INAMED CORP - 10-Q Quarterly Report

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

INAMED CORPORATION AND SUBSIDIARIES

(Unaudited)

(millions, except par value)

	March 31, 2005			December 31, 2004
Assets

Current assets:
Cash and cash equivalents	$	79.6		$	107.2
Short-term investments	55.9			23.1
Trade accounts receivable, net of allowances of $18.7 in 2005 and 2004	76.8			69.2
Inventories, net	58.9			56.0
Prepaid expenses and other current assets	15.9			13.5
Deferred income taxes	10.9			2.9
Total current assets	298.0			271.9
Property and equipment, net	61.4			62.5
Goodwill	151.5			151.9
Other intangible assets, net	50.4			50.9
Deferred income taxes	21.7			30.1
Other assets	2.6			2.8
Total assets	$	585.6		$	570.1

Liabilities and Stockholders’ Equity

Current liabilities:
Current portion of long-term debt	$	15.0		$	12.5
Accounts payable	27.4			20.8
Income taxes payable	7.1			6.2
Accrued liabilities and other	40.9			41.5
Total current liabilities	90.4			81.0

Long-term debt, net of current portion	—			10.0
Other long-term liabilities	33.8			32.8
Commitments and contingencies (see note 14)
Stockholders’ equity:
Common stock, $0.01 par value; authorized 100.0 shares; issued and outstanding 36.1 and 35.9 shares for 2005 and 2004, respectively	0.4			0.4
Additional paid-in capital	254.5			244.8
Retained earnings	205.7			192.0
Deferred compensation	(8.6		)	(4.8		)
Accumulated other comprehensive income	9.4			13.9
Total stockholders’ equity	461.4			446.3
Total liabilities and stockholders’ equity	$	585.6		$	570.1

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 March 31, 2005			Three Months Ended March 31, 2004

Net sales	$	105.2		$	90.8
Cost of goods sold	29.2			24.9
Gross profit	76.0			65.9
Operating expenses:
Selling, general and administrative (see note 2)	46.8			37.4
Research and development	9.8			5.2
Restructuring charges	(0.4		)	—
Amortization of intangible assets	1.4			1.1
Total operating expenses	57.6			43.7
Operating income	18.4			22.2

Other income:

Net interest income and debt costs	0.2			0.4
Foreign currency transaction gains	0.1			0.1
Royalty income and other	1.0			1.0
Total other income, net	1.3			1.5
Income before income tax expense	19.7			23.7

Income tax expense	6.0			6.2
Net income	$	13.7		$	17.5
Net income per share of common stock:

Basic	$	0.38		$	0.50
Diluted	$	0.38		$	0.49
Weighted average shares outstanding:

Basic	36.0			35.4
Diluted	36.5			35.8

See accompanying notes to unaudited consolidated financial statements.

INAMED CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

(millions)

											Accumulated
	Common Stock			Additional							Other			Total
	(Issued)			Paid-in		Retained		Deferred			Comprehensive			Stockholders’
	Shares	Amount		Capital		Earnings		Compensation			Income (Loss)			Equity
Balance, December 31, 2004	35.9	0.4		244.8		192.0		(4.8		)	13.9			446.3
Comprehensive income:
Net income						13.7								13.7
Translation adjustment											(4.5		)	(4.5		)
Total comprehensive income														9.2
Restricted stock grant	0.1			4.4				(4.4		)				—
Employee stock purchase plan				2.3										2.3
Amortization of stock compensation								0.6						0.6
Exercise of stock options	0.1			2.7										2.7
Tax benefit of option exercises				0.3										0.3
Balance, March 31, 2005	36.1	$	0.4	$	254.5	$	205.7	$	(8.6	)	$	9.4		$	461.4

See accompanying notes to unaudited consolidated financial statements.

INAMED CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(millions)

	Three Months Ended, March 31, 2005			Three Months Ended, March 31, 2004
Cash flows from operating activities:
Net income	$	13.7		$	17.5
Non-cash elements included in net income:
Depreciation and amortization	3.8			3.5
Tax benefit from stock option exercises	0.3			0.9
Deferred income taxes	0.4			4.3
Non-cash compensation	0.6			0.6
Provision for doubtful accounts	0.6			1.1
Amortization of deferred loan costs	0.1			0.1
Changes in operating assets and liabilities:
Trade accounts receivable	(9.6		)	(2.3		)
Inventories	(3.6		)	(3.6		)
Prepaid expenses and other current assets	(2.6		)	(0.5		)
Other assets	0.6			2.5
Accounts payable	6.7			2.8
Income taxes payable	1.3			0.4
Accruals and other long-term liabilities	0.9			(6.9		)
Net cash provided by operating activities	13.2			20.4

Cash flows from investing activities:

Purchase of property and equipment	(2.3		)	(4.4		)
Purchase of investments	(42.6		)	(4.2		)
Proceeds from maturities of investments	9.5			—
Purchase of intangibles	(1.0		)	(9.2		)
Net cash used in investing activities	(36.4		)	(17.8		)

Cash flows from financing activities:
Principal repayment of long-term debt	(7.5		)	(2.5		)
Issuance of common stock	5.0			3.4
Net cash (used in) provided by financing activities	(2.5		)	0.9

Effect of exchange rate changes on cash	(1.9		)	0.3
Change in cash and cash equivalents:
Net change in cash and cash equivalents	(27.6		)	3.8
Cash and cash equivalents at beginning of period	107.2			80.5
Cash and cash equivalents at end of period	$	79.6		$	84.3

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	0.3		$	0.5
Income taxes	$	1.2		$	0.3

Non-cash investing and financing activities: amortization of investment premiums for the three months ended March 31, 2005 and 2004 was $0.1 and $0.0, respectively

See accompanying notes to unaudited consolidated financial statements.

INAMED CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

(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, 2004 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 healthcare 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.

On March 20, 2005, Inamed Corporation, Medicis Pharmaceutical Coproration (“Medicis”), and a wholly-owned subsidiary of Medicis entered into an Agreement and Plan of Merger. Medicis is a leading specialty pharmaceuticals company, focusing on the treatment of dermatologic and podiatric conditions.

Under the terms of the Agreement and Plan of Merger, Inamed will merge with and into a subsidiary of Medicis and each share of Inamed common stock will be converted into the right to receive 1.4205 shares of Medicis common stock and thirty dollars cash. The completion of the transaction is subject to several customary conditions, including the receipt of applicable approvals from Medicis’ and Inamed’s stockholders, the absence of any material adverse effects on either party’s business, and the receipt of regulatory approvals. It is currently anticipated that the closing of the transaction would occur by the end of calendar 2005.

During the first quarter of 2005, Inamed incurred approximately $5.2 of costs related to the transaction, primarily for legal and other professional fees. The costs were recorded in selling, general and administrative expenses.

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.

Reclassifications

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

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 instruments purchased with maturities of three months or less. Inamed maintains balances in A1 equivalent-rated or better financial institutions. In the U.S., these balances at times are in excess of federally insured limits.

Investments

In accordance with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and Emerging Issues Task Force (EITF) No. 03-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” 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 A-rated or better corporate debt and government securities, and the cost of securities sold is based on the specific identification method.

The gross unrealized losses and fair value of the Company’s investments at March 31, 2005 are as follows:

	Less Than 12 Months
	Fair Value	Unrealized Losses
Corporate Bonds	30.1	(0.1	)
Federal Agency - Mortgage Backed Securities	25.7	—
Total	55.8	(0.1	)

Because of the short-term nature of the investments and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2005.

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

Fair Value of Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their short-term maturities. The amounts presented for 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 the analysis of historical bad debts, customer credit-worthiness, past transaction history with the customer, current economic trends, and changes in customer payment terms. If the financial condition of Inamed’s customers were 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. The Company capitalizes inventory costs associated with certain product candidates prior to regulatory approval, based on its judgment of probable future commercialization. As of March 31, 2005, Inamed holds no inventory for product candidates not yet approved by regulatory agencies.

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/or a possible loss of sales, which would adversely affect operating results.

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation. Depreciation is recorded on the straight-line basis over the estimated useful lives of the assets, which range from three to ten years, except for leasehold improvements which are depreciated over the life of the lease. Depreciation 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 supersedes SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets to be Disposed of” and certain sections of Accounting Principles Board Opinion (APB) No. 30 “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions” 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. As of March 31, 2005 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 accounts for goodwill and other intangible assets in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets.” Under SFAS No. 142, goodwill is no longer amortized, but is 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 No. 142, the Company evaluates the fair value of the reporting unit in relation to its carrying value, including goodwill. As long as the fair value of the reporting unit exceeds its carrying value 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 its carrying value, 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, alternative future uses, 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, 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, in accordance with SFAS No. 144.

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 (see notes 9 and 10). The U.S. plan, in most cases, provides lifetime product replacement and one thousand two 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 Three Months Ended March 31, 2005			Accrued Warranty Three Months Ended March 31, 2004

Balance at December 31	$	12.0		$	10.4
Accruals for warranties issued during the period	1.2			1.1
Settlements made during the period	(0.9		)	(0.8		)
Balance	$	12.3		$	10.7

Revenue Recognition

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. Inamed recognizes revenue when title to the product 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. Sales provisions are calculated 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.

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

The Company’s sales to independent distributors are conducted under the same revenue recognition criteria as sales via the 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,” 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, an interpretation of APB No. 25,” SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” 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.

April 2005, the SEC released Staff Accounting Bulletin No. 107 that permits filers to implement SFAS No. 123R beginning with their next fiscal year after June 15, 2005. The pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. Inamed is required to adopt SFAS No. 123R in the first quarter of fiscal 2006, beginning January 1, 2006. Under SFAS No. 123R, the Company must determine the transition method to be used at date of adoption, the appropriate fair value model to be used for valuing share-based payments and the amortization method for compensation cost. The Company currently utilizes a standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees. While SFAS No. 123R permits entities to continue to use such a model, the standard also permits the use of a “lattice” model. The Company has not yet determined which model it will use to measure the fair value of employee stock options upon the adoption of SFAS No. 123R. The transition methods include prospective and retroactive adoption options. Under the retroactive options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS No. 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The Company anticipates adopting the prospective method and is currently evaluating the impact of this standard on its financial statements.

With respect to the 2003 Restricted Stock Plan, as amended in 2004, Inamed has recorded $8.6 net of amortization, in deferred stock-based compensation in accordance with APB No. 25. Stock compensation expense is recognized over the vesting period of the stock. The awards vest fifty percent in three years and the balance in five years. The holders of the restricted stock are also “locked out” from selling any of these shares prior to the fifth year, with the exception that shares may be sold earlier to satisfy tax liabilities. Stock compensation expense for the three months ended March 31, 2005 and 2004 was $0.6 and $0.6, respectively.

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

2005	3.88	%	0.0	3.25	24.7	%
2004	3.15	%	0.0	4	44.1	%

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 March 31, 2005			Three Months Ended March 31, 2004
Net income as reported	$	13.7		$	17.5
Add: Stock-based compensation expense included in reported net income, net of related tax effects	0.4			0.3
Deduct: Total stock-based compensation expense determined under the fair value method for all awards, net of tax effects	(2.2		)	(2.9		)
Pro forma net income	$	11.9		$	14.9

Earnings Per Share
Basic as reported	$	0.38		$	0.50
Basic pro-forma	$	0.33		$	0.42

Diluted as reported	$	0.38		$	0.49
Diluted pro-forma	$	0.33		$	0.42

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. Translation gains and losses are recorded in the consolidated statements of income. Accumulated foreign currency gains were $9.4 and $4.8 at March 31, 2005 and 2004, respectively.

Income Taxes

The Company accounts for deferred income taxes utilizing SFAS No. 109 “Accounting for Income Taxes” (SFAS No. 109), as amended. SFAS No. 109 states that deferred income tax assets or liabilities are to be 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. No tax benefit has been included in the provision for income taxes for the three months ended March 31, 2005 for the $5.2 in merger related expenses.

Recent Pronouncements

In December 2004, the FASB issued Staff Position No. SFAS 109-2, “Accounting and Disclosure Guidance for Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004”, (SFAS No. 109-2). The American Jobs Creation Act of 2004 introduces a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer, provided certain criteria are met. SFAS No. 109-2 allows an entity time beyond the current reporting period to evaluate the effect of the Act on its plans to reinvest or repatriate foreign earnings for purposes of applying SFAS No. 109 “Accounting for Income Taxes”, and provides accounting and disclosure guidance for the repatriation provision. This Staff Position was effective upon issuance. The Company

may elect to apply this provision to qualifying earnings repatriations in its 2005 calendar year. The Company began an evaluation of the effects of the repatriation provision; however, it does not expect to be able to complete this evaluation until after Congress or the Treasury Department provide additional clarifying language on key elements of the provision. The Company expects to complete its evaluation within a reasonable period of time following the publication of the additional clarifying language. The range of possible amounts that the Company is considering for repatriation under this provision is between $0.0 and $100.0 The related potential range of income tax is between $0.0 and $7.3.

NOTE 4 – RESTRUCTURING COSTS

In the fourth quarter of 2002, Inamed recorded a charge of $5.1 for restructuring costs, the majority of which relates to severance. This restructuring was undertaken to consolidate manufacturing facilities. The annual savings to cost of goods sold from the relocation to lower-cost manufacturing facilities is approximately $5.3 per year. To date, the Company eliminated approximately 150 manufacturing positions in Santa Barbara, and added approximately 80 of these positions in Ireland and Costa Rica. Inamed 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 consolidation, the Company accelerated the depreciation on certain assets with shortened useful lives, charging $0.0 and $0.4 to cost of goods sold for the three months ended March 31, 2005 and 2004 respectively. These assets were fully depreciated as of March 31, 2004. In the three months ended March 31, 2005, the Company reversed $0.4 of previously accrued severance charges for employees who elected to leave the Company prior to their termination date or obtained other positions within the Company The Company does not expect any further material 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.

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

	Employee Termination Benefits

2001 restructuring accrual:
Balance at December 31, 2004	$	0.2
Cash paid through March 31, 2005	—
Accrual balance at March 31, 2005	$	0.2
2002 restructuring accural:
Balance at December 31, 2004	$	1.0
Cash paid through March 31, 2005	(0.2		)
Reversal of accrued severance	(0.4		)
Accrual balance at March 31, 2005	$	0.4
Total accrual balance at March 31, 2005	$	0.6

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 are as follows:

	Three Months Ended March 31,
	2005			2004
Net income	$	13.7		$	17.5

Weighted average shares outstanding - Basic	36.0			35.4
Dilutive effect of stock options and warrants	0.5		(1)	0.4		(1)
Weighted average shares outstanding - Diluted	36.5			35.8

Net income per share of common stock
Basic	$	0.38		$	0.50
Diluted	$	0.38		$	0.49

(1) The calculation excludes 0.0 and 0.9 options that are anti-dilutive for the three months ended March 31, 2005 and 2004, respectively.

NOTE 6 - INVENTORIES

Inventories are summarized as follows:

	March 31, 2005		December 31, 2004
Raw materials	$	14.6	$	13.4
Work in progress	13.3		11.1
Finished goods, net	31.0		31.5
	$	58.9	$	56.0

NOTE 7 - SALES BY PRODUCT LINE/GEOGRAPHICALLY

Sales by product line were as follows:

	Three Months Ended March 31,
	2005		2004
Breast Aesthetics	$	59.2	$	52.8
Health	27.6		19.2
Facial Aesthetics	17.5		17.5
Other*	0.9		1.3
Total	$	105.2	$	90.8

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

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

	Three Months Ended March 31,
	2005		2004
U.S.	$	63.6	$	55.2
All Other Countries*	41.6		35.6
Total	$	105.2	$	90.8

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

NOTE 8 - INTEREST INCOME AND INTEREST EXPENSE

Interest income and interest expense were as follows:

	Three Months Ended March 31,
	2005			2004
Interest income	$	0.5		$	0.8
Interest expense	(0.3		)	(0.4		)
Net interest income	$	0.2		$	0.4

NOTE 9 - ACCRUED LIABILITIES AND OTHER

Accrued liabilities and other is summarized as follows:

	March 31, 2005		December 31, 2004
Salaries, wages, and payroll taxes	$	11.8	$	16.4
Royalties payable	3.9		3.5
Trilucent liability, current	5.5		5.5
Sales tax liability	2.8		3.1
Warranty provision, current	3.3		3.2
Other*	13.6		9.8
Total accrued liabilities and other	$	40.9	$	41.5

*At March 31, 2005, Other includes approximately $5.2 in accruals related to the Company’s proposed merger with Medicis.

NOTE 10 - OTHER LONG-TERM LIABILITIES

Other long-term liabilities consist of the following:

	March 31, 2005		December 31, 2004
Warranty provision	$	9.0	$	8.8
Trilucent liability	3.8		5.4
Deferred income tax liability	14.6		11.8
Other liabilities	6.4		6.8
Total other long-term liabilities	$	33.8	$	32.8

NOTE 11 - LONG-TERM DEBT

Long-term debt is summarized as follows:

	March 31, 2005			December 31, 2004

Variable 1-month LIBOR plus 2.00% note, due December 2006	$	15.0		$	22.5
Less: current maturities	(15.0		)	(12.5		)
Long-term debt	$	—		$	10.0

In July 2003, the Company obtained a credit facility having a principal balance of $65.0 for a term of five years and also entered into a revolving credit facility of $35.0. Inamed is currently using $16.8 million of the revolver capacity by having letters of credit issued to collateralize certain insurance programs. The remaining $18.2 million of revolver capacity was unused as of March 31, 2005. The borrowings under the current credit facilities bear interest at the London Interbank Overnight Rate (LIBOR) plus 2.0%. The variable interest rate as of March 31, 2005 applicable to Inamed’s long term debt was approximately 4.5%.

The long-term debt facilities above are secured by substantially all of the Company’s assets and requires the Company to maintain a minimum net worth, minimum fixed charge coverage ratio and maximum leverage ratio. In addition, the sum of funds used to pay dividends and purchase shares of the Company’s common stock is limited to $75.0 over the life of the facility. As of March 31, 2005, the Company was in compliance with these covenants.

As of March 31, 2005 and December 31, 2004, Inamed had $0.7 and $0.8, respectively, of unamortized financing costs recorded in other assets. These costs will be amortized ratably over the life of the term loan facility maturing in July 2008.

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 as of October 31, 2004 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 2004.

Goodwill was $151.5 as of March 31, 2005 and $151.9 as of December 31, 2004. The changes since December 31, 2004 represent 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 $46.3 and $46.8 as of March 31, 2005 and December 31, 2004, 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 were $4.1 at March 31, 2005 and December 31, 2004. Total other intangible assets are as follows:

		March 31, 2005							December 31, 2004
	Weighted Average Life	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Licenses	13.2	$	63.1	$	(20.9)		$	42.2	$	62.2	$	(19.6)		$	42.6
Patents	16.0	5.5		(1.8		)	3.7		5.7		(1.9		)	3.8
Other	3.0	0.4		—			0.4		2.8		(2.4		)	0.4
Total intangibles subject to amortization		$	69.0	$	(22.7	)	$	46.3	$	70.7	$	(23.9	)	$	46.8
Other intangibles not subject to amortization		4.1		—			4.1		4.1		—			4.1
Total other intangibles		$	73.1	$	(22.7	)	$	50.4	$	74.8	$	(23.9	)	$	50.9

Aggregate amortization expense for intangible assets was $1.4 and $1.1 for the three months ended March 31, 2005 and 2004, respectively. For the next five years, amortization expense on existing intangible assets is expected to be approximately $4.7 to $5.2 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 March 31, 2005:

	Authorized shares	Number of securities to be issued upon the exercise of outstanding options	Weighted average exercise price of outstanding options		Number of securities remaining available for future issuance
The 1993 Plan	225,000	37,500	$	19.20	—
The 1998 Plan	675,000	92,400	$	54.11	22,499
The 1999 Program	1,350,000	296,416	$	45.50	136,416
The 2000 Option Plan	2,287,500	1,188,553	$	38.47	6,246
The 2003 Outside Director Plan	225,000	90,000	$	50.15	135,000
The 2004 Plan	500,000	—	$	—	500,000
Equity compensation plans approved by Stockholders	5,262,500	1,704,869	$	40.73	800,161

Stand Alone Options, not approved by Stockholders	2,426,250	50,001	$	16.68	—

Total	7,688,750	1,754,870	$	40.05	800,161

Summary

Activity under these plans for the periods ended March 31, 2005 and 2004 was as follows (shares in millions):

	Three Months Ended March 31,
	2005				2004
	Shares Under Option		Weighted Average Exercise Price		Shares Under Option		Weighted Average Exercise Price
Options outstanding at the beginning of the period	1.8		$	39.99	2.1		$	32.55
Granted	—		$	63.85	—		$	49.04
Cancelled	—		$	61.25	—		$	29.74
Exercised	(0.1	)	$	47.31	(0.1	)	$	19.00
Options outstanding at the end of the period	1.7		$	40.05	2.0		$	33.54
Options exercisable at the end of the period	0.6		$	31.12	0.2		$	20.00
Weighted average fair value of options granted during the period			$	13.32			$	22.48

The following table summarizes information about stock options outstanding at March 31, 2005 (shares in millions):

	Options Outstanding				Options Exercisable
Range of exercise prices	Number Outstanding	Wgtd. Avg. Remaining Contractual Life (Years)	Weighted Avg. Exercise Price		Number Exercisable	Weighted Average Exercise Price
$4.33 - $14.69	0.20	6.80	$	12.76	0.08	$	11.88
$15.47 - $18.17	0.21	6.60	$	17.42	0.14	$	17.14
$20.88 - $44.58	0.18	5.95	$	28.58	0.13	$	28.69
$46.91 - $48.82	0.26	8.91	$	48.16	0.03	$	47.61
$48.99	0.66	8.50	$	48.99	0.17	$	48.99
$49.70 - $60.38	0.13	8.83	$	55.15	0.01	$	50.25
$61.03 - 66.24	0.11	8.83	$	62.32	—	$	—

$4.33 - $66.24	1.75	7.92	40.05		0.56	$	31.12

Restricted Stock Plan

In 2003 Inamed adopted the 2003 Restricted Stock Plan, as amended in 2004, which authorizes Inamed to issue shares to any employee, officer, consultant, or non-employee director. 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 2003 Restricted Stock Plan, as amended	300,000	208,300	91,700

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 March 31,
	2005		2004

Cost of goods sold	$	86.0	$	83.2
Selling, general and administrative	$	520.0	$	443.5
	$	606.0	$	526.7

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 Part II, Item 1 “Legal Proceedings.”

In conjunction with the completion of the merger with Medicis, Inamed is contractually obligated to pay its investment brokers approximately $14.0, which may change based upon total merger consideration,

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, 2004 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 healthcare company that develops, manufactures and markets a diverse line of products that enhance the quality of peoples’ lives. These products include breast implants for aesthetic augmentation and reconstructive surgery, a range of dermal products for use in facial rejuvenation, the LAP-BANDÒ System designed to treat severe and morbid obesity, and the Bioenterics® BIBÒ System for the treatment of obesity. We generate approximately 40% of our revenues outside the U.S.

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, improving our manufacturing facilities, leveraging our cost structure, and possibly entering into alliances and other arrangements.

We derive the majority 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 third party 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. The cost of goods sold represents the cost of third party finished products, raw materials, labor, overhead, and royalties. 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 finished products, raw materials, labor and overhead, and manufacturing efficiencies or inefficiencies.

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. We have reclassified prior period royalty expense from selling, general and administrative to cost of goods sold to conform to the current period presentation. 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 research and development activities: salaries and benefits, allocated overhead, clinical trial and related clinical manufacturing costs, contract services, and other outside costs. We also conduct research on materials technology, product design and product improvement.

On March 20, 2005, Inamed Corporation, Medicis Pharmaceutical Coproration (“Medicis”), and a wholly owned subsidiary of Medicis entered into an Agreement and Plan of Merger. Medicis is a leading specialty pharmaceuticals company, focusing on the treatment of dermatologic and podiatric conditions.

During the first quarter of fiscal 2005, the Company incurred approximately $5.2 million of costs related to the transaction, primarily for legal and other professional fees. The costs were recorded as selling, general and administrative costs.

Liquidity and Capital Resources

We had cash and cash equivalents of $79.6 million and short-term investments of $55.9 million at March 31, 2005, an aggregate increase of $5.2 million from $107.2 million of cash and cash equivalents and $23.1 million of short-term investments at December 31, 2004. The increase was primarily the result of cash provided by operations of $13.2 million and cash from the issuance of common stock of $5.0 million, offset primarily by the purchases of plant and equipment of $2.3 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 $13.2 million for the three months ending March 31, 2005 compared to $20.4 million for the three months ended March 31, 2004. The decrease was primarily due to an increase in accounts receivable of $9.6 million due to increased sales. In addition, royalty payments have increased as a result of the Ethicon settlement in the second quarter of 2004, which requires us to pay royalties at a rate of 7.5%. Prepaid and other current assets decreased $2.6 million primarily due to insurance reimbursements received against our Trilucent receivable (see Part II, Item I Legal Proceedings, Breast Implant Litigation, Trilucent Breast Implant Matters). Accruals and other long-term liabilities increased primarily due to merger-related expenses. 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 $36.4 million for the three months ended March 31, 2005 consists of $42.6 million for the purchase of short-term investments, $9.5 million received on the maturity of short-term investments, and $2.3 million in capital expenditures, primarily for our global Enterprise Resource Planning, or ERP, system. Cash used in investing activities of $17.8 million for the three months ended March 31, 2004 consisted of $4.2 million for the purchase of short-term investments, $9.2 million for the purchase of intangible assets, primarily license and distribution agreements, and $4.4 million in capital expenditures, primarily for our global ERP system.

Cash used in financing activities for the three months ended March 31, 2005 of $2.5 million reflects proceeds of $5.0 million from the issuance of common stock upon the exercise of outstanding employee stock options and issuances pursuant to the employee stock purchase plan, offset by long-term debt principal payments of $7.5 million. Cash provided by financing activities for the three months ended March 31, 2004 of $0.9 million reflected proceeds of $3.4 million from the issuance of common stock upon the exercise of outstanding employee stock options and issuances pursuant to the ESPP, offset by long-term debt principal payments of $2.5 million.

As of March 31, 2005, we had long-term debt of $15.0 million, all of which is classified in current liabilities. In addition, we had a $35.0 million five-year revolving credit facility, expiring in June 2008. We had utilized $16.8 million of the revolver capacity by having letters of credit issued to collateralize certain insurance programs. The remaining $18.2 million of revolver capacity was unused as of March 31, 2005. The borrowings under the current credit facilities bear interest at the London Interbank Offered Rate, or LIBOR, plus 2.0%. Remaining principal payments of $11.3 and $3.7 million are scheduled to be paid in 2005 and 2006, respectively. We anticipate terminating this credit facility in relation to our merger agreement with Medicis. As such, we believe all remaining principal payments will be paid by the end of calendar 2005.

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

Certain items in this section are presented excluding the $5.2 million in merger related expenses. These expenses are outside our normal business operations. We present these items in a manner that is consistent with how management views our business.

FOR THE THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2004.

Sales

	Three Months Ended March		Percent of		Three Months Ended		Percent of		Three Months Ended March 31, 2005 vs 2004
	31, 2005		sales		March 31, 2004		sales		Dollar change			Percent change

Inamed Aesthetics - Breast	$	59.2	56	%	$	52.8	58	%	$	6.4		12	%
Inamed Heatlh - Obesity intervention	27.6		26	%	19.2		21	%	8.4			44	%
Inamed Aesthetics - Facial	17.5		17	%	17.5		20	%	—			—
Other Products	0.9		1	%	1.3		1	%	(0.4		)	(31	)%
Total	$	105.2	100	%	$	90.8	100	%	$	14.4		16	%

Net sales (net of returns, discounts, and allowances), or sales, for the three months ended March 31, 2005 and 2004, were affected by foreign exchange rate fluctuations positively by approximately 1% and 4%, respectively.

Inamed Aesthetics—Breast. The growth for the three months ending on March 31, 2005 of breast aesthetics 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 our saline implants, primarily led by the Style 68 smooth round saline matrix implants. as well as growth in our tissue expander products used for reconstruction purposes.

• Internationally, our growth was primarily driven by our BioDIMENSIONAL^TMCohesive Gel Matrix^TM products (Style 410, Style 510, and Soft Touch implants).

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

Inamed Health—Obesity Intervention. The increase in obesity intervention sales for the three months ended March 31, 2005 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.

• The obesity epidemic has been widely publicized in the press and is anticipated by experts to be a serious and prevalent health care issue for the foreseeable future.

• The launch of our direct-to-consumer advertising in certain markets within the U.S.

For 2005, sales of obesity intervention products are expected to increase in excess of 30% compared to sales in 2004. We expect to achieve this growth by training and qualifying more physicians on the procedure, driving

consumers to our established doctors through direct-to-consumer programs, 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.

Inamed Aesthetics—Facial. Facial aesthetics sales remained flat during the three months ended March 31, 2005 over the same period ended March 31, 2004. In February 2005, we launched Captique^TM, our first non-animal, stabilized hyaluronic acid-based dermal filler in the U.S. In Europe we continued to grow the Hydrafill product family, our non-animal, stabilized hyaluronic acid-based dermal filler in the markets that we have rights to distribute. Our collagen product revenues continued to decline during the quarter primarily due to introductions of hyaluronic acid-based dermal fillers and competitive products in the U.S.

In 2005, sales of facial aesthetics products are expected to increase slightly over 2004 due to the launches of Hylaform in new international markets, Juvederm/Hydrafill line extensions, and Captique in the U.S.

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 March 31, 2005	$	29.2	27.8	%	72.2	%	(0.4	)%

Three Months Ended March 31, 2004	$	24.9	27.4	%	72.6	%

The decrease in gross margins is primarily due to increased royalty expenses related to our Ethicon royalty on sales of the LAP-BAND System. In the three months ended March 31, 2004, we were not accruing at the settlement rate. In the three months ended March 31, 2005, we accrued royalties on U.S. sales at 7.5% and on foreign sales at 3.5%, pursuant to a settlement agreement in July 2004. We have reclassified prior period royalty expense from selling, general and administrative to cost of goods sold to conform to the current period presentation.

Selling, General and Administrative (SG&A)

	SG&A		Percent of sales		Dollar change over prior year		Percent change over prior year
Three Months Ended March 31, 2005	$	46.8	44.5	%	$	9.4	25.1	%

Three Months Ended March 31, 2004	$	37.4	41.2	%

We have reclassified prior period royalty expense from selling, general and administrative to cost of goods sold to conform to the current period presentation.

Selling and marketing expenses increased on an absolute basis and as a percentage of sales for the three months ended March 31, 2005 over the same period in 2004. The increase is primarily due to the launch of our direct-to-consumer campaign for our obesity products. The increase is also due to increased commissions as a result of higher breast aesthetics and health sales.

General and administrative expense increased in absolute dollars and as a percentage of sales for the three months ended March 31, 2005 over the same period in 2004, primarily due to costs associated with our announced

merger with Medicis Corporation. We incurred approximately $5.2 million in expenses related to the merger in the first quarter of 2005, consisting primarily of legal fees and other professional fees. See company and industry overview. Excluding these expenses, SG&A would be $41.6 million, or 39.5% of sales for the three months ended March 31, 2005..

Research and Development (R&D)

	R&D		Percent of sales		Dollar change over prior year		Percent change over prior year
Three Months Ended March 31, 2005	$	9.8	9.3	%	$	4.6	88.5	%
Three Months Ended March 31, 2004	$	5.2	5.7	%

The majority of our research and development expenses in the three months ending March 31, 2005 were related to the clinical development programs for our Juvéderm dermal fillers; our botulinum toxin Type A product, Reloxin; the silicone gel and cohesive silicone gel breast implant clinical trials; and pre-market approval (PMA) applications as applicable in the U.S. The increase in R&D expense in the period ending March 31, 2005 over the same period in 2004 was primarily due to our Phase III Reloxin trials and clinical investigations for Juvéderm, a non-animal, hyaluronic acid-based dermal filler.

The majority of the expenses in 2004 related to the clinical development programs for our Hylaform dermal filler, Reloxin, and the silicone gel and cohesive silicone gel breast implant clinical trials, and PMA applications as applicable in the U.S.

In 2005, we expect research and development expenses will increase substantially over 2004. The expected increase is primarily due to:

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

• The Juvéderm clinical trials and development in the U.S.

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.

Restructuring charges

In the three months ended March 31, 2005, we reversed $0.4 of previously accrued severance charges for employees who elected to leave Inamed prior to their termination date or obtained other positions within Inamed.

Amortization

For the three months ended March 31, 2005, amortization of intangible assets was $1.4 million, compared to $1.1 million for the same period in 2004. The increase was primarily due to the purchase of a new license agreement. We present our selling, general and administrative numbers excluding the merger-related expenses because such expenses are non-recurring charges that are outside our normal business operations. The numbers are presented in a manner that is consistent with how management views our business

Restricted Stock Plan

In 2003 we adopted the 2003 Restricted Stock Plan, as amended in 2004, which authorizes us to issue shares of common stock to any employee, officer, consultant, or non-employee director. 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 terminate.

	Authorized Shares	Number of Shares Issued	Available for Issuance

The 2003 Restricted Stock Plan, as amended	300,000	208,300	91,700

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 March 31,
	2005		2004

Cost of goods sold	$	86.0	$	83.2
Selling, general and administrative	$	520.0	$	443.5
	$	606.0	$	526.7

Interest Income (Expense)

The decrease in net interest income of $0.2 million for the three months ended March 31, 2005, compared to the same period in 2004 is primarily due to interest on a favorable tax settlement received in the first quarter of 2004 in back interest from the U.S. government. This was partially offset by increased interest income earned in the first quarter of 2005, as we held higher balances of short-term investments.

	Three Months Ended March 31,
	2005			2004
Interest income	$	0.5		$	0.8
Interest expense	(0.3		)	(0.4		)
Net interest income	$	0.2		$	0.4

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 months ended March 31, 2005 and 2004, our net sales included approximately $1.4 and $3.8 million, respectively, of favorable exchange effects. Our exchange effect continues to be positive due to the strength of the Euro.

Royalty Income and Other

Royalty income, net of other expenses, was $1.0 million for the three months ended March 31, 2005 and 2004.

Income Tax Expense

Our effective tax rate for the first quarter of 2005 was 30.3%, up from 26.0% for the first quarter of 2004. The higher rate is related to non-deductible expenses incurred in the U.S. in the first quarter of 2005, related to our proposed merger with Medicis. Excluding these merger-related expenses, our effective tax rate would be xx%. We expect our tax rate to be 24% to 26% for the full year of 2005.

On October 22, 2004, the American Jobs Creation Act (the AJCA) was signed into law. The AJCA includes a provision allowing a deduction of 85% of certain foreign earnings that are repatriated, as defined in the AJCA. We may elect to apply this provision to qualifying earnings repatriations in 2005. We have started an evaluation of the effects of the repatriation provision; however, we do not expect to be able to complete this evaluation until after Congress or the Treasury Department provide additional clarifying language on key elements of the provision. We expect to complete our evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the additional clarifying language. The range of possible amounts that we are considering for repatriation under this provision is between $0.0 million and $100.0 million. The related potential range of income tax expense is between $0.0 million and $7.3 million.

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 both 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 clinic 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.

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.

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 future commercialization. As of March 31, 2005, we hold no inventory for product candidates not yet approved by regulatory agencies. We write off inventory for estimated obsolescence or unmarketable inventory or write it down to the estimated market value based on assumptions about future demand and market conditions. We believe our estimates of inventory values is a “critical accounting estimate” because if actual future demand or market conditions differ from those projected by us, additional inventory valuation adjustments may be required. In addition, 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 allowances 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, 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 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 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.

We account for goodwill and other intangible assets in accordance with SFAS No. 142 ‘‘Goodwill and Other Intangible Assets,’’ Under SFAS No. 142, goodwill is not amortized, but is subject 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 No. 142, we evaluate the fair value of the reporting unit in relation to its carrying value, including goodwill. As long as the fair value of the reporting unit exceeds its carrying value 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, 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. In accordance with SFAS No. 142, we reassess the estimated useful lives annually.

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 is certain. 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 accruals for our 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 this warranty based on actuarial analysis. 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 lifetime product replacement and one thousand two 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. 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 calculation which could materially impact our reported expenses and results of operations.

Recent Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. In April 2005 the SEC adopted a rule that permits filers to implement SFAS No. 123R beginning with their next fiscal year. The pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. Inamed is required to adopt SFAS No. 123R in the first quarter of fiscal 2006, beginning January 1, 2006. Under SFAS No. 123R, the Company must determine the transition method to be used at date of adoption, the appropriate fair value model to be used for valuing share-based payments and the amortization method for compensation cost. The Company currently utilizes a standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees. While SFAS No. 123R permits entities to continue to use such a model, the standard also permits the use of a “lattice” model. The Company has not yet determined which model it will use to measure the fair value of employee stock options upon the adoption of SFAS No. 123R. The transition methods include prospective and retroactive adoption options. Under the retroactive options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS No. 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The Company anticipates adopting the prospective method and is currently evaluating the impact of this standard on its 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, complications and other health factors, rupture, deflation 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 damages and 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.

In addition, we continue to incur substantial costs and expenses as a result of our liabilities related to the Trilucent breast implant. Our Trilucent costs and expenses derive in part from the program announced 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, 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. 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 approximately $3.5 million remaining under this commitment at March 31, 2005 and $4.2 million remaining at December 31, 2004.

In addition, at March 31, 2005, we had an accrual for future Trilucent claims, costs, and expenses of approximately $9.3 million and insurance of $3.5 million, or $5.8 million, net of insurance. 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. 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 which 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 75% 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. Prior to February 15, 2005, an insurance company honored its commitment under an insurance policy to reimburse us for most of the medical expenses incurred in connection with this explantation program. As of February 15, 2005, this policy expired in accordance with its terms. Despite the expiration of this policy, we may continue to pay for the explanations of certain Trilucent recipients, and hence it is possible that we will incur material liabilities for Trilucent-related explantation expenses in the future for which we will not have insurance coverage.

Recipients of the Trilucent implants have also asserted claims and brought legal proceedings against the Company, AEI (an affiliate 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 approximately 80 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 (approximately 43 of which are still pending) 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, approximately 950 have been explanted, but only approximately 130 have made claims for bodily injury or financial loss (although we have already paid for their explants). By reason of adverse publicity concerning Trilucent and the announced closure 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 2005 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 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 or 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 AND MARKET PRODUCTS AS ANTICIPATED.

We have entered into collaborative arrangements with third parties to develop and market 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 or obtain a sufficient amount of quality silicone raw materials in a timely manner. We depend on third party manufacturers for silicone molded components and silicone facial implants. We also depend on third party manufacturers for our facial aesthetics product lines with the exclusion of the bovine and human based collagen products. In addition, we currently rely on Smith and Nephew and Immucor, Inc. 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.

Approximately 40% 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. A large percentage of our operating expenses are denominated in currencies other than the U.S. dollar due to the elimination of our Santa Barbara manufacturing operations. 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 and biologic license application 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. For example, our Supplemental Submission for Pending Silicone Gel-Filled Breast Implants PMA is scheduled to be reviewed by the FDA’s General and Plastic Surgery Devices Advisory Panel on April 11-13, 2005. There can be no assurance that the FDA will approve our PMA.

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 AND GOVERNMENT INVESTIGATIONS MAY HARM OUR BUSINESS OR OTHERWISE DISTRACT OUR MANAGEMENT.

Substantial, complex or extended litigation and government investigations 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.

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 March 31, 2005, which was primarily variable rate debt, a hypothetical 10% change in interest rates applied to our outstanding debt as of March 31, 2005, would have no material impact on earnings, cash flows, or fair values of interest rate risk sensitive instruments over a one-year period.

Foreign Currency Exposure- Inamed’s foreign currency risk exposure results from fluctuating currency exchange rates, primarily the movement of the U.S. dollar relative to the Euro and Yen. Inamed’s transactional currency exposures arise when Inamed or one of its subsidiaries enter into transactions denominated in currencies other than their local currency. Inamed also faces currency exposure arising from the translation of the financial results of Inamed’s global operations into U.S. dollars at exchange rates that have fluctuated during the reporting period.

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

ITEM 4. Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

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 continued to pay for certain explanations and related expenses if a patient justified 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 75% of the non-U.K. residents who have requested explantations as a result of an initial consultation have had them performed. Prior to February 15, 2005, an insurance company reimbursed us for approximately 70% of these expenses. As of February 15, 2005, this insurance expired.

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, to date, 59 women have commenced individual legal proceedings in court against us. To date, four of these cases have been withdrawn. Seventeen of the remaining 55 proceedings have proceeded to judgment in the court of first instance. We have won 5, and lost 12, of these cases. We are currently pursuing appeals in 5 of the 12 cases that we lost. To date, damages have been assessed in 9 of the 16 cases that we lost in the court below; such damages have averaged approximately $18,000 per case. Each of the prior appeals brought by Spanish litigants in cases they lost in the court of first instance have been rejected.

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 $3.5 million remaining under this commitment at March 31, 2005. 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 (TSAP) 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 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 March 31, 2005, Inamed had an accrual for future Trilucent claims, costs, and expenses of approximately $9.3 million and insurance of $3.5 million, or $5.8 million, net of insurance.

Based upon the information and analyses currently available to Inamed, 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.

PATENTS AND LICENSE LITIGATION

Manders Matter

Inamed is also a defendant in Ernest K. Manders, M.D. v. McGhan Medical et al., pending in the U.S. District Court for the Western District of Pennsylvania, Case No. 02-CV-1341. The Amended Complaint in the Manders case seeks damages for alleged infringement of a patent allegedly held by Manders in the field of tissue expanders. We do not believe we practice the device claimed by Manders or that we teach the methods he claims. Accordingly, in February 2003, we answered the complaint, denying its material allegations, and counterclaimed against Manders for declarations of invalidity as well as noninfringement. Fact discovery was completed on July 31, 2004. Expert discovery relating to claim construction issues was completed in August 2004. Manders has elected to limit his claim for infringement to twelve of the forty-six claims in his patent. The Court held a Markman hearing on September 23, October 6-7, and 18, 2004. The Court has indicated that it will issue an order on claim construction in 30 - 60 days. Expert discovery will commence after the Court issues its claim construction order. Inamed believes it has strong defenses to this lawsuit and intends to defend it vigorously.

OTHER MATTERS

Government Inquiry

On February 24, 2005, the U.S. Securities and Exchange Commission (SEC) notified Inamed that it had initiated a formal private investigation to determine whether Inamed has violated federal securities laws. We were not aware of the investigation or any related inquiry prior to that date. They have requested that we produce certain documents in connection with the investigation. We intend to fully cooperate in the investigation. Based upon subsequent communications with them, we believe the investigation relates to assessing the adequacy of our disclosures regarding one style (Style 153) of our silicone gel-filled breast implant products. This particular style accounted for approximately $3.4 million (less than 1%) of our total revenues in 2004. There can be no assurance, however, that the scope of the SEC’s investigation will not change or expand. While we believe that our disclosures regarding our silicone gel-filled breast implant products have been and are in compliance with federal securities laws, there can be no assurance that the investigation will not have an adverse effect on Inamed.

Other

Inamed is involved in various other legal actions arising in the ordinary course of business, which may involve product liability claims for bodily injury and/or financial loss arising from the use of the Company’s products. These claims have not had, and are not expected to have, a material adverse effect on the Company’s financial condition or results of operations.

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.)
10.50 *		Settlement Agreement dated as of June 21, 2004, by and between Ethicon Endo-Surgery, Inc., Lubomyr I. Kuzmak, M.D., Inamed Corporation, Inamed Development Company and BioEnterics Corporation
10.51		Amended and Restated Employment Agreement by and between Inamed Corporation and Nicholas L. Teti, dated as of October 18, 2004
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

* Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from this exhibit and have been submitted separately to the Securities and Exchange Commission.

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

5540 Ekwill Street Santa Barbara, California 93111-2936

Telephone Number: (805) 683-6761

*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 Unaudited 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*

	INAMED CORPORATION


	By:		/s/ Nicholas L. Teti
			Nicholas L. Teti, Chairman, President and Chief Executive Officer (Principal Executive Officer)
May 10, 2005


	By:	/s/ Declan Daly
		Declan Daly, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
May 10, 2005

SIGNATURES