PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

INAMED CORPORATION AND SUBSIDIARIES

(Unaudited)

(millions, except par value)

	September 30, 2004			December 31, 2003
Assets

Current assets:
Cash and cash equivalents	$	93.6		$	80.5
Short-term investments	14.7			—
Trade accounts receivable, net of allowances of $20.1 and $19.7 in 2004 and 2003, respectively	62.3			63.7
Inventories, net	55.5			47.0
Prepaid expenses and other current assets	12.7			10.6
Deferred income taxes	7.7			10.3
Total current assets	246.5			212.1
Property and equipment, net	59.2			51.2
Goodwill	151.1			151.2
Other intangible assets, net	51.1			44.5
Deferred income taxes	32.1			32.9
Other assets	2.9			9.1
Total assets	$	542.9		$	501.0

Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	11.2		$	10.0
Accounts payable	23.3			23.5
Income taxes payable	8.9			10.3
Accrued liabilities and other (note 10)	37.8			36.4
Total current liabilities	81.2			80.2

Long-term debt, net of current portion	13.8			22.5
Other long-term liabilities (note 10)	35.7			46.8
Commitments and contingencies (note 14)
Stockholders’ equity:
Common stock, $0.01 par value; authorized 100.0 and 50.0 shares; issued and outstanding 35.8 and 35.3 shares for 2004 and 2003, respectively	0.4			0.4
Additional paid-in capital	238.9			223.3
Deferred compensation	(5.3		)	(6.9		)
Retained earnings	173.1			128.9
Accumulated other comprehensive income	5.1			5.8
Total stockholders’ equity	412.2			351.5
Total liabilities and stockholders’ equity	$	542.9		$	501.0

See accompanying notes to unaudited consolidated financial statements.

INAMED CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(millions, except per share data)

	Three Months Ended September 30, 2004		Three Months Ended September 30, 2003

Net sales	$	90.0	$	80.1
Cost of goods sold	22.6		22.8
Gross profit	67.4		57.3
Operating expenses:
Selling, general and administrative	38.8		33.7
Research and development	7.2		5.4
Amortization of intangible assets	1.3		1.1
Total operating expenses	47.3		40.2
Operating income	20.1		17.1
Other income (expense):
Net interest income (expense) and debt costs	0.1		(1.6		)
Foreign currency transaction gains	0.2		—
Royalty income and other	1.2		1.0
Total other income (expense), net	1.5		(0.6		)
Income before income tax expense	21.6		16.5
Income tax expense	4.8		4.0
Net income	$	16.8	$	12.5

Net income per share of common stock:
Basic	$	0.47	$	0.36
Diluted	$	0.47	$	0.35

Weighted average shares outstanding:
Basic	35.7		34.5
Diluted	36.0		35.2

See accompanying notes to unaudited consolidated financial statements.

INAMED CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(millions, except per share data)

	Nine Months Ended September 30, 2004		Nine Months Ended September 30, 2003

Net sales	$	280.6	$	241.4
Cost of goods sold	71.1		68.4
Gross profit	209.5		173.0
Operating expenses:
Selling, general and administrative (note 15)	136.8		100.7
Research and development	19.1		16.2
Amortization of intangible assets	3.7		3.0
Total operating expenses	159.6		119.9
Operating income	49.9		53.1
Other income (expense):
Net interest income (expense) and debt costs	0.4		(8.5		)
Foreign currency transaction gains	—		0.5
Royalty income and other	3.5		3.3
Total other income (expense), net	3.9		(4.7		)
Income before income tax expense	53.8		48.4
Income tax expense	9.6		11.1
Net income	$	44.2	$	37.3

Net income per share of common stock:
Basic	$	1.25	$	1.10
Diluted	$	1.23	$	1.08

Weighted average shares outstanding:
Basic	35.5		33.8
Diluted	35.9		34.6

See accompanying notes to unaudited consolidated financial statements.

INAMED CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

(millions)

	Common Stock (Issued)			Additional Paid-in			Retained			Deferred				Accumulated Other Comprehensive				Total Stockholders’
	Shares	Amount		Capital			Earnings			Compensation				Income				Equity
Balance, December 31, 2003	35.3	$	0.4	$		223.3	$	128.9		$	(6.9		)	$	5.8			$	351.5
Comprehensive income:
Net income							44.2											44.2
Translation adjustment														(0.7			)	(0.7			)
Total comprehensive income																		43.5
Employee stock purchase plan	0.1			4.1														4.1
Amortization of deferred compensation										1.6								1.6
Exercise of stock options	0.4			6.4														6.4
Tax benefit of option exercises				5.1														5.1
Balance, September 30, 2004	35.8	$	0.4	$	238.9		$		173.1	$		(5.3	)	$		5.1		$		412.2

See accompanying notes to unaudited consolidated financial statements.

INAMED CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(millions)

	Nine Months Ended September 30, 2004			Nine Months Ended September 30, 2003
Cash flows from operating activities:
Net income	$	44.2		$	37.3
Non-cash elements included in net income:
Depreciation and amortization	10.2			11.5
Tax benefit from stock option exercises	5.1			12.1
Deferred income taxes	3.4			(8.4		)
Non-cash compensation	1.6			—
Loss on disposition of property and equipment	—			0.2
Provision for doubtful accounts	2.7			3.0
Amortization of deferred loan costs	0.2			0.5
Write-off of deferred loan fees	—			1.2
Changes in assets and liabilities:
Trade accounts receivable	(2.7		)	(16.3		)
Inventories	(9.0		)	(1.0		)
Prepaid expenses and other current assets	(2.1		)	1.9
Other assets	5.9			6.7
Accounts payable	0.1			1.5
Income taxes payable	(1.1		)	3.2
Accruals and other long-term liabilities	(9.7		)	3.8
Net cash provided by operating activities	48.8			57.2
Cash flows from investing activities:
Purchase of property and equipment	(14.6		)	(8.1		)
Purchase of investments	(15.2		)	—
Proceeds from sale of investments	0.5			—
Purchase of intangibles	(10.2		)	(4.3		)
Net cash used in investing activities	(39.5		)	(12.4		)
Cash flows from financing activities:
Proceeds of long-term debt	—			65.0
Principal repayment of long-term debt	(7.5		)	(86.3		)
Payment of deferred loan fees	—			(1.3		)
Issuance of common stock	10.5			30.0
Net cash provided by financing activities	3.0			7.4
Effect of exchange rate changes on cash	0.8			1.4
Change in cash and cash equivalents:
Net change in cash and cash equivalents	13.1			53.6
Cash and cash equivalents at beginning of period	80.5			39.3
Cash and cash equivalents at end of period	$	93.6		$	92.9
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	1.0		$	7.1
Income taxes	$	3.2		$	5.2

See accompanying notes to unaudited consolidated financial statements.

INAMED CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(millions)

NOTE 1 – INTERIM FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements include all adjustments which are, in our opinion, necessary for the fair presentation of the results of operations for the periods presented. Interim results are not necessarily indicative of the results to be expected for a full year.

Certain information and note disclosures normally included in financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted as allowed by Form 10-Q. The accompanying unaudited consolidated financial statements should be read in conjunction with Inamed Corporation’s (“Inamed” or the “Company”) consolidated financial statements for the year ended December 31, 2003 as filed with the Securities and Exchange Commission on Form 10-K.

NOTE 2 – DESCRIPTION OF BUSINESS

The Company

Inamed Corporation, a Delaware corporation, is a global health care company that develops, manufactures, and markets a diverse line of products that enhance the quality of people’s lives. We have three principal product lines (which, for financial reporting purposes, are considered to be one segment): breast aesthetics (consisting primarily of breast implants and tissue expanders for use in plastic and reconstructive surgery); facial aesthetics (consisting primarily of collagen and hyaluronic acid-based dermal fillers for use in facial rejuvenation); and obesity intervention (consisting of products for use in treating severe and morbid obesity). Our manufacturing locations are in California, Costa Rica, and Ireland, and our administrative support functions are principally in California and Ireland. We sell our products through our staff of sales representatives in the U.S. and in our wholly owned foreign subsidiaries and, in certain countries, through independent distributors.

Common Stock Split

On October 30, 2003, the Board approved a three for two stock split of the Company’s Common Stock in the form of a 50 percent stock dividend. The stock split was effected on December 15, 2003 for stockholders of record at the close of business on December 1, 2003. A total of 11,727,612 shares of common stock were issued in connection with the stock split. The par value of the shares was not changed from $0.01. All references in the Quarterly Report on Form 10-Q to shares, per share amounts, stock option data and market prices of the Company’s stock have been restated to reflect the stock split.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires Inamed to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates and judgments, including those related to revenue recognition, inventories, adequacy of allowances for doubtful accounts, valuation of long-lived assets and goodwill, income taxes, litigation and warranties. Inamed bases its estimates on historical and anticipated results and trends and on various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not

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

Cash and Cash Equivalents

Cash and cash equivalents consist principally of cash in banks and highly liquid debt and equity instruments purchased with original maturities of three months or less. Inamed maintains balances in high-quality financial institutions. In the U.S., these balances at times are in excess of federally insured limits.

Short-term Investments

In accordance with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” the Company classifies its securities as held-to-maturity and reports them at cost without recognizing any unrealized gains or losses. Because of the Company’s cash position and the short-term nature of the maturities, the Company has the positive intent and ability to hold these securities to their maturity dates. Securities that mature in three months or less are classified as cash equivalents. Those that mature over three months but within one year are classified as short-term investments. The Company is currently investing in high quality corporate debt securities and the cost of securities sold is based on the specific identification method.

Fair Value of Financial Instruments

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

Allowance for Doubtful Accounts

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

Inventories

Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. The Company provides valuation reserves for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.

Current Vulnerability Due to Certain Concentrations

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

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is recorded on the straight-line method over the estimated useful lives of the assets, which range from three to ten years. Amortization of leasehold improvements is based upon the estimated useful lives of the assets or the term of the lease, whichever is shorter. Maintenance and repairs are charged to operations as incurred, while significant improvements are capitalized. Asset retirements and dispositions are accounted for in accordance with SFAS No. 144 as described below.

Accounting for Long-Lived Assets

Inamed accounts for long-lived assets, other than goodwill, in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment and Disposal of Long Lived Assets,” which superseded SFAS No. 121 and certain sections of APB Opinion No. 30 specific to discontinued operations. SFAS No. 144 classifies long-lived assets as either (1) to be held and used, (2) to be disposed of by other than sale, or (3) to be disposed of by sale. This standard introduces a probability-weighted cash flow estimation approach to address situations where alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or a range is estimated for the amount of possible future cash flows. SFAS No. 144 requires, among other things, that an entity review its long-lived assets and certain related intangibles for impairment whenever changes in circumstances indicate that the

carrying amount of an asset may not be fully recoverable. Factors the Company considers important that could trigger an impairment review include substantial operating losses, significant negative industry trends and significant changes in how it uses an asset. Upon the determination that an impairment review is required the Company would compare the carrying amounts of the long-lived asset to its fair value, which is determined using a discounted cash flow model. This model requires estimates of future revenues, profits, capital expenditures, working capital and other relevant factors. These amounts are estimated by evaluating historical trends, current budgets, operating plans, and industry data. If the assets are considered to be impaired, the impairment charge is the amount by which the asset’s carrying value exceeds its fair value. As with all cash flow models there is an inherent subjectivity. The assumptions listed above could be different from actual results which would in turn create a different valuation. If these assumptions change in the future, the Company may be required to record impairment charges for those assets. With the exception of the manufacturing consolidation that commenced in 2002 (see Note 4), Inamed does not believe that any such changes have taken place. The Company will continue to monitor its long lived asset balances and conduct formal tests when impairment indicators are present.

Goodwill and Other Intangible Assets

Goodwill represents the excess of cost over the fair value of identifiable net assets of businesses acquired. Other intangible assets consist primarily of purchased technology and patents. The Company adopted SFAS No. 142 “Goodwill and Other Intangible Assets,” on January 1, 2002. As a result, goodwill is no longer amortized, but was subjected to a transitional impairment analysis and is tested for impairment on an annual basis as of October 31, or more frequently as impairment indicators arise. The test for impairment involves the use of estimates related to the fair values of the business operations with which goodwill is associated. In accordance with SFAS 142 the Company evaluates the fair value of the reporting unit in relation to the carrying value of goodwill. As long as the fair value of the reporting unit exceeds the carrying value of the reporting unit’s goodwill and no specific circumstances indicate a loss in value for goodwill, no impairment charge will be recognized. If the fair value of the reporting unit is less than the carrying value of goodwill, the Company will measure the amount of the impairment loss and record an impairment charge based on a discounted cash flow model. Other intangible assets are amortized using the straight-line method over their estimated useful lives and are evaluated for impairment under SFAS No. 144.

License and distribution rights – In the normal course of business, the Company enters into collaborative license and distribution contracts. These collaborative agreements usually require the Company to pay up-front fees and milestone payments, some of which are significant. When the Company pays an up-front or milestone payment for these license and distribution rights, management evaluates the stage of the acquired technology’s development to determine the appropriate accounting treatment. Payments for these rights made in advance of regulatory approval are evaluated for capitalization based upon certain factors including: the contract, the expected launch date of the product, the market acceptance of the product in other countries, competitive product information (including products using the same compounds, similar compounds, or products used for the same application), level of development, alternative future uses, clinical experience and regulatory information. Payments made to third parties subsequent to regulatory approval are capitalized. Capitalized rights are stated at cost, less accumulated amortization, and are amortized using the straight-line method over their estimated useful lives of five to twenty-one years. Significant changes to any of the factors above may result in a reduction in the useful life of the license and an acceleration of related amortization expense. License rights are assessed periodically for impairment.

Product Warranties

The Company has an accrual for warranty programs for breast implant sales in the United States, Europe, and certain other countries. Management estimates the amount of potential future claims from these warranty programs based on actuarial analyses. Expected future obligations are determined based on the history 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 the balance sheet. The U.S. plan, in most cases, provides product replacement and one thousand two hundred to two thousand four hundred dollars of financial assistance for surgical procedures within ten years of implantation. The warranty programs in non-U.S. markets have similar terms and conditions to the U.S. plan. The Company does not currently offer a warranty on its facial or health products and therefore no amount is included in the liability for those products. The Company does not warrant any level of aesthetic result and, as required by government regulation, makes extensive disclosures concerning the risks of the use of its products and implantation surgery. Changes to actual warranty claims incurred and interest rates could have a material impact on the actuarial analysis which could materially impact Inamed’s reported expenses and results of operations. Substantially all of the product warranty liability arises from the U.S. warranty program.

	Accrued Warranty Nine Months Ended September 30, 2004			Accrued Warranty Nine Months Ended September 30, 2003

Balance at December 31	$	10.4		$	9.5
Accruals for warranties issued during the period	3.9			3.7
Settlements made during the period	(2.8		)	(3.1		)
Balance	$	11.5		$	10.1

Revenue Recognition

The Company’s revenue is generated from the sale of its products to doctors, hospitals, clinics and independent distributors. The Company sells its products through a direct sales force in the U.S. and through a direct sales force and independent distributors internationally.

Inamed recognizes product revenue, net of sales discounts, returns and allowances, in accordance with Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition” and SFAS No. 48 “Revenue Recognition When Right of Return Exists.” Revenue is recognized when all four of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred and all significant contractual obligations have been satisfied; (iii) the fee is fixed or determinable; and (iv) collection is considered probable. Appropriate reserves are established for anticipated returns and allowances based on historical experience. The Company recognizes revenue when title to the goods and risk of loss transfer to customers provided there are no remaining performance obligations required of the Company or any matters requiring customer acceptance.

The Company allows for the return of product from doctors, hospitals, and clinics within a specified time frame, and records estimated sales returns as a reduction of sales in the same period revenue is recognized. The Company does not provide a right of return on facial products. Inamed calculates these sales provisions based upon historical experience with actual returns.

A portion of the Company’s revenue is generated from consigned inventory maintained at doctors, hospitals, and clinic locations. Each consignment customer is contractually obligated to maintain a specific level of inventory and to notify Inamed upon use of the product. For these customers, revenue is recognized at the time the Company is notified by the customer that the product has been implanted.

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

Research and Development (R&D)

Inamed conducts its R&D internally as well as through contracts with other companies in the research and development of new products and processes. R&D expenses are comprised of the following types of costs incurred in performing research and development activities: salaries and benefits, allocated overhead, clinical trial and related clinical manufacturing costs, regulatory costs, contract services, and other outside costs. In accordance with SFAS No. 2, “Accounting for Research and Development Costs,” all R&D costs are expensed as incurred.

Stock-Based Compensation

Inamed accounts for stock-based compensation in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 44, “Accounting for Certain Transactions Involving Stock Compensation, and interpretation of APB No. 25,” and Emerging Issue Task Force (EITF) No. 96-18, “Accounting for Equity Instruments that Are Issued to Other Than Employees for Acquiring, or In Conjunction with Selling, Goods, or Services.” In accordance with SFAS No. 123, Inamed has elected the disclosure-only provisions related to employee stock options and follows the intrinsic value method in APB No. 25 in accounting for stock options issued to employees. Under APB No. 25, compensation expense, if any, is recognized as the difference between the exercise price and the fair value of the common stock on the measurement date, which is typically the date of grant, and is recognized over the service period, which is typically the vesting period. Inamed accounts for options and warrant grants to non-employees using the guidance prescribed by SFAS No. 123, FIN No. 44, and EITF No. 96-18, whereby the fair value of such option and warrant grants are measured using the fair value

at the earlier of the date at which the non-employee’s performance is completed or a performance commitment is reached.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123 and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require more prominent and frequent disclosures in financial statements about the effects of stock-based compensation. Inamed adopted the disclosure requirements of SFAS No. 148 in the fourth quarter of 2002 and will adopt, upon the completion of the final FASB rules, the fair value based method of accounting for stock-based employee compensation.

Pro Forma Disclosures of the Effect of Stock-based Compensation

Pro forma information regarding results of operations and net income per share is required by SFAS No. 123, which also requires that the information be determined as if Inamed had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option valuation model with 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 - 3.70	%	0.0	4	28.5 - 44.1	%
2003	2.74 - 2.91	%	0.0	4	34.7 - 40.9	%

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

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

	Three Months Ended September 30, 2004			Three Months Ended September 30, 2003			Nine Months Ended September 30, 2004			Nine Months Ended September 30, 2003
Net income as reported	$	16.8		$	12.5		$	44.2		$	37.3
Add: Stock-based compensation expense included in reported net income, net of related tax effects	0.3			—			0.9			—
Deduct: Total stock-based compensation expense determined under the fair value method for all awards, net of tax effects	(3.0		)	(0.9		)	(8.8		)	(2.9		)
Pro forma net income	$	14.1		$	11.6		$	36.3		$	34.4

Earnings Per Share

Basic as reported	$	0.47		$	0.36		$	1.25		$	1.10
Basic pro-forma	$	0.39		$	0.34		$	1.02		$	1.02

Diluted as reported	$	0.47		$	0.35		$	1.23		$	1.08
Diluted pro-forma	$	0.39		$	0.33		$	1.01		$	1.00

Foreign Currency Translation

Assets and liabilities of foreign subsidiaries with functional currencies other than the U.S. dollar are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of their operations are translated using the average exchange rates during the period. The resulting foreign currency translation adjustment is included in stockholders’ equity as a component of accumulated other comprehensive income. Transaction gains and losses are recorded in the consolidated statements of income. Accumulated foreign currency gains were $5.1 and $1.5, at September 30, 2004 and 2003, respectively.

Income Taxes

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

Income taxes are determined using an estimated annual effective tax rate, which is generally less than the U.S. Federal statutory rate, primarily because of lower tax rates in certain non-U.S. jurisdictions and research and development tax credits available in the United States. In accordance with FIN 18, “Accounting for Income Taxes in Interim Periods,” discrete items are included in the period affected rather than being reflected in the annual effective tax rate. Included in the provision for income taxes for the nine months ended September 30, 2004 is an estimated $6.9 income tax benefit for a legal settlement and related second quarter fees.

Recent Pronouncements

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,” which was originally effective on July 1, 2003. In December 2003, the FASB deferred the effective date for applying the provision of FIN 46 to March 31, 2004 for interests held by public companies in variable interest entities or potential variable interest entities created prior to February 1, 2003. The adoption of FIN 46 did not have a material impact on the Company’s financial position or results from operations.

On March 31, 2004, the FASB issued an exposure draft, “Share-Based Payment, an Amendment of SFAS No. 123 and 95.” The exposure draft proposes to expense the fair value of share-based payments to employees beginning in late 2005. The Company is currently evaluating the impact of this proposed standard on its financial statements.

NOTE 4 – RESTRUCTURING COSTS

In the fourth quarter of 2002, Inamed recorded a charge of $5.1 for restructuring costs. This restructuring was undertaken to consolidate manufacturing facilities. The annual savings from the manufacturing consolidation was estimated to be a reduction in U.S. payroll and support costs of $10.0, with a corresponding increase in costs in Ireland of $4.3 and Costa Rica of $0.4, with a net savings of $5.3 per year. The savings are from the relocation to lower-cost manufacturing locations. The savings will be reflected in the cost of goods sold on the income statement. The consolidation of operations was completed in the first quarter of 2004 and involved transitioning Santa Barbara-based manufacturing to the Company’s facilities in Costa Rica and Ireland. Through September 30, 2004, the Company eliminated approximately 145 manufacturing positions in Santa Barbara and will eliminate approximately 5 more through the end of 2004. Approximately 80 of these positions were added in Ireland and Costa Rica through March 31, 2004, completing the additions related to this consolidation. The majority of the costs relate to severance which has been and will be paid from the beginning of 2003 through 2005. Inamed has accounted for the restructuring in accordance with EITF 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).” As part of the manufacturing consolidation the Company accelerated the depreciation on certain assets with shortened useful lives. For the three and nine months ended September 30, 2004, Inamed included $0.0 and $0.4, respectively, of accelerated depreciation charges in cost of goods sold. For the three and nine months ended September 30, 2003, Inamed

included $0.9 and $2.7, respectively, of accelerated depreciation charges in cost of goods sold. These assets were fully depreciated as of March 31, 2004. The Company does not expect any further material costs related to the 2002 restructuring. Through the nine months ended September 30, 2004 a major contributor in the decrease in cost of goods sold as a percentage of sales year over year was the savings generated as a result of the manufacturing consolidation. The savings generated were primarily the result of reduced payroll costs.

Inamed recorded $12.0 of restructuring costs in the first quarter of 2001. This restructuring was a series of events to reorganize senior management and to consolidate facilities and administrative functions. The Santa Barbara reduction was facilitated by certain manufacturing operations having moved to Inamed’s new facility in Costa Rica and the move of Santa Barbara’s remaining manufacturing to a local facility. These costs were primarily employee severance costs which will be paid through 2005. Inamed does not expect any further material costs related to the 2001 restructuring.

A summary of activity related to the restructuring charges is as follows:

	Employee Termination Benefits

2001 restructuring accrual:
Balance at December 31, 2003	$	0.7
Cash paid through September 30, 2004	(0.4		)
Accrual balance at September 30, 2004	$	0.3
2002 restructuring accural:
Balance at December 31, 2003	$	3.2
Cash paid through September 30, 2004	(1.9		)
Accrual balance at September 30, 2004	$	1.3
Total accrual balance at September 30, 2004	$	1.6

NOTE 5 – NET INCOME PER SHARE RECONCILIATION (Per share data shown as actual, not millions)

Basic net income per share is calculated by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing income available to common stockholders by the weighted-average number of common and dilutive common equivalent shares outstanding during the period. Computations of per share earnings for the three and nine months ended September 30, 2004 and 2003 are as follows:

	Three Months Ended September 30, 2004			Three Months Ended September 30, 2003			Nine Months Ended September 30, 2004			Nine Months Ended September 30, 2003
Net Income - Basic and Diluted	$	16.8		$	12.5		$	44.2		$	37.3

Weighted average shares outstanding - Basic	35.7			34.5			35.5			33.8
Dilutive effect of stock options	0.3		(1)	0.7		(1)	0.4		(1)	0.8		(1)
Weighted average shares outstanding - Diluted	36.0			35.2			35.9			34.6

Per share amount
Basic	$	0.47		$	0.36		$	1.25		$	1.10
Diluted	$	0.47		$	0.35		$	1.23		$	1.08

(1) The calculation excludes 0.1 options that were anti-dilutive for the three months ended September 30, 2004 and 2003, and excludes 0.0 options that are anti-dilutive for the nine months ended September 30, 2004 and 2003.

NOTE 6 – INVENTORIES

Inventories are summarized as follows:

	September 30, 2004		December 31, 2003

Raw materials	$	13.0	$	11.7
Work in process	13.9		7.1
Finished goods, net	28.6		28.2
	$	55.5	$	47.0

NOTE 7 – SALES BY PRODUCT LINE/GEOGRAPHICALLY

Sales by product line were as follows:

	Three Months Ended September 30, 2004		Three Months Ended September 30, 2003		Nine Months Ended September 30, 2004		Nine Months Ended September 30, 2003
Breast Aesthetics	$	49.3	$	41.1	$	159.5	$	131.0
Health	22.2		16.2		62.6		45.3
Facial Aesthetics	17.1		21.6		55.0		61.6
Other*	1.4		1.2		3.5		3.5
Total Sales	$	90.0	$	80.1	$	280.6	$	241.4

* Other products consist of collagen sales to other medical manufacturers.

Sales in the U.S. and all other countries (according to the location of the customer) were as follows:

	Three Months Ended September 30, 2004		Three Months Ended September 30, 2003		Nine Months Ended September 30, 2004		Nine Months Ended September 30, 2003
United States	$	56.3	$	53.7	$	171.4	$	155.9
All other countries*	33.7		26.4		109.2		85.5
Total Sales	$	90.0	$	80.1	$	280.6	$	241.4

* No other country’s sales comprise more than 10% of net sales for any of the periods presented.

NOTE 8 – INTEREST RATE SWAP

As of September 30, 2004 and 2003, the Company no longer had an interest rate swap agreement. As of June 30, 2003, the Company determined that it was probable that Inamed’s variable interest rate debt for which the hedge was utilized would be refinanced. Consequently, pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, unrealized losses of $3.5 that had been previously included in accumulated other comprehensive income (loss) were recorded as interest expense in the Company’s income statement. In July 2003, the Company terminated the interest rate swap agreement in connection with the termination of the variable interest rate debt.

NOTE 9 – INTEREST INCOME AND INTEREST EXPENSE

Interest income and interest expense for the three and nine month periods ended September 30, 2004 and 2003 were as follows:

	Three Months Ended September 30, 2004		Three Months Ended September 30, 2003		Nine Months Ended September 30, 2004		Nine Months Ended September 30, 2003
Interest income	0.4		0.2		1.4		0.6
Interest expense	(0.3	)	(1.8	)	(1.0	)	(9.1	)
Interest income (expense)	0.1		(1.6	)	0.4		(8.5	)

Included in interest expense in the nine months ended September 30, 2003 is $3.5 of realized losses on the Company’s interest rate swap.

NOTE 10 - ACCRUED LIABILITIES AND OTHER; OTHER LONG-TERM LIABILITIES

Accrued liabilities and other is summarized as follows:

	September 30, 2004		December 31, 2003
Salaries, wages, and payroll taxes	$	12.8	$	14.7
Restructuring costs	0.9		2.4
Royalties payable	3.1		2.6
Trilucent liability, current	5.5		3.5
Sales tax liability	3.5		5.0
Warranty accrual, current	3.3		2.7
Other	8.7		5.5
Total accrued liabilities and other	$	37.8	$	36.4

Other long-term liabilities consist of the following:

	September 30, 2004		December 31, 2003
Warranty accrual	$	8.2	$	7.7
Trilucent liability	6.4		18.2
Deferred income tax liability	14.6		14.6
Other liabilities	6.5		6.3
Total other long-term liabilities	$	35.7	$	46.8

NOTE 11 - LONG-TERM DEBT

Long-term debt is summarized as follows:

	September 30, 2004			December 31, 2003

Variable 1-month LIBOR plus 2.0% note, final maturity in July 2008	$	25.0		$	32.5
Less: current maturities	(11.2		)	(10.0		)
Long-term debt	$	13.8		$	22.5

As of September 30, 2004, the Company had long-term debt of $25.0 including $11.2 of current liabilities. In addition, the Company had a $35.0 five-year revolving credit facility of which $14.8 of the revolver capacity was utilized by having letters of credit issued to collateralize certain insurance programs. The remaining $20.2 of revolver capacity was unused as of September 30, 2004. The borrowings under the current credit facilities bear interest at the London Interbank Offered Rate or LIBOR plus 2.0%. Remaining principal payments of $2.5, $12.5, and $10.0 are due in 2004, 2005 and 2006, respectively.

NOTE 12 - GOODWILL AND OTHER INTANGIBLE ASSETS

Inamed has adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” In accordance with SFAS No. 142, Inamed discontinued amortizing goodwill and other intangible assets with indefinite lives. Inamed performed its annual impairment test of goodwill using a market value approach during the fourth quarter of 2003 and determined that there was no impairment of goodwill and intangible assets. No events have occurred to trigger an impairment evaluation since the fourth quarter of 2003.

Goodwill was $151.1 and $151.2 as of September 30, 2004 and December 31, 2003, respectively. The change represents the effect of foreign exchange translation on goodwill carried in subsidiaries with functional currencies other than the U.S. dollar.

Net other intangible assets subject to amortization were $47.0 and $40.4 as of September 30, 2004 and December 31, 2003, respectively. These assets will continue to be amortized over their expected useful lives, which range

from three to twenty one years. Other intangible assets not subject to amortization (trade names) were $4.1 at September 30, 2004 and December 31, 2003. Total other intangible assets are as follows:

		September 30, 2004							December 31, 2003
	Weighted Average Life	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Licenses	13.2	$	61.5	$	(18.4	)	$	43.1	$	51.1	$	(14.9	)	$	36.2
Patents	15.5	5.7		(1.8		)	3.9		5.7		(1.5		)	4.2
Other	5.0	2.4		(2.4		)	—		2.4		(2.4		)	—
Total intangibles subject to amortization		$	69.6	$	(22.6	)	$	47.0	$	59.2	$	(18.8	)	$	40.4
Other intangibles not subject to amortization		4.1		—			4.1		4.1		—			4.1
Total other intangibles		$	73.7	$	(22.6	)	$	51.1	$	63.3	$	(18.8	)	$	44.5

Aggregate amortization expense for intangible assets was $1.3 and $3.7 for the three and nine months ended September 30, 2004, respectively. For the next five years, amortization expense on existing intangible assets is expected to be approximately $5.0 million per year.

NOTE 13 – STOCKHOLDERS’ EQUITY (Share quantity and per share data shown as actual, not millions)

Stock Options

The following table represents share information for all the option plans for Inamed at September 30, 2004:

	Authorized shares	Number of securities to be issued upon the exercise of outstanding options	Weighted average exercise price of outstanding options		Number of options remaining available for future issuance
The 1993 Plan	225,000	37,500	$	19.20	—
The 1998 Plan	675,000	102,400	$	55.55	12,499
The 1999 Program	1,350,000	327,249	$	45.51	131,416
The 2000 Option Plan	2,287,500	1,226,769	$	36.71	105,246
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	1,776,418	$	39.60	891,661

Stand Alone Options, not approved by Stockholders	2,426,250	100,001	$	14.01	—

Total	7,688,750	1,876,419	$	38.24	891,661

Summary

Activity under these plans for the periods ended September 30, 2004 and 2003 was as follows (shares in millions):

	For the three months ended September 30, 2004				For the three months ended September 30, 2003				For the nine months ended September 30, 2004				For the nine months ended September 30, 2003
	Shares Under Option		Weighted Average Exercise Price		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 period	1.9		$	33.88	2.2		$	17.20	2.1		$	32.55	3.4		$	15.20
Granted	0.2		$	54.02	1.0		$	48.56	0.3		$	53.28	1.0		$	47.37
Cancelled	—		$	48.99	—		$	25.07	(0.1	)	$	43.47	(0.1	)	$	21.89
Exercised	(0.2	)	$	15.80	(0.9	)	$	17.95	(0.4	)	$	16.80	(2.0	)	$	14.07
Options outstanding at the end of the period	1.9		$	38.24	2.3		$	30.38	1.9		$	38.24	2.3		$	30.38
Options exercisable at the end of the period	0.6		$	33.91	0.3		$	17.92	0.6		$	33.91	0.3		$	17.92
Weighted average fair value of options granted during the period			$	20.17			$	21.08			$	20.33			$	20.51

The following table summarizes information about stock options outstanding at September 30, 2004 (shares in millions):

	Options Outstanding				Options Exercisable
Range of exercise prices	Number Outstanding	Wgtd. Avg. Remaining Contractual Life (Years)	Wgtd. Avg. Exercise Price		Number Exercisable	Wgtd. Avg. Exercise Price
$4.33 - $14.69	0.26	7.23	$	12.49	0.08	$	11.94
$15.47 - $18.17	0.25	7.23	$	17.47	0.10	$	16.78
$20.88 - $44.58	0.19	6.48	$	28.27	0.13	$	28.63
$46.91 - $48.82	0.27	9.34	$	48.06	0.02	$	48.30
$48.99	0.76	9.00	$	48.99	0.26	48.99
$49.70 - $57.96	0.06	8.36	$	50.06	0.01	50.31
$59.9 - $61.63	0.09	9.26	$	61.36	—	—

$4.33 - $61.63	1.88	8.31	$	38.24	0.60	$	33.91

Restricted Stock Plan

In 2003 Inamed adopted the 2003 Restricted Stock Plan, which authorizes Inamed to issue shares to any employee, officer, consultant, or non-employee director. In the second quarter of 2004, the stockholders approved an increase in the number of authorized shares by 150,000 shares to 300,000 shares. Restricted Stock Awards may be granted by the Board subject to vesting and any other restrictions (including a period during which vested shares may not be sold) as determined by the Board and stated in the Award Agreement. Restricted stock may not be sold or otherwise transferred or pledged until the restrictions lapse or are terminated.

	Authorized shares	Number of shares issued	Available for Issuance

The 2004 Restricted Stock Plan	300,000	142,500	157,500

The following table summarizes the restricted stock-based compensation charges that have been included in the following captions of the income statement, for each of the periods presented (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2004	2003	2004	2003

Cost of goods sold	$83.2	—	$249.5	—
Selling, general and administrative	$443.5	—	$1,330.5	—
	$526.7	—	$1,580.0	—

NOTE 14 - COMMITMENTS AND CONTINGENCIES

The Company is involved in various litigation matters as a claimant and as a defendant. Inamed records any amounts recovered in these matters when collection is realized. Inamed records liabilities for claims against the Company when the losses are probable and can be reasonably estimated. Amounts recorded are based on reviews by outside counsel, in-house counsel, and management. Actual results could differ from estimates. See “Legal Proceedings.”

NOTE 15 - LITIGATION

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 patents related to gastric banding. Under the terms of the settlement agreement, Inamed paid Ethicon $17.2 in the second quarter of 2004, and, pursuant to a license arrangement included in the settlement agreement, will pay royalties to Ethicon on future United States sales of the LAP-BAND® System, initially at 7.5%. Prior to this settlement, Inamed accrued a royalty on U.S. sales at

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, and other written and oral statements made from time to time by us, do not relate strictly to historical facts. These statements are considered “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of 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 forward looking statements. This forward looking information involves important risks and uncertainties that could materially alter results in the future from those expressed in any forward looking statements made by, or on behalf of, us. We caution you that such forward-looking statements are only predictions and that actual events or results may differ materially. In evaluating such statements, you should specifically consider the various factors that could cause actual events or results to differ materially, including those factors described below. It is not possible to foresee or identify all factors affecting our forward-looking statements and you should not consider any list of such factors to be exhaustive. We are under no duty to update any forward-looking statements.

Although forward-looking statements in this report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed under the heading ‘‘Risks and Uncertainties’’ below, as well as those discussed elsewhere in this report on Form 10-Q. Readers are referred to the report on Form 10-K for the year ended December 31, 2003 and other documents as filed by Inamed Corporation with the Securities and Exchange Commission, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report on Form 10-Q. The information contained in this Form 10-Q is a statement of our present intention, belief, or expectation and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices, the economy in general, and our assumptions. We may change our intention, belief, or expectation at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise. We undertake no obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report on Form 10-Q and we expressly disclaim any duty to update the information contained in this Form 10-Q. Readers are urged to carefully review and consider the various disclosures made in this report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

By including any information in this Form 10-Q, we do not necessarily acknowledge that disclosure of such information is required by applicable law or that the information is material.

The following Management’s Discussion and Analysis (MD&A) is intended to help the reader to better understand the financial condition and results of operations of Inamed Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes included herein and our audited financial statements and accompanying notes included in our annual report on Form 10-K. The following provides a brief description of each section of our MD&A:

• Company and Industry Overview — provides a general description of our business, our market place and the basis for most of our revenues and expenses;

• Liquidity and Capital Resources — provides our historical sources and uses of cash, existence and timing of cash commitments, and a prospective look into where future cash will be provided and used;

• Results of Operations — provides a consolidated analysis of the results of operations for the two periods presented in our financial statements, including prospective information;

• Application of Critical Accounting Policies and Estimates — provides a discussion on our accounting policies that require critical judgments and estimates.

Company and Industry Overview

Inamed is a global health care company that develops, manufactures and markets a diverse line of products that enhance the quality of peoples’ lives. These products include breast implants and tissue expanders for use in plastic and reconstructive surgery, a range of dermal products for use in facial rejuvenation, and the LAP-BANDÒ System and Bioenterics® Intragastric Balloon (BIBÒ) System used to treat severe and morbid obesity. We generated approximately 39% of our revenues outside the U.S. for the nine months ended September 30, 2004.

Our primary markets are very competitive and subject to substantial government regulation. Pricing and market share pressures vary by product line and geographic market. In general, inflationary trends result in increases in our labor and material costs. In addition, there are foreign currency fluctuations and other risks associated with operating on a global basis, such as price and currency-exchange controls, import restrictions, and changing economic, social and political conditions in foreign countries. We expect these trends and risks to continue. We will continue to manage these issues by capitalizing on our market presence, developing innovative products, investing in human resources, leveraging our cost structure, and possibly entering into alliances and other arrangements.

We derive all of our revenues from product sales. We sell our breast aesthetics, facial aesthetics and obesity intervention products in the U.S. to hospitals, clinics and doctors through a direct sales force. Internationally, our products are sold either through direct sales forces in countries where we have our own subsidiaries or through independent distributors.

We manufacture our products in California, Costa Rica and Ireland. We also purchase finished products and certain raw material components from third party manufacturers and suppliers. The cost of goods sold represents raw materials, labor and overhead, and the cost of third party-supplied finished products. Gross margins may fluctuate from period to period due to changes in the selling prices of our products, the mix of products sold, changes in the cost of third party-supplied finished products, raw materials, labor and overhead and manufacturing efficiencies or inefficiencies. For the nine months ended September 30, 2004 and September 30, 2003, the cost of goods sold also includes accelerated depreciation charges related to the manufacturing consolidation. (See Note 4 of the notes to the consolidated financial statements.)

Our selling, general and administrative expense incorporates the expenses of our sales and marketing organization and the general and administrative expenses necessary to support the global corporation. Our sales and marketing expenses consist primarily of salaries, commissions, and marketing program costs. General and administrative expenses incorporate the costs of finance, human resources, information services, legal and insurance costs.

Our research and development expenses are comprised of the following types of costs incurred in performing clinical development and research and development activities: salaries and benefits, allocated overhead, clinical trial and related clinical manufacturing costs, regulatory costs, contract services, and other outside costs. We also conduct research on materials technology, product design and product improvement.

Liquidity and Capital Resources

We had cash and cash equivalents of $93.6 million and short-term investments of $14.7 million at September 30, 2004, an aggregate increase of $27.8 million from $80.5 million of cash and cash equivalents and no short-term investments at December 31, 2003. The increase was primarily the result of cash provided by operations of $48.8 million and cash from the issuance of common stock of $10.5 million, offset primarily by the purchases of plant and equipment of $14.6 million, intangible assets of $10.2 million, and principal payments of long-term debt of $7.5 million. Cash provided by operating activities has been, and is expected to continue to be, our primary source of funds. We invest a portion of our cash and cash equivalents in short-term investments with maturities of less than one year.

Cash provided by operations was $48.8 million for the nine months ending September 30, 2004 compared to $57.2 million for the nine months ended September 30, 2003. The decrease was primarily the result of a cash

payment for our Ethicon Endo-Surgery, Inc. (“Ethicon”) legal settlement of $17.2 million in June 2004. Pursuant to the terms of this settlement agreement, we have commenced accrual of the royalties in the third quarter of 2004 and will commence payment of such royalties to Ethicon in the fourth quarter of 2004. Royalty amounts will vary based on the sales of these products and geography in which these products are sold. Accounts receivable increased $2.7 million due to increased sales. Inventories increased $9.0 million, primarily due to increased facial product inventory in the U.S. We increased our facial product inventory while we changed suppliers of human collagen mesh to support any transitional issues as well as to comply with our long-term contract agreements. In addition, we increased inventory to support the launch of new products. Other assets decreased $5.9 million primarily due to a reduction in our Trilucent insurance receivable (see Part II, Item 1. Legal Proceedings, Breast Implant Litigation, Trilucent Breast Implant Matters). Accruals and other long-term liabilities decreased $9.7 million primarily due to payments on our Trilucent liability. We expect cash from operations to increase for the full year as a result of increased sales and net income.

Cash used in investing activities of $39.5 million for the nine months ended September 30, 2004 consists of $15.2 million for the purchase of short-term investments, $10.2 million for the purchase of intangibles, primarily the purchase of license and distribution agreements, and $14.6 million in capital expenditures, primarily for our plant expansions and our global Enterprise Resource Planning or ERP system. Cash used in investing activities of $12.4 million for the nine months ended September 30, 2003 consisted of the purchase of intangibles of $4.3 million and capital expenditures of $8.1 million, primarily for our global ERP system.

Cash provided by financing activities for the nine months ended September 30, 2004 of $3.0 million reflects proceeds of $10.5 million from the issuance of common stock upon the exercise of outstanding employee stock options and issuances pursuant to the employee stock purchase plan, offset by long-term debt principal payments of $7.5 million. Cash provided by financing activities for the nine months ended September 30, 2003 of $7.4 million reflected proceeds of $30.0 million from the issuance of common stock upon the exercise of outstanding employee stock options and issuances pursuant to the employee stock purchase plan, and proceeds of long-term debt of $65.0 million offset by principal repayment of long-term debt of $86.3 million, upon refinancing our long-term debt.

As of September 30, 2004, we had long-term debt of $25.0 million, $11.2 million of which is classified in current liabilities. In addition, we had a $35.0 million five-year revolving credit facility. We had utilized $14.8 million of the revolver capacity by having letters of credit issued to collateralize certain insurance programs. The remaining $20.2 million of revolver capacity was unused as of September 30, 2004. The borrowings under the current credit facilities bear interest at the London Interbank Offered Rate or LIBOR plus 2.0%. Remaining principal payments of $2.5, $12.5, and $10.0 million are due in 2004, 2005 and 2006, respectively.

The primary objectives of our investment policy are, in order of priority, preservation of principal, liquidity, and attaining a high rate of return. Consequently, our investments are generally of short duration and high credit quality. We believe that existing funds, cash generated from operations, and existing debt financing are adequate to satisfy our working capital and capital expenditure requirements for the foreseeable future. Further, we believe that our operating cash flow will be in an amount sufficient to repay the existing term loan. However, we may raise additional capital from time to time.

Results of Operations

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003.

Sales

	Three Months Ended		Percent		Three Months Ended		Percent		Three Months Ended September 30, 2004 vs. 2003
	September 30, 2004		of Sales		September 30, 2003		of Sales		Dollar Change					Percent Change
Inamed Aesthetics - Breast	$	49.3	54	%	$	41.1	52	%	$		8.2			20	%
Inamed Health - Obesity intervention	22.2		24	%	16.2		19	%	6.0					37	%
Inamed Aesthetics - Facial	17.1		20	%	21.6		28	%	(4.5				)	-21	%
Other Products	1.4		2	%	1.2		1	%	0.2					17	%
Total	$	90.0	100	%	$	80.1	100	%	$			9.9		12	%

	Nine Months Ended		Percent		Nine Months Ended		Percent		Nine Months Ended September 30, 2004 vs. 2003
	September 30, 2004		of Sales		September 30, 2003		of Sales		Dollar Change					Percent Change
Inamed Aesthetics - Breast	$	159.5	57	%	$	131.0	55	%	$	28.5				22	%
Inamed Health - Obesity intervention	62.6		22	%	45.3		18	%	17.3					38	%
Inamed Aesthetics - Facial	55.0		20	%	61.6		26	%	(6.6				)	-11	%
Other Products	3.5		1	%	3.5		1	%	—					0	%
Total	$	280.6	100	%	$	241.4	100	%	$	39.2				16	%

Net sales (net of returns, discounts, and allowances), or sales, for the three and nine months ended September 30, 2004 and 2003, were affected by foreign exchange rate fluctuations positively by approximately 2% and 3%, and 3% and 4%, respectively.

Inamed Aesthetics—Breast. The growth for the three and nine months ended September 30, 2004 compared to the three and nine months ended September 30, 2003 of breast aesthetic sales was driven by several key factors:

• The acceptance of all aesthetics procedures has grown, including breast augmentation and reconstruction.

• Favorable demographics continue to emerge in the U.S. and internationally for various types of aesthetic procedures, including breast augmentation.

• Our physician practice building initiatives and consumer awareness programs. These include an advanced educational program for surgeons (Inamed Academy) and the company-sponsored LookingYourBest™ web site for consumers and surgeons.

• In the United States, we have seen a continued acceptance of the Style 68 smooth round saline matrix implants (primarily used for augmentation purposes) and the Style 10 and Style 20 smooth round silicone gel filled implants used in connection with the adjunct clinical study for breast reconstruction.

• Continued growth and acceptance internationally for our BioDIMENSIONAL™ Cohesive Gel Matrix™ products and line extensions such as the style 410, Soft Touch line, and the new style 510.

In 2004, we expect sales of breast aesthetics products to grow at a mid to high teen rate when compared to 2003.

Inamed Aesthetics—Facial. Facial aesthetics sales experienced a decrease during the three and nine months ended September 30, 2004 over the same periods ended September 30, 2003. This decrease was primarily the result of the introduction of a competing facial aesthetics product in the new hyaluronic acid class of products, called Restylane®, into the U.S. market in January of 2004. Our hyaluronic acid-based dermal filler, Hylaform®, was approved by the U.S. Food and Drug Administration, or FDA, in April 2004. In October 2004, the FDA approved another product in this line, Hylaform® Plus, a large particle size hyaluronic acid-based gel for mid to deep wrinkle correction.

Despite the additions of Hylaform® and Hylaform® Plus to our product line in the U.S., we expect the percentage decline of facial aesthetics sales in 2004 to decrease in the mid to high teens compared to 2003 due to the introduction of Restylane® in the U.S.

Inamed Health—Obesity Intervention. The increase in obesity intervention sales for the three and nine months ended September 30, 2004 was primarily due to the following:

• Strong sales of the LAP-BAND System in the U.S., aided by our targeted physician practice building program as well as public relations efforts.

• An increase in insurance coverage for LAP-BAND System procedures in the U.S and continued increase in peer reviewed articles supporting the safety and efficacy of the LAP-BAND System.

• Strong sales of the BIB System internationally.

• Obesity-related health issues have been widely publicized in the press and are anticipated by experts to continue for the foreseeable future.

For 2004, sales of obesity intervention products are expected to increase in excess of 30% compared to sales in 2003. We expect to achieve this growth by training and qualifying more physicians on the procedure, working to achieve broader reimbursement for the product and the procedure and educating consumers about the benefits of the LAP-BAND System versus other medical procedures.

Cost of Goods Sold

	Cost of goods sold		Percent of sales		Gross profit margin		Percentage point change in gross profit margin over prior year
Three Months Ended September 30, 2004	$	22.6	25.1	%	74.9	%	3.4

Three Months Ended September 30, 2003	$	22.8	28.5	%	71.5	%

Nine Months Ended September 30, 2004	$	71.1	25.3	%	74.7	%	3.0

Nine Months Ended September 30, 2003	$	68.4	28.3	%	71.7	%

The improvement of gross profit margins for the three and nine months ended September 30, 2004 over the same periods ended September 30, 2003 reflected a favorable product mix and the benefits of the global manufacturing program, which was completed during the first quarter of 2004. The global manufacturing program savings generated were primarily the result of reduced payroll costs and lower-cost manufacturing locations. The annual savings from the manufacturing consolidation is estimated to be a reduction in U.S. payroll and support costs of $10.0 million, with a corresponding 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 are reflected in cost of goods sold on the income statement. See Note 4 of the notes to the consolidated financial statements. The increase in our gross profit margin also reflected the fact that we had $0.0 and $0.4 million of accelerated depreciation relating to our global manufacturing consolidation for the three and nine months ended September 30, 2004, respectively, versus $0.9 and $2.7 million for the same periods ended September 30, 2003. The assets related to the manufacturing consolidation were fully depreciated in the first quarter of 2004, therefore we have had no further accelerated depreciation expense related to the manufacturing consolidation. In 2004, we expect cost of goods sold to be 26% to 28% and the gross profit margin to be 72% to 74% of sales.

Selling, General and Administrative (SG&A)

	SG&A		Percent of sales		Dollar change over prior year		Percent change over prior year
Three Months Ended September 30, 2004	$	38.8	43.1	%	$	5.1	15.1	%

Three Months Ended September 30, 2003	$	33.7	42.1	%

Nine Months Ended September 30, 2004	$	136.8	48.8	%	$	36.1	35.8	%

Nine Months Ended September 30, 2003	$	100.7	41.7	%

Selling and marketing expenses increased in absolute dollars and as a percentage of sales for the three and nine months ended September 30, 2004 over the same periods in 2003. The increase is primarily the result of royalty expenses related to the Ethicon settlement and other recently approved products, and investments in key sales and marketing programs to support the expansion of our worldwide Aesthetics franchise.

General and administrative expenses remained relatively flat in absolute dollars and decreased slightly as a percentage of sales for the three month period ended September 30, 2004 compared to the same quarter in 2003, and increased substantially in absolute dollars and as a percentage of sales for the nine months ended September 30, 2004 over the same period in 2003. This increase is primarily due to a $17.2 million charge related to our Ethicon patent settlement and related litigation costs in the second quarter of 2004. Excluding this non-recurring charge, selling, general and administrative expenses were $119.6 million, or 42.6% of sales, for the nine months ended September 30, 2004. Additionally, we have experienced increased information technology costs in support of our new ERP system. We present our selling, general and administrative numbers excluding the Ethicon settlement because such settlement is a non-recurring charge that is outside our normal business operations. The numbers are presented in a manner that is consistent with how management views our business.

We expect selling and marketing expenses to continue to increase over prior year due to the royalties payable per the settlement agreement with Ethicon. This agreement requires us to pay royalties on future U.S. sales of the LAP-BAND System, initially at 7.5%. Prior to this settlement, we 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 the FDA for the marketing of an adjustable gastric band sometime in the future. We will also pay Ethicon 3.5% on foreign sales of the LAP-BAND System. The U.S. and international royalties payable will decrease to 2.0% after June 20, 2011, and all our royalty obligations under the settlement agreement will expire no later than May 12, 2013.

Research and Development (R&D)

	R&D		Percent of sales		Dollar change over prior year		Percent change over prior year
Three Months Ended September 30, 2004	$	7.2	8.0	%	$	1.8	33.3	%

Three Months Ended September 30, 2003	$	5.4	6.7	%

Nine Months Ended September 30, 2004	$	19.1	6.8	%	$	2.9	17.9	%

Nine Months Ended September 30, 2003	$	16.2	6.7	%

The majority of our research and development expenses in the three and nine months ended September 30, 2004 and 2003 related to the clinical development programs for our Juvederm® and Hylaform® dermal fillers; our botulinum toxin Type A product, Reloxin®; the silicone gel and cohesive silicone gel breast implant clinical trials; and PMA applications as applicable in the U.S. The increase in R&D expense in the three and nine months ended September 30, 2004 over the same periods in 2003 was primarily due to the commencement of Phase III of the Reloxin trials and clinical investigations for Juvéderm, our non-animal, hyaluronic acid-based dermal filler.

In 2004, we expect research and development expenses will increase $7.0 to $9.0 million over 2003 and be in the range of $28.0 to $30.0 million. The expected increase is due to continual support of our:

• Reloxin Phase III trials in the U.S.;

• Juvéderm clinical investigation and development in the U.S.;

• Silicone and cohesive gel breast implant PMA applications in the U.S.;

• The BIB System feasibility study in the U.S.; and

• Pursuit of CosmoDerm® and CosmoPlast® approvals in International markets.

The increase in investment in R&D is essential to advance our strategic and market positions in our three main product lines around the world.

Amortization

For the three and nine months ended September 30, 2004, amortization of intangible assets was $1.3 million and $3.7 million, respectively, compared to $1.1 million and $3.0 million for the same periods in 2003. The increase was due to the purchase of new intangibles and the commencement of amortization on certain intangibles in the first and second quarters of 2004. We expect amortization expense on our existing intangibles to be approximately $5.0 million per year.

Restricted Stock Plan

In 2003 Inamed adopted the 2003 Restricted Stock Plan, which authorizes Inamed to issue shares of common stock to any employee, officer, consultant, or non-employee director. In the second quarter of 2004, the stockholders approved an amendment which increased the number of authorized shares by 150,000 shares to 300,000 shares. Restricted stock awards may be granted by the Board subject to vesting and any other restrictions (including a period during which vested shares may not be sold) as determined by the Board and stated in an award agreement. Restricted stock may not be sold or otherwise transferred or pledged until the restrictions lapse or are terminated.

	Authorized shares	Number of shares issued	Available for Issuance

The 2004 Restricted Stock Plan	300,000	142,500	157,500

The following chart summarizes the restricted stock-based compensation charges that have been included in the following captions of the income statement, for each of the periods presented (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004			2003	2004			2003
Cost of goods sold	$	83.2		—	$		249.5	—
Selling, general and administrative	$	443.5		—	$	1,330.5		—
	$		526.7	—	$		1,580.0	—

Interest Income (Expense)

The increase in net interest income (expense) of $1.7 and $8.9 million for the three and nine months ended September 30, 2004, respectively, compared to the same periods in 2003 is due to decreased debt levels after our refinancing in 2003, related lower interest rates, and unscheduled principal payments in 2003. Additionally, in the second quarter of 2003, we realized $3.5 million of unrealized losses on our interest rate swap. We also earned larger amounts of interest income in the current year, as we held higher balances of cash and cash equivalents and short-term investments.

	Three Months Ended September 30, 2004			Three Months Ended September 30, 2003			Nine Months Ended September 30, 2004			Nine Months Ended September 30, 2003
Interest income	$	0.4		$	0.2		$	1.4		$	0.6
Interest expense	(0.3		)	(1.8		)	(1.0		)	(9.1		)
Interest income (expense)	$	0.1		$	(1.6	)	$	0.4		$	(8.5	)

Foreign Currency

Foreign currency gains and losses fluctuate based largely upon the movements in the exchange rate of the dollar to the European Union (EU) Euro and the Japanese Yen. For the three and nine months ended September 30, 2004 and 2003, our net sales included approximately $1.9 and $7.6 million and approximately $2.0 and $9.4 million, respectively, of favorable exchange effects. Our exchange effect continues to be positive due to the strengthening Euro.

Royalty Income and Other

Royalty income, net of other expenses, was $1.2 and $3.5 million for the three and nine months ended September 30, 2004, respectively, compared to $1.0 and $3.3 million for the same periods in 2003.

Income Tax Expense

Our effective tax rate for the third quarter of 2004 was 22.0%, down from 24.0% for the third quarter of 2003. Our effective tax rates for the nine months ended September 30, 2004 and 2003 were approximately 17.9% and 22.9%, respectively. The lower tax rates in 2004 are mainly due to our Ethicon patent settlement in the second quarter which is fully deductible in the U.S., a high tax rate jurisdiction. Excluding the non-recurring Ethicon charge, the effective tax rates would have been approximately 22.0% and 23.2% for the three and nine months ended September 30, 2004, respectively. The higher rates are related to increased earnings in higher tax jurisdictions and the fact that certain items that reduced our worldwide tax burden in 2003 did not affect our worldwide effective tax rate in 2004. We expect our tax rate to be 24% to 26% for the full year of 2004. We present our effective tax rate excluding the Ethicon settlement because such settlement is a non-recurring charge that is outside our normal business operations which results in a one-time benefit to our effective tax rate.

Application of Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventories, adequacy of allowances for doubtful accounts, valuation of long-lived assets and goodwill, income taxes, litigation, and warranties. We base our estimates on historical and anticipated results and trends and on various other assumptions

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

Revenue Recognition

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

We recognize product revenue, net of sales discounts, returns and allowances, in accordance with Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition” and SFAS No. 48 “Revenue Recognition When Right of Return Exists.” Revenue is recognized when all four of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred and all significant contractual obligations have been satisfied; (iii) the fee is fixed or determinable; and (iv) collection is considered probable. Appropriate reserves are established for anticipated returns and allowances based on historical experience. We recognize revenue when title to the product and risk of loss transfer to customers provided there are no remaining performance obligations required of us or any matters requiring customer acceptance.

We allow for the return of product from doctors, hospitals, and clinics within a specified time frame, and record estimated sales returns as a reduction of sales in the same period revenue is recognized. We do not provide a right of return on facial products. We calculate these sales provisions based upon historical experience with actual returns. Actual returns in any future period are inherently uncertain and thus may differ from the estimates. If actual returns differ significantly from the estimates, an adjustment to revenue in the current or subsequent period would be recorded. Substantially all of the product returns relate to breast implants. We believe our estimates for anticipated returns is a “critical accounting estimate” because it requires us to estimate returns and, if actual returns vary, it could have a material impact on our reported sales and results of operations. Historically, our estimates of return rates have not fluctuated from the actual returns by more than 1% to 2%.

A portion of our revenue is generated from consigned inventory of breast implants maintained at doctors, hospitals and clinics locations. The customer is contractually obligated to maintain a specific level of inventory and to notify us upon use. For these products, revenue is recognized at the time we are notified by the customer that the product has been implanted. Notification is usually through the replenishing of the inventory and we periodically review consignment inventories to confirm accuracy of customer reporting. FDA regulations require tracking the sales of all implanted products.

Inventories

Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. We capitalize inventory costs associated with certain product candidates prior to regulatory approval, based on our judgment of probable worldwide future commercialization. As of September 30, 2004, Inamed holds no inventory for product candidates not yet approved by regulatory agencies. We believe our estimates of inventory values is a ‘‘critical accounting estimate’’ because we could be required to expense previously capitalized costs related to pre-approval inventory upon a change in such judgment, due to, among other factors, a decision denying approval of the product candidate by the necessary regulatory bodies, which could have a material impact on our results of operations.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of some of our customers to make required payments. The allowances for doubtful accounts are based on the analysis of historical bad debts, customer credit-worthiness, past transaction history with the customer, current economic trends, the accounts receivable aging, and changes in customer payment terms. We believe our estimates for our allowance for doubtful accounts is a ‘‘critical accounting estimate’’ because if the financial condition of our customers were to

deteriorate, adversely affecting their ability to make payments, additional allowances may be required, which could have a material impact on our results of operations.

Valuation of Long-lived Assets and Goodwill

We account for long-lived assets, other than goodwill in accordance with the provisions of SFAS No. 144, ‘‘Accounting for the Impairment and Disposal of Long Lived Assets,’’ which superceded SFAS No. 121 and certain sections of APB Opinion No. 30 specific to discontinued operations. SFAS No. 144 classifies long-lived assets as either (1) to be held and used, (2) to be disposed of by other than sale, or (3) to be disposed of by sale. This standard introduces a probability-weighted cash flow estimation approach to deal with situations in which alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or a range is estimated for the amount of possible future cash flows. SFAS No. 144 requires, among other things, that an entity review its long-lived assets and certain related intangibles for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Factors we consider important that could trigger an impairment review include substantial operating losses, significant negative industry trends and significant changes in how we use an asset. Upon the determination that an impairment review is required we would compare the carrying amounts of the long-lived asset to its fair value, which is determined using a discounted cash flow model. This model requires estimates of our future revenues, profits, capital expenditures, working capital and other relevant factors. We estimate these amounts by evaluating our historical trends, current budgets, operating plans, and other industry data. If the assets are considered to be impaired, the impairment charge is the amount by which the asset’s carrying value exceeds its fair value. As with all cash flow models there is an inherent subjectivity. The assumptions listed above could be different from actual results which would in turn create a different valuation. If these assumptions change in the future, we may be required to record impairment charges for those assets. With the exception of the manufacturing consolidation that occurred in 2002, we do not believe that any such changes have taken place. We will continue to monitor our long lived assets balances and conduct formal tests when impairment indicators are present.

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 impairment analysis and is tested for impairment on an annual basis, or more frequently as impairment indicators arise. The test for impairment involves the use of estimates related to the fair values of the business operations with which goodwill is associated. In accordance with SFAS No. 142 we evaluate the fair value of the reporting unit in relation to the carrying value of goodwill. As long as the fair value of the reporting unit exceeds the carrying value of the reporting unit’s goodwill and no specific circumstances indicate a loss in value for goodwill, no impairment charge will be recognized. If the fair value of the reporting unit is less than the carrying value of goodwill, we will measure the amount of the impairment loss and record an impairment charge based on a discounted cash flow model. Other intangible assets are amortized using the straight-line method over their estimated useful lives, which are periods of up to 21 years.

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

Income Taxes

Deferred income tax assets or liabilities are computed based on the temporary differences between the financial statement and income tax bases of assets and liabilities using the statutory marginal income tax rate in effect for the years in which the differences are expected to reverse. Deferred income tax expenses or credits are based on the changes in the deferred income tax assets or liabilities from period to period. We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. We consider our ability to carryback losses, forecasted earnings and future taxable income and feasible tax planning strategies in determining the need for and amount of a valuation allowance. We believe the estimate of our income tax assets, liabilities and expense are ‘‘critical accounting estimates’’ because if the actual income tax assets, liabilities and expenses differ from our estimates the outcome could have a material impact on our results of operations.

Litigation

We are involved in various litigation matters as a claimant and as a defendant. We record any amounts recovered in these matters when collection occurs. We record liabilities for claims against us when the losses are probable and can be reasonably estimated. Amounts recorded are based on reviews by outside counsel, in-house

counsel, and management. We believe that our estimate for litigation liabilities is a ‘‘critical accounting estimate’’ because actual amounts may differ from estimates and may materially impact our results of operations.

Product Warranties

We have an accrual for warranty programs for our breast implant sales in the United States, Europe, and certain other countries. We estimate the amount of potential future claims from these warranty programs based on actuarial analyses. Expected future obligations are determined based on the history 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 the balance sheet. Substantially all of the product warranty liability arises from the U.S. warranty program. The U.S. plan, in most cases, provides product replacement and one thousand two hundred to two thousand four hundred dollars of financial assistance for surgical procedures within ten years of implantation. The warranty program in non-U.S. markets have similar terms and conditions to the U.S. plan. We do not currently offer a warranty on our facial or health products and therefore no amount is included in the liability for those products. We do not warrant any level of aesthetic result and, as required by government regulation, make extensive disclosures concerning the risks of our products and implantation surgery. We believe that our estimate for product warranties is a ‘‘critical accounting estimate’’ because it requires us to estimate failure rates, claim amounts, and discount rates. Changes to actual claims and interest rates could have a material impact on the actuarial analyses which could materially impact our reported expenses and results of operations.

Recent Pronouncements

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,” which was originally effective on July 1, 2003. In December 2003, the FASB deferred the effective date for applying the provisions of FIN 46 to March 31, 2004 for interests held by public companies in variable interest entities or potential variable interest entities created prior to February 1, 2003. The adoption of FIN 46 did not have a material impact on our financial position or results from operations.

On March 31, 2004, the FASB issued an exposure draft, “Share-Based Payment, an Amendment of SFAS No. 123 and 95.” The exposure draft proposes to expense the fair value of share-based payments to employees beginning in late 2005. We are currently evaluating the impact of this proposed standard on our financial statements.

Risks and Uncertainties

IF WE ARE UNABLE TO AVOID SIGNIFICANT PRODUCT LIABILITY CLAIMS, PRODUCT RECALLS, OR INDEMNIFICATION CLAIMS, WE MAY BE FORCED TO PAY SUBSTANTIAL DAMAGE AWARDS, CLAIMS, AND OTHER EXPENSES THAT COULD EXCEED OUR ACCRUALS AND INSURANCE COVERAGE.

We have in the past been, currently are, and may in the future be subject to product liability claims alleging that the use of our technology or products has resulted in adverse health effects. These claims may be brought even

with respect to products that have received, or in the future may receive, regulatory approval for commercial sale. In particular, the manufacture and sale of breast implant products entails significant risk of product liability claims due to potential allegations of possible disease causation, transmission and other health factors, rupture or other product failure. Other breast implant manufacturers that suffered such claims in the past have been forced to cease operations or even to declare bankruptcy. We also face a substantial risk of product liability claims from our obesity intervention products and our facial aesthetics products. In addition to product liability claims, we may in the future need to recall or issue field corrections related to our products due to manufacturing deficiencies, labeling errors, or other safety or regulatory reasons. We have, from time to time, entered into indemnification agreements with health care practitioners with respect to certain clinical research studies. Pursuant to these agreements, we have agreed to indemnify the health care practitioners from third-party claims (in addition to product liability claims) resulting from or arising out of these studies.

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

Also at present, we are actively engaged in efforts to seek product-liability insurance coverage. However, to date, the Company and its brokers have not identified any carriers that are willing to sell us risk-shifting liability insurance on terms and conditions which are acceptable to the Company. While we continue to explore the feasibility of purchasing risk-shifting product liability insurance coverage from a third- party carrier or carriers, we cannot assure you that we will be successful in these efforts.

In addition, we continue to incur substantial costs and expenses as a result of liabilities related to the Trilucent breast implant product. Our Trilucent costs and expenses derive in part from the program announced by us on June 6, 2000, and include, among other things, continuing expenses of our explantation program, regulatory compliance, scientific and other investigative studies, bodily injury and financial loss claims, and related legal and defense costs. While we have insurance for some of these expenses and have also established accruals for them in addition to our insurance program, it is possible that the combined amount of our insurance and accruals may be insufficient to cover all our future Trilucent-related liabilities. In 2002, we came to final settlements with each of our two insurers for product liability claims arising from the Trilucent implant. Under one settlement, with MEDMARC Casualty Insurance Company, MEDMARC paid $6.0 million in cash to us in January 2003, $1.5 million cash to us in May 2003, and, effective November 16, 2002, agreed to make a policy with a limit of $10.0 million available to us for defense and indemnification of Trilucent-related bodily injury claims worldwide. The policy does not cover claims filed against us after November 7, 2005. There was approximately $3.3 million remaining on the policy commitment at December 31, 2003. This policy 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 $10.0 million available to us for the indemnification of non-U.S. Trilucent claims. There was $4.2 million remaining under this commitment at September 30, 2004 and approximately $6.2 million remaining at December 31, 2003.

In addition, at September 30, 2004, we had an accrual for future Trilucent claims, costs, and expenses of approximately $11.9 million, or $7.7 million net of insurance receivable. While we currently believe this amount is adequate, it is possible that our future Trilucent-related liabilities could exceed this amount. Further, the existing insurance coverage is subject to a number of conditions, notably, it does not apply to any claims which may be filed against us after November 7, 2005. Thus, our accruals and liability insurance coverage under the foregoing insurance policies may be inadequate to cover our future Trilucent-related liabilities, including our Trilucent-related bodily injury claims and other contingent liabilities.

Under the program announced on June 6, 2000, we have, through our AEI Inc. subsidiary, undertaken a comprehensive program of support and assistance for women who received Trilucent breast implants. Under this program, we are covering medical expenses associated with the removal and replacement of those implants for the approximately 8,500 women who received them. To date, we believe that more than 90% of the United Kingdom residents and more than two-thirds of the women in the rest of the world who had these implants have had them removed. The product was not sold commercially in the United States, only through clinical trials. To date, an insurance company has honored its policy commitment to reimburse us for most of the medical expenses incurred in connection with this explantation program and is obligated under the same policy to cover 75% of these expenses in the future. We are currently engaged in efforts to explant the remainder of the Trilucent patients prior to the

expiration of this policy in February 2005. However, there can be no assurance that we will be able to complete this program prior to February 2005 and hence it is possible that we will incur material liabilities for Trilucent-related explantation expenses after that date, for which we would not have insurance coverage.

Recipients of the Trilucent implants have also asserted claims and brought legal proceedings against the Company, AEI, Inc. (a subsidiary of the Company), other affiliated and unaffiliated entities, and persons alleging bodily injury and financial loss as a result of the implantation and explantation of their Trilucent implants. To date, we have been able to resolve these claims within our accruals and with insurance proceeds. In the United Kingdom and Spain, we have entered into protocols under which 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 legal causation. In the United Kingdom, while we have been successful in settling the vast majority of claims, we have yet to finally adjudicate more than 100 claims in which women in the U.K. are claiming “serious medical complications” from their Trilucent explantation procedure. See Part II, Item 1 Legal Proceedings. In Spain, although approximately 310 women have accepted our protocol, approximately 59 have commenced individual legal proceedings and a Spanish consumer union has commenced a single action in which it alleges that it represents approximately 40 Spanish Trilucent explantees. More than 790 Spanish women were explanted and hence 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 these women may now be time-barred under Spanish law. We are also facing Trilucent related claims and legal proceedings in Germany, Belgium, Italy and other countries. In Germany, where as many as 1,500 to 2,000 women are believed to have been implanted with Trilucent implants, approximately 950 have been explanted, but only approximately 150 have made claims for bodily injury or financial loss (although we have already paid for their explants). By reason of adverse publicity concerning Trilucent implants in 2003 and the announced closure as of December 31, 2003 of our explantantion program, the rate of filing of new Trilucent related bodily injury claims by women in Germany, Belgium, Italy and other European countries may increase in 2004 or in the following years.

In addition, under U.K. and Spanish law, the release granted to us under our settlement protocol is necessarily provisional, and each participating claimant reserves the right to pursue a future claim should she develop cancer or reproductive abnormalities. On August 4, 2004, the Trilucent Scientific Advisory Panel (TSAP) delivered a report to the successor entity to the MDA in the United Kingdom, known as the MHRA. In its report, issued after more than three (3) years of research, the TSAP concluded that there is no scientific evidence that Trilucent implants pose a significant systemic risk to human health but that the removal of the implants on precautionary grounds was and is appropriate. Although our regulator in the U.K. has determined that no further studies of Trilucent are currently required, we could also be obligated to fund scientific or epidemiologic research, or incur expenses for medical monitoring, that are in excess of the spending levels which are currently forecast. As a result of these and other factors, the total amount of accruals and insurance available to address our future Trilucent-related liabilities may be insufficient and we may need to make additional provisions for Trilucent related liabilities in the future.

IF WE SUFFER NEGATIVE PUBLICITY CONCERNING THE SAFETY OF OUR PRODUCTS, OUR SALES MAY BE HARMED AND WE MAY BE FORCED TO WITHDRAW PRODUCTS.

Physicians and potential and existing patients may have a number of concerns about the safety of our products, including our breast implants, obesity intervention products and facial dermal fillers, whether such concerns have a basis in generally accepted science or peer-reviewed scientific research or not. Negative publicity—whether accurate or inaccurate—about our products, based on, for example, news about breast implant litigation or regulatory 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 could result in product withdrawals. In addition, significant negative publicity could result in an increased number of product liability claims, whether or not these claims have a basis in scientific fact.

OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SUBSTANTIAL FLUCTUATIONS AND ANY FAILURE TO MEET FINANCIAL EXPECTATIONS FOR ANY FISCAL QUARTER MAY DISAPPOINT SECURITIES ANALYSTS AND INVESTORS AND COULD CAUSE OUR STOCK PRICE TO DECLINE.

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

• changes in demand for our products;

• our ability to meet the demand for our products;

• on-going and increased competition;

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

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

• changes in pricing policies by us and our competitors;

• the timing of significant orders and shipments;

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

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

• general economic factors, such as foreign exchange rates.

As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and you should not rely upon these comparisons as indications of future performance. These factors may cause our operating results to be below securities analysts’ expectations in some future quarters, which could cause the market price of our stock to decline.

IF CHANGES IN THE ECONOMY AND CONSUMER SPENDING REDUCE CONSUMER DEMAND FOR OUR PRODUCTS, OUR SALES AND PROFITABILITY WILL SUFFER.

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

Reimbursement for obesity surgery, including use of our products, is available to various degrees in most of our international markets. In the United States, reimbursements by insurance plans are increasing, but reimbursement is not widely available to all insured patients at this time. Adverse changes in the economy could have an adverse effect on consumer spending and governmental health care resources. This shift could have an adverse effect on the sales and profitability of our obesity intervention business.

IF WE ARE UNABLE TO CONTINUE TO DEVELOP AND MARKET NEW PRODUCTS AND TECHNOLOGIES, WE MAY EXPERIENCE A DECREASE IN DEMAND FOR OUR PRODUCTS OR OUR PRODUCTS COULD BECOME OBSOLETE.

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

There is also a risk that our products may not gain market acceptance among physicians, patients and the medical community generally. The degree of market acceptance of any medical device or other product that we develop will depend on a number of factors, including demonstrated clinical efficacy and safety, cost-effectiveness,

potential advantages over alternative products, and our marketing and distribution capabilities. Physicians will not recommend our products until clinical data or other factors demonstrate their safety and efficacy compared to other competing products. Even if the clinical safety and efficacy of using our products is established, physicians may elect not to recommend using them for any number of other reasons, including whether our products best meet the particular needs of the individual patient.

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

IF CLINICAL TRIALS FOR OUR PRODUCTS ARE UNSUCCESSFUL OR DELAYED, WE WILL BE UNABLE TO MEET OUR ANTICIPATED DEVELOPMENT AND COMMERCIALIZATION TIMELINES, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.

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

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

• lack of efficacy during the clinical trials;

• unforeseen safety issues;

• slower than expected patient recruitment; and

• government or regulatory delays.

The results from pre-clinical testing and early clinical trials are often not predictive of results obtained in later clinical trials. A number of new products have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals. Data obtained from pre-clinical and clinical activities are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, regulatory delays or rejections may be encountered as a result of many factors, including perceived defects in the design of the clinical trials and changes in regulatory policy during the period of product development. Any delays in, or termination of, our clinical trials will materially and adversely affect our development and commercialization timelines, which would cause our stock price to decline.

IF OUR COLLABORATIVE PARTNERS DO NOT PERFORM, WE WILL BE UNABLE TO DEVELOP PRODUCTS AS ANTICIPATED.

We have entered into collaborative arrangements with third parties to develop certain products. We cannot assure you that these collaborations will produce successful products. If we fail to maintain our existing collaborative arrangements or fail to enter into additional collaborative arrangements, the number of products from which we could receive future revenues would decline.

Our dependence on collaborative 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 significant discretion in electing whether or not to pursue any of the planned activities. We cannot control the amount and timing of resources our collaborative partners may devote to products based on the collaboration, and our partners may choose to pursue alternative products. Our partners may not perform their obligations as expected. Business combinations, significant changes in a collaborative partner’s business strategy, or its access to financial resources may adversely affect a partner’s willingness or ability to complete its obligations under the arrangement. Moreover, we could become involved in disputes with our partners, which could lead to delays or termination of the collaborations and time-consuming and expensive litigation or arbitration. Even if we fulfill our obligations under a collaborative agreement, our partner can terminate the agreement under certain

circumstances. If any collaborative partner were to terminate or breach our agreement with it, or otherwise fail to complete its obligations in a timely manner, our chances of successfully commercializing products would be materially and adversely affected.

OUR FAILURE TO ATTRACT AND RETAIN KEY MANAGERIAL, TECHNICAL, SELLING AND MARKETING PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS

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

We must continue to attract, train and retain managerial, technical, selling and marketing personnel. Competition for such highly skilled employees in our industry is high, and we cannot be certain that we will be successful in recruiting or retaining such personnel. We also believe that our success depends to a significant extent on the ability of our key personnel to operate effectively, both individually and as a group. If we are unable to identify, hire and integrate new employees in a timely and cost-effective manner, our operating results may suffer.

IF OUR INTELLECTUAL PROPERTY RIGHTS DO NOT ADEQUATELY PROTECT OUR PRODUCTS OR TECHNOLOGIES, OTHERS COULD COMPETE AGAINST US MORE DIRECTLY, WHICH WOULD HURT OUR PROFITABILITY.

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

In addition to patents and trademarks, we rely on trade secrets and proprietary know-how. We seek protection of these rights, in part, through confidentiality and proprietary information agreements. These agreements may not provide meaningful protection or adequate remedies for violation of our rights in the event of unauthorized use or disclosure of confidential and proprietary information. Failure to protect our proprietary rights could seriously impair our competitive position.

IF THIRD PARTIES CLAIM WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY RIGHTS, WE COULD SUFFER SIGNIFICANT LITIGATION OR LICENSING EXPENSES OR BE PREVENTED FROM MARKETING OUR PRODUCTS.

Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of others. However, regardless of our intent, our technologies may infringe the patents or violate other proprietary rights of third parties. In the event of such infringement or violation, we may face litigation, become subject to damages, and may be prevented from selling existing products and pursuing product development or commercialization. At present, we are a party in one such matter. See Part II, Item 1. Legal Proceedings, Patents and License Litigation, Manders Matter.

WE DEPEND ON A SOLE OR LIMITED NUMBER OF SUPPLIERS FOR CERTAIN PRODUCTS AND RAW MATERIALS AND THE LOSS OF ANY SUPPLIER COULD ADVERSELY AFFECT OUR ABILITY TO MANUFACTURE AND/OR SELL MANY OF OUR PRODUCTS.

We currently rely on a single supplier for silicone raw materials used in many of our products. Although we have an agreement with this supplier to transfer the necessary formulations to us in the event that it cannot meet our

requirements, we cannot guarantee that we would be able to produce a sufficient amount of quality silicone raw materials in a timely manner. We also depend on third party manufacturers for silicone molded components, Hylaform and Juvederm/Hydrafill product lines, and silicone facial implants. In addition, we currently rely on Smith and Nephew and Immucor Corporation for the supply of human collagen mesh, used in the production of CosmoDerm and CosmoPlast.

If there is any disruption in the supply of these finished goods or raw materials, our sales and profitability for the affected products would be adversely affected.

OUR ABILITY TO SELL BOVINE COLLAGEN-BASED PRODUCTS COULD BE ADVERSELY AFFECTED IF WE EXPERIENCE PROBLEMS WITH THE CLOSED HERD OF DOMESTIC CATTLE FROM WHICH WE DERIVE THESE PRODUCTS.

We rely on two closed herds of domestic cattle that are kept apart from all other cattle for the production of our bovine collagen-based products. If these herds suffered a significant reduction or became unavailable to us, we would have a limited ability to access a supply of acceptable bovine collagen from a similarly segregated source. A significant reduction in the supply of bovine collagen could have a material adverse effect on our ability to sell bovine collagen-based products.

OUR INTERNATIONAL BUSINESS EXPOSES US TO A NUMBER OF RISKS.

More than one-third of our sales are derived from international operations. Accordingly, any material decrease in foreign sales would have a material adverse effect on our overall sales and profitability. Most of our international sales are denominated in U.S. dollars, Euros, or Yen. Depreciation or devaluation of the local currencies of countries where we sell our products may result in our products becoming more expensive in local currency terms, thus reducing demand. In addition, we manufacture and assemble the majority of our breast implant products and obesity intervention products in Ireland and in Costa Rica. An increased percentage of our operating expenses is denominated in currencies other than the U.S. dollar due to the elimination of Santa Barbara manufacturing. We cannot guarantee that we will not experience unfavorable currency fluctuation effects in future periods, which could have an adverse effect on our operating results. Our operations and financial results also may be significantly affected by other international factors, including:

• foreign government regulation of our products;

• product liability, intellectual property and other claims;

• new export license requirements;

• political or economic instability in our target markets;

• trade restrictions;

• changes in tax laws and tariffs;

• inadequate protection of intellectual property rights in some countries;

• managing foreign distributors, manufacturers and staffing;

• managing foreign branch offices; and

• competition.

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

WE ARE SUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS.

The production and marketing of our products and our ongoing research and development, pre-clinical testing and clinical trial activities are subject to extensive regulation and review by numerous governmental authorities both in the U.S. and abroad. Most of the products we develop must undergo rigorous pre-clinical and clinical testing and an extensive regulatory approval process before they can be marketed. This process makes it longer, harder and more costly to bring our products to market, and we cannot guarantee that any of our products will be approved, or, once approved, not recalled. The pre-marketing approval process can be particularly expensive, uncertain and lengthy, and a number of products for which FDA approval has been sought by other companies have never been approved for marketing. In addition to testing and approval procedures, extensive regulations also govern marketing, manufacturing, distribution, labeling, and record-keeping procedures. If we do not comply with applicable regulatory requirements, such violations could result in warning letters, non-approval, suspensions of regulatory approvals, civil penalties and criminal fines, product seizures and recalls, operating restrictions, injunctions, and criminal prosecution.

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

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

From time to time, legislative or regulatory proposals are introduced that could alter the review and approval process relating to our products. It is possible that the FDA or other governmental authorities will issue additional regulations further restricting the sale of our present or proposed products. Any change in legislation or regulations that govern the review and approval process relating to our current and future products could make it more difficult and costly to obtain approval for new products, or to produce, market, and distribute existing products.

HEALTHCARE REFORM LEGISLATION COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS.

If any national healthcare reform or other legislation or regulations are passed that imposes limits on the number or type of medical procedures that may be performed or that has the effect of restricting a physician’s ability to select specific products for use in patient procedures, such changes could have a material adverse effect on the demand for our products. In the U.S., there have been, and we expect that there will continue to be, a number of federal and state legislative and regulatory proposals to implement greater governmental control over the healthcare industry. These proposals create uncertainty as to the future of our industry and may have a material adverse effect on our ability to raise capital or to form collaborations. In a number of foreign markets, the pricing and profitability of healthcare products are subject to governmental influence or control. In addition, legislation or regulations that impose restrictions on the price that may be charged for healthcare products or medical devices may adversely affect our sales and profitability.

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

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

OUR STOCK PRICE HAS BEEN VOLATILE AND OUR TRADING VOLUME HAS HISTORICALLY BEEN LOWER THAN THAT OF MANY NASDAQ LISTED STOCKS.

The trading price of our common stock has been, and may be, subject to wide fluctuations in response to a number of factors, many of which are beyond our control. These factors include:

• quarter-to-quarter variations in our operating results;

• the results of testing, technological innovations, or new commercial products by us or our competitors;

• governmental actions, regulations, rules, and orders;

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

• changes in earnings estimates by securities analysts;

• developments and litigation concerning patents or other intellectual property rights;

• litigation or public concern about the safety of our products; and

• resignation of senior officers.

Historically, the daily trading volume of our common stock has been relatively low compared to that of many other NASDAQ listed stocks. We cannot guarantee that an active public market for our common stock will be sustained or that the average trading volume will remain at present levels or increase. In addition, the stock market in general and the NASDAQ National Market in particular experience significant price and volume fluctuations. Volatility in the market price for particular companies has often been unrelated or disproportionate to the operating performance of those companies. Broad market factors may seriously harm the market price of our common stock, regardless of our operating performance. In addition, securities class action litigation has often been initiated following periods of volatility in the market price of a company’s securities. A securities class action suit against us could result in substantial costs, potential liabilities, and the diversion of management’s attention and resources.

LITIGATION MAY HARM OUR BUSINESS OR OTHERWISE DISTRACT OUR MANAGEMENT.

Substantial, complex or extended litigation could cause us to incur large expenditures and distract our management. For example, lawsuits by employees, stockholders, customers, or competitors could be very costly and substantially disrupt our business. Disputes from time to time with such companies or individuals are not

uncommon, and we cannot assure you that that we will always be able to resolve such disputes out of court or on terms favorable to us.

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

The reports of publicly-traded companies are subject to review by the SEC from time to time for the purpose of assisting companies in complying with applicable disclosure requirements and to enhance the overall effectiveness of companies public filings, and comprehensive reviews of such reports are now required at least every three years under the Sarbanes-Oxley Act of 2002. SEC reviews may be initiated at any time. While we believe that our previously filed SEC reports comply, and we intend that all future reports will comply in all material respects with the published rules and regulations of the SEC, we could be required to modify or reformulate information contained in prior filings as a result of an SEC review. Any modification or reformulation of information contained in such reports could be significant and result in material liability to us and have a material adverse impact on the trading price of our common stock.

OUR INTERNAL CONTROL OVER FINANCIAL REPORTING MAY NOT BE CONSIDERED EFFECTIVE WHICH COULD RESULT IN A LOSS OF INVESTOR CONFIDENCE IN OUR FINANCIAL REPORTS, AND IN TURN HAVE AN ADVERSE EFFECT ON OUR STOCK PRICE.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 10-K for the fiscal year ending December 31, 2004, we will be required to furnish a report by our management on our internal control over financial reporting. Such report will contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. Such report will also contain a statement that our auditors have issued an attestation report on management’s assessment of such internal controls.

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) provides a framework for companies to assess and improve their internal control systems. While we feel that our key controls are currently effective, we continue to enhance our internal controls over financial reporting by adding additional resources in key functional areas and bringing all of our operations up to the level of documentation, segregation of duties, and systems security necessary, as well as transactional control procedures required, under newly promulgated standards.

We are currently performing the system and process documentation and evaluation needed to comply with Section 404, which is both costly and challenging. During this process, if our management identifies one or more material weaknesses in our internal control over financial reporting, we may be unable to assert such internal control is effective. If we are unable to assert that our internal control over financial reporting is effective as of December 31, 2004 (or if our auditors are unable to attest that our management’s report is fairly stated or they are unable to express an opinion on our management’s evaluation or on the effectiveness of the internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which in turn could have an adverse effect on our stock price.

IF WE ARE REQUIRED TO RECORD COMPENSATION EXPENSE IN CONNECTION WITH STOCK OPTION GRANTS, OUR PROFITABILITY MAY BE REDUCED SIGNIFICANTLY.

The Financial Accounting Standards Board (“FASB”) has recently proposed an accounting standard that will require the fair value of all equity-based awards granted to employees be recognized in the income statement as compensation expense. The various methods for determining the fair value of stock options are based on, among other things, the volatility of the underlying stock. As noted above, our stock price has historically been volatile. Therefore, the adoption of an accounting standard requiring companies to expense stock options could negatively affect our profitability and may adversely affect our stock price. Such adoption could also limit our ability to continue to use stock options as an incentive and retention tool, which could, in turn, hurt our ability to recruit employees and retain existing employees. The FASB is expected to issue final rules on stock option expensing in late 2004. We will continue to monitor the FASB’s progress on the issuance of this standard.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Exposure- Based on our overall interest rate exposure at September 30, 2004, which was primarily variable rate debt, a hypothetical 10% change in interest rates applied to our outstanding debt as of September 30, 2004, would have no material impact on earnings, cash flows, or fair values of interest rate risk sensitive instruments over a one-year period. At September 30, 2004 Inamed did not have an interest rate swap.

PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

BREAST IMPLANT LITIGATION

Trilucent Breast Implant Matters

When the Company purchased Collagen in September 1999, Inamed assumed certain liabilities relating to the Trilucent breast implant, a soybean oil-filled breast implant, which had been manufactured and distributed by various subsidiaries of Collagen 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 Devices Agency, or MDA, announced the voluntary suspension of marketing and withdrawal of the Trilucent implant in the U.K. The MDA stated that its actions were taken as a precautionary measure and did not identify any immediate hazard associated with the use of the product. The MDA further stated that it sought the withdrawal because it had received “reports of local complications in a small number of women” who had received those implants, involving localized swelling. The same notice stated that there “has been no evidence of permanent injury or harm to general health” as a result of these implants. In March 1999, Collagen agreed with the U.K. National Health Service that, for a period of time, 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’s notified body in Europe suspended the product’s CE Mark pending further assessment of the long-term safety of the product. Sierra Medical has since stopped sales of the product. Subsequent to acquiring Collagen, Inamed elected to continue the voluntary program.

Inamed estimates that approximately 8,000-9,000 women 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 women received Trilucent breast implants in two clinical studies; enrollment in both studies ended by June 1997.

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

Concurrently with the MDA announcement of June 6, 2000, Inamed announced that, through its AEI, Inc. subsidiary, it had undertaken a comprehensive program of support and assistance for women who have received Trilucent breast implants, under which it is covering medical expenses associated with the removal and replacement of those implants for women in the European Community, the U.S. and other countries. After consulting with competent authorities in each affected country, the Company terminated this support program effective as of December 31, 2004 in all countries other than the United States and Canada. Notwithstanding the termination of the general program, Inamed may continue to pay for explanations and related expenses if a patient can justify her delay in having her Trilucent implants removed on medical grounds or owing to lack of notice. Under this program, the Company may pay a fee to any surgeon who conducts an initial consultation with any Trilucent implantee. The Company also pays for the explantation procedure and related costs, and for replacement (non-Trilucent) implants for women who are candidates for and who desire them. To date, more than 90% of the U.K. residents and more than two-thirds of the non-U.K. residents who have requested explantations as a result of an initial consultation have had them performed. To date, an insurance company has reimbursed Inamed for approximately 70% of these expenses. Going forward, the insurance company is obligated to reimburse Inamed for not less than 75% of these expenses, up to an aggregate of $50.0 million in coverage through February 15, 2005.

In 2000-2001, Inamed was sued in various litigations in 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 to any Trilucent related court proceedings in the United States at this time.

Also, 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 compensation for general 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 settlement protocol with the lead solicitor for the U.K. claimants. The protocol affords a fixed level of compensation to qualified claimants who, in an uncomplicated surgical procedure, have had their Trilucent breast implants explanted in reliance on the June 2000 MDA hazard notice. The protocol also affords a mechanism for the efficient resolution of any claims alleging that the early explantation of Trilucent implants involved serious surgical complications or resulted in a medical condition, which required either extended hospitalization or extended home care. To date, more than 90% of the U.K. women who have had their Trilucent implants explanted since June 2000, represented by more than 90 different solicitors, have sought compensation through the settlement protocol. To date, no such woman has brought civil proceedings.

In addition, in Spain, Inamed has offered a protocol similar in structure to the United Kingdom protocol. To date, we have received approximately 310 claims under the Spanish protocol. In addition, a Spanish consumer union has commenced a single action in which the consumer union alleges that it represents approximately 40 Spanish Trilucent explantees. Finally, approximately 59 women have commenced individual legal proceedings. To date, 10 of these proceedings have proceeded to judgment. We have won 5, and lost 5, of these cases. Damages in the cases we lost have averaged $18,000 per case. We have taken appeals in 5 of the cases. Three of the claimants in cases decided adversely to them are taking appeals.

In 2002, Inamed came to final settlements with each of its two insurers for product liability claims arising from the Trilucent implant. Under one settlement, with MEDMARC Casualty Insurance Company, MEDMARC paid $6.0 million in cash to Inamed in January 2003, and $1.5 million in cash in May 2003, and, effective November 16, 2002, agreed to make a policy with a limit of $10.0 million available to the Company for defense and indemnification of Trilucent-related bodily injury claims worldwide. The policy does not cover claims filed against us after November 7, 2005. As of June 30, 2004 we had no remaining coverage under this policy. Under the second settlement, AISLIC, an AIG company, agreed to make an excess policy with a limit of $10.0 million available to the Company for the indemnification of non-U.S. Trilucent claims. There was approximately $4.2 million remaining under this commitment at September 30, 2004. As a result of these settlements, we released both carriers from any other actual or potential financial claims under the policies and dismissed all carrier related litigation with prejudice.

By agreement with the MDA, Inamed funded additional scientific research and patient monitoring relating to Trilucent. On August 4, 2004, the Trilucent Scientific Advisory Panel delivered a report to the successor entity to the MDA in the United Kingdom, known as the MRHA. In its report, issued after more than three (3) years of research, the TSAP concluded that there is no scientific evidence that Trilucent implants pose a significant systemic risk to human health but that the removal of the implants on precautionary grounds was and is appropriate.

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

1. the recommendation that Trilucent breast implants should be removed remains appropriate because exposure to local tissue to toxic compounds has been confirmed;

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

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

In addition, at September 30, 2004, Inamed had an accrual for future Trilucent claims, costs, and expenses of approximately $7.7 million, net of insurance.

Based upon the information and analyses currently available to the Company, the Company believes that its current accruals and available insurance coverage are sufficient to discharge future Trilucent related liabilities; however, there can be no assurances that the future Trilucent liabilities will not exceed the current accruals and insurance coverage.

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

Not Applicable

ITEM 3. Defaults Upon Senior Securities

Not Applicable

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

Not Applicable

ITEM 5. Other Information

None

ITEM 6. Exhibits

The following exhibits are filed as part of this Quarterly Report on Form 10-Q:

Exhibit No.		Description
2.1		Agreement and Plan of Merger dated as of December 22, 1998 by and between Inamed Corporation and Inamed Corporation (Delaware). (Incorporated herein by reference to Exhibit 2.1 of Inamed’s Current Report on Form 8-K filed with the Commission on December 30, 1998.)
2.2		Agreement and Plan of Merger, dated as of July 31, 1999, by and among Inamed Corporation, Inamed Acquisition Corporation and Collagen Aesthetics, Inc. (Incorporated herein by reference to Exhibit (c)(1) to Schedule 14D-1 filed by Inamed Corporation and Inamed Acquisition Corporation with the Commission on August 4, 1999.)
3.1		Inamed’s Restated Certificate of Incorporation, as amended December 22, 1998. (Incorporated herein by reference to Exhibit 3.1 of Inamed’s Annual Report on Form 10-K filed with the Commission on March 29, 1999.
3.2		Inamed’s By-Laws, as amended December 22, 1998. (Incorporated herein by reference to Exhibit 3.2 of Inamed’s Annual Report on Form 10-K filed with the Commission on March 29, 1999.
4.1		Registration Rights Agreement, dated as of September 30, 1998. (Incorporated herein by reference to Exhibit 99.10 of Inamed’s Current Report on Form 8-K filed with the Commission on October 15, 1998.)
4.2		Registration Rights Agreement by and between Inamed Corporation and Santa Barbara Bank and Trust, as trustee, dated as of November 5, 1998. (Incorporated herein by reference to Exhibit 99.9 of Inamed’s Current Report on Form 8-K filed with the Commission on November 19, 1998.)
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.)
10.51		Amended and Restated Employment Agreement by and between Inamed Corporation and Nicholas L. Teti, dated as of October 18, 2004. (Incorporated herein by reference to Exhibit 10.51 of Inamed’s Current Report on Form 8-K filed with the Commission on November 4, 2004.)

Delaware		59-0920629
(State of Incorporation)		(I.R.S. Employer Identification No.)

*PART I – FINANCIAL INFORMATION*

Item 1.			Financial Statements (unaudited)

	Consolidated Balance Sheets

	Consolidated Statements of Income

	Consolidated Statements of Stockholders’ Equity and Comprehensive Income

	Consolidated Statements of Cash Flows

	Notes to the Consolidated Financial Statements

Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.			Quantitative and Qualitative Disclosures About Market Risk

Item 4.			Controls and Procedures

*PART II – OTHER INFORMATION*

Item 1.		Legal Proceedings

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

Item 3.		Defaults Upon Senior Securities

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

Item 5.		Other Information

Item 6.		Exhibits

*SIGNATURES*

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

	INAMED CORPORATION


	By:	/s/ Nicholas L. Teti
		Nicholas L. Teti, Chairman, President and Chief Executive Officer (Principal Executive Officer)
November 8, 2004

	By:	/s/ Declan Daly
		Declan Daly, Executive Vice President and Chief Financial Officer (Principal Financial Officer)
November 8, 2004

NOTE 1 – INTERIM FINANCIAL STATEMENTS

NOTE 2 – DESCRIPTION OF BUSINESS

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 4 – RESTRUCTURING COSTS

NOTE 5 – NET INCOME PER SHARE RECONCILIATION (Per share data shown as actual, not millions)

NOTE 6 – INVENTORIES

NOTE 7 – SALES BY PRODUCT LINE/GEOGRAPHICALLY

NOTE 8 – INTEREST RATE SWAP

NOTE 9 – INTEREST INCOME AND INTEREST EXPENSE

NOTE 16 – SUBSEQUENT EVENTS