**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**ANNUAL REPORT PURSUANT TO SECTION 13 OR15 (d)OFTHE SECURITIES EXCHANGE ACT OF 1934**

**Forthe fiscal year ended December 31, 2004**

**Commissionfile number 1-9741**

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INAMEDCORPORATION

(Exact name of registrantas specified in its charter)

| **Delaware**                                                     | **59-0920629**                        |
|------------------------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) | (I.R.S. Employer  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

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Securities registered pursuantto Section 12(b) of the Act:**None**

Securities registeredpursuant to Section 12(g) of the Act:**Common Stock, par value $0.01 per sharePreferred Stock Purchase Rights**

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 is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K.  o

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

The aggregate market valueof voting stock held by non-affiliates as of June 30, 2004 was $2,232.4million, based on the closing sales price on the NASDAQ National Market on thatdate.

On March 10, 2005,there were 36,074,910 shares of the registrant’s common stock outstanding.

**DOCUMENTS INCORPORATED BYREFERENCE:**

The information requiredby Part III of this Form 10-K is incorporated by reference tothe registrant’s definitive proxy statement to be filed with theSecurities and Exchange Commission not later than 120 days after the conclusionof the registrant’s fiscal year ending December 31, 2004 (April 30,2005) pursuant to Regulation 14A.

 

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**INAMED CORPORATIONAnnual Report on Form 10-KFor the Fiscal Year Ended December 31, 2004TABLE OF CONTENTS**
|                      | ** ** | ** **                                                                                                     | ** ** | **Page** |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**           |
| Item 1.              |       | Business                                                                                                       |       | 2        |   |
| Item 2.              |       | Properties                                                                                                     |       | 23       |   |
| Item 3.              |       | Legal Proceedings                                                                                              |       | 24       |   |
| Item 4.              |       | Submission of Matters to a Vote of  Security Holders                                                           |       | 27       |   |
| **PART II**          |
| Item 5.              |       | Market for Inamed’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities |       | 28       |   |
| Item 6.              |       | Selected Financial Data                                                                                        |       | 29       |   |
| Item 7.              |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operation                |       | 31       |   |
| Item 7A.             |       | Quantitative and Qualitative Disclosures about  Market Risk                                                    |       | 42       |   |
| Item 8.              |       | Financial Statements and  Supplementary Data                                                                   |       | 43       |   |
| Item 9.              |       | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                          |       | 43       |   |
| Item  9A.            |       | Controls and Procedures                                                                                        |       | 43       |   |
| Item  9B.            |       | Other Information                                                                                              |       | 43       |   |
| **PART III**         |
| Item  10.            |       | Directors and Officers of Inamed                                                                               |       | 44       |   |
| Item  11.            |       | Executive Compensation                                                                                         |       | 44       |   |
| Item  12.            |       | Security Ownership of Certain Beneficial  Owners and Management                                                |       | 44       |   |
| Item  13.            |       | Certain Relationships and Related  Transactions                                                                |       | 44       |   |
| Item  14.            |       | Principal  Accounting Fees and Services                                                                        |       | 44       |   |
| **PART IV**          |
| Item  15.            |       | Exhibits, Financial Statement  Schedules                                                                       |       | 45       |   |
| Signatures           |       | 49                                                                                                             |       |
| 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.

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**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

Inamed is a globalhealthcare company that develops, manufactures, and markets a diverse line ofproducts that enhance the quality of people’s lives. These products includebreast implants for aesthetic augmentation and reconstructive surgery followinga mastectomy, a range of dermal products to correct facial wrinkles, theBioEnterics® LAP-BAND® System designed to treat severe and morbid obesity, andthe BioEnterics® Intragastric Balloon (BIB®) system for the treatment ofobesity.

**COMPANY HISTORY**

McGhan Medical Corporationwas incorporated in 1974 and was a manufacturer of silicone products forplastic and reconstructive surgery. In 1977, that business was sold toMinnesota Mining and Manufacturing Company, or 3M. In 1984, a newly formedMcGhan Medical Corporation acquired the assets of 3M’s silicone implant productline. In 1985, that corporation became a subsidiary of a publicly-held companythrough a merger with First American Corporation, a Florida corporation. In1986, First American changed its name to Inamed Corporation. Inamed formed itsBioEnterics Corporation subsidiary in 1991, primarily to pursue opportunitiesin the field of stomach constriction technology. In 

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December 1998,Inamed changed its state of incorporation to Delaware through a reincorporationmerger. In September 1999, Inamed completed its acquisition of CollagenAesthetics Inc., which was then a publicly-held corporation which manufacturedand marketed primarily collagen-based dermal fillers and other aestheticsproducts. In 2001, Inamed renamed its McGhan Medical Corporation subsidiary toInamed Medical 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.

**PRODUCTS ANDPRODUCT 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 ina large number of variations to meet customers’ preferences and needs.

*Saline-Filled Breast Implants*.   Wesell saline-filled breast implants in the U.S. and internationally for use inbreast augmentation for cosmetic or revision reasons and for reconstructivesurgery. The U.S. market is the primary consumer of our saline-filled breastimplants.

*Silicone Gel-Filled Breast Implants*.   Wesell silicone gel-filled breast implants primarily in Europe, the Middle East,Latin America, Australia, New Zealand and Asia. More than 90% of our breastimplant sales outside the U.S. are silicone gel-filled. There are a variety ofsilicone gel-filled breast implants available in these markets based upon the degreesof cohesivity 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 we neededto provide prior to the FDA’s further review of our PMA for silicone gel-filledbreast implants. According to the letter, submission of the requestedinformation and data will place the PMA in approvable form and allow the FDA toconduct further review of Inamed’s PMA. In January 2004, the FDA alsoissued draft guidance for saline, silicone gel, and alternative breast implants.The guidance provides non-binding recommendations regarding device description,preclinical, clinical, and labeling 

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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 Pending Silicone Gel-Filled Breast ImplantsPMA to the FDA, which is scheduled to be reviewed by the FDA’s General andPlastic Surgery Devices Advisory Panel on April 11-13, 2005.

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 fourth 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. The Style 410 cohesivesilicone gel-filled implants are currently the leading selling breast implantsin 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 andCaptiqueTM. In July 2002, we acquired the exclusive rights in the U.S.,Canada and Japan to sell Ipsen Limited’s botulinum toxin Type A product,branded as ReloxinTM in the U.S., for all cosmetic indications. In January 2004,we acquired the exclusive rights to sell Juvéderm® in the United States, Canada, and Australia, and thenon-exclusive rights to sell the product under a different name in variousother countries. In December 2004, the FDA approved CaptiqueTM Injectablegel, a new dermal filler product based on Genzyme Corporation’s non-animalstabilized hyaluronic acid (HA) technology.

*Zyderm and Zyplast*.   Zydermand Zyplast dermal fillers are injectable formulations of bovine collagen. Zydermimplants 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 certainshallow scars. Zyplast implants are designed to treat deeper depressions andcan be used for more pronounced contour problems, such as deeper scars, linesand furrows, and for areas upon which more force is exerted, such as thecorners of the mouth. The implants take on the texture and appearance of humantissue and are subject to similar stresses and aging processes. Consequently,supplemental treatments are necessary to maintain the desired result. Zydermand Zyplast implants require a skin test, with a requisite 30-day periodto observe the possibility of allergic reaction in the recipient. Both of theseproducts are formulated with Lidocaine, an anesthetic, to alleviate pain duringinjection. In the U.S., the FDA approved the PMA for Zyderm in 1981 and forZyplast in 1985. Zyderm and Zyplast were approved for marketing in Europe in1995.

*CosmoDerm and CosmoPlast*.   CosmoDermand CosmoPlast dermal fillers are a line of injectable human skin-cell derivedcollagen products that Inamed licenses from Smith & Nephew, Inc. Wereceived FDA approval for CosmoDerm and CosmoPlast in March 2003 andreceived approval from Health Canada in December 2002. We received approvalto market CosmoDerm 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 

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upon which moreforce is exerted, such as the corners of the mouth. The implants take on thetexture and appearance of human tissue and are subject to similar stresses andaging processes. Consequently, supplemental treatments are necessary tomaintain the desired result. CosmoDerm and CosmoPlast**implants donot require a skin test pre-treatment. Both of these products are formulatedwith Lidocaine, an anesthetic, to alleviate pain during injection.

*Hylaform Gel.  *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.

*Ju*véd*erm/Hydrafill*.   Juvéderm, a non-animal basedcross-linked hyaluronic acid-based dermal filler, is indicated for wrinklecorrection, facial contouring, and lip enhancements. In January 2004, we signed adevelopment and distribution agreement with Corneal Group for the rights todevelop, 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, Australia and Japan, and non-exclusive rights inFrance, Spain, the United Kingdom, Italy, Germany and Switzerland. In thenon-exclusive European countries, Inamed has established the brand name,Hydrafill, to promote and market Juvéderm. Currently,Hydrafill is available in five formulations and Juvéderm is alsoavailable in five formulations, for soft tissue augmentation of varyingseverities of wrinkles. Juvéderm products are currently approved orregistered in over 34 countries, including all major European markets. In thesemarkets Juvéderm/Hydrafill does not require a skin testpre-treatment. Distribution of Juvéderm and Hydrafill in Canada and keyEuropean markets commenced in 2004, and we have filed for and are awaitingregulatory approval of Juvéderm in Australia. We initiated a clinical study inthe U.S. in the fourth quarter of 2004 and currently anticipate filing a PMAwith the FDA in 2006.

*Captique.  *Captiquedermal filler is a non-animal stabilized hyaluronic acid injectable productindicated for the correction of moderate to severe facial wrinkles and scars. Theproduct is licensed from Genzyme Corporation. Captique does not require a skintest, so patients can be treated immediately. In December 2004, the FDAgranted U.S. market approval for Captique. We commenced sales of the product inthe U.S. in January 2005.

*Reloxin*.   In July 2002,Inamed and Ipsen Limited signed a definitive agreement which provides thatInamed will develop, distribute and market Ipsen Limited’s botulinum toxin TypeA, branded as Reloxin in the U.S., for all cosmetic indications, includingwrinkles, in the United States, Canada, and Japan. In January 2005, Inamedand Ipsen executed a preliminary agreement for distribution rights in selectedinternational markets, including Europe. The product is a sterile,freeze-dried, purified form of botulinum toxin A, and we will be the exclusivedistributor of all current and future formulations in the U.S., Canada, andJapan. The product is currently marketed under the tradename Dysport® in Europe and elsewhere where it competes with other botulinumtoxin products such as Allergan’s Botox®. Dysport has been granted marketingauthorization in over 65 countries worldwide including the U.K., France, andGermany, and has been approved for cosmetic indications in 10 countriesworldwide including New Zealand, Brazil, Mexico and Argentina. We completed thephase II dosing trial in 2003, during which an optimal dose was selected. Datawas presented to, 

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and accepted by,the FDA to initiate the phase III pivotal studies using this dose. We initiatedthe phase III trials in 2004 in the United States.

*Obesity Intervention*

We develop, manufacture, andmarket several devices for the treatment of obesity. Our principal product inthis market area, the BioEnterics 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 BioEntericsLAP-BAND System is an adjustable silicone elastomer band which islaparoscopically placed around the upper part of the stomach through a smallincision, creating a small pouch at the top of the stomach. This slows down thepassage of food and makes the patient feel fuller sooner. Unlike a gastricbypass which is permanent, the BioEnterics LAP-BAND System procedure isadjustable and reversible.

The LAP-BAND System hasachieved widespread acceptance in the United States, Europe, Australia, LatinAmerica, the Middle East, and other countries and regions. In June 2001,the LAP-BAND System was approved by the FDA for treatment of severe obesity inadults who have failed more conservative weight reduction alternatives. Commercialdistribution of the BioEnterics 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 theFDA in January 2004. The LAP-BAND VG meets the needs of a wider range ofpatients, allowing us to serve a broader market. The larger band circumference ofthe LAP-BAND VG serves those who are physically larger, have thicker gastricwalls, or have substantial internal fat. Approximately 160,000 LAP-BAND unitshave been sold worldwide since 1993.

We also sell theBioEnterics Intragastric Balloon®, or BIB, System, which is a short-termtherapy designed for patients who must reduce weight in preparation for surgeryor for moderately obese patients in conjunction with a long-term comprehensivediet and exercise program. Currently distributed only outside the U.S., the BIBis a silicone elastomer balloon that is filled with saline after insertion intothe 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 collagenproduct used for treatment of urinary incontinence due to intrinsic sphincterdeficiency. We obtained approval from the FDA to market Contigen in September 1993.C. R. Bard, Inc. licensed from us exclusive worldwide marketingand distribution rights to Contigen. We also provide other collagen productsfor use by other medical manufacturers.

**SALES AND MARKETING**

We sell our productsdirectly and through independent distributors in approximately 70 countriesworldwide. We supplement our marketing efforts with appearances at trade shows,advertisements in trade journals, sales brochures, and national media. Inaddition, we sponsor symposiums and educational programs to familiarizesurgeons with the leading techniques and methods of using our products.

*Breast Aesthetics.  *Inthe U.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 European markets. In other European markets, in the Middle East,Latin America, Africa, and the Asia-Pacific region, our breast aestheticsproducts are sold through a network of distributors.

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*Facial Aesthetics.  *Ourfacial aesthetics products are marketed under Inamed Aesthetics to plastic andreconstructive surgeons, hospitals and clinics, as well as to facial and oralsurgeons, and dermatologists. The facial aesthetics products are sold in mostof the same countries and by the same sales organizations that sell the breastaesthetics products. We have a direct sales force for facial products in Japanand Australia.

*Obesity Intervention.  *Ourobesity intervention products are marketed under Inamed Health to general,laparoscopic, and bariatric surgeons, and sold to hospitals. In the U.S.,obesity intervention products are sold by a sales force of company-employedrepresentatives and managers. In Europe and Australia, our Health products aresold by our subsidiaries through their staff of sales representatives as wellas third-party agents. In other European markets, in the Middle East, LatinAmerica, Africa, and the Asia-Pacific region, our Health products are soldthrough a network of distributors.

**COMPETITION**

*Breast Aesthetics*

We compete in the U.S.breast implant market with Mentor Corporation. We are aware of severalcompanies conducting clinical studies of breast implant products in the U.S. Internationally,we compete with several manufacturers, including Mentor Corporation, Silimed,Medicor Corporation, 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 and plastic surgery markets with other hyaluronicacid products, substantially different treatments, such as laser treatments,chemical peels, fat injections, gelatin- or cadaver-based collagen products,and botulinum toxin-based products. In addition, several companies are engagedin research and development activities examining the use of collagen and otherbiomaterials for the correction of soft tissue defects. Internationally, wecompete with products such as RestylaneÒ,RestylaneÒ Fine Lines, and PerlaneÔ(all manufactured by Q-Med A.B.). Since the first quarter of 2004 we havecompeted in the U.S. dermal filler market with Restylane® which is distributedby Medicis Pharmaceutical Corporation.

*Obesity Intervention*

No gastric bands otherthan the BioEnterics LAP-BAND System are commercially available in the U.S.,and we are currently aware of only one other company conducting U.S. clinicalstudies of gastric bands at this time. Outside the United States, the LAP-BANDSystem competes primarily with the Swedish Adjustable Gastric Band(manufactured by Ethicon Endo Surgery,) and the Heliogast Band (manufactured byHelioscopie, S.A., France). There are at least two other gastric bands on themarket internationally. The LAP-BAND System also competes with surgical obesityprocedures, including gastric bypass, vertical banded gastroplasty, andbiliopancreatic diversion.

No intragastric balloonsother than the BioEnterics BIB System are commercially available in the U.S.and we are currently aware of only one other company outside the U.S.,Helioscopie, which recently launched the Heliosphere. We are not aware of anypublished clinical studies that support this device’s effectiveness.

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**RESEARCH ANDDEVELOPMENT**

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 $28.8million, $21.5 million, and $13.6 million for the years ended, December 31,2004, 2003 and 2002, 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 exclusive distributor and licensee for Genzyme Corporation’sHylaform® products since 1999, including Hylaform® Plus and Hylaform® FineLine.In December 2004, we entered into an amended and restated agreement withGenzyme Corporation for exclusive U.S. development and distribution rights ofCaptique, a non-animal based hyaluronic acid-based dermal filler. We purchasethese products from Genzyme Corporation and pay royalties based on sales.

·       InJuly 2002, we entered into a development and distribution agreement withIpsen Limited to develop and be the exclusive distributor and licensee forIpsen Limited’s current and any future botulinum toxin A products for allcosmetic indications in the U.S., Canada, and Japan. We are actively pursuingdevelopment of this product, branded as ReloxinTM, at this time. In January 2005,we signed a preliminary agreement with Ipsen for distribution rights ofbotulinum toxin Type A products for all cosmetic indications in selectedinternational markets including Europe.

·       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.

·       Wehad an agreement with Advanced Tissue Sciences, Inc., or ATS, under whichwe acquired an exclusive, worldwide license to certain intellectual propertyfor the development and distribution of certain of ATS’s human-based,tissue-engineered products for surgical applications. Due to the liquidation ofATS, we entered into a supply agreement with an affiliate of Smith and NephewInc. in March 2003, which provides us, on a going forward basis, the rawmaterials previously provided by ATS. Smith and Nephew is also licensing to usthe intellectual property previously licensed to us by ATS. In January 2003,we signed a development agreement with Immucor, Inc. for the production ofhuman collagen extra-cellular mesh and entered into a supply agreement withthem in 2004.

In June 2004, we entered into a settlement agreementwith Ethicon Endo-Surgery, Inc. pursuant to which, among other terms, we weregranted a worldwide, royalty-bearing, non-exclusive license with respect to aportfolio of U.S. and international patents applicable to adjustable gastricbands.

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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 ANDRAW MATERIALS**

Our manufacturing facilities are located in Fremont,California; San José, Costa Rica; and in Arklow, Ireland. Our Santa Barbara,California manufacturing location was closed in 2004, and was consolidated intoour facilities in Costa Rica and Ireland. See Note 3 of the notes to theconsolidated financial statements.

Manufacturing facilitiesproducing medical devices intended for distribution in the U.S. andinternationally are subject to regulation and periodic review by the FDA andother notified bodies. All of our facilities are currently approved by the FDAand the relevant notified bodies to manufacture medical devices fordistribution in the U.S. and internationally.

*Breast Aesthetics*

The Inamed quality system and facility in SantaBarbara, California was inspected by the U.S. FDA in February 2004 andagain in February 2005. Our facility in Arklow, Ireland was inspected in June 2003and the facility in San José, Costa Rica in June 2004. The quality systemand all facilities 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 facility was inspected by the FDB in 2003 and foundto be in compliance with applicable state statutes, and our facility license iscurrent.

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 (a EuropeanNotified Body) in November and October 2004, respectively. Thefacility in Arklow, Ireland was inspected by G-Med (a European Notified Body)in October 2004. Our quality system and all facilities are in compliancewith the requirements of the MDD and with applicable ISO standards (ISO 13485).All applicable Quality System and CE Mark certificates have been issued and arecurrent.

These certifications currently include ISO 9001:1994and ISO 13485:1996. In 2003, ISO 13485:2003 was revised to more closely reflectthe process approach to quality in the manufacturing of medical devices. TheInamed quality system and facilities in Santa Barbara, California and San José,Costa Rica have also been inspected to this new standard and found to becompliant and recommended for certification. The facility in Arklow, Irelandhas been certified to ISO 13485:2003.

We manufacture breast implant and related tissue expanderproducts at our facilities in San José, Costa Rica and Arklow, Ireland. We alsomanufactured breast implants at our facilities in Santa Barbara, California upuntil the closure in mid-2004. These products are manufactured incontrolled environments utilizing specialized equipment for precisionmeasurement, quality control, packaging, and sterilization.

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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 and CosmoDerm and CosmoPlastimplants are manufactured at our facility located in Fremont, 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 our 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 January 2003,we signed a development agreement with Immucor, Inc. for the production ofhuman collagen extra-cellular mesh, the raw material for CosmoDerm andCosmoPlast. 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 manufacturing facility and quality systemwas inspected by the FDB in 2003, and by the FDA in June 2003 and found tobe substantially compliant with all applicable regulations. In addition, thisfacility was inspected by TÜV Product Services in June 2004 and certifiedto applicable International and European regulations and standards. The Fremontfacility is pending a certification audit to ISO 13485:2003 in April 2005.

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.

*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®intermediates are manufactured for NeuColl Inc.

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*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. In 2005, we do not expect to incur any material expense tomaintain our compliance level. Our manufacturing facility in Arklow, Ireland,is regulated by the Irish Environmental Protection Agency, or EPA. The IrishEPA carries out regular checks and monitors compliance with the requirements ofthe Integrated Pollution Control License. In 2004, we received one notice ofnon-compliance from the EPA. Prior to that notice, we had already startedinstalling an oxidizer to mitigate the problem. Installation will be completedin 2005.

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. We received nocitations or notices of violations from the Costa Rican authorities in 2004. Wedo not expect to incur any material expense to maintain this compliance levelduring 2005.

**GOVERNMENTREGULATION**

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 devicesintended for human use and are subject to regulation by the FDA in the U.S. Unlessan exemption 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 of manufacturing facilities. These regulations alsorequire reporting of alleged product defects to the FDA. FDA regulations dividemedical devices into three classes. Class I devices are subject to generalcontrols that require compliance with device establishment registration,product listing, labeling, GMPs and other general requirements. Class IIdevices are subject to special controls in addition to general controls.Class III devices are subject to the most extensive regulation and in mostcases require submission to the FDA of a PMA application that includes datasupporting the safety and effectiveness of the device. Periodic reports must besubmitted to the FDA, including any descriptions of any adverse eventsreported. The majority of our products are regulated as Class III medicaldevices.

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 

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deviceapproval requirements for some or all of our medical device products torequests for product data or certifications. Failure to comply with thesedomestic and international regulatory requirements could affect our ability tomarket and sell our products in these countries. The current regulatory statusof our products is discussed in the “Products and Product Candidates” sectionabove.

*Regulation ofBiologics*

Although we do notcurrently market any biologic products, we are seeking approval to marketbiologic products in the future, including a botulinum toxin Type A product,branded as Reloxin. The FDA approval process for biologic products is a complexprocess with a number of discrete phases, beginning with laboratory analysisand pre-clinical testing in animals. To begin human testing, an investigationalnew drug application is filed with the FDA. Human clinical testing typicallyinvolves three phases. In Phase 1, small clinical trials are conducted todetermine the safety of the product and the acceptable dose. In Phase 2,expanded clinical trials are conducted to determine optimal dose and to assesssafety of the product. In Phase 3, still larger clinical trials are conductedto provide sufficient data to assess safety and efficacy at the optimal dose. Aftercompleting all three phases of human testing, a Biologic License Application(BLA) is submitted to the FDA for approval. If the FDA approves the BLA, theproduct becomes available for marketing. Periodic reports must be submitted tothe FDA, including descriptions of any adverse reactions reported. The FDA mayrequest additional studies to evaluate long-term effects. Side effects oradverse events that are reported during clinical trials can delay, impede, orprevent marketing approval. Similarly, adverse events that are reported aftermarketing approval can result in additional limitations being placed on theproduct’s use and, potentially, withdrawal of the product from the market.

*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 

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anti-kickback orsimilar laws. False claims laws prohibit anyone from knowingly and willinglypresenting, or causing to be presented for payment to third party payors(including Medicare and Medicaid) claims for reimbursed products or servicesthat are false or fraudulent, claims for items or services not provided asclaimed, or claims for medically unnecessary items or services. Our activitiesrelating to the sale and marketing of our products may be subject to scrutinyunder these laws. Violations of fraud and abuse laws may be punishable bycriminal and/or civil sanctions, including fines and civil monetary penalties,as well as the possibility of exclusion from federal health care programs(including Medicare and Medicaid).

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

**THIRD PARTYCOVERAGE 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 REPLACEMENTPROGRAMS**

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 surgicalprocedures required within ten years of implantation. Breast implants sold andimplanted elsewhere are subject to a similar program. We do not warrant anylevel of aesthetic result and, as required by government regulation, makeextensive disclosure concerning the risks of our products and implantationsurgery.

**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.

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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.

**EMPLOYEES**

As of February 28,2005 we had approximately 1,200 employees in active service, of whichapproximately 650 were in the U.S., Canada, and Costa Rica and approximately550 were at other international operations. Except for employees at ourmanufacturing facility in Arklow, Ireland, none of our employees arerepresented by a labor union.

**RISKS ANDUNCERTAINTIES**

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 described below.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.

**IF WEARE UNABLE TO AVOID SIGNIFICANT PRODUCT LIABILITY CLAIMS, PRODUCT RECALLS, ORINDEMNIFICATION CLAIMS, WE MAY BE FORCED TO PAY SUBSTANTIAL DAMAGE AWARDS,CLAIMS, AND OTHER EXPENSES THAT COULD EXCEED OUR ACCRUALS AND INSURANCECOVERAGE.**

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.

At present, except for some of our products used incurrent clinical trials, we have no third-party liability insurance to protectus from damages and the costs of claims for damages due to the use or recall 

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of our products orindemnification claims. Product liability claims, recall orders orindemnification 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 breast implant.Our Trilucent costs and expenses derive in part from the program announced byus on June 6, 2000, and include, among other things, continuing expensesof our explantation program, regulatory compliance, scientific and otherinvestigative studies, bodily injury and financial loss claims, and relatedlegal and defense costs. While we have insurance for some of these expenses andhave also established accruals for them in addition to our insurance program,the combined amount of our insurance and accruals may be insufficient to coverall our future Trilucent-related liabilities. In 2002, we came to finalsettlements with each of our two insurers for product liability claims arisingfrom the Trilucent implant. Under one settlement with MEDMARC CasualtyInsurance 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 AIG company, agreed to make an excess policy with a limit of $10.0million available to us for the indemnification of non-U.S. Trilucent claims. Therewas approximately $4.2 million remaining under this commitment at December 31,2004.

In addition, at December 31, 2004, we had anaccrual for future Trilucent claims, costs, and expenses of approximately $10.9million and insurance of $4.2 million, or $6.7 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 more than 90% of the United Kingdom residentsand more than 75% 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, that coverage terminated in accordance with its terms. While the numberof new requests for explantation surgery has fallen off considerably in thelast three fiscal quarters, we may receive such requests, and honor them, inthe future**.**Hence it is possible that we willincur material liabilities for Trilucent-related explantation expenses forwhich we would 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 their Trilucent implants. To date, we havebeen able to resolve these claims within our accruals and with insuranceproceeds. In the United Kingdom and Spain, we have entered into protocols underwhich women who have had their Trilucent implants removed since June 6,2000 may apply for certain fixed levels of compensation, or may obtain an independent,binding determination of their damages, without proof of defect or legalcausation. In the United Kingdom, while we have been successful in settling thevast majority of claims, we have yet to finally adjudicate approximately 100claims in which women in the U.K. are claiming “serious medical complications”from their Trilucent explantation procedure. See Part I, Item 3 LegalProceedings. In Spain, although approximately 315 women have accepted ourprotocol, 

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approximately 45 havecommenced individual legal proceedings and a Spanish consumer union hascommenced a single action in which it alleges that it represents approximately40 Spanish Trilucent explantees. More than 790 Spanish women were explanted andhence more than 300 have yet to make claims for bodily injury or financial loss(although we have already paid for their explants). The claims of many of thesewomen may now be time-barred under Spanish law. We are also facing Trilucentrelated claims and legal proceedings in Germany, Belgium, Italy and othercountries. In Germany, where as many as 1,500 to 2,000 women are believed tohave been implanted with Trilucent, approximately 950 have been explanted, butonly approximately 140 have made claims for bodily injury or financial loss(although we have already paid for their explants). The claims of many of thesewomen may now be time-barred under German law. While the number of newly filedclaims for bodily injury resulting from Trilucent breast implants has fallenoff considerably in the last three fiscal quarters, the Company expects toreceive some new claims, and adjust and settle them, in the future. Absentunusual circumstances, the claims of any UK residents who were explanted priorto 2002 may now be time-barred under English and Irish law.

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.

**IF WESUFFER NEGATIVE PUBLICITY CONCERNING THE SAFETY OF OUR PRODUCTS, OUR SALES MAY BEHARMED AND WE MAY BE FORCED 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.

**OURQUARTERLY OPERATING RESULTS ARE SUBJECT TO SUBSTANTIAL FLUCTUATIONS AND ANYFAILURE TO MEET FINANCIAL EXPECTATIONS FOR ANY FISCAL QUARTER MAY DISAPPOINTSECURITIES ANALYSTS AND INVESTORS 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;

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

·       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;

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

**IFCHANGES IN THE ECONOMY AND CONSUMER SPENDING REDUCE CONSUMER DEMAND FOR OURPRODUCTS, OUR SALES AND PROFITABILITY 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 to reassesstheir spending choices and reduce the demand for cosmetic surgery. This shiftcould 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 WEARE UNABLE TO CONTINUE TO DEVELOP AND MARKET NEW PRODUCTS AND TECHNOLOGIES, WE MAY EXPERIENCEA DECREASE 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, potential advantagesover alternative products, and our marketing and distribution capabilities.Physicians will not recommend our products until clinical data or other factorsdemonstrate their safety and efficacy compared to other competing products.Even if the clinical safety and efficacy of 

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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 anumber of other products manufactured by major health care companies, and mayalso compete with new products currently under development by others. If ournew products do not achieve significant market acceptance, or if our currentproducts are not able to continue competing successfully in the changingmarket, our revenue and earnings may not grow as much as expected or may evendecline.

**IFCLINICAL TRIALS FOR OUR PRODUCTS ARE UNSUCCESSFUL OR DELAYED, WE WILL BE UNABLETO MEET OUR ANTICIPATED DEVELOPMENT AND COMMERCIALIZATION TIMELINES, WHICHCOULD CAUSE OUR STOCK PRICE TO 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 OURCOLLABORATIVE PARTNERS DO NOT PERFORM, WE WILL BE UNABLE TO DEVELOP AND MARKETPRODUCTS 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

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changesin a collaborative partner’s business strategy, or its access to financialresources may adversely affect a partner’s willingness or ability to completeits obligations under the arrangement. Moreover, we could become involved indisputes with our partners, which could lead to delays or termination of thecollaborations and time-consuming and expensive litigation or arbitration. Evenif we fulfill our obligations under a collaborative agreement, our partner canterminate the agreement under certain circumstances. If any collaborativepartner were to terminate or breach our agreement with it, or otherwise fail tocomplete its obligations in a timely manner, our chances of successfullycommercializing products would be materially and adversely affected.

**OURFAILURE TO ATTRACT AND RETAIN KEY MANAGERIAL, TECHNICAL, SELLING AND MARKETINGPERSONNEL COULD ADVERSELY AFFECT 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 OURINTELLECTUAL PROPERTY RIGHTS DO NOT ADEQUATELY PROTECT OUR PRODUCTS ORTECHNOLOGIES, OTHERS COULD COMPETE AGAINST US MORE DIRECTLY, WHICH WOULD HURTOUR 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.

Inaddition to patents and trademarks, we rely on trade secrets and proprietaryknow-how. We seek protection of these rights, in part, through confidentialityand proprietary information agreements. These agreements may not providemeaningful protection or adequate remedies for violation of our rights in theevent of unauthorized use or disclosure of confidential and proprietaryinformation. Failure to protect our proprietary rights could seriously impairour competitive position.

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**IFTHIRD PARTIES CLAIM WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY RIGHTS, WECOULD SUFFER SIGNIFICANT LITIGATION OR LICENSING EXPENSES OR BE PREVENTED FROMMARKETING 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*.

**WEDEPEND ON A SOLE OR LIMITED NUMBER OF SUPPLIERS FOR CERTAIN PRODUCTS AND RAWMATERIALS AND THE LOSS OF ANY SUPPLIER COULD ADVERSELY AFFECT OUR ABILITY TOMANUFACTURE AND/OR SELL MANY OF OUR PRODUCTS.**

We currently rely on a single supplier for siliconeraw materials used in many of our products. Although we have an agreement withthis supplier to transfer the necessary formulations to us in the event that itcannot meet our requirements, we cannot guarantee that we would be able toproduce or obtain a sufficient amount of quality silicone raw materials in atimely manner. We depend on third party manufacturers for silicone moldedcomponents and silicone facial implants. We also depend on third partymanufacturers for our facial aesthetics product lines with the exclusion of thebovine and human based collagen products. In addition, we currently rely onSmith and Nephew and Immucor, Inc. for the supply of human collagen mesh,used in the production of CosmoDerm and CosmoPlast.

If there is any disruptionin the supply of these finished goods or raw materials, our sales andprofitability for the affected products would be adversely affected.

**OURABILITY TO SELL BOVINE COLLAGEN-BASED PRODUCTS COULD BE ADVERSELY AFFECTED IFWE EXPERIENCE PROBLEMS WITH THE CLOSED HERD OF DOMESTIC CATTLE FROM WHICH WEDERIVE 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.**

More than one-thirdof 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 Yen. Depreciation or devaluation of thelocal currencies of countries where we sell our products may result in ourproducts becoming more expensive in local currency terms, thus reducing demand.In addition, we manufacture and assemble the majority of our breast implantproducts and obesity intervention products in Ireland and in Costa Rica. Alarge percentage of our operating expenses are denominated in currencies otherthan the U.S. dollar due to the elimination of our Santa Barbara manufacturingoperations. We cannot guarantee that we will not experience unfavorablecurrency fluctuation effects in future periods, which could have an adverseeffect on our operating results. Our operations and financial results also maybe significantly affected by other international factors, including:

·       foreigngovernment regulation of our products;

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·       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

·       competition.

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

**WE ARESUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION, WHICH COULD MATERIALLY ADVERSELYAFFECT OUR BUSINESS.**

The production and marketing of our products and ourongoing research and development, pre-clinical testing and clinical trialactivities are subject to extensive regulation and review by numerousgovernmental authorities both in the U.S. and abroad. Most of the products wedevelop must undergo rigorous pre-clinical and clinical testing and anextensive regulatory approval process before they can be marketed. This processmakes it longer, harder and more costly to bring our products to market, and wecannot guarantee that any of our products will be approved, or, once approved,not recalled. The pre-marketing approval process and biologic licenseapplication process can be particularly expensive, uncertain and lengthy, and anumber of products for which FDA approval has been sought by other companieshave never been approved for marketing. In addition to testing and approvalprocedures, extensive regulations also govern marketing, manufacturing,distribution, labeling, and record-keeping procedures. If we do not comply withapplicable regulatory requirements, such violations could result in warningletters, non-approval, suspensions of regulatory approvals, civil penalties andcriminal fines, product seizures and recalls, operating restrictions,injunctions, and criminal prosecution.

Delays in or rejection of FDA or other governmententity approval of our new products may also adversely affect our business.Such delays or rejection may be encountered due to, among other reasons,government or regulatory delays, lack of efficacy during clinical trials,unforeseen safety issues, slower than expected rate of patient recruitment forclinical trials, inability to follow patients after treatment in clinicaltrials, inconsistencies between early clinical trial results and resultsobtained in later clinical trials, varying interpretations of data generated byclinical trials, or changes in regulatory policy during the period of productdevelopment in the U.S. and abroad. In the U.S., there has been a continuingtrend of more stringent FDA oversight in product clearance and enforcementactivities, causing manufacturers to experience longer approval cycles, moreuncertainty, greater risk, and higher expenses. Internationally, there is arisk that we may not be successful in meeting the quality standards or othercertification requirements. Even if regulatory approval of a product isgranted, this approval may entail limitations on uses for which the product maybe labeled and promoted. It is possible, for example, that we may not receiveFDA approval to market our current products for broader or differentapplications or to market updated products that represent extensions of ourbasic technology. For example, our Supplemental Submission for Pending SiliconeGel-Filled Breast Implants PMA is scheduled to be reviewed by the FDA’s Generaland Plastic Surgery Devices Advisory Panel on April 11-13, 2005. Therecan be no assurance that the FDA will approve our PMA. In addition, we may notreceive FDA export approval to 

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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 will issue additional regulations furtherrestricting the sale of our present or proposed products. Any change inlegislation or regulations that govern the review and approval process relatingto our current and future products could make it more difficult and costly toobtain approval for new products, or to produce, market, and distributeexisting products.

**HEALTHCAREREFORM LEGISLATION COULD 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 OURUSE OF HAZARDOUS MATERIALS RESULTS IN CONTAMINATION OR INJURY, WE COULD SUFFERSIGNIFICANT 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 financialresources.

**OURSTOCK PRICE HAS BEEN VOLATILE AND OUR TRADING VOLUME HAS HISTORICALLY BEENLOWER THAN THAT OF MANY NASDAQ LISTED 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;

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·       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 significantprice and volume fluctuations. Volatility in the market price for particularcompanies has often been unrelated or disproportionate to the operatingperformance of those companies. Broad market factors may seriously harm themarket price of our common stock, regardless of our operating performance. Inaddition, securities class action litigation has often been initiated followingperiods of volatility in the market price of a company’s securities. Asecurities class action suit against us could result in substantial costs,potential liabilities, and the diversion of management’s attention andresources.

**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.

**OURPUBLICLY-FILED SEC REPORTS ARE REVIEWED BY THE SEC FROM TIME TO TIME AND ANYSIGNIFICANT CHANGES REQUIRED AS A RESULT OF ANY SUCH REVIEW MAY RESULT INMATERIAL LIABILITY TO US AND HAVE A MATERIAL ADVERSE IMPACT ON THE TRADINGPRICE 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 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. In 2005, we plan to begin construction of anew manufacturing building in Costa Rica.

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**ITEM 3**.                LEGALPROCEEDINGS 

**BREAST IMPLANTLITIGATION**

*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 Sierra Medical Technologies, Inc.Collagen retained certain liabilities for Trilucent implants 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 had undertakena comprehensive program of support and assistance for women who have receivedTrilucent 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 December 31, 2003 in all countries other thanGermany. Notwithstanding the termination of the general program, the Companycontinued to pay for explanations and related expenses in certain cases if apatient could justify her delay in having her Trilucent implants removed onmedical grounds or owing to lack of notice. Under this program, Inamed pays a feeto 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, more than 90% of the U.K. residents and more than75% 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. However, that insurance company’s obligationceased as of February 15, 2005. The Company 

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expectsto continue to fund a small number of explantations in 2005, in most casesowing to a pregnancy, breast feeding or a similar factor warrantingpostponement of the procedure to 2005.

In 2000-2001, 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 wedo not face any Trilucent related claims or litigation in the United States atthis time. At present, three Trilucent related breast implant claims arecurrently pending. While the Company expects to resolve these claims for animmaterial sum, there can be no assurance that it will be able to do so. Dependingon the precise allegations that could be made, any future claims by U.S.residents could be barred by the applicable statutes of limitations**.**

Also during and since the third quarter of 2000,Inamed and its subsidiaries have received notices of claim from European women,the vast majority of them residents of the U.K. or Spain, seeking compensationfor general and special damages for alleged bodily injuries from Trilucentimplants. 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 affords afixed 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 affords 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. To date, close to 90% of the U.K. women who have hadtheir Trilucent implants explanted since June 2000, represented by morethan 90 different solicitors, have sought compensation through the settlementprotocol. To date, no such woman has brought civil proceedings.

In addition, in Spain, Inamed has offered a protocolsimilar in structure to the United Kingdom protocol. To date, we have receivedapproximately 315 claims under the Spanish protocol. In addition, a Spanishconsumer union has commenced a single action in which the consumer unionalleges that it represents approximately 40 Spanish Trilucent explantees. Finally,at present Inamed faces approximately 45 individual legal proceedings. To date,Inamed has won certain Trilucent legal proceedings in Spain and lost others. Theaverage damages in cases lost were approximately $21,000.

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 secondsettlement, AISLIC, an AIG company, agreed to make an excess policy with alimit of $10.0 million available to the Company for the indemnification ofnon-U.S. Trilucent claims. There was approximately $4.2 million remaining underthis commitment at December 31, 2004. As a result of these settlements,Inamed released both carriers from any other actual or potential financialclaims under the policies and dismissed all carrier related litigation withprejudice.

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.

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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 noevidence for local or systemic disease risk once the implants are removed; and

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

In addition, at December 31, 2004, the Companyhad an accrual for future Trilucent claims, costs, and expenses ofapproximately $10.9million and insurance of $4.2 million, or $6.7 million, net ofinsurance.

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, it is continuing to adjust andsettle Trilucent claims and, in the U.K., claims by solicitors for their legalfees and claim costs. Included in the accrual, Inamed has received some 75requests to fund or reimburse patients for surgery to correct complicationswith implants that were used to replace Trilucent implants. A companysubsidiary may have liability for these costs as well. Thus, while Inamed hasmade very substantial progress in resolving the great bulk of Trilucent-relatedliabilities, it will continue to address and resolve individual claims in 2005.Thus, while the Company believes its current accruals and insurance to beadequate to the task, there can be no assurances that future Trilucent-relatedliabilities will not exceed the current accruals and insurance.

**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. We donot believe we practice the device claimed by Manders or that we teach themethods he claims. Accordingly, in February 2003, we answered thecomplaint, denying its material allegations, and counterclaimed against Mandersfor declarations of invalidity as well as noninfringement. Fact discovery wascompleted on July 31, 2004. Expert discovery relatingto claim construction issues was completed in August 2004. Mandershas elected to limit his claim for infringement to twelve of the forty-sixclaims in his patent. The Court held a Markman hearing on September 23,October 6-7, and 18, 2004. The Court has not yet issuedits order on claim construction. We expect the Court to schedule a statusconference after it issues its claim construction order to set the pretrialschedule, including expert discovery. We believe we have strong defensesto this lawsuit and intend to defend it vigorously.

**OTHER MATTERS**

*Government Inquiry*

On February 24, 2005, the U.S. Securities and ExchangeCommission (SEC) notified Inamed that it had initiated a formal privateinvestigation to determine whether Inamed has violated federal securities laws.We were not aware of the investigation or any related inquiry prior to thatdate. They have requested that we produce certain documents in connection withthe investigation. We intend to fully cooperate in the investigation. Basedupon subsequent communications with them, we believe the investigation relatesto assessing the adequacy of our disclosures regarding one style (Style 153) ofour silicone gel-filled breast implant products. This particular styleaccounted for approximately $3.4 million (less than 1%) of our total revenuesin 2004. There can be no assurance, however, that the scope of the SEC’sinvestigation 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.

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*Other*

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 our products. These claims have not had, and are notexpected to have, a material adverse effect on our financial condition orresults of operations.

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

During the fourth quarter of the fiscal year coveredby this report, no matter was submitted to a vote of security holders throughthe solicitation of proxies or otherwise.

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**PART II**

**ITEM 5**.                MARKETFOR THE COMPANY’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

**MARKET INFORMATION**

On March 10, 2005, we had 295 stockholders ofrecord. Our common stock price at the close of business on March 10, 2005,was $67.55 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. All prices in the table below reflectthe three-for-two stock split effected in December 2003. Quotationsreflect prices between dealers, do not reflect retail markups, markdowns orcommissions, and may not necessarily represent actual transactions.
| ** **  | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------|------------|----------|------------|---------|------------|
| *2003*      |       |     |       |    |       |
| 1st Quarter |       | $        | 24.00      |    | $          | 18.53 |   |
| 2nd Quarter |       | $        | 37.64      |    | $          | 21.91 |   |
| 3rd Quarter |       | $        | 52.45      |    | $          | 35.11 |   |
| 4th Quarter |       | $        | 58.90      |    | $          | 44.27 |   |
| *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 |   |

 

**SECURITIESAUTHORIZED FOR ISSUANCES UNDER EQUITY COMPENSATION PLANS**

See Part III Item 12,“Security Ownership of Certain Beneficial Owners and Management” for thesecurities authorized for issuances under equity compensation plans.

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**ITEM 6**.                SELECTEDFINANCIAL DATA

The followingfinancial information is qualified by reference to, and should be read inconjunction with, our consolidated financial statements and the notes theretoincluded in this Annual Report and “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” contained elsewhere in thisAnnual Report. The selected consolidated financial information presented belowis derived from our audited consolidated financial statements for each of thefive years through the period ended December 31, 2004.
| ** **                                   | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| **Statements of income data:**               |       |                                        |       |   |   |   |   |   |   |   |   |
| Net sales                                    |       | $                                           | 384.4      |   | $ | 332.6 |   | $ | 275.7 |   | $ | 238.1 |   | $ | 240.1 |   |
| Cost of goods  sold                          |       | 97.9                                        |       | 92.8 |   | 77.6 |   | 67.2 |   | 66.4 |   |
| Gross profit                                 |       | 286.5                                       |       | 239.8 |   | 198.1 |   | 170.9 |   | 173.7 |   |
| Operating expenses:                          |       |                                        |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative          |       | 179.7                                       | (3)        | 141.8 |   | 126.7 |   | 96.6 |   | 102.3 |   |
| Research and development                     |       | 28.8                                        |       | 21.5 |   | 13.6 |   | 12.2 |   | 9.9 |   |
| Restructuring charges                        |       | —                                      |       | — |   | 5.1 |   | 12.0 |   | — |   |
| Amortization of intangible assets            |       | 5.0                                         |       | 4.0 |   | 4.9 |   | 11.3 | (1) | 9.3 |   |
| Total operating expenses                     |       | 213.5                                       |       | 167.3 |   | 150.3 |   | 132.1 |   | 121.5 |   |
| Operating income                             |       | 73.0                                        |       | 72.5 |   | 47.8 |   | 38.8 |   | 52.2 |   |
| Other income  (expense):                     |       |                                        |       |   |   |   |   |   |   |   |   |
| Net interest income (expense) and debt costs |       | 0.5                                         | (2)        | (9.4 | ) | (11.7 | ) | (11.7 | ) | (10.5 | ) |
| Foreign currency transaction gains (losses)  |       | 0.1                                         |       | (0.1 | ) | 0.3 |   | (0.4 | ) | 2.6 |   |
| Royalty income and other                     |       | 4.7                                         |       | 4.2 |   | 5.8 |   | 5.0 |   | 7.0 |   |
| Total other income (expense), net            |       | 5.3                                         |       | (5.3 | ) | (5.6 | ) | (7.1 | ) | (0.9 | ) |
| Income before income tax expense             |       | 78.3                                        |       | 67.2 |   | 42.2 |   | 31.7 |   | 51.3 |   |
| Income tax  expense                          |       | 15.2                                        |       | 14.2 |   | 9.3 |   | 10.7 |   | 14.3 |   |
| Net income                                   |       | $                                           | 63.1       |   | $ | 53.0 |   | $ | 32.9 |   | $ | 21.0 |   | $ | 37.0 |   |
| Net income per  share of common stock        |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic                                        |       | $                                           | 1.77       |   | $ | 1.54 |   | $ | 1.04 |   | $ | 0.69 |   | $ | 1.21 |   |
| Diluted                                      |       | $                                           | 1.75       |   | $ | 1.51 |   | $ | 1.00 |   | $ | 0.64 |   | $ | 1.07 |   |
| Weighted average shares  outstanding:        |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic                                        |       | 35.6                                        |       | 34.5 |   | 31.5 |   | 30.3 |   | 30.6 |   |
| Diluted                                      |       | 36.0                                        |       | 35.2 |   | 32.9 |   | 32.6 |   | 34.5 |   |

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Note 1—In 2000 and 2001,Inamed recorded amortization on goodwill in accordance with APB Opinion No. 17.Beginning January 1, 2002, Inamed adopted Statement of Financial AccountingStandard (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, we began investingour excess cash in short-term investments in 2004, which significantlyincreased our interest income.

Note 3—Selling, general, and administrative includes aone-time legal settlement of $17.2 million with Ethicon relating to a patentinfringement case. See Kuzmak Matter, Part I Item III, “Legal Proceedings”.

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| ** **                                                       | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                       | ** ** | **(millions)**        | ** ** |
| **Balance sheet data:**                                          |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Working capital                                                  |       |                  | $          | 190.9 |   |   | $ | 131.9 |   | $ | 81.4 |   | $ | 63.3 |   | $ | 50.8 |   |
| Total assets                                                     |       |                  | 570.1      |   |   | 501.0 |   | 439.4 |   | 400.2 |   | 385.9 |   |
| Total long-term  debt and capital leases (incl. current portion) |       |                  | 22.5       |   |   | 32.5 |   | 83.7 |   | 121.0 |   | 98.6 |   |
| Stockholders’ equity                                        |       |                  | 446.3      |   |   | 351.5 |   | 232.7 |   | 174.4 |   | 167.7 |   |
|                                                                  |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

The followingManagement’s Discussion and Analysis (MD&A) is intended to help the readerto better understand the financial condition and results of operations ofInamed Corporation. MD&A is provided as a supplement to, and should be readin conjunction with, our 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 historical sourcesand uses of cash, existence and timing of cash commitments, and a prospectivelook 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 andEstimates—*provides**adiscussion on our accounting policies that require critical judgments andestimates.

**COMPANY ANDINDUSTRY 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-BANDÒSystemdesigned to treat severe and morbid obesity, and the Bioenterics® BIBÒSystem for the treatment of obesity. We generate approximately 39% of ourrevenues 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 and overhead.Gross margins may fluctuate from period to period due to changes in the sellingprices of our products, the mix of products sold, changes in the cost of thirdparty finished products, raw materials, labor and overhead and manufacturingefficiencies or inefficiencies. In 2004 and 2003, the cost of goods sold alsoincludes accelerated depreciation charges related to the manufacturing consolidation(see Note 3 to the Consolidated 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 

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sales and marketingexpenses consist primarily of salaries, commissions, royalties, and marketingprogram costs. General and administrative expenses incorporate the costs offinance, 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, and other outsidecosts. We also conduct research on materials technology, product design andproduct improvement.

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

**LIQUIDITY ANDCAPITAL RESOURCES**

We had cash and cash equivalents of $107.2 million andshort-term investments of $23.1 million at December 31, 2004, an aggregateincrease of $49.8 million from $80.5 million of cash and cash equivalents andno short-term investments at December 31, 2003. At December 31, 2004,approximately $69.5 million of our cash was held internationally which may besubject to U.S. income tax if repatriated to the U.S. The increase during 2004was the result of cash provided by operations of $70.7 million and cash fromthe issuance of common stock of $14.7 million offset primarily by the purchaseof investments of $30.2 million, principal repayments of long-term debt of$10.0 million and the purchase of plant and equipment of $18.7 million andintangibles of $11.1 million. Cash provided by operating activities has been,and is expected to continue to be, our primary source of funds. We invest aportion of our cash and cash equivalents in short-term investments withmaturities of less than one year.

Cash provided by operations was $70.7 million in 2004compared to $75.2 million in 2003. The decrease was primarily the result of acash payment for our Ethicon Endo-Surgery, Inc. (“Ethicon”) legalsettlement of $17.2 million in June 2004. Pursuant to the terms of thissettlement agreement, we commenced expensing the royalty in the third quarterof 2004 and the first payment was made in the fourth quarter of 2004. Royaltyamounts will vary based on the sales of these products and geography in whichthese products are sold. Trade accounts receivable increased $7.2 million dueto increased sales. Inventories increased $8.3 million, primarily due toincreased facial product inventory in the U.S. We increased our inventory whilewe changed suppliers of human collagen mesh to support any transitional issuesas well as to comply with our long-term contract agreements. In addition, weincreased inventory to support the launch of new products. Other assetsdecreased $6.3 million primarily due to a reduction in our Trilucent insurancereceivable (see Part I, Item 3. Legal Proceedings, Breast ImplantLitigation, Trilucent Breast Implant Matters). Accruals and other long-termliabilities decreased $9.3 million primarily due to payments with respect toour Trilucent liability and a decrease in our deferred tax liability due totiming of payments. Cash provided by operations of $75.2 million in 2003increased by $31.4 million from $43.8 million in 2002. The increase wasprimarily the result of an increase in net income of $20.1 million, offset byan increase in accounts receivable. In addition, we received an $18.3 milliontax benefit on stock option exercises compared to only $3.8 million in 2002. Weexpect cash from operations to increase in 2005 as a result of increased salesand net income.

Cash used in investing activities of $53.2 million in2004 consists of $30.2 million for the purchase of short-term investments toearn better rates of interest on our cash, $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 Enterprise Resource Planning, or ERP, system. Cash used in investingactivities of $16.9 million in 2003 consisted primarily of capital expendituresfor our global ERP system and capacity expansion projects.

Cash provided by financing activities in 2004 of $4.7million reflects proceeds of $14.7 million from the issuance of common stockupon the exercise of outstanding employee stock options and issuances pursuant 

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to the employee stockpurchase plan, offset by long-term debt principal payments of $10.0 million. Cashused in financing activities for the year 2003 of $19.4 million reflected netprincipal payments of $51.2, partially offset by proceeds of $33.2 million fromthe issuance of common stock upon the exercise of outstanding employee stockoptions and issuances pursuant to the employee stock purchase plan.

As of December 31, 2004, we had long-term debt of$22.5 million, $12.5 million of which is classified in current liabilities. Inaddition, we have a $35.0 million revolving line of credit. We have utilized$16.8 million of the revolver capacity by having letters of credit issued tocollateralize certain insurance programs. The remaining $18.2 million ofrevolver capacity was unused as of December 31, 2004. The borrowings underthe current credit facilities bear interest at the London Interbank OfferedRate, or LIBOR, plus 2.0%. Remaining principal payments of $12.5 and $10.0million are due in 2005 and 2006, respectively.

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 31,2004, 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                                                                           |       | $                                         | 22.5       |   |   | $ | 12.5 |   |   |   | $ | 10.0 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Operating leases                                                                         |       | 54.1                                      |       |   | 8.1 |   |   |   | 12.0 |   |   |   | 9.0 |   |   |   | 25.0 |   |   |
| Purchase  obligations                                                                    |       | 18.7                                      |       |   | 13.5 |   |   |   | 5.2 |   |   |   | — |   |   |   | — |   |   |
| License &  distribution agreements                                                   |       | 77.5                                      |       |   | 25.7 |   |   |   | 49.8 |   |   |   | 2.0 |   |   |   | — |   |   |
| Other long-term  liabilities reflected on the registrant’s balance sheet under GAAP |       | 43.1                                      |       |   | 10.3 |   |   |   | 19.1 |   |   |   | 5.8 |   |   |   | 7.9 |   |   |
| Total                                                                                    |       | $                                         | 215.9      |   |   | $ | 70.1 |   |   |   | $ | 96.1 |   |   |   | $ | 16.8 |   |   |   | $ | 32.9 |   |   |
|                                                                                          |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The $18.7 million in purchase obligations primarilyrelates to research and development commitments, including those related toclinical trials, for new and existing products. The actual amounts, if any, andtiming of such payments will depend upon a variety of factors outside of ourcontrol.

The $77.5 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 such paymentswill depend upon a variety of factors outside of our control.

The $43.1 millionobligations for other long-term liabilities consists of long-term andshort-term amounts as follows: total other long-term liabilities is $32.8million; and the short-term portion of these long-term liabilities is $10.3million (see notes 7 and 8 of the financial statements for a detaileddescription).

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**RESULTS OFOPERATIONS**

***Sales***
| ** **                               | ** ** | ** ** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **                 | ** ** | **Twelve Months Ended December 31,** | ** ** |
|------------------------------------------|------------|------------|------------|----------------------------|------------|------------|------------|----------------------------|------------|------------|------------|----------------------------|------------|----------------------------------------------------------|------------|
| ** **                               | ** ** | ** ** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **                 | ** ** | **2004 vs. 2003**                              | ** ** | **2003 vs. 2002** | ** ** |
| ** **                               | ** ** | **2004**   | ** ** | **Percent of  sales** | ** ** | **2003**   | ** ** | **Percent of  sales** | ** ** | **2002**   | ** ** | **Percent of  sales** | ** ** | **Dollar  change**                                       | ** ** | **Percent  change** | ** ** | **Dollar  change** | ** ** | **Percent  change** | ** ** |
| Inamed Aesthetics—  Breast          |       | $          | 215.8      |                       |       | 56         | %          |                       | $          | 177.8      |       |                       | 53         | %                                                        |       | $ | 156.3 |   |   | 57 | % |   |   | $ | 38.0 |   |   |   | 21 | % |   |   | $ | 21.5 |   |   |   | 14 | % |   |
| Inamed Heatlh—Obesity  intervention |       | 88.5       |       |                       | 23         | %          |       | 63.1                       |       |       | 20         | %                          |       | 39.4                                                     |       |   | 14 | % |   |   | 25.4 |   |   |   | 40 | % |   |   | 23.7 |   |   |   | 60 | % |   |
| Inamed Aesthetics—  Facial          |       | 75.6       |       |                       | 20         | %          |       | 87.2                       |       |       | 26         | %                          |       | 73.8                                                     |       |   | 27 | % |   |   | (11.6 | ) |   |   | (13 | )% |   |   | 13.4 |   |   |   | 18 | % |   |
| Other Products                           |       | 4.5        |       |                       | 1          | %          |       | 4.5                        |       |       | 1          | %                          |       | 6.2                                                      |       |   | 2 | % |   |   | — |   |   |   | 0 | % |   |   | (1.7 | ) |   |   | (27 | )% |   |
| Total                                    |       | $          | 384.4      |                       |       | 100        | %          |                       | $          | 332.6      |       |                       | 100        | %                                                        |       | $ | 275.7 |   |   | 100 | % |   |   | $ | 51.8 |   |   |   | 16 | % |   |   | $ | 56.9 |   |   |   | 21 | % |   |

 

Net sales (net of returns, discounts, and allowances),or sales, for 2004, 2003, and 2002 were affected by foreign exchange ratefluctuations positively by approximately 3%, 4%, and 1%, respectively. Weexpect sales to grow at a mid-double digit rate in 2005 over 2004.

***Inamed Aesthetics—Breast***.   The growth in2004 and 2003 of breast aesthetic sales was driven by several key factors:

·       Theacceptance of all aesthetics procedures has grown, including breastaugmentation and reconstruction.

·       Favorabledemographics continue to emerge in the U.S. and internationally for varioustypes of aesthetic procedures, including breast augmentation.

·       Ourphysician practice building initiatives and consumer awareness programs. Theseinclude an advanced educational program for surgeons (Inamed Academy) and thecompany-sponsored LookingYourBestTM web site for consumers and surgeons.

·       Inthe United States, we have seen a continued acceptance of the Style 68 smoothround saline matrix implants (primarily used for augmentation purposes) and theStyle 10 and Style 20 smooth round silicone gel filled implants used inconnection with the adjunct clinical study for breast reconstruction andrevision.

·       Continuedgrowth and acceptance internationally for our BioDIMENSIONALTM Cohesive GelMatrixTM products and line extensions such as the Style 410 Soft Touch line andthe new Style 510.

In 2005, we expect sales of breast aesthetics productsto grow in the mid double digits when compared to 2004.

***Inamed Health—Obesity Intervention***.   Theincrease in 2004 and 2003 sales was primarily due to the following:

·       Continuedgrowth and acceptance of the LAP-BAND® System in the U.S., aided by ourtargeted physician practice building program as well as public relationsefforts.

·       Astrong increase in sales of the BIB System internationally.

Other factors affecting sales include an increase ininsurance coverage for the LAP-BAND System and the awareness of the obesityepidemic that has been widely publicized in the press and is anticipated to bea health care issue for the foreseeable future.

In 2005, sales of obesityintervention products are expected to increase in excess of 30% oversales in 2004. We expect to achieve this growth by training and qualifying morephysicians on the procedure, 

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driving consumers to ourestablished doctors through direct-to-consumer programs, working to achievebroader reimbursement for the product and the procedure, and educatingconsumers about the benefits of the BioEnterics® LAP-BAND® System versus othermedical procedures.

***InamedAesthetics—Facial***.   Facial aesthetics salesexperienced a decrease in 2004 over 2003. This decrease was primarily theresult of the introduction of a competing facial aesthetics product in the hyaluronicacid class of products, called Restylane®, into the U.S. market in January of2004. Our hyaluronic acid-based dermal filler, Hylaform®, was approved by the FDAin April 2004. In October 2004, the FDA approved another product in theHylaform line, Hylaform® Plus, a large particle size hyaluronic acid-based gelfor mid to deep wrinkle correction.

In 2005, sales of facialaesthetics products are expected to increase slightly over 2004 due to the fullyear effect of Hylaform and Hylaform Plus in the United States and the launchof Captique in early 2005.

***Cost of Goods Sold***
| ** ** | ** ** | **Cost of goods  sold** | ** ** | **Percent of  sales** | ** ** | **Gross profit  margin** | ** ** | **Percentage point  change in gross profit margin  over prior year** | ** ** |
|------------|------------|-----------------------------------|------------|----------------------------|------------|-------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| 2004       |       |                              | $          | 97.9                       |       |                          |       | 25.5                                                                                                    | %          |   |   | 74.5 | % |   |   | 2.4 | % |   |
| 2003       |       |                              | $          | 92.8                       |       |                          |       | 27.9                                                                                                    | %          |   |   | 72.1 | % |   |   | 0.2 | % |   |
| 2002       |       |                              | $          | 77.6                       |       |                          |       | 28.1                                                                                                    | %          |   |   | 71.9 | % |   |   |   |   |   |

 

The improvement of grossprofit margins in 2004 and 2003 reflected a favorable product mix and thebenefits of our manufacturing consolidation program, which was completed duringthe first quarter of 2004. The program savings generated were primarily theresult of reduced payroll costs and lower-cost manufacturing locations. Theannual savings from the manufacturing consolidation is estimated to be areduction in U.S. payroll and support costs of $10.0 million, with acorresponding increase in costs in Ireland of $4.3 million and Costa Rica of$0.4 million, with a net savings of $5.3 million per year. The savings is reflectedin cost of goods sold on the income statement. See Note 3 of the notes to theconsolidated financial statements. The increase in our gross margin in 2004also reflected the fact that we had $0.4 and $3.4 million of accelerateddepreciation relating to our global manufacturing consolidation in 2004 and2003, respectively. The assets related to the manufacturing consolidation werefully depreciated in the first quarter of 2004, therefore we have had nofurther accelerated depreciation expense related to the manufacturingconsolidation.

*Selling, General, and Administrative (SG&A)*
| ** ** | ** ** | **SG&A** | ** ** | **Percent of  sales** | ** ** | **Dollar change  over prior year** | ** ** | **Percent change  over prior year** | ** ** |
|------------|------------|--------------|------------|----------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------|------------|
| 2004       |       | $            | 179.7      |                       |       | 46.7                                              | %          |                                               |       | $ | 37.9 |   |   |   | 26.7 | % |   |
| 2003       |       | $            | 141.8      |                       |       | 42.6                                              | %          |                                               |       | $ | 15.1 |   |   |   | 11.9 | % |   |
| 2002       |       | $            | 126.7      |                       |       | 46.0                                              | %          |                                               |       |   |   |   |   |   |   |   |

 

Selling and marketing expense increased in 2004 and2003 on an absolute basis and as a percentage of sales. The increase in 2004 isprimarily the result of royalty expenses related to the Ethicon settlement andother recently approved products, and investments in key sales and marketingprograms to support the expansion of our worldwide Aesthetics franchise. Theincrease in selling and marketing expense in 2003 over 2002 was largely due tothe launch of CosmoDerm and CosmoPlast with focus on consumer awareness, androyalties associated with the sales of our aesthetic products.

General and administrativeexpense increased on an absolute basis and as a percentage of sales in 2004,and decreased on an absolute basis and as a percentage of sales in 2003. The increase in 2004 is 

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primarily due to a $17.2 million charge related toour Ethicon patent settlement and related litigation costs in the secondquarter of 2004. Additionally, we have experienced increased information technologycosts in support of our new ERP system. Excluding the non-recurring Ethiconcharge, selling, general and administrative expenses were $162.5 million, or42.3% of sales, in 2004. We present our selling, general and administrativenumbers excluding the Ethicon settlement because such settlement is anon-recurring charge that is outside our normal business operations. Thenumbers are presented in a manner that is consistent with how management viewsour business.

*Research andDevelopment (R&D)*
| ** ** | ** ** | **R&D** | ** ** | **Percent  of sales** | ** ** | **Dollar  change  over prior  year** | ** ** | **Percent  change over  prior year** | ** ** |
|------------|------------|-------------|------------|----------------------------|------------|-------------------------------------------|------------|------------------------------------------------|------------|
| 2004       |       | $           | 28.8       |                       |       | 7.5                                       | %          |                                           |       | $ | 7.3 |   |   |   | 34.0 | % |   |
| 2003       |       | $           | 21.5       |                       |       | 6.5                                       | %          |                                           |       | $ | 7.9 |   |   |   | 58.1 | % |   |
| 2002       |       | $           | 13.6       |                       |       | 4.9                                       | %          |                                           |       |   |   |   |   |   |   |   |

 

The majority of our research and development expensesin the year 2004 were related to the clinical development programs for ourJuvéderm and Hylaform dermal fillers; our botulinum toxin Type A product,Reloxin; the silicone gel and cohesive silicone gel breast implant clinicaltrials; and PMA applications as applicable in the U.S. The increase in R&Dexpense in 2004 over 2003 was primarily due to the commencement of Phase III ofthe Reloxin trials and clinical investigations for Juvéderm, a non-animal,hyaluronic acid-based dermal filler.

The increase in investment in R&D is essential toadvance our strategic and market positions in our three main product linesaround the world.

The majority of the expenses in 2003 related to theclinical development programs for our Hylaform dermal filler, Reloxin, and thesilicone gel and cohesive silicone gel breast implant clinical trials, and PMAapplications as applicable in the U.S.

In 2005, we expectresearch and development expenses will increase substantially over 2004. Theexpected increase is primarily due to:

·       TheReloxin Phase III trials in the U.S.; and

·       TheJuvéderm clinical trials and development in the U.S.

*RestructuringCharges*

In 2002 we recorded $5.1million of restructuring costs. This restructuring was undertaken toconsolidate manufacturing facilities. The manufacturing consolidation has resultedin improved efficiencies and cost savings. The consolidation was completed in2004 and involved transitioning Santa Barbara-based manufacturing to ourfacilities in Costa Rica and Ireland. We eliminated approximately 150 positionsin Santa Barbara and added about 80 of those to our facilities in Costa Ricaand Ireland. The majority of the costs relate to severance which has been andwill be paid from the beginning of 2003 through 2005. As part of themanufacturing consolidation, we accelerated the depreciation on certain assetswith shortened useful lives. For the years ending December 31, 2004 and2003 we incurred $0.4 and $3.4 million of accelerated depreciation chargesincluded in cost of goods sold on the income statement. We do not expect anyfurther charges related to the manufacturing consolidation.

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*Amortization*

In 2004, amortization ofintangible assets was $5.0 million compared to $4.0 million in 2003 and $4.9million in 2002. The increase in 2004 was due to the purchase of newintangibles and the commencement of amortization on certain intangibles in thefirst and second quarters of 2004. The decrease in 2003 was primarily due toone patent becoming fully amortized in August 2003. We expect amortizationexpense on our existing intangibles to be approximately $5.0 million per year.

*Restricted StockPlan*

In2003 we adopted the 2003 Restricted Stock Plan, which authorizes us to issueshares of common stock to any employee, officer, consultant, or non-employeedirector. In the second quarter of 2004, the stockholders approved an amendmentwhich increased the number of authorized shares by 150,000 shares to 300,000shares. Restricted stock awards may be granted by the Board subject to vestingand any other restrictions (including a period during which vested shares maynot be sold) as determined by the Board and stated in an award agreement. Restrictedstock may not be sold or otherwise transferred or pledged until the restrictionslapse or terminate.
| ** **                      | ** ** | **Authorized  Shares** | ** ** | **Number of  Shares  Issued** | ** ** | **Available for Issuance** | ** ** |
|---------------------------------|------------|------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| The 2003  Restricted Stock Plan |       |                   | 300,000    |                               |       |                                 | 142,500    |   |   |   | 157,500 |   |   |
|                                 |            |                        |            |                                    |            |                                      |            |  |  |  |  |  |  |

 

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 thousands):
| ** **                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cost of goods  sold                  |       | $        | 332.6      |     | $          | 13.9     |       |   | — |   |   |
| Selling, general  and administrative |       | $        | 1,774.1    |     | $          | 73.9     |       |   | — |   |   |
|                                 |       | $        | 2,106.7    |     | $          | 87.8     |       |   | — |   |   |

 

*Interest Income (Expense)*
| ** **                 | ** ** | **Twelve Months**          | ** ** | **Twelve Months**          | ** ** | **Twelve Months**          | ** ** |
|----------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **Ended**                       | ** ** | **Ended**                       | ** ** | **Ended**                       | ** ** |
| ** **                 | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** | **December 31, 2002** | ** ** |
| Interest income            |       |                            | $          | 2.0                             |       |                            |       | $ | 0.8 |   |   |   | $ | 0.5 |   |   |
| Interest expense           |       |                            | (1.5       | )                               |       |                            | (10.2      | ) |   |   | (12.2 | ) |   |
| Interest income  (expense) |       |                            | $          | 0.5                             |       |                            |       | $ | (9.4 | ) |   |   | $ | (11.7 | ) |   |

 

The increase in interest income in 2004 when comparedto 2003 is related to increased investment balances and the rise in interestrates during the year. During the same period, the decline in interest expensewas related to 1) decreased debt levels, 2) the recognition of the $3.6 millionof interest expense related to the payoff of our interest rate swap in 2003,and 3) additional interest expense related to the recognition of deferred loanfees associated with accelerated principal payments in 2003.

The decrease in 2003 over2002 is due to lower interest rates and significantly lower debt levels, offsetby additional charges for the recognition of unamortized loan fees and therealization of $3.5 million in losses on our interest rate swap in 2003 inconnection with the refinancing and prepayment of our debt.

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*Foreign Currency*

Foreign currency gains andlosses fluctuate based largely upon the fluctuation of the dollar to the EUEuro and the Japanese Yen. In 2004, 2003 and 2002, our net sales includedapproximately $11.1, $7.6, and $3.1 million, respectively, of favorableexchange effects. Our exchange effect continues to be positive due to thestrengthening Euro.

*Royalty Income andOther*

Royalty income, net ofother expenses, was $4.7 million, $4.2 million, and $5.8 million in 2004, 2003,and 2002, respectively.

*Income Tax Expense*

Our effective tax rate was 19.5%, 21.1%, and 21.9%,for 2004, 2003, and 2002, respectively. The lower tax rate in 2004 is mainlydue to our Ethicon patent settlement in the second quarter which is fullydeductible in the U.S., a high tax rate jurisdiction. Excluding thenon-recurring Ethicon charge, the effective tax rate would have beenapproximately 23.1% in 2004. We present our effective tax rate excluding theEthicon settlement because such settlement is a non-recurring charge that isoutside our normal business operations which results in a one-time benefit toour effective tax rate.

The lower tax rate in 2003 was due to increasedeconomic activity in low tax jurisdictions and several non-recurring items,including the recognition of additional foreign net operating losscarryforwards, the write-off of the tax basis of certain foreign subsidiaries andthe favorable resolution of several tax issues.

On October 22, 2004,the American Jobs Creation Act (the AJCA) was signed into law. The AJCAincludes a provision allowing a deduction of 85% of certain foreign earningsthat are repatriated, as defined in the AJCA. We may elect to apply thisprovision to qualifying earnings repatriations in 2005. We have started anevaluation of the effects of the repatriation provision; however, we do notexpect to be able to complete this evaluation until after Congress or theTreasury Department provide additional clarifying language on key elements ofthe provision. We expect to complete our evaluation of the effects of therepatriation provision within a reasonable period of time following thepublication of the additional clarifying language. The range of possibleamounts that we are considering for repatriation under this provision isbetween $0.0 million and $70.0 million. The related potential range of incometax expense is between $0.0 million and $3.6 million.

**APPLICATION OFCRITICAL ACCOUNTING POLICIES AND ESTIMATES**

The preparation of financial statements in accordancewith accounting principles generally accepted in the United States of Americarequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and disclosure of contingent assetsand liabilities. On an on-going basis, we evaluate our estimates and judgments,including those related to revenue recognition, inventories, adequacy ofallowances for doubtful accounts, valuation of long-lived assets and goodwill,income taxes, litigation and warranties. We base our estimates on historicaland anticipated results and trends and on various other assumptions that webelieve are reasonable under the circumstances, including assumptions as tofuture events. The policies discussed below are considered by management to becritical to an understanding of our financial statements. These estimates formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. By their nature,estimates are subject to an inherent degree of uncertainty. Actual results maydiffer from those estimates.

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*Revenue Recognition*

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

Werecognize product revenue, net of sales discounts, returns and allowances, inaccordance with Staff Accounting Bulletin (SAB) No. 104, “RevenueRecognition” and SFAS No. 48 “Revenue Recognition When Right of ReturnExists.” Revenue is recognized when all four of the following criteria are met:(i) persuasive evidence of an arrangement exists; (ii) delivery hasoccurred 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. 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.

Weallow for the return of product from doctors, hospitals, and clinics within aspecified time frame, and record estimated sales returns as a reduction ofsales in the same period revenue is recognized. We do not provide aright of return on facial products. Wecalculate these sales provisions based upon historical experience with actualreturns. Actual returns in any future period are inherently uncertain and thusmay differ from the estimates. If actual returns differ significantly from theestimates, an adjustment to revenue in the current or subsequent period wouldbe recorded. Substantially all of the product returns relate to breast implants.We believe our estimates for anticipated returns is a “critical accountingestimate” because it requires us to estimate returns and, if actual returnsvary, it could have a material impact on our reported sales and results ofoperations. Historically, our estimates of return rates have not fluctuatedfrom the actual returns by more than 1% to 2%.

Aportion of our revenue is generated from consigned inventory of breast implantsmaintained at doctors, hospitals and clinics locations. The customer iscontractually obligated to maintain a specific level of inventory and to notifyus upon use. For these products, revenue is recognized at the time we arenotified by the customer that the product has been implanted. Notification isusually through the replenishing of the inventory and we periodically reviewconsignment inventories to confirm accuracy of customer reporting. FDAregulations require tracking the sales of all implanted products.

Oursales to independent distributors are conducted under the same revenuerecognition criteria as sales via our direct sales force. Independentdistributors do not have explicit or implicit rights to return product and donot maintain consignment inventory.

*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. Asof December 31, 2004, Inamed holds no inventory for product candidatesnot yet approved by regulatory agencies. We write off inventoryfor estimated obsolescence or unmarketable inventory or write it down to theestimated market value based on assumptions about future demand and marketconditions. We believe our estimates of inventory values is a “criticalaccounting estimate” because if actual future demand or market conditionsdiffer from those projected by us, additional inventory valuation adjustmentsmay be required. In addition, we could be required to expense previouslycapitalized costs related to pre-approval inventory upon a change in suchjudgment, 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 for Doubtful 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 

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analysisof historical bad debts, customer credit-worthiness, past transaction historywith the customer, current economic trends, and changes in customer paymentterms. We believe our estimates for our allowance for doubtful accounts is a “criticalaccounting estimate” because if the financial condition of our customers wereto deteriorate, adversely affecting their ability to make payments, additionalallowances may be required, which could have a material impact on our resultsof operations.

*Valuation of Long-lived Assets and Goodwill*

We account for long-livedassets, other than goodwill in accordance with the provisions of SFAS No. 144,“Accounting for the Impairment and Disposal of Long Lived Assets,” whichsuperseded SFAS No. 121 and certain sections of APB Opinion No. 30specific to discontinued operations. SFAS No. 144 classifies long-livedassets as either (1) to be held and used, (2) to be disposed of byother than sale, or (3) to be disposed of by sale. This standardintroduces a probability-weighted cash flow estimation approach to deal withsituations in which alternative courses of action to recover the carryingamount of a long-lived asset are under consideration or a range is estimatedfor the amount of possible future cash flows. SFAS No. 144 requires, amongother things, 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 we considerimportant that could trigger an impairment review include substantial operatinglosses, significant negative industry trends and significant changes in how weuse an asset. Upon the determination that an impairment review is required wewould compare the carrying amounts of the long-lived asset to its fair value,which is determined using a discounted cash flow model. This model requiresestimates of our future revenues, profits, capital expenditures, workingcapital and other relevant factors. We estimate these amounts by evaluating ourhistorical trends, current budgets, operating plans, and other industry data. Ifthe assets are considered to be impaired, the impairment charge is the amountby which the asset’s carrying value exceeds its fair value. As with all cashflow models there is an inherent subjectivity. The assumptions listed abovecould be different from actual results which would in turn create a differentvaluation. If these assumptions change in the future, we may be required torecord impairment charges for those assets.

We also adopted SFAS No. 142“Goodwill and Other Intangible Assets,” on January 1, 2002. As a result,goodwill is no longer amortized, but is subject to a transitional impairmentanalysis and 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 business operationswith which goodwill is associated. In accordance with SFAS No. 142, weevaluate 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 thestraight-line method over their estimated useful lives, which are periods of upto 21 years. In accordance with SFAS No. 142, we reassess the estimateduseful lives annually.

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 

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morelikely than not to be realized. We consider our ability to carryback losses,forecasted earnings and future taxable income and feasible tax planningstrategies in determining the need for and amount of a valuation allowance. We believe the estimate of our income taxassets, liabilities and expense are “critical accounting estimates” because ifthe actual income tax assets, liabilities and expenses differ from ourestimates the outcome could have a material impact on our results ofoperations.

*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 actual claims and interest rates could have a material impact on theactuarial calculation which could materially impact our reported expenses andresults of operations.

*Recent Pronouncements*

In March 2004, theEmerging Issues Task Force (EITF) reached a consensus on Issue No. 03-1,“The Meaning of Other-Than-Temporary Impairments and Its Application to CertainInvestments” (EITF 03-1). EITF 03-1 provides a three-stepimpairment model for determining whether an investment isother-than-temporarily impaired and requires companies to recognize suchimpairments as an impairment loss equal to the difference between the investment’scost and its fair value at the reporting date. The disclosure requirements areapplicable for the current year end. The adoption of EITF 03-1 in thethird quarter of 2004 did not have a material impact on our financial positionor results from operations.

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. Wedo not anticipate the adoption of SFAS 151 will have a material impact on ourfinancial position or results from operations.

In December 2004, theFASB issued Staff Position No. SFAS 109-2, “Accounting andDisclosure Guidance for Foreign Earnings Repatriation Provision within theAmerican Jobs Creation Act of 2004”, (SFAS 109-2). The American JobsCreation Act of 2004 introduces a special one-time dividends received 

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deductionon the repatriation of certain foreign earnings to a U.S. taxpayer, provided certaincriteria are met. SFAS 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 109 “Accounting forIncome Taxes”, and provides accounting and disclosure guidance for therepatriation provision. This Staff Position was effective upon issuance. Seenote 12 of the notes to the consolidated financial statements for additionaldiscussions.

In December 2004, theFASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R),which replaces SFAS No. 123, “Accounting for Stock-Based Compensation”(SFAS 123) and supersedes APB Opinion No. 25, “Accounting for Stock Issuedto Employees.” SFAS 123R requires all share-based payments to employees,including grants of employee stock options, to be recognized in the financialstatements based on their fair values, beginning with the first interim orannual period after June 15, 2005, with early adoption encouraged. The proforma disclosures previously permitted under SFAS 123 no longer will be analternative to financial statement recognition. We are required to adopt SFAS123R in the third quarter of fiscal 2005, beginning July 1, 2005. UnderSFAS 123R, we must determine the transition method to be used at date ofadoption, the appropriate fair value model to be used for valuing share-basedpayments and the amortization method for compensation cost. We currentlyutilize a standard option pricing model (i.e., Black-Scholes) to measure thefair value of stock options granted to employees. While SFAS 123R permitsentities to continue to use such a model, the standard also permits the use ofa “lattice” model. We have not yet determined which model we will use tomeasure the fair value of employee stock options upon the adoption of SFAS 123R.The transition methods include prospective and retroactive adoption options. Underthe retroactive options, prior periods may be restated either as of thebeginning of the year of adoption or for all periods presented. The prospectivemethod requires that compensation expense be recorded for all unvested stockoptions and restricted stock at the beginning of the first quarter of adoptionof SFAS 123R, while the retroactive methods would record compensation expensefor all unvested stock options and restricted stock beginning with the firstperiod restated. We anticipate adopting the prospective method and arecurrently evaluating the impact of this standard on our financial statements.

In September 2004,the EITF reached a consensus regarding Issue No. 04-1, “Accountingfor Preexisting Relationships Between the Parties to a Business Combination”(EITF 04-1). EITF 04-1 requires an acquirer in a businesscombination to evaluate any preexisting relationship with the acquiree todetermine if the business combination in effect contains a settlement of thepreexisting relationship. A business combination between parties with apreexisting relationship should be viewed as a multiple element transaction. EITF 04-1is effective for business combinations after October 13, 2004, butrequires goodwill resulting from prior business combinations involving partieswith a preexisting relationship to be tested for impairment by applying theguidance in the consensus. We do not believe the adoption of EITF 04-1will have a material impact on our financial position or results fromoperations.

**ITEM 7A.**        QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course ofbusiness, Inamed’s operations are exposed to fluctuations in interest rates andforeign currencies. These fluctuations can vary our cost of financing andoperations.

Interest Rate Exposure-Based on Inamed’s overall interest rate exposure at December 31, 2004,which was variable rate debt, a hypothetical 10% change in interest ratesapplied to the outstanding debt as of December 31, 2004, would have nomaterial impact on earnings, cash flows, or fair values of interest rate risksensitive instruments over a one-year period.

Foreign Currency Exposure-Inamed’s foreign currency risk exposure results from fluctuating currencyexchange rates, primarily the movement of the U.S. dollar relative to the Euroand Yen. Inamed’s transactional currency exposures arise when Inamed or one ofits subsidiaries enter into transactions denominated in currencies other thantheir local currency. Inamed also faces currency exposure arising 

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from thetranslation of the financial results of Inamed global operations into U.S.dollars at exchange rates that have fluctuated during the reporting period.

There were no foreignexchange forward or option contracts at December 31, 2004 or 2003. Basedon Inamed’s overall exposure for foreign currency at December 31, 2004, ahypothetical 10% change in foreign currency rates would not have a materialimpact 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.**                CHANGES IN ANDDISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

**ITEM 9A**.        CONTROLS AND PROCEDURES

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we evaluated the effectiveness of ourdisclosure controls and 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.

There were no significantchanges in our internal control over financial reporting during the threemonths ended December 31, 2004 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

**ManagementReport on Internal Control Over Financial Reporting**

Management of InamedCorporation (“Inamed”) is responsible for establishing and maintaining effectiveinternal control over financial reporting as is defined in the SecuritiesExchange Act of 1934 Rule 13a-15(f). The consolidated financialstatements and other information presented in this Annual Report have beenprepared in accordance with accounting principles generally accepted in theUnited States. Inamed’s internal control system was designed to providereasonable assurance to the Company’s management and board of directorsregarding the preparation and fair presentation of published financialstatements. All internal control systems, no matter how well designed, haveinherent limitations. Therefore, even those systems determined to be effectivecan provide only reasonable assurance with respect to financial statementpreparation and presentation.

Management of Inamedassessed its internal control over financial reporting as of December 31,2004 in relation to the criteria 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, 2004, Inamed maintainedeffective internal control over financial reporting.

KPMG LLP, our registeredindependent 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**.       OTHER INFORMATION

**None**

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**PART III**

**ITEM 10**.         DIRECTORSAND OFFICERS OF THE COMPANY

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, 2005.

**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, 2005.

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

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, 2005.
| ** **                                          | ** ** | **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                |       |                                                                                                              | 37,500     |                                                                             |       |                                                                                        | $          | 19.20 |   |   |   | — |   |   |
| The 1998 Plan                                       |       | 675,000                |       |                                                                                                              | 102,400    |                                                                             |       |                                                                                        | $          | 54.84 |   |   |   | 12,499 |   |   |
| The 1999 Program                                    |       | 1,350,000              |       |                                                                                                              | 321,499    |                                                                             |       |                                                                                        | $          | 45.63 |   |   |   | 131,416 |   |   |
| The 2000 Option  Plan                               |       | 2,287,500              |       |                                                                                                              | 1,200,403  |                                                                             |       |                                                                                        | $          | 38.23 |   |   |   | 31,246 |   |   |
| The 2003 Outside  Director Plan                     |       | 225,000                |       |                                                                                                              | 82,500     |                                                                             |       |                                                                                        | $          | 48.69 |   |   |   | 142,500 |   |   |
| The 2004 Plan                                       |       | 500,000                |       |                                                                                                              | —     |                                                                             |       |                                                                                        | $          | — |   |   |   | 500,000 |   |   |
| Equity  compensation plans approved by Stockholders |       | 5,262,500              |       |                                                                                                              | 1,744,302  |                                                                             |       |                                                                                        | $          | 40.65 |   |   |   | 817,661 |   |   |
| Stand Alone Options, not approved by Stockholders   |       | 2,426,250              |       |                                                                                                              | 50,001     |                                                                             |       |                                                                                        | $          | 16.68 |   |   |   | 300,000 |   |   |
| Total                                               |       | 7,688,750              |       |                                                                                                              | 1,794,303  |                                                                             |       |                                                                                        | $          | 39.99 |   |   |   | 1,117,661 |   |   |

 

**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 the Securitiesand Exchange Commission not later than April 30, 2005.

**ITEM 14**.         PRINCIPALACCOUNTING FEES AND SERVICES

The information requiredin this item is incorporated herein by reference to information under thecaption “Independent Public Accountants” of the registrant’s Proxy Statementfor Annual Meeting of Stockholders to be filed with the Securities and ExchangeCommission not later than April 30, 2005.

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**PART IV**

**ITEM 15**.         EXHIBITS,FINANCIAL STATEMENT SCHEDULES
| (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, 2004 and 2003                                                           |   | F-4 |
|   |                                                                    | Consolidated  Statements of Income for three years ended December 31, 2004                                              |   | F-5 |
|   |                                                                    | Consolidated  Statements of Stockholders’ Equity and Comprehensive Income for three years  ended December 31, 2004 |   | F-6 |
|   |                                                                    | Consolidated  Statements of Cash Flows for three years ended December 31, 2004                                          |   | 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*                                                                                                                   |   |   |

 

Thefollowing exhibits are filed as part of this Annual Report on Form 10-K.
| Exhibit   No. | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **Description** |
|---------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 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.                                                                                                                                                         |
| 4.3           |       | Amended and Restated Rights Agreement, dated as of  November 16, 1999, by and between Inamed Corporation and U.S. Stock  Transfer Corporation, as Rights Agent. (Incorporated herein by reference to  Exhibit 4.1 of Inamed’s Current Report on Form 8-K filed with the  Commission on November 19, 1999.)                                          |
| 4.4           |       | Amendment No. 1 to  Amended and Restated Rights Agreement, dated as of December 22, 1999, by  and among Inamed Corporation, Appaloosa Management LP and U.S. Stock Transfer  Corporation, as Rights Agent. (Incorporated by reference to Exhibit 4.1  of Inamed’s Current Report on Form 8-K filed with the Commission on December 30,  1999.) |
| 4.5           |       | Amendment No. 2 to Amended and Restated Rights  Agreement, dated as of April 1, 2002, by and between Inamed Corporation  and U.S. Stock Transfer Corporation, as Rights Agent. (Incorporated herein by  reference to Exhibit 4.5 of Inamed’s Annual Report on Form 10-K  filed with the Commission on March 29, 2002.)                         |
| 4.6           |       | Letter Agreement by and between Inamed Corporation  and Appaloosa Management LP regarding Rights Agreement. (Incorporated herein  by reference to Exhibit 4.6 of Inamed’s Annual Report on Form 10-K  filed with the Commission on March 29, 2002.)                                                                                                      |
| 4.7           |       | 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.)                                                                                                                                               |

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| 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 Form 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. (To be filed on  Inamed’s Annual Report as amended on Form 10-K/A no later than  April 30, 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. (To be filed on Inamed’s Annual Report as amended on Form 10-K/A  no later than April 30, 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.)                                                                                                                                                                                                                                                                                                                                 |
| 10.15 |   | 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.)                                                                                                                                                                                                                                                                                                                   |
| 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.)                                                                                                                                                                                                                                      |

46

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| 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 10.41 of Inamed’s Quarterly Report on Form 10-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 10.42 of  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.)                                                                                                                                                                                   |
| 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 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# |   | Amended and Restated Employment  Agreement dated as of October 18, 2004 by and between Inamed Corporation and  Nicholas Teti (Incorporated herein by reference to Exhibit 10.51 to Inamed’s  Current Report on Form 8-K filed with the Commission on November 4, 2004).                                                                                                                                                     |

47

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| 10.52* |   | Amended and Restated United  States Distribution Agreement dated November 29, 2004 by and between Inamed  Medical Products Corporation and Genzyme Corporation.                                                                                                                                                                                       |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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, 2004).                                                                                                                                                  |
| 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.  (To be filed on Inamed’s Annual Report as amended on Form 10-K/A  no later than April 30, 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.                                                                                                                                                                                                                                                                                                           |
| 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).                                                                                                                                           |
| 21.0   |   | Subsidiaries of registrant. (To be filed on Inamed’s  Annual Report as amended on Form 10-K/A no later than  April 30, 2005.)                                                                                                                                                                                                          |   |
| 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 asterisks) have been omitted pursuant to arequest for confidential treatment and have been filed separately with theCommission.

#      Indicates management contract orcompensatory plan.

48

----

 

**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant caused this Annual Report to be signed on its behalf bythe undersigned, thereunto duly authorized.
|        | INAMED  CORPORATION |
|--------|---------------------|
|   | By:                 | /s/ NICHOLAS L. TETI |
|   |                | Nicholas L. Teti |
|   |                | *Chairman,  President and Chief Executive Officer* |
|   |                | March 16, 2005 |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Annual Report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.
| /s/ NICHOLAS L. TETI            |   | Chairman, President and  Chief Executive Officer |   | March 16, 2005  |
|---------------------------------|--------|--------------------------------------------------|--------|----------------------|
| Nicholas L. Teti                |   | (Principal Executive  Officer)                   |   |                 |
| /s/ DECLAN DALY                 |   | Executive Vice  President and                    |   | March 16,  2005 |
| Declan Daly                     |   | Chief Financial Officer                          |   |                 |
|                            |   | (Principal Financial and  Accounting Officer)    |   |                 |
| /s/ JOY A. AMUNDSON             |   | Director                                         |   | March 16,  2005 |
| Joy A. Amundson                 |   |                                             |   |                 |
| /s/ JAMES E. BOLIN              |   | Director                                         |   | March 16,  2005 |
| James E. Bolin                  |   |                                             |   |                 |
| /s/ MALCOLM R. CURRIE, PH.D.    |   | Director                                         |   | March 16,  2005 |
| Malcolm R. Currie, Ph.D.        |   |                                             |   |                 |
| /s/ JOHN C. MILES II            |   | Director                                         |   | March 16,  2005 |
| John C. Miles II                |   |                                             |   |                 |
| /s/ MITCHELL S. ROSENTHAL, M.D. |   | Director                                         |   | March 16,  2005 |
| Mitchell S. Rosenthal,  M.D.    |   |                                             |   |                 |
| /s/ TERRY E. VANDEWARKER        |   | Director                                         |   | March 16,  2005 |
| Terry E. Vandewarker            |   |                                             |   |                 |

 

49

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors andStockholdersInamed Corporation:

We have audited management’s assessment, included inthe accompanying Management Report on Internal Control Over Financial Reportingappearing under Item 9A*,*thatInamed Corporation maintained effective internal control over financialreporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Inamed Corporation’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon 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 U.S. generally accepted accounting principles. Acompany’s internal 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 maydeteriorate.

In our opinion, management’s assessment that InamedCorporation maintained effective internal control over financial reporting asof December 31, 2004, is fairly stated, in all material respects, based oncriteria established in**Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO).**Also, in our opinion, Inamed Corporationmaintained, in all material respects, effective internal control over financialreporting as of December 31, 2004, based on criteria established in**InternalControl—Integrated Framework**issuedby the Committee of Sponsoring Organizations 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 balance sheets of Inamed Corporation andsubsidiaries as of December 31, 2004 and 2003, and the relatedconsolidated statements of income, stockholders’ equity and comprehensiveincome, and cash flows for each of the years in the three-year period ended December 31,2004, and the related financial statements schedule II and our reportdated March 14, 2005 expressed an unqualified opinion on those consolidatedfinancial statements.
| /s/ KPMG LLP             |   |
|--------------------------|--------|
| KPMG  LLP                |
| Los  Angeles, California |
| March 14,  2005     |

 

F-2

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors andStockholdersInamed Corporation:

We have audited the accompanying consolidated balancesheets of Inamed Corporation and subsidiaries as of December 31, 2004 and2003, and the related consolidated statements of income, stockholders’ equityand comprehensive income, and cash flows for each of the years in the three-yearperiod ended December 31, 2004. In connection with our audits of theconsolidated financial statements, we also have audited the related financialstatement schedule II. These consolidated financial statements andfinancial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements and 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, 2004and 2003, and the results of their operations and their cash flows for each ofthe years in the three-year period ended December 31, 2004, in conformitywith U.S. generally accepted accounting principles. Also in our opinion, therelated financial statement schedule II, when considered in relation tothe basic consolidated financial statements taken as a whole, presents fairly,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 InamedCorporation’s internal control over financial reporting as of December 31,2004, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated March 14,2005 expressed an unqualified opinion on management’s assessment of, and theeffective operation of, internal control over financial reporting.
| /s/ KPMG LLP            |   |
|-------------------------|--------|
| KPMG LLP                |
| Los Angeles, California |
| March 14, 2005     |

 

F-3

----

**INAMED CORPORATIONAND SUBSIDIARIESConsolidated Balance SheetsAs of December 31, 2004 and 2003(millions, except par value)**
| ** **                                                                                                                                     | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                     | ** ** | **2004**              | ** ** | **2003**              | ** ** |
| **Assets**                                                                                                                                     |       |                  |       |                  |       |   |   |   |   |
| Current assets:                                                                                                                                |       |                  |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                      |       |                  | $          | 107.2                 |       |   |   | $ | 80.5 |   |   |
| Short-term investments                                                                                                                         |       |                  | 23.1       |                  |       |   | — |   |   |
| Trade accounts receivable, net of allowances of  $18.7 and $19.7 in 2004 and 2003, respectively                                                |       |                  | 69.2       |                  |       |   | 63.7 |   |   |
| Inventories, net                                                                                                                               |       |                  | 56.0       |                  |       |   | 47.0 |   |   |
| Prepaid expenses and other current assets                                                                                                      |       |                  | 13.5       |                  |       |   | 10.6 |   |   |
| Deferred income taxes                                                                                                                          |       |                  | 2.9        |                  |       |   | 10.3 |   |   |
| Total current assets                                                                                                                           |       |                  | 271.9      |                  |       |   | 212.1 |   |   |
| Property and equipment, net                                                                                                                    |       |                  | 62.5       |                  |       |   | 51.2 |   |   |
| Goodwill                                                                                                                                       |       |                  | 151.9      |                  |       |   | 151.2 |   |   |
| Other intangible  assets, net                                                                                                                  |       |                  | 50.9       |                  |       |   | 44.5 |   |   |
| Deferred income  taxes                                                                                                                         |       |                  | 30.1       |                  |       |   | 32.9 |   |   |
| Other assets                                                                                                                                   |       |                  | 2.8        |                  |       |   | 9.1 |   |   |
| Total assets                                                                                                                                   |       |                  | $          | 570.1                 |       |   |   | $ | 501.0 |   |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                 |       |                  |       |                  |       |   |   |   |   |
| Current  liabilities:                                                                                                                          |       |                  |       |                  |       |   |   |   |   |
| Current portion of long-term debt                                                                                                              |       |                  | $          | 12.5                  |       |   |   | $ | 10.0 |   |   |
| Accounts payable                                                                                                                               |       |                  | 20.8       |                  |       |   | 23.5 |   |   |
| Income taxes payable                                                                                                                           |       |                  | 6.2        |                  |       |   | 10.3 |   |   |
| Accrued liabilities and other                                                                                                                  |       |                  | 41.5       |                  |       |   | 36.4 |   |   |
| Total current liabilities                                                                                                                      |       |                  | 81.0       |                  |       |   | 80.2 |   |   |
| Long-term debt, net of current portion                                                                                                         |       |                  | 10.0       |                  |       |   | 22.5 |   |   |
| Other long-term  liabilities                                                                                                                   |       |                  | 32.8       |                  |       |   | 46.8 |   |   |
| Commitments and  contingencies (see notes 18 and 20)                                                                                           |       |                  |       |                  |       |   |   |   |   |
| Stockholders’  equity:                                                                                                                    |       |                  |       |                  |       |   |   |   |   |
| Common stock, $0.01 par value; authorized 100.0 and  50.0 shares; issued and outstanding 35.9 and 35.3 shares for 2004 and 2003,  respectively |       |                  | 0.4        |                  |       |   | 0.4 |   |   |
| Additional paid-in capital                                                                                                                     |       |                  | 244.8      |                  |       |   | 223.3 |   |   |
| Retained earnings                                                                                                                              |       |                  | 192.0      |                  |       |   | 128.9 |   |   |
| Deferred compensation                                                                                                                          |       |                  | (4.8       | )                     |       |   | (6.9 | ) |   |
| Accumulated other comprehensive income                                                                                                         |       |                  | 13.9       |                  |       |   | 5.8 |   |   |
| Total stockholders’ equity                                                                                                                |       |                  | 446.3      |                  |       |   | 351.5 |   |   |
| Total liabilities  and stockholders’ equity                                                                                               |       |                  | $          | 570.1                 |       |   |   | $ | 501.0 |   |   |

 

See accompanying notes to consolidated financial statements.

F-4

----

**INAMED CORPORATIONAND SUBSIDIARIESConsolidated Statements of IncomeFor the Three Years Ended December 31, 2004(millions, except per share data)**
| ** **                                       | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                                        |       | $        | 384.4      |     | $          | 332.6    |       | $ | 275.7 |   |
| Cost of goods  sold                              |       | 97.9     |       | 92.8     |       | 77.6     |       |
| Gross profit                                     |       | 286.5    |       | 239.8    |       | 198.1    |       |
| Operating  expenses:                             |       |     |       |     |       |     |       |
| Selling, general and administrative (note 20)    |       | 179.7    |       | 141.8    |       | 126.7    |       |
| Research and development                         |       | 28.8     |       | 21.5     |       | 13.6     |       |
| Restructuring charges                            |       | —   |       | —   |       | 5.1      |       |
| Amortization of intangible assets                |       | 5.0      |       | 4.0      |       | 4.9      |       |
| Total operating expenses                         |       | 213.5    |       | 167.3    |       | 150.3    |       |
| Operating income                                 |       | 73.0     |       | 72.5     |       | 47.8     |       |
| Other income  (expense):                         |       |     |       |     |       |     |       |
| Net interest income (expense) and debt costs     |       | 0.5      |       | (9.4     | )          | (11.7    | )          |
| Foreign currency transaction gains (losses), net |       | 0.1      |       | (0.1     | )          | 0.3      |       |
| Royalty income and other                         |       | 4.7      |       | 4.2      |       | 5.8      |       |
| Total other income (expense), net                |       | 5.3      |       | (5.3     | )          | (5.6     | )          |
| Income before income tax expense                 |       | 78.3     |       | 67.2     |       | 42.2     |       |
| Income tax  expense                              |       | 15.2     |       | 14.2     |       | 9.3      |       |
| Net income                                       |       | $        | 63.1       |     | $          | 53.0     |       | $ | 32.9 |   |
| Net income per  share of common stock:           |       |     |       |     |       |     |       |
| Basic                                            |       | $        | 1.77       |     | $          | 1.54     |       | $ | 1.04 |   |
| Diluted                                          |       | $        | 1.75       |     | $          | 1.51     |       | $ | 1.00 |   |
| Weighted average  shares outstanding:            |       |     |       |     |       |     |       |
| Basic                                            |       | 35.6     |       | 34.5     |       | 31.5     |       |
| Diluted                                          |       | 36.0     |       | 35.2     |       | 32.9     |       |

 

See accompanying notes to consolidated financial statements.

F-5

----

 

**INAMED CORPORATIONAND SUBSIDIARIESConsolidated Statements of Stockholders’ Equity andComprehensive IncomeFor the Three Years Ended December 31, 2004(millions)**
|                                                       | ** ** | ** **            | ** ** | ** **     | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** **   | ** **        | ** ** | **Accumulated**        | ** **                | ** ** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|----------------|------------|--------------|------------|--------------|------------|--------------|--------------|-------------------|------------|------------------------|---------------------------|------------|------------|
| ** **                                            | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** **   | **Other**         | ** ** | **Total**              | ** **                |
| ** **                                            | ** ** | **(Issued)**          | ** ** | **Paid-in**    | ** ** | **Treasury** | ** ** | **Retained** | ** ** | **Deferred** | ** **   | **Comprehensive** | ** ** | **Stockholders’** | ** **                |
| ** **                                            | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Capital**  | ** ** | **Stock**    | ** ** | **Earnings** | ** **   | **Compensation**  | ** ** | **Income (Loss)** | ** **                | **Equity** | ** ** |
| **Balance, December 31, 2001**                   |       |                  | 31.9       |           |       |         | 0.3        |         |       |         | 170.0        |              |       |                   | (24.0                     | )          |       |   | 43.1 |   |   |   | — |   |   |   | (15.0 | ) |   |   | 174.4 |   |   |
| Comprehensive income:                                 |       |                  |       |           |       |         |       |         |       |         |         |              |       |                   |                      |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                            |       |                  |       |           |       |         |       |         |       |         |         |              |       |                   |                      |       |       |   | 32.9 |   |   |   |   |   |   |   |   |   |   |   | 32.9 |   |   |
| Translation adjustment                                |       |                  |       |           |       |         |       |         |       |         |         |              |       |                   |                      |       |       |   |   |   |   |   |   |   |   |   | 6.3 |   |   |   | 6.3 |   |   |
| Unrealized gain on interest rate swaps           |       |                  |       |           |       |         |       |         |       |         |         |              |       |                   |                      |       |       |   |   |   |   |   |   |   |   |   | 0.3 |   |   |   | 0.3 |   |   |
| Total comprehensive income                            |       |                  |       |           |       |         |       |         |       |         |         |              |       |                   |                      |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 39.5 |   |   |
| Cancellation of treasury stock                        |       |                  | (1.5       | )              |       |         |       |         |       |         | (24.0        | )                 |       |                   | 24.0                      |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   | — |   |   |
| Compensation expense                                  |       |                  |       |           |       |         |       |         |       |         | 0.7          |              |       |                   |                      |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 0.7 |   |   |
| Employee stock purchase plan                          |       |                  | 0.1        |           |       |         |       |         |       |         | 0.4          |              |       |                   |                      |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 0.4 |   |   |
| Exercise of stock  options and warrants               |       |                  | 2.4        |           |       |         |       |         |       |         | 13.9         |              |       |                   |                      |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 13.9 |   |   |
| Tax benefit of stock option exercises                 |       |                  |       |           |       |         |       |         |       |         | 3.8          |              |       |                   |                      |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 3.8 |   |   |
| **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 |   |   |

 

See accompanying notes to consolidated financial statements.

F-6

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**INAMED CORPORATIONAND SUBSIDIARIESConsolidated Statements of Cash FlowsYears Ended December 31, 2004, 2003, and 2002(millions)**
| ** **                                                                             | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from operating activities:                                                  |       |     |       |     |       |     |       |
| Net income                                                                             |       | $        | 63.1       |     | $          | 53.0     |       | $ | 32.9 |   |
| Non-cash elements included  in net income:                                             |       |     |       |     |       |     |       |
| Depreciation and  amortization                                                         |       | 13.9     |       | 15.3     |       | 12.6     |       |
| Tax benefit from  stock option exercises                                               |       | 6.8      |       | 18.3     |       | 3.8      |       |
| Deferred income  taxes                                                                 |       | 10.4     |       | (5.0     | )          | (1.7     | )          |
| Non-cash  compensation                                                                 |       | 2.1      |       | 0.1      |       | 0.7      |       |
| Loss on  disposition of property and equipment                                         |       | 0.1      |       | 0.2      |       | 0.6      |       |
| Provision for  doubtful accounts                                                       |       | 3.0      |       | 7.3      |       | 1.7      |       |
| Amortization and  write-off of deferred loan costs                                     |       | 0.2      |       | 2.1      |       | 1.5      |       |
| Special charges                                                                        |       | —   |       | —   |       | 5.7      |       |
| Changes in operating  assets and liabilities:                                          |       |     |       |     |       |     |       |
| Trade accounts  receivable                                                             |       | (7.2     | )          | (20.5    | )          | (8.8     | )          |
| Inventories                                                                            |       | (8.3     | )          | (2.0     | )          | 2.0      |       |
| Prepaid expenses  and other current assets                                             |       | (2.8     | )          | 2.4      |       | (6.6     | )          |
| Other assets                                                                           |       | 6.3      |       | 8.4      |       | (15.7    | )          |
| Accounts payable                                                                       |       | (2.8     | )          | 0.8      |       | 1.8      |       |
| Income taxes  payable                                                                  |       | (4.8     | )          | (3.0     | )          | 2.0      |       |
| Accruals and other  long-term liabilities                                              |       | (9.3     | )          | (2.2     | )          | 11.3     |       |
| Net cash provided  by operating activities                                             |       | 70.7     |       | 75.2     |       | 43.8     |       |
| Cash flows from investing activities:                                                  |       |     |       |     |       |     |       |
| Purchase of  property and equipment                                                    |       | (18.7    | )          | (12.1    | )          | (14.8    | )          |
| Purchase of  investments                                                               |       | (30.2    | )          | —   |       | —   |       |
| Proceeds from sale  of investments                                                     |       | 6.8      |       | —   |       | —   |       |
| Purchase of  intangibles                                                               |       | (11.1    | )          | (4.8     | )          | —   |       |
| Other                                                                                  |       | —   |       | —   |       | (3.8     | )          |
| Net cash used in  investing activities                                                 |       | (53.2    | )          | (16.9    | )          | (18.6    | )          |
| Cash flows from financing activities:                                                  |       |     |       |     |       |     |       |
| Proceeds of  long-term debt                                                            |       | —   |       | 65.0     |       | —   |       |
| Principal  repayment of long-term debt                                                 |       | (10.0    | )          | (116.2   | )          | (36.5    | )          |
| Payment of  deferred loan costs                                                        |       | —   |       | (1.3     | )          | —   |       |
| Issuance of common  stock                                                              |       | 14.7     |       | 33.2     |       | 14.3     |       |
| Payment of cash  dividend                                                              |       | —   |       | (0.1     | )          | —   |       |
| Net cash provided  by (used in) financing activities                                   |       | 4.7      |       | (19.4    | )          | (22.2    | )          |
| Effect of exchange  rate changes on cash                                               |       | 4.5      |       | 2.3      |       | 1.5      |       |
| Change in cash and cash equivalents:                                                   |       |     |       |     |       |     |       |
| Net increase in  cash and cash equivalents                                             |       | 26.7     |       | 41.2     |       | 4.5      |       |
| Cash and cash  equivalents at beginning of year                                        |       | 80.5     |       | 39.3     |       | 34.8     |       |
| Cash and cash  equivalents at end of year                                              |       | $        | 107.2      |     | $          | 80.5     |       | $ | 39.3 |   |
| Supplemental disclosures of cash flow information:                                     |       |     |       |     |       |     |       |
| Cash paid during the year  for:                                                        |       |     |       |     |       |     |       |
| Interest                                                                               |       | $        | 1.3        |     | $          | 8.1      |       | $ | 11.2 |   |
| Income taxes                                                                           |       | $        | 5.8        |     | $          | 5.1      |       | $ | 5.3 |   |
| Non-cash investing and financing activities:  amortization of investment premiums $0.3 |       |     |       |     |       |

 

See accompanying notes to consolidated financial statements.

F-7

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 (millions)**

**NOTE 1—DESCRIPTION OF BUSINESS**

*The Company*

Inamed Corporation, aDelaware corporation, is a global healthcare company that develops,manufactures, and markets a diverse line of products that enhance the qualityof people’s lives. We have three principal product lines (which, for financialreporting purposes, are considered to be one segment): breast aesthetics(consisting primarily of breast implants and tissue expanders for use inplastic and reconstructive surgery); facial aesthetics (consisting primarily ofcollagen and hyaluronic acid-based dermal fillers for use in facialrejuvenation); and obesity intervention (consisting of products for use intreating 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.

**NOTE2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

*Principles of Consolidation*

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

*Critical Accounting Policies 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 sources. By their nature, estimates are subject to an inherent degree ofuncertainty. Actual results may differ from those estimates.

*Cash and Cash Equivalents*

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 withStatement of Financial Accounting Standards (SFAS) No. 115, “Accountingfor Certain Investments in Debt and Equity Securities” and Emerging Issues TaskForce (EITF) No. 03-1 “The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments,” the Company classifies its securitiesas held-to-maturity and reports them at cost without recognizing any unrealizedgains or losses. Because of the Company’s cash position and the short-termnature of the 

F-8

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

maturities,the Company has the positive intent and ability to hold these securities totheir maturity dates. Securities that mature in three months or less areclassified as cash equivalents. Those that mature over three months but withinone year are classified as short-term investments. The Company is currentlyinvesting in high quality corporate debt securities and the cost of securitiessold is based on the specific identification method.

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, 2004and 2003 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.

Thegross unrealized losses and fair value of the Company’s investments are asfollows:
| ** **                   | ** ** | **Less Than 12 Months** | ** ** |
|------------------------------|------------|----------------------------------------|------------|
| ** **                   | ** ** | **Fair Value**                    | ** ** | **Unrealized  Losses** | ** ** |
| Corporate Bonds              |       |                                   | 19.4       |   |   |   | 0.5 |   |   |
| Federal Agency—Mortgage |       |                                   |       |   |   |   |   |   |   |
| Backed Securities            |       |                                   | 3.5        |   |   |   | — |   |   |
| Total                        |       |                                   | 22.9       |   |   |   | 0.5 |   |   |

 

Because of the short-termnature of the investments and because the Company has the ability and intent tohold these investments until a recovery of fair value, which may be maturity,the Company does not consider these investments to be other-than-temporarilyimpaired at December 31, 2004.

*Fair Value of Financial 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 for Doubtful 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.

F-9

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

*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, 2004, Inamed holds noinventory for product candidates not yet approved by regulatory agencies.

*Current Vulnerability 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 and Equipment*

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 Statement of FinancialAccounting Standards (SFAS) No. 144 as described below.

*Accounting for Long-Lived Assets*

Inamedaccounts for long-lived assets, other than goodwill, in accordance with theprovisions of Statement of Financial Accounting Standards SFAS No. 144, “Accountingfor the Impairment and Disposal of Long Lived Assets,” which supersedes SFAS No. 121and certain sections of APB Opinion No. 30 specific to discontinuedoperations. SFAS No. 144 classifies long-lived assets as either (1) tobe held and used, (2) to be disposed of by other than sale, or (3) tobe disposed of by sale. This standard introduces a probability-weighted cashflow estimation approach to address situations where 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. Factorsthe Company considers important that could trigger an impairment review includesubstantial operating losses, significant negative industry trends andsignificant changes in how it uses an asset. Upon the determination that animpairment review is required, the Company would compare the carrying amountsof the long-lived asset to its fair value, which is determined using adiscounted cash flow model. This model requires estimates of future revenues,profits, capital expenditures, working capital and other relevant factors. Theseamounts are estimated by evaluating historical trends, current budgets,operating plans, and industry data. If the assets are considered to beimpaired, the impairment charge is the amount by which the asset’s carryingvalue exceeds its fair value. As with all cash flow models there is an inherentsubjectivity. The 

F-10

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

assumptions listed above could be different fromactual results which would in turn create a different valuation. If theseassumptions change in the future, the Company may be required to recordimpairment charges for those assets. With the exception of the manufacturingconsolidation that commenced in 2002 (see Note 3), Inamed does not believe thatany such changes have taken place. The Company will continue to monitor itslong lived asset balances and conduct formal tests when impairment indicatorsare present.

*Goodwill and Other Intangible Assets*

Goodwill represents theexcess of cost over the fair value of identifiable net assets of businessesacquired. Other intangible assets consist primarily of purchased technology andpatents. The Company adopted SFAS No. 142 “Goodwill and Other IntangibleAssets,” on January 1, 2002. As a result, goodwill is no longer amortized,but was subjected to a transitional impairment analysis and is tested forimpairment on an annual basis as of October 31, or more frequently asimpairment indicators arise. The test for impairment involves the use ofestimates related to the fair values of the business operations with whichgoodwill is associated. In accordance with SFAS 142 the Company evaluates thefair value of the reporting unit in relation to its carrying value, includinggoodwill. As long as the fair value of the reporting unit exceeds its carryingvalue and no specific circumstances indicate a loss in value for goodwill, noimpairment charge will be recognized. If the fair value of the reporting unitis less than its carrying value, the Company will measure the amount of theimpairment loss and record an impairment charge based on a discounted cash flowmodel. Other intangible assets are amortized using the straight-line methodover their estimated useful lives 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 usuallyrequire 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 product, themarket 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 five 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 

F-11

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

cases, provides lifetime product replacement and onethousand two hundred dollars of financial assistance for surgical procedureswithin ten years of implantation. The warranty programs in non-U.S. marketshave similar terms and conditions to the U.S. plan. The Company does notcurrently offer a warranty on its facial or health products and therefore noamount is included in the liability for those products. The Company does notwarrant any level of aesthetic result and, as required by governmentregulation, makes extensive disclosures concerning the risks of the use of itsproducts and implantation surgery. Changes to actual warranty claims incurredand interest rates could have a material impact on the actuarial analysis whichcould materially impact Inamed’s reported expenses and results of operations. Substantiallyall of the product warranty liability arises from the U.S. warranty program. 
| ** **                                                       | ** ** | **Accrued  Warranty** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|
| Balance at  December 31, 2001                               |       |                  | $          | 9.7 |   |   |
| Accruals for warranties issued during the period                 |       |                  | 3.8        |   |   |
| Adjustments made to accruals related to pre-existing  warranties |       |                  | (0.6       | ) |   |
| Settlements made during the period                               |       |                  | (3.4       | ) |   |
| 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 |   |   |

 

*Revenue Recognition*

Inamedrecognizes product revenue, net of sales discounts, returns and allowances, inaccordance with Staff Accounting Bulletin (SAB) No. 104, “RevenueRecognition” and SFAS No. 48 “Revenue Recognition When Right of ReturnExists.” Revenue is recognized when all four of the following criteria are met:(i) persuasive evidence of an arrangement exists; (ii) delivery hasoccurred 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.

TheCompany allows for the return of product from doctors, hospitals, and clinicswithin a specified time frame, and record estimated sales returns as areduction of sales in the same period revenue is recognized. The Companydoes not provide a right of return on facial products. Sales provisions are calculated based upon historical experience withactual returns. Actual returns in any future period are inherently uncertainand thus may differ from the estimates. If actual returns differ significantlyfrom the estimates, an adjustment to revenue in the current or subsequentperiod would be recorded. Substantially all of the product returns relate tobreast implants.

F-12

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

Aportion of the Company’s revenue is generated from consigned inventory ofbreast implants maintained at doctors, hospitals and clinics locations. Thecustomer is contractually obligated to maintain a specific level of inventoryand to notify Inamed upon use. For these products, revenue is recognized at thetime Inamed is notified by the customer that the product has been implanted. Notificationis usually through the replenishing of the inventory and Inamed periodicallyreviews consignment inventories to confirm accuracy of customer reporting. FDAregulations require tracking the sales of all implanted products.

The Company’s sales toindependent distributors are conducted under the same revenue recognitioncriteria as sales via the direct sales force. Independent distributors do nothave explicit or implicit rights to return product and do not maintainconsignment inventory.

*Research and Development (R&D)*

Inamed conducts itsR&D internally as well as through contracts with other companies in theresearch and development of new products and processes. R&D expenses arecomprised of the following types of costs incurred in performing research anddevelopment activities: salaries and benefits, allocated overhead, clinicaltrial and related clinical manufacturing costs, regulatory costs, contractservices, and other outside costs. In accordance with SFAS No. 2, “Accountingfor Research and Development Costs,” all R&D costs are expensed asincurred.

*Stock-Based Compensation*

Inamed accounts forstock-based compensation in accordance with SFAS No. 123, “Accounting forStock-Based Compensation,” Accounting Principles Board Opinion (APB) No. 25,“Accounting for Stock Issued to Employees,” Financial Accounting StandardsBoard (FASB) Interpretation (FIN) No. 44, “Accounting for CertainTransactions Involving Stock Compensation, an interpretation of APB No. 25,”SFAS No. 148, “Accounting for Stock-Based Compensation-Transition andDisclosure,” and Emerging Issue Task Force (EITF) No. 96-18, “Accountingfor Equity Instruments that Are Issued to Other Than Employees for Acquiring,or In Conjunction with Selling, Goods, or Services.” In accordance with SFAS No. 123,Inamed has elected the disclosure-only provisions related to employee stockoptions and follows the intrinsic value method in APB No. 25 in accountingfor stock options issued to employees. Under APB No. 25, compensationexpense, if any, is recognized as the difference between the exercise price andthe fair value of the common stock on the measurement date, which is typicallythe date of grant, and is recognized over the service period, which istypically the vesting period. Inamed accounts for options and warrant grants tonon-employees using the guidance prescribed by SFAS No. 123, FIN No. 44,and EITF No. 96-18, whereby the fair value of such option and warrantgrants are measured using the fair value at the earlier of the date at whichthe non-employee’s performance is completed or a performance commitment isreached.

In December 2004, theFASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R),which replaces SFAS No. 123, “Accounting for Stock-Based Compensation”(SFAS 123) and supersedes APB Opinion No. 25, “Accounting for StockIssued to Employees.” SFAS 123R requires all share-based payments to employees,including grants of employee stock options, to be recognized in the financialstatements based on their fair values, beginning with the first interim orannual period after June 15, 2005, with early adoption encouraged. The proforma disclosures previously permitted under 

F-13

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

SFAS123, no longer will be an alternative to financial statement recognition. Inamedis required to adopt SFAS 123R in the third quarter of fiscal 2005, beginning July 1,2005. Under SFAS 123R, the Company must determine the transition method to beused at date of adoption, the appropriate fair value model to be used forvaluing share-based payments and the amortization method for compensation cost.The Company currently utilizes a standard option pricing model (i.e.,Black-Scholes) to measure the fair value of stock options granted to employees.While SFAS 123R permits entities to continue to use such a model, the standardalso permits the use of a “lattice” model. The Company has not yet determinedwhich model it will use to measure the fair value of employee stock optionsupon the adoption of SFAS 123R. The transition methods include prospective and retroactiveadoption options. Under the retroactive options, prior periods may be restatedeither as of the beginning of the year of adoption or for all periods presented.The prospective method requires that compensation expense be recorded for allunvested stock options and restricted stock at the beginning of the firstquarter of adoption of SFAS 123R, while the retroactive methods would recordcompensation expense for all unvested stock options and restricted stockbeginning with the first period restated. The Company anticipates adopting theprospective method and is currently evaluating the impact of this standard onits financial statements.

On December 15, 2003Inamed’s board granted to certain executives 142,500 shares from the 2003restricted stock plan. In accordance with APB No. 25 Inamed has recorded$7.0 in deferred stock-based compensation. Stock compensation expense will berecognized over the vesting period of the stock. The awards vest fifty percentin July 2006 and the balance in July 2008. The holders of therestricted stock are also “locked out” from selling any of these shares priorto July 2008, with the exception that shares may be sold as of July 2006to satisfy tax liabilities. Stock compensation expense for the year ended December 31,2004 and 2003 was $2.1 and $0.1, respectively.

*Pro forma disclosures of the effect of stock-basedcompensation*

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** | ** ** |
|----------|------------|------------|-------------|----------------------------------------|------------|---------------------|------------|-------------------------------------------------------------------------------------|------------|----------------------------|------------|
| 2004     |       |       | 3.15% - 3.7 | 0%                                     |       |                | 0.0        |                                                                                |       |                       | 3.25       |   |   | 25.0%  - 44.1% |   |
| 2003     |       |       | 2.74% - 3.2 | 5%                                     |       |                | 0.0        |                                                                                |       |                       | 4.00       |   |   | 34.7%  - 58.2% |   |
| 2002     |       |       | 3.01% - 4.4 | 6%                                     |       |                | 0.0        |                                                                                |       |                       | 4.00       |   |   | 33.6% - 75.0% |   |

 

The option valuation modelwas developed for use in estimating the fair value of traded options that haveno vesting restrictions and are fully transferable. In addition, option valuationmodels require the input of highly subjective assumptions, including theexpected life of the option. Because Inamed’s employee stock options havecharacteristics significantly different from those of traded options andbecause changes in the subjective input assumptions can materially affect thefair value estimate, in management’s opinion, the existing models do notprovide a reliable single measure of the fair value of its employee stockoptions.

F-14

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

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:
| ** **                                                                                                                 | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income as  reported                                                                                                    |       | $        | 63.1       |     | $          | 53.0     |       | $ | 32.9 |   |
| Add: Stock-based  compensation expense included in reported net income, net of related tax  effects                        |       | 1.3      |       | 0.1      |       | 0.4      |       |
| Deduct: Total  stock-based compensation expense determined under the fair value method for  all awards, net of tax effects |       | (10.9    | )          | (5.5     | )          | (4.9     | )          |
| Pro forma net  income                                                                                                      |       | $        | 53.5       |     | $          | 47.6     |       | $ | 28.4 |   |
| **Earnings Per Share**                                                                                                     |       |     |       |     |       |     |       |
| Basic as reported                                                                                                          |       | $        | 1.77       |     | $          | 1.54     |       | $ | 1.04 |   |
| Basic pro-forma                                                                                                            |       | $        | 1.50       |     | $          | 1.38     |       | $ | 0.90 |   |
| Diluted as reported                                                                                                        |       | $        | 1.75       |     | $          | 1.51     |       | $ | 1.00 |   |
| Diluted pro-forma                                                                                                          |       | $        | 1.49       |     | $          | 1.34     |       | $ | 0.86 |   |

 

*Foreign Currency Translation*

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(losses) were $13.9 and $5.8 in 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.

Income taxes aredetermined using an estimated annual effective tax rate, which is generallyless than the U.S. Federal statutory rate, primarily because of lower tax ratesin certain non-U.S. jurisdictions and research and development tax creditsavailable in the United States. In accordance with FIN 18, “Accounting forIncome Taxes in Interim Periods,” discrete items are included in the periodaffected rather than being reflected in the annual effective tax rate. Includedin the provision for income taxes for 

F-15

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

the yearended December 31, 2004 is an estimated $6.8 income tax benefit for alegal settlement and related second quarter fees.

*Interest Rate Swaps*

On January 1, 2001,the Company adopted SFAS No. 133, “Accounting for Derivative Instrumentsand Certain Hedging Activities” and SFAS No. 138, “Accounting for CertainDerivative Instruments and Certain Hedging Activity, an Amendment of SFAS 133”,as amended by SFAS No. 149, “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities,”. SFAS Nos. 133 and 138 require that allderivative instruments be recorded on the balance sheet at their respectivefair values. If the hedging criteria in SFAS No. 133 are met, theresulting valuation adjustments are included in stockholders’ equity as acomponent of accumulated other comprehensive income (loss), net of tax when noineffectiveness exists. Amounts in accumulated other comprehensive income(loss) shall be reclassified into earnings in the same period during which thehedged forecasted transaction affects earnings or when a cash flow hedge isdiscontinued because it is probable that the original forecasted transactionwill not occur. As of December 31, 2004, the Company had no interest rateswap or other hedge.

*Recent Pronouncements*

In March 2004, theEmerging Issues Task Force (EITF) reached a consensus on Issue No. 03-1,“The Meaning of Other-Than-Temporary Impairments and Its Application to CertainInvestments” (EITF 03-1). EITF 03-1 provides a three-stepimpairment model for determining whether an investment isother-than-temporarily impaired and requires companies to recognize suchimpairments as an impairment loss equal to the difference between theinvestment’s cost and its fair value at the reporting date. The disclosurerequirements are applicable for the current year end. The adoption of EITF 03-1in the third quarter of 2004 did not have a material impact on Inamed’sfinancial position or results from operations.

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.

In December 2004, theFASB issued Staff Position No. SFAS 109-2, “Accounting and DisclosureGuidance for Foreign Earnings Repatriation Provision within the American JobsCreation Act of 2004”, (SFAS 109-2). The American Jobs Creation Act of2004 introduces a special one-time dividends received deduction on therepatriation of certain foreign earnings to a U.S. taxpayer, provided certaincriteria are met. SFAS 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 109 “Accounting forIncome Taxes”, and provides accounting and disclosure guidance for therepatriation provision. This Staff Position was effective upon issuance. TheCompany may elect to apply this provision to qualifying earnings repatriationsin its 2005 calendar year. The Company began an evaluation of the effects ofthe repatriation provision; however, it does not expect to be able to completethis evaluation until after Congress or the Treasury Department provideadditional clarifying language on key elements of the provision. The 

F-16

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

Companyexpects to complete its evaluation within a reasonable period of time followingthe publication of the additional clarifying language. The range of possibleamounts that the Company is considering for repatriation under this provisionis between $0.0 and $70.0. The related potential range of income tax is between$0.0 and $3.6.

In September 2004,the EITF reached a consensus regarding Issue No. 04-1, “Accountingfor Preexisting Relationships Between the Parties to a Business Combination”(EITF 04-1). EITF 04-1 requires an acquirer in a businesscombination to evaluate any preexisting relationship with the acquiree todetermine if the business combination in effect contains a settlement of thepreexisting relationship. A business combination between parties with apreexisting relationship should be viewed as a multiple element transaction. EITF04-1 is effective for business combinations after October 13, 2004,but requires goodwill resulting from prior business combinations involvingparties with a preexisting relationship to be tested for impairment by applyingthe guidance in the consensus. The Company does not believe the adoption ofEITF 04-1 will have a material impact on Company’s financial position orresults from operations.

**NOTE 3—RESTRUCTURINGCOSTS**

In the fourth quarter of2002, Inamed recorded a charge of $5.1 for restructuring costs. Thisrestructuring was undertaken to consolidate manufacturing facilities. Theannual savings from the manufacturing consolidation was estimated to be areduction in U.S. payroll and support costs of $10.0, with a correspondingincrease in costs in Ireland of $4.3 and Costa Rica of $0.4, with a net savingsof $5.3 per year. The savings are from the relocation to lower-cost manufacturinglocations. The savings are reflected in the cost of goods sold on the incomestatement. The consolidation of operations was completed in the first quarterof 2004 and involved transitioning Santa Barbara-based manufacturing to theCompany’s facilities in Costa Rica and Ireland. Through December 31, 2004,the Company eliminated approximately 150 manufacturing positions in SantaBarbara, and added approximately 80 of these positions in Ireland and CostaRica through March 31, 2004, completing the transition related to thisconsolidation. The majority of the costs relate to severance which has been andwill be paid from the beginning of 2003 through 2005. 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, 2004and 2003, Inamed included $0.4 and $3.4, respectively, of accelerateddepreciation charges in cost of goods sold. These assets were fully depreciatedas of March 31, 2004. The Company does not expect any further materialcosts related to the 2002 restructuring. In 2004 a major contributor in thedecrease in cost of goods sold as a percentage of sales was the savingsgenerated as a result of the manufacturing consolidation, which were primarilythe result of reduced payroll costs.

Inamed recorded $12.0 ofrestructuring costs in the first quarter of 2001. This restructuring was aseries of events to reorganize senior management and to consolidate facilitiesand administrative functions. The Santa Barbara reduction was facilitated bycertain manufacturing operations having moved to Inamed’s new facility in CostaRica and the move of Santa Barbara’s remaining manufacturing to a localfacility. These costs were primarily employee severance costs which will bepaid through 2005. Inamed does not expect any further material costs related tothe 2001 restructuring.

F-17

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

Asummary of activity related to the restructuring charges is as follows:
| ** **                                       | ** ** | **Employee  Termination   Benefits** | ** ** | **Lease  Obligations** | ** ** | **Asset Write  Offs** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------|------------|------------------------|------------|----------------------------|------------|-----------|------------|
| **2001  restructuring accrual:**                 |       |                                      |       |                   |       |                       |       |      |       |   |   |   |   |   |   |
| Accrual balance  at December 31, 2001       |       |                                      | $          | 3.7                    |       |                       |       | $         | 0.8        |   |   |   | $ | — |   |   | $ | 4.5 |   |
| Cash paid through  December 31, 2002        |       |                                      | (2.4       | )                      |       |                       | (0.6       | )         |       |   | — |   |   | (3.0 | ) |
| 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 |   |
| **2002 restructuring accrual:**                  |       |                                      |       |                   |       |                       |       |      |       |   |   |   |   |   |   |
| 2002  restructuring charge                       |       |                                      | $          | 4.7                    |       |                       |       | $         | —     |   |   |   | $ | 0.4 |   |   | $ | 5.1 |   |
| Expense through  December 31, 2002          |       |                                      | —     |                   |       |                       | —     |      |       |   | (0.4 | ) |   | (0.4 | ) |
| 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 |   |
| Total accrual  balance at December 31, 2004 |       |                                      | $          | 1.2                    |       |                       |       | $         | —     |   |   |   | $ | — |   |   | $ | 1.2 |   |

 

**NOTE 4—NETINCOME PER SHARE (Per share data shown as actual, not millions)**

Basicnet income per share is calculated by dividing income available to commonstockholders by the weighted average number of common shares outstanding duringthe period. Diluted net income per share is calculated by dividing incomeavailable to common stockholders by the weighted average number of common anddilutive common equivalent shares outstanding during the period. Computationsof per share earnings for the three years ended December 31, 2004 are asfollows:
| ** **                                        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net Income                                        |       | $        | 63.1       |     | $          | 53.0     |       | $ | 32.9 |   |
| Weighted average  shares outstanding—Basic   |       | 35.6     |       | 34.5     |       | 31.5     |       |
| Dilutive effect  of stock options and warrants    |       | 0.4      | (1)        | 0.7      | (1)        | 1.4      | (1)        |
| Weighted average  shares outstanding—Diluted |       | 36.0     |       | 35.2     |       | 32.9     |       |
| Net income per  share of common stock             |       |     |       |     |       |     |       |
| Basic                                             |       | $        | 1.77       |     | $          | 1.54     |       | $ | 1.04 |   |
| Diluted                                           |       | $        | 1.75       |     | $          | 1.51     |       | $ | 1.00 |   |

----

(1)          Thecalculation excludes 0.1, 0.3, and 1.0 options that are anti-dilutive for theyears ended December 31, 2004, 2003, and 2002, respectively.

F-18

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

**NOTE 5—INVENTORIES**

Inventories are summarizedas follows:
| ** **           | ** ** | **December 31,** | ** ** |
|----------------------|------------|-----------------------|------------|
| ** **           | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Raw materials        |       | $                     | 13.4       |   | $ | 11.7 |   |
| Work in progress     |       | 11.1                  |       | 7.1 |   |
| Finished goods,  net |       | 31.5                  |       | 28.2 |   |
|                 |       | $56.0                 |       | $ | 47.0 |   |
|                      |            |                       |            |  |  |  |  |

 

At December 31, 2004,approximately $5.5 of Inamed’s inventory was held on consignment at a largenumber of doctors’ offices, clinics, and hospitals worldwide. The value andquantity at any one location is not significant.

**NOTE 6—PROPERTY AND EQUIPMENT**

Propertyand equipment, at cost, are summarized as follows:
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Machinery and  equipment                         |       | $                     | 60.5       |   | $ | 50.6 |   |
| Leasehold  improvements                          |       | 47.0                  |       | 36.8 |   |
| Gross property  and equipment                    |       | 107.5                 |       | 87.4 |   |
| Less: Accumulated  depreciation and amortization |       | (45.0                 | )          | (36.2 | ) |
| Property and equipment,  net                     |       | $                     | 62.5       |   | $ | 51.2 |   |

 

**NOTE 7—ACCRUED LIABILITIES AND OTHER**

Accruedliabilities and other are summarized as follows:
| ** **                           | ** ** | **December 31,,** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **2004**               | ** ** | **2003** | ** ** |
| Salaries, wages,  and payroll taxes  |       | $                      | 16.4       |   | $ | 14.7 |   |
| Acquisition and  restructuring costs |       | 0.8                    |       | 2.3 |   |
| Royalties payable                    |       | 3.5                    |       | 2.6 |   |
| Trilucent  liability, current        |       | 5.5                    |       | 3.4 |   |
| Sales tax  liability                 |       | 3.1                    |       | 4.8 |   |
| Warranty  provision, current         |       | 3.2                    |       | 2.6 |   |
| Other                                |       | 9.0                    |       | 6.0 |   |
| Total accrued  liabilities and other |       | $                      | 41.5       |   | $ | 36.4 |   |

 

F-19

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

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

Other long-termliabilities are summarized as follows:
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Warranty provision                 |       | $                     | 8.8        |   | $ | 7.8 |   |
| Trilucent  liability               |       | 5.4                   |       | 18.2 |   |
| Deferred income  tax liability     |       | 11.8                  |       | 14.6 |   |
| Other liabilities                  |       | 6.8                   |       | 6.2 |   |
| Total other long-term  liabilities |       | $                     | 32.8       |   | $ | 46.8 |   |

 

**NOTE 9—INTEREST INCOME AND INTEREST EXPENSE**

Interestincome and interest expense were as follows:
| ** **                 | ** ** | ** Twelve Months Ended  December 31,** | ** ** |
|----------------------------|------------|------------------------------------------------------------|------------|
| ** **                 | ** ** | **2004**                                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Interest income            |       | $                                                          | 2.0        |   | $ | 0.8 |   | $ | 0.5 |   |
| Interest expense           |       | (1.5                                                       | )          | (10.2 | ) | (12.2 | ) |
| Interest income  (expense) |       | $                                                          | 0.5        |   | $ | (9.4 | ) | $ | (11.7 | ) |

 

Included in interestexpense in 2004, 2003, and 2002 is $0.0, $3.6, and $0.0, respectively, ofrealized losses on a terminated interest rate swap. Also included in interestexpense in 2004, 2003, and 2002 is $0.0, $1.6, and $0.0 of accelerated deferredloan fees related to accelerated principal payments on long-term debt.

**NOTE 10—LONG-TERM DEBT**

Long-termdebt consisted of the following amounts:
| ** **                                                      | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                      | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Variable 1-month  LIBOR plus 2.00% note, due December 2006 |       | $                     | 22.5       |   | $ | 32.5 |   |
| Less: current  maturities                                       |       | (12.5                 | )          | (10.0 | ) |
| Long-term debt                                                  |       | $                     | 10.0       |   | $ | 22.5 |   |

 

In July 2003, the Company obtained a new creditfacility having a principal balance of $65.0 for a term of five years and alsoentered into a new revolving credit facility of $35.0. The Company terminatedan interest rate swap as part of the refinance and recognized $3.5 million inunrealized losses in interest income. Inamed is currently using $16.8 millionof the revolver capacity by having letters of credit issued to collateralizecertain insurance programs. The remaining $18.2 million of revolver capacitywas unused as of December 31, 2004. The borrowings under the currentcredit facilities bear interest at the London Interbank Overnight Rate (LIBOR)plus 2.0%. The variable interest rate as of December 31, 2004 applicableto Inamed’s long term debt was approximately 4.5%.

F-20

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

As a result of an accelerated principal payment on thenew credit facility and refinancing to the new credit facility, the Companyexpensed unamortized deferred loan fees in the amount of $1.6 during 2003.

The long-term debt facilities above are secured bysubstantially all of the Company’s assets and requires the Company to maintaina minimum net worth, minimum fixed charge coverage ratio and maximum leverageratio. In addition, the sum of funds used to pay dividends and purchase sharesof the Company’s common stock is limited to $75.0 over the life of the facility.As of December 31, 2004, the Company was in compliance with thesecovenants.

As of December 31, 2004 and 2003, Inamed had $0.8and $0.9, respectively, of unamortized financing costs recorded in other assets.These costs will be amortized ratably over the life of the term loan facilitymaturing in July 2008.

Theaggregate maturities required on long-term debt at December 31, 2004 areas follows:
| ** ** | ** ** | **Term Notes** | ** ** |
|------------|------------|---------------------|------------|
| 2005       |       |                | $          | 12.5 |   |   |
| 2006       |       |                | 10.0       |   |   |
|       |       |                | $22.5      |   |   |

 

**NOTE 11—GOODWILL AND OTHER INTANGIBLE ASSETS**

Inamed has adopted SFAS No. 142, “Goodwill andOther Intangible Assets.”  In accordancewith SFAS No. 142, Inamed discontinued amortizing goodwill and otherintangible assets with indefinite lives. Inamed performed its annual impairmenttest of goodwill using a market value approach as of October 31, 2004 anddetermined that there was no impairment of goodwill and intangible assets. Noevents have occurred to trigger an impairment evaluation since the fourthquarter of 2004.

Goodwill was $151.9 as of December 31, 2004 and$151.2 as of December 31, 2003. The changes since December 31, 2003represent the effect of foreign exchange translation on goodwill carried insubsidiaries with functional currencies other than the U.S. dollar.

F-21

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

Netother intangible assets subject to amortization were $46.8 and $40.4 as of December 31,2004 and 2003, respectively. These assets will continue to be amortized overtheir expected useful lives, which range from three to seventeen years. Otherintangible assets not subject to amortization were $4.1 at December 31,2004 and 2003.  Total other intangibleassets are as follows:
| ** **                                     | ** ** | ** **                            | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **Weighted   Average Life** | ** ** | **Gross**                       | ** ** | **Accumulated  Amortization**   | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Licenses                                       |       |                                  | 13.1       |                            |       | $                               | 62.2       |   |   | $ | (19.6 | ) |   | $ | 42.6 |   | $ | 51.1 |   |   | $ | (14.9 | ) |   | $ | 36.2 |   |
| Patents                                        |       |                                  | 15.5       |                            |       | 5.7                             |       |   | (1.9 | ) |   | 3.8 |   | 5.7 |   |   | (1.5 | ) |   | 4.2 |   |
| Other                                          |       |                                  | 4.7        |                            |       | 2.8                             |       |   | (2.4 | ) |   | 0.4 |   | 2.4 |   |   | (2.4 | ) |   | — |   |
| Total intangibles  subject to amortization     |       |                                  |       |                            |       | $                               | 70.7       |   |   | $ | (23.9 | ) |   | $ | 46.8 |   | $ | 59.2 |   |   | $ | (18.8 | ) |   | $ | 40.4 |   |
| Other intangibles  not subject to amortization |       |                                  |       |                            |       | 4.1                             |       |   | — |   |   | 4.1 |   | 4.1 |   |   | — |   |   | 4.1 |   |
| Total other intangibles                        |       |                                  |       |                            |       | $                               | 74.8       |   |   | $ | (23.9 | ) |   | $ | 50.9 |   | $ | 63.3 |   |   | $ | (18.8 | ) |   | $ | 44.5 |   |

 

Aggregate amortizationexpense for intangible assets was $5.0, $4.0, and $4.9 for the years ended December 31,2004, 2003, and 2002 respectively. For the next five years, amortizationexpense on existing intangible assets is expected to be approximately $5.0 peryear.

**NOTE 12—INCOME TAXES**

Incometax expense (benefit) is summarized as follows:
| ** **                                                                       | ** ** | **2004**   | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Current                                                                          |       |       |       |     |       |     |       |
| Federal                                                                          |       | $          | 0.3        |     | $          | (2.7     | )          | $ | 2.5 |   |
| State and local                                                                  |       | 0.3        |       | (0.3     | )          | 0.4      |       |
| Foreign                                                                          |       | 3.5        |       | 4.1      |       | 4.0      |       |
|                                                                             |       | $ 4.1 |       | $        | 1.1        |     | $          | 6.9 |   |
| Deferred                                                                         |       |       |       |     |       |     |       |
| Federal                                                                          |       | $          | 6.0        |     | $          | (1.0     | )          | $ | 1.6 |   |
| State and local                                                                  |       | (0.4       | )          | (2.4     | )          | (1.7     | )          |
| Foreign                                                                          |       | (0.3       | )          | (1.8     | )          | (1.3     | )          |
|                                                                             |       | 5.3        |       | (5.2     | )          | (1.4     | )          |
| Charge in lieu of  taxes attributable to tax benefit from employee stock options |       | 5.8        |       | 18.3     |       | 3.8      |       |
| Total income tax  expense                                                        |       | $          | 15.2       |     | $          | 14.2     |       | $ | 9.3 |   |

 

The domestic and foreign components of income beforeincome taxes were $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, and $24.0 and $18.2, respectively, for the year ended December 31,2002.

F-22

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

The Company has an agreement with the Republic ofCosta Rica providing for a tax holiday through October, 2007. This tax holidayis available to certain corporations that invest in facilities in Costa Rica. Forthe twelve months ended December 31, 2004, 2003, and 2002 the tax savingsfor earnings reported in Costa Rica was approximately $0.5 million or $0.01 pershare, $0.4 million or $0.01 per share, and $0.3 million or $0.01 per share,respectively.

Theincome tax expense differs from the amounts computed by applying the applicablefederal statutory rate due to the following:
| ** **                                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal income  taxes at the statutory rate           |       | 35.0     | %          | 35.0     | %          | 35.0     | %          |
| State and local  income taxes, net of federal benefit |       | 0.7      | %          | 0.5      | %          | (1.2     | )%         |
| Benefit of lower  foreign tax brackets                |       | (13.0    | )%         | (8.9     | )%         | (9.6     | )%         |
| Benefit of  extraterritorial income exclusion         |       | (0.7     | )%         | (1.0     | )%         | (0.7     | )%         |
| Tax credits                                           |       | (2.9     | )%         | (1.5     | )%         | (1.5     | )%         |
| Change in  valuation allowance                        |       | 0.8      | %          | (1.3     | )%         | —   |       |
| Other                                                 |       | (0.4     | )%         | (1.7     | )%         | (0.6     | )%         |
| Subpart F income                                      |       | —   |       | —   |       | 0.5      | %          |
| Income tax expense                                    |       | 19.5     | %          | 21.1     | %          | 21.9     | %          |

 

Theprincipal items that comprise Inamed’s net deferred tax assets and liabilitiesare as follows:
| ** **                           | ** ** | **As of December 31,**        | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|
| ** **                           | ** ** | **   2004   ** | ** ** | **   2003   ** | ** ** |
| Deferred tax assets                  |       |                                         |       |   |   |   |   |   |   |
| Sales return and bad debt allowances |       |                                         | $          | 5.0 |   |   |   | $ | 5.1 |   |   |
| Accrued liabilities                  |       |                                         | 7.7        |   |   |   | 12.4 |   |   |
| Net operating losses and credits     |       |                                         | 23.6       |   |   |   | 30.4 |   |   |
| Uniform capitalization adjustment    |       |                                         | 3.1        |   |   |   | 0.6 |   |   |
|                                 |       |                                         | 39.4       |   |   |   | 48.5 |   |   |
| Valuation allowance                  |       |                                         | (1.7       | ) |   |   | (1.1 | ) |   |
| Total deferred tax assets            |       |                                         | $          | 37.7 |   |   |   | $ | 47.4 |   |   |
| Deferred tax liabilities             |       |                                         |       |   |   |   |   |   |   |
| Unrealized foreign currency gains    |       |                                         | $          | (0.5 | ) |   |   | $ | (0.8 | ) |   |
| Depreciable and amortizable assets   |       |                                         | (1.3       | ) |   |   | (0.6 | ) |   |
| License agreements                   |       |                                         | (2.9       | ) |   |   | (2.9 | ) |   |
| Total deferred tax liabilities       |       |                                         | $          | (4.7 | ) |   |   | $ | (4.2 | ) |   |
| Net deferred tax asset               |       |                                         | $          | 33.0 |   |   |   | $ | 43.2 |   |   |

 

F-23

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

For 2004, deferred tax assets of $21.7, $13.3, and$2.7 are reported on the financial statements for U.S. federal, U.S. state, andvarious foreign tax jurisdictions, respectively. Similarly, deferred taxliabilities of $4.7, $0.9, and $(0.9) are reported for U.S. federal, U.S.state, and various foreign tax jurisdictions, respectively. For 2003, deferredtax assets of $31.6, $12.6, and $3.2 are reported on the financial statementsfor U.S. federal, U.S. state, and various foreign tax jurisdictions, respectively.Similarly, deferred tax liabilities of $3.6, $0.6, and $0.0 are reported forU.S. federal, U.S. state, and various foreign tax jurisdictions, respectively. Valuationallowances of $1.7 and $1.1 for 2004 and 2003, respectively, apply exclusivelyto certain foreign net operating losses whose likelihood of utilization appearsto be less than the “more likely than not” standard required by SFAS 109 “Accountingfor Income Taxes” 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 $37.4, $29.3, and $16.2as of December 31, 2004, 2003, and 2002, respectively.

For federal income tax purposes, Inamed currently hasfederal net operating loss carryforwards of approximately $9.0. These netoperating losses begin to expire in 2019. Inamed also has federal tax creditcarryforwards of approximately $6.8 that will expire in various years beginningin 2019.

For state income tax purposes, Inamed has netoperating losses of approximately $20.5 with a corresponding tax benefit ofabout $1.7, which expires no earlier than 2007. In addition, Inamed has statetax credit carryforwards of approximately $7.8, which begin to expire in 2019.

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.

On October 22, 2004,the American Jobs Creation Act (the AJCA) was signed into law. The AJCAincludes a provision allowing a deduction of 85% of certain foreign earningsthat are repatriated, as defined in the AJCA. The Company may elect to applythis provision to qualifying earnings repatriations in its 2005 calendar year. TheCompany has started an evaluation of the effects of the repatriation provision;however, the Company does not expect to be able to complete this evaluationuntil after Congress or the Treasury Department provide additional clarifyinglanguage on key elements of the provision. The Company expects to complete itsevaluation of the effects of the repatriation provision within a reasonableperiod of time following the publication of the additional clarifying language.The range of possible amounts that the Company is considering for repatriationunder this provision is between $0.0 and $70.0. The related potential range ofincome tax expense is between $0.0 and $3.6.

F-24

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

**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 and warrants. At December 31, 2004,under the terms of all director, officer and employee stock option plans,1,117,661 shares 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 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-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 OutsideDirector Compensation Plan vest and become exercisable in full on the firstanniversary of 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 exercisable 

F-25

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

at suchtimes or upon such events and subject to such terms, conditions, performancecriteria 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 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.

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                |       |                                                                                                              | 37,500     |                                                                             |       |                                                                                        | $          | 19.20 |   |   |   | — |   |   |
| The 1998 Plan                                           |       | 675,000                |       |                                                                                                              | 102,400    |                                                                             |       |                                                                                        | $          | 54.84 |   |   |   | 12,499 |   |   |
| The 1999 Program                                        |       | 1,350,000              |       |                                                                                                              | 321,499    |                                                                             |       |                                                                                        | $          | 45.63 |   |   |   | 131,416 |   |   |
| The 2000 Option  Plan                                   |       | 2,287,500              |       |                                                                                                              | 1,200,403  |                                                                             |       |                                                                                        | $          | 38.23 |   |   |   | 31,246 |   |   |
| The 2003 Outside  Director Plan                         |       | 225,000                |       |                                                                                                              | 82,500     |                                                                             |       |                                                                                        | $          | 48.69 |   |   |   | 142,500 |   |   |
| The 2004 Plan                                           |       | 500,000                |       |                                                                                                              | —     |                                                                             |       |                                                                                        | $          | — |   |   |   | 500,000 |   |   |
| Equity compensation plans approved by Stockholders      |       | 5,262,500              |       |                                                                                                              | 1,744,302  |                                                                             |       |                                                                                        | $          | 40.65 |   |   |   | 817,661 |   |   |
| Stand Alone Options, not approved by  Stockholders |       | 2,426,250              |       |                                                                                                              | 50,001     |                                                                             |       |                                                                                        | $          | 16.68 |   |   |   | 300,000 |   |   |
| Total                                                   |       | 7,688,750              |       |                                                                                                              | 1,794,303  |                                                                             |       |                                                                                        | $          | 39.99 |   |   |   | 1,117,661 |   |   |

 

F-26

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

*Summary*

Activityunder these plans for the years ended December 31, 2004, 2003, and 2002was as follows (shares in millions):
| ** **                                                      | ** ** | **2004**                      | ** ** | **2003**                                   | ** ** | **2002**                      | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------|------------|--------------------------------------------|------------|-------------------------------|------------|
| ** **                                                      | ** ** | **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               |       |                          | 2.1        |                                       |       |                          | $          | 32.51 |   |   |   | 3.3 |   |   |   | $ | 15.18 |   |   |   | 5.3 |   |   |   | $ | 10.63 |   |   |
| Granted                                                         |       |                          | 0.4        |                                       |       |                          | $          | 53.67 |   |   |   | 1.1 |   |   |   | $ | 47.37 |   |   |   | 1.4 |   |   |   | $ | 18.19 |   |   |
| Cancelled                                                       |       |                          | (0.1       | )                                          |       |                          | $          | 44.23 |   |   |   | (0.1 | ) |   |   | $ | 21.89 |   |   |   | (0.9 | ) |   |   | $ | 21.19 |   |   |
| Exercised                                                       |       |                          | (0.5       | )                                          |       |                          | $          | 19.68 |   |   |   | (2.2 | ) |   |   | $ | 14.15 |   |   |   | (2.4 | ) |   |   | $ | 5.55 |   |   |
| Options  outstanding at the end of the year                     |       |                          | 1.8        |                                       |       |                          | $          | 39.99 |   |   |   | 2.1 |   |   |   | $ | 32.51 |   |   |   | 3.3 |   |   |   | $ | 15.18 |   |   |
| Options  exercisable at the end of the year                     |       |                          | 0.6        |                                       |       |                          | $          | 32.23 |   |   |   | 0.2 |   |   |   | $ | 19.40 |   |   |   | 1.2 |   |   |   | $ | 13.48 |   |   |
| Weighted average fair value  of options granted during the year |       |                          |       |                                       |       |                          | $          | 19.32 |   |   |   |   |   |   |   | $ | 14.54 |   |   |   |   |   |   |   | $ | 18.53 |   |   |

 

Thefollowing table summarizes information about stock options outstanding at December 31,2004 (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  - $14.69                      |       |                         | 0.2        |                         |       |   | 7.05 |   |   |   | $ | 12.76 |   |   |   | 0.08 |   |   |   | $ | 11.88 |   |   |
| $15.47 - $18.17                                  |       |                         | 0.2        |                         |       |   | 6.84 |   |   |   | $ | 17.42 |   |   |   | 0.14 |   |   |   | $ | 17.13 |   |   |
| $20.88 - $44.58                                  |       |                         | 0.2        |                         |       |   | 6.19 |   |   |   | $ | 28.57 |   |   |   | 0.12 |   |   |   | $ | 29.09 |   |   |
| $46.91 - $48.82                                  |       |                         | 0.3        |                         |       |   | 9.15 |   |   |   | $ | 48.11 |   |   |   | 0.03 |   |   |   | $ | 47.62 |   |   |
|        $48.99 |       |                         | 0.7        |                         |       |   | 8.75 |   |   |   | $ | 48.99 |   |   |   | 0.21 |   |   |   | $ | 48.99 |   |   |
| $49.70 - $59.90                                  |       |                         | 0.1        |                         |       |   | 9.06 |   |   |   | $ | 54.95 |   |   |   | 0.01 |   |   |   | $ | 50.25 |   |   |
| $60.38 - $61.63                                  |       |                         | 0.1        |                         |       |   | 9.04 |   |   |   | $ | 61.44 |   |   |   | — |   |   |   | $ | — |   |   |
| $  4.33 -  $61.63                      |       |                         | 1.8        |                         |       |   | 8.17 |   |   |   | $ | 39.99 |   |   |   | 0.59 |   |   |   | $ | 32.23 |   |   |
|                                                  |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

F-27

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

*2000 Employee StockPurchase Plan*

In January 2000, Inamed adopted the 2000 EmployeeStock Purchase Plan. The 2000 Stock Purchase Plan is intended to assist Inamedin securing and retaining its employees by allowing them to participate in theownership and growth of Inamed through the grant of certain rights to purchaseshares of Inamed’s common stock at a discount of 15% from the fair market valueof the shares. 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 is 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 employee underthis 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, provides for a series of consecutiveoffering periods that are six months long. Offering periods commence on February 1and August 1 of each year during the term of the Plan. During eachoffering period, participating employees are 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 is lower. Under terms of the 2000 StockPurchase Plan, as amended, 600,000 shares of common stock have been reservedfor issuance to employees, of which 195,544 remain available at December 31,2004. In 2004, 2003, and 2002, 104,955 shares ($4.2), 155,089 shares ($1.9),and 36,979 shares ($0.4), respectively, were purchased by approximately 359,200, and 200 participating employees under the Plan.

*Restricted StockPlan*

In2003 Inamed adopted the 2003 Restricted Stock Plan, which authorizes Inamed toissue shares to any employee, officer, consultant, or non-employee director. RestrictedStock Awards may be granted by the Board subject to vesting and any otherrestrictions (including a period during which vested shares may not be sold) asdetermined by the Board and stated in the Award Agreement. Restricted stock maynot be sold or otherwise transferred or pledged until the restrictions lapse orare terminated.
| ** **                      | ** ** | **Authorized  Shares** | ** ** | **Number of Shares  Issued** | ** ** | **Available for Issuance** | ** ** |
|---------------------------------|------------|------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| The 2003  Restricted Stock Plan |       |                   | 300,000    |                                   |       |                                 | 142,500    |   |   |   | 157,500 |   |   |
|                                 |            |                        |            |                                        |            |                                      |            |  |  |  |  |  |  |

 

There were no warrantsoutstanding to purchase shares of common stock at December 31, 2004 or2003.

**NOTE 14—STOCKREPURCHASE PROGRAM**

As of December 31,2004, 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, 2004.

F-28

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

**NOTE 15—EMPLOYEEBENEFIT 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, $0.9, and $0.7, for the yearsended December 31, 2004, 2003, and 2002, respectively.

In February 1990, McGhan Limited (Ireland)adopted a Defined Contribution Plan. Upon commencement of service, theseemployees become eligible to participate in the plan and contribute to the planup to 5% of their compensation. Inamed’s matching contribution is up to8.5% of the participant’s compensation. Inamed’s contributions to the planapproximated $0.6, $0.4, and $0.3 for the years ended December 31, 2004,2003, and 2002, respectively.

Certain other foreign subsidiariessponsor defined contribution plans. The remaining plans, covering approximately80 non-U.S. employees, were instituted at various times during 1991 through1997 and the accumulated assets and obligations are immaterial. These plans arefunded annually according to plan provisions with aggregate contributionsof $0.4, $0.3, and $0.3 for the years ended December 31, 2004,2003, and 2002, respectively.

**NOTE 16—PRODUCTLINE AND GEOGRAPHICAL FINANCIAL INFORMATION**

Inamed’ssales by product line are as follows:
| ** **            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|
| Breast Aesthetics     |       | $        | 215.8      |     | $          | 177.8    |       | $ | 156.3 |   |
| Obesity  Intervention |       | 88.5     |       | 63.1     |       | 39.4     |       |
| Facial Aesthetics     |       | 75.6     |       | 87.2     |       | 73.8     |       |
| Other*                |       | 4.5      |       | 4.5      |       | 6.2      |       |
| Total                 |       | $        | 384.4      |     | $          | 332.6    |       | $ | 275.7 |   |

----

*                    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:
| ** **            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|
| U.S.                  |       | $        | 235.2      |     | $          | 215.2    |       | $ | 176.0 |   |
| All Other  Countries* |       | 149.2    |       | 117.4    |       | 99.7     |       |
| Total                 |       | $        | 384.4      |     | $          | 332.6    |       | $ | 275.7 |   |

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

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

Long-livedassets (which consist of property and equipment) by major country were asfollows:
| ** **            | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| U.S.                  |       | $        | 42.2       |     | $          | 35.9 |   |
| Ireland               |       | 17.4     |       | 12.6     |       |
| All Other  Countries* |       | 2.9      |       | 2.7      |       |
| Total                 |       | $        | 62.5       |     | $          | 51.2 |   |

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*       No other country’s long-lived assets comprise more than 10% oftotal long-lived assets as of December 31, 2004 and 2003.

**NOTE 17**—MAJORSUPPLIERS

The Company purchases itsraw materials and certain finished products from many different suppliersworldwide. There are three suppliers which account for $22.1, $21.3, and $12.2of raw material purchases for the years ending December 31, 2004, 2003,and 2002 respectively.

**NOTE 18**—LEASE,GOVERNMENT SUBSIDY AND ROYALTY COMMITMENTS

Inamed leases facilities under operating leases. Rentexpense aggregated $7.4, $5.7, and $6.4 for the years ended December 31,2004, 2003, and 2002, respectively.

Minimumlease commitments under all non-cancelable operating leases at December 31,2004 are as follows:
| 2005       |   | 8.1  |   |
|------------|--------|------|--------|
| 2006       |   | 6.8  |   |
| 2007       |   | 5.2  |   |
| 2008       |   | 4.6  |   |
| 2009       |   | 4.4  |   |
| Thereafter |   | 25.0 |   |
|       |   | $    | 54.1   |   |
|            |        |      |        |  |

 

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 year ended December 31, 2004, was $0.2, and less than$0.1 for the years ended December 31, 2003 and 2002. IDA grants aresubject to revocation upon a change of ownership or liquidation of McGhanLimited, Inamed’s Irish subsidiary. If the grant were revoked, Inamed would beliable on demand from the IDA for all sums received and deemed to have beenreceived by Inamed in respect to the grant. In the event of revocation of thegrant, Inamed could be liable for the amount of approximately $2.5 at December 31,2004.

Inamed has obtained theright to produce, use and sell patented technology through various licenseagreements. Inamed pays royalties ranging from 5% to 8% of the related sales,depending upon sales 

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

levels. Royaltyexpense under these agreements was approximately $9.9, $6.1, and $3.7 for theyears ended December 31, 2004, 2002, and 2003, respectively, and isincluded in selling, general and administrative expense. 

**NOTE 19—RELATEDPARTY TRANSACTIONS**

In 2001, Inamed loaned an executive $0.2 under a fullrecourse note bearing minimum interest at approximately 4%. The note has annualinstallments due of one-third of the principal balance in February of2003, 2004, and 2005, with all accrued interest due and payable on February 2005.As of December 31, 2004 and 2003 the note balance and accrued interest was$0.1 and has been subsequently paid in full.

In 2004 and 2003,respectively, Inamed paid $0.4 and $1.4 to a marketing consulting firm, whichis 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 31,2004 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 Sierra Medical Technologies, Inc.Collagen retained certain liabilities for Trilucent implants 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. patientsimplanted with the Trilucent implant and pay for explants for any U.K. womenwith confirmed Trilucent implant ruptures. Subsequently, LipoMatrix’s notifiedbody in Europe suspended the product’s CE Mark pending further assessment ofthe long-term safety of the product. Sierra Medical has since stopped sales ofthe product. Subsequent to acquiring Collagen, Inamed elected to continue thevoluntary program.

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

Inamed estimates that approximately 8,000-9,000 womenreceived 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, the Company terminated thissupport program effective as of December 31, 2003 in all countries otherthan Germany. Notwithstanding the termination of the general program, Inamedcontinued to pay for explanations and related expenses in certain cases if apatient could justify her delay in having her Trilucent implants removed onmedical grounds or owing to lack of notice. Under this program, the Company maypay a fee to any surgeon who conducts an initial consultation with anyTrilucent implantee. The Company also pays for the explantation procedure andrelated costs, and for replacement (non-Trilucent) implants for women who arecandidates for and who desire them. To date, more 90% of the U.K. residents andmore than 75% of the non-U.K. residents who have requested explantations as aresult of an initial consultation have had them performed. To date, aninsurance company has reimbursed Inamed for approximately 70% of these expenses.However, that insurancecompany’s obligation ceased as of February 15, 2005. Inamed expects tocontinue to fund a small number of explantations in 2005, in most cases owingto a pregnancy, breast feeding or a similar factor warranting postponement ofthe procedure to 2005.

In 2000-2001, Inamed was sued in various litigationsin the United States alleging bodily injury caused by Trilucent breast implants.All of these cases have now been dismissed or settled and we are not a party toany Trilucent 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 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 affords afixed level of compensation to qualified claimants who, in an uncomplicated surgicalprocedure, have had their Trilucent breast implants explanted in reliance onthe June 2000 MDA hazard notice. The protocol also affords a mechanism forthe efficient resolution of any claims alleging that the early explantation ofTrilucent implants involved serious surgical complications or resulted in amedical condition, which required either extended hospitalization or extendedhome care. To date, close to 90% of the U.K. women who have had their Trilucentimplants explanted since June 2000, represented by more than 90 different 

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

solicitors, have soughtcompensation through the settlement protocol. To date, no such woman hasbrought civil proceedings.

In addition, in Spain, Inamed has offered a protocolsimilar in structure to the U.K. protocol. To date, Inamed has receivedapproximately 315 claims under the Spanish protocol. In addition, a Spanishconsumer union has commenced a single action in which the consumer unionalleges that it represents approximately 40 Spanish Trilucent explantees. Finally,at present the Company faces approximately 45 individual legal proceedings. Todate, Inamed has won certain Trilucent legal proceedings in Spain and lostothers. The average damages in cases lost were approximately $21,000.

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 in cash to Inamed in January 2003, and $1.5 in cash in May 2003,and, effective November 16, 2002, agreed to make a policy with a limit of$10.0 available to the Company for defense and indemnification ofTrilucent-related bodily injury claims worldwide. As of June 30, 2004 Inamed had noremaining coverage under this policy. Under the second settlement,AISLIC, an AIG company, agreed to make an excess policy with a limit of $10.0available to the Company for the indemnification of non-U.S. Trilucent claims. Therewas approximately $4.2 remaining under this commitment at December 31,2004. As a result of these settlements, the Company released both carriers fromany other actual or potential financial claims under the policies and dismissedall 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 (3) 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.

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

1.     therecommendation that Trilucent breast implants should be removed remainsappropriate because exposure to local tissue to toxic compounds has beenconfirmed;

2.     there isno evidence for local or systemic disease risk once the implants are removed;and

3.     no furtherstudies are needed to assess the potential risk of Trilucent breast implants.

In addition, at December 31, 2004 and 2003, theCompany had an accrual for future Trilucent claims, costs, and expenses ofapproximately $6.7 and $12.2, net of insurance receivables of $4.2 and $9.4,respectively.

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, it is continuing to adjust andsettle Trilucent claims and, in the U.K., claims by solicitors for their legalfees and claim costs. In addition, Inamed has received some 75 requests to fundor reimburse patients for surgery to correct complications with implants thatwere used to replace Trilucent implants. A company subsidiary may haveliability for these costs as well. Thus, while Inamed has made 

F-33

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

verysubstantial progress in resolving the great bulk of Trilucent-relatedliabilities, it will continue to address and resolve individual claims in 2005.Thus while the Company believes its current accruals and insurance to beadequate to the task, there can be no assurances that future Trilucent-relatedliabilities will not exceed the current accruals and insurance.

**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. The Company does not believe it practices the device claimed byManders or that 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 wascompleted on July 31, 2004. Expert discovery relatingto claim construction issues was completed in August 2004. Mandershas elected 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. The Court has not yet issued its order on claimconstruction. The Company expects the Court to schedule a status conferenceafter it issues its claim construction order to set the pretrial schedule,including expert discovery. Inamed believes it has strong defenses to thislawsuit and intends to defend it vigorously.

*Brauman Matter*

On April 2, 2004,Daniel Brauman filed a civil action against the Company in the United StatesDistrict Court for the Southern District of New York. Brauman alleged that theCompany was infringing U.S. Reissue Patent No. RE 35,391, entitledImplantable Prosthetic Devices (“the RE ‘391 patent”). Brauman’s Complaintsought permanent injunctive relief, compensatory and treble damages, andattorneys’ fees and costs. The Company filed an Answer on June 15, 2004,denying all of the material allegations of the Complaint, and assertedCounterclaims for non-infringement and invalidity of the RE ‘391 patent. TheCourt held a Case Management Conference on June 25, 2004 and ordered theparties to mediation. On September 23, 2004, the parties settled theirdispute at the Court-ordered mediation and stipulated to entry of an Orderdismissing all claims with prejudice. The Court entered that Order anddismissed the case on September 24, 2004.

*Ethicon Matter*

Effective June 21,2004, the Company resolved its patent infringement lawsuit with Ethicon Endo-Surgery, Inc.(“Ethicon”) and entered into a settlement agreement regarding various patentsrelated to gastric banding. Under the terms of the settlement agreement, Inamedpaid Ethicon $17.2 in the second quarter of 2004, and, pursuant to a licensearrangement included in the settlement agreement, will pay royalties to Ethiconon future United States sales of the LAP-BAND® System, initially at 7.5%. Priorto this settlement, Inamed accrued a royalty on U.S. sales at 1.2%. The 7.5%royalty will be reduced to 5.5% if Ethicon is able to obtain approval from theU.S. Food and Drug Administration for the marketing of an 

F-34

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

adjustablegastric band sometime in the future. Inamed will also pay Ethicon 3.5% on allfuture foreign sales of the LAP-BAND® System. The U.S. and internationalroyalties payable will decrease to 2% after June 20, 2011, and all Inamedroyalty obligations will expire no later than May 12, 2013. Inamed’slicense is to Ethicon’s family of gastric banding patents which were at issueduring the litigation.

The Company recorded acharge in the amount of $17.2 for the three months ended June 30, 2004, toreflect the settlement payment to Ethicon and related second quarter litigationcosts and expenses. This charge is net of the previously accrued amounts and isincluded in selling, general and administrative expenses.

**OTHER MATTERS**

*Government Inquiry*

On February 24, 2005, theU.S. Securities and Exchange Commission (SEC) notified Inamed that it hadinitiated a formal private investigation to determine whether Inamed hasviolated federal securities laws. Inamed was not aware of the investigation orany related inquiry prior to that date. They have requested that Inamed producecertain documents in connection with the investigation. Inamed intends to fullycooperate in the investigation. Based upon subsequent communications with them,Inamed believes the investigation relates to assessing the adequacy of Inamed’sdisclosures regarding one style (Style 153) of its silicone gel-filled breastimplant products. This particular style accounted for approximately $3.4 (lessthan 1%) of Inamed’s total revenues in 2004. There can be no assurance,however, that the scope of the SEC’s investigation will not change or expand.While Inamed believes that its disclosures regarding its silicone gel-filledbreast implant products have been and are in compliance with federal securitieslaws, there can be no assurance that the investigation will not have an adverseeffect on Inamed.

*Other*

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

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**INAMED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (millions)**

**NOTE 21**—QUARTERLYSUMMARY OF OPERATIONS—(Unaudited) (Per share data shown as actual, notmillions)

Thefollowing is a summary of selected quarterly financial data for 2004 and 2003:
| ** **             | ** ** | **Quarter** | ** ** |
|------------------------|------------|-------------|------------|
| ** **             | ** ** | **1st**     | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** |
| Net Sales:             |       |        |       |   |   |   |   |   |   |
| 2004                   |       | $           | 90.8       |   | $ | 99.7 |   | $ | 90.0 |   | $ | 103.8 |   |
| 2003                   |       | $           | 75.5       |   | $ | 85.8 |   | $ | 80.1 |   | $ | 91.2 |   |
| Gross Profit:          |       |        |       |   |   |   |   |   |   |
| 2004                   |       | $           | 67.5       |   | $ | 74.6 |   | $ | 67.4 |   | $ | 77.0 |   |
| 2003                   |       | $           | 54.1       |   | $ | 61.7 |   | $ | 57.3 |   | $ | 66.7 |   |
| Net Income:            |       |        |       |   |   |   |   |   |   |
| 2004                   |       | $           | 17.5       |   | $ | 9.8 |   | $ | 16.8 |   | $ | 18.9 |   |
| 2003                   |       | $           | 12.0       |   | $ | 12.8 |   | $ | 12.5 |   | $ | 15.7 |   |
| Net Income per  share: |       |        |       |   |   |   |   |   |   |
| 2004 Basic             |       | $           | 0.50       |   | $ | 0.28 |   | $ | 0.47 |   | $ | 0.53 |   |
| 2004 Diluted           |       | $           | 0.49       |   | $ | 0.27 |   | $ | 0.47 |   | $ | 0.52 |   |
| 2003 Basic             |       | $           | 0.36       |   | $ | 0.38 |   | $ | 0.36 |   | $ | 0.44 |   |
| 2003 Diluted           |       | $           | 0.35       |   | $ | 0.37 |   | $ | 0.35 |   | $ | 0.44 |   |

 

F-36

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**SCHEDULE II**INAMED CORPORATION AND SUBSIDIARIESVALUATION ACCOUNTSYears ended December 31, 2004, 2003, and 2002(In millions)
| ** **                                      | ** ** | **Beginning of  Period Balance** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Ending of  Period Balance** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|---------------|------------|----------------|------------|-----------------------------------------|------------|
| 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 |   |   |
| Year ended  December 31, 2002:             |       |                                       |       |          |       |           |       |                                    |       |   |   |   |   |   |   |   |   |
| Allowance for returns(1)                        |       |                                       | 7.6        |          |       |           | 90.8       |                                    |       |   | 91.4 |   |   |   | 7.0 |   |   |
| Allowance for doubtful accounts(2)              |       |                                       | 3.5        |          |       |           | 2.1        |                                    |       |   | 1.6 |   |   |   | 3.9 |   |   |
| Allowance for undelivered product(3)            |       |                                       | 0.4        |          |       |           | 1.3        |                                    |       |   | 1.1 |   |   |   | 0.6 |   |   |
| Allowance for obsolescence(4)                   |       |                                       | 6.2        |          |       |           | 4.4        |                                    |       |   | 3.7 |   |   |   | 6.9 |   |   |
| Valuation  allowance for deferred tax assets(5) |       |                                       | 2.0        |          |       |           | —     |                                    |       |   | — |   |   |   | 2.0 |   |   |

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(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

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