 |   |   |
| Total                                                   |       | 7,688,750              |       |                                                                                                              | 1,047,342  |                                                                             |       |                                                                                        | $          | 46.49 |   |   |   | 1,121,660 |   |   |

 

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

The information requiredin this item is incorporated herein by reference to information under thecaption “Certain Relationships and Related Transactions” of the registrant’sProxy Statement for Annual Meeting of Stockholders to be filed with theSecurities and Exchange Commission not later than April 30, 2006.

**ITEM 14.**         PRINCIPALACCOUNTING FEES AND SERVICES

The information required in this item is incorporatedherein by reference to information under the caption “Independent PublicAccountants” of the registrant’s Proxy Statement for Annual Meeting ofStockholders to be filed with the Securities and Exchange Commission not laterthan April 30, 2006.

46

----

**PART IV**

**ITEM15.   EXHIBITS, FINANCIAL STATEMENTSCHEDULES**

| *(a)*  | *Index to**Financial Statements and  Financial Statement Schedule* |                                                                                                                                |   |
|--------|--------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | (a)(1)                                                             | Consolidated Financial Statements:                                                                                                  |   |   |
|        |                                                               | Reports  of Independent Registered Public Accounting Firm                                                                           |   | F-1 |
|   |                                                               | Consolidated  Balance Sheets as of December 31, 2005 and 2004                                                                  |   | F-4 |
|   |                                                               | Consolidated  Statements of Operations for three years ended December 31, 2005                                                 |   | F-5 |
|   |                                                               | Consolidated  Statements of Stockholders’ Equity and Comprehensive Income (Loss) for three  years ended December 31, 2005 |   | F-6 |
|   |                                                               | Consolidated  Statements of Cash Flows for three years ended December 31, 2005                                                 |   | F-7 |
|   |                                                               | Notes  to Consolidated Financial Statements                                                                                         |   | F-8 |
|   | (a)(2)                                                             | Consolidated Financial Statement Schedules:                                                                                         |   |   |
|   |                                                               | Schedule II—Valuation  accounts                                                                                                |   | S-2 |
|   |                                                               | All other schedules are  omitted because the required information is not present or is not required.                                |
|   | (a)(3)                                                             | *Exhibits*                                                                                                                          |   |   |

 

The following exhibits arefiled as part of this Annual Report on Form 10-K.
| Exhibit   No. | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **Description** |
|---------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 2.1           |       | Agreement and Plan of Merger, dated as of  March 20, 2005, by and among Medicis Pharmaceutical Corporation, a  Delaware corporation, Masterpiece Acquisition Corp., a Delaware corporation,  and Inamed Corporation. (Incorporated herein by reference to Exhibit 2.1  of Inamed’s Current Report on Form 8-K filed with the Commission  on March 21, 2005.) |
| 2.2           |       | Agreement and Plan of Merger, dated as of  December 20, 2005, by and among Allergan, Inc., a Delaware  corporation, Banner Acquisition, Inc., a Delaware corporation, and  Inamed Corporation. (Incorporated herein by reference to Exhibit 2.2 of  Inamed’s Current Report on Form 8-K filed with the Commission on  December 21, 2005.)          |
| 3.1           |       | Inamed’s Restated Certificate of Incorporation, as  amended December 22, 1998. (Incorporated herein by reference to  Exhibit 3.1 of Inamed’s Annual Report on Form 10-K filed with  the Commission on March 29, 1999.                                                                                                                                   |
| 3.2           |       | Inamed’s By-Laws, as amended December 22, 1998.  (Incorporated herein by reference to Exhibit 3.2 of Inamed’s Annual  Report on Form 10-K filed with the Commission on March 29,  1999.                                                                                                                                                                 |
| 4.1           |       | Amended and Restated Rights Agreement. (Incorporated  by reference to Exhibit 4.1 of Inamed’s Current Report on Form 8-K  filed with the Commission on November 19, 1999.)                                                                                                                                                                                        |
| 4.2           |       | Amendment No. 1 to the Amended and Restated  Rights Agreement. (Incorporated by reference to Exhibit 4.1 of Inamed’s  Current Report on Form 8-K filed with the Commission on  December 30, 1999.)                                                                                                                                                           |
| 4.3           |       | Amendment No. 2 to the Amended and Restated  Rights Agreement. (Incorporated by reference to Exhibit 4.5 of Inamed’s  Annual Report on Form 10-K filed with the Commission on  March 29, 2002.)                                                                                                                                                              |
| 4.4           |       | Amendment No. 3 to the Amended and Restated  Rights Agreement. (Incorporated by reference to Exhibit 4.4 of Inamed’s  Registration Statement of Form 8-A/A field with the Commission on  March 21, 2005.)                                                                                                                                                    |

47

----

 
| 4.5   |   | Amendment No. 4 to  the Amended and Restated Rights Agreement. (Incorporated by reference to  Exhibit 4.5 of Inamed’s Registration Statement of Form 8-A/A  field with the Commission on December 22, 2005.)                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.6   |   | Form of Specimen Stock Certificate  (Incorporated herein by reference to Exhibit 4.3 of Inamed’s  Registration Statement on Form S-3 filed with the Commission on  March 29, 1996).                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.6# |   | Option agreement for Nicholas L. Teti, dated  July 23, 2001. (Incorporated herein by reference to Exhibit 10.6 of  Inamed’s Annual Report on Form 10-K filed with the Commission on  March 29, 2002.)                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.7# |   | Option agreement for Hani Zeini, dated  September 28, 2001. (Incorporated herein by reference to  Exhibit 10.7 of Inamed’s Annual Report on Form 10-K filed  with the Commission on March 29, 2002.)                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.8# |   | Employment agreement with Nicholas L. Teti dated as  of July 23, 2001. (Incorporated herein by reference to Exhibit 10.7  of Inamed’s Quarterly Report on Form 10-Q filed with the  Commission on November 14, 2001.)                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.9  |   | Standard Industrial Lease—Multi-Tenant, Full, Net,  dated October 27, 1993, by and between the Equitable Life Assurance  Society of the United States and Collagen Corporation, as amended by  Amendment Number One, dated July 8, 1995, and Second Amendment to Lease,  dated August 7, 1998, by and between AMB Property, L.P.,  Successor-in-Interest to the Equitable Life Assurance Society of the United  States and Collagen Corporation, for 48340 Milmont Drive, Fremont,  California (Incorporated herein by reference to Exhibit 10.9 to Inamed’s  Annual Report on From 10-K filed with the Commission on  March 29,2002). |
| 10.10 |   | Lease dated May 23, 1989 by and between Ekwill  Partners, Ltd. and McGhan Medical Corporation, as amended by First Amendment  of Lease dated August 20, 1992, and Second Amendment of Lease dated  May 8, 1996, for 5540 Ekwill Street, Santa Barbara, California.  (Incorporated herein by reference to Exhibit 10.10 of Inamed’s Annual  Report on Form 10-K/A filed with the Commission on April 29,  2005.)                                                                                                                                                                                                                             |
| 10.11 |   | Lease Agreement, dated May 1, 1996, by and  between Ekwill Partners, Ltd. and McGhan Medical Corporation, as amended by  First Amendment to Lease Agreement dated May 4, 1996 and Second  Amendment to Lease Agreement dated May 21, 2002, for 5520 Ekwill Street,  Santa Barbara, California. (Incorporated herein by reference to  Exhibit 10.11 of Inamed’s Annual Report on Form 10-K/A filed  with the Commission on April 29, 2005.)                                                                                                                                                                                                  |
| 10.12 |   | Lease Agreement by and between Zona Franca  Metropólitana, S.A., and McGhan Medical Corporation dated as of May 13,  1999 for Leased Premises in Barreal de Heredia, within Metro Free Zone, Costa  Rica. (Incorporated herein by reference to Exhibit 10.12 of Inamed’s  Annual Report on Form 10-K filed with the Commission on  March 29, 2002.)                                                                                                                                                                                                                                                                                              |
| 10.13 |   | Contract of Operation by and between La Promotora de  Comércio Exterior de Costa Rica and McGhan Médico, S.A., dated  November 30, 1999. (Incorporated herein by reference to  Exhibit 10.13 of Inamed’s Annual Report on Form 10-K filed  with the Commission on March 29, 2002.)                                                                                                                                                                                                                                                                                                                                                          |
| 10.14 |   | Sublease Agreement by and between McGhan Medical  Corporation and Agility Communications, Inc. dated as of  January 28, 2000 for 600 Ward Drive, Santa Barbara, California.  (Incorporated herein by reference to Exhibit 10.14 of Inamed’s Annual  Report on Form 10-K filed with the Commission on March 29,  2002.)                                                                                                                                                                                                                                                                                                                           |
| 10.15 |   | Lease by and between Rockber Partners, LLC, and  McGhan Medical Corporation dated as of November 16, 1999 for 71 South  Los Carneros, Santa Barbara, California. (Incorporated herein by reference to  Exhibit 10.15 of Inamed’s Annual Report on Form 10-K filed  with the Commission on March 29, 2002.)                                                                                                                                                                                                                                                                                                                                            |

48

----

 
| 10.17  |   | Sub-Lease by and between  the Industrial Development Authority and McGhan Limited dated as of  August 29, 1990 for Kilbride Industrial Estate, Arklow, County Wicklow,  Ireland. (Incorporated herein by reference to Exhibit 10.17 of Inamed’s  Annual Report on Form 10-K filed with the Commission on  March 29, 2002.)                                                                                   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.19  |   | Lease Agreement by and between Allman Equities  Limited and Chamfield Limited dated as of September 20, 1994 for  Kilbride Industrial Estate, Arklow, County Wicklow, Ireland. (Incorporated  herein by reference to Exhibit 10.19 of Inamed’s Annual Report on Form 10-K  filed with the Commission on March 29, 2002.)                                                                                     |
| 10.20  |   | Agreement by and between Allman Equities Limited and  Chamfield Limited dated as of September 25, 1994 for the right to  surrender that Lease dated September 20, 1994 for Kilbride Industrial  Estate, Arklow, County Wicklow, Ireland. (Incorporated herein by reference to  Exhibit 10.20 of Inamed’s Annual Report on Form 10-K filed  with the Commission on March 29, 2002.)                      |
| 10.26  |   | Standard Industrial/Commercial Single-Tenant Lease  dated November 1, 1997 by and between Eleanor H. Simpson, Trustee for  the Eleanor H. Simpson Trust dated as of June 28, 1977 and BioEnterics  Corporation for 1125 Mark Avenue, Carpinteria, California. (Incorporated  herein by reference to Exhibit 10.26 of Inamed’s Annual Report on Form 10-K  filed with the Commission on March 29, 2002.) |
| 10.39  |   | United States Distribution agreement dated  June 14, 1996 between Biomatrix, Inc. and Collagen Corporation.  (Incorporated herein by reference to Exhibit 10.39 of Inamed’s Quarterly  Report on Form 10-Q filed with the Commission on August 19,  2002.)                                                                                                                                              |
| 10.40  |   | International Distribution agreement dated  June 14, 1996 between Biomatrix, Inc. and Collagen Corporation.  (Incorporated herein by reference to Exhibit 10.39 of Inamed’s Quarterly  Report on Form 10-Q filed with the Commission on August 19,  2002.)                                                                                                                                              |
| 10.41* |   | Development Agreement and Amendment to United States  Distribution Agreement dated September 30, 2002 between Genzyme  Biosurgery Corporation and Inamed Corporation. (Incorporated herein by  reference to Exhibit 10.41of Inamed’s Quarterly Report on Form10-Q  filed with the Commission on November 14, 2002).                                                                                               |
| 10.42  |   | Transition and Advisory Agreement dated  July 2002 by and between Richard G. Babbitt and BIA Advisors, Inc.  and Inamed Corporation. (Incorporated herein by reference to  Exhibit 10.42of Inamed’s Quarterly Report on Form 10-Q filed  with the Commission on November 14, 2002.)                                                                                                                     |
| 10.43# |   | Employment Agreement by and between Inamed  Corporation and Robert Vaters, dated January 21, 2003. (Incorporated herein  by reference to Inamed’s Quarterly Report on Form 10-Q filed with  the Commission on August 14, 2003.)                                                                                                                                                                                   |
| 10.44  |   | Credit Agreement, dated as of July 25, 2003, by  and among the Company, certain of its subsidiaries and the Lenders set forth  on the signature page to the Credit Agreement. (Incorporated herein by  reference to Exhibit 99.1 of Inamed’s Form 8-K filed with the  Commission on August 8, 2003.)                                                                                                    |
| 10.45  |   | Security Agreement, dated as of July 25, 2003,  by and among the Company, certain of its subsidiaries and the Lenders set  forth on the signature page of the Security Agreement. (Incorporated  herein by reference to Exhibit 99.2 of Inamed’s Form 8-K  filed with the Commission on August 8, 2003.)                                                                                                |
| 10.46# |   | Inamed Corporation 2000 Employee Stock Purchase Plan  restated as of May 12, 2003. (Incorporated herein by reference to Annex  A of Inamed’s 2003 Proxy Statement on Schedule 14A filed with the Commission  on June 13, 2003.)                                                                                                                                                                                        |

49

----

 
| 10.47# |   | Inamed Corporation 2003  Restricted Stock Plan (as amended). (Incorporated herein by reference to  Annex B of Inamed’s 2003 Proxy Statement on Schedule 14A filed with the  Commission on June 13, 2003.)                                                                                                                                                                                            |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.48# |   | Inamed Corporation 2003 Outside Director  Compensation Plan as of May 12, 2003. (Incorporated herein by reference  to Annex C of Inamed’s 2003 Proxy Statement on Schedule 14A filed with the  Commission on June 13, 2003.)                                                                                                                                                                    |
| 10.49# |   | Employment Agreement by and between Inamed  Corporation and Joseph A. Newcomb, dated August 1, 2003. (Incorporated  herein by reference to Inamed’s Quarterly Report on Form 10-Q  filed with the Commission on November 14, 2003.)                                                                                                                                                        |
| 10.50* |   | Settlement Agreement dated as of June 21, 2004  by and between Ethicon Endo-Surgery, Inc., Lubomyr I. Kuzmak, M.D.,  Inamed Corporation, Inamed Development Company and BioEnterics Corporation  (Incorporated by reference herein by reference to Exhibit 10.50 to  Inamed’s Quarterly Report on Form 10-Q filed with the Commission  on August 9, 2004).                       |
| 10.51# |   | Change in Control Agreement by and between Inamed  Corporation and Patricia Walker, dated January 10, 2005.  (Incorporated herein by reference to Exhibit 10.51 of Inamed’s Quarterly  Report on Form 10-Q/A filed with the Commission on May 11,  2005.)                                                                                                                        |
| 10.52* |   | Amended and Restated United States Distribution  Agreement dated November 29, 2004 by and between Inamed Medical Products  Corporation and Genzyme Corporation. (Incorporated herein by reference to  Exhibit 10.52 of Inamed’s Annual Report on Form 10K filed with the  Commission on March 16, 2005.)                                                                              |
| 10.53# |   | Inamed Corporation 1998 Stock Option Plan  (Incorporated herein by reference to Exhibit 10.32 to Inamed’s Annual  Report on Form 10-K filed with the Commission on March 29,  2002).                                                                                                                                                                                                       |
| 10.54# |   | Inamed Corporation 2000 Stock Option Plan  (Incorporated herein by reference to Exhibit 10.34 to Inamed’s Annual  Report on Form 10-K filed with the Commission on March 29,  2002).                                                                                                                                                                                                       |
| 10.55# |   | Inamed Corporation 2004 Performance Stock Option  Plan (Incorporated herein by reference to Inamed’s Definitive Proxy Statement  on Schedule 14A filed with the Commission on April 29, 2005).                                                                                                                                                                                                       |
| 10.56  |   | Lease Agreement dated October 1, 2002 by and  between General Electric Capital Corporation and Inamed Corporation, as  amended by Amendment to Facility Lease, dated October 1, 2002, for 48490  Milmont Drive, Fremont, California. (Incorporated herein by reference to  Exhibit 10.56 of Inamed’s Annual Report on Form 10-K/A filed  with the Commission on April 29, 2005.) |
| 10.57# |   | Inamed Corporation Non-Employee Director Stock  Option Plan (Incorporated herein by reference to Exhibit 10.31 to  Inamed’s Annual Report on Form 10-K filed with the Commission on  March 29, 2002).                                                                                                                                                                                      |
| 10.58# |   | Inamed Corporation 1999 Stock Option Plan. (Incorporated  herein by reference to Exhibit 10.58 of Inamed’s Annual Report on Form 10K  filed with the Commission on March 16, 2005.)                                                                                                                                                                                                        |
| 10.59# |   | Inamed Corporation 1999 Directors’ Stock Election  Plan (Incorporated herein by reference to Exhibit 10.33 to Inamed’s  Annual Report on Form 10-K filed with the Commission on  March 29, 2002).                                                                                                                                                                                     |
| 10.60# |   | Employment Agreement by and between Inamed  Corporation and Hani Zeini, dated September 10, 2001. (Incorporated  herein by reference to Exhibit 10.60 of Inamed’s Annual Report on  Form 10-K/A filed with the Commission on April 29, 2005.)                                                                                                                                         |

50

----

 
| 10.61# |   | Change in Control Agreement by and between Inamed  Corporation and Hani Zeini, dated April 18, 2002. (Incorporated herein  by reference to Exhibit 10.61 of Inamed’s Annual Report on Form 10-K/A  filed with the Commission on April 29, 2005.)                                                                                                                                                             |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.62# |   | Employment Agreement by and between Inamed  Corporation and Vicente Trelles, effective January 21, 2003.  (Incorporated herein by reference to Exhibit 10.61 of Inamed’s Annual  Report on Form 10-K/A filed with the Commission on April 29,  2005.)                                                                                                                                                        |
| 10.63  |   | Merger Termination Agreement, dated as of  December 13, 2005, by and among Medicis Pharmaceutical Corporation, a  Delaware corporation, Masterpiece Acquisition Corp., a Delaware corporation  and a wholly owned subsidiary of Parent, and Inamed Corporation.  (Incorporated herein by reference to Exhibit 10.63 of Inamed’s Current Report  on Form 8-K filed with the Commission on December 13, 2005.) |
| 10.64  |   | 2005 First Amendment to Amended and Restated  Employment Agreement, dated as of December 14, 2005, by and between  Inamed Corporation and Nicholas L. Teti. (Incorporated herein by reference to  Exhibit 10.64 of Inamed’s Current Report on Form 8-K filed  with the Commission on December 29, 2005.)                                                                                                     |
| 10.65  |   | 2005 First Amendment to Employment Agreement, dated  as of December 14, 2005, by and between Inamed Corporation and Joseph A.  Newcomb. (Incorporated herein by reference to Exhibit 10.64 of Inamed’s  Current Report on Form 8-K filed with the Commission on  December 29, 2005.)                                                                                                                         |
| 21.0   |   | Subsidiaries of registrant.                                                                                                                                                                                                                                                                                                                                                                                                           |
| 23.1   |   | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.1   |   | Certification of Chief Executive Officer, pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                 |
| 31.2   |   | Certification of Chief Financial Officer, pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                 |
| 32.1   |   | Certification of Chief Executive Officer, pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                 |
| 32.2   |   | Certification of Chief Financial Officer, pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                 |

----

*       Portionsof this exhibit (indicated by asterisk) have been omitted pursuant to a requestfor confidential treatment and have been filed separately with the Commission.

#      Indicatesmanagement contract or compensatory plan.

51

----

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant caused this Annual Report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

|        | INAMED CORPORATION |
|--------|--------------------|
|   | By:                | /s/ NICHOLAS L. TETI |
|   |               | Nicholas L. Teti |
|   |               | *Chairman, President and Chief Executive Officer* |
|   |               | March 22, 2006 |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this Annual Reporthas been signed below by the following persons on behalf of the registrant andin the capacities and on the dates indicated.

| /s/ NICHOLAS L. TETI             |   | Chairman, President and Chief Executive Officer |   | March 22,  2006 |
|----------------------------------|--------|-------------------------------------------------|--------|----------------------|
| Nicholas L. Teti                 |   | (Principal Executive Officer)                   |   |                 |
| /s/ DECLAN  DALY                 |   | Executive Vice President  and                   |   | March 22,  2006 |
| Declan Daly                      |   | Chief Financial Officer                         |   |                 |
|                             |   | (Principal Financial and Accounting Officer)    |   |                 |
| /s/ JOY  A. AMUNDSON             |   | Director                                        |   | March 22,  2006 |
| Joy A. Amundson                  |   |                                            |   |                 |
| /s/  MALCOLM R. CURRIE, PH.D.    |   | Director                                        |   | March 22,  2006 |
| Malcolm R.  Currie, Ph.D.        |   |                                            |   |                 |
| /s/  JOHN C. MILES II            |   | Director                                        |   | March 22,  2006 |
| John C. Miles II                 |   |                                            |   |                 |
| /s/  MITCHELL S. ROSENTHAL, M.D. |   | Director                                        |   | March 22,  2006 |
| Mitchell S.  Rosenthal, M.D.     |   |                                            |   |                 |
| /s/  TERRY E. VANDEWARKER        |   | Director                                        |   | March 22,  2006 |
| Terry E.  Vandewarker            |   |                                            |   |                 |

 

52

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

TheBoard of Directors and Stockholders

Inamed Corporation:

We have audited management’s assessment, included inthe accompanying Management Report on Internal Control Over FinancialReporting, appearing under Item 9A, thatInamed Corporation maintained effective internal control over financialreporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO). InamedCorporation’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that InamedCorporation maintained effective internal control over financial reporting asof December 31, 2005, is fairly stated, in all material respects, based oncriteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Also, in our opinion,Inamed Corporation maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2005, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

F-1

----

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balancesheets of Inamed Corporation andsubsidiaries as of December 31, 2005 and 2004, and the related consolidated statements ofoperations, stockholders’ equity and comprehensive income (loss), and cash flowsfor each of the years in the three-year period ended December 31, 2005,and our report dated March 22,2006 expressed an unqualifiedopinion on those consolidated financial statements.
| /s/ KPMG LLP             |   |
|--------------------------|--------|
| Los Angeles,  California |   |
| March 22,  2006     |   |

 

F-2

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

TheBoard of Directors and Stockholders

Inamed Corporation:

We have audited the accompanying consolidated balancesheets of Inamed Corporation and subsidiaries as of December 31, 2005 and2004, and the related consolidated statements of operations, stockholders’equity and comprehensive income (loss), and cash flows for each of the years inthe three-year period ended December 31, 2005. In connection with ouraudits of the consolidated financial statements, we also have audited therelated financial statement schedule. These consolidated financial statementsand the financial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Inamed Corporation and subsidiaries as of December 31, 2005and 2004, and the results of theiroperations and their cash flowsfor each of the years in the three-year period ended December 31, 2005, inconformity with U.S. generally accepted accounting principles. Also in ouropinion, the related financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentfairly, in all material respects, the information set forth therein.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of Inamed Corporation’sinternal control over financial reporting as of December 31, 2005, basedon criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated March 22,2006 expressed an unqualified opinionon management’s assessment of, and the effective operation of, internal controlover financial reporting.

| /s/ KPMG LLP             |   |
|--------------------------|--------|
| Los Angeles,  California |   |
| March 22,  2006     |   |

 

F-3

----

**INAMED CORPORATION AND SUBSIDIARIESConsolidated Balance SheetsAs of December 31, 2005 and 2004(millions, except par value)**

| ** **                                                                                                                            | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                            |       |                        |       |                        |       |   |   |   |   |
| Current assets:                                                                                                                       |       |                        |       |                        |       |   |   |   |   |
| Cash and cash equivalents                                                                                                             |       |                        | $          | 111.7                       |       |   |   | $ | 107.2 |   |   |
| Short-term investments                                                                                                                |       |                        | —     |                        |       |   | 23.1 |   |   |
| Trade accounts receivable, net of allowances of  $15.2 and $18.7 in 2005 and 2004, respectively                                       |       |                        | 78.7       |                        |       |   | 69.2 |   |   |
| Inventories, net                                                                                                                      |       |                        | 63.3       |                        |       |   | 56.0 |   |   |
| Prepaid expenses and other current assets                                                                                             |       |                        | 13.2       |                        |       |   | 13.5 |   |   |
| Income taxes receivable                                                                                                               |       |                        | 4.8        |                        |       |   | — |   |   |
| Deferred income taxes                                                                                                                 |       |                        | 6.3        |                        |       |   | 10.2 |   |   |
| Total current assets                                                                                                                  |       |                        | 278.0      |                        |       |   | 279.2 |   |   |
| Property and equipment, net                                                                                                           |       |                        | 64.4       |                        |       |   | 62.5 |   |   |
| Goodwill                                                                                                                              |       |                        | 136.2      |                        |       |   | 151.9 |   |   |
| Other intangible  assets, net                                                                                                         |       |                        | 46.5       |                        |       |   | 50.9 |   |   |
| Deferred income  taxes                                                                                                                |       |                        | 22.0       |                        |       |   | 22.8 |   |   |
| Other assets                                                                                                                          |       |                        | 1.3        |                        |       |   | 2.8 |   |   |
| Total assets                                                                                                                          |       |                        | $          | 548.4                       |       |   |   | $ | 570.1 |   |   |
| **Liabilities  and Stockholders’ Equity**                                                                                        |       |                        |       |                        |       |   |   |   |   |
| Current  liabilities:                                                                                                                 |       |                        |       |                        |       |   |   |   |   |
| Current portion of long-term debt                                                                                                     |       |                        | $          | 5.0                         |       |   |   | $ | 12.5 |   |   |
| Accounts payable                                                                                                                      |       |                        | 33.3       |                        |       |   | 20.8 |   |   |
| Income taxes payable                                                                                                                  |       |                        | 0.4        |                        |       |   | 6.2 |   |   |
| Accrued liabilities and other                                                                                                         |       |                        | 40.0       |                        |       |   | 41.5 |   |   |
| Total current liabilities                                                                                                             |       |                        | 78.7       |                        |       |   | 81.0 |   |   |
| Long-term debt, net of current portion                                                                                                |       |                        | —     |                        |       |   | 10.0 |   |   |
| Other long-term  liabilities                                                                                                          |       |                        | 19.4       |                        |       |   | 32.8 |   |   |
| Commitments and  contingencies (see notes 18 and 20)                                                                                  |       |                        |       |                        |       |   |   |   |   |
| Stockholders’  equity:                                                                                                           |       |                        |       |                        |       |   |   |   |   |
| Common stock, $0.01 par value; authorized 100.0  shares; issued and outstanding 36.9 and 35.9 shares for 2005 and 2004,  respectively |       |                        | 0.4        |                        |       |   | 0.4 |   |   |
| Additional paid-in capital                                                                                                            |       |                        | 292.2      |                        |       |   | 244.8 |   |   |
| Retained earnings                                                                                                                     |       |                        | 165.8      |                        |       |   | 192.0 |   |   |
| Deferred compensation                                                                                                                 |       |                        | (8.5       | )                           |       |   | (4.8 | ) |   |
| Accumulated other comprehensive income                                                                                                |       |                        | 0.4        |                        |       |   | 13.9 |   |   |
| Total stockholders’ equity                                                                                                       |       |                        | 450.3      |                        |       |   | 446.3 |   |   |
| Total liabilities  and stockholders’ equity                                                                                      |       |                        | $          | 548.4                       |       |   |   | $ | 570.1 |   |   |

 

See accompanying notes to consolidated financial statements.

F-4

----

**INAMED CORPORATION AND SUBSIDIARIESConsolidated Statementsof OperationsFor the Three Years Ended December 31, 2005(millions, except per share data)**

| ** **                                       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                                        |       | $        | 437.8      |     | $          | 384.4    |       | $ | 332.6 |   |
| Cost of goods  sold                              |       | 120.8    |       | 107.8    |       | 98.8     |       |
| Gross profit                                     |       | 317.0    |       | 276.6    |       | 233.8    |       |
| Operating  expenses:                             |       |     |       |     |       |     |       |
| Selling, general and administrative              |       | 188.4    |       | 169.8    |       | 135.8    |       |
| Research and development                         |       | 38.8     |       | 28.8     |       | 21.5     |       |
| Restructuring charges                            |       | (0.7     | )          | —   |       | —   |       |
| Amortization of intangible assets                |       | 5.4      |       | 5.0      |       | 4.0      |       |
| Total operating expenses                         |       | 231.9    |       | 203.6    |       | 161.3    |       |
| Operating income                                 |       | 85.1     |       | 73.0     |       | 72.5     |       |
| Other (expense)  income:                         |       |     |       |     |       |     |       |
| Net interest income (expense) and debt costs     |       | 2.7      |       | 0.5      |       | (9.4     | )          |
| Foreign currency transaction (losses) gains, net |       | (0.6     | )          | 0.1      |       | (0.1     | )          |
| Merger expense (Note 1)                          |       | (91.7    | )          | —   |       | —   |       |
| Royalty income and other income                  |       | 3.8      |       | 4.7      |       | 4.2      |       |
| Total other (expense) income, net                |       | (85.8    | )          | 5.3      |       | (5.3     | )          |
| (Loss) income before income tax expense          |       | (0.7     | )          | 78.3     |       | 67.2     |       |
| Income tax  expense                              |       | 25.5     |       | 15.2     |       | 14.2     |       |
| Net (loss) income                                |       | $        | (26.2      | )        | $          | 63.1     |       | $ | 53.0 |   |
| Net (loss) income  per share of common stock:    |       |     |       |     |       |     |       |
| Basic                                            |       | $        | (0.72      | )        | $          | 1.77     |       | $ | 1.54 |   |
| Diluted                                          |       | $        | (0.72      | )        | $          | 1.75     |       | $ | 1.51 |   |
| Weighted average  shares outstanding:            |       |     |       |     |       |     |       |
| Basic                                            |       | 36.3     |       | 35.6     |       | 34.5     |       |
| Diluted                                          |       | 36.3     |       | 36.0     |       | 35.2     |       |

 

See accompanying notes to consolidated financial statements.

F-5

----

**INAMED CORPORATION AND SUBSIDIARIESConsolidated Statementsof Stockholders’ Equity and Comprehensive Income (Loss)For the Three Years Ended December 31, 2005(millions)**

| ** **                                                | ** ** | ** **            | ** ** | ** **     | ** ** | ** **   | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|----------------|------------|--------------|------------|--------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                                | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **   | ** ** | **Other**         | ** ** | **Total**              | ** ** |
| ** **                                                | ** ** | **(Issued)**          | ** ** | **Paid-in**    | ** ** | **Retained** | ** ** | **Deferred** | ** ** | **Comprehensive** | ** ** | **Stockholders’** | ** ** |
| ** **                                                | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Capital**  | ** ** | **Earnings** | ** ** | **Compensation**  | ** ** | **Income (Loss)** | ** ** | **Equity** | ** ** |
| **Balance, December 31, 2002**                       |       |                  | 32.9       |           |       |         | $          | 0.3          |       |              |       | $                      | 164.8      |       |       |   | $ | 76.0 |   |   |   | $ | — |   |   |   | $ | (8.4 | ) |   |   | $ | 232.7 |   |   |
| Comprehensive  income:                                    |       |                  |       |           |       |         |       |         |       |              |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                |       |                  |       |           |       |         |       |         |       |              |       |                   |       |       | 53.0       |   |   |   |   |   |   |   |   |   |   |   | 53.0 |   |   |
| Translation adjustment                                    |       |                  |       |           |       |         |       |         |       |              |       |                   |       |       |       |   |   |   |   |   |   |   | 10.2 |   |   |   | 10.2 |   |   |
| Unrealized gain on interest rate swap agreement           |       |                  |       |           |       |         |       |         |       |              |       |                   |       |       |       |   |   |   |   |   |   |   | 0.4 |   |   |   | 0.4 |   |   |
| Realization of loss on interest rate swap agreement       |       |                  |       |           |       |         |       |         |       |              |       |                   |       |       |       |   |   |   |   |   |   |   | 3.6 |   |   |   | 3.6 |   |   |
| Total comprehensive income                                |       |                  |       |           |       |         |       |         |       |              |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   | 67.2 |   |   |
| Cash paid for fractional share impact of stock split |       |                  |       |           |       |         |       |         |       |              |       |                   |       |       | (0.1       | ) |   |   |   |   |   |   |   |   |   |   | (0.1 | ) |   |
| Restricted stock grant                                    |       |                  | 0.1        |           |       |         |       |         |       |              | 7.0        |                   |       |       |       |   |   |   | (7.0 | ) |   |   |   |   |   |   | — |   |   |
| Employee stock purchase plan                              |       |                  | 0.1        |           |       |         |       |         |       |              | 1.9        |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   | 1.9 |   |   |
| Amortization of stock compensation                        |       |                  |       |           |       |         |       |         |       |              |       |                   |       |       |       |   |   |   | 0.1 |   |   |   |   |   |   |   | 0.1 |   |   |
| Exercise of stock options                                 |       |                  | 2.2        |           |       |         | 0.1        |         |       |              | 31.3       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   | 31.4 |   |   |
| Tax benefit of option exercises                           |       |                  |       |           |       |         |       |         |       |              | 18.3       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   | 18.3 |   |   |
| **Balance, December 31, 2003**                       |       |                  | 35.3       |           |       |         | 0.4        |         |       |              | 223.3      |                   |       |       | 128.9      |   |   |   | (6.9 | ) |   |   | 5.8 |   |   |   | 351.5 |   |   |
| Comprehensive  income:                                    |       |                  |       |           |       |         |       |         |       |              |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                |       |                  |       |           |       |         |       |         |       |              |       |                   |       |       | 63.1       |   |   |   |   |   |   |   |   |   |   |   | 63.1 |   |   |
| Translation adjustment                                    |       |                  |       |           |       |         |       |         |       |              |       |                   |       |       |       |   |   |   |   |   |   |   | 8.1 |   |   |   | 8.1 |   |   |
| Total comprehensive income                                |       |                  |       |           |       |         |       |         |       |              |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   | 71.2 |   |   |
| Employee stock purchase plan                              |       |                  | 0.1        |           |       |         |       |         |       |              | 4.2        |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   | 4.2 |   |   |
| Amortization of stock compensation                        |       |                  |       |           |       |         |       |         |       |              |       |                   |       |       |       |   |   |   | 2.1 |   |   |   |   |   |   |   | 2.1 |   |   |
| Exercise of stock options                                 |       |                  | 0.5        |           |       |         |       |         |       |              | 10.5       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   | 10.5 |   |   |
| Tax benefit of option exercises                           |       |                  |       |           |       |         |       |         |       |              | 6.8        |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   | 6.8 |   |   |
| **Balance, December 31, 2004**                       |       |                  | 35.9       |           |       |         | 0.4        |         |       |              | 244.8      |                   |       |       | 192.0      |   |   |   | (4.8 | ) |   |   | 13.9 |   |   |   | 446.3 |   |   |
| Comprehensive  loss:                                      |       |                  |       |           |       |         |       |         |       |              |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                  |       |                  |       |           |       |         |       |         |       |              |       |                   |       |       | (26.2      | ) |   |   |   |   |   |   |   |   |   |   | (26.2 | ) |   |
| Translation adjustment                                    |       |                  |       |           |       |         |       |         |       |              |       |                   |       |       |       |   |   |   |   |   |   |   | (13.5 | ) |   |   | (13.5 | ) |   |
| Total comprehensive loss                                  |       |                  |       |           |       |         |       |         |       |              |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   | (39.7 | ) |   |
| Restricted stock grant                                    |       |                  | 0.1        |           |       |         |       |         |       |              | 7.2        |                   |       |       |       |   |   |   | (7.2 | ) |   |   |   |   |   |   | — |   |   |
| Employee stock purchase plan                              |       |                  | 0.1        |           |       |         |       |         |       |              | 4.3        |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   | 4.3 |   |   |
| Amortization of stock compensation                        |       |                  |       |           |       |         |       |         |       |              |       |                   |       |       |       |   |   |   | 3.5 |   |   |   |   |   |   |   | 3.5 |   |   |
| Exercise of stock options                                 |       |                  | 0.8        |           |       |         |       |         |       |              | 24.3       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   | 24.3 |   |   |
| Tax benefit of option exercises                           |       |                  |       |           |       |         |       |         |       |              | 11.6       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   | 11.6 |   |   |
| **Balance,  December 31, 2005**                      |       |                  | 36.9       |           |       |         | $          | 0.4          |       |              |       | $                      | 292.2      |       |       |   | $ | 165.8 |   |   |   | $ | (8.5 | ) |   |   | $ | 0.4 |   |   |   | $ | 450.3 |   |   |

 

See accompanying notes to consolidated financial statements.

F-6

----

**INAMED CORPORATION AND SUBSIDIARIESConsolidated Statementsof Cash FlowsFor the Three Years Ended December 31, 2005, 2004, and 2003(millions)**

| ** **                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from operating  activities:                |       |     |       |     |       |     |       |
| Net income (loss)                                     |       | $        | (26.2      | )        | $          | 63.1     |       | $ | 53.0 |   |
| Non-cash  elements included in net income (loss):     |       |     |       |     |       |     |       |
| Depreciation and amortization                         |       | 15.4     |       | 13.9     |       | 15.3     |       |
| Tax benefit from stock option exercises               |       | 11.6     |       | 6.8      |       | 18.3     |       |
| Deferred income taxes                                 |       | 4.4      |       | 10.4     |       | (5.0     | )          |
| Non-cash compensation                                 |       | 3.5      |       | 2.1      |       | 0.1      |       |
| Provision for doubtful accounts                       |       | 1.9      |       | 3.0      |       | 7.3      |       |
| Other non-cash elements included in net income (loss) |       | 0.4      |       | 0.3      |       | 2.3      |       |
| Changes  in operating assets and liabilities:         |       |     |       |     |       |     |       |
| Trade accounts receivable                             |       | (15.9    | )          | (7.2     | )          | (20.5    | )          |
| Inventories                                           |       | (9.5     | )          | (8.3     | )          | (2.0     | )          |
| Prepaid expenses and other current assets             |       | (0.1     | )          | (2.8     | )          | 2.4      |       |
| Other assets                                          |       | 1.7      |       | 6.3      |       | 8.4      |       |
| Accounts payable                                      |       | 13.0     |       | (2.8     | )          | 0.8      |       |
| Income taxes payable                                  |       | (4.1     | )          | (4.8     | )          | (3.0     | )          |
| Income taxes receivable                               |       | (4.8     | )          | —   |       | —   |       |
| Accruals and other long-term liabilities              |       | 0.6      |       | (9.3     | )          | (2.2     | )          |
| Net cash (used in) provided by operating activities   |       | (8.1     | )          | 70.7     |       | 75.2     |       |
| Cash flows from  investing activities:                |       |     |       |     |       |     |       |
| Purchase of property and equipment                    |       | (14.5    | )          | (18.7    | )          | (12.1    | )          |
| Purchase of investments                               |       | (130.1   | )          | (30.2    | )          | —   |       |
| Proceeds from maturites of investments                |       | 98.6     |       |     |       |     |       |
| Proceeds from sale of investments                     |       | 54.2     |       | 6.8      |       | —   |       |
| Purchase of intangibles                               |       | (1.0     | )          | (11.1    | )          | (4.8     | )          |
| Net cash provided by (used in) investing activities   |       | 7.2      |       | (53.2    | )          | (16.9    | )          |
| Cash flows from  financing activities:                |       |     |       |     |       |     |       |
| Proceeds of long-term debt                            |       | —   |       | —   |       | 65.0     |       |
| Principal repayment of long-term debt                 |       | (17.5    | )          | (10.0    | )          | (116.2   | )          |
| Payment of deferred loan costs                        |       | —   |       | —   |       | (1.3     | )          |
| Issuance of common stock                              |       | 28.6     |       | 14.7     |       | 33.2     |       |
| Payment of cash dividend                              |       | —   |       | —   |       | (0.1     | )          |
| Net cash provided by (used in) financing activities   |       | 11.1     |       | 4.7      |       | (19.4    | )          |
| Effect of exchange rate changes on cash               |       | (5.7     | )          | 4.5      |       | 2.3      |       |
| Change in cash and cash  equivalents:                 |       |     |       |     |       |     |       |
| Net increase in cash and cash equivalents             |       | 4.5      |       | 26.7     |       | 41.2     |       |
| Cash and cash equivalents at beginning of year        |       | 107.2    |       | 80.5     |       | 39.3     |       |
| Cash and cash equivalents at end of year              |       | $        | 111.7      |     | $          | 107.2    |       | $ | 80.5 |   |
| Supplemental  disclosures of cash flow information:   |       |     |       |     |       |     |       |
| Cash paid during  the year for:                       |       |     |       |     |       |     |       |
| Interest                                              |       | $        | 0.8        |     | $          | 1.3      |       | $ | 8.1 |   |
| Income taxes                                          |       | $        | 16.9       |     | $          | 5.8      |       | $ | 5.1 |   |
| Non-cash investing  and financing activities:         |       |     |       |     |       |     |       |
| Amortization of discount on investments               |       | $        | 0.1        |     | $          | 0.3      |       | $ | — |   |
| Reversal of  deferred tax liability and goodwill      |       | $        | 14.6       |     | $          | —   |       | $ | — |   |

 

See accompanying notes to consolidated financial statements.

F-7

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (millions)**

**NOTE1—DESCRIPTION OF BUSINESS**

*The Company*

Inamed Corporation, a Delaware corporation, is aglobal healthcare company that develops, manufactures, and markets a diverseline of products that enhance the quality of people’s lives. We have threeprincipal product lines (which, for financial reporting purposes, areconsidered to be one segment): breast aesthetics (consisting primarily ofbreast implants and tissue expanders for use in plastic and reconstructivesurgery); facial aesthetics (consisting primarily of collagen and hyaluronicacid-based dermal fillers for use in facial rejuvenation); and obesity intervention (consisting of products foruse in treating severe and morbid obesity). Our manufacturing locations are inCalifornia, Costa Rica, and Ireland, and our administrative support functionsare principally in California and Ireland. We sell our products through ourstaff of sales representatives in the U.S. and in our wholly owned foreignsubsidiaries and, in certain countries, through independent distributors.

In March 2005, Inamed announced the execution ofa merger agreement, by and among Inamed, Medicis Pharmaceutical Corporation(Medicis), and Masterpiece Acquisition Corporation, a wholly-owned subsidiaryof Medicis. Under the merger agreement, Inamed would have been merged with andinto Masterpiece Acquisition Corporation. Under the terms of the transaction,Inamed stockholders would have received 1.4205 shares of Medicis common stockand thirty dollars in cash for each share of Inamed common stock uponconsummation of the proposed merger.

On November 14, 2005, Inamed received a lettercontaining an unsolicited preliminary non-binding proposal from Allergan, Inc.(Allergan) to acquire all outstanding shares of Inamed for a per shareconsideration of $84.00 in cash or 0.8498 of a share of Allergan common stock,at the election of the holder, subject to proration such that the total valueof the consideration payable would be $1.45 billion in cash and17.9 million shares of Allergan. The proposal stated that it was subjectto the satisfactory completion of limited due diligence and the execution of amutually acceptable definitive agreement. On November 21, 2005, Allerganfiled with the SEC the Schedule TO and the Registration Statement, includingthe Prospectus, and formally commenced its exchange offer.

On December 13, 2005, Inamed, Medicis andMasterpiece Acquisition Corporation entered into a merger termination agreement(the “Termination Agreement”), which provides that the Medicis merger agreementterminated effective immediately upon the parties’ execution of the TerminationAgreement and Medicis’ receipt from Inamed of a $90.0 termination fee and anadditional $0.5 in expense reimbursement fees. Inamed paid these terminationand expense reimbursement fees in full on December 13, 2005. On the samedate, Inamed also announced that its Board of Directors had unanimouslydetermined to recommend that Inamed stockholders tender their shares toAllergan upon execution by Inamed of a definitive agreement and plan of mergerbetween Inamed and Allergan. On December 15, 2005, Inamed announced thatits Board of Directors had unanimously approved the definitive agreement andPlan of Merger.

On December 20, 2005, Inamed and Allerganexecuted a definitive agreement and plan of merger. Pursuant to the definitivemerger agreement and consistent with the exchange offer previously commenced byAllergan, Allergan will exchange for each outstanding common share of Inamed,either $84.00 in cash or 0.8498 of a share of Allergan common stock, at theelection of the holder. Elections of Inamed 

F-8

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

stockholders are subjectto proration as described in Allergan’s Form S-4 initially filedwith the Securities and Exchange Commission (SEC) on November 21, 2005,and subsequently amended, so that 45% of the aggregate Inamed shares tenderedwill be exchanged for cash and 55% of the aggregate Inamed shares tendered willbe exchanged for shares of Allergan common stock.

On December 20, 2005, Inamed also entered into atermination agreement with Ipsen Ltd. Effective upon the consummation ofAllergan’s acquisition of Inamed which occurred March 17, 2006, Ipsen hastaken back its rights to the botulinum toxin Type A product Reloxin, and Inamedand Ipsen have released each other of all obligations under the distributionagreement regarding Reloxin. As a result of the termination agreement, Inamedwill receive a $10.0 payment from Ipsen.

The exchange offer expired at 12:00 midnight EasternTime on Friday, March 17, 2006, at which time 34,971,207 shares,representing approximately 94.7%, of Inamed’s outstanding common stock had beentendered. As Allergan has received tenders representing at least 90% of theoutstanding Inamed common stock, Allergan intends to complete the acquisitionthrough a short-form merger under Delaware law.

During the twelve monthsended December 31, 2005, Inamed incurred approximately $110.4 of costsrelated to the merger transactions, primarily for the termination fee to Medicis,legal and other professional fees. Of the $110.4 , $91.7 was recordedin merger expense and $18.7 was recorded in selling, general andadministrative expenses.

**NOTE2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

*Principles ofConsolidation*

The consolidated financialstatements include the accounts of Inamed and its subsidiaries afterelimination of all significant intercompany accounts and transactions.

*Reclassifications*

Certain items in the prioryears’ consolidated financial statements have been reclassified to conform tothe current year presentation. Included in these reclassifications is thereclassification of royalty expense from selling, general and administrativeexpense to cost of goods sold on the income statement.

*Critical AccountingPolicies and Estimates*

The preparation offinancial statements in accordance with accounting principles generallyaccepted in the United States of America requires Inamed to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and disclosure of contingent assets and liabilities. On an on-goingbasis, the Company evaluates its estimates and judgments, including thoserelated to revenue recognition, inventories, adequacy of allowances fordoubtful accounts, valuation of long-lived assets and goodwill, income taxes,litigation and warranties. Inamed bases its estimates on historical andanticipated results and trends and on various other assumptions that itbelieves are reasonable under the circumstances, including assumptions as tofuture events. These estimates form the basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother 

F-9

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

sources.By their nature, estimates are subject to an inherent degree of uncertainty.Actual results may differ from those estimates.

*Cash and CashEquivalents*

Cash and cash equivalentsconsist principally of cash in banks and highly liquid debt instrumentspurchased with original maturities of three months or less. Inamed maintainsbalances in highly-qualified financial institutions. In the U.S., thesebalances at times are in excess of federally insured limits.

*Investments*

In accordance with Statement of Financial AccountingStandards (SFAS) No. 115, “Accounting for Certain Investments in Debt andEquity Securities” and Emerging Issues Task Force (EITF) No. 03-1 “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments,” the Company classifies its securities as held-to-maturity andreports them at cost without recognizing any unrealized gains or losses. Becauseof the Company’s cash position and the short-term nature of the maturities, theCompany has the positive intent and ability to hold these securities to theirmaturity dates. Securities that mature in three months or less are classifiedas cash equivalents. Those that mature over three months but within one yearare classified as short-term investments. The Company invests in high qualitycorporate debt securities and the cost of securities sold is based on thespecific identification method.

In December 2005, the Company sold its entireportfolio of short-term held-to-maturity securities, $54.2 net of unamortizeddiscounts, to pay the Medicis termination fee. The Company recognized a loss of$0.1 in relation to the sales. In accordance with SFAS No. 115, an entitymay sell held-to-maturity securities without calling into question its intentto hold other securities to maturity if the sale is due to an event which isisolated, nonrecurring, and unusual for the reporting entity and could not havereasonably been anticipated. The Company believes the merger termination feemet the aforementioned SFAS No. 115 criteria. See Note 1 regarding theproposed merger with Medicis, the Allergan offer, and the subsequenttermination of the Medicis merger agreement.

The gross unrealized losses on the Company’sinvestments were $0.0 and $0.5 at December 31, 2005 and 2004,respectively.

The Company may, from timeto time, invest in equity instruments of privately-held companies which aretypically for business and strategic purposes, which at December 31, 2005and 2004 were $0.0. These investments are included in other long-term assetsand are accounted for under the cost method when ownership is less than 20% andwhen we do not have the ability to exercise significant influence overoperations. These investments are accounted for under the equity method whenownership is greater than 20% or when we have the ability to exercisesignificant influence. The Company records an investment impairment charge whenit believes an investment has experienced a decline in value that is other thantemporary. Adverse changes in market conditions or poor operating results ofunderlying investments could result in losses or an inability to recover thecarrying value of the investment that may not be reflected in an investment’scurrent carrying value, thereby possibly requiring an impairment charge.

F-10

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

*Fair Value ofFinancial Instruments*

The carrying amountsreported in the consolidated balance sheets for cash and cash equivalents,accounts receivable, accounts payable, and accrued expenses approximate fairvalue due to their short-term maturities. The amounts presented for long-termdebt approximate fair value becausethe interest rate adjusts periodically based on current market rates.

*Allowance forDoubtful Accounts*

Inamed maintainsallowances for doubtful accounts for estimated losses resulting from theinability of some of its customers to make required payments. The allowancesfor doubtful accounts are based on the analysis of historical bad debts,customer credit-worthiness, past transaction history with the customer, currenteconomic trends, and changes in customer payment terms. If the financialcondition of Inamed’s customers were to deteriorate, adversely affecting theirability to make payments, additional allowances may be required.

*Inventories*

Inventories are stated atthe lower of cost or market using the first-in, first-out (FIFO) method. TheCompany provides valuation reserves for estimated obsolescence or unmarketableinventory in an amount equal to the difference between the cost of inventoryand the estimated market value based upon assumptions about future demand andmarket conditions. The Company capitalizes inventory costs associated withcertain product candidates prior to regulatory approval, based on its judgmentof probable future commercialization. As of December 31, 2005, Inamedholds no inventory for product candidates not yet approved by regulatoryagencies.

*CurrentVulnerability Due to Certain Concentrations*

Inamed has sole or limitedsources of supply for certain raw materials and finished goods that aresignificant. A change in suppliers could cause a delay in manufacturing and apossible loss of sales, which would adversely affect operating results.

*Property andEquipment*

Property and equipment arecarried at cost less accumulated depreciation. Depreciation is recorded on thestraight-line basis over the estimated useful lives of the assets, which rangefrom three to ten years, except for leasehold improvements which aredepreciated over the life of the lease. Depreciation of leasehold improvementsis based upon the estimated useful lives of the assets or the term of thelease, whichever is shorter. Maintenance and repairs are charged to operationsas incurred, while significant improvements are capitalized. Asset retirementsand dispositions are accounted for in accordance with SFAS No. 144 “Accounting for the Impairment and Disposal ofLong Lived Assets” as described below.

*Accounting forLong-Lived Assets*

Inamedaccounts for long-lived assets, other than goodwill, in accordance with theprovisions of SFAS No. 144, which classifies long-lived assets as either (1) tobe held and used, (2) to be disposed of by other 

F-11

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

than sale, or (3) to be disposed of by sale. Thisstandard uses a probability-weighted cash flow estimation approach to addresssituations where alternative courses of action to recover the carrying amountof a long-lived asset are under consideration or a range is estimated for theamount of possible future cash flows. SFAS No. 144 requires, among otherthings, that an entity review its long-lived assets and certain relatedintangibles for impairment whenever changes in circumstances indicate that thecarrying amount of an asset may not be fully recoverable. Factors the Company considers important thatcould trigger an impairment review include substantial operating losses,significant negative industry trends and significant changes in how it uses anasset. Upon the determination that an impairment review is required, theCompany compares the carrying amounts of the long-lived asset to its fairvalue, which is determined using an undiscounted cash flow model. This modelrequires estimates of future revenues, profits, capital expenditures, workingcapital and other relevant factors. These amounts are estimated by evaluatinghistorical trends, current budgets, operating plans, and industry data. If theassets are considered to be impaired, the impairment charge is the amount bywhich the asset’s carrying value exceeds its fair value. As with all cash flowmodels there is an inherent subjectivity. The assumptions listed above could bedifferent from actual results which would in turn create a different valuation.If these assumptions change in the future, the Company may be required torecord impairment charges for those assets. With the exception of themanufacturing consolidation that commenced in 2002 (see Note 3), Inamed doesnot believe that any such changes have taken place. The Company will continueto monitor its long lived asset balances and conduct formal tests whenimpairment indicators are present.

*Goodwill and OtherIntangible Assets*

Goodwill represents the excess of cost over the fairvalue of identifiable net assets of businesses acquired. Other intangibleassets consist primarily of purchased technology and patents. The Companyaccounts for goodwill and other intangible assets in accordance with SFAS No. 142“Goodwill and Other Intangible Assets”. Under SFAS No. 142, goodwill isnot amortized, but is tested for impairment on an annual basis as of October 31,or more frequently as impairment indicators arise. The test for impairmentinvolves the use of estimates related to the fair values of the businessoperations with which goodwill is associated. In accordance with SFAS No. 142,the Company evaluates the fair value of the reporting unit in relation to itscarrying value, including goodwill. As long as the fair value of the reportingunit exceeds its carrying value and no specific circumstances indicate a lossin value for goodwill, no impairment charge will be recognized. If the fairvalue of the reporting unit is less than its carrying value, the Company willmeasure the amount of the impairment loss and record an impairment charge basedon an undiscounted cash flow model. Other definite-life intangible assets areamortized using the straight-line method over their estimated useful lives ofthree to twenty-one years and are evaluated for impairment under SFAS No. 144.

License and distributionrights—In the normal course of business, the Company enters into collaborativelicense and distribution contracts. These collaborative agreements frequentlyrequire the Company to pay up-front fees and milestone payments, some of whichare significant. When the Company pays an up-front or milestone payment forthese license and distribution rights, management evaluates the stage of theacquired technology’s development to determine the appropriate accountingtreatment. Payments for these rights made in advance of regulatory approval areevaluated for capitalization based upon certain factors including: thecontract, alternative future uses, the expected launch date of the 

F-12

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

product,the market acceptance of the product in other countries, competitive productinformation (including products using the same compounds, similar compounds, orproducts used for the same application), level of development, clinicalexperience and regulatory information. Payments made to third partiessubsequent to regulatory approval are capitalized. Capitalized rights arestated at cost, less accumulated amortization, and are amortized using thestraight-line method over their estimated useful lives of ten to twenty-oneyears. Significant changes to any of the factors above may result in areduction in the useful life of the license and an acceleration of relatedamortization expense. License rights are assessed periodically for impairment,in accordance with SFAS No. 144.

*Product Warranties*

TheCompany has an accrual for warranty programs for breast implant sales in theUnited States, Europe, and certain other countries. Management estimates theamount of potential future claims from these warranty programs based onactuarial analyses. Expected future obligations are determined based on thehistory of product shipments and claims; and are discounted to a current value.The liability is included in both the current and long-term liabilities in thebalance sheet (see Notes 7 and 8). The U.S. plan, in most cases, provideslifetime product replacement and one thousand two hundred dollars of financialassistance for surgical procedures within ten years of implantation. Thewarranty programs in non-U.S. markets have similar terms and conditions to theU.S. plan. The Company does not currently offer a warranty on its facial orhealth products and therefore no amount is included in the liability for thoseproducts. The Company does not warrant any level of aesthetic result and, asrequired by government regulation, makes extensive disclosures concerning therisks of the use of its products and implantation surgery. Changes to actualwarranty claims incurred and interest rates could have a material impact on theactuarial analysis which could materially impact Inamed’s reported expenses andresults of operations. Substantially all of the product warranty liabilityarises from the U.S. warranty program.

| ** **                                       | ** ** | **Accrued  Warranty** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| Balance at  December 31, 2002               |       |                  | $          | 9.5 |   |   |
| Accruals for warranties issued during the period |       |                  | 5.0        |   |   |
| Settlements made during the period               |       |                  | (4.1       | ) |   |
| Balance at  December 31, 2003               |       |                  | $          | 10.4 |   |   |
| Accruals for warranties issued during the period |       |                  | 4.9        |   |   |
| Settlements made during the period               |       |                  | (3.3       | ) |   |
| Balance at  December 31, 2004               |       |                  | $          | 12.0 |   |   |
| Accruals for warranties issued during the period |       |                  | 6.5        |   |   |
| Settlements made during the period               |       |                  | (3.9       | ) |   |
| Balance at  December 31, 2005               |       |                  | $          | 14.6 |   |   |

 

*Revenue Recognition*

Inamed recognizes productrevenue, net of sales discounts, returns and allowances, in accordance withStaff Accounting Bulletin (SAB) No. 104, “Revenue Recognition” and SFAS No. 48“Revenue Recognition When Right of Return Exists.” Revenue is recognized whenall four of the following criteria 

F-13

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

aremet: (i) persuasive evidence of an arrangement exists; (ii) deliveryhas occurred and all significant contractual obligations have been satisfied; (iii) thefee is fixed or determinable; and (iv) collection is considered probable. Appropriatereserves are established for anticipated returns and allowances based onhistorical experience. Inamed recognizes revenue when title to the product andrisk of loss transfer to customers provided there are no remaining performanceobligations required of the Company or any matters requiring customeracceptance.

The Company allows for thereturn of product from doctors, hospitals, and clinics within a specified timeframe, and records estimated sales returns as a reduction of sales in the sameperiod revenue is recognized. The Company does not provide a right ofreturn on facial products. Sales provisionsare calculated based upon historical experience with actual returns. Actualreturns in any future period are inherently uncertain and thus may differ fromthe estimates. If actual returns differ significantly from the estimates, anadjustment to revenue in the current or subsequent period would be recorded. Substantiallyall of the product returns relate to breast implants.

A portion of the Company’srevenue is generated from consigned inventory of breast implants maintained atdoctors, hospitals and clinics locations. The customer is contractuallyobligated to maintain a specific level of inventory and to notify Inamed uponuse. For these products, revenue is recognized at the time Inamed is notifiedby the customer that the product has been implanted. Notification is usuallythrough the replenishing of the inventory and Inamed periodically reviewsconsignment inventories to confirm accuracy of customer reporting. FDAregulations require tracking the sales of all implanted products.

The Company’s sales to independent distributors areconducted under the same revenue recognition criteria as sales via the directsales force. Independent distributors do not have explicit or implicit rightsto return product and do not maintain consignment inventory.

Shipping and handling feesare recognized as a reduction to shipping and handling expense in selling,general and administrative expenses. If recognized in net sales, the increasein sales and gross profit would be less than 1%. Shipping and handling expensewas $7.5, $5.4, and $4.4 for the years ended December 31, 2005, 2004, and2003, respectively.

*Research andDevelopment (R&D)*

Inamed conducts its R&D internally as well asthrough contracts with other companies in the research and development of newproducts and processes. R&D expenses are comprised of the following typesof costs incurred in performing research and development activities: salariesand benefits, allocated overhead, clinical trial and related clinicalmanufacturing costs, regulatory costs, contract services, consultants and otheroutside costs. In accordance with SFAS No. 2, “Accounting for Research andDevelopment Costs,” all R&D costs are expensed as incurred.

F-14

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

*Stock-BasedCompensation*

Inamed accounts for stock-based compensation inaccordance with SFAS No. 123, “Accounting for Stock-Based Compensation,”Accounting Principles Board Opinion (APB) No. 25, “Accounting for StockIssued to Employees,” Financial Accounting Standards Board (FASB)Interpretation (FIN) No. 44, “Accounting for Certain TransactionsInvolving Stock Compensation, an interpretation of APB No. 25,” SFAS No. 148,“Accounting for Stock-Based Compensation-Transition and Disclosure,” and EITF No. 96-18,“Accounting for Equity Instruments that Are Issued to Other Than Employees forAcquiring, or In Conjunction with Selling, Goods, or Services.” In accordancewith SFAS No. 123, Inamed has elected the disclosure-only provisionsrelated to employee stock options and follows the intrinsic value method in APBNo. 25 in accounting for stock options issued to employees. Under APB No. 25,compensation expense, if any, is recognized as the difference between theexercise 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 serviceperiod, which is typically the vesting period. Inamed accounts for options andwarrant grants to non-employees using the guidance prescribed by SFAS No. 123,FIN No. 44, and EITF No. 96-18, whereby the fair value of suchoption and warrant grants are measured using the fair value at the earlier ofthe date at which the non-employee’s performance is completed or a performancecommitment is reached.

In December 2004, the FASB issued SFAS No. 123(revised 2004), “Share-Based Payment” (SFAS No. 123R), which replacesSFAS No. 123, and supersedes APB No. 25, SFAS No. 123R requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the financial statements based on their fairvalues, beginning with the first interim or annual period after June 15,2005, with early adoption encouraged. In April 2005, the SEC released SAB No. 107“Share-Based Payment” that requires filers to implement SFAS No. 123Rbeginning with the first quarter of their first fiscal year beginning after June 15,2005. Accordingly, Inamed adopted the provisions of SFAS No. 123R on January 1,2006. The pro forma disclosures previously permitted under SFAS No. 123will no longer be an alternative to financial statement recognition. Under SFASNo. 123R, the Company must determine the transition method to be used atdate of adoption, the appropriate fair value model to be used for valuingshare-based payments and the amortization method for compensation cost. TheCompany will utilize a standard option pricing model (i.e., Black-Scholes) tomeasure the fair value of stock options granted to employees. While SFAS No. 123Rpermits entities to use such a model, the standard also permits the use of a “lattice”model. The transition methods include prospective and retroactive adoptionoptions. Under the retroactive options, prior periods may be restated either asof the beginning of the year of adoption or for all periods presented. Theprospective method requires that compensation expense be recorded for allunvested stock options and restricted stock at the beginning of the firstquarter of adoption of SFAS No. 123R, while the retroactive methods wouldrecord compensation expense for all unvested stock options and restricted stockbeginning with the first period restated. The Company adopted the prospectivemethod and is currently evaluating the impact of this standard on its financialstatements. All share-based awards accelerate vesting upon the closing of theAllergan merger agreement.

With respect to theCompany’s 2003 Restricted Stock Plan, as amended in 2004, Inamed has recorded$8.5, net of amortization, in deferred stock-based compensation in accordance withAPB No. 25. Stock compensation expense is recognized over the vestingperiod of the stock. The awards vest fifty percent in three years and thebalance in five years. The holders of the restricted stock are also “locked out”from 

F-15

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

sellingany of these shares prior to the fifth year, with the exception that shares maybe sold earlier to satisfy tax liabilities. Stock compensation expense for the years ended December 31,2005, 2004 and 2003 was $3.5, $2.1, and $0.1 respectively.

*Proforma disclosures of the effect of stock-based compensation*

Proforma information regarding results of operations and net income per share isrequired by SFAS No. 123, which also requires that the information bedetermined as if Inamed had accounted for its employee stock options under thefair value method of SFAS No. 123. The fair value for these options wasestimated at the date of grant using a Black-Scholes option valuation modelwith the following weighted-average assumption used for grants:

| **Year** | ** ** | ** ** | ** **    | **Risk Free Interest  Rate** | ** ** | **Dividend  Yield** | ** ** | **Weighted Average  Expected Life of the  Option (Years)** | ** ** | **Volatility Factor** | ** ** |
|----------|------------|------------|---------------|----------------------------------------|------------|---------------------|------------|-------------------------------------------------------------------------------------|------------|----------------------------|------------|
| 2005     |       |       | 3.87% - 3.96% |                                   |       |                | 0.0        |                                                                                |       |                       | 3.25       |   |   | 24.7% - 43.0% |   |
| 2004     |       |       | 3.15% - 3.70% |                                   |       |                | 0.0        |                                                                                |       |                       | 3.25       |   |   | 25.0% - 44.1% |   |
| 2003     |       |       | 2.74% - 3.25% |                                   |       |                | 0.0        |                                                                                |       |                       | 4.00       |   |   | 34.7% - 58.2% |   |

 

The option valuation model was developed for use inestimating the fair value of traded options that have no vesting restrictionsand are fully transferable. In addition, option valuation models require theinput of highly subjective assumptions, including the expected life of theoption. Because Inamed’s employee stock options have characteristicssignificantly different from those of traded options and because changes in thesubjective input assumptions can materially affect the fair value estimate, in management’sopinion, the existing models do not provide a reliable single measure of thefair value of its employee stock options.

Hadcompensation costs for Inamed’s stock-based compensation plan been determinedusing the fair value at the grant dates for awards under the plan calculatedusing the Black-Scholes option valuation model, Inamed’s net income would havebeen decreased to the pro forma amounts indicated below:

| ** **                                                                                                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income (loss)  as reported                                                                                                  |       | $        | (26.2      | )        | $          | 63.1     |       | $ | 53.0 |   |
| Add: Stock-based  compensation expense included in reported net income (loss), net of  related tax effects                 |       | 2.1      |       | 1.3      |       | 0.1      |       |
| Deduct: Total  stock-based compensation expense determined under the fair value method  for all awards, net of tax effects |       | (8.2     | )          | (10.9    | )          | (5.5     | )          |
| Pro forma net  income (loss)                                                                                                    |       | $        | (32.3      | )        | $          | 53.5     |       | $ | 47.6 |   |
| **Earnings Per Share**                                                                                                          |       |     |       |     |       |     |       |
| Basic as reported                                                                                                               |       | $        | (0.72      | )        | $          | 1.77     |       | $ | 1.54 |   |
| Basic pro-forma                                                                                                                 |       | $        | (0.89      | )        | $          | 1.50     |       | $ | 1.38 |   |
| Diluted as reported                                                                                                             |       | $        | (0.72      | )        | $          | 1.75     |       | $ | 1.51 |   |
| Diluted pro-forma                                                                                                               |       | $        | (0.89      | )        | $          | 1.49     |       | $ | 1.34 |   |

* *

F-16

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

*Foreign CurrencyTranslation*

Assets and liabilities offoreign subsidiaries with functional currencies other than the U.S. dollar aretranslated into U.S. dollars using the exchange rates in effect at the balancesheet date. Results of their operations are translated using the averageexchange rates during the period. The resulting foreign currency translationadjustment is included in stockholders’ equity as a component of accumulatedother comprehensive income (loss). Transaction gains and losses are recorded inthe consolidated statements of income. Accumulated foreign currency gains were$0.4, $13.9, and $5.8 in 2005, 2004, and 2003, respectively.

*Income Taxes*

The Company accounts fordeferred income taxes utilizing SFAS No. 109 “Accounting for Income Taxes”,as amended. SFAS No. 109 states that deferred income tax assets orliabilities are to be computed based on the temporary differences between thefinancial statement and income tax bases of assets and liabilities using thestatutory marginal income tax rate in effect for the years in which thedifferences are expected to reverse. Deferred income tax expenses or creditsare based on the changes in the deferred income tax assets or liabilities fromperiod to period. A valuation allowance against deferred tax assets is requiredif, based on the weight of available evidence, it is more likely than not thatsome portion or all of the deferred tax assets will not be realized. Thevaluation allowance should be sufficient to reduce the deferred tax asset tothe amount that is more likely than not to be realized.

*RecentPronouncements*

In November 2004, theFASB issued SFAS No. 151 “Inventory Costs—An Amendment of ARB No. 43,Chapter 4” (SFAS 151). SFAS 151 requires abnormal amounts of idle facility expense, freight, handling costs, andwasted material be recognized as current-period charges. In addition, SFAS 151requires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities. Thisstatement is applicable to fiscal years beginning after June 15, 2005. TheCompany does not anticipate the adoption of SFAS 151 will have a materialimpact on its financial position or results from operations.

**NOTE 3—RESTRUCTURING COSTS**

In the fourth quarter of 2002, Inamed recorded acharge of $5.1 for restructuring costs. This restructuring was undertaken toconsolidate manufacturing facilities. The annual savings from the manufacturingconsolidation was estimated to be a reduction in U.S. payroll and support costsof $10.0, with a corresponding increase in costs in Ireland of $4.3 and CostaRica of $0.4, with a net savings of $5.3 per year. The savings are from therelocation to lower-cost manufacturing locations. The savings are reflected incost of goods sold on the income statement. The consolidation of operations wascompleted in the first quarter of 2004 and involved transitioning SantaBarbara-based manufacturing to the Company’s facilities in Costa Rica andIreland. Through December 31, 2004, the Company eliminated approximately150 manufacturing positions in Santa Barbara, and added approximately 80 ofthese positions in Ireland and Costa Rica through March 31, 2004,completing the transition related to this consolidation. The majority of thecosts relate to severance which has been paid from the beginning of 2003through 2005. 

F-17

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

Inamed has accounted forthe restructuring in accordance with EITF 94-3 “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(Including Certain Costs Incurred in a Restructuring).” As part of themanufacturing consolidation the Company accelerated the depreciation on certainassets with shortened useful lives. For the years ended December 31, 2005,2004, and 2003 Inamed included $0.0, $0.4 and $3.4, respectively, ofaccelerated depreciation charges in cost of goods sold. These assets were fullydepreciated as of March 31, 2004. In 2005 the Company reversed $0.7 ofpreviously accrued severance charges for employees who elected to leave theCompany prior to their termination date or who obtained other positions withinthe Company. The restructuring has been completed and the Company no longer hasa liability recorded related to the restructuring. The Company does not expectany further material costs related to the 2002 restructuring.

Inamed recorded $12.0 of restructuring costs in thefirst quarter of 2001. This restructuring was a series of events to reorganizesenior management and to consolidate facilities and administrative functions. TheSanta Barbara reduction was facilitated by certain manufacturing operationshaving moved to Inamed’s new facility in Costa Rica and the move of SantaBarbara’s remaining manufacturing to a local facility. These costs were primarilyemployee severance costs which have all been paid as of December 31, 2005.The restructuring has been completed and the Company no longer has a liabilityrecorded related to the restructuring. Inamed does not expect any furthermaterial costs related to the 2001 restructuring.

Asummary of activity related to the restructuring charges is as follows:

| ** **                                       | ** ** | **Employee  Termination  Benefits** | ** ** | **Lease  Obligations** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|-------------------------------------|------------|------------------------|------------|-----------|------------|
| **2001  restructuring accrual:**                 |       |                                |       |                   |       |      |       |   |   |   |   |
| Accrual balance  at December 31, 2002       |       |                                | $          | 1.3                    |       |      |       | $ | 0.2 |   |   | $ | 1.5 |   |
| Cash paid through  December 31, 2003        |       |                                | (0.6       | )                      |       |      | (0.2       | ) |   | (0.8 | ) |
| Accrual balance  at December 31, 2003       |       |                                | $          | 0.7                    |       |      |       | $ | — |   |   | $ | 0.7 |   |
| Cash paid through  December 31, 2004        |       |                                | (0.5       | )                      |       |      | —     |   |   | (0.5 | ) |
| Accrual balance  at December 31, 2004       |       |                                | $          | 0.2                    |       |      |       | $ | — |   |   | $ | 0.2 |   |
| Cash paid through  December 31, 2005        |       |                                | (0.2       | )                      |       |      | —     |   |   | (0.2 | ) |
| Accrual balance  at December 31, 2005       |       |                                | $          | —                 |       |      |       | $ | — |   |   | $ | — |   |
| **2002 restructuring accrual:**                  |       |                                |       |                   |       |      |       |   |   |   |   |
| Accrual balance  at December 31, 2002       |       |                                | $          | 4.7                    |       |      |       | $ | — |   |   | $ | 4.7 |   |
| Cash paid through  December 31, 2003        |       |                                | (1.5       | )                      |       |      | —     |   |   | (1.5 | ) |
| Accrual balance  at December 31, 2003       |       |                                | $          | 3.2                    |       |      |       | $ | — |   |   | $ | 3.2 |   |
| Cash paid through  December 31, 2004        |       |                                | (2.2       | )                      |       |      | —     |   |   | (2.2 | ) |
| Accrual balance  at December 31, 2004       |       |                                | $          | 1.0                    |       |      |       | $ | — |   |   | $ | 1.0 |   |
| Cash paid through  December 31, 2005        |       |                                | (0.3       | )                      |       |      | —     |   |   | (0.3 | ) |
| Reversal of  accrued severence                   |       |                                | (0.7       | )                      |       |      | —     |   |   | (0.7 | ) |
| Accrual balance  at December 31, 2005       |       |                                | $          | —                 |       |      |       | $ | — |   |   | $ | — |   |
| Total accrual  balance at December 31, 2005 |       |                                | $          | —                 |       |      |       | $ | — |   |   | $ | — |   |

 

F-18

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

**NOTE4—NET INCOME (LOSS) PER SHARE (Per share data shown as actual, not millions)**

Basicnet income (loss) per share is calculated by dividing income (loss) availableto common stockholders by the weighted average number of common sharesoutstanding during the period. Diluted net income (loss) per share is calculatedby dividing income (loss) available to common stockholders by the weightedaverage number of common and dilutive common equivalent shares outstandingduring the period. Computations of per share earnings (loss) for the threeyears ended December 31, 2005 are as follows:

| ** **                                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income (loss)                                 |       | $        | (26.2      | )        | $          | 63.1     |       | $ | 53.0 |   |
| Weighted average shares outstanding—Basic    |       | 36.3     |       | 35.6     |       | 34.5     |       |
| Dilutive effect  of stock options and warrants    |       | —   | (1)        | 0.4      | (1)        | 0.7      | (1)        |
| Weighted average  shares outstanding—Diluted |       | 36.3     |       | 36.0     |       | 35.2     |       |
| Net income (loss) per share of common stock       |       |     |       |     |       |     |       |
| Basic                                             |       | $        | (0.72      | )        | $          | 1.77     |       | $ | 1.54 |   |
| Diluted                                           |       | $        | (0.72      | )        | $          | 1.75     |       | $ | 1.51 |   |

----

(1)          Thecalculation excludes 0.4, 0.1, and 0.3 options that are anti-dilutive for theyears ended December 31, 2005, 2004, and 2003, respectively.

**NOTE 5—INVENTORIES**

Inventoriesare summarized as follows:

| ** **           | ** ** | **December 31,** | ** ** |
|----------------------|------------|-----------------------|------------|
| ** **           | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Raw materials        |       | $                     | 17.8       |   | $ | 13.4 |   |
| Work in progress     |       | 13.2                  |       | 11.1 |   |
| Finished goods,  net |       | 32.3                  |       | 31.5 |   |
|                 |       | $                     | 63.3       |   | $ | 56.0 |   |

 

At December 31, 2005and 2004, approximately $6.0 and $5.5, respectively, of Inamed’s inventory washeld on consignment at a large number of doctors’ offices, clinics, andhospitals worldwide. The value and quantity at any one location is not significant.

F-19

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

**NOTE 6—PROPERTY AND EQUIPMENT**

Propertyand equipment, at cost, are summarized as follows:

| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Property and equipment,  at cost:                |       |                  |       |   |   |
| Machinery and  equipment                         |       | $                     | 61.9       |   | $ | 60.5 |   |
| Leasehold  improvements                          |       | 52.4                  |       | 47.0 |   |
| Gross property  and equipment                    |       | 114.3                 |       | 107.5 |   |
| Less: Accumulated  depreciation and amortization |       | (49.9                 | )          | (45.0 | ) |
| Property and equipment,  net                     |       | $                     | 64.4       |   | $ | 62.5 |   |

 

**NOTE 7—ACCRUED LIABILITIES AND OTHER**

Accruedliabilities and other are summarized as follows:

| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Salaries, wages,  and payroll taxes  |       | $                     | 19.5       |   | $ | 16.4 |   |
| Royalties payable                    |       | 5.2                   |       | 3.5 |   |
| Trilucent  liability, current        |       | 2.0                   |       | 5.5 |   |
| Warranty  provision, current         |       | 3.7                   |       | 3.2 |   |
| Other                                |       | 9.6                   |       | 12.9 |   |
| Total accrued  liabilities and other |       | $                     | 40.0       |   | $ | 41.5 |   |

 

**NOTE 8—OTHER LONG-TERM LIABILITIES**

Other long-term liabilities are summarized as follows:

| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Warranty  provision, non-current             |       | $                     | 10.9       |   | $ | 8.8 |   |
| Deferred income  tax liability, non-current* |       | —                |       | 11.8 |   |
| Other liabilities                            |       | 8.5                   |       | 12.2 |   |
| Total other long-term  liabilities           |       | $                     | 19.4       |   | $ | 32.8 |   |

----

*                    Deferredtax liability related to acquisition of Collagen Aesthetics, Inc., wasreduced in the second quarter of 2005. See Note 11.

F-20

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

**NOTE9—INTEREST INCOME AND INTEREST EXPENSE**

Interest income and interest expense were as follows:

| ** **                | ** ** | **Twelve Months Ended  December 31,** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|
| ** **                | ** ** | **2005**                                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest income           |       | $                                                    | 3.8        |   | $ | 2.0 |   | $ | 0.8 |   |
| Interest expense          |       | (1.1                                                 | )          | (1.5 | ) | (10.2 | ) |
| Interest income (expense) |       | $                                                    | 2.7        |   | $ | 0.5 |   | $ | (9.4 | ) |

 

Included in interestexpense in  2003 is $3.6 of realizedlosses on a terminated interest rate swap. Also included in interest expense in2003 is $1.6 of accelerated deferred loan fees related to accelerated principalpayments on long-term debt.

**NOTE 10—LONG-TERM DEBT**

Long-termdebt consisted of the following amounts:

| ** **                                                  | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                  | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Variable 1-month  LIBOR plus 2.00% note, due June 2006 |       | $                     | 5.0        |   | $ | 22.5 |   |
| Less: current  maturities                                   |       | (5.0                  | )          | (12.5 | ) |
| Long-term debt, net of  current portion                     |       | $                     | —     |   | $ | 10.0 |   |

 

In July 2003, the Company obtained a creditfacility having a principal balance of $65.0 for a term of five years and alsoentered into a revolving credit facility of $35.0. As of December 31, 2005Inamed used $17.8 million of the revolver capacity by having letters of creditissued to collateralize certain insurance programs. The remaining $17.2 millionof revolver capacity was unused as of December 31, 2005. The borrowingsunder the current credit facilities bear interest at the London InterbankOffered Rate (LIBOR) plus 2.0%. The variable interest rate as of December 31,2005 applicable to Inamed’s long term debt was approximately 4.4%. As of March 3,2006, the loan has been paid in full and the credit agreement has beenterminated. Subsequent to the termination of the credit agreement, the lettersof credit used to collateralize certain insurance programs became unsecured. TheCompany was prompted to pay off the debt as a result of being out of complianceof certain loan covenants as of December 31, 2005. This non-compliance wasthe result of the recognition of approximately $110.4 million of mergertransaction costs. The debt originally matured in June 2006.

As of December 31,2005 and 2004, Inamed had $0.5 and $0.8, respectively, of unamortized financingcosts recorded in other assets. These costs will be recognized as interestexpense upon the termination of the credit agreement on March 3, 2006.

**NOTE11—GOODWILL AND OTHER INTANGIBLE ASSETS**

Inamed accounts for goodwill and other intangibleassets in accordance with SFAS No 142, “Goodwill and Other Intangible Assets.”  Inamed performed its annual impairment testof goodwill using a market 

F-21

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

value approach as of October 31,2005 and determined that there was no impairment of goodwill and intangibleassets.

On December 20, 2005, Inamed also entered into atermination agreement with Ipsen Ltd. Effective upon the consummation ofAllergan’s acquisition of Inamed which occurred March 17, 2006, Ipsen hastaken back its rights to the botulinum toxin product Reloxin, and Inamed andIpsen have released each other of all obligations under the distributionagreement regarding Reloxin. The Company has assessed this intangible asset forimpairment because of this change in circumstance. The carrying amount does notexceed the sum of the undiscounted cash flows expected to result from the useand eventual disposition. Therefore, the carrying amount is recoverable and theassets are not impaired at December 31, 2005. No other triggering eventshave occurred since October 31, 2005.

Goodwill was $136.2 and$151.9 as of December 31, 2005 and 2004, respectively. Thechanges since December 31, 2004 include $14.6 in relation to the reductionof a deferred tax liability recorded at the acquisition of Collagen Aesthetics, Inc.upon settlement with tax authorities, and the effect of foreign exchangetranslation on goodwill carried in subsidiaries with functional currenciesother than the U.S. dollar.

Netother intangible assets subject to amortization were $42.4 and $46.8 as of December 31,2005 and 2004, respectively. These assets will continue to be amortized overtheir expected useful lives, which range from three to twenty-one years. Otherintangible assets not subject to amortization were $4.1 at December 31,2005 and 2004.  Total other intangibleassets are as follows:

| ** **                                     | ** ** | ** **                      | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **Weighted  Average Life** | ** ** | **Gross**                       | ** ** | **Accumulated  Amortization**   | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Licenses                                       |       |                            | 13.2       |                            |       | $                               | 63.3       |   |   | $ | (24.7 | ) |   | $ | 38.6 |   | $ | 62.2 |   |   | $ | (19.6 | ) |   | $ | 42.6 |   |
| Patents                                        |       |                            | 16.0       |                            |       | 5.5                             |       |   | (2.0 | ) |   | 3.5 |   | 5.7 |   |   | (1.9 | ) |   | 3.8 |   |
| Other                                          |       |                            | 3.0        |                            |       | 0.4                             |       |   | (0.1 | ) |   | 0.3 |   | 2.8 |   |   | (2.4 | ) |   | 0.4 |   |
| Total intangibles  subject to amortization     |       |                            |       |                            |       | $                               | 69.2       |   |   | $ | (26.8 | ) |   | $ | 42.4 |   | $ | 70.7 |   |   | $ | (23.9 | ) |   | $ | 46.8 |   |
| Other intangibles  not subject to amortization |       |                            |       |                            |       | 4.1                             |       |   | — |   |   | 4.1 |   | 4.1 |   |   | — |   |   | 4.1 |   |
| Total other intangibles                        |       |                            |       |                            |       | $                               | 73.3       |   |   | $ | (26.8 | ) |   | $ | 46.5 |   | $ | 74.8 |   |   | $ | (23.9 | ) |   | $ | 50.9 |   |

 

Aggregate amortizationexpense for intangible assets was $5.4, $5.0, and $4.0 for the years ended December 31,2005, 2004, and 2003, respectively. For the next five years, amortizationexpense on existing intangible assets is expected to be between $5.2 and $4.7per year.

F-22

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

**NOTE 12—INCOME TAXES**

Incometax expense (benefit) is summarized as follows:

| ** **                                                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current                                                                               |       |     |       |     |       |     |       |
| Federal                                                                               |       | $        | 2.3        |     | $          | 0.3      |       | $ | (2.7 | ) |
| State and local                                                                       |       | —   |       | 0.3      |       | (0.3     | )          |
| Foreign                                                                               |       | 6.9      |       | 3.5      |       | 4.1      |       |
|                                                                                  |       | $        | 9.2        |     | $          | 4.1      |       | $ | 1.1 |   |
| Deferred                                                                              |       |     |       |     |       |     |       |
| Federal                                                                               |       | $        | 3.4        |     | $          | 6.0      |       | $ | (1.0 | ) |
| State and local                                                                       |       | (0.4     | )          | (0.4     | )          | (2.4     | )          |
| Foreign                                                                               |       | 1.7      |       | (0.3     | )          | (1.8     | )          |
|                                                                                  |       | 4.7      |       | 5.3      |       | (5.2     | )          |
| Charge in lieu of  taxes attributable to tax benefit from employee stock options |       | 11.6     |       | 5.8      |       | 18.3     |       |
| Total income tax  expense                                                             |       | $        | 25.5       |     | $          | 15.2     |       | $ | 14.2 |   |

 

The domestic and foreign components of income (loss)before income taxes were $(46.3) and $45.6, respectively, for the year ended December 31,2005, $38.3 and $40.0, respectively, for the year ended December 31, 2004,and $32.1 and $35.1, respectively, for the year ended December 31, 2003.

The Company has an agreement with the Republic ofCosta Rica providing for a tax holiday through October 2007. This taxholiday is available to certain corporations that invest in facilities in CostaRica. For the twelve months ended December 31, 2005, 2004, and 2003 thetax savings for earnings reported in Costa Rica was approximately $0.7 millionor $0.02 per share, $0.5 million or $0.01 per share, and $0.4 million or $0.01per share, respectively.

Theincome tax expense differs from the amounts computed by applying the applicablefederal statutory rate due to the following:

| ** **                                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal income  tax expense (benefit) at the statutory rate |       | $        | (0.3       | )        | $          | 27.4     |       | $ | 23.5 |   |
| State and local  income taxes, net of federal benefit       |       | 1.0      |       | 0.5      |       | 0.3      |       |
| Benefit of lower  foreign tax brackets                      |       | (7.5     | )          | (10.1    | )          | (6.0     | )          |
| Non-deductible merger  transaction costs                    |       | 37.1     |       | —   |       | —   |       |
| Benefit of  extraterritorial income exclusion               |       | (0.4     | )          | (0.6     | )          | (0.6     | )          |
| Tax credits                                                 |       | (3.4     | )          | (2.2     | )          | (1.0     | )          |
| Change in  valuation allowance                              |       | 0.1      |       | 0.7      |       | (0.9     | )          |
| Other                                                       |       | (1.1     | )          | (0.5     | )          | (1.1     | )          |
| Income tax expense                                          |       | $        | 25.5       |     | $          | 15.2     |       | $ | 14.2 |   |

 

F-23

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

Theprincipal items that comprise Inamed’s net deferred tax assets and liabilitiesare as follows:

| ** **                         | ** ** | **As of December 31,**                          | ** ** |
|------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                         | ** ** | **     2005    ** | ** ** | **     2004    ** | ** ** |
| Deferred tax  assets               |       |                                                           |       |   |   |   |   |   |   |
| Sales return and other allowances  |       |                                                           | $          | 5.0 |   |   |   | $ | 5.0 |   |   |
| Accrued liabilities                |       |                                                           | 8.6        |   |   |   | 7.7 |   |   |
| Net operating losses and credits   |       |                                                           | 21.4       |   |   |   | 23.6 |   |   |
| Uniform capitalization adjustment  |       |                                                           | 2.1        |   |   |   | 3.1 |   |   |
|                               |       |                                                           | 37.1       |   |   |   | 39.4 |   |   |
| Valuation allowance                |       |                                                           | (1.8       | ) |   |   | (1.7 | ) |   |
| Total deferred tax assets          |       |                                                           | $          | 35.3 |   |   |   | $ | 37.7 |   |   |
| Deferred tax  liabilities          |       |                                                           |       |   |   |   |   |   |   |
| Unrealized foreign currency gains  |       |                                                           | $          | (0.6 | ) |   |   | $ | (0.5 | ) |   |
| Depreciable and amortizable assets |       |                                                           | (2.8       | ) |   |   | (1.3 | ) |   |
| License agreements                 |       |                                                           | (3.6       | ) |   |   | (2.9 | ) |   |
| Total deferred tax liabilities     |       |                                                           | $          | (7.0 | ) |   |   | $ | (4.7 | ) |   |
| Net deferred tax asset             |       |                                                           | $          | 28.3 |   |   |   | $ | 33.0 |   |   |

 

For 2005, deferred tax assets of $18.8, $14.0, and $2.5are reported on the financial statements for U.S. federal, U.S. state, andvarious foreign tax jurisdictions, respectively. Similarly, deferred taxliabilities of $(5.2), $(1.0), and $(0.8) are reported for U.S. federal, U.S.state, and various foreign tax jurisdictions, respectively. For 2004, deferredtax assets of $21.7, $13.3, and $2.7 are reported on the financial statementsfor U.S. federal, U.S. state, and various foreign tax jurisdictions,respectively. Similarly, deferred tax liabilities of $(4.7), $(0.9), and $0.9are reported for U.S. federal, U.S. state, and various foreign taxjurisdictions, respectively. Valuation allowances of $1.8 and $1.7 for 2005 and2004, respectively, apply exclusively to certain foreign net operating losseswhose likelihood of utilization appears to be less than the “more likely thannot” standard required by SFAS No. 109 recognition.

No provision has been made for U.S. or additionalforeign taxes on undistributed earnings of certain foreign subsidiaries. Thoseearnings have been, and will continue to be, permanently reinvested, but couldbecome subject to additional tax if they were remitted as dividends, wereloaned to Inamed or a U.S. affiliate, or if Inamed should sell the stock of itsforeign subsidiaries. The additional tax on the cumulative amount of reinvestedearnings that has not been recorded was approximately $40.9, $37.4, and $29.3,as of December 31, 2005, 2004, and 2003, respectively.

Inamed projects that it will utilize all of itsfederal net operating loss carry-forwards for the tax year 2005. Inamed alsohas federal tax credit carryforwards of approximately $7.1 that will expire invarious years beginning in 2019.

For state income tax purposes, Inamed has netoperating losses of approximately $7.1 with a corresponding tax benefit ofabout $0.5, which expires no earlier than 2007. In addition, Inamed has statetax credit carryforwards of approximately $10.1, which begin to expire in 2019.

F-24

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

Realization of the deferred tax asset is dependent ongenerating sufficient taxable income prior to the expiration of any netoperating loss or credit carryforwards. Although realization is not assured,management believes it is more likely than not that the deferred tax asset willbe realized.

In December 2004, the FASB issued SFAS No. 109-2,“Accounting and Disclosure Guidance for Foreign Earnings Repatriation Provisionwithin the American Jobs Creation Act of 2004” (SFAS No. 109-2),which provides guidance relating to application of the American Jobs CreationAct (the AJCA) which was signed into law on October 22, 2004. The AJCAintroduces a special one-time dividends received deduction on the repatriationof certain foreign earnings to a U.S. taxpayer, provided certain criteria aremet. SFAS No. 109-2 allows an entity time beyond the currentreporting period to evaluate the effect of the Act on its plans to reinvest orrepatriate foreign earnings for purposes of applying SFAS No. 109,and provides accounting and disclosure guidance for the repatriation provision.This Staff Position was effective upon issuance. The Company has evaluated therepatriation provisions and has decided not to avail itself of the repatriationprovisions made available by the American Jobs Creation Act of 2004.

The Company is currentlysubject to various federal, state and foreign audits by taxing authorities. TheCompany accrues tax expense from these audits in accordance with SFAS No. 5“Accounting for Contingencies”, or when tax expense is probable and can bereasonably estimated. Because of the uncertainties related to both the amountand range of potential expense from tax audits, the Company is unable to makereasonable estimates of the liability that could result from unfavorableoutcomes. As additional information becomes available, the Company will assessits potential liability and revise its estimates.

**NOTE13—STOCKHOLDERS’ EQUITY (Share quantity and per share data shown as actual, not millions)**

*Stock Options*

Inamed has adopted several stock option plans andissued both standalone stock options. At December 31, 2005, under theterms of all director, officer and employee stock option plans, 1,121,660shares of common stock were available for grant.

In 1993, Inamed adopted a Non-Employee Director StockOption Plan the (“1993 Plan”), which authorized Inamed to issue options todirectors who are not employees of or consultants to Inamed and who are thusnot eligible to receive stock option grants under Inamed’s other stock optionplans. The exercise price per share is the fair market value per share on thedate of grant. The options are exercisable for ten years after the option grantdate and vest in full one year from grant date.

In 1998, Inamed adopted a non-qualified stock optionplan the (“1998 Plan”), which authorized Inamed to issue options to keyemployees. The exercise price per share is the fair market value per share onthe date of grant. The options are exercisable for ten years after the optiongrant date and vest ratably over three years. 

In 1999, Inamed adopted a non-qualified stock optionprogram the (“1999 Program”), which authorized Inamed to issue options to keyemployees. The exercise price per share is the fair market value 

F-25

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

per share on the date ofgrant. The options are exercisable for ten years after the option grant dateand vest ratably over three years.

In 1999, Inamed adopted a Non-Employee Director StockElection Plan the (“Stock Election Plan”), which authorized Inamed to issueoptions to directors and receive shares of common stock in lieu of cashcompensation owed to them as a result of their service on Inamed’s Board ofDirectors.

In 2000, Inamed adopted the 2000 Employee Stock OptionPlan the (“2000 Option Plan”), which authorized Inamed to issue options to keyemployees. The exercise price per share is the fair market value per share onthe date of grant. The options are exercisable for ten years after the optiongrant date. In general, options issued under the 2000 Option Plan vest ratably,one-third per year on the first, second, and third anniversaries of theirissuance.

In 2003, Inamed adopted the 2003 Outside DirectorCompensation Plan (“the 2003 Outside Director Plan”), which authorizes Inamedto grant stock options to directors who are not employees of Inamed or any ofits subsidiaries. The exercise price per share is the fair market value pershare on the date of grant. The options are exercisable for seven years afterthe option grant date. In general, options issued under the 2003 Outside DirectorCompensation Plan vest and become exercisable in full on the first anniversaryof their issuance.

In 2004, Inamed adoptedthe 2004 Performance Stock Option Plan (the “2004 Plan”), which authorizedInamed to issue options to employees, directors, or consultants. The exerciseprice per share is the fair market value per share on the date of grant. Ingeneral, options issued under the 2004 Plan are exercisable over ten years, oras few as five as required by law. Options will become vested and exercisableat such times or upon such events and subject to such terms, conditions,performance criteria or restrictions as specified by the Board.

*ExecutiveStandalone Stock Options*

In 2001, Inamed granted a standalone option for450,000 shares of common stock to an executive. The exercise price per share isthe fair market value per share on the date of grant. These options vestratably on the first, second, and third anniversaries of the grant date. Someor all of these options may also vest immediately upon a change-of-control, asdefined in the option agreement.

In 2001, Inamed also granted a standalone option for150,000 shares of common stock to another executive. The exercise price pershare is the fair market value per share on the date of grant. These optionsvest ratably on the first, second, and third anniversaries of the grant date. Someor all of these options may also vest immediately upon a change-of-control, asdefined in the option agreement.

F-26

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

Thefollowing table represents share information for all the option plans forInamed:

| ** **                                              | ** ** | **Authorized  shares** | ** ** | **Number of  securities to be  issued upon the  exercise of  outstanding  options** | ** ** | **Weighted average  exercise price of  outstanding options** | ** ** | **Number of securities  remaining available for  future issuance** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| The 1993 Plan                                           |       | 225,000                |       |                                                                                                              | 30,000     |                                                                             |       |                                                                                        | $          | 18.45 |   |   |   | — |   |   |
| The 1998 Plan                                           |       | 675,000                |       |                                                                                                              | 53,377     |                                                                             |       |                                                                                        | $          | 58.28 |   |   |   | 27,499 |   |   |
| The 1999 Program                                        |       | 1,350,000              |       |                                                                                                              | 214,917    |                                                                             |       |                                                                                        | $          | 47.18 |   |   |   | 173,665 |   |   |
| The 2000 Option  Plan                                   |       | 2,287,500              |       |                                                                                                              | 629,048    |                                                                             |       |                                                                                        | $          | 45.07 |   |   |   | 15,496 |   |   |
| The 2003 Outside  Director Plan                         |       | 225,000                |       |                                                                                                              | 120,000    |                                                                             |       |                                                                                        | $          | 54.44 |   |   |   | 105,000 |   |   |
| The 2004 Plan                                           |       | 500,000                |       |                                                                                                              | —     |                                                                             |       |                                                                                        | $          | — |   |   |   | 500,000 |   |   |
| Equity compensation plans approved by Stockholders |       | 5,262,500              |       |                                                                                                              | 1,047,342  |                                                                             |       |                                                                                        | $          | 46.49 |   |   |   | 821,660 |   |   |
| Stand Alone Options, not approved by Stockholders       |       | 2,426,250              |       |                                                                                                              | —     |                                                                             |       |                                                                                        | $          | — |   |   |   | 300,000 |   |   |
| Total                                                   |       | 7,688,750              |       |                                                                                                              | 1,047,342  |                                                                             |       |                                                                                        | $          | 46.49 |   |   |   | 1,121,660 |   |   |

 

*Summary*

Activityunder these plans for the years ended December 31, 2005, 2004, and 2003was as follows (shares in millions):

| ** **                                                            | ** ** | **2005**                      | ** ** | **2004**                                   | ** ** | **2003**                      | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------|------------|--------------------------------------------|------------|-------------------------------|------------|
| ** **                                                            | ** ** | **Shares Under  Option** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Shares Under  Option** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Shares Under  Option** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Options  outstanding at the beginning of the year           |       |                          | 1.8        |                                       |       |                          | $          | 39.99 |   |   |   | 2.1 |   |   |   | $ | 32.51 |   |   |   | 3.3 |   |   |   | $ | 15.18 |   |   |
| Granted                                                               |       |                          | 0.1        |                                       |       |                          | $          | 65.53 |   |   |   | 0.4 |   |   |   | $ | 53.67 |   |   |   | 1.1 |   |   |   | $ | 47.37 |   |   |
| Cancelled                                                             |       |                          | —     |                                       |       |                          | $          | 43.45 |   |   |   | (0.1 | ) |   |   | $ | 44.23 |   |   |   | (0.1 | ) |   |   | $ | 21.89 |   |   |
| Exercised                                                             |       |                          | (0.8       | )                                          |       |                          | $          | 32.80 |   |   |   | (0.5 | ) |   |   | $ | 19.68 |   |   |   | (2.2 | ) |   |   | $ | 14.15 |   |   |
| Options  outstanding at the end of the year                      |       |                          | 1.1        |                                       |       |                          | $          | 46.49 |   |   |   | 1.8 |   |   |   | $ | 39.99 |   |   |   | 2.1 |   |   |   | $ | 32.51 |   |   |
| Options  exercisable at the end of the year                      |       |                          | 0.5        |                                       |       |                          | $          | 40.08 |   |   |   | 0.6 |   |   |   | $ | 32.23 |   |   |   | 0.2 |   |   |   | $ | 19.40 |   |   |
| Weighted average fair value  of options granted during the  year |       |                          |       |                                       |       |                          | $          | 16.05 |   |   |   |   |   |   |   | $ | 19.32 |   |   |   |   |   |   |   | $ | 14.54 |   |   |

 

F-27

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

Thefollowing table summarizes information about stock options outstanding atDecember 31, 2005 (shares in millions):

| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of exercise prices** | ** ** | ** **                   | ** ** | **Number  Outstanding**      | ** ** | **Wgtd. Avg.  Remaining Contractual  Life (Years)** | ** ** | **Weighted Avg.  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted Avg.  Exercise Price** | ** ** |
| $ 4.33 - $21.08                        |       |                         | 0.11       |                         |       |   | 5.83 |   |   |   | $ | 17.97 |   |   |   | 0.11 |   |   |   | $ | 17.97 |   |   |
| $21.13 - $46.91                             |       |                         | 0.11       |                         |       |   | 6.13 |   |   |   | $ | 36.14 |   |   |   | 0.07 |   |   |   | $ | 32.53 |   |   |
| $47.36 - $48.68                             |       |                         | 0.07       |                         |       |   | 7.39 |   |   |   | $ | 47.71 |   |   |   | 0.04 |   |   |   | $ | 47.62 |   |   |
| $48.82 - $48.99                             |       |                         | 0.54       |                         |       |   | 7.95 |   |   |   | $ | 48.95 |   |   |   | 0.24 |   |   |   | $ | 48.95 |   |   |
| $49.70 - $61.03                             |       |                         | 0.11       |                         |       |   | 7.51 |   |   |   | $ | 55.95 |   |   |   | 0.04 |   |   |   | $ | 57.21 |   |   |
| $61.63 - $63.95                             |       |                         | 0.09       |                         |       |   | 8.38 |   |   |   | $ | 62.37 |   |   |   | 0.00 |   |   |   | $ | — |   |   |
| $67.35 - $76.88                             |       |                         | 0.02       |                         |       |   | 6.60 |   |   |   | $ | 70.66 |   |   |   | 0.00 |   |   |   | $ | — |   |   |
| $ 4.33 - $76.88                        |       |                         | 1.05       |                         |       |   | 7.46 |   |   |   | $ | 46.49 |   |   |   | 0.50 |   |   |   | $ | 40.08 |   |   |
|                                             |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*2000 Employee StockPurchase Plan*

In January 2000, Inamed adopted the 2000 EmployeeStock Purchase Plan. This plan was intended to assist Inamed in securing andretaining its employees by allowing them to participate in the ownership andgrowth of Inamed through the grant of certain rights to purchase shares ofInamed’s common stock at a discount of 15% from the fair market value of theshares. The granting of such rights serves as partial consideration foremployment and gives employees an additional inducement to remain in theservice of Inamed and its subsidiaries and provides them with an increasedincentive to work toward Inamed’s success.

Under the 2000 Employee Stock Purchase Plan, eacheligible employee was permitted to purchase shares of common stock throughregular payroll deductions and/or cash payments in amounts ranging from 1% to15% of the employee’s compensation for each payroll period. The fair marketvalue of the shares of common stock which may be purchased by any employeeunder this or any other Inamed plan that is intended to comply with Section 423of the Internal Revenue Code.

The 2000 Employee StockPurchase Plan, as amended in 2001, provided for a series of consecutiveoffering periods that were six months long. Offering periods commenced on February 1and August 1 of each year during the term of the Plan. During eachoffering period, participating employees were able to purchase shares of commonstock at a purchase price equal to 85% of the fair market value of the commonstock at either the beginning of each offering period or the end of eachoffering period, whichever price was lower. Under terms of the 2000 StockPurchase Plan, as amended, 600,000 shares of common stock had been reserved forissuance to employees. There were 114,095 shares left available in the Planwhen it ceased after the July 31, 2005 purchase. In 2005, 2004, and 2003,81,449 shares ($4.3), 104,955 shares ($4.2), and 155,089 shares ($1.9),respectively, were purchased by approximately 370, 360, and 200 participatingemployees under the Plan.

F-28

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

*Restricted StockPlan*

In2003, Inamed adopted the 2003 Restricted Stock Plan, as amended in 2004, whichauthorizes Inamed to issue shares to any employee, officer, consultant, ornon-employee director. Restricted Stock Awards may be granted by the Boardsubject to vesting and any other restrictions (including a period during whichvested shares may not be sold) as determined by the Board and stated in theAward Agreement. Restricted stock may not be sold or otherwise transferred orpledged until the restrictions lapse or are terminated.

| ** **                                  | ** ** | **Authorized  Shares** | ** ** | **Number of Shares  Issued** | ** ** | **Available for Issuance** | ** ** |
|---------------------------------------------|------------|------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| The 2003  Restricted Stock Plan, as amended |       |                   | 300,000    |                                   |       |                                 | 253,950    |   |   |   | 46,050 |   |   |
|                                             |            |                        |            |                                        |            |                                      |            |  |  |  |  |  |  |

 

Thefollowing table summarizes the restricted stock-based compensation charges thathave been included in the following captions of the income statement, for eachof the periods presented:

| ** **                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cost of goods  sold                  |       | $        | 0.5        |     | $          | 0.3      |       | $ | 0.0 |   |
| Selling, general  and administrative |       | $        | 3.0        |     | $          | 1.8      |       | $ | 0.1 |   |
|                                 |       | $        | 3.5        |     | $          | 2.1      |       | $ | 0.1 |   |

 

**NOTE14—STOCK REPURCHASE PROGRAM**

As of December 31,2005, Inamed has the ability under the term loan agreement to purchase up to$75.0 of its common stock, reduced by the amount of dividends paid over thelife of the credit facility. Inamed has no stock repurchase program in place asof December 31, 2005.

**NOTE 15—EMPLOYEE BENEFIT PLANS**

In January 1990, Inamed adopted a 401(k) DefinedContribution Plan (the Plan) for all U.S. employees. Participants maycontribute to the Plan and Inamed may, at its discretion, match a percentage ofthe participant’s contribution as specified in the Plan’s provisions. Inamed’scontributions to the plan approximated $1.1, $1.1, and $0.9, for the yearsended December 31, 2005, 2004, and 2003, respectively.

In February 1990, McGhan Limited (Inamed’s Irishsubsidary) adopted a Defined Contribution Plan. Upon commencement of service,these employees become eligible to participate in the plan and contribute tothe plan up to 5% of their compensation. Inamed’s matching contribution isup to 8.5% of the participant’s compensation. Inamed’s contributionsto the plan approximated $0.7, $0.6, and $0.4 for the years ended December 31,2005, 2004, and 2003, respectively.

Certain other foreignsubsidiaries sponsor defined contribution plans. The remaining plans, coveringapproximately 80 non-U.S. employees, were instituted at various times during1991 through 1997 and the accumulated assets and obligations are immaterial. Theseplans are funded annually according to plan provisions with aggregatecontributions of $0.4, $0.4, and $0.3 for the years ended December 31,2005, 2004, and 2003, respectively.

F-29

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

**NOTE16—PRODUCT LINE AND GEOGRAPHICAL FINANCIAL INFORMATION**

Inamed’ssales by product line are as follows:

| ** **            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|
| Breast Aesthetics     |       | $        | 230.9      |     | $          | 215.8    |       | $ | 177.8 |   |
| Obesity  Intervention |       | 131.2    |       | 88.5     |       | 63.1     |       |
| Facial Aesthetics     |       | 71.7     |       | 75.6     |       | 87.2     |       |
| Other*                |       | 4.0      |       | 4.5      |       | 4.5      |       |
| Total                 |       | $        | 437.8      |     | $          | 384.4    |       | $ | 332.6 |   |

----

*                    Other includesongoing sales to other medical manufacturers (principally sales of Contigen).

Inamed’ssales by major country (according to the location of the customer) were asfollows:

| ** **            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|
| U.S.                  |       | $        | 268.7      |     | $          | 235.2    |       | $ | 215.2 |   |
| All Other  Countries* |       | 169.1    |       | 149.2    |       | 117.4    |       |
| Total                 |       | $        | 437.8      |     | $          | 384.4    |       | $ | 332.6 |   |

----

*       No othercountry’s sales comprise more than 10% of net sales for any of the years

Long-livedassets (which consist of property and equipment) by major country were asfollows:

| ** **            | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| U.S.                  |       | $        | 41.6       |     | $          | 42.2 |   |
| Ireland               |       | 17.1     |       | 17.4     |       |
| All Other  Countries* |       | 5.7      |       | 2.9      |       |
| Total                 |       | $        | 64.4       |     | $          | 62.5 |   |

----

*       No other country’s long-lived assets comprise more than 10% oftotal long-lived assets as of December 31, 2005 or 2004.

**NOTE 17—MAJOR SUPPLIERS**

The Company purchases itsraw materials and certain finished products from many different suppliersworldwide. There are three suppliers which account for $32.6, $22.1, and $21.3of raw material purchases for the years ending December 31, 2005, 2004,and 2003 respectively.

**NOTE18—LEASE, GOVERNMENT SUBSIDY AND ROYALTY COMMITMENTS**

Inamed leases facilities under operating leases. Rentexpense aggregated $7.3, $7.4, and $5.7 for the years ended December 31,2005, 2004, and 2003, respectively.

F-30

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

Minimumlease commitments under all non-cancelable operating leases at December 31,2005 are as follows:

| 2006       |   | $    | 7.5    |   |
|------------|--------|------|--------|--------|
| 2007       |   | 6.2  |   |
| 2008       |   | 5.5  |   |
| 2009       |   | 5.4  |   |
| 2010       |   | 5.5  |   |
| Thereafter |   | 22.4 |   |
|       |   | $    | 52.5   |   |

 

Deferred grant income represents grants received fromthe Irish Industrial Development Authority, or IDA, for the purchase of capitalequipment and is being amortized to income over the life of the related assets.Amortization for the years ended December 31, 2005, 2004, and 2003,respectively was $0.2, $0.2, and less than $0.1. IDA grants are subject torevocation upon a change of ownership or liquidation of McGhan Limited. If thegrant was revoked, Inamed would be liable on demand from the IDA for all sumsreceived and deemed to have been received by Inamed in respect to the grant. Inthe event of revocation of the grant, Inamed could be liable for the amount ofapproximately $1.2 at December 31, 2005.

Inamed has obtained theright to produce, use and sell patented technology through various licenseagreements. Inamed pays royalties ranging from 1% to 8% of the related sales,depending upon sales levels. Royalty expense under these agreements wasapproximately $17.4, $9.9, and $6.1 for the years ended December 31, 2005,2004, and 2003, respectively, and is included in cost of goods sold. 

**NOTE 19—RELATED PARTY TRANSACTIONS**

In 2001, Inamed loaned an executive $0.2 under a fullrecourse note bearing minimum interest at approximately 4%. The note had annualinstallments due of one-third of the principal balance in February of2003, 2004, and 2005, with all accrued interest due and payable in February 2005.As of December 31, 2004 the note balance and accrued interest was $0.1,and was paid in full in February 2005.

In 2005, 2004, and 2003,respectively, Inamed paid $0.0, $0.4, and $1.4 to a marketing consulting firmwhich is owned by the son-in-law of one of the Company’s Directors. Managementbelieves that the terms entered into are at arms-length and that such terms arecomparable to those with third parties. The unpaid balance at December 31,2005 and 2004 was $0.0.

**NOTE 20—LITIGATION**

**BREAST IMPLANT LITIGATION**

*Trilucent BreastImplant Matters*

When the Company purchased Collagen in September 1999,Inamed assumed certain liabilities relating to the Trilucent breast implant, asoybean oil-filled breast implant, which had been manufactured and distributedby various subsidiaries of Collagen between 1995 and November 1998. In November 1998,Collagen announced the sale of its LipoMatrix, Inc. subsidiary,manufacturer of the Trilucent implant, to 

F-31

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

Sierra MedicalTechnologies, Inc. Collagen retained certain liabilities for Trilucentimplants sold prior to November 1998.

In March 1999, the United Kingdom Medical DevicesAgency, or MDA, announced the voluntary suspension of marketing and withdrawalof the Trilucent implant in the U.K. The MDA stated that its actions were takenas a precautionary measure and did not identify any immediate hazard associatedwith the use of the product. The MDA further stated that it sought thewithdrawal because it had received “reports of local complications in a smallnumber of women” who had received those implants, involving localized swelling.The same notice stated that there “has been no evidence of permanent injury orharm to general health” as a result of these implants. In March 1999,Collagen agreed with the U.K. National Health Service that, for a period oftime, it would perform certain product surveillance with respect to U.K.patients implanted with the Trilucent implant and pay for explants for any U.K.women with confirmed Trilucent implant ruptures. Subsequently, LipoMatrix’snotified body in Europe suspended the product’s CE Mark pending furtherassessment of the long-term safety of the product. Sierra Medical has sincestopped sales of the product. Subsequent to acquiring Collagen, Inamed electedto continue the voluntary program.

Inamed estimates that approximately 8,000-9,000women received Trilucent implants until commercial sales ceased in March 1999,and approximately half of them reside in the U.K. In the U.S., 165 womenreceived Trilucent breast implants in two clinical studies; enrollment in bothstudies ended by June 1997.

On June 6, 2000, the MDA issued a hazard noticerecommending that surgeons and their patients consider explanting the Trilucentimplants even if the patient is asymptomatic. The MDA also recommended thatwomen avoid pregnancy and breast-feeding until the explantation. The hazardnotice stressed, however, “that all of the above advice is precautionary.Although there have been reports of breast swelling and discomfort in somewomen with these implants, there has been no clinical evidence of any serioushealth problems, so far.”

Concurrently with the MDA announcement of June 6,2000, Inamed announced that, through its AEI, Inc. subsidiary, it hadundertaken a comprehensive program of support and assistance for women who havereceived Trilucent breast implants, under which it is covering medical expensesassociated with the removal and replacement of those implants for women in theEuropean Community, the U.S. and other countries. After consulting withcompetent authorities in each affected country, the Company terminated thissupport program effective as of March 31, 2005 in all countries other thanthe United States and Canada. Notwithstanding the termination of the generalprogram, Inamed continued to pay for certain explanations and related expensesif a patient justified her delay in having her Trilucent implants removed on medicalgrounds or owing to lack of notice. Under this program, the Company may pay afee to any surgeon who conducts an initial consultation with any Trilucentimplantee. The Company also pays for the explantation procedure and relatedcosts, and for replacement (non-Trilucent) implants for women who arecandidates for and who desire them. To date, virtually all of the U.K.residents and more than 95% of the non-U.K. residents who have requestedexplantations as a result of an initial consultation have had them performed.Prior to February 15, 2005, an insurance company reimbursed us forapproximately 70% of these expenses. As of February 15, 2005, thisinsurance expired.

F-32

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

In 2000-2002, Inamed was sued in variouslitigations in the United States alleging bodily injury caused by Trilucentbreast implants. All of these cases have now been dismissed or settled and,except for one matter recently brought by an individual who received Trilucentimplants in a U.S. clinical trial (and who executed a broadly-worded informedconsent in order to participate in that trial), Inamed is not a party to anyTrilucent related court proceedings in the United States at this time.

Also, since the third quarter of 2000, Inamed and itssubsidiaries have received notices of claims from European women, the vastmajority of them residents of the U.K. or Spain, seeking compensation forgeneral and special damages for alleged bodily injuries from Trilucent implants.In November 2000, with the consent and approval of its insurers, AEI, Inc.,on behalf of itself, its affiliates and insurers, entered into a settlementprotocol with the lead solicitor for the U.K. claimants. The protocol affordeda fixed level of compensation to qualified claimants who, in an uncomplicatedsurgical procedure, have had their Trilucent breast implants explanted inreliance on the June 2000 MDA hazard notice. The protocol also afforded amechanism for the efficient resolution of any claims alleging that the earlyexplantation of Trilucent implants involved serious surgical complications orresulted in a medical condition, which required either extended hospitalizationor extended home care. More than 95% of the U.K. women who have had theirTrilucent implants explanted since June 2000, represented by more than 90different solicitors, have sought compensation through the settlement protocol.Effective September 15, 2005, Inamed closed its settlement protocol in theU.K. To date, Inamed has not received any civil proceedings in the UK as aresult of its Trilucent-related exposure.

In addition, in Spain, prior to September 30,2005, Inamed offered a protocol similar in structure to the United Kingdomprotocol. During the time that this Spanish protocol was open, the Companyreceived 336 claims. In addition, a Spanish consumer union has commenced asingle action in which the consumer union Avinesa alleges that it represents 41Spanish Trilucent explantees. Finally, to date, 63 women have commencedindividual legal proceedings in court against us, of which 39 were stillpending as of December 31, 2005. Prior to the issuance of a decision by anAppellate Court sitting in Madrid in the second quarter of 2005, we wonapproximately one-third, and lost approximately two-thirds of our Trilucentcases in the lower courts. The average damages awarded in cases we lost wereapproximately $18,000. In the second quarter of 2005, in a case called *Gomez Martin v. AEI*, for the first time an appellate courtin Spain issued a decision holding that Trilucent breast implants were not “defective”within the meaning of applicable Spanish product liability law and dismissed aEUR 60,000 award issued by the lower court. While this ruling is a positivedevelopment for the Company, it may not be followed by other Spanish appellatecourts or could be modified or found inapplicable to other cases filed in theMadrid district. The Avinesa class action was filed in the Madrid district. Todate, since the ruling in Gomez Martin, the Company has had greater success inwinning the Spanish cases than before that ruling.

In 2002, Inamed came to final settlements with each ofits two insurers for product liability claims arising from the Trilucentimplant. Under one settlement, with MEDMARC Casualty Insurance Company, MEDMARCpaid $6.0 million in cash to Inamed in January 2003, and $1.5 million incash in May 2003, and, effective November 16, 2002, agreed to make apolicy with a limit of $10.0 million available to the Company for defense andindemnification of Trilucent-related bodily injury claims worldwide. The policydoes not cover claims filed against us after November 7, 2005. As of June 30,2004 we had no remaining coverage under this policy. Under the secondsettlement, AISLIC, an AIG company, agreed to make an 

F-33

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

excess policy with a limitof $10.0 million available to the Company for the indemnification of non-U.S.Trilucent claims. There was approximately $1.6 million remaining under thiscommitment at December 31, 2005. As a result of these settlements, wereleased both carriers from any other actual or potential financial claimsunder the policies and dismissed all carrier related litigation with prejudice.

By agreement with the MDA, Inamed funded additionalscientific research and patient monitoring relating to Trilucent. On August 4,2004, the Trilucent Scientific Advisory Panel (TSAP) delivered a report to thesuccessor entity to the MDA in the United Kingdom, known as the MRHA. In itsreport, issued after more than three years of research, the TSAP concluded thatthere is no scientific evidence that Trilucent implants pose a significantsystemic risk to human health but that the removal of the implants onprecautionary grounds was and is appropriate.

On September 27,2004, the MHRA issued an update on Trilucent in which it concluded:

4.                the recommendationthat Trilucent breast implants should be removed remains appropriate becauseexposure to local tissue to toxic compounds has been confirmed;

5.                there is noevidence for local or systemic disease risk once the implants are removed; and

6.                no further studiesare needed to assess the potential risk of Trilucent breast implants.

In addition, at December 31, 2005, Inamed had anaccrual for future Trilucent claims, costs, and expenses of approximately $4.0million and insurance of $1.6 million, or $2.4 million, net of insurance.

Based upon the informationand analyses currently available to Inamed, the Company believes that itscurrent accruals and available insurance coverage are sufficient to dischargefuture Trilucent related liabilities; however, there can be no assurances thatthe future Trilucent liabilities will not exceed the current accruals andinsurance coverage.

**PATENTS AND LICENSE LITIGATION**

*Manders Matter*

Inamed is a defendant inErnest K. Manders, M.D. v. McGhan Medical Corporation, et al., pending in theU.S. District Court for the Western District of Pennsylvania, Case No. 02-CV-1341.The amended complaint in the Manders case seeks damages for alleged infringementof a patent allegedly held by Manders in the field of tissue expanders. TheCompany does not believe that it practices the device claimed by Manders orthat it teaches the methods he claims. Accordingly, in February 2003,Inamed answered the complaint, denying its material allegations, andcounterclaimed against Manders for declarations of invalidity as well asnoninfringement. Fact discovery was completed on July 31, 2004. Expertdiscovery relating to claim construction issues was completed in August 2004.Manders has elected to limit his claim for infringement to twelve of theforty-six claims in his patent. The Court held a Markman hearing on September 23,October 6-7, and 18, 2004. On February 23, 2006, the Courtissued its Memorandum Opinion on claim construction. The Court also issued anorder setting a Status Conference for April 21, 2006, which will set theschedule for remaining pretrial activities including a period of time forexpert discovery. The Company intends to defend this lawsuit vigorously.

F-34

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

**OTHER MATTERS**

*Government Inquiry*

On February 24, 2005,the U.S. Securities and Exchange Commission (SEC) notified Inamed that it hadinitiated a formal private investigation to determine whether Inamed hasviolated federal securities laws. The Company was not aware of theinvestigation or any related inquiry prior to that date. Inamed has fullycooperated in the investigation. Based upon communications with the SEC Staff,the Company believes the investigation relates to assessing the adequacy of itsdisclosures regarding one style (Style 153) of silicone gel-filled breastimplant products. This particular style accounted for approximately $3.4million (less than 1%) of total revenues in 2004. On September 8, 2005,the SEC Staff notified Inamed that it intended to recommend to the SEC that theinvestigation be closed without any enforcement action or recommendation. Therecan be no assurance, however, that the SEC will accept that recommendation orthat the scope of the investigation will not change or expand. While theCompany believes that its disclosures regarding its silicone gel-filled breastimplant products have been and are in compliance with federal securities laws,there can be no assurance that the investigation will not have an adverseeffect on Inamed.

*Other Matters*

Inamed is involved invarious other legal actions arising in the ordinary course of business, whichmay involve product liability claims for bodily injury and/or financial lossarising from the use of the Company’s products, and breach of contract claims. Theseclaims have not had, and are not expected to have, a material adverse effect onthe Company’s financial condition or results of operations.

F-35

----

**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (millions)**

**NOTE21—QUARTERLY SUMMARY OF OPERATIONS—(Unaudited, see accompanying accountants’report) (Per share data shown as actual, not millions)**

Thefollowing is a summary of selected quarterly financial data for 2005 and 2004:

| ** **                   | ** ** | **Quarter** | ** ** |
|------------------------------|------------|-------------|------------|
| ** **                   | ** ** | **1st**     | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** |
| Net Sales:                   |       |        |       |   |   |   |   |   |   |
| 2005                         |       | $           | 105.2      |   | $ | 114.6 |   | $ | 105.2 |   | $ | 112.8 |   |
| 2004                         |       | $           | 90.8       |   | $ | 99.7 |   | $ | 90.0 |   | $ | 103.8 |   |
| Gross Profit:                |       |        |       |   |   |   |   |   |   |
| 2005                         |       | $           | 76.0       |   | $ | 82.8 |   | $ | 76.0 |   | $ | 82.2 |   |
| 2004                         |       | $           | 65.9       |   | $ | 72.9 |   | $ | 64.2 |   | $ | 73.6 |   |
| Net Income (Loss):           |       |        |       |   |   |   |   |   |   |
| 2005                         |       | $           | 13.7       |   | $ | 20.6 |   | $ | 14.9 |   | $ | (75.4 | )(1) |
| 2004                         |       | $           | 17.5       |   | $ | 9.8 |   | $ | 16.8 |   | $ | 18.9 |   |
| Net Income (Loss) per share: |       |        |       |   |   |   |   |   |   |
| 2005 Basic                   |       | $           | 0.38       |   | $ | 0.57 |   | $ | 0.41 |   | $ | (2.06 | ) |
| 2005 Diluted                 |       | $           | 0.38       |   | $ | 0.56 |   | $ | 0.41 |   | $ | (2.06 | ) |
| 2004 Basic                   |       | $           | 0.50       |   | $ | 0.28 |   | $ | 0.47 |   | $ | 0.53 |   |
| 2004 Diluted                 |       | $           | 0.49       |   | $ | 0.27 |   | $ | 0.47 |   | $ | 0.52 |   |

----

(1)—Included in netloss is $110.4 of Medicis merger termination fees and related merger expenses.

 

F-36

----

**SCHEDULE IIINAMED CORPORATION AND SUBSIDIARIESVALUATION ACCOUNTSYears ended December 31, 2005, 2004, and 2003(In millions)**

| ** **                                      | ** ** | **Beginning of**   | ** ** | ** **    | ** ** | ** **     | ** ** | **Ending of**      | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|---------------|------------|----------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **Period Balance** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Period Balance** | ** ** |
| Year ended  December 31, 2005:             | ** ** |                    | ** ** | ** **    |       |           | ** ** | ** **              |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Allowance for returns(1)                        |       |                    | $          | 12.0          | ** ** |           |       | $                       | 136.2      | ** ** |   |   | $ | 139.8 | ** ** |   |   | $ | 8.4 | ** ** |   |
| Allowance for doubtful accounts(2)              |       |                    | 6.1        | ** **    |       |           | 2.0        | ** **              |       |   | 2.4 | ** ** |   |   | 5.7 | ** ** |   |
| Allowance for undelivered product(3)            |       |                    | 0.4        | ** **    |       |           | 1.2        | ** **              |       |   | 1.1 | ** ** |   |   | 0.5 | ** ** |   |
| Allowance for obsolescence(4)                   |       |                    | 1.3        | ** **    |       |           | 1.0        | ** **              |       |   | 0.6 | ** ** |   |   | 1.7 | ** ** |   |
| Valuation allowance for deferred tax assets(5)  |       |                    | 1.7        | ** **    |       |           | 0.1        | ** **              |       |   | — | ** ** |   |   | 1.8 | ** ** |   |
| Year ended  December 31, 2004:             |       |                    |       | ** **    |       |           |       | ** **              |       |   |   | ** ** |   |   |   | ** ** |   |
| Allowance for returns(1)                        |       |                    | 9.3        | ** **    |       |           | 136.3      | ** **              |       |   | 133.6 | ** ** |   |   | 12.0 | ** ** |   |
| Allowance for doubtful accounts(2)              |       |                    | 9.4        | ** **    |       |           | 3.2        | ** **              |       |   | 6.5 | ** ** |   |   | 6.1 | ** ** |   |
| Allowance for undelivered product(3)            |       |                    | 1.0        | ** **    |       |           | 1.0        | ** **              |       |   | 1.6 | ** ** |   |   | 0.4 | ** ** |   |
| Allowance for obsolescence(4)                   |       |                    | 1.3        | ** **    |       |           | 0.5        | ** **              |       |   | 0.5 | ** ** |   |   | 1.3 | ** ** |   |
| Valuation allowance for deferred tax assets(5)  |       |                    | 1.1        | ** **    |       |           | 0.6        | ** **              |       |   | — | ** ** |   |   | 1.7 | ** ** |   |
| Year ended  December 31, 2003:             |       |                    |       | ** **    |       |           |       | ** **              |       |   |   | ** ** |   |   |   | ** ** |   |
| Allowance for returns(1)                        |       |                    | 7.0        | ** **    |       |           | 115.9      | ** **              |       |   | 113.6 | ** ** |   |   | 9.3 | ** ** |   |
| Allowance for doubtful accounts(2)              |       |                    | 3.9        | ** **    |       |           | 7.3        | ** **              |       |   | 1.8 | ** ** |   |   | 9.4 | ** ** |   |
| Allowance for undelivered product(3)            |       |                    | 0.6        | ** **    |       |           | 0.9        | ** **              |       |   | 0.5 | ** ** |   |   | 1.0 | ** ** |   |
| Allowance for obsolescence(4)                   |       |                    | 6.9        | ** **    |       |           | 4.5        | ** **              |       |   | 10.1 | ** ** |   |   | 1.3 | ** ** |   |
| Valuation  allowance for deferred tax assets(5) |       |                    | 2.0        | ** **    |       |           | —     | ** **              |       |   | 0.9 | ** ** |   |   | 1.1 | ** ** |   |
|                                                 |            |                         |            |               |            |                |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          The additions to theallowance for returns represent estimates of returns based upon our historicalreturns experience. Deductions are the actual returns of products.

(2)          The additions to theallowance for doubtful accounts represent the estimates of our bad debt expensebased upon the factors for which we evaluate the collectability of our accountsreceivable. Deductions are the actual write offs of the receivables.

(3)          The additions to theallowance for undelivered product represent the increase in the reserve for nondelivery of product at a period end. Deductions represent a decrease in thereserve for the delivery of the product prior to period end.

(4)          The additions to theallowance for obsolescence represent the estimated amounts of inventoriedproduct, which we estimate will not be consumed or sold in a timely manner, andalso includes amounts estimated for lower of cost or market adjustments. Deductionsrepresent the write off or sell through of that inventory.

(5)          The additions to anddeductions from the valuation allowance for deferred tax assets are primarilyrelated to the Company’s ability to use its net operating loss carry-forwardsto offset taxable income reported in certain jurisdictions.

S-2

----