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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

FOR THE TRANSITION PERIOD FROM ___________ TO ____________

COMMISSION FILE NUMBER ____________

THE PLASTIC SURGERY COMPANY
(Exact Name of Registrant as Specified in its Charter)

GEORGIA 58-2317410
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)

509 E. MONTECITO STREET, 2ND FLOOR
SANTA BARBARA, CALIFORNIA 93103
TELEPHONE: (805) 963-0400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

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

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- ---------------------

Common Stock, no par value American Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO[ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. YES [X] NO[ ]

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 26, 2001 (based on the last reported closing price
per share of common stock as reported on The American Stock Exchange on such
date) was approximately $9,064,540. As of March 26, 2001, the registrant had
4,692,158 shares of common stock outstanding.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain 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 and we intend that such
forward-looking statements be subject to the safe harbors created thereby. For
this purpose, any statements contained in this Annual Report on Form 10-K except
for historical information may be deemed to be forward-looking statements.
Without limiting the generality of the foregoing, words such as "may," "will,"
"expect," "believe," "anticipate," "intend," "could," "estimate," or "continue"
or the negative or other variations thereof or comparable terminology are
intended to identify forward-looking statements. In addition, any statements
that refer to expectations, projections or other characterizations of future
events or circumstances are forward-looking statements.

Our business and operations are subject to risks that increase the
uncertainty inherent in the forward-looking statements, and the inclusion of
such information should not be regarded as a representation that our objectives
or plans will be achieved. Such forward looking statements are not guarantees of
future performances and involve risks and uncertainties. Actual results may
differ materially from those contemplated by such forward-looking statements.

Some factors that may cause results to differ materially from those
contemplated by such forward looking statement include, among other things (a)
changes in governmental or professional regulations that may effect our
profitability or the enforceability of our contracts with our affiliated
practices; (b) increasing competition in the medical services industry; (c) our
ability to continue to make successful acquisitions of cosmetic surgery centers
and integrate and grow our business; (d) our continued dependence on revenue
generated by our affiliated practices and (e) general economic conditions
including impacts on liquidity and availability of capital as needed. These and
other factors that may affect our future operating results are discussed in more
detail in "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Factors Affecting Future Performance."

Assumptions relating to the foregoing involve judgments with respect to,
among other things, future economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. In addition, risks,
uncertainties and assumptions change as events or circumstances change. We
disclaim any obligation to publicly release the results of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances occurring subsequent to the filing of this Form 10-K with the SEC
or otherwise to revise or update any oral or written forward-looking statement
that may be made from time to time by or on our behalf.

PART I

ITEM 1. BUSINESS.

GENERAL DESCRIPTION OF OUR BUSINESS

We acquire, develop and manage elective cosmetic and laser surgery
centers. We operate outside of the managed care market and provide private pay,
fee-for-service cosmetic surgery and laser procedures through our retail network
of surgery centers (the "Centers"). These services include cosmetic surgery,
cosmetic laser skin treatments and physician-directed skin care all under the
national umbrella of Personal Image Centers. We offer an extraordinary
"one-stop-shop" for all cosmetic surgery and laser procedures in the elective
care segment of healthcare. We currently own and/or manage 25 Centers located
throughout the United States. Headquartered in Santa Barbara, California, we
completed our initial public offering on December 10, 1999 and our common stock
trades on the American Stock Exchange under the ticker symbol PSU.

THE COSMETIC SURGERY INDUSTRY

Procedures for cosmetic surgery have continued to increase dramatically
in number; from 1992 to 1998, according to the American Society of Plastic
Surgery, the most popular procedures experienced significant increases: facelift
procedures increased 75%, liposuction procedures increased 260%, and breast
augmentation procedures increased 300%. The American Society of Aesthetic
Plastic Surgery estimates that approximately 2.8 million cosmetic surgery
procedures were performed in 1998. The market for cosmetic surgery procedures
has grown rapidly over the last several years, and we expect this market to
continue to grow.

The consumer market is served in part by approximately 5,200 Board
certified plastic surgeons in the United States. In recent years, fees for the
reconstructive segment of plastic surgery have declined primarily due to cost
containment pressures from third

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party insurance payors. As a result, many plastic surgeons have shifted the
focus of their practices from reconstructive to cosmetic surgery procedures.
This has resulted in increased competition for private pay cosmetic surgery
procedures. Physicians practicing in other disciplines, such as ophthalmologists
and dermatologists, are also performing cosmetic surgery procedures
traditionally performed by plastic surgeons, such as eyelid surgery and
liposuction, to earn the higher fees associated with these procedures.
Consequently, plastic surgeons are attempting to emphasize the importance of
having plastic surgery procedures performed by surgeons certified by the Board
of the American Society of Plastic Surgeons.

OPERATING STRATEGY

We operate outside of the managed care market and provide private pay,
fee for service cosmetic surgery and laser procedures through our network of
Centers. We offer an extraordinary "one-stop-shop" for all cosmetic surgery and
laser procedures in the separate "elective-care" segment of healthcare and all
available procedures are pre-paid by the patient or financed through patient
financing companies. By marketing to this elective surgery segment, we are able
to avoid third-party payment reimbursement issues, capitation reductions and
long-term collection problems, all of which negatively affect the managed care
segment of healthcare.

We believe that our "Personal Image Center" brand represents the only
national company within the cosmetic surgery and cosmetic laser procedure market
and our goal is to establish strong and sustainable brand identity through our
25 Centers. We intend to grow with the elective-care segment of healthcare and
the cosmetic surgery and cosmetic laser procedure market. We approach this
market with a strong retail marketing philosophy. We believe that elective
procedures are consumer driven and demand can be stimulated through
patient-education style advertising strategies. These include public seminars
attended by hundreds of prospective patients, cable and broadcast channel
television commercials, professionally produced radio spots and a diverse
offering of print ad campaigns. In addition to our retail-designed external
marketing programs, our Centers attract entry-level consumers with medical
strength skin care solutions and cross-market between these consumers and
patients seeking one of the broad offerings of cosmetic procedures.
Additionally, through professional internal marketing, patients learn of new and
alternative treatments and surgeries offered at our Centers.

Our website, www.idealme.com is managed as an additional focused
marketing channel integral to the overall retail approach to attracting new
patients. The Internet represents the ideal medium for cosmetic surgery and
other elective procedures, as it is both private and visual. We have created
"the largest before and after photo gallery on the Internet" and have seen
strong sequential growth in the numbers of both new visitors to the gallery as
well as repeated use of the features that let visitors email before and after
photos to their friends and family. The Internet site is becoming increasingly
effective for attracting new patients. In fact, our first Center to
fully-integrate our Internet strategy has recently been receiving 30% of its new
patients through our websites.

GROWTH STRATEGY

We intend to further solidify our national presence by acquiring
cosmetic surgery centers in key markets nationwide, as well as converting our
existing Centers to a new business structure whereby, subject to applicable
state and federal laws, we take control of the business of the Centers,
including marketing programs and sales activities, operations, finance and human
resources.

We have identified both underutilized single-surgeon facilities and
multi-surgeon centers in key markets as significant opportunities for us to add
new Centers to our current network, and, to the extent permitted by applicable
law, any future acquisitions will be structured to give us complete control of
the investments required for faster, more profitable growth. The identified pool
of underutilized facilities also offer us acquisition opportunities at favorable
purchase prices.

THE CENTERS

Our founding business model was based on providing cosmetic surgery
facilities and business development services to affiliated cosmetic surgery
practices through long-term business services agreements. Pursuant to the
business services agreements, physicians continue to have final decision
authority for the day-to-day management of our Centers, including operations,
finance and human resources. For some of our current Centers and for all new
Centers, we have commenced a strategic shift to an alternate business structure
whereby we will to take control of all business affairs of our Centers,
including but not limited to marketing programs and other sales activities
designed to increase consumer demand as well as the business, finance and human
resource decisions with respect to business personnel in our Centers, subject to
applicable federal and state laws. The affiliated surgeons in our Centers are
then free to spend their time focused on patient care and surgery. The
affiliated surgeons would maintain control over the standards of practice to
promote quality patient care. We also are working with a number of our
affiliated surgeons in our existing Centers to revise the business structure to
transfer to us control of the business affairs of their Centers.

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We are affiliated with 35 Board certified or Board eligible plastic
surgeons and one surgeon certified by the Canadian Board of Plastic Surgery
operating 25 Centers (which includes 31 offices) located in 18 metropolitan
markets. Past revenues may not be indicative of future results. Approximately
85% of the procedures performed by our affiliated surgeons are cosmetic. We
selected the Centers based upon a variety of factors, including:

- board certification, licensing and good standing of affiliated
surgeons;

- practice size, historical financial performance and potential
for future growth;

- geographic location; and

- reputation among local consumers and peers within the plastic
surgery industry.

The following table sets forth the number of surgeons and locations of
our founding surgeons.

NUMBER OF NUMBER OF NUMBER OF NUMBER OF
METROPOLITAN MARKET SURGEONS OFFICES METROPOLITAN MARKET SURGEONS OFFICES
- ------------------- -------- --------- ------------------- -------- ---------

California Maine
Los Angeles 3 4 Portland 1 1
Colorado North Carolina
Denver 4 3 Raleigh 1 1
Connecticut Ohio
Hartford 1 2 Cincinnati 1 1
Westport 1 1 Oklahoma
Florida Oklahoma City 1 1
Ft. Lauderdale 5 1 Oregon
Orlando 2 2 Portland 1 1
Miami 1 2 Pennsylvania
South Miami 2 1 Philadelphia 4 1
Georgia Texas
Atlanta 1 1 Amarillo 1 1
Hawaii Austin 2 1
Honolulu 1 3 Houston 1 1
Maryland 36 31
Baltimore 2 2 == ==

Acquisition Agreements. We entered into acquisition agreements with each
of the founding affiliated practices and affiliated surgeons. These acquisition
agreements were in the form of an asset purchase and sale agreement, a stock
purchase and sale agreement or an agreement and plan of reorganization whereby
we merged with the affiliated practice. Based on applicable state laws and
regulations, the operating assets of each practice were transferred to us
pursuant to the acquisition agreements. As consideration for entering into each
acquisition agreement, we paid consideration consisting of a combination of
common stock, notes and cash.

Business Services Agreements. We have entered into business services
agreements with each of the founding practices. These agreements were in the
form of a service agreement or consulting agreement as dictated by state law.
Each service agreement generally requires that we provide the following services
for the Centers at the request of the affiliated practices:

- assisting with advertising, marketing and business development;

- acquisition and maintenance of specified furnishings and
equipment;

- provision of suitable offices and facilities;

- payroll processing;

- employment of necessary personnel, excluding plastic surgeons
and certain medical personnel;

- development of business systems procedures and forms;

- procurement and inventory management;

- assistance in acquiring malpractice insurance;

- cash management;

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- development of appropriate business systems;

- supervision, management and organization of files and records;
and

- financial reporting and analysis.

Under the business service agreements, we recognize revenues in amounts
equal to the assumed expenses plus service fees based on the net cash collected.
In future agreements, we may recognize revenues in amounts equal to the assumed
expenses plus a fixed dollar amount with annual fixed percentage increases.

If required by applicable state law or regulations, a founding practice
may have entered into a consulting agreement with us that contains certain of
the same provisions as the service agreement, including: (a) provisions relating
to the obligation to loan funds to the affiliated practice in the event the
affiliated practice is unable to pay its current expenses, (b) repurchase of
assets and assumption of liabilities by the affiliated practice upon expiration
or termination, (c) covenant not to compete, and (d) indemnification. Under the
consulting agreement, we provide the following services to the affiliated
practice in exchange for a fixed dollar annual fee with annual fixed percentage
increases:

- consulting with respect to equipment and office needs;

- preparing staffing models appropriate for the affiliated
practice;

- advising and training with respect to business systems;

- purchasing and maintaining inventory;

- advising with respect to and providing or arranging accounting
and bookkeeping services;

- assisting with the acquisition of malpractice insurance;

- advising with respect to developing a marketing plan;

- assessing the financial feasibility of establishing new offices;

- providing billing and collection services; and

- assisting the affiliated practices in organizing and developing
filing and recording systems.

The business services agreements have either 20 or 25-year terms. The
business services agreements are subject to termination by either party in the
event the non-terminating party becomes subject to voluntary or involuntary
bankruptcy proceedings or materially breaches the agreement, subject to a cure
period. The affiliated practices may also terminate the business services
agreements if we are subject to a change of control not approved by our board of
directors. Upon the termination of the business services agreements, except upon
our breach, the affiliated practices and its shareholders are subject to a two
year covenant not to compete which prohibits within a specified territory the
following (a) advertising in print and electronic media; (b) soliciting
patients, surgeons or staff associated with the affiliated practice; and (c)
soliciting any referrals from any physician who referred one or more patients to
the affiliated practice within three years prior to the date of such
termination.

Pursuant to these business services agreements, we must pay the
operating expenses of the Centers and we are reimbursed by the affiliated
practice. To the extent a Center's operating expenses exceed revenues, we must
pay the excess but the affiliated practice will be obligated to repay us, with
interest, out of future revenues. The obligation of the Center to repay these
advances will not be securitized or prioritized and will not have a definite
maturity date.

Under the business services agreements, the affiliated surgeons maintain
full control and ownership of the affiliated practices, determine which clinical
personnel will be employed by the affiliated practices and establish their own
practice standards to promote quality plastic surgery care. We do not engage in
the practice of medicine. Each affiliated surgeon is responsible for the
compliance of his or her affiliated practice with state and local regulations,
licensing and certification requirements applicable to the practice of plastic
surgery.

Employment Agreements. Each affiliated surgeon who is an equity holder
in an affiliated practice or who provides plastic surgery services through an
affiliated practice an average of more than ten days a month either at the time
of execution of the business services agreement or any time thereafter is
required to execute an employment agreement with the affiliated practice. Each
employment agreement generally provides that the affiliated surgeon will perform
professional services for the affiliated practice over a period of 5 years, with
automatic renewal for additional one-year terms. After the expiration of the
initial term, either the affiliated practice or the affiliated surgeon may
terminate the employment agreement at any time without cause by giving ninety
days' prior

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written notice. Each affiliated surgeon's compensation is a percentage of the
net cash collected by the affiliated practice after the payment of the service
fee and all operating expenses of the affiliated practice, with such percentage
to be determined by the affiliated practice. The affiliated surgeon agrees that
upon termination or expiration of the employment agreement, he or she will not
compete for a period of two years in the market in which the Center operates,
will not solicit former patients of the Center, will not solicit referrals from
any physician who referred one or more patients to the affiliated surgeon or the
Center within the two years prior to the termination, and will limit the methods
of advertising in the area in which any Center is located.

SERVICES AND OPERATIONS

We make available support and services to the Centers, including
administrative and back office functions, purchasing, marketing, training and
patient education programs. We offer to the affiliated surgeon a variety of
operating procedures and systems designed to improve the productivity and
increase the revenue of each Center and to achieve economies of scale, such as:

- national group purchasing contracts for medical and office
supplies and equipment, implants and pharmaceuticals;

- centralized payroll processing and employee benefits packages;

- appropriate credit and collection policies to accommodate
specific needs of the target market of each affiliated practice;

- patient flow and work flow enhancements from physical
improvements in design of facilities to increase the number of
patients seen and the productivity of the affiliated surgeon;
and

- promotional programs to include newsletters, direct mail,
seminars and patient financing to expand the Affiliated
Surgeon's patient base.

We institute operating efficiencies and economies on a per market or per
Center basis after thorough analysis, including review of work flow, patient
flow, aged accounts receivable history, facilities, employee work load and
productivity, and employee and patient satisfaction.

Pursuant to our strategy to revise the business structure of the
arrangements with the founding practices, we plan to generally manage all of the
operations of the Centers.

GOVERNMENT REGULATION

Overview. The health care industry is highly regulated, and there can be
no assurance that the regulatory environment in which we operate will not change
significantly and adversely in the future. In general, regulation of health care
providers and companies is increasing.

Every state imposes licensing requirements on medical doctors and on
their facilities and services. In addition, many states require regulatory
approval, including certificates of need, before establishing certain types of
health care facilities, offering certain services or making expenditures in
excess of statutory thresholds for health care equipment, facilities, or
programs. The execution of a business services agreement with an affiliated
practice currently does not require any health care regulatory approval on our
part or on the part of the affiliated practice. However, in connection with the
expansion of existing operations and the entry into new markets, we and our
affiliated surgeons may become subject to additional regulation.

Health Care Regulations. Federal and state laws regulate the health care
industry, the relationships between practice management companies such as us and
physicians, and the relationships among physicians and other providers of health
care services.

Corporate Practice of Medicine. The laws of many states prohibit
corporations and other entities that are not owned entirely by medical doctors
from employing medical doctors, having control over clinical decisions, or
engaging in other activities deemed to constitute the corporate practice of
medicine. We will contract with professional associations, which will be owned
by one or more medical doctors and which in turn will employ or contract with
physicians and other health care providers to provide professional services. We
will perform only non-professional services, will not represent to the public
that we provide medical services, and will not exercise influence or control
over the medical doctors employed by the professional associations. The business
services agreements and consulting agreements specifically provide that all
decisions required by law to be made by licensed physicians or other licensed
professionals shall be made by those individuals. While certain shareholders of
managed professional corporations that practice medicine may also be involved in
company management, they act independently when making decisions on behalf of
their professional corporations and we will have no right, and will not attempt
to exercise any right, to control those decisions.

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Fee-Splitting and Anti-kickback Laws

State Law. Many states prohibit "fee-splitting" by physicians with any
party except other physicians in the same professional practice association. In
most cases, these laws have been construed as applying to the payment of a
portion of a fee to another person for referring a patient or otherwise
generating business and not to prohibit payment of reasonable compensation for
facilities and services, other than the generation of referrals, even if the
payment is based on a percentage of the practice's revenues. In addition, most
states have laws prohibiting the payment or receipt of any remuneration that is
intended to induce referrals for health care products or services. For example,
the Florida fee-splitting law prohibits the payment or receipt of any
commission, bonus, kickback, or rebate, or engaging in any split-fee arrangement
in any form for patient referrals to providers of goods or services. According
to a Florida court of appeals decision interpreting this law, it does not
prohibit a management fee that is based on a percentage of gross income of a
professional practice if the manager does not refer patients to the practice.
Other states, such as New York, have fee-splitting statutes that have been
interpreted to prohibit any compensation arrangement that is based on a
percentage of physicians' revenue.

Federal Law. The fraud and abuse provisions of the Medicare and Medicaid
statutes prohibit the payment or receipt of any remuneration in return for the
referral of patients covered by federally funded health care programs such as
Medicare and Medicaid, or in return for purchasing, leasing, ordering, or
arranging for the purchase, lease or order of any product or service that is
covered by such programs, and impose significant penalties for false or improper
billings under such programs. In addition, under legislation known as the "Stark
Bill," physicians' referrals for certain designated health services to entities
with which they have a financial relationship are prohibited unless certain
exceptions apply. Violations of these laws may result in substantial civil or
criminal penalties, including exclusion from participation in the Medicare and
Medicaid programs, or recoveries of prior payment.

The several laws described above have civil and criminal penalties and
have been subject to judicial and regulatory interpretation. They are enforced
by regulatory agencies vested with broad discretion in interpreting them. Our
agreements and proposed activities have not been examined by federal or state
authorities under these laws and regulations. Currently, we are not a separate
provider of Medicare or state health program reimbursed services. Although we
believe that our operations and those of our affiliated practices will be
conducted so as to comply with all of the foregoing laws, there can be no
assurance that these operations will not be successfully challenged as violative
of one or more such laws. In addition, these laws and their interpretation vary
from state to state. The regulatory framework of certain jurisdictions may limit
our expansion into, or ability to continue operations within, such jurisdictions
if we are unable to modify our operational structure to conform with such
regulatory framework. Any limitation on our ability to expand could have an
adverse effect on us.

Impact of Healthcare Reform. The United States Congress has considered
various healthcare reform proposals, including comprehensive revisions to the
current healthcare system. It is uncertain what legislative proposals will be
adopted in the future or what actions federal or state legislatures or
third-party payors may take in anticipation of or in response to any healthcare
reform proposals or legislation. Changes in the healthcare industry, such as the
growth of managed care organizations or provider networks, may result in lower
payment levels for the services of the affiliated surgeons and lower revenues
for us.

Internet Regulation. There are an increasing number of laws and
regulations pertaining to the Internet. In addition, a number of legislative and
regulatory proposals are under consideration by federal, state, local and
foreign governments and agencies. Laws or regulations may be adopted with
respect to the Internet relating to liability for information retrieved from or
transmitted over the Internet, online content regulation, visitor privacy,
taxation and quality of products and services. Moreover, the applicability to
the Internet of existing laws governing issues such as intellectual property
ownership and infringement, copyright, trademark, trade secret, obscenity,
libel, employment and personal privacy is uncertain and developing. Any new
legislation or regulation, or the application or interpretation of existing laws
may have an adverse effect on our Internet business. In addition to Internet
regulation, our websites may be subject to numerous state and federal laws that
govern the delivery of healthcare services and goods in the United States. These
laws range from laws prohibiting the offer, payment or receipt of remuneration
to induce referrals to entities providing healthcare services and goods to
licensure requirements as well as special protection for healthcare data. These
laws are complex and are under constant revision and interpretation. These laws
and their active enforcement, particularly in the areas of healthcare fraud,
affect the way all healthcare providers structure their business relationships
and deliver healthcare services and goods. New developments in this area could
affect the structure and operation of our Internet business. In the event some
state or federal regulatory agency determined that our relationship with one or
more of our advertisers that deliver healthcare services or goods violate any
such laws, then we could be subjected to fines and other costs and could be
required to revise or terminate that portion of our business.

Liability for Information Retrieved from Our Websites and from the
Internet. Content may be accessed on our websites and this

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content may be downloaded by visitors and subsequently transmitted over the
Internet. This could result in claims against us based on a variety of theories,
including defamation, practicing medicine without a license, malpractice,
obscenity, negligence, copyright or trademark infringement or other theories
based on the nature, publication and distribution of this content. Some of these
types of claims have been brought, sometimes successfully, against providers of
Internet services in the past. In addition, we may be subject to claims alleging
that, by directly or indirectly providing links to other websites, we are liable
for copyright or trademark infringement or the wrongful actions of third parties
through their respective websites. Any claims brought against us in this respect
may have a material and adverse effect on our business.

Domain Names. Domain names are Internet "addresses." The current system
for registering, allocating and managing domain names has been the subject of
litigation, including trademark litigation, and of proposed regulatory reform.
We have registered Idealme.com, ThePlasticSurgeryCo.com and approximately 25
additional domain names. There can be no assurance that our domain names will
not lose their value, or that we will not have to obtain entirely new domain
names in addition to or in lieu of our current domain names if reform efforts
result in a restructuring of the current system.

Jurisdiction. Due to the global nature of the Internet, it is possible
that, although transmissions by us over the Internet originate primarily in the
United States, the governments of states and foreign countries might attempt to
regulate our transmissions or prosecute us for violations of their laws. These
laws may be modified, or new laws enacted, in the future. Any of the foregoing
developments could have a material adverse effect on our business, results of
operations and financial condition. In addition, as our service is available
over the Internet in multiple states and foreign countries, these jurisdictions
may claim that we are required to qualify to do business as a foreign
corporation in each state or foreign country. We have not qualified to do
business as a foreign corporation in every jurisdiction. Our failure to qualify
as a foreign corporation in a jurisdiction where we are required to do so could
subject us to taxes and penalties and could result in our inability to enforce
contracts in such jurisdictions. Any new legislation or regulation, the
application of laws and regulations from jurisdictions whose laws do not
currently apply to our business, or the application of existing laws and
regulations to the Internet and other online services could have a material
adverse effect on our business, financial condition, and results of operations.

COMPETITION

There are several companies that affiliate with physicians in the area
of plastic surgery, and we realize that additional entities may enter this
market. We intend to capitalize on the reputations and relationships of the
founding practices and their affiliated surgeons to assist us in identifying
potential sites for the development of new Centers.

The business of providing plastic surgery services is highly competitive
in each market in which the Centers operate. The Centers compete with other
plastic surgeons that maintain single offices or operate a single satellite
office, as well as with plastic surgeons that maintain group practices or
operate in multiple offices. The Centers also compete with general surgeons and
dermatologists and ophthalmologists who provide certain plastic surgery
services. The provision of plastic surgery services by such general
practitioners and dermatologists has increased in recent years.

EMPLOYEES

As of March 26, 2001, we had 165 employees. None of our employees are
covered by a collective bargaining agreement. We consider our relationship with
our employees to be good. We do not employ the affiliated surgeons.

INTELLECTUAL PROPERTY

We have applied for federal registration of the service mark "Personal
Image Center." We intend to implement a brand awareness program through our
marketing and advertising campaigns in order to associate the name Personal
Image Center with a reputation for nationwide quality plastic surgery care.

INSURANCE

We maintain general liability and professional liability insurance for ourselves
and, where permitted by applicable law and insurers, are named as an additional
insured under the policies of the affiliated practices. There can be no
assurance that any claims against us or any of the affiliated practices will not
be successful, or if successful, will not exceed the limits of available
insurance coverage or that such coverage will continue to be available at
acceptable rates. The affiliated surgeons purchase and maintain their own
malpractice liability insurance coverage.

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ITEM 2. PROPERTIES.

We lease approximately 6,500 square feet of office space in Santa
Barbara, California for our headquarters. In addition, we lease approximately
7,800 square feet of office and surgery center space for our Personal Image
Center in Ft. Lauderdale, Florida and 2,700 square feet of office and surgery
center space for our Personal Image Center in Raleigh, North Carolina.

ITEM 3. LEGAL PROCEEDINGS.

As of December 31, 2000, we are not a party to any litigation that if
adversely determined would have a material adverse effect on our operations.
Many of the founding Centers and some owned Centers have pending litigation
arising in the ordinary course of business. If we acquired the stock of a Center
in a stock purchase or merger transaction, we assume the liabilities of the
Center, including litigation, prior to the transaction. We intend to vigorously
defend any and all litigation. We maintain general liability insurance for us
and on behalf of our affiliated Centers and where permitted by applicable law
and insurers, we will be named as an additional insured under the policies of
the affiliated Centers. The affiliated surgeons maintain professional liability
insurance covering the delivery of health services. Also, we are indemnified
under the business services agreements for liabilities we incur as a result of
the performance of medical services by affiliated surgeons. Successful
malpractice claims against affiliated Centers could have a material adverse
effect on our profitability. Although we believe we have adequate liability
insurance coverage, there can be no assurance that a pending or future claim or
claims will not be successful or, if successful, will not exceed the limits of
available insurance coverage. There can also be no assurance that coverage will
continue to be available at acceptable costs and on favorable terms.

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

NONE.

ITEM 5. MARKET FOR REGISTRANT'S CAPITAL STOCK AND RELATED STOCKHOLDER MATTERS.

(a) Our stock is traded on The American Stock Exchange under the symbol
"PSU". The high and low prices of the stock as reported on The American Stock
Exchange for each quarter of our fiscal year 2000 and for our fourth quarter or
our fiscal year 1999 are shown below:

High Low
------ ------
First Quarter 2000 $8.000 $3.375
Second Quarter 2000 $4.500 $2.500
Third Quarter 2000 $3.750 $2.188
Fourth Quarter 2000 $3.750 $1.500
First Quarter 2001 (through March 26, 2001) $5.400 $1.750

High Low
------ ------
Fourth Quarter 1999 $8.375 $6.250

At March 26, 2001, the last reported sale price of our stock was $2.75
per share and there were approximately 119 record holders.

We have not declared any dividends or made any distributions to
shareholders except for the payment of $6.1 million cash and note consideration
to 17 initial affiliated practices that were accounted for under Staff
Accounting Bulletin 48 "Transfer of Nonmonetary Assets by Promoters and
Shareholders" ("SAB 48"). The shareholders of these founding practices were
considered promoters. We expect to retain future earnings for the growth and
development of our business and do not anticipate any dividends being declared
or paid for the foreseeable future.

(b) Pursuant to the registration statement on Form S-1 that became
effective on December 2, 1999, we offered and sold 1,400,000 shares of stock in
our initial public offering for an aggregate offering price of $11,200,000. The
amount of expenses we incurred in connection with the issuance and distribution
of the stock in our initial public offering was (1) $1,120,000 for

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underwriting discounts and commissions, and (2) approximately $1,547,000 for
legal, accounting, printing, filing fees and miscellaneous costs. We have used
the remaining net proceeds of $8,533,000 to pay the cash portion of the
consideration to the affiliated practices, to service the debt payments of the
notes issued as consideration to the affiliated practices, to repay indebtedness
assumed from certain affiliated practices and to pay certain accrued liabilities
and for working capital. We did not use any of the proceeds for the funding of
our operations during 2000.

(c) On December 15, 2000 we issued warrants to purchase 405,154 shares
of our common stock to Pacific Mezzanine Fund, L.P., as part of the
consideration for a $1,500,000 loan. The warrants have an exercise price of
$2.50 and are exercisable for a ten year period. In connection with the issuance
of these warrants, we relied on the exemption set forth in Section 4(2) of the
1933 Act regarding non-public offerings. No underwriter was engaged in
connection with the issuance of the warrants.

(d) On December 18, 2000, we issued to the shareholders of the Florida
Center for Cosmetic Surgery, Inc., 406,075 shares of our common stock, along
with notes totaling $5,100,000, for the purchase all of the issued and
outstanding stock of the Florida Center for Cosmetic Surgery. In connection with
this offering, we relied on the exemption set forth in section 4(2) of the 1933
Act regarding non-public offerings. No underwriter was engaged in connection
with this sale.

ITEM 6. SELECTED FINANCIAL DATA.

The following financial information for the years ended December 31,
1998, 1999 and 2000 is derived from our audited financial statements. No
significant operations occurred until our initial public offering on December
15, 1999.

FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------

Revenues
Practice reimbursements ........................ $ 23,889,595 $ 1,266,555 $ -
Management fees ................................ 5,166,683 160,140 -
Cosmetic procedures ............................ 580,703 - -
------------ ------------ ------------
Net revenues ................................... 29,636,981 1,426,695 -
Direct expenses:
Salaries, wages, and benefits .................. 7,371,629 468,367 -
Cost of procedures ............................. 196,268 - -
Medical supplies ............................... 4,156,601 187,470 -
Advertising .................................... 3,518,211 113,272 -
Rent ........................................... 2,169,039 110,664 -
------------ ------------ ------------
Total direct expenses ....................... 17,411,748 879,773 -
Salaries, wages and benefits ..................... 1,549,282 7,224,936 2,181,990
General operating expenses ....................... 8,339,569 2,838,826 1,021,961
Depreciation and amortization .................... 1,005,235 183,094 6,548
Provision for doubtful accounts .................. 175,025 - -
------------ ------------ ------------

Total operating expenses ....................... 28,480,859 11,126,629 3,210,499
------------ ------------ ------------
Operating income (loss) .......................... 1,156,122 (9,699,934) (3,210,499)
Other income ................................... 29,456 6,126 7,623
Interest expense ............................... (470,854) - -
Amortization of debt discount expense .......... (75,000) - -
------------ ------------ ------------

Income (loss) before provision for income taxes... 639,724 (9,693,808) (3,202,876)
Provision for income taxes ..................... 19,531 - -
------------ ------------ ------------
Net Income (loss) ................................ $ 620,193 $ (9,693,808) $ (3,202,876)
============ ============ ============
Basic net income (loss) per share ................ $ 0.14 $ (44.26) $ (188.40)
============ ============ ============
Weighted average basic shares outstanding ........ 4,524,000 219,000 17,000
============ ============ ============
Diluted net income (loss) per share .............. $ 0.13 $ (44.26) $ (188.40)
============ ============ ============
Weighted average diluted shares outstanding ...... 4,666,000 219,000 17,000
============ ============ ============

AS OF DECEMBER 31,
--------------------------------------------------
2000 1999 1998
------------ ------------ ------------

BALANCE SHEET DATA:
Cash and cash equivalents, including
restricted cash of $118,048 at
December 31, 2000 ........................ $ 274,425 $ 842,307 $ 402,860
Working capital deficit .................... $ (2,332,607) $ (3,436,594) $ (1,348,094)
Total assets ............................... $ 18,557,906 $ 11,302,201 $ 440,099
Total long-term liabilities ................ $ 10,263,357 $ 4,203,565 --
Total shareholders' equity (deficit) ....... $ 4,814,222 $ 2,659,595 $ (1,310,855)

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

You should read the following discussion and analysis in conjunction
with the accompanying financial statements and related notes. No significant
operations occurred until our initial public offering on December 15, 1999, and,
accordingly, our historical results of operations and period to period
comparisons may not be meaningful or indicative of future results.

OVERVIEW

Under our business services agreements we earn revenue from providing
services and facilities to affiliated practices at Centers on a monthly basis as
each affiliated practice collects its cash. The agreements provide that each
affiliated practice will pay our fees based on a percentage of the net cash
collected by that affiliated practice. Our revenue consists of the sum of the
service fee and amounts equal to the operating expenses of the affiliated
practice assumed by us under the business services agreements. The operating
expenses of the affiliated practice that are our responsibility and that we are
legally obligated to pay include the following:

- salaries, benefits, payroll taxes, workers compensation, health
insurance and other benefit plans, and other direct expenses of
non-medical employees that are our employees located at the
Centers;

- direct costs of all employees or consultants that provide
services to each of the Centers;

- medical and office supplies;

- lease or rent payments, utilities, telephone and maintenance
expenses for the Center's facilities;

- property taxes on our assets located at the Centers;

- property, casualty and liability insurance premiums, excluding
malpractice insurance, is the responsibility of the affiliated
practice;

- surgeon recruiting expenses; and

- advertising and expenses attributable to the promotion of the
Centers.

We assume all of these expenses and pay the third-party provider of the
goods and services.

The affiliated practices pay for any and all direct employment expenses,
including benefits, for any surgeon or other employee that we are prohibited
from employing by applicable law. In addition, the affiliated practices retain
responsibility for the payment of expenses for continuing education, seminars,
professional licenses, professional membership dues and malpractice insurance
and all other expenses of any surgeon.

RESULTS OF OPERATIONS

Net Revenues. Net revenues consists of management fees and affiliate
costs that must be reimbursed by us and to a lesser extent revenue from
procedures performed at the Florida Center for Cosmetic Surgery. Revenues for
the year ended December 31, 2000 were $29,636,981 as compared to $1,426,695 in
the same period in the prior year. Revenues increased by $28,210,286 or 1,977%.
The increase in the current year is a result of a full year's revenue in 2000
from management fees and growth in the affiliated practices' revenue and
reimbursable expenses. As we conducted no operations and earned no revenue prior
to the closing of our initial public offering, 1999 revenues reported include
only the revenue generated from operations during the period from December 16,
1999 to December 31, 1999.

Direct Expenses. Direct expenses consist of operating room costs at the
Centers and the reimbursable expenses paid by us for the affiliated practices
for salaries, wages and benefits, medical supplies, advertising and rent, paid
as part of providing plastic surgery procedures in their facilities. Direct
expenses for the year ended December 31, 2000 were $17,411,748 as compared to
$879,773 for the period from December 16, 1999 to December 31, 1999.

Salaries, Wages and Benefits. Salaries, wages and benefits consist of
salaries, wages and benefits paid to all employees at corporate and the Centers.
Salaries, wages and benefits for the years ended December 31, 2000 and 1999 were

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$8,920,911 and $7,693,303, respectively, an increase of 16%. Of the expenses
incurred for the year ended December 31, 1999, approximately 81%, or $5,831,353,
was recorded as a result of the issuance of warrants in May and December of
1999. Approximately 4%, or $273,560, was related to consultants and the
remaining 15%, or $1,109,745, was related to employee salaries, wages and
benefits. The 2000 expenses represent a full year of operations.

General Operating Expenses. General operating expenses consist primarily
of administrative operating costs, non-rent facility costs, professional fees
and overhead costs incurred by the corporate office, the Centers and reimbursed
by the affiliated practices. General operating expenses for the years ended
December 31, 2000 and 1999 were $8,339,569 in 2000 and $2,838,826, respectively,
an increase of 194%. Of the expenses paid for the year ended December 31, 1999,
approximately $1,624,000, was recorded as a result of impairment of certain
intangible assets originally recorded in May 1999. Of the remaining $1,214,826
of general operating expense, $386,782 was general operating costs incurred by
the affiliated Centers, and $828,044 was legal and accounting, travel and
general costs of operations. General operating expenses for 1999 included
significant expenditures in preparation for the initial public offering. The
2000 expenses represent a full year of operations.

Depreciation and Amortization. Depreciation expenses consist of
depreciation of corporate assets and depreciation of the assets we acquired from
the affiliated practices. Amortization expenses consist of amortization of
goodwill from the affiliated Centers, intangible assets recorded as a result of
our acquisition in May 1999 of the rights to negotiate business development
agreements with plastic surgery Centers and goodwill related to the acquisition
of our Personal Image Centers in Ft. Lauderdale and Raleigh. Depreciation and
amortization for the years ended December 31, 2000 and 1999 were $1,005,235 and
$183,094, respectively, an increase of 449%. Depreciation of corporate assets
for the year ended December 31, 2000 was approximately $138,000, for affiliated
Centers was approximately $167,000. Amortization of corporate assets for the
year ended December 31, 2000 was approximately $700,000.

Interest Expense. Interest expense consists of the interest portion of
note payments to the affiliated practices, interest on notes payable to
consultants and employees, and interest on our credit lines. Interest expense
for the years ended December 31, 2000 and 1999 were $545,854 and $0,
respectively.

Provision for income taxes. The provision for income taxes was recorded
as a result of income generated in states without net operating loss carry
forwards. No provision for federal taxes was recorded in the current year, while
we recorded a provision of $19,531 for state taxes. A valuation allowance has
been recorded against the deferred assets.

LIQUIDITY AND CAPITAL RESOURCES

Development and acquisition costs, capital expenditures and working
capital requirements will be financed by cash generated through operations,
borrowings and the issuance of notes and common stock. As of December 31, 2000
and 1999, the Company had $274,425 and $842,307 in cash and cash equivalents,
respectively, including restricted cash of $118,048 at December 31, 2000.

Total Assets. Total assets include assets at our corporate office as
well as assets acquired at the IPO from the affiliated practices and the
acquisition of Centers in Raleigh, North Carolina and Ft. Lauderdale, Florida.
Total assets increased to $18,557,906 in 2000 from $11,302,201 in 1999, an
increase of $7,255,705. The majority of the increase is the result of $6,905,752
of goodwill recorded which resulted from current year acquisitions.

Working Capital. The working capital deficit is $2,332,607 at December
31, 2000 compared to $3,436,594 at the end of the prior year. The decrease in
the working capital deficit is primarily a result of accrued consulting and
payroll expenses that were converted into long-term notes.

Cash flows from operating activities were $426,238, ($1,479,971) and
($1,018,255) during 2000, 1999 and 1998, respectively. The increase in 2000 as
compared to 1999 and 1998 is a result of the lack of income from operations,
during 1999 and 1998. Operations began on December 15, 1999. During 2000 cash
flows from operating activities were favorably impacted by net income of
$620,193, including $1,005,235 of depreciation and amortization expenses. Since
2000 was the first full year of operations, the Company experienced significant
fluctuation in its operating accounts, which decreased cash flow from operations
by a net $1,451,057. These fluctuations are not expected to continue.

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Net cash used in investing activities for the years ended December 31,
2000, 1999 and 1998 was $1,244,754, $3,539,936 and $26,036, respectively. The
majority of the net cash used in investing activities in the year ended December
31, 2000 was cash paid for the acquisition of the Florida Center for Cosmetic
Surgery. The majority of the net cash used in investing activities in the year
ended December 31, 1999 was for payments to affiliated practices for the cash
portion of their acquisition.

Net cash provided by financing activities for the years ended December
31, 2000, 1999 and 1998 was $250,634, $5,459,354 and $1,263,000, respectively.
The majority of the net cash provided by financing activities for the year ended
December 31, 2000, was proceeds from debt financing for the acquisition of the
Florida Center for Cosmetic Surgery. These proceeds from debt financing were
offset by payments of related party debt. The net cash provided by financing
activities for the year ended December 31, 1999 resulted from proceeds from the
sale of warrants and the net proceeds from our initial public offering less
dividends paid to shareholders of affiliated practices as part of the SAB 48
merger at the IPO.

Debt and Leases. On December 15, 2000, we entered into a credit
agreement with a mezzanine lender to provide a 5-year, $1,500,000 loan, with an
interest rate of 14%. The loan is secured by security interests in our assets,
which include accounts receivable, Management Agreements and capital stock.

Consistent with the purchase agreement for the Florida Center for
Cosmetic Surgery the Company entered into two notes for $4,100,000 and
$1,000,000. The $4,100,000 note is secured by the stock of the Florida Center
for Cosmetic Surgery and requires interest only payment at 9 percent with the
principal balance due on January 1, 2002 or at the closing of a financing event
with proceeds in excess of $4,000,000. The use of cash generated from the
operations of the Florida Center for Cosmetic Surgery is restricted until the
secured note is paid in full. The $1,000,000 note is unsecured and is payable
based on a 10 year amortization with the remaining principal due January of
2004.

In May 2000, we entered into a facility lease agreement for the
corporate headquarters with aggregate minimum lease payments of approximately
$860,000 through May 2007. In October 2000 we assumed a six-year lease for the
Center in Raleigh with aggregate minimum lease payments of $360,000 through July
2006. In December 2000 in connection with the acquisition of The Florida Center
for Cosmetic Surgery, we assumed a four-year lease for the Personal Image Center
in Ft. Lauderdale with aggregate minimum lease payments of $555,000 through July
2005.

Equity. Pursuant to the Registration Statement on Form S-1 that became
effective on December 2, 1999, we offered and sold 1,400,000 shares of stock in
our initial public offering for an aggregate offering price of $11,200,000. As
of December 31, 1999, the amount of expenses we incurred in connection with the
issuance and distribution of the stock in our initial public offering was (1)
$1,120,000 for underwriting discounts and commissions, and (2) approximately
$1,547,000 for legal, accounting, printing, filing fees and miscellaneous costs.
We have used the remaining net proceeds of $8,533,000 to pay the cash portion of
the consideration to the affiliated practices, to service the debt payments of
the notes issued as consideration to the affiliated practices, to repay
indebtedness assumed from certain affiliated practices and to pay certain
accrued liabilities and for working capital.

Prior to our initial public offering, we financed our start-up costs
primarily through private sales of our securities. Our lack of operating history
resulted in our inability to obtain bridge financing and required us to raise
funds through the issuance of warrants. On May 13, 1999, we sold 1,390,204
warrants to existing shareholders for $0.50 per warrant. The warrants have an
exercise price of $2.50 and were fully vested on the date of issuance. We
recorded the excess of the fair value of the warrants over amounts paid of
approximately $9.3 million as a charge to additional paid-in capital because the
warrants were a cost of raising funds for our operations. We received cash
proceeds of approximately $304,000 and the release of liabilities associated
with accrued compensation of approximately $391,000 as payment for the $0.50
purchase price of the warrants. The non-cash proceeds from the offering were
used to offset accrued compensation of approximately $391,000 and the cash
proceeds of approximately $304,000 were used to fund our operating expenses,
primarily rent and related expenses, travel, advertising, development and
professional services.

Going Concern. The Company has incurred losses from operations in two of
the last three years. As of December 31, 2000, the Company had a working capital
deficit of $2,332,607 that raises substantial doubt about its ability to
continue as a going concern. The Company had an overall net cash outflow of
$567,882 for the year ended December 31, 2000 and incurred a net loss of
$300,391 for the quarter ended December 31, 2000. In addition, all cash acquired
and generated through the Florida Center for Cosmetic Surgery is restricted
until the Company pays a $4,100,000 debt obligation due to the sellers of the
Florida Center for Cosmetic Surgery. Further, the Company must make this debt
payment of $4,100,000 on January 1, 2002. Availability under the Company's line
of credit is limited. At December 31, 1999, the Company had $250,000 available
out of a maximum of $250,000 under the facility.

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Management's plans in regard to these items include the following:

- The Company is currently seeking to raise an additional
$6,000,000 to $8,000,000 via a private placement of its
common stock

- The Company has reduced portions of its fixed overhead expenses

- In January 2001, the Company converted $154,000 of current
accrued expenses into 60,000 shares of the Company's common
stock (see Note 14)

- Management is working with a related party debt holder to
convert portions of amounts due to Company common stock

- Management intends to focus additional efforts toward developing
and growing its Company owned surgery centers, which have
yielded positive cash flows since acquisition

- Management intends to acquire or open additional surgery centers

There are no assurances that Management will be able to successfully
complete its private placement of common stock or that the ultimate amounts
raised will meet the Company's cash flow needs and be sufficient to fund the
Company's operations through 2001. In addition, there is no assurance that the
Company will be able to successfully convert additional debt into common stock
and reduce its current liabilities. Further, there is no assurance that the
Company will be able to successfully develop and grow its affiliated practices
or acquire or open new Centers. The failure of the Company to successfully
achieve one or all of the above items may have a material impact on the
Company's financial position and results of operations. The accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.

NEW ACCOUNTING PRONOUNCEMENTS

In June of 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
In accordance with SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,"
the Company delayed the implementation of SFAS No. 133, as amended by SFAS
138. The standard is effective January 1, 2001 and management does not expect
the adoption of the standard to have a significant impact on the financial
position or results of operations of the Company.

In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements" summarizing the SEC's views in applying generally accepted
accounting principles to various revenue recognition issues. Management believes
that its revenue recognition practices are in conformity with SAB No. 101.

In April 2000, the FASB issued FASB Interpretation No. 44 ("FIN No. 44"),
"Accounting for Certain Transactions Involving Stock Compensation: An
Interpretation of APB No. 25". The Company has adopted the provisions of FIN No.
44, and such adoption did not materially impact the Company's results of
operations.

In September 2000 the FASB issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Asset and Extinguishment of Liabilities, a replacement of
SFAS N. 125. "The standard is effective in 2001 and management does not expect
adoption of the standard to have a material effect on the Company's financial
position or results of operations.

SEASONALITY AND SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The Company has historically experienced and expects to continue to experience
some seasonal fluctuation in its net sales, operating income and net income. A
greater amount of the Company's net sales and operating and net income is
generally realized during the first and second quarter. The results of
operations are also effected by opening new centers and the closing or unwinding
of existing centers.

The following tables set forth certain unaudited results of operations for each
quarter during 1999 and 2000. The unaudited information has been prepared on the
same basis as the audited financial statements appearing elsewhere in this
report and includes all adjustments, which management considers necessary for a
fair presentation of the financial data shown. The operating results for any
quarter are not necessarily indicative of the results to be attained for any
future period.

First Second Third Fourth
Fiscal Year 2000 Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------

Net revenues $ 7,638,518 $ 7,862,789 $ 6,957,966 $ 7,177,708
Operating margin $ 513,694 $ 498,387 $ 292,608 $ (148,567)
Net income (loss) after taxes $ 365,297 $ 373,066 $ 182,220 $ (300,390)

Basic net income (loss) per share $ 0.08 $ 0.08 $ 0.04 $ (0.07)
=========== =========== =========== ===========
Weighted average basic shares outstanding 4,553,708 4,553,708 4,533,677 4,456,000
=========== =========== =========== ===========
Diluted net income (loss) per share $ 0.08 $ 0.08 $ 0.04 $ (0.07)
=========== =========== =========== ===========
Weighted average diluted shares outstanding 4,865,061 4,711,776 4,632,193 4,456,000
=========== =========== =========== ===========

First Second Third Fourth
Fiscal Year 1999 Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------

Net revenues $ -- $ -- $ -- $ 1,426,695
Operating margin $ (442,267) $(2,255,278) $ (509,439) $(6,492,950)
Net (loss) after taxes $ (438,491) $(2,253,136) $ (509,230) $(6,492,951)

Basic net (loss) per share $ (22.77) $ (100.26) $ (19.93) $ (29.65)
=========== =========== =========== ===========
Weighted average basic shares outstanding 19,258 22,474 25,548 218,978
=========== =========== =========== ===========
Diluted net (loss) per share $ (22.77) $ (100.26) $ (19.93) $ (29.65)
=========== =========== =========== ===========
Weighted average diluted shares outstanding 19,258 22,474 25,548 218,978
=========== =========== =========== ===========

FACTORS AFFECTING FUTURE PERFORMANCE

OUR COMBINED OPERATING HISTORY IS LIMITED SO THERE IS LIMITED HISTORICAL
INFORMATION ON WHICH TO EVALUATE OUR COMBINED BUSINESS.

We did not conduct any operations or generate any revenues until the
completion of our initial public offering and the acquisition of 25 founding
practices in December 1999. Prior to that, each of the founding practices
operated as a separate, independent entity. The combined historical financial
results of the founding practices cover periods when each practice operated
separately and may not be indicative of our future financial results.

OUR SUCCESS DEPENDS ON THE CONTINUED EFFECTIVE PERFORMANCE OF OUR
AFFILIATED SURGEONS.

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Under our business services agreements, our revenue depends on the
revenue generated by each of our affiliated practices. The success of each of
the affiliated practices essentially depends on the affiliated surgeons.
Therefore, the effective and continued performance of the affiliated surgeons is
essential to our long-term success. The failure of any of the affiliated
surgeons to complete or renew their employment agreements could result in a
decline in revenues. Any loss of revenue by the affiliated practices would have
an adverse effect on our business.

WE HAVE INCURRED SUBSTANTIAL DEBT AND MAY NOT BE ABLE TO MEET OUR
WORKING CAPITAL REQUIREMENTS AND DEBT SERVICE OBLIGATIONS.

We incurred a significant amount of indebtedness in connection with the
acquisition of the operating assets of the founding practices and in connection
with our recent acquisition of the Florida Center for Cosmetic Surgery. We may
incur additional debt in the future to acquire additional plastic surgery
practices. A substantial portion of our cash flow from operations must be used
to service our debt. In addition, based upon the terms of our acquisition
agreement with the Florida Center for Cosmetic Surgery, we are restricted from
using the cash generated from the operations of the Florida Center for Cosmetic
Surgery until our debt obligation is paid in full. In addition, our level of
indebtedness may limit our ability to obtain additional financing in the future.
Our ability to service our debt and satisfy other obligations depends on our
future operating performance. Although we believe that our cash flow from
operations is sufficient to fund our ongoing operations, if we do not generate
sufficient cash flow to meet our obligations, then we may need to sell
additional equity or debt securities or obtain a credit facility.

OUR ABILITY TO FUND OUR ACQUISITION STRATEGY WILL BE SIGNIFICANTLY
LIMITED IF WE CANNOT OBTAIN ADDITIONAL FINANCING.

To continue our strategy of acquiring additional medical practices, we
need substantial capital, which we may not be able to obtain. We recently
secured a $1.5 million credit facility from the Pacific Mezzanine Fund, L.P.,
but we cannot guaranty that this credit facility will be sufficient and we may
need additional credit facilities to fund our future capital requirements. We
may not be able to obtain additional required capital on satisfactory terms, if
at all. If we are unable to obtain additional capital on acceptable terms, our
ability to achieve our acquisition goals will be significantly limited which
could adversely affect our business.

OUR SUCCESS DEPENDS ON OUR ABILITY TO IMPLEMENT OUR ACQUISITION
STRATEGY.

In pursing acquisition candidates we may compete with companies that
have greater resources than we have. We may not be able to identify acquisition
candidates or consummate planned acquisitions on favorable terms, or at all. If
a planned acquisition fails to occur, our quarterly results could be adversely
affected. In addition, increased competition for acquisition candidates may
result in increased purchase prices and fewer suitable candidates for
acquisition. If we are unable to consummate future acquisitions, we may not be
able to expand our network of affiliated surgeons.

WE MUST EFFECTIVELY INTEGRATE OUR ACQUIRED PRACTICES TO BE SUCCESSFUL.

The integration of acquired practices into our network is a difficult,
costly and time-consuming process. This process may place strains on our
management, operation and systems. There may also be substantial unanticipated
costs or delays in connection with this integration. In addition, we must
attract and retain additional management personnel to successfully integrate the
new practices, which we may not be able to do. Any failure or delay in
successfully integrating the new practices may cause our revenues to decline and
our associated integration expenses to increase.

WE ASSUME CERTAIN LIABILITIES IN CONNECTION WITH OUR ACQUISITIONS THAT
COULD ADVERSELY IMPACT OUR FINANCIAL CONDITION.

Although we are indemnified by the affiliated practices for assumed
liabilities, any payments of indemnification amounts could reduce the revenues
available to pay operating expenses.

A SUCCESSFUL MALPRACTICE CLAIM COULD EXCEED OUR INSURANCE LIMITS. OUR
PLASTIC SURGEONS MAY BE EXPOSED TO PROFESSIONAL LIABILITY AND OTHER
CLAIMS FOR THE PROCEDURES THAT THEY PERFORM.

Some of these claims may be substantial and require significant defense
costs. Any successful suit involving us or our surgeons could result in a large
damage award that may exceed the limits of our insurance coverage. Although we
do not perform plastic surgery procedures, we could become subject to liability
because we provide management services to the practices. While we believe that
we have adequate insurance coverage, it is possible that our coverage is
insufficient to cover losses. It is also possible that coverage may not continue
to be available on satisfactory terms. Successful malpractice claims could
adversely effect a on our

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business, financial condition and results of operations.

WE MAY BE REQUIRED TO LOAN FUNDS TO OUR AFFILIATED PRACTICES AT A TIME
WHEN FUNDS ARE NOT AVAILABLE.

If our affiliated practices do not generate sufficient revenue to cover
their operating expenses, our business services agreements require us to fund
the excess operating expenses. The amount that we must pay is unlimited. If we
are obligated to pay excess operating expenses and sufficient funds are not
available to do so, we would be in breach of our business services agreement.
This would give the affiliated practice the right to terminate its agreement
with us. If we fund the excess operating expenses, the affiliated practice is
obligated to repay the excess with interest. However, there is no guarantee that
a practice will generate sufficient revenue to repay all or a part of its
obligation.

A DETERMINATION THAT THE NON-COMPETITION AGREEMENTS WITH OUR AFFILIATED
SURGEONS ARE NOT ENFORCEABLE COULD HAVE AN ADVERSE IMPACT ON OUR
BUSINESS.

Our business services agreements with the affiliated practices require
the affiliated practices to enter into employment agreements with surgeons.
These employment agreements contain non-competition agreements that generally
limit a surgeon's ability to compete with the affiliated practice for a period
after employment within a specified geographic area. Although the laws of each
state differ concerning the enforcement of such covenants, generally states will
enforce a covenant if it is necessary to protect a legitimate business interest
and is reasonable in both duration and geographic scope. A notable exception is
California in which these types of agreements are generally unenforceable. There
is little judicial authority regarding whether a business services agreement is
the sort of protectable business interest that would permit us to enforce these
covenants or to require the affiliated practices to enforce these covenants
against surgeons formerly employed by the practice. Since the intangible value
of the business services agreement depends on the ability of the affiliated
practices to preserve their business, which could be harmed if former surgeons
went into competition with the practice, a determination that the covenants not
to compete are unenforceable could have an adverse impact on our business.

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST OTHER COMPETITORS WITH
GREATER FINANCIAL AND OTHER RESOURCES, OR LOWER-COST PROVIDERS, WHICH
WOULD ADVERSELY IMPACT OUR BUSINESS.

Our competitors include national and regional providers of management
services that may have greater financial or other resources or otherwise enjoy
competitive advantages that would make it difficult for us to compete with them
or acquire additional practices. In addition, our practices may compete in local
markets with surgeons that perform the services traditionally performed by
plastic surgeons at a lower price than our affiliated surgeons. If the number of
procedures performed by our plastic surgeons or the fees they charge for such
procedures decreases, our financial results could be adversely affected.

GOVERNMENTAL REGULATION MAY HAVE A DETRIMENTAL EFFECT ON OUR REVENUES.

The medical industry and plastic surgery practices are regulated
extensively at the state and federal levels. Review of our business
relationships by regulatory authorities or the courts or changes in regulation
may result in determinations that could adversely affect the amount of service
fees that we receive from our affiliated practices and negatively affect our
earnings. Certain states prohibit non-medical entities from practicing, owning
all or a part of a medical practice, employing physicians or controlling the
content of a physician's advertisements. Certain states also prohibit physicians
from paying a portion of fees received for medical services in consideration for
the referral of a patient or from paying a percentage of revenue to
non-physicians. In addition, many states impose limits on the procedures that
may be delegated by a plastic surgeon to other staff members. These laws and
their interpretations vary from state to state and our business services
agreements may be successfully challenged. Enforceability of certain provisions
could be limited and prevent us from receiving service fees. These types of
changes could restrict our operations in those states or prevent us from
affiliating with plastic surgery practices in those states. In addition, the
laws and regulations of states in which affiliated practices presently operate
may change or be interpreted in the future to either restrict or adversely
affect our agreements with affiliated practices in those states. Currently, the
majority of our business services agreements with founding practices provide for
service fees based on 15% of net cash collections. If changes in these laws
require us to revise these agreements and use consulting agreements with our
fees based on a fixed dollar amount with a fixed percentage increase, our
revenues could be adversely affected.

The United States Congress has considered various healthcare reform
proposals, including comprehensive revisions to the current healthcare system.
It is uncertain what legislative proposals will be adopted in the future or what
actions federal or state legislatures or third-party payers may take in
anticipation of or in response to any healthcare reform proposals or
legislation. Changes in the healthcare industry, such as growth of managed care
organizations or provider networks, may result in lower payment levels for the

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services of our surgeons and lower revenues for us.

Generally, fees received from private-pay patients are higher than those
from third-party payers that have cost-containment requirements. Although
approximately 80% of our practices' current revenues are derived from
private-pay patients, a decrease in the number of these patients could occur due
to federal and state legislative initiatives. Currently, most procedures
reimbursed under Medicare, Medicaid or other third-party payment programs
(including commercial insurers, managed care organizations, health maintenance
organizations or preferred provider organization) for plastic surgery services
are related to reconstructive procedures. The costs of most cosmetic surgery
procedures, which currently represent approximately 75% of the procedures
performed by our surgeons, are not reimbursed by governmental or private payors
and are not subject to cost containment requirements. Comprehensive healthcare
reform that includes reimbursement for the costs of cosmetic surgery procedures
could affect the payment for and availability of services, including discounted
reimbursement rates or more procedures falling under third-party coverage. These
changes could lower the revenues of our practices.

Many states prohibit physicians from using advertising that includes any
name other than the physician's, or from advertising in any manner likely to
lead a person to believe that a non-physician is engaged in the delivery of
medical services. Our business services agreements require all advertising to
conform to these requirements. We have endeavored to structure our web sites to
avoid violation of any state licensing requirements, but a state regulatory
authority may allege that some portion of our Internet business violates these
statutes. Any such allegation could adversely affect our business, results of
operations and financial condition.

ANTITRUST LAWS MAY LIMIT OUR ABILITY TO COMPETE IN CERTAIN MARKETS.

We are subject to a range of antitrust laws that prohibit
anti-competitive conduct, including price fixing and concerted refusals to deal
and division of markets. These laws may limit our ability to enter into business
services agreements with separate plastic surgery practices that compete with
one another in the same geographic market. In addition, these laws may prevent
us from acquiring plastic surgery practices that would be integrated into our
existing network of practices if these acquisitions would substantially lessen
competition or tend to create a monopoly.

IF THE MEDICARE/MEDICAID ANTI-KICKBACK LAWS ARE DETERMINED TO APPLY TO
US, WE COULD BE SUBJECT TO FINES AND OTHER PENALTIES AND OUR AFFILIATED
PRACTICES COULD BE EXCLUDED FROM PARTICIPATION IN FEDERAL HEALTHCARE
PROGRAMS.

The Medicare/Medicaid anti-kickback statute prohibits the payment or
receipt of any remuneration in return for the referral of patients for services
covered under federal healthcare programs, including the Medicare and Medicaid
programs, or in return for purchasing, leasing, ordering or arranging for or
recommending the purchase, lease or order of any item or service that is covered
under a federal health care program. A violation of the anti-kickback statute is
a felony punishable by imprisonment, fines or both and may result in the
imposition of civil money penalties and exclusion from participation in any
federal healthcare program. The statute has been broadly interpreted by the
courts and enforcement agencies. In addition, many states have laws that
prohibit the payment or receipt of any remuneration in return for the referral
of patients or the purchase of items or services under both government and
private health care programs. Violations of these state laws may result in
payment not being made for the items and services rendered, loss of a healthcare
provider's license, fines or criminal penalties. These statutes and regulations
vary from state to state and are often vague. In many states they have not been
interpreted by courts or regulatory agencies. Although we believe that our
current business arrangements with our affiliated practices do not implicate
federal anti-kickback laws, this may not be the case.

WE COULD BE LIABLE FOR THE MISAPPROPRIATION OF PERSONAL INFORMATION
ABOUT THE USERS OF OUR WEB SITE.

Our web sites retain personal information about our users that we obtain
with their consent. If unauthorized persons penetrate our network security and
gain access to or otherwise misappropriate our users' personal information we
may be subject to liability. Such liability could include claims for the misuse
of personal information, such as for unauthorized marketing purposes or the
unauthorized use of credit cards. These claims could result in litigation that
would require us to expend significant time and financial resources to defend.
In addition, if any of the misappropriated data is deemed to constitute patient
health records, this could be a violation of federal law as a breach of privacy.

The Federal Trade Commission and state governmental bodies have recently
investigated the disclosure of personal identifying information obtained from
individuals by Internet companies. The federal government has also made
legislative proposals in this area. We could incur additional expenses if new
regulations regarding the use of personal information are introduced or if any
regulator chooses to investigate our privacy practices. Any new law or
regulation, or the adverse application or interpretation of existing laws, may
decrease the growth in the use of the Internet our web sites. This could
decrease the demand for our services,

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increase our cost of doing business and reduce our earnings. The potential
imposition of liability upon us for our content or services resulting from
changes in government regulations could require us to implement measures to
reduce our exposure to this liability which might require us to expend
substantial resources or to discontinue Internet service offerings.

IF WE ARE SUBJECT TO CLAIMS BASED ON THE CONTENT WE PROVIDE ON THE
INTERNET, WE COULD INCUR UNANTICIPATED EXPENSES.

We may be subject to claims for defamation, negligence, product
liability, copyright or trademark infringement or other matters based on content
and information on our web sites supplied by us or third parties. These types of
claims have been brought, sometimes successfully, against other online service
companies. We may also be subject to claims for the content on other web sites
that are linked to ours, or for the content posted by visitors in chat rooms or
bulletin boards. We could incur significant costs in investigating and defending
against such claims even if they do not result in any liability to us.

OUR BUSINESS WILL BE HARMED IF A BREACH OF SECURITY OCCURS WITH RESPECT
TO OUR WEB SITES.

Internet usage and access by consumers may decline if a compromise of
security occurs at our web sites. We may incur significant costs to provide
security and protect against the threat of security breaches or to alleviate
problems caused by such breaches. If our network security is penetrated,
proprietary and confidential information could be misappropriated and there may
be interruptions in our services. Security breaches could also expose us to
litigation.

INFRINGEMENT OF OUR INTELLECTUAL PROPERTY RIGHTS COULD DISRUPT OUR
BUSINESS.

We rely on a combination of copyright, trademark and trade secret laws
and contractual provisions to establish and protect our proprietary rights. We
have registered the domain names www.idealme.com, www.theplasticsurgeryco.com
and approximately 25 other domain names. However, we have not applied for
federal registration of any trademarks and we may not be able to secure
registration of these names. If we have to change our corporate name, our
customers may be confused and our business could be disrupted. This could have
an adverse effect on the value of our common stock.

OUR SUCCESS DEPENDS ON OUR ABILITY TO RETAIN OUR KEY PERSONNEL.

The continued efforts of our senior management, including Dennis Condon,
is critical to our success. We believe that Mr. Condon's experience and
professional relationship in our industry are key factors in our ability to
achieve our expansion strategy. The loss of his services could have a
detrimental impact on our business. In addition, we depend on the continued
performance of our affiliated surgeons.

THE MARKET PRICE OF OUR COMMON STOCK MAY FLUCTUATE WIDELY.

The market prices of securities of Internet-related companies have
experienced volatility. If we are viewed as an Internet company, the market
price of our common stock could be adversely affected for reasons unrelated to
our operating performance. Fluctuations may also occur in response to our
historical and anticipated operating results, regulatory changes, competition
and any difference between actual results and the results expected by investors
and analysts.

MANAGEMENT BENEFICIALLY OWNS APPROXIMATELY 59% OF OUR COMMON STOCK AND
THEIR INTEREST COULD CONFLICT WITH YOURS.

Our directors, executive officers and the owners of the founding
practices beneficially own approximately 59% of our outstanding common stock. As
a result, collectively they are able to substantially influence all matters
requiring shareholder approval, including the election of directors and approval
of significant corporate transactions. This concentration of ownership may also
have the effect of delaying or preventing a change in control.

SHARES ELIGIBLE FOR SALE IN THE FUTURE COULD NEGATIVELY AFFECT OUR STOCK
PRICE.

The market price of our common stock could decline as a result of sales
of a large number of shares of our common stock or the perception that these
sales could occur. This might also make it more difficult for us to raise funds
through the issuance of securities. Shares of our common stock that have not
been previously traded in the public market but may at some time be sold in the
public market include shares held by affiliates, shares to be issued in
acquisitions and shares to be issued upon the exercise of warrants or stock
options. As of March 1, 2001, we had outstanding 4,825,873 shares of common
stock of which 3,786,282 are freely tradeable. As of March 1, 2001 we have
reserved an aggregate of 4,392,308 shares of common stock for issuance upon
exercise of outstanding

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stock options and warrants. In addition we have filed a registration statement
covering 2,500,000 shares of common stock for use in connection with
acquisitions and two registration statements covering an aggregate of
approximately 3,206,075 shares being offered for resale by selling shareholders.
We may register additional shares in the future in connection with acquisitions,
compensation or otherwise.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our primary financial instrument subject to market risk is a
line-of-credit agreement with maximum availability at December 31, 2000 of
$250,000. The line-of-credit is secured by our principal operating assets and
personally guaranteed by certain of our management. The line-of-credit bears
variable interest rate equal to the Prime rate published in the Wall Street
Journal plus 1 percentage point. (9.5 percent at December 31, 2000) The primary
exposures relating to this financial instrument result from changes in the
interest rates. No amounts were outstanding on this line at December 31, 2000.

At December 31, 2000, a hypothetical ten-percentage point increase in
short-term interest rates would result in a reduction of $25,000 in annual
pre-tax earnings. The estimated reduction is based on the bank debt at its
December 31, 2000 level if the credit line was completely used. The line of
credit was not being used at December 31, 2000.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our financial statements, together with the reports thereon of Arthur
Andersen LLP, dated March 30, 2001 begin on page F-1 of this Report.

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

Not applicable.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

OUR DIRECTORS

Jonathan E. Wilfong, Chairman of the Board. Mr. Wilfong (age 52) is our
founder and served as our Chief Executive Officer until June 1998, and has
served as Chairman of the Board of Directors since 1997. From June 1996 to May
1997, Mr. Wilfong served as a consultant for OrthAlliance, Inc., a public
company which provides business development services to orthodontic Centers, and
from May 1997 to May 1999 he served as Chairman of the Board of OrthAlliance,
Inc. and continues to serve as a director. In 1996, Mr. Wilfong founded Newfound
Capital Associates, an investment banking advisory firm. Mr. Wilfong is a
Certified Public Accountant, and from 1983 to 1996 was a partner with Price
Waterhouse LLP (known now as PricewaterhouseCoopers LLP) in Atlanta, Georgia and
Greenville, South Carolina where he worked primarily with high growth companies.

Dennis E. Condon, President, Chief Executive Officer and Director. Mr.
Condon (age 52) has served as our President and Chief Executive Officer since
June 1998 and has served as a director since December 15, 1999. From 1984 until
joining us, Mr. Condon was employed by Mentor Corporation, an international
supplier of medical products and technology, serving from 1991 to 1998 as
President of the Mentor's medical device division specializing in aesthetic
surgery implants and electromechanical medical instrumentation.

William G. Armiger, M.D., F.AC.S., Director. Dr. Armiger (age 54) has
served as a director since January 15, 2000. Dr. Armiger has been practicing
plastic surgery since 1976. From 1984 to present, Dr. Armiger has served as
director of the Chesapeake Plastic Surgery Center in Baltimore, Maryland. He is
a member of the American Medical Association, the American Society of Plastic
and Reconstructive Surgeons and the American Society of Aesthetic Plastic
Surgeons, as well as several other professional societies. Dr. Armiger is
certified by both the American Board of Surgery and the American Board of
Plastic Surgery. He is a fellow of the American College of Surgeons, and served
as president and governor of the Maryland Chapter from 1990 to 1995. Dr. Armiger
received his M.D. in 1972 from the University of Maryland School of Medicine,
performed a general surgery internship at the University of Maryland Hospital, a
residency in general surgery where he was appointed chief resident at St. Agnes
Hospital in

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Baltimore, Maryland, a plastic surgery residency at Strong Memorial Hospital in
Rochester, New York, and a post graduate fellowship in head and neck
reconstructive surgery and oncology at the Roswell Memorial Institute in
Buffalo, New York.

Robert A. Ersek, M.D., F.A.C.S., Director. Dr. Ersek (age 62) has served
as a director since December 15, 1999. Dr. Ersek has been practicing plastic
surgery in Austin, Texas since 1978. In 1996, he formed Personique, Inc., a
company focusing on patient orientation procedures. Dr. Ersek is the former
President of both the Austin Plastic Surgery Society and the Lipoplasty Society
of Board Certified Plastic Surgeons of North America. Since 1970, he has served
as the Medical Director and a member of the Board of Directors of Genetic
Laboratories Wound Care, a wound care product manufacturing company, now a
wholly-owned subsidiary of Derma Science. Dr. Ersek is a member of the American
Medical Association, a fellow of the American College of Surgeons and the
American Board of Plastic Surgery, American Society of Plastic and
Reconstructive Surgeons, and American Aesthetic Surgery Society. Dr. Ersek
received his M.D. in 1966 from Hahnemann University Medical School, performed an
internship and general surgery residency at the University of Minnesota, a
residency in plastic surgery at Tulane University and a fellowship in plastic
surgery at the University of Mississippi.

John C. Schantz, M.D., F.A.C.S., Director. Dr. Schantz (age 59) has
served as a director since December 15, 1999. Dr. Schantz founded Plastic
Surgery Associates, P.C., a founding Center, in Lancaster, Pennsylvania in 1978.
He currently serves as the Chief of the Division of Plastic Surgery at Lancaster
General Hospital and serves on the active staff of HealthSouth Surgery Center of
Lancaster. He is a member of the Governing Board, Department of Surgery and
serves as Chairman, Surgical Center Council at the Lancaster General Hospital.
He is a member of the American Society of Plastic and Reconstructive Surgeons
and a fellow of the American College of Surgeons. Dr. Schantz received his M.D.
in 1971 from Hahnemann Medical College and completed his residency training at
the Hershey Medical Center, Hershey, Pennsylvania.

W. Grant Stevens, M.D., F.A.C.S., Director. Dr. Stevens (age 47) has
served as a director since December 15, 1999. Dr. Stevens has served as
President of W. Grant Stevens, M.D., Inc. (d/b/a/ Plastic Surgery Associates), a
founding Center in Marina Del Ray, California, since 1988. Dr. Stevens is a
Board Certified Diplomate of the American Board of Plastic Surgery and is a
member of the American Society of Plastic and Reconstructive Surgeons, The
American Society of Aesthetic Plastic Surgery, the California Society of Plastic
Surgeons, as well as several other professional societies. Dr. Stevens is also
on the clinical faculty at U.C.L.A. Dr. Stevens served as Chairman of the
Department of Surgery and was on the Medical Executive Committee at Daniel
Freeman Marina Hospital from 1989 through 1996. Dr. Stevens is an editorial
advisory board member of Cosmetic Surgery Times, Plastic Surgery Products, and
Wounds: A Compendium of Current Research and Center. Dr. Stevens received his
M.D. with honors in 1980 from the Washington University School of Medicine in
St. Louis, Missouri, where he also completed his plastic surgery training. Dr.
Stevens also received the Special Congressional Certificate of Recognition and
the Distinguished Service Citation from the Medical Board of California.

COMPENSATION OF DIRECTORS

Members of the board are reimbursed for their out of pocket expenses for
each meeting attended, but otherwise serve without cash compensation. We adopted
the 1999 Non-Employee Director Stock Plan, pursuant to which each non-employee
director receives a nondiscretionary grant to purchase 10,000 shares of common
stock upon his or her election or appointment to the board and, if the
non-employee director is serving as a non-employee director following the annual
meeting each year, an additional non-discretionary grant for the purchase of
25,000 shares of common stock.

OUR EXECUTIVE OFFICERS

NAME AGE POSITION
- ---- ----- --------

Dennis E. Condon................. 52 President, Chief Executive Officer and Director
Patricia A. Altavilla............ 43 EVP Marketing and Business Planning
Gunnar Sundstrom................. 55 Chief Financial Officer
Josh Levine...................... 42 Chief Development Officer

Dennis E. Condon, President, Chief Executive Officer and Director. Mr.
Condon has served as our President and Chief Executive Officer since June 1998
and has served as a director since December 15, 1999. From 1984 until joining
us, Mr. Condon was employed by Mentor Corporation, an international supplier of
medical products and technology, serving from 1991 to 1998 as President of the
Mentor's medical device division specializing in aesthetic surgery implants and
electromechanical medical instrumentation.

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Patricia A. Altavilla, Chief Operating Officer. Ms. Altavilla has served
as our Vice President of Marketing and Business Planning since August 1998 and
in March 2001 became our Chief Operating Officer. From 1984 to 1998, Ms.
Altavilla was employed by Mentor, serving as Vice President of Marketing since
1993.

Gunnar Sundstrom, Chief Financial Officer. Mr. Sundstrom joined us in
May 1999 as our Chief Financial Officer. Mr. Adam E. Romo Jr. replaced Mr.
Sundstrom as our CFO in January 2001 and Mr. Sundstrom currently serves as out
Vice President of Finance. From 1992 to 1999, Mr. Sundstrom was employed by
Mentor's medical device division, serving as Vice President and Controller since
1996.

Josh Levine, Chief Development Officer. Mr. Levine has served as our
Chief Development Officer since February 2000. Mr. Levine resigned his
employment with us effective as of September 2000.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires our executive offices and
directors and persons who own more than ten percent of our common stock to file
with the Securities and Exchange Commission certain reports, and to furnish
copies thereof to us, with respect to such person's beneficial ownership of our
equity securities. Based solely upon a review of the copies of such reports
furnished to us and certain representation of such persons, we believe that all
filings were timely.

ITEM 11. EXECUTIVE COMPENSATION.

The following table sets forth information with respect to all
compensation earned, whether paid or accrued, in the fiscal years ended December
31, 2000, 1999 and 1998, for services rendered in all capacities to us by our
Chief Executive Officer and other officers earning in excess of $100,000.

ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------------- --------------------------
SECURITIES
ACCRUED & ACCRUED & UNDERLYING
PAID UNPAID UNPAID OPTIONS (#)/ ALL OTHER
YEAR SALARY SALARY BONUS SARS COMPENSATION
---- -------- -------- -------- ------------ ------------

Dennis E. Condon ................................ 2000 $219,617 $ -- $ -- 150,000 $ --
President, Chief Executive Officer and Director 1999 100,000 100,000 218,334 400,000 12,500(1)
1998 83,334 16,667 30,000 600 --
Patricia A. Altavilla ........................... 2000 170,440 -- -- 75,000 --
Chief Operating Officer ....................... 1999 71,250 78,750 91,250 160,000 8,750(1)
1998 32,727 15,000 15,000 300 --
Gunnar Sundstrom ................................ 2000 145,294 -- -- -- --
Chief Financial Officer ....................... 1999 32,500 46,000 73,563 100,000 --
1998 -- -- -- -- --
Joshua H. Levine ................................ 2000 124,615 -- -- 100,000 --
Chief Development Officer 1999 -- -- -- -- --

- ----------

(1) Represents accrued compensation used to pay off notes for the purchase
of our warrants by the officers in May 1999.

OPTION GRANTS FOR LAST FISCAL YEAR

The following table sets forth information regarding stock option grants
for the year ending December 31, 2000 to the Chief Executive Officer and each of
the named executive officers. No stock appreciation rights were granted during
such year.

INDIVIDUAL GRANTS
----------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES OF
NUMBER OF TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
SECURITIES GRANTED TO OPTION TERM (1)
UNDERLYING EMPLOYEES IN EXERCISE OR BASE EXPIRATION ----------------------------
OPTIONS GRANTED FISCAL 2000 PRICE PER SHARE DATE 5%(2) 10%(2)
--------------- ----------- --------------- ---------- ------------- -----------

Dennis E. Condon 150,000 46% $ 4.25 5-11-2010 -- $ 71,612

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Patricia A. Altavilla 75,000 23% $ 4.25 5-11-2010 -- 35,806
Gunnar Sundstrom -- -- -- -- -- --
Joshua H. Levine -- -- -- -- -- --

(1) The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the SEC. There can be no assurance
provided to any executive officer or any other holder of the our
securities that the actual stock price appreciation over the term will
be at the assumed 5% and 10% levels or at any other defined level.
Unless the market price of the common stock appreciates over the option
term, no value will be realized from the option grants made to the Chief
Executive Officer or the named executive officers.

(2) Based on a closing price of $1.813 per share of common stock on December
31, 2000.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUE

The following table sets forth certain information concerning option
holdings for the fiscal year ended December 31, 2000 with respect to the Chief
Executive Officer and each of our named executive officers. No options or stock
appreciation rights were exercised during such year.

SECURITIES UNDERLYING VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FY-END (#) AT FY-END ($)(1)
----------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------

Dennis E. Condon 120,000 330,000 -- --
Patricia A. Altavilla 60,000 165,000 -- --
Gunnar Sundstrom 40,000 60,000 -- --

Joshua H. Levine -- -- -- --

(1) Based on a closing price of $1.813 per share of common stock on December
31, 2000.

We entered into employment agreements with Messrs. Condon and Levine and
Ms. Altavilla providing for annual base salaries of $200,000, $150,000 and
$150,000, respectively, with each being eligible for a cash bonus of up to 30%
of his or her base salary if certain annual financial performance targets are
met. Mr. Sundstrom was granted a bonus of $15,000 payable upon closing of the
initial public offering, and Mr. Levine was granted a signing bonus of $48,000
payable $4,000 per month during his first year of employment with us. We also
granted Mr. Condon and Ms. Altavilla options to purchase 600 and 300 shares of
common stock, respectively, at an exercise price of $500.00 per share with the
options vesting on June 15, 1998 and August 1, 1998, respectively. These options
have since been cancelled. Additionally, we granted at the closing of the
initial public offering options for the purchase of common stock to each of
Messrs. Condon and Sundstrom and Ms. Altavilla for 300,000, 100,000 and 150,000,
shares, respectively, at an exercise price of $8.00 per share. Twenty percent of
these options vested upon the effective date of the initial public offering and
the remainder vest 20% per year on each of the first four anniversary dates of
that effective date. In February of 2000, we granted options to Mr. Levine for
the purchase of 100,000 shares of common stock, at an exercise price of $6.75
per share. Twenty percent of these options vested upon the date of his
employment and the remainder vest 20% per year on each of the first four
anniversary dates of that date. Additionally, we granted on May 11, 2000,
options for the purchase of common stock to Mr. Condon and Ms. Altavilla for
150,000 and 75,000 shares respectively at $4.25 per share with 25% vesting at
the end of each of the first four anniversary dates.

Each of these employment agreements is for an initial term of five years
with an automatic renewal for successive one-year terms unless prior notice of
termination is provided. We may terminate an employment agreement for cause,
without cause upon 30 days prior written notice, or upon death or disability of
the employee. The employee may terminate the employment agreement within 120
days after a constructive termination (as defined therein). If the employee's
employment is terminated by us without cause, by the employee within 120 days
following a constructive termination, or upon occurrence of a change in control,
we will pay the employee on the date of termination:

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- - severance pay in the amount of two times annual base salary;

- - base salary accrued but unpaid from the last monthly payment date to the
date of termination;

- - specified expense reimbursements;

- - a pro-rata portion of the annual maximum bonus for the year in which the
termination occurs; and

- - two times the amount of the bonus actually earned for the prior calendar
year, or if the termination occurs during the first year of employment,
two times the pro-rata portion of the annual maximum bonus for the first
year.

Each agreement prohibits the employee from competing with us for a period of two
years following termination of employment.

Stock Option Plans

We have adopted the 1998 Employee Stock Option Plan, the 1999
Non-Employee Director Stock Plan and the 2000 Stock Compensation Plan. We have
registered the shares of common stock issuable upon exercise of options granted
under these plans, and such shares will be eligible for resale in the public
market, subject to applicable rules and regulations of the Securities Act.

1998 Employee Stock Option Plan. The board has adopted and the
shareholders have approved the 1998 Employee Stock Option Plan. Awards under the
employee plan are to be determined by the compensation committee and granted to
officers and employees as incentive or non-incentive stock options. The board
may terminate the employee plan at any time.

840,000 shares of common stock are reserved for issuance pursuant to the
employee plan, subject to certain anti-dilution provisions. Options for the
purchase of 605,000 shares of common stock were granted at the closing of the
initial public offering to certain officers and employees at an exercise price
equal to the price to the public of $8.00 per share. These options vested 20%
upon the closing of the initial public offering, with the balance vesting 20%
per year on the first through fourth anniversary date of the date of grant. The
options expire five years from the date of grant. Mr. Condon and Ms. Altavilla
were granted non-qualified options under the employee plan for the purchase of
600 and 300 shares of common stock, respectively, at an exercise price of
$500.00 per share. These options vest 100% upon the effective date of their
respective employment agreements.

1999 Non Employee Director Stock Plan. The board has adopted and the
shareholders have approved the 1999 Non Employee Director Stock Plan. Awards
under this plan are to be granted to non-employee directors to purchase shares
of our common stock.

280,000 shares of common stock are reserved for issuance to the
non-employee directors under the director plan. Each person who is elected or
appointed a non-employee director will be granted a nondiscretionary option to
purchase 10,000 shares of common stock at the time of his or her election or
appointment. On December 15, 1999, one non-employee director received a grant of
options to purchase 10,000 shares of common stock. Beginning in 2000, each
person who continues to serve as a non-employee director following the annual
meeting each year will receive a nondiscretionary option to purchase 25,000
shares of common stock. Options issued to non-employee directors under this plan
will be non-qualified stock options, and will expire ten years from the date of
the grant. The exercise price will be equal to the average closing bid price for
the five trading days before election or appointment of the director. Options
issued to non-employee directors become exercisable on the first anniversary of
the date of the grant.

2000 Stock Compensation Plan. The board has adopted and the shareholders
have approved the 2000 Stock Compensation Plan. Awards under the stock
compensation plan are to be determined by the compensation committee and granted
to directors, officers and employees as incentive or non-incentive stock
options. The board may terminate the plan at any time.

1,000,000 shares of common stock are reserved for issuance pursuant to
the stock compensation plan, subject to certain anti-dilution provisions. These
options vest at the rate of 25% of the total shares after one year, and monthly
thereafter with respect to an additional 1/48th of the total shares.

Administration of the Stock Option Plans. The employee plan will be
administered by the compensation committee of the board. The director plan is
self-governing. Under the employee plan, the compensation committee determines
who will receive, and the times at which, awards are granted, the types of
awards granted, and all of the terms and conditions of the awards. Under the
employee plan, the compensation committee must consist of at least two
directors, and for grants of options or awards to any person subject to Section
16 of the Exchange Act, the committee must consist of at least two directors who
are non-employee directors under Rule 16b-3.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

23
24

All of the members of the Board (consisting of Mr. Wilfong) determined
executive compensation prior to the formation of a compensation committee on
January 15, 2000, at which time, the Board designated a compensation committee
composed of Messrs. Wilfong and Kaiser and Dr. Stevens. Mr. Kaiser resigned his
position on the Board effective October 14, 2000. None of our executive officers
serves as a member of a compensation committee or as a director of any entity of
which our directors serve as an executive officer.

REPORT ON EXECUTIVE COMPENSATION

The compensation committee is responsible for ensuring that a proper
system of short and long-term compensation is in place to provide performance
oriented incentives to management. Its report on compensation is as follows:

The compensation committee is responsible for administering our
executive compensation program. Until January of 2000, we had no compensation
committee or other committee of the board of directors performing similar
functions. Decisions regarding the compensation of executive officers for all
periods from inception until then were made by our board of directors (Mr.
Wilfong). The board of directors established a compensation committee on January
15, 2000 consisting of Messrs. Wilfong and Kaiser and Dr. Stevens. Mr. Kaiser
has since resigned from the Board

COMPENSATION POLICY

The compensation committee has adopted the following general principles
and objectives which it considered in establishing executive compensation levels
for 2000 and which it will use to guide future compensation decisions:

- Our compensation programs should be designed to attract and
retain highly qualified executives who will be critical to our
long-term success.

- A portion of the executive's total compensation should bear a
direct relationship to our operating performance and
profitability.

- Executives should be recognized and rewarded for high
performance and extraordinary results.

- Incentive compensation arrangements should provide executives
with an opportunity to acquire and increase direct ownership
interests in us and motivate them to build stockholder value by
aligning their personal interests with stockholder interests.

EXECUTIVE COMPENSATION PROGRAM

The compensation committee believes that a portion of the compensation
paid to executive officers should relate to both our short-term and long-term
profitability. Therefore, the executive officers' compensation program is
composed of base salary, bonus and long-term incentive compensation.

Base Salary and Bonus. Base salaries for Mr. Condon and Ms. Altavilla
are paid pursuant to employment agreements. Each of Messrs. Condon, Levine and
Sundstrom and Ms. Altavilla are eligible for an annual cash bonus of up to 30
percent of his or her annualized base salary. The individual bonus percentages
for 1999 were established by the compensation committee based upon each
officer's level of responsibility and his or her contributions toward improving
operating performance and profitability. The bonus percentages will be reviewed
annually by the compensation committee and may be adjusted in accordance with
these factors or others that the compensation committee determines to be
relevant at the time.

The compensation committee believes that the bonus portion of the
executive compensation program is effective in motivating our executive officers
to improve our current profitability. The compensation committee also believes
that an adequate base salary is necessary to retain effective executive officers
and to discourage management decisions which might improve short-term
profitability but may not always be in our long-term best interest.

Long-Term Incentives. The compensation committee believes that, in
addition to the annual cash bonus arrangements, it is appropriate for us to
provide long-term incentive awards to motivate the executive officers to improve
our long-term profitability and create value for the stockholders. In 1999,
Messrs. Condon and Sundstrom and Ms. Altavilla received grants of options for
the purchase of common stock of 300,000, 100,000 and 150,000 shares,
respectively. In February of 2000, Mr. Levine received a grant of options for
the purchase of 100,000 shares of common stock. In May of 2000, Mr. Condon and
Ms. Altavilla received grants of options for the purchase of common stock
150,000 and 75,000 shares, respectively.

COMPENSATION OF THE CHIEF EXECUTIVE OFFICER

24
25

Compensation arrangements for Mr. Condon as President and Chief
Executive Officer were determined based on his employment agreement with respect
to base salary and long-term compensation and based on consideration of the
factors described above with respect to the bonus amounts.

SECTION 162(M) OF THE INTERNAL REVENUE CODE

Section 162(m) of the Internal Revenue Code, added as part of the
Omnibus Budget Reconciliation Act of 1993, imposes a limitation on deductions
that can be taken by a publicly held corporation for compensation paid to
certain of its executives. Under Section 162(m), a deduction is denied for
compensation paid in a tax year beginning on or after January 1, 1994, to a
corporation's chief executive officer or any of its other four most highly
compensated officers to the extent that such compensation exceeds $1 million.
Certain performance-based compensation, however, is specifically exempt from the
deduction limit.

The Compensation Committee's current policy with respect to the Section
162(m) limitations is to preserve the federal income tax deductibility of
executive compensation payments when it is appropriate and in our best interests
and our stockholders. For the foreseeable future, the Compensation Committee
does not expect Section 162(m) to have any practical effect on our compensation
program. However, the Committee reserves the right to approve the payment of
nondeductible compensation in the future if it deems such payment to be
appropriate.

COMPENSATION COMMITTEE

Jonathan Wilfong, Chairman

W. Grant Stevens, M.D., F.A.C.S.

THE FOREGOING REPORT SHOULD NOT BE DEEMED INCORPORATED BY REFERENCE BY
ANY GENERAL STATEMENT INCORPORATING BY REFERENCE THIS REPORT INTO ANY FILING
UNDER THE 1933 ACT OR UNDER THE 1934 ACT (TOGETHER, THE "ACTS"), EXCEPT TO THE
EXTENT THAT WE SPECIFICALLY INCORPORATE THIS INFORMATION BY REFERENCE, AND SHALL
NOT OTHERWISE BE DEEMED FILED UNDER SUCH ACTS.

25
26

STOCK PRICE PERFORMANCE GRAPH

The following line graph compares the yearly percentage change in
cumulative stockholder return on the common stock with (a) the performance of a
broad equity market indicator, and (b) the performance of a published industry
index. The graph compares the percentage change in the return on the common
stock since December 10, 1999. The stock price performance graph assumes an
investment of $100.00 on December 10, 1999 and an investment of $100.00 in the
S&P 500. Stock price performance as presented is not necessarily indicative of
future results.

[GRAPH]

COMPARISON OF CUMULATIVE TOTAL RETURNS *

Dec 10, 1999 1999 2000
------------ ------- -------

The Plastic Surgery Company Return % 0.00 -18.75 -72.12
Cum $ $100.00 $81.25 $22.65

S & P 500 Return % 0.00 5.89 -9.10
Cum $ $100.00 $105.89 $96.25

S & P SMALLCAP 600 Return % 0.00 8.22 11.80
Cum $ $100.00 $108.22 $120.99

NASDAQ US Return % 0.00 85.84 -39.83
Cum $ $100.00 $185.84 $111.82

New Peer Group Only Return % 0.00 -9.68 75.22
Cum $ $100.00 $90.32 $158.26

New Peer Group + PSU Return % 0.00 -9.68 71.35
Cum $ $100.00 $90.32 $154.76

Old Peer Group Only Return % 0.00 -18.06 -85.20
Cum $ $100.00 $81.94 $12.13

* Total return based on $100.00 initial investment & reinvestment of
dividends

THE STOCK PRICE PERFORMANCE GRAPH SHALL NOT BE DEEMED INCORPORATED BY
REFERENCE BY ANY GENERAL STATEMENT INCORPORATING BY REFERENCE THIS REPORT INTO
ANY FILING UNDER THE ACTS EXCEPT TO THE EXTENT THAT WE SPECIFICALLY INCORPORATE
THIS INFORMATION BY REFERENCE, AND SHALL NOT OTHERWISE BE DEEMED FILED UNDER
SUCH ACTS.

26
27

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

COMMON STOCK OWNERSHIP BY MANAGEMENT
AND PRINCIPAL STOCKHOLDERS

The following table sets forth the beneficial ownership of shares of
common stock as of March 27, 2000 for (i) our directors, (ii) the Chief
Executive Officer and named executive officers, (iii) our directors and
executive officers as a group, and (iv) each person who is a stockholder holding
more than a five percent (5%) interest.

NUMBER OF SHARES PERCENT OF
OF COMMON STOCK COMMON STOCK
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER (2) OWNED(1) OWNED
- ---------------------------- ---------------- ------------

Jonathan E. Wilfong (3) 733,190 13.3%
Dennis E. Condon (4) 309,250 6.1%
Patricia A. Altavilla (5) 110,425 2.2%
Gunnar Sundstrom (6) 40,000 *
Joshua H. Levine (7) 20,000 *
William G. Armiger, M.D., F.A.C.S. 409,949 8.5%
Robert Ersek , M.D., F.A.C.S. 452,914 9.4%
John Schantz, M.D., F.A.C.S. 51,273 1.1%
W. Grant Stevens, M.D., F.A.C.S. (8) 582,901 11.5%
S. L. Schlesinger, M.D., F.A.C.S. (9) 236,173 4.8%
All executive officers and directors as a group
(10 persons) 2,713,062 44.2%

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

* less than 1%

(1) Based on an aggregate of 4,692,158 shares of common stock issued and
outstanding as of March 26, 2001. Includes shares of common stock that
may be acquired upon the exercise of stock options exercisable within
sixty days.

(2) Unless otherwise indicated, the address of each of the beneficial owners
identified is c/o The Plastic Surgery Company, 509 E. Montecito Street,
2nd Floor, Santa Barbara, California 93103. Except as otherwise
indicated, such beneficial owner has sole dispositive power with respect
to all shares of common stock owned by them, subject to community
property laws where applicable.

(3) Includes (i) 8,000 shares of common stock held of record; (ii) 700,000
shares subject to presently exercisable warrants; and (iii) 150 shares
of common stock and 15,000 shares subject to presently exercisable
warrants held of record by his wife. Mr. Wilfong disclaims beneficial
ownership of the shares held by his wife.

(4) Includes (i) 26,750 shares of common stock held of record and (ii)
282,500 shares subject to presently exercisable warrants and options.

(5) Includes (i) 4,175 shares of common stock held of record and (ii)
106,250 shares subject to presently exercisable warrants and options.

(6) Includes 20,000 shares subject to presently exercisable options.

(7) Includes 20,000 shares subject to presently exercisable options.

(8) Includes (i) 442,901 shares of common stock held of record; (ii) 125,000
shares subject to presently exercisable warrants; and (iii) 15,000
shares subject to presently exercisable warrants held by his wife. Dr.
Stevens disclaims beneficial ownership of the warrants held by his wife.

(9) Includes (i) 186,173 shares of common stock held of record; and (ii)
50,000 shares subject to presently exercisable warrants.

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28

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

In February of 2000, we granted options to Joshua. Levine, our former
Chief Development Officer, for the purchase of 100,000 shares of common stock,
at an exercise price of $6.75 per share. Twenty percent of these options vested
upon the date of his employment and the remainder vest 20% per year on each of
the first four anniversary dates of that date. Additionally, we granted on May
11, 2000, options for the purchase of common stock to Dennis Condon, our
President, Chief Executive Officer and Director, and Ms. Altavilla, our Chief
Operating Officer, for 150,000 and 75,000 shares respectively at $4.25 per share
with 25% vesting at the end of each of the first four anniversary dates.

PART IV

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

(1) Financial Statements

Listed on the Index to the Financial Statements and Schedules on page
F-1 of this Report.

(2) Financial Statement Schedules

Listed on the Index to the Financial Statements and Schedules on page
F-1 of this Report.

(3) Exhibits

2.1 Form of Agreement and Plan of Reorganization between The Plastic
Surgery Company and the Founding Centers (incorporated by reference to Exhibit
2.1 of The Plastic Surgery Company's Registration on Form S-1 Registration No.
333-78565)

2.2 Form of Amendment to the Form of Agreement and Plan of
Reorganization between The Plastic Surgery Company and the Founding Centers
(incorporated by reference to Exhibit 2.2 of The Plastic Surgery Company's
Registration on Form S-1 Registration No. 333-78565)

2.3 Form of Purchase and Sale Agreement between The Plastic Surgery
Company and the Founding Centers (incorporated by reference to Exhibit 2.3 of
The Plastic Surgery Company's Registration on Form S-1 Registration No.
333-78565)

2.4 Form of Stock Purchase and Sale Agreement between The Plastic
Surgery Company and the Founding Centers (incorporated by reference to Exhibit
2.4 of The Plastic Surgery Company's Registration on Form S-1 Registration No.
333-78565)

2.5 Letter Agreement between The Plastic Surgery Company and Isis
Cosmetic Surgery Partners, Inc. dated May 13, 1999 (incorporated by reference to
Exhibit 2.5 of The Plastic Surgery Company's Registration on Form S-1
Registration No. 333-78565)

2.6 Form of Amendment to Agreement and Plan of Reorganization dated as
of November 11, 1999 between The Plastic Surgery Company and the Founding
Centers (incorporated by reference to Exhibit 2.6 of The Plastic Surgery
Company's Registration on Form S-1 Registration No. 333-78565)

2.7 Form of Amendment to Purchase and Sale Agreement dated as of
November 11, 1999 between The Plastic Surgery Company and the Founding Centers
(incorporated by reference to Exhibit 2.7 of The Plastic Surgery Company's
Registration on Form S-1 Registration No. 333-78565)

2.8 Form of Amendment to Agreement and Plan of Reorganization dated as
of November 24, 1999 between The Plastic Surgery Company and Founding Centers
(incorporated by reference to Exhibit 2.8 of The Plastic Surgery Company's
Registration on Form S-1 Registration No. 333-78565)

2.9 Form of Amendment to Purchase and Sale Agreement dated as of
November 24, 1999 between The Plastic Surgery Company and Founding Centers
(incorporated by reference to Exhibit 2.9 of The Plastic Surgery Company's
Registration on Form S-1 Registration No. 333-78565)

2.10 Stock Purchase Agreement between and among The Plastic Surgery
Company and the stockholders of the Florida Center for Cosmetic Surgery, dated
November 15, 2000 (incorporated by reference to Exhibit 2.1 of The Plastic
Surgery Company's Current Report on Form 8-K, filed on December 18, 2000.

28
29
3.1 Form of Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3.1 of The Plastic Surgery Company's
Registration on Form S-1 Registration No. 333-78565)

3.2 Form of Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 of The Plastic Surgery Company's Registration on Form S-1
Registration No. 333-78565)

4.1 Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 of The Plastic Surgery Company's Registration on Form S-1
Registration No. 333-78565)

4.2 Form of Warrant Agreement between The Plastic Surgery Company and
the representatives of the underwriters of The Plastic Surgery Company's initial
public offering. (incorporated by reference to Exhibit 4.2 of The Plastic
Surgery Company's Registration on Form S-1 Registration No. 333-78565)

4.3 Form of Referral Warrant (incorporated by reference to Exhibit 4.3
of The Plastic Surgery Company's Registration on Form S-1 Registration No.
333-78565)

10.1 Amendment to Employment Agreement between The Plastic Surgery
Company and David Challoner dated February 25, 1999 (incorporated by reference
to Exhibit 10.3 of The Plastic Surgery Company's Registration on Form S-1
Registration No. 333-78565)

10.2 Amendment to Employment Agreement between The Plastic Surgery
Company and Patricia Altavilla dated March 1, 1999 (incorporated by reference to
Exhibit 10.5 of The Plastic Surgery Company's Registration on Form S-1
Registration No. 333-78565)

10.3 Form of Service Agreement between The Plastic Surgery Company and
the Founding Centers (incorporated by reference to Exhibit 10.7 of The Plastic
Surgery Company's Registration on Form S-1 Registration No. 333-78565)

10.4 Form of Amendment to Form of Service Agreement between The Plastic
Surgery Company and the Founding Centers (incorporated by reference to Exhibit
10.8 of The Plastic Surgery Company's Registration on Form S-1 Registration No.
333-78565)

10.5 Form of Consulting and Business Services Agreement between The
Plastic Surgery Company and the Founding Centers (incorporated by reference to
Exhibit 10.9 of The Plastic Surgery Company's Registration on Form S-1
Registration No. 333-78565)

10.6 Form of Employment Agreement between the affiliated surgeons and
the affiliated Centers (incorporated by reference to Exhibit 10.1 of The Plastic
Surgery Company's Registration on Form S-1 Registration No. 333-78565)

10.7 1998 Employee Stock Option Plan (incorporated by reference to
Exhibit 10.11 of The Plastic Surgery Company's Registration on Form S-1
Registration No. 333-78565)

10.8 1999 Non-Employee Director Stock Plan (incorporated by reference
to Exhibit 10.12 of The Plastic Surgery Company's Registration on Form S-1
Registration No. 333-78565)

10.9 Amendment to Employment Agreement between The Plastic Surgery
Company and Dennis E. Condon dated June 30, 1999 (incorporated by reference to
Exhibit 10.13 of The Plastic Surgery Company's Registration on Form S-1
Registration No. 333-78565)

10.10 Loan Agreement between The Plastic Surgery Company and Pacific
Mezzanine Fund, L.P., dated December 18, 2000

10.11 Warrant issued to Pacific Mezzanine Fund, L.P., dated December
18, 2000

23.1 Consent of Arthur Andersen LLP

29
30

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the 1934 Act, we
have duly caused this Form 10-K to be signed on behalf of the undersigned,
thereunto duly authorized, on April 16, 2001.

THE PLASTIC SURGERY COMPANY

By: /s/ Dennis E. Condon
-------------------------------------
Dennis E. Condon
President, Chief Executive Officer
and Director

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

SIGNATURE TITLE DATE
- --------- ----- ----

/s/ Jonathan Wilfong Chairman of the Board April 16, 2001
- ------------------------------------------
Jonathan Wilfong

/s/ Dennis Condon President and Chief April 16, 2001
- ------------------------------------------ Executive Officer (Principal
Dennis Condon Executive Officer)

/s/ Adam E. Romo Jr. Chief Financial Officer April 16, 2001
- ------------------------------------------ (Principal Accounting
Adam E. Romo Jr. Officer)

/s/ Robert Ersek, M.D. Director April 16, 2001
- ------------------------------------------
Robert Ersek, M.D.

/s/ John Schantz, M.D. Director April 16, 2001
- ------------------------------------------
John Schantz, M.D.

/s/ W. Grant Stevens Director April 16, 2001
- ------------------------------------------
W. Grant Stevens

/s/ William Armiger, M.D. Director April 16, 2001
- ------------------------------------------
William Armiger, M.D.

31
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

The Plastic Surgery Company, Inc. and Subsidiaries Report of
Independent Public Accountants......................................... F-2

Consolidated Balance Sheets as of December 31, 2000 and 1999............. F-3

Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998....................................... F-4

Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended December 31, 2000, 1999 and 1998........................... F-5

Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998....................................... F-6

Notes to Consolidated Financial Statements............................... F-7

Report of Independent Public Accountants on Supplemental Schedule........ F-24

Schedule II - Valuation and Qualifying Accounts for each of the
three years in the period ended December 31, 2000...................... II-1

F-1
32

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To The Plastic Surgery Company:

We have audited the accompanying consolidated balance sheets of The Plastic
Surgery Company, Inc. (a Georgia corporation) and Subsidiaries as of December
31, 2000 and 1999 and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Plastic Surgery Company,
Inc. and Subsidiaries as of December 31, 2000 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, as of December 31, 2000, the Company had a working capital
deficit of $2,332,607 which raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.

ARTHUR ANDERSEN LLP

Los Angeles, California
March 30, 2001

F-2

THE PLASTIC SURGERY COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of December 31: 2000 1999
------------ ------------

ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................ $ 156,377 $ 842,307
Restricted cash .................................. 118,048 --
Accounts receivable, net of allowance for doubtful
accounts of $175,025 and $ 0 in 2000 and 1999,
respectively ................................... 602,498 160,140
Current portion of notes receivable .............. 31,872 --
Prepaids ......................................... 174,863 --
Other current assets ............................. 64,062 --
------------ ------------
Total current assets ........................... 1,147,720 1,002,447

PROPERTY AND EQUIPMENT, net ........................ 1,291,903 1,147,580
GOODWILL FOUNDING PRACTICES, net of accumulated
amortization of $513,894 and $142,330 in 2000 and
1999, respectively ............................... 8,176,958 9,152,174
GOODWILL FLORIDA CENTER, net of $17,820 accumulated
amortization...................................... 6,851,258 --
OTHER INTANGIBLES, net of accumulated amortization
of $4,926 ........................................ 329,849 --
NOTES RECEIVABLE, net of current portion
and allowance of $230,000 ........................ 526,899 --
DEBT ISSUANCE COSTS, net of accumulated amortization
of $1,800 ........................................ 214,028 --
OTHER ASSETS ....................................... 19,291 --
------------ ------------
$ 18,557,906 $ 11,302,201
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Current portion of capital lease obligations ..... $ 40,939 $ --
Current portion of related party debt ............ 1,162,184 1,952,557
Current portion of long-term notes ............... 654,354 --
Accounts payable ................................. 647,668 70,518
Accrued payroll and payroll related .............. 185,728 808,967
Accrued consulting expenses ...................... 406,395 726,895
Accrued expenses ................................. 383,059 880,104
------------ ------------
Total current liabilities .......................... 3,480,327 4,439,041

NON-CURRENT LIABILITIES:
CAPITAL LEASE OBLIGATIONS, net of current portion. 86,175 --
RELATED PARTY DEBT, net of current portion ....... 4,172,427 4,203,565
LONG-TERM NOTES, net of current portion .......... 6,004,755 --
------------ ------------
Total liabilities .............................. 13,743,684 8,642,606

COMMITMENTS AND CONTINGENCIES (Note 9)

SHAREHOLDERS' EQUITY:
Common stock; no par value; 100,000,000 shares
authorized, and 4,765,873 and 4,553,708 shares
issued and outstanding at December 31, 2000
and 1999, respectively ......................... -- --
Paid-in capital .................................. 37,529,583 36,450,529
Warrants ......................................... 9,170,134 8,714,754
Accumulated deficit .............................. (41,885,495) (42,505,688)
------------ ------------
4,814,222 2,659,595
------------ ------------
$ 18,557,906 $ 11,302,201
============ ============

The accompanying notes are an integral part of these
consolidated balance sheets.

F-3

THE PLASTIC SURGERY COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31: 2000 1999 1998
------------ ------------ -----------

Revenues:
Practice reimbursements ..................... $ 23,889,595 $ 1,266,555 $ --
Management fees ............................. 5,166,683 160,140 --
Cosmetic procedures ......................... 580,703 -- --
------------ ------------ -----------
Total Revenue ............................. 29,636,981 1,426,695 --
------------ ------------ -----------

Direct expenses:
Salaries, wages, and benefits ............... 7,371,629 468,367 --
Cost of procedures .......................... 196,268 -- --
Medical supplies ............................ 4,156,601 187,470 --
Advertising ................................. 3,518,211 113,272 --
Rent ........................................ 2,169,039 110,664 --
------------ ------------ -----------
Total direct expenses ..................... 17,411,748 879,773 --

Salaries, wages, and benefits ................. 1,549,282 7,224,936 2,181,990
General operating expenses .................... 8,339,569 2,838,826 1,021,961
Depreciation and amortization ................. 1,005,235 183,094 6,548
Provision for doubtful accounts ............... 175,025 -- --
------------ ------------ -----------
Total operating expenses .................. 28,480,859 11,126,629 3,210,499
------------ ------------ -----------
Operating income (loss) ....................... 1,156,122 (9,699,934) (3,210,499)
Other income .................................. 29,456 6,126 7,623
Interest expense .............................. (470,854) -- --
Amortization of debt discount ................. (75,000) -- --
------------ ------------ -----------
Income (loss) before provision for income taxes 639,724 (9,693,808) (3,202,876)
Provision for income taxes .................... 19,531 -- --
------------ ------------ -----------
Net income (loss) ............................. $ 620,193 $ (9,693,808) $(3,202,876)
============ ============ ===========

Basic earning (loss) per share ................ $ 0.14 $ (44.26) $ (188.40)
============ ============ ===========

Weighted average basic shares outstanding ..... 4,524,000 219,000 17,000
============ ============ ===========

Diluted earnings (loss) per share ............. $ 0.13 $ (44.26) $ (188.40)
============ ============ ===========

Weighted average diluted shares outstanding ... 4,666,000 219,000 17,000
============ ============ ===========

The accompanying notes are an integral part of these consolidated statements.

F-4

THE PLASTIC SURGERY COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for each of the three years in the period ended December 31, 2000

COMMON STOCK
------------------------ PAID-IN
SHARES AMOUNT CAPITAL WARRANTS
---------- --------- ------------ -----------

BALANCE AT DECEMBER 31, 1997 ....................... 16,400 $ -- $ 1,471,440 $ 250,000
Common stock issued to Investors ................. 2,526 -- 1,263,000 --
Common stock sold to consultants and
employees from shareholder ..................... -- -- 787,500 --
Net loss ......................................... -- -- -- --
---------- --------- ------------ -----------
BALANCE AT DECEMBER 31, 1998 ....................... 18,926 -- 3,521,940 250,000
Common stock issued to investors in private
placements ..................................... 474 -- 237,000 --
Warrants issued to employees, consultants
and shareholders ............................... -- -- -- 4,856,353
Warrants issued to shareholder ................... -- -- (9,269,630) 9,964,983
Stock issued to ISIS ............................. 6,148 -- 3,073,780 --
Sale of common stock in initial public offering... 1,400,000 -- 8,532,976 --
Stock issued to founding surgeons ................ 2,999,734 -- 23,997,881 --
Warrants converted by shareholders................ 128,426 -- 1,338,982 (1,338,982)
Warrants purchased from shareholder .............. -- -- 5,017,600 (5,017,600)
Dividends paid ................................... -- -- -- --
Net loss ......................................... -- -- -- --
---------- --------- ------------ -----------
BALANCE AT DECEMBER 31, 1999 ....................... 4,553,708 -- 36,450,529 8,714,754
Common stock issued in connection with
the acquisition of the Florida Center .......... 406,075 -- 1,000,000 --
Unwinding of affiliated practice ................. (153,574) 130,489 --
Conversion of affiliated practice ................ (40,336) -- (110,924) --
Interest imputed on related party debt ........... -- -- 59,489 --
Fair value of warrants issued in connection
with the issuance of a long-term note payable... -- -- -- 455,380
Net income ....................................... -- -- -- --
---------- ---- ------------ -----------
BALANCE AT DECEMBER 31, 2000 ....................... 4,765,873 $ -- $ 37,529,583 $ 9,170,134
========== ==== ============ ===========

TOTAL
SHAREHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
------------ ------------

BALANCE AT DECEMBER 31, 1997 ....................... $ (1,879,919) $ (158,479)
Common stock issued to Investors ................. -- 1,263,000
Common stock sold to consultants and
employees from shareholder ..................... -- 787,500
Net loss ......................................... (3,202,876) (3,202,876)
------------ -----------
BALANCE AT DECEMBER 31, 1998 ....................... (5,082,795) (1,310,855)
Common stock issued to investors in private
placements ..................................... -- 237,000
Warrants issued to employees, consultants
and shareholders ............................... -- 4,856,353
Warrants issued to shareholder ................... -- 695,353
Stock issued to ISIS ............................. -- 3,073,780
Sale of common stock in initial public offering... -- 8,532,976
Stock issued to founding surgeons ................ (21,579,640) 2,418,241
Warrants converted by shareholders................ -- --
Warrants purchased from shareholder .............. -- --
Dividends paid ................................... (6,149,445) (6,149,445)
Net loss ......................................... (9,693,808) (9,693,808)
------------ -----------
BALANCE AT DECEMBER 31, 1999 ....................... (42,505,688) 2,659,595
Common stock issued in connection with
the acquisition of the Florida Center for
Cosmetic Surgery, Inc. ......................... -- 1,000,000
Unwinding of affiliated practice ................. -- 130,489
Conversion of affiliated practice ................ -- (110,924)
Interest imputed on related party debt ........... -- 59,489
Fair value of warrants issued in connection
with the issuance of a long-term note payable... -- 455,380
Net income ....................................... 620,193 620,193
------------ -----------
BALANCE AT DECEMBER 31, 2000 ....................... $(41,885,495) $ 4,814,222
============ ===========

The accompanying notes are an integral part of these consolidated statements.

F-5

THE PLASTIC SURGERY COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31: 2000 1999 1998
----------- ----------- -----------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................. $ 620,193 $(9,693,808) $(3,202,876)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Loss on disposal of property and equipment ....... 7,603 -- --
Depreciation and amortization .................... 1,005,235 183,094 6,548
Imputed interest on notes payable ................ 75,000 -- --
Expense related to stock and warrant issuance .... -- 5,831,353 787,500
Expense related to asset impairment .............. -- 1,624,000 --
Provision for doubtful accounts .................. 175,025 -- --
Changes in assets and liabilities:
Accounts receivable ............................ (896,181) (160,140) --
Prepaids and current assets .................... (103,706) -- --
Other assets ................................... (19,291) -- --
Accounts payable ............................... (104,591) (13,101) 514,656
Accrued payroll and payroll related ............ (320,500) 748,631 875,917
Accrued consulting expense ..................... (623,239) -- --
Accrued expenses ............................... 610,690 -- --
----------- ----------- -----------
Net cash provided by (used in)
operating activities ....................... 426,238 (1,479,971) (1,018,255)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................ (217,663) (174,120) (26,036)
Notes receivable payments received ................. 33,070 -- --
Payment to founding practices ...................... -- (2,939,016) --
Proceeds from sale of property and equipment ....... 600 -- --
Acquisition of intangible assets ................... -- (426,800) --
Cash paid for the acquisition of the Florida
Center for Cosmetic Surgery, Inc.,
net of cash acquired ............................. (1,060,761) -- --
----------- ----------- -----------
Net cash used in investing activities ................ (1,244,754) (3,539,936) (26,036)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations .............. (11,801) -- --
Borrowings on the line of credit ................... 440,000 -- --
Repayments of the line of credit ................... (440,000) -- --
Borrowings under long-term notes ................... 9,048 -- --
Payments of related party debt ..................... (1,033,544) -- --
Proceeds from debt financing ....................... 1,500,000 -- --
Debt acquisition costs ............................. (213,169) -- --
Proceeds from warrants issued ...................... 100 695,353 --
Advance from shareholders .......................... -- 170,121 --
Payment of advance from shareholder ................ -- (50,121) --
Dividend paid to shareholders of founding practices -- (4,125,975) --
Net proceeds from initial public offering .......... -- 8,532,976 --
Common stock issued to investors ................... -- 237,000 1,263,000
----------- ----------- -----------
Net cash provided by financing activities ........ 250,634 5,459,354 1,263,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS
AND RESTRICTED CASH ................................ (567,882) 439,447 218,709
CASH, CASH EQUIVALENTS AND RESTRICTED CASH,
beginning of year .................................. 842,307 402,860 184,151
----------- ----------- -----------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH,
end of year ........................................ $ 274,425 $ 842,307 $ 402,860
=========== =========== ===========

The accompanying notes are an integral part of these consolidated statements.

F-6

THE PLASTIC SURGERY COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000

1. BUSINESS, FORMATION AND LIQUIDITY/GOING CONCERN

BUSINESS

The Company owns and/or operates cosmetic surgery and cosmetic laser centers
across the United States. The initial business model was based on providing
business development services to affiliated cosmetic surgery centers through
long-term service agreements. Pursuant to the business services agreements,
physicians continue to have final decision authority for the day-to-day
management of the Centers, including operations, finance and human resources.
For future growth, the Company plans to make a strategic shift to an alternative
structure whereby the Company will take control of all business affairs of the
Centers. The surgeons then are able to spend their time focused on patient care
and surgery. As of December 31, 2000 the Company owned, managed and/or operated
27 cosmetic surgery centers. Subsequent to year-end, the Company dissolved two
of its allied center relationships (see note 14).

FORMATION

The Plastic Surgery Company (the "Company"), formerly knows as Better Image,
Inc., was incorporated as a Georgia corporation on April 30, 1997 to provide
business development services and internet solutions to plastic surgery
practices. The Company had no significant operations until the closing of an
initial public offering (the "Offering") on December 15, 1999. Upon the closing
of the Offering, the Company effected the transfer (the "Transfer"), of certain
operating assets and certain liabilities of, or the stock of an entity holding
certain assets and certain liabilities of, plastic surgery practice entities
(the "Founding Practices") in exchange for cash, notes and shares of common
stock. Each Founding Practice transaction was individually negotiated between
the Company and the Founding Practice as to all material terms. The Company also
entered into long-term business services agreements with these Founding
Practices. Sixteen of the original plastic surgery practices were considered
promoters and therefore were accounted for consistent with Staff Accounting
Bulletin 48 "Accounting for Transfer of Non-Monetary Assets by Promoters or
Shareholders in Exchange for Common Stock" ("SAB 48").

Prior to the Offering, the Company reported as a development stage company.
Capital was raised through private placement sales of stock and warrants, and
all sales activities centered around signing the allied practices that became
part of the Company at the Offering.

During 2000, the Company acquired two plastic surgery centers, which are
operated by the Company. The Company employs surgeons as independent contractors
to perform the procedures. As of December 31, 2000, the Company owned these two
centers through its two wholly owned subsidiaries: The Plastic Surgery Company
of North Carolina (see note 4), located in Raleigh, North Carolina, and the
Florida Center for Cosmetic Surgery ("FCCS")(see note 3), located in Fort
Lauderdale, Florida.

LIQUIDITY/GOING CONCERN

The Company has incurred losses in two of the last three years. As of December
31, 2000, the Company had a working capital deficit of $2,332,607 that raises
substantial doubt about its ability to continue as a going concern. The Company
had a net cash outflow of $567,882 for the year ended December 31, 2000 and
incurred a net loss of $300,391 for the quarter ended December 31, 2000. In
addition, all cash acquired and generated through FCCS is restricted until the
Company pays a $4,100,000 debt obligation due to the sellers of FCCS. Further,
the Company must make this debt payment of $4,100,000 on January 1, 2002.
Availability under the Company's line of credit is limited. At December 31,
2000, the Company had $250,000 available out of a maximum of $250,000 under the
facility.

F-7

Management's plans in regard to these items include the following:

o The Company is currently seeking to raise an additional $6,000,000
to $8,000,000 via a private placement of its common stock

o The Company has reduced portions of its fixed overhead expenses

o In January 2001, the Company converted $154,000 of current accrued
expenses into 60,000 shares of the Company's common stock and converted
$150,000 of current accrued expenses into a long-term note payable (see
Note 14)

o Management is working with a related party debt holder to convert
portions of amounts due to Company common stock

o Management intends to focus additional efforts toward developing and
growing its Company owned surgery centers, which have yielded positive
cash flows since acquisition

o Management intends to acquire or open additional surgery centers

There are no assurances that Management will be able to successfully complete
its private placement of common stock or that the ultimate amounts raised will
meet the Company's cash flow needs and be sufficient to fund the Company's
operations through 2001. In addition, there is no assurance that the Company
will be able to successfully convert additional debt into common stock and
reduce its current liabilities. Further, there is no assurance that the Company
will be able to successfully develop and grow its Company-owned surgery centers
or acquire or open new centers. The failure of the Company to successfully
achieve one or all of the above items may have a material impact on the
Company's financial position and results of operations. The accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements were prepared in conformity
with accounting principles generally accepted in the United States and include
the accounts of the Company and its wholly owned subsidiaries (see note 1). All
intercompany accounts and transactions have been eliminated.

CASH AND CASH EQUIVALENTS

Cash equivalents consist of highly liquid investments acquired with original
maturities of 90 days or less at the date of purchase. They are recorded at
cost, which approximates fair value.

RESTRICTED CASH

Consistent with the acquisition agreement for the purchase of FCCS dated
December 18, 2000, all cash purchased plus cash generated from continuing
operations is restricted until a $4,100,000 recourse note due the sellers is
paid (see notes 3 and 7).

REVENUE RECOGNITION

The Company receives revenue from three different sources:

(1) Revenue is received by the Company as a fee for business services that
are performed for affiliated practices. This fee is calculated based
on a rate of 15 percent of actual cash collections received by the
affiliated practices, during the period. Revenue is recognized during
the period in which cash is received by the affiliated practices,
consistent with the management agreements.

F-8

(2) Practice reimbursements revenues are the operating expenses of the
practices assumed by the Company. Operating expenses of the founding
practices are the responsibility and legal obligation of the Company
and included as a component of the Company's revenue, consistent with
industry practices. These expenses are as follows:

- Salaries, benefits, payroll taxes, workers compensation, health
insurance and other benefit plans, and other direct expenses of
non-medical employees of the Company at each practice office,

- Direct costs of all employees or consultants that provide services
to each practice office,

- Medical and office supplies,

- Lease or rent payments, utilities, telephone and maintenance
expenses for practice facilities,

- Property taxes on the Company assets located at practice offices,

- Property, casualty and liability insurance premiums, excluding
malpractice insurance which will be the responsibility of the
practice,

- Surgeon recruiting expenses, and

- Advertising and other expenses attributable to the promotion of
practice offices.

The Founding Practices retain responsibility for the payment of any
and all direct employment expenses, including benefits, for any
surgeon or other employee that the Company is prohibited from
employing by applicable state law. In addition, the Founding Practices
retain responsibility for the payment of expenses for continuing
education, seminars, professional licenses, professional membership
dues and malpractice insurance and all other expenses of any surgeon.

The amount of operating expenses of the affiliated practices assumed
by the Company was as follows:

For the year ended December 31, 1998 $ --
For the year ended December 31, 1999 $ 1,266,555
For the year ended December 31, 2000 $23,889,595

(3) Cosmetic procedure revenue is generated from the Company's wholly
owned surgery centers that were acquired near the end of 2000. Revenue
from owned practices is recognized at the time the procedure is
performed. For the year ended December 31, 2000, revenue from
company-owned centers was $580,703.

SUPPLEMENTAL STATEMENTS OF CASH FLOWS DISCLOSURES

Non-cash investing and financing activities, which are excluded from the
consolidated statements of cash flows, are as follows:

For the years ended December 31: 2000 1999 1998
----------- ----------- ----

NON-CASH TRANSACTIONS
Transactions with founding surgeons:
Stock issued ....................................................... $ -- $23,997,881 $ --
Notes payable - recorded as dividends .............................. $ -- $ 2,023,470 $ --
Notes payable - recorded as goodwill ............................... $ -- $ 3,037,652 $ --
Equipment acquired ................................................. $ -- $ 971,985 $ --
Warrants converted by shareholders ................................... $ -- $ 1,338,982 $ --
Warrants purchased from shareholders ................................. $ -- $ 5,017,600 $ --
Issuance of warrants ................................................. $ -- $ 9,269,630 $ --
Common stock issued in purchase of contract rights from Isis ......... $ -- $ 3,073,780 $ --
Capital leases to purchase property and equipment .................... $ 138,915 $ -- $ --

Acquisition of FCCS, Unwound and Converted practices:
Fair market value of assets acquired, net of cash acquired ........... $ 551,506 $ -- $ --
Excess of fair value over cost (Goodwill) ............................ 6,905,752 -- --
Fair value of liabilities assumed .................................... (936,839) -- --
Debt issued for acquisition .......................................... (4,996,142) -- --
Debt forgiven in acquisitions ........................................ 556,049 -- --
Stock Issued in acquisition .......................................... (1,019,565) -- --
----------- ----------- ----
Cash paid for acquisition, net of cash acquired .................... $ 1,060,761 $ -- $ --
=========== =========== ====
CASH PAID FOR:
Interest ............................................................. $ 379,871 $ -- $ --
Taxes ................................................................ $ 2,513 $ -- $ --

F-9

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided using the straight-line
method over the assets' estimated useful lives of 2 to 5 years, with leasehold
improvements amortized over 7 years or the term of the leases if lesser.
Property and equipment are summarized as follows as of December 31:

2000 1999
----------- -----------

Computer equipment and software .................... $ 429,901 $ 314,747
Furniture and fixtures ............................. 355,551 207,057
Medical equipment .................................. 412,405 427,417
Leasehold improvements ............................. 433,767 247,644
----------- -----------
1,631,624 1,196,865
Less - accumulated depreciation and amortization....
(339,721) (49,285)
----------- -----------
$ 1,291,903 $ 1,147,580
=========== ===========

The Company has a policy of capitalizing expenditures that materially increase
assets useful lives and charges ordinary maintenance and repairs to operations
as incurred. When property or equipment are disposed of, the cost and related
accumulated depreciation and amortization are removed from the accounts and any
gain or loss is included in operations. Depreciation and amortization expense
for the years ended December 31, 2000, 1999 and 1998 was $304,475, $40,764 and
$6,548, respectively

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash, accounts receivable and accounts payable
approximate their fair values principally because of the short-term maturities
of these instruments. The carrying amounts of long-term debt approximates fair
value based on current interest rates available to the Company for debt
instruments with similar terms, degree of risk and remaining maturities. The
remaining financial instruments approximate fair value based on their short-term
nature.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates and
assumptions.

STOCK OPTIONS AND WARRANTS

The Company accounts for the issuance of options and warrants to employees in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25"). Options and warrants issued to
employees at an exercise price at or above fair value at the date of grant would
require no compensation expense to be recorded under APB No. 25. Options and
warrants issued to non-employees are accounted for under Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
No. 123"). Options and warrants issued to non-employees require compensation
expense to be recorded for the fair value of the equity instrument issued less
any consideration received.

BASIC AND DILUTED NET LOSS PER SHARE

Basic and diluted net income (loss) per share was computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share", using
the weighted average number of common shares outstanding. Diluted net income
(loss) per share does not include the impact of common stock equivalents for
options and warrants of 1,440,500, 2,461,154 and 1,900 for the years ended
December 31, 2000, 1999 and 1998, respectively, as their effect would be
anti-dilutive.

F-10

The following schedule summarizes the information used to compute earnings per
common share:

Years ended December 31,
--------------------------------
2000 1999 1998
--------- ------- ------
Weighted average number of common
shares used to compute basic net
income (loss) per share 4,524,000 219,000 17,000
Dilutive effect of stock options
and warrants 142,000 -- --
--------- ------- ------
Weighted average number of common
shares used to compute diluted net
income (loss) per common share
4,666,000 219,000 17,000
========= ======= ======

COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) for the years ended December 2000, 1999, and 1998 is
the same as net income (loss) presented in the accompanying consolidated
statements of operations.

ADVERTISING AND MARKETING

The costs of advertising are expensed when the advertising takes place.
Production costs are expensed the first time that an advertisement runs.

GOODWILL AND OTHER INTANGIBLES

Goodwill and other intangible assets consist of the excess of the purchase price
over the fair value of the net assets acquired from asset acquisitions at fair
value and amounts paid for a non-compete agreement. Amounts are amortized
straight-line over the estimated life of the acquired tangible and intangible
assets as follows:

Goodwill 3 to 15 years
Non-compete agreement 3 years

The Company reviews the carrying value of its long-lived assets on a
practice-by-practice basis to determine if facts and circumstances exist that
would suggest that assets might be impaired or that the amortization period
needs to be modified. Among the factors the Company considers in making the
evaluation are changes in the practices' market position, reputation,
profitability, geographic penetration, the relationship with the physicians and
any changes in the legal or regulatory environment. If facts and circumstances
are present which may indicate that the carrying amount of the asset may not be
recoverable, the Company will prepare a projection of the undiscounted cash
flows of the specific practice and determine if the long-lived assets and/or
goodwill are recoverable based on these undiscounted cash flows. If the carrying
value of the assets exceeds the undiscounted cash flow, the Company will adjust
the carrying amount of these assets to their estimated fair value. The Company
will determine estimated fair value by reference to quoted market prices, if
available, or by considering the prices for similar assets or the results of
valuation techniques that include the present value of the estimated future cash
flows.

NEW ACCOUNTING PRONOUNCEMENTS

In June of 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In
accordance with SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133," the
Company delayed the implementation of SFAS No. 133, as amended by SFAS No. 138.
The standard is effective January 1, 2001 and management does not expect the
adoption of the standard to have a significant impact on the financial position
or results of operations of the Company.

F-11

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements"
summarizing the SEC's views in applying generally accepted accounting principles
to various revenue recognition issues. Management believes that its revenue
recognition practices are in conformity with SAB No. 101.

RECLASSIFICATIONS

Certain prior year balances have been reclassified to conform to the current
year presentation.

3. ACQUISITION OF FLORIDA CENTER FOR COSMETIC SURGERY

On December 18, 2000, the Company acquired all of the issued and outstanding
capital stock of FCCS, for a purchase price of $7,000,000, in accordance with
the terms and conditions of the Stock Purchase Agreement. In connection with the
Agreement, the Purchase Price included (i) a cash payment in the amount of
$900,000, (ii) the issuance of secured promissory notes to the FCCS Shareholders
with an aggregate principal amount of $4,100,000 (see note 7), (iii) the
issuance of unsecured promissory notes to the FCCS Shareholders with an
aggregate principal amount of $1,000,000 (see note 7), and (iv) the issuance of
an aggregate of 406,075 shares of Common Stock of the Company with an aggregate
fair value at the date of issuance of $1,000,000 to the FCCS Shareholders (see
note 10). The acquisition of FCCS resulted in $6,869,078 of goodwill that will
be amortized straight-line over a 15-year life (see note 2). Amortization
expense of $17,820 is recorded in the accompanying consolidated financial
statement for the year ending December 31, 2000. Operating results from "FCCS"
from December 18, 2000 through December 31, 2000 are included in the
accompanying consolidated financial statements.

The following unaudited pro forma consolidated data summarize the operations for
the periods indicated as if the acquisition had been completed on January 1,
1999. These unaudited pro forma amounts for the years ended December 31, 2000
and 1999 are intended for informational purposes only and are not necessarily
indicative of the results of operations that would have occurred had the
purchase been made at the beginning of the periods presented or the future
results of the combined operations.

2000 1999
----------- ------------
(unaudited) (unaudited)

Revenues $37,499,937 $ 7,633,361
Net income (loss) $ 756,880 $(9,731,185)
Basic earnings (loss) per share $ 0.16 $ (15.57)
Diluted earnings (loss) per share $ 0.17 $ (15.57)

Three of the prior owners of FCCS signed one-year employment contracts with the
Company. The contract terms require the Company to make total cash payments of
$175,000, which is six months combined salary, in the event of a termination
before the end of the contract.

F-12

4. UNWINDING AND CONVERSION OF ALLIED PRACTICES

In September 2000, the Company unwound an acquisition and service agreement with
a physician who's practice was initially acquired in a business combination
accounted for using SAB 48. All the tangible and intangible assets originally
transferred at the initial combination were returned, including 153,574 shares
of Company common stock which were retired upon receipt. The net effect of the
transaction was recorded as an increase in additional paid in capital of
$130,489. Cash paid by the Company of $153,574 in the initial acquisition will
be repaid with interest over a three-year period. This amount has been included
in notes receivable in the accompanying consolidated balance sheets (see note
5).

In October 2000, the Company converted an affiliated practice to a wholly owned
subsidiary. The doctor originally working under a service agreement continues to
perform procedures at the practice as an independent contractor. The Company
purchased the assets and assumed certain liabilities of the practice. The
physician returned 40,336 shares of Company common stock issued at the initial
practice affiliation, which were retired by the Company (at the fair market
value on the date of return), and signed a note receivable to the Company for
the value of liabilities assumed and the receivables outstanding at the
conversion date (see note 5). The transaction was accounted for as a purchase
and the fair value of the consideration received was allocated to net acquired
assets with the remaining $301,000 was recorded as a reduction of goodwill.

5. NOTES RECEIVABLE

The Company has two unsecured notes receivable from plastic surgeons that were
previously affiliated practices. The principal balances of these notes are
$107,875 at 8% interest and $680,896 at 6% interest at December 31, 2000. The
smaller note is being repaid based on a three-year amortization schedule. The
larger note is a result of a practice that was converted to a wholly owned
surgery center (see note 4). The note is repaid by a percentage withheld from
the doctor's negotiated fee from ongoing services as an independent contractor
surgeon. The Company has provided a reserve, in purchase accounting, of $230,000
for potential default of the notes receivable.

6. LINE OF CREDIT

In July 2000, the Company established a line of credit of $250,000, which
matures in July 2001. Interest on the line of credit equals the prime rate plus
one percent, or 10.5% at December 31, 2000. The amounts borrowed under the line
of credit are secured by a personal guarantee of an officer of the Company, and
has no other covenants or restrictions. Interest expense on the line of credit
was $5,269 for the year ended December 31, 2000. No amounts were outstanding as
of December 31, 2000. Activity under this facility was as follows during 2000:

Maximum amount outstanding $230,000
Weighted average amount outstanding $ 93,000
Weighted average interest rate during the period 10.5%

F-13

44
7. DEBT OBLIGATIONS

The Company has debt obligations outstanding to both related parties and to
third parties.

The Company's related party debt consisted of the following at December 31,:

2000 1999
---------- ----------

Note payable to shareholder and director, unsecured, net of imputed
interest at rates of 14% and 8%, or $59,469 and $75,000 in 2000
and 1999, respectively, payable in monthly installments of $15,000
with the final balance due in June 2006 $ 910,531 $ 975,000

Notes payable to affiliated practices, unsecured, senior to the note
payable to the Mezzanine lender (see below) bearing interest at an
annual rate of 8%, payable in monthly installments of $89,085 with the
final balance due in December 2004 3,665,529 5,061,122

Notes payable to employees and a shareholder/director for accrued payroll
and bonuses, unsecured, bearing interest at an annual rate of 8%, payable
in monthly installments of $36,011, due in December 2003 758,551 --

Other -- 120,000
----------- -----------
$ 5,334,611 $ 6,156,122
Less - Current portion (1,162,184) (1,952,557)
----------- -----------
$ 4,172,427 $ 4,203,565
=========== ===========

debt obligation to third parties

The Company's long term notes consisted of the following at December 31,:

2000 1999
----------- -----------

Secured note payable to sellers of FCCS, bearing interest at an annual
rate of 9%, interest payable in monthly installments of $30,750, final
interest and principal due January 1, 2002 $ 4,100,000 $ --

Unsecured note payable to sellers of FCCS, stated interest at an annual
rate of 9%, interest imputed at an annual rate of 14%, net of discount
of $103,858, principal and interest payable in monthly installments
of $12,628 and final payment of approximately $790,000 due on
January 1, 2004. 896,142 --

Note payable to Mezzanine lender, secured by assets of the Company
stated interest at an annual rate of 14%, net of discount of $455,380
due to detachable warrants, effective interest at an annual rate of
24.6%, interest payable in monthly installments of $17,500, principal
amount of $1,500,000 due December 31, 2005 1,044,720 --

Notes payable to individuals unsecured, bearing interest at an annual
rate of 8%, principal and interest payable in monthly payments of
$28,624 and a final payment January 2002. 355,410 --

Payments due under a non-compete agreement due in monthly installments of
$20,000 through October 2001 200,000 --

Other 62,837 --
---------- -----------
6,659,109 --
Less - current portion (654,354) --
----------- -----------
$ 6,004,755 $ --
=========== ===========

F-14

Future principal maturities of all debt obligations above are as follows at
December 31, 2000:

Year Ending December 31,
------------------------
2001 $ 1,816,538
2002 5,504,608
2003 2,158,759
2004 1,204,095
2005 1,224,720
Thereafter 85,000
-----------
$11,993,720
===========

Interest expense on debt was $545,854, $0, and $0 for the years ended December
31, 2000, 1999 and 1998, respectively.

The priority of the debt liquidation is first payment of the $4,100,000 FCCS
secured one-year note, second the FCCS unsecured three year note, third the
affiliated practices notes, the Mezzanine note, and then all others.

8. INCOME TAXES

The components of the income tax provision for the years ended December 31,
2000, 1999, and 1998 are as follows:

2000 1999 1998
--------- ----------- ----------

Current:
Federal..................... $ -- $ -- $ --
State....................... 19,531 -- --
--------- ----------- ----------
19,531 -- --
--------- ----------- ----------
Deferred:
Federal..................... (181,010) 1,375,120 1,087,944
State....................... (21,296) 183,349 128,115
--------- ----------- ----------
(202,306) 1,558,469 1,216,059
--------- ----------- ----------

Change in Valuation allowance 202,306 (1,558,469) (1,216,059)
--------- ----------- ----------
Total Provision............... $ 19,531 $ -- $ --
========= =========== ==========

The following is a summary of the items which caused recorded income taxes to
differ from taxes computed using the statutory federal income tax rate for the
years ended December 31, 2000, 1999, and 1998:

2000 1999 1998
---- ---- ----
Statutory federal income tax rate................. 34% (34)% (34)%

Effect of:
State income tax, net of federal benefit....... 3 (4) (4)
Change in valuation allowance.................. (37) 98 38
Permanent items................................ 4 0 0
Warrant expense/acquisition expense............ 0 (60) 0
Other.......................................... (1) 0 0
--- ---- ---
Total................................... 3% 0% 0%
=== ==== ===

F-15

As reflected in the accompanying statement of operations, the Company incurred a
loss from operations during the years ended December 31, 1998 and 1999. Due to
the limited operations of the Company, a valuation allowance has been recorded
to fully reserve for the deferred tax assets. The components of the deferred tax
assets as of December 31, 2000 and 1999 are as follows:

2000 1999
----------- -----------

Net operating loss carryforward ............... $ 186,203 $ 48,574
Contract right impairment ..................... 575,979 617,120
Accrued liabilities and organizational expenses 644,785 766,437
Amortization of intangible assets ............. 1,111,131 1,342,397
Allowance for doubtful accounts ............... 54,124 --
----------- -----------
2,572,222 2,774,528
Valuation allowance ........................... (2,572,222) (2,774,528)
----------- -----------
$ -- $ --
=========== ===========

The Company has approximately $500,000 of federal and state net operating loss
carryforwards at December 31, 2000, expiring at various dates through 2019.

9. COMMITMENTS AND CONTINGENCIES

Legal

The Company is subject to certain government regulations at the federal and
state levels. In compliance with certain regulatory requirements, the Company
does not control the practice of medicine. The business services agreements may
be challenged by certain states as to their legality. There also can be no
assurance that the laws and regulations of states in which the Company will
maintain operations will not change or be interpreted in the future to restrict
the Company's relationships with the Founding Practices.

Each surgeon may be exposed to professional liability and other claims by
providing plastic surgery procedures to the public. Each Founding Practice is
required to maintain general liability and malpractice insurance. As a result of
providing business services, the Company may be named as a co-defendant in
lawsuits against surgeons affiliated with the Founding Practices. The Company
does not control the practice of plastic surgery and cannot purchase malpractice
insurance. The Company does not control the compliance of the surgeons with
regulations or other requirements relating to the practice of medicine.
Successful claims could result in large damage awards that could exceed
insurance limits. The Company is not aware of any outstanding claims at December
31, 2000 that are expected to materially impact its operations or financial
position.

The Company has been named a defendant in various lawsuits arising out of the
normal course of business. Management does not expect that the outcome of these
matters will have a material effect on the Company's financial position or
results of operations.

Leases

In May 2000, the Company entered into a facility lease agreement for its
corporate headquarters that expires in May 2007. In October 2000, as part of
acquiring the assets of the affiliate practice in Raleigh, N.C., the Company
assumed the remaining six years of the nine-year facility lease expiring in July
2006. In December 2000, as part of the purchase of the FCCS, the Company assumed
a four-year lease expiring in July 2005. Rent payments for these facilities are
subject to escalation, based upon increases in the consumer price index. In
addition, the Company leases certain equipment under non-cancelable operating
leases expiring at various dates through May 2007.

The Company has leased equipment under capital lease agreements expiring at
various dates through September 2003. As of December 31, 2000, there is
$138,915, at cost, included in property and equipment in the accompanying
consolidated balance sheets purchased under capital leases.

F-16

Aggregate future minimum lease payments under non-cancelable capital and
operating leases as of December 31, 2000 are as follows:

Year Ended December 31,: Capital Operating Total
- ------------------------ --------- ---------- ----------
2001 .................................. $ 61,981 $ 327,939 $ 389,920
2002 .................................. 61,981 325,543 387,524
2003 .................................. 39,421 321,312 360,733
2004 .................................. -- 321,312 321,312
2005 .................................. -- 271,057 271,057
Thereafter ............................ -- 218,919 218,919
-------- ---------- ----------
163,383 $1,786,082 $1,949,465
========== ==========
Less - amount representing interest
at 17 and 21 percent ................ (36,269)
--------
Present value of minimum lease payments 127,114
Less - current portion ................ (40,939)
--------
$ 86,175
========

Rent expense of $114,522, $106,548 and $41,328 was recorded for the years ended
December 31, 2000, 1999 and 1998, respectively.

10. COMMON STOCK

In March 1998, the Company began selling 3,000 shares of common stock to
affiliates of anticipated Founding Practices and other unrelated investors
through a second private placement memorandum ("PPM2") at a price of
approximately $500.00 per share. As of December 31, 1998, 2,526 shares were
issued under the PPM2 for net proceeds of $1,263,000.

In November 1998, a principal stockholder of the Company sold 1,575 shares of
his common stock to certain employees and consultants of the Company for
approximately $.20 per share. The Company recorded expense of $787,500 on these
shares in 1998 based on a fair value of approximately $500.00 per share as
determined by management.

In January and February of 1999, the Company sold 474 shares of common stock for
net proceeds of $237,000.

In May 1999, the Company acquired the rights to negotiate agreements with
plastic surgery practices from ISIS Cosmetic Surgery Partners, Inc. As
consideration, the Company issued 6,148 shares of its common stock with a fair
market value of $3,073,780 and $500,000 in cash. The excess of the fair market
value less the net assets acquired was allocated as goodwill among the doctors
acquired at the initial public offering.

Pursuant to the registration statement on Form S-1 that became effective in
December 1999, the Company offered and sold 1,400,000 shares of stock in its
initial public offering for an aggregate offering price of $11,200,000 and net
proceeds of approximately $8,533,000.

In September 2000, the Company dissolved its relationship with one of the
affiliated practices. The dissolution included the return of 153,574 shares of
common stock. In addition the Company acquired another affiliated practice. The
terms of the agreement required 40,336 shares of stock to be returned to the
Company. These shares were retired (see note 4).

In December 2000, the Company issued in connection with the acquisition of FCCS
406,075 shares of its common stock with a fair market value of $1,000,000 (see
note 3).

F-17

11. STOCK OPTIONS AND WARRANTS

Stock Options

The Company has adopted the 1998 Employee Stock Option Plan, the 1999
Non-Employee Director Stock Plan and the 2000 Employee, Director and Consultant
Stock Option Plan (collectively, the Plans). The Plans provide for grants of
non-qualified and incentive stock options to purchase up to 2,120,000 shares of
common stock. Options may be granted to officers, employees, directors and
consultants. Options are granted at the fair market value on the date of grant
or at a price determined by the Compensation Committee of the Board of
Directors. Options typically vest over a four or five year period and expire
from five to ten years from the date of grant.

Information regarding the combined stock Option Plan as of December 31, 2000,
1999 and 1998, and changes during the years then ended is summarized as follows:

Available Option Weighted Average
For Grant Shares Exercise Price
--------- -------- ----------------
December 31, 1997 -- -- $ --
--------- --------- -------
Additional authorized 840,000 -- --
Granted (900) 900 500.00
Exercised -- -- --
Cancelled -- -- --
--------- --------- -------
December 31, 1998 839,100 900 $500.00
--------- --------- -------
Additional authorized 280,000 -- --
Granted (845,000) 845,000 8.00
Exercised -- -- 0.00
Cancelled 150,000 (150,000) 8.00
--------- --------- -------
December 31, 1999 424,100 695,900 $ 8.64
--------- --------- -------
Additional authorized 1,000,000 -- --
Granted (598,800) 598,800 3.34
Exercised -- -- --
Cancelled 10,900 (10,900) 89.91
--------- --------- -------
December 31, 2000 836,200 1,283,800 $ 6.21
========= ========= =======

At December 31, 2000, 1999 and 1998, 312,500, 127,000 and 900 options were
exercisable at a weighted average price of $8.00, $10.80 and $500 per share,
respectively. The options outstanding at December 31, 2000 expire in various
years through 2010. Information about stock options outstanding at December 31,
2000 is summarized as follows:

Weighted Weighted Weighted
Average Average Average
Range of Options Remaining Exercise Number Exercise
Exercise Prices Outstanding Contract Life Price Exercisable Price
- ------------------------------------------------------------------------------------------------------------

$8.00 801,500 4.31 Years $8.00 312,500 $8.00
$8.00
$4.25 225,000 4.36 Years $4.25 -- $ --
$ --
$2.25 - $2.46 257,300 7.31 Years $2.36 -- $ --
- ------------------------------------------------------------------------------------------------------------
$2.25 - $8.00 1,283,800 4.92 Years $6.21 312,500 $8.00
============================================================================================================

F-18

49
The Company has elected to adopt SFAS No. 123 for disclosure purposes only and
applies APB Opinion No. 25 and related interpretations in accounting for its
employee stock options. Had the Company applied the fair value based method of
accounting, which is not required, to all grants of stock options, under SFAS
No. 123, the Company would have recognized compensation expense of $887,796 and
$639,447 relating to options for the years ended December 31, 2000 and 1999,
respectively. Accordingly, the Company's net income and basic and diluted
earnings per share would have reflected the following unaudited pro forma
amounts:

2000 1999
--------- ------------
Pro forma net loss $(267,603) $(10,333,255)
Pro forma basic net loss per share $ (0.06) $ (47.19)
Pro forma diluted net loss per share $ (0.06) $ (47.19)

The weighted average fair value of options granted during 2000, 1999 and 1998
was $2.50, $6.00 and $0, respectively.

Under SFAS 123, the fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions:

2000 1999 1998
--------- --------- ---------

Expected dividend yield.......................... -- -- --
Risk-free interest rate.......................... 5.25-6.74% 6.09-6.20% 6.09-6.20%
Expected volatility.............................. 100% 81% 81%
Expected life (in years)......................... 2-5 years 3-4 years 3-4 years

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. Option value models also require the input of highly subjective
assumptions such as expected option life and expected stock price volatility.

Stock Warrants

WARRANTS ISSUED TO EMPLOYEES AND CONSULTANTS

On May 12, 1999, the Company issued warrants to purchase 160,000 shares of
common stock to certain employees and a consultant of the Company for an
exercise price per share equal to $2.50. The warrants are not subject to
adjustment for stock split, stock dividends or any other reorganization of the
Company's outstanding stock. The Company recorded expense of $1,148,112 related
to the issuance of these warrants based on the fair value of the Company's
common stock on the date of issuance of $8.93 per share.

On December 15, 1999, certain Founding Practice surgeons received warrants to
purchase an aggregate of 137,750 shares of common stock with an exercise price
per share equal to the initial public offering price of $8.00, exercisable for a
five year term, for referring surgeons for affiliation with the Company and
assistance in the recruitment of officers of the Company. The Company also
issued warrants to individuals not affiliated with the Company to purchase an
aggregate of 125,000 shares of common stock with an exercise price per share
equal to the initial public offering price of $8.00, exercisable for a five-year
term, for referring surgeons to the Company. The Company recorded $1,179,070 in
expense related to these warrants, based on a Black-Scholes value of $4.49 per
warrant.

On December 29, 1999 the Company's board of directors approved the purchase of
700,000 warrants from the Chairman of the Board. The warrants were sold to the
Chairman on May 13, 1999 for $.50 per warrant and had an exercise price of $2.50
per share. The Company purchased the warrants for the issuance (i) of a
non-interest bearing promissory note in the principal amount of $1,050,000 and
(ii) warrants to purchase 700,000 shares of common stock at $8.00 per share (see
note 12). The note was recorded at its principal value less a discount of
$75,000. Compensation expense of $3,504,171 related to the issuance of the
warrants and the note was recorded. $2,529,171 of compensation expense related
to the warrants with the remaining $975,000 being the net value of the note
payable to the Chairman of the Board.

WARRANTS ISSUED TO SHAREHOLDERS

On May 13, 1999, the Company sold warrants to purchase 1,390,204, including
those issued to the Chairman of the Board, shares of common stock at an exercise
price per share equal to $2.50. The purchase price was $.50 per warrant. The
Company received cash proceeds of $303,852 from the sale of these warrants. The
Company received notes from a consultant and certain officers and employees in
the amount of $391,250, for the $.50 per warrant purchase price of the warrants.
The notes were full recourse notes that were to mature three years from the date
of issuance and accrue interest at a rate of 8% per annum. The notes were
subsequently paid off prior to June 30, 1999 by an offset to accrued
compensation owed to the consultant and the employees. The warrants may be
exercised in whole or in part for a five-year term commencing on the date of
issuance. The warrants are not subject to adjustment for stock split, stock
dividends or any other reorganization of the Company's outstanding stock. As the
warrants were a cost of raising capital, the Company recorded a charge to

F-19
50
additional paid-in capital of $9,269,630 related to the issuance of these
warrants based on the fair value of the Company's common stock on the date of
issuance of $8.93 per share.

WARRANTS CONVERTED

On December 15, 1999, certain warrant holders elected to convert 186,800
warrants through a cashless exercise at $2.50 per share exercise price. The
warrants were converted into 128,426 shares of common stock. The Company
recorded this transaction by removing the value of warrants of $1,338,982 and
recording it as paid-in capital.

On December 15, 2000 the Company issued warrants to purchase 405,154 shares of
common stock to Pacific Mezzanine Fund, L.P. as part of the consideration for a
$1,500,000 loan (see note 7). The warrants have an exercise price of $2.50, and
are exercisable for a ten-year period. The Company recorded $455,380 in debt
discount related to these warrants, based on a Black-Scholes value of $1.12 per
warrant.

12. RELATED PARTY TRANSACTIONS

AGREEMENTS WITH FOUNDING PRACTICES

The Company completed, through a series of stock acquisitions and mergers and
asset transfers, the acquisition of certain assets and assumption of certain
liabilities of the Founding Practices concurrently with the initial public
offering of shares of its common stock. Each Founding Practice has entered into
three agreements, collectively referred to as the business services agreements:
(i) an acquisition agreement pursuant to which the Company purchases certain
operating assets of each practice; (ii) a 20 or 25 year business services
agreement whereby the Company agrees to provide management or consulting
services to the practice; and (iii) an employment agreement between the practice
and each surgeon who is an equity holder in the practice or who provides
services through such practice on an average of more than ten days each month.
As of December 31, 2000, the founding practices owned 2,805,824 shares of common
stock and were due notes payable in the amount of $3,665,529 recorded as related
party debt in the accompanying consolidated balance sheets.

AGREEMENTS WITH OFFICERS AND DIRECTORS

On May 13, 1999, the Company sold to the Chairman of the Board warrants to
purchase 700,000 shares of common stock at an exercise price per share equal to
$2.50. The purchase price was $.50 per share. The Company received a note from
the Chairman in the amount of $350,000 for the $.50 purchase price of the
warrants. The note was full recourse and was to mature three years from the date
of issuance and accrue interest at a rate of 8% per annum. The note was paid off
prior to June 30, 1999 by an offset to accrued compensation. On December 29,
1999, the board of directors approved the purchase of the warrants from the
Chairman for the issuance (i) of a non-interest bearing promissory note in the
principal amount of $1,050,000 (see note 7) and (ii) warrants to purchase
700,000 shares of common stock at $8.00 per share. The note provides for
repayment in monthly installments of $15,000 and prepayment without penalty at
any time or from time to time at the discretion of the board of directors. The
warrants may be exercised in whole or in part for a five-year term beginning on
the date of issuance. The Company recorded a compensation charge of
approximately $3.5 million in 1999 related to these transactions.

In December 2000 the Company converted $758,551 of commissions, bonus and
payroll accrued at December 31, 1999, with an interest rate of 8%, into
three-year notes payable. Interest expense of $64,552 was recorded for these
notes for the year ended December 31, 2000. $88,000 of these notes was to a
director, the remaining $589,803 was to officers of the Company. The notes are
included in related party debt (See Note 7) in the accompanying consolidated
balance sheets.

F-20
51

13. SEGMENT INFORMATION

The Company has two reportable business segments, both in the medical industry:
management services for affiliated practices and operation of personal image
centers. The reportable segments are based on the types of services provided.
The Company operates personal image centers through its two wholly owned
subsidiaries. These have been aggregated as a single reportable segment due to
the similarities in economic characteristics, the services provided, the
processes involved, the types of customers and the regulatory environment.

Revenues from management services to affiliated practices are generated from the
affiliated surgeons participating in management agreements for the years ended
December 31, 2000 and 1999, as well as the practice reimbursements from such
affiliated practices (see note 2). Revenues from the operation of personal image
centers are generated from the performance of surgical procedures for the year
ended December 31, 2000. The Company evaluates performance based on several
factors, of which the primary financial measures are revenues and operating
income (loss).

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in Note 2 of the Notes to
Consolidated Financial Statements.

The Company had no customers representing more than 10% of revenues in any year.
Substantially all of the Company's revenues were earned in the United States.
All of the Company's long-lived assets reside in the United States.

F-21

Summarized financial information concerning the Company's reportable segments is
shown in the following tables.

2000 1999 1998
----------- ------------ --------

Revenues:
Personal image centers $ 580,703 $ -- $ --
Affiliated practices - management fees 5,166,683 160,140 --
Affiliated practices - practice reimbursements 23,889,595 1,266,555 --
----------- ------------ --------
Total $29,636,981 $ 1,426,695 $ --
=========== ============ ========

Operating income (loss):
Personal image centers $ 111,659 $ -- $ --
Management of affiliated practices 1,044,463 (9,699,934) --
----------- ------------ --------
Total $ 1,156,122 $ (9,699,934) $ --
=========== ============ ========

Interest expense:
Personal image center $ 156 $ -- $ --
Management of affiliated practices 545,698 -- --
----------- ------------ --------
Total $ 545,854 $ -- $ --
=========== ============ ========

Depreciation and amortization:
Personal image centers $ 10,410 $ -- $ --
Management of affiliated practices 994,825 183,094 6,548
----------- ------------ --------
Total $ 1,005,235 $ 183,094 $ 6,548
=========== ============ ========

Assets:
Personal image centers $ 1,241,153 $ --
Management of affiliated practices 17,316,753 11,302,201
----------- ------------
$18,557,906 $ 11,302,201
=========== ============

Capital expenditures:
Personal image centers $ -- $ -- $ --
Management of affiliated practice 217,663 174,120 26,036
----------- ------------ --------
Total $ 217,663 $ 174,120 $ 26,036
=========== ============ ========

F-22

14. SUBSEQUENT EVENTS

In January 2001, the Company converted $156,000 of current accrued expenses into
60,000 shares of Company common stock and converted $150,000 of current accrued
expenses into a five-year long-term note payable.

In March 2001, the Company unwound the acquisitions and service agreements of
two additional physicians whose practices were initially acquired in a business
combination accounted for using SAB 48. All the tangible and intangible assets
originally transferred at the initial combination were returned. The net effect
of the transactions will be recorded in additional paid in capital.

F-23

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE

To The Plastic Surgery Company, Inc. and Subsidiaries:

We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of The Plastic Surgery
Company, Inc. and Subsidiaries included in this Form 10-K, and have issued our
report thereon dated March 30, 2001. Our audits were made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. Schedule II - Valuation and Qualifying Accounts is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Los Angeles, California
March 30, 2001

F-24

SCHEDULE II

PLASTIC SURGERY COMPANY, INC AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2000

Balance at Charged to Balance
Beginning Costs and at End
of Year Deductions Expenses Other of Year
---------- ---------- -------- -------- --------

Year Ended December 31, 1998:
Allowance for doubtful accounts $ -- $ -- $ -- $ -- $ --
Notes receivable reserve $ -- $ -- $ -- $ -- $ --

Year Ended December 31, 1999:
Allowance for doubtful accounts $ -- $ -- $ -- $ -- $ --
Notes receivable reserve $ -- $ -- $ -- $ -- $ --

Year Ended December 31, 2000:
Allowance for doubtful accounts $ -- $ -- $175,025 -- $175,025
Notes receivable reserve $ -- $ -- $ -- $230,000(1) $230,000

- ----------------
(1) Reserve recorded in purchase accounting at acquisition of assets

II-1

56
EXHIBIT INDEX

2.9 Form of Amendment to Purchase and Sale Agreement dated as of
November 24, 1999 between The Plastic Surgery Company andFounding Centers
(incorporated by reference to Exhibit 2.9 of The Plastic Surgery Company's
Registration on Form S-1 Registration No. 333-78565)

3.1 Form of Amended and Restated Articles of Incorporation (incorporated
by reference to Exhibit 3.1 of The Plastic Surgery Company's Registration on
Form S-1 Registration No. 333-78565)

3.2 Form of Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 of The Plastic Surgery Company's Registration on Form S-1
Registration No. 333-78565)

4.1 Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 of The Plastic Surgery Company's Registration on Form S-1
Registration No. 333-78565)

4.3 Form of Referral Warrant (incorporated by reference to Exhibit 4.3
of The Plastic Surgery Company's Registration on Form S-1 Registration No.
333-78565)

10.7 1998 Employee Stock Option Plan (incorporated by reference to
Exhibit 10.11 of The Plastic Surgery Company's Registration on Form S-1
Registration No. 333-78565)

10.8 1999 Non-Employee Director Stock Plan (incorporated by reference to
Exhibit 10.12 of The Plastic Surgery Company's Registration on Form S-1
Registration No. 333-78565)

10.10 Loan Agreement between The Plastic Surgery Company and Pacific
Mezzanine Fund, L.P., dated December 18, 2000

10.11 Warrant issued to Pacific Mezzanine Fund, L.P., dated December
18, 2000

23.1 Consent of Arthur Andersen, LLP