**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**Washington, D.C. 20549

**FORM 10-Q**

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the quarterly periodended**June 30, 2006**

or

o  TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the transitionperiod from                            to                           

Commission File No. 001-31744

**MENTOR CORPORATION**(ExactName of Registrant as Specified in its Charter)

| Minnesota                                                        |  | 41-0950791                        |
|------------------------------------------------------------------|--|-----------------------------------|
| (State or other jurisdiction  of  incorporation or organization) |  | (IRS Employer Identification No.) |

**201 Mentor Drive, Santa Barbara, California 93111**(Address of Principal Executive Offices) (Zip Code)

**(805) 879-6000**(Registrant's telephone number including area code)

Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or such shorter period that the Registrant was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes  x        No  o

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer.  See definition of "acceleratedfiler and large accelerated filer" in Rule 12b-2 of the Exchange Act.(Checkone):  Large accelerated filer  x       Acceleratedfiler  o   Non-accelerated filer o

Indicateby check mark whether the Registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).  Yes  x    No o

Asof August 4, 2006 there were approximately 41,529,764 Common Shares, $.10 parvalue per share, outstanding.

----

**MENTOR CORPORATION**

**INDEX**

| Part I. Financial Information |
|-------------------------------|
| Item  1.                      | Financial  Statements: |
|                               | Consolidated  Balance Sheets (unaudited) - June 30, 2006 and March 31, 2006 |
|                               | Consolidated  Statements of Income (unaudited) - Three Months Ended June 30, 2006 and 2005 |
|                               | Notes  to Consolidated Financial Statements - June 30, 2006 |
| Item  2.                      | Management's  Discussion and Analysis of Financial Condition and Results of Operations |
| Item  3.                      | Quantitative  and Qualitative Disclosures About Market Risk |
| Item  4.                      | Controls  and Procedures |
| Part  II. Other Information   |
| Item  1.                      | Legal  Proceedings |
| Item  1A.                     | Risk  Factors |
| Item  2.                      | Unregistered  Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity  Securities |
| Item  3.                      | Defaults  upon Senior Securities |
| Item  4.                      | Submission  of Matters to a Vote of Security Holders |
| Item  5.                      | Other  Information |
| Item  6.                      | Exhibits |

 
2

**PART I - FINANCIALINFORMATION**

**Item1.        Consolidated Financial Statements**

Mentor Corporation

Consolidated Balance  Sheets

(Unaudited)

**June 30,**

March 31,

(in  thousands)

**2006**

2006

**Assets**

** **

Current  assets:

** **

   Cash and cash equivalents

** $**

**474,018 **

 $

98,713 

   Marketable securities

**104,431 **

102,241 

   Accounts receivable, net 

**60,304 **

58,199 

   Inventories, net

**32,927 **

35,139 

   Deferred income taxes

**24,087 **

21,764 

   Prepaid expenses and other

**25,925 **

14,716 

Current  assets of discontinued operations

**- **

96,070 

Total  current assets

**721,692 **

426,842 

** **

Property  and equipment, net

**36,107 **

36,448 

Intangible  assets, net

**15,194 **

15,745 

Goodwill,  net

**9,518 **

9,243 

Other  assets

**7,448 **

8,310 

Non-current  assets of discontinued operations

**- **

60,264 

     Total assets

** $**

**789,959 **

 $

556,852 

** **

See  notes to consolidated financial statements.

** **

 
3

Mentor Corporation

Consolidated Balance  Sheets

(Unaudited)

**June 30,**

March 31,

(in  thousands)

**2006**

2006

**Liabilities  and shareholders' equity**

** **

Current  liabilities:

** **

  Accounts  payable and accrued liabilities

** $**

**29,045 **

 $

27,685 

  Sales  returns

**14,592 **

15,544 

  Accrued  compensation

**13,278 **

17,335 

  Deferred  revenue

**10,869 **

10,495 

  Short-term  bank borrowings

**9,500 **

14,000 

  Dividends  payable

**7,467 **

7,772 

  Product  liability reserves 

**6,917 **

6,701 

  Warranty  reserves

**4,347 **

4,260 

  Interest  payable

**2,063 **

1,031 

  Income  taxes payable

**1,550 **

1,837 

  Accrued  royalties

**312 **

274 

  Other

**16,048 **

13,819 

Current  liabilities of discontinued operations

**130,468 **

29,971 

Total  current liabilities

**246,456 **

150,724 

** **

Long-term  accrued liabilities

**19,643 **

18,984 

Convertible  subordinated notes  

**150,000 **

150,000 

Non-current  liabilities of discontinued operations

**- **

10,555 

Commitments  and contingencies

** **

** **

Shareholders'  equity:

** **

  Common  stock, $.10 par value:

** **

    Authorized  - 150,000,000 shares; issued and outstanding

** **

    41,481,800  shares at June 30, 2006;

** **

    43,176,495  shares at March 31, 2006;

**4,148 **

4,318 

  Capital  in excess of par value

**- **

36,726 

  Accumulated  other comprehensive income

**7,784 **

16,498 

  Retained  earnings

**361,928 **

169,047 

    Total  shareholders' equity

**373,860 **

226,589 

      Total  liabilities and shareholders' equity

** $**

**789,959 **

 $

556,852 

** **

See  notes to consolidated financial statements.

** **
    4
Mentor  Corporation

Consolidated  Statements of Income

Three  Months Ended June 30, 2006 and 2005
 
(in thousands,  except per share data)

**2006**

2005

Net sales

** $**

**79,437 **

 $

74,126 

** **

  Cost of sales

**22,045 **

18,346 

Gross profit

**57,392 **

55,780 

** **

  Selling, general, and  administrative

**29,711 **

25,003 

  Research and development

**7,881 **

6,340 

**37,592 **

31,343 

** **

Operating income from continuing operations

**19,800 **

24,437 

** **

  Interest expense

**(1,632)**

(1,339)

  Interest income

**3,064 **

701 

  Other income

**538 **

42 

** **

Income from continuing operations before  income taxes 

**21,770 **

23,841 

** **

Income taxes

**6,096 **

6,766 

Income from continuing operations

**15,674 **

17,075 

** **

Income from discontinued operations, net of  taxes of $3,930 and $3,992

**3,366 **

5,400 

Gain on sale of discontinued operations,  net of taxes of $138,471

**222,362 **

- 

Net income

** $**

**241,402 **

 $

22,475 

** **

Basic earnings per share

** **

  Continuing operations

** $**

**0.37 **

 $

0.40 

  Discontinued operations

** $**

**5.32 **

 $

0.13 

    Basic earnings per  share

** $**

**5.69 **

 $

0.53 

** **

Diluted earnings per share

** **

  Continuing operations

** $**

**0.33 **

 $

0.36 

  Discontinued operations

** $**

**4.58 **

 $

0.11 

    Diluted earnings  per share

** $**

**4.91 **

 $

0.47 

** **

  Dividends per share

** $**

**0.18 **

 $

0.17 

** **

Weighted average shares outstanding

** **

  Basic

**42,443 **

42,234 

  Diluted 

**49,316 **

49,423 

See notes to consolidated financial  statements.

 
5

Mentor  Corporation

Consolidated  Statements of Cash Flows

Three  Months Ended June 30, 2006 and 2005

(Unaudited)
   
(in thousands)

**2006**

2005

**Operating  Activities:**

Income from continuing operations

** $**

**15,674 **

 $

17,075 

Adjustments to derive cash flows from  continuing operating activities:

** **

  Depreciation 

**1,806 **

1,947 

  Amortization

**563 **

490 

  Deferred income taxes	

**4,342 **

161 

  Non-cash compensation

**2,290 **

**- **

  Tax benefit from exercise of  stock options

**981 **

18,406 

  Loss (gain) on sale of  assets

**3 **

7 

  Loss on long-term marketable  securities and investment write-    downs, net

**52 **

- 

 Changes in operating assets and  liabilities:

** **

    Accounts receivable

**(2,425)**

(974)

    Inventories and other  current assets

**(5,861)**

(14,275)

    Accounts payable and  accrued liabilities

**9,145 **

12,254 

    Income taxes payable

**(3,772)**

- 

Net cash provided by continuing  operating activities

**22,798 **

35,091 

**Investing Activities:**

** **

Purchases of property and equipment

**(1,289)**

(1,532)

Purchases of intangibles

**(21)**

- 

Purchases of marketable securities

**(15,516)**

(97,464)

Sales of marketable securities

**13,285 **

100,155 

Other, net

**3 **

- 

Net cash provided by (used for)  continuing investing activities

**(3,538)**

1,159 

**Financing Activities:**

** **

Repurchase of common stock

**(84,000)**

- 

Proceeds from exercise of stock options  and ESPP

**2,779 **

30,508 

Dividends paid

**(7,774)**

(6,927)

Borrowings under line of credit  agreements

**- **

371 

Repayments under line of credit  agreements

**(4,500)**

(908)

Net cash (used for) provided by  continuing financing activities

**(93,495)**

23,044 

Effect of currency exchange rates on  cash and cash equivalents

**(77)**

(971)

Net cash (used) provided by discontinued  operating activities

**(8,279)**

5,199 

Net cash used for discontinued investing  activities

**(50)**

(569)

Net cash used for discontinued financing  activities

**- **

(2,662)

Proceeds from the sale of the urology  business

**458,066 **

- 

Effect of currency exchange rates of  discontinued operations

**(120)**

(562)

Increase in cash and cash equivalents

**375,305 **

59,729 

Cash and cash equivalents at beginning  of year

**98,713 **

76,666 

Cash and cash equivalents at end of period

** $**

**474,018 **

 $

136,395 
         
See notes to consolidated financial  statements.

 
6

**MENTORCORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2006**

**Note A - Business Activity**

MentorCorporation was incorporated in April 1969.  Unless the context indicatesotherwise, when we refer to "Mentor," "we," "us,""our," or the "Company" in these notes, we are referring toMentor Corporation and its subsidiaries on a consolidated basis.  The Companydevelops, manufactures and markets a range of products serving the aestheticmarket, including plastic and reconstructive surgery.  Historically, theCompany's products have been utilized by three primary segments:  aesthetic andgeneral surgery (plastic and reconstructive surgery), surgical urology, andclinical and consumer healthcare.  Aesthetic and general surgery productsinclude surgically implantable prostheses for plastic and reconstructivesurgery, capital equipment and consumables used for soft tissue aspiration orbody contouring (liposuction), and facial aesthetics products. On June 2, 2006, the Company completed a transaction for the sale of the surgical urology andclinical and consumer healthcare businesses to Coloplast A/S ("Coloplast").  Thesurgical urology products included surgically implantable prostheses for thetreatment of impotence, surgically implantable incontinence products, urinarycare products, and brachytherapy seeds for the treatment of prostatecancer.  The clinical and consumer healthcare products included cathetersand other products for the management of urinary incontinence and retention.

**Note B - Summary of Significant Accounting Policies**

Theconsolidated financial statements include the accounts of the Company and allof its subsidiaries in which a controlling interest is maintained.  Forthose subsidiaries where the Company owns less than 100%, the outsideshareholders' interests are treated as minority interests.  Allintercompany accounts and transactions have been eliminated.  Certainprior year amounts in previously issued financial statements have beenreclassified to conform to the current year presentation.  The net incomefrom discontinued operations for the three-month period ended June 30, 2006includes the results of the surgical urology and clinical and consumerhealthcare segments (collectively, the "Urology Business") for two months fromApril 1, 2006 to the date of the sale of these two segments on June 2, 2006.  Forthe prior year, the net income from discontinued operations includes theresults of these two segments for three months ended June 30, 2005.  

**Basis of Presentation**

Thefinancial information for the three months ended June 30, 2006 is unaudited,but includes all adjustments (consisting only of normally recurring accruals,unless otherwise indicated) that the Company considers necessary for a fairpresentation of the results of operations for this period.  Interimresults are not necessarily indicative of results for the full fiscal year. ** **

**Use of Estimates**

Financialstatements prepared in accordance with accounting principles generally acceptedin the United States require management to make estimates and judgments thataffect amounts and disclosures reported in the financial statements.  Actualresults could differ from those estimates.

**RevenueRecognition**

The Company recognizes product revenue, netof discounts, returns, and rebates in accordance with Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition When the Right ofReturn Exists," and Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition."  As required by these standards, revenue isrecorded when persuasive evidence of a sales arrangement exists, delivery hasoccurred, the buyer's price is fixed or determinable, contractual obligationshave been satisfied, and collectibility is reasonably assured.  Theserequirements are met, and sales and related cost of sales are recognized uponthe shipment of products, or in the case of consignment inventories, upon thenotification of usage by the customer.  The Company records estimatedreductions to revenue for customer programs and other volume-basedincentives.  Should the actual level of customer participation in theseprograms differ from those estimated, additional adjustments to revenue may berequired.  The Company also allows credit for products returned within itspolicy terms.  The Company records an allowance for estimated returns atthe time of sale based on historical experience, recent gross sales levels andany notification of pending returns.  Should the actual returns differfrom those estimated, additional adjustments to revenue and cost of sales maybe required. 

7

The Company has current and long termdeferred revenue, which include funds received in connection with purchases ofthe Company's Enhanced Advantage Breast Implant Limited Warranty program.  Thefees received in connection with the Enhanced Advantage Breast Implant LimitedWarranty are deferred and recognized evenly over the life of the warranty term.

**WarrantyReserves**

TheCompany offer two types of warranties relating to its breast implants in theUnited States, Canada, and Puerto Rico:  a standard limited warranty which isoffered at no additional charge and an enhanced limited warranty at anadditional charge of $100 in the U.S. ($100 CAD in Canada), which providelimited financial assistance in the event of a deflation or rupture.  TheCompany's standard limited warranty is also offered in certain European andother international countries for silicone gel-filled breast implants.  TheCompany provides an accrual for the estimated cost of breast implant warrantiesat the time revenue is recognized.  Costs related to warranties arerecorded in cost of sales.  The estimated cost of the standard limited warrantyis recorded as an expense at the time of sale, whereas the estimated cost ofthe enhanced limited warranty is deferred and recognized as costs are incurred. Such accruals are based on estimates, which are based on relevant factors suchas unit sales, historical experience, the limited warranty period, estimatedcosts, and, to a limited extent, information developed by the Company'sinsurance company using actuarial techniques.  These accruals are analyzedperiodically for adequacy.  While the Company engages in extensive productquality programs and processes, including actively monitoring and evaluatingthe quality of the Company's component suppliers, the warranty obligation isaffected by reported rates of warranty claims and levels of financialassistance specified in the limited warranties.  Should actual patientclaim rates reported differ from the Company's estimates, adjustments to theestimated warranty liability may be required.  These adjustments would beincluded in cost of sales.

**ProductLiability Reserves**

TheCompany has product liability reserves for product-related claims to the extentthose claims may result in litigation expenses, settlements or judgments withinour self-insured retention limits.  The Company has also established additionalreserves, through its wholly-owned captive insurance company, for estimatedliabilities for product-related claims based on actuarially determinedestimated liabilities taking into account its excess insurance coverages.  Theactuarial valuations are based on historical information and certainassumptions about future events.  Product liability costs are recorded inselling, general and administrative expenses as they are directly under thecontrol of our General Counsel and other general and administrative staff andare directly impacted by the Company's overall risk management strategy. Should actual product liability experience differ from the estimates andassumptions used to develop these reserves, subsequent changes in reserves willbe recorded in selling, general and administrative expenses, and may affect theCompany's operating results in future periods.  

**EmployeeStock-Based Payments**

Wehave employee compensation plans under which various types of stock-basedinstruments have been granted. These instruments principally include stockoptions, restricted stock and performance units.  As of June 30, 2006, these plans have instruments outstanding that might require the issuance of 4.1 millionshares of common stock to our employees.  Stock-based awards under our employeecompensation plans are made with newly issued shares reserved for this purpose.

Priorto April 1, 2006, we accounted for our employee stock-based compensation underthe recognition and measurement principles of Accounting Principles BoardOpinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and relatedInterpretations, as permitted by SFAS No. 123, "Accounting for Stock-BasedCompensation".  Under the recognition principles of APB No. 25, compensationexpense related to restricted stock and performance units was recognized in ourfinancial statements.  However, APB No. 25 generally did not require therecognition of compensation expense for our stock options because the exerciseprice of these instruments was equal to the market value of the underlyingcommon stock on the date of grant, and the related number of shares grantedwere fixed at that point in time.

EffectiveApril 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R),"Share-Based Payment".  In addition to recognizing compensation expense relatedto restricted stock and performance units, SFAS No. 123(R) also requires us torecognize compensation expense related to the estimated fair value of stockoptions and other equity based compensation instruments.  We adopted SFAS No.123(R) using the modified-prospective-transition method.  Under that transitionmethod, compensation expense recognized subsequent to adoption includes: (a)compensation cost for all share-based payments granted prior to, but not yetvested as of April 1, 2006, based on the values estimated in accordance withthe original provisions of SFAS No. 123, and (b) compensation cost for allshare-based payments granted subsequent to April 1, 2006 based on thegrant-date fair values estimated in accordance with the provisions of SFAS No.123(R). Consistent with the modified-prospective-transition method, our resultsof operations for prior periods have not been adjusted to reflect the adoptionof SFAS 123(R).

8

Asa result of recognizing compensation expense for stock options pursuant to theprovisions of SFAS No. 123(R), our income before income taxes and net incomefor the three months ended June 30, 2006 were $1.5 million and $1.3 millionlower, respectively, than if we had continued to account for stock optionsunder APB No. 25.  In addition, both basic and diluted earnings per share forthe three months ended June 30, 2006 were $0.03 lower than if we had continuedto account for stock options under APB No. 25.  See Note K - "Stock Options,Restricted Stock and Employee Stock Purchase Plan" in the Notes toConsolidated Financial Statements for additional information.

**Effectsof Recent Accounting Pronouncements**

In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48 (FIN 48) "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" whichprescribes a recognition threshold and measurement process for recording in thefinancial statements uncertain tax positions taken or expected to be taken in atax return.  Additionally, FIN 48 provides guidance on derecognition,classification, accounting in interim periods, and disclosure requirements foruncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company is currently assessing the impact of FIN 48 on itsconsolidated financial position and results of operations.

In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 155, Accounting for Certain HybridFinancial Instruments - an amendment of FASB Statements No. 133 and 140("SFAS 155").  This statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), and SFASNo. 140, Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities, and resolves issues addressed in SFAS 133Implementation Issue No. D1, "Application of Statement 133 toBeneficial Interest in Securitized Financial Assets."  This Statement:(a) permits fair value remeasurement for any hybrid financial instrumentthat contains an embedded derivative that otherwise would require bifurcation;(b) clarifies which interest-only strips and principal-only strips are notsubject to the requirements of SFAS 133; (c) establishes a requirement to evaluate beneficial interestsin securitized financial assets to identify interests that are freestandingderivatives or that are hybrid financial instruments that contain an embeddedderivative requiring bifurcation; (d) clarifies that concentrations ofcredit risk in the form of subordination are not embedded derivatives; and(e) eliminates restrictions on a qualifying special-purpose entity'sability to hold passive derivative financial instruments that pertain tobeneficial interests that are or contain a derivative financial instrument. The standard also requires presentation within the financial statements thatidentifies those hybrid financial instruments for which the fair value electionhas been applied and information on the income statement impact of the changesin fair value of those instruments.  The Company is required to apply SFAS 155 to all financial instruments acquired, issued or subject to aremeasurement event beginning January 1, 2007, although early adoption ispermitted as of the beginning of an entity's fiscal year.  The Company isevaluating the provisions of SFAS 155.  The effects of adopting ofSFAS 155 on the Company's financial statements are not known at this time.

InMay 2005, the FASB issued SFAS No. 154, Accounting Changes and ErrorCorrections, which replaces APB Opinion No. 20, Accounting Changes and SFAS No.3, Reporting Accounting Changes in Interim Financial Statements.  Thispronouncement applies to all voluntary changes in accounting principle, andrevises the requirements for accounting for, and reporting a change in,accounting principle.  SFAS No. 154 requires retrospective application to priorperiods' financial statements of a voluntary change in accounting principle,unless it is impracticable to do so.  This pronouncement also requires that achange in the method of depreciation, amortization, or depletion forlong-lived, non-financial assets be accounted for as a change in accountingestimate that is affected by a change in accounting principle.  SFAS No. 154retains many provisions of APB Opinion 20 without change, including thoserelated to reporting a change in accounting estimate, a change in the reportingentity, and correction of an error.  The pronouncement also carries forward theprovisions of SFAS No. 3, which govern reporting accounting changes in interimfinancial statements.  SFAS No. 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15, 2005.  The statement does not change the transition provisions of any existingaccounting pronouncements, including those that are in a transition phase as ofthe effective date of SFAS No. 154.  The Company has applied the provisions ofthis statement effective April 1, 2006.

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-BasedPayment," ("SFAS 123(R)").  SFAS 123(R) replaces FASBStatement No. 123, Accounting for Stock-Based Compensation, and supersedes APBOpinion No. 25, Accounting for Stock Issued to Employees.  SFAS 123(R)covers a wide range of share-based compensation arrangements and requires thatthe compensation cost related to these types of payment transactions berecognized in financial statements.  Cost will be measured based on thefair value of the equity or liability instruments issued.

9

InMarch 2005, the Securities and Exchange Commission ("SEC") issuedStaff Accounting Bulletin ("SAB") No. 107, which provides guidance regardingthe application of SFAS 123(R).  SAB No. 107 expresses views of the Staffregarding the interaction between SFAS 123(R), Share-Based Payment, and certainSEC rules and regulations, and provides the Staff's views regarding thevaluation of share-based payment arrangements for public companies.  Inparticular, SAB No. 107 provides guidance related to share-based paymenttransactions with nonemployees, the transition from nonpublic to public entitystatus, valuation methods (including assumptions such as expected volatilityand expected term), the accounting for certain redeemable financial instrumentsissued under share-based payment arrangements, the classification ofcompensation expense, non-GAAP financial measures, first-time adoption of SFAS123(R) in an interim period, capitalization of compensation cost related toshare-based payment arrangements, the accounting for income tax effects ofshare-based payment arrangements upon adoption of SFAS 123(R), the modificationof employee share options prior to adoption of SFAS 123(R), and disclosures inManagement's Discussion and Analysis subsequent to adoption of SFAS 123(R).

On April 14, 2005, the SEC approved a new rule that delays the effective date forSFAS 123(R) to fiscal years beginning after June 15, 2005, thereby rendering it effective as to the Company on April 1, 2006.  The adoption of SFAS 123(R) on April 1, 2006 has had a material impact on the Company'sconsolidated net income and earnings per share.  See Note K, "StockOptions, Restricted Stock and Employee Stock Purchase Plan" in the Notesto Consolidated Financial Statements.  

InNovember 2004, the FASB issued Statement No. 151, Inventory Costs, which amendsthe guidance in Accounting Review Board ("ARB") No. 43, Chapter 4, InventoryPricing.  This amendment clarifies the accounting for abnormal amounts ofidle facility expense, freight, handling costs and wasted material(spoilage).  This Statement requires that those items be recognized ascurrent-period charges, regardless of whether they meet the criteria specifiedin ARB 43 of "so abnormal".  In addition, this Statementrequires that allocation of fixed production overheads to the costs ofconversion be based on normal capacity of the production facilities.  ThisStatement is effective for fiscal years beginning after June 15, 2005.  TheCompany has applied the provisions of this statement effective April 1, 2006.  The adoption of SFAS No. 151 did not have a material impact on theresults of operations or the financial position of the Company. 

**NoteC - Interim Reporting**

TheCompany's three quarterly interim reporting periods are each thirteen-weekperiods ending on the Friday nearest the end of the third calendar month ofeach calendar quarter.  The fiscal year end remains March 31st. To facilitate ease of presentation, each interim period is shown as if it endedon the last day of the appropriate calendar month.  The actual dates foreach of the three interim quarters-ends are shown below:

Fiscal 2007

Fiscal  2006

First  Quarter

June 30, 2006

July   1, 2005

Second  Quarter

September 29, 2006

September   30, 2005

Third  Quarter

December 29, 2006

December   30, 2005

Theaccompanying unaudited consolidated financial statements for the three-monthperiods ended June 30, 2006 and 2005 have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial information and with instructions to Form 10-Q and Article 10 ofRegulation S-X.  Accordingly, they do not include all of the informationand notes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, alladjustments (consisting only of normally recurring accruals, unless otherwiseindicated) considered necessary for a fair presentation of the results of operationsfor the indicated periods have been included.  Certain amounts recorded inprevious periods have been reclassified or restated to conform to the currentperiod presentation.  Operating results for the three-month period ended June 30, 2006 are not necessarily indicative of the results for the full fiscal year.

Thebalance sheet at March 31, 2006 has been derived from the audited financialstatements as of that date, but does not include all of the information andnotes required by accounting principles generally accepted in the United States for complete financial statements.

Theconsolidated financial statements should be read in conjunction with theCompany's Annual Report on Form 10-K for the year ended March 31, 2006.** **

10

**NoteD - Cash Equivalents, Marketable Securities, and Long-Term MarketableSecurities and Investments**

Allhighly liquid investments with maturities of three months or less at the dateof purchase are considered to be cash equivalents.

TheCompany considers its marketable securities available-for-sale as defined inSFAS No. 115, "Accounting for Certain Investments in Debt and EquitySecurities."  Realized gains and losses, and declines in valueconsidered to be other than temporary, are included in income.  The costof securities sold is based on the specific identification method. Available-for-sale securities are reported at fair market value.  Unrealizedgains and losses are excluded from income, but instead are reported as a netamount in Accumulated Other Comprehensive Income in Shareholders' Equity.  TheCompany's short-term marketable securities consist primarily of state andmunicipal government and government agency obligations, Federal Home Loan Bankand Mortgage Association bonds, and investment grade corporate obligations,including commercial paper. 

Available-for-saleinvestments at June 30, 2006 were as follows:

** **

** **

**Gross**

**Gross**

**Estimated**

** **

**Adjusted**

**Unrealized**

**Unrealized**

**Fair**

(in  thousands)

**Cost**

**Gains**

**Losses**

**Value**

Cash  balances

** $**

**461,370 **

** $**

**- **

** $**

**- **

** $**

**461,370 **

Money  market funds

**12,648 **

**- **

**- **

**12,648 **

State  and Municipal agency obligations

**83,451 **

**- **

**- **

**83,451 **

Mortgage-backed  securities

**20,664 **

**- **

**(8)**

**20,656 **

Corporate  debt securities

**325 **

**- **

**(1)**

**324 **

  Total  available-for-sale investments

** $**

**578,458 **

** $**

**- **

** $**

**(9)**

** $**

**578,449 **

** **

** **

** **

** **

Included  in cash and cash equivalents

** $**

**474,018 **

** $**

**- **

** $**

**- **

** $**

**474,018 **

Included  in current marketable securities

**104,440 **

**- **

**(9)**

**104,431 **

  Total  available-for-sale investments

** $**

**578,458 **

** $**

**- **

** $**

**(9)**

** $**

**578,449 **

Available-for-saleinvestments at March 31, 2006 were as follows:

Gross

Gross

Estimated

Adjusted

Unrealized

Unrealized

Fair

(in thousands)

Cost

Gains

Losses

Value

Cash balances

 $

95,054 

 $

- 

 $

- 

 $

95,054 

Money market funds

3,659 

- 

- 

3,659 

State and Municipal agency obligations

71,374 

- 

- 

71,374 

Mortgage-backed securities

30,667 

- 

(85)

30,582 

Corporate debt securities

286 

- 

(1)

285 

  Total available-for-sale  investments

 $

201,040 

 $

- 

 $

(86)

 $

200,954 

Included in cash and cash equivalents

 $

98,713 

 $

- 

 $

- 

 $

98,713 

Included in current marketable securities

102,327 

- 

(86)

102,241 

  Total available-for-sale  investments

 $

201,040 

 $

- 

 $

(86)

 $

200,954 

** **

11

**NoteE - Inventories**

Inventoriesare stated at the lower of cost or market, cost determined by the first-in,first-out (FIFO) method.  The Company writes down its inventory forestimated obsolescence or unmarketable inventory equal to the differencebetween the cost of inventory and the estimated market value based uponassumptions about future demand and market conditions.

Inventories at June 30, 2006 and March 31, 2006 consisted of:

(in thousands)

**June 30, 2006**

March 31, 2006

Raw materials

** $**

**3,987 **

 $

3,994 

Work in process

**5,108 **

5,382 

Finished goods on consignment

**11,581 **

11,052 

Finished goods

**12,251 **

14,711 

** $**

**32,927 **

 $

35,139 

**Note F - Property and Equipment**

Propertyand equipment is stated at cost.  Depreciation is based on the usefullives of the properties and computed using the straight-line method. Buildings are depreciated over 30 years, furniture and equipment over 3 to 10years and leasehold improvements over the shorter of their estimated remaininglives or lease terms.  Significant improvements and betterments arecapitalized, while maintenance and repairs are charged to operations asincurred.

Property and equipment at June 30, 2006 and March 31, 2006 consisted of:

(in thousands)

**June 30, 2006**

March 31, 2006

Land

** $**

**55 **

 $

55 

Buildings

**10,401 **

10,053 

Leasehold improvements

**22,755 **

21,952 

Furniture, fixtures and equipment

**58,613 **

60,004 

Construction in progress

**3,003 **

3,481 

**94,827 **

95,545 

Less accumulated depreciation

**(58,720)**

(59,097)

** $**

**36,107 **

 $

36,448 

**Note G - Product Warranties**

TheCompany provides an accrual for the estimated cost of product warranties at thetime revenue is recognized.  The Company offers product replacement andcertain financial assistance for surgical procedures that fall within thelimited warranties and coverage period of implantation on its breast implantproducts.  Such accruals are based on estimates, taking into considerationrelevant factors such as unit sales, historical experience, warranty period,estimated costs, and, to a limited extent, information developed by theCompany's insurance company using actuarial techniques.  The Company assessesthe adequacy of the accrual for product warranties periodically and adjusts theamounts as necessary based on actual experience and changes in futureexpectations.  In the first quarter of fiscal 2006, the Company expanded itsstandard limited warranty programs to provide certain financial assistance forsurgical procedures within ten years of implantation (increased from fiveyears) and in the third quarter of fiscal 2006 expanded the program coverage toinclude silicone gel-filled breast implant sales implanted in certain Europeanand other international countries.  These changes to the Company's warrantyprograms were not retroactive, but applicable to implants implanted subsequentto the effective date of the expanded programs.

12

Informationon changes in the Company's accrued product warranty reserves are as follows:

Three Months Ended

June 30,

(in thousands)

**2006**

2005

Beginning warranty reserves

** $**

**22,350 **

 $

19,245 

Costs of warranty claims

**(1,421)**

(997)

Accruals for product warranties

**2,133 **

1,861 

Adjustments  made to accruals related to pre-    existing warranties

**- **

- 

Ending warranty reserves

** $**

**23,062 **

 $

20,109 

**Note H - Comprehensive Income**

Comprehensiveincome is net income from continuing operations adjusted for changes in thevalue of derivative financial instruments, unrealized gains and losses onmarketable securities and foreign currency translation.  

Comprehensive income for the three-month periodswas:

Three Months Ended

June 30,

(in  thousands)

**2006**

2005

Net  income 

** $**

**241,402 **

 $

22,475 

Foreign  currency translation adjustment

**(8,766)**

(7,976)

Unrealized  (gains) losses on marketable securities    and investment activities, net

**52 **

(381)

Comprehensive  income

** $**

**232,688 **

 $

14,118 

**Note I - Income Taxes**

Theprovision for income taxes for the 2007 and 2006 interim periods was computedin accordance with FASB Interpretation No. 18, "Accounting for Income Taxes inInterim Periods, "and was based on projections of total year pre-tax income inaccordance with SFAS No. 109, "Accounting for Income Taxes."  Theeffective income tax rate attributable to continuing operations was 28.0percent and 28.4 percent for the three months ended June 30, 2006 and 2005, respectively.

TheCompany's effective tax rate for the three months ended June 30, 2006 hasdecreased when compared to the same period in prior year primarily due to anincrease in the amount of foreign earnings intended to be invested indefinitelyoutside of the United States and the recognition of tax on the Company's repatriationof foreign cash pursuant to IRC Section 965 in the three month period endedJune 30, 2005, and increased investments utilizing tax-free municipalinstruments.  This decrease was partially offset by an increase in our tax raterelated to the book treatment of employee equity compensation as required underSFAS 123(R).  

Aspermitted in Accounting Principles Board Opinion ("APB") No. 23, "Accounting for Income Taxes - Special Areas", the Company does not provide for U.S. income taxeson undistributed earnings of the Company's foreign operations that are intendedto be invested indefinitely outside the United States 

13

**NoteJ - Earnings per Share**

A reconciliation of weighted average sharesoutstanding, used to calculate basic earnings per share, to weighted averageshares outstanding assuming dilution, used to calculate diluted earnings pershare, follows:

Three  Months Ended  June 30,

(in thousands, except per share data)

**2006**

2005

Net income from continuing operations:  as reported

** $**

**15,674 **

 $

17,075 

Add back after tax interest expense on convertible  note

**802 **

802 

Net  income from continuing operations for numerator of diluted     earnings per share

** $**

**16,476 **

 $

17,877 
      
Three  Months Ended  June 30,

(in thousands)

**2006**

2005

Weighted average  outstanding shares:  basic

**42,443 **

42,234 

Restricted grants

**299 **

- 

Shares issuable  through exercise of stock options

**1,100 **

2,056 

Shares issuable  through convertible notes

**5,147 **

5,133 

Shares issuable through  warrants

**327 **

- 

Weighted average  outstanding shares:  diluted

**49,316 **

49,423 

Basic earnings per  share - continuing operations

** $**

**0.37 **

 $

0.40 

Diluted earnings per  share - continuing operations

** $**

**0.33 **

 $

0.36 

Employee equity-based compensation

Shares issuable under the Company'sLong Term Incentive Plan, including, employeestock options, restricted shares and performance stock units, may beincluded in the diluted earnings per share calculation using the treasury stockmethod.  The Company would exclude thepotential stock issuances in the diluted earnings per share calculation whenthe combined exercise price, average unamortized fair values and assumed taxbenefits upon exercise are greater than the average market price for theCompany's underlying common stock.  This calculation is done on an instrumentby instrument basis.

Convertible subordinated notes andwarrants

The terms of the Company's convertiblesubordinated notes include restrictions which prevent the holder fromconverting the notes during any fiscal quarter prior to January 1, 2019, if the closing price of the Company's common stock for at least 20 trading days inthe 30 consecutive trading day period ending on the first trading day of suchfiscal quarter is more than 120% of the conversion price per share of theCompany's common stock on such trading day.  However, EITF issue No. 04-8requires that the Company use the if-converted method to determine the dilutiveimpact of the convertible subordinated notes described below in Note N.  Underthe if-converted method, the numerator of the diluted earnings per sharecalculation is increased by the after-tax interest expense not recognized forthe period upon conversion and the denominator of the calculation is increasedby approximately 5.1 million shares potentially issued upon conversion for boththat current reporting period and the corresponding year-to-date reportingperiod.

As described below in Note N, wepurchased a convertible note hedge and sold warrants which, in combination,have the effect of reducing the dilutive impact of the convertible subordinatednotes by increasing the effective conversion price for the notes from theCompany's perspective to approximately $39.2339.  SFAS 128, however,requires the Company to analyze the impact of the convertible note hedge andwarrants on diluted earnings per share separately.  As a result, the purchaseof the convertible note hedge is excluded because its impact will always beanti-dilutive.  SFAS 128 further requires that the impact of the sale ofthe warrants be computed using the treasury stock method.  

14

Forexample, using the treasury stock method, if the average price of the Company'sstock during the period ended June 30, 2006 had been $38.00, $40.00 or $45.00;the shares from the warrants to be included in diluted earnings per share wouldhave been zero, 99,000 and 659,000 shares, respectively.  The total maximumnumber of shares that could potentially be included under the warrants is 5.1million.  The average share price of our stock during the quarter ended June 30, 2006 exceeded the $39.2633 conversion price of the warrants.  The impact of thesewarrants was that 0.327 million shares were added to the diluted shares anddiluted earnings per share calculation during the quarter ended June 30, 2006.  The Company adopted the provisions of EITF 04-8, "The Effect ofContingently Convertible Debt on Diluted Earnings per Share," in December2004.  The EITF required the inclusion of contingently issuable shares inthe calculation of diluted earnings per share when the effect would be dilutiveeven if none of the required conditions for conversion were satisfied.  Inaddition, the EITF required application on retrospective basis for all periodspresented.

**Note K - Stock Options, Restricted Stock andEmployee Stock Purchase Plan**

Long-TermIncentive Plans

TheCompany has granted options to key employees and non-employee directors underits Amended 2000 Long-Term Incentive Plan (the "2000 Plan") and its 1991Plan.  In addition, inSeptember 2005, the Company's shareholders approved an amended and restatedversion of the Company's Amended 2000 Long-Term Incentive Plan, which is nowreferred to as the Mentor Corporation 2005 Long-Term Incentive Plan and whichwas further amended in November 2005 (as amended, the "2005 Plan").  The 2005Plan does not provide for an increase in the number of shares of the Company'scommon stock available for award grants under the plan.  Options granted undereach of the Company's plans vest in four equal annual installments beginningone year from the date of grant, and expire ten years from the date of grant. At June 30, 2006, the Company had one plan under which stock options wereavailable for future grants, the 2005 Plan.  Pursuant to the terms of theoption plans, 158,296 common shares were issued pursuant to exercises during thethree months ended June 30, 2006.  

The2005 Plan reflects, among other things, amendments to the earlier plans to: (i)provide the Company with flexibility to grant awards other than stock options,including but not limited to restricted stock, stock bonuses, stock units anddividend equivalents; (ii) allow the Company to grant awards intended toqualify as performance-based compensation within the meaning of Section 162(m)of the U.S. Internal Revenue Code; and (iii) extend the term of the plan to July 24, 2015.  Following the November 2005 amendment, the 2005 Plan provides asfollows:

Grants of full-value awards under the 2005 Plangenerally must satisfy certain minimum vesting requirements.  ("Full-value awards"include all awards granted under the 2005 Plan other than stock options with anexercise price that is not less than the fair market value of the underlyingstock on the date the option is granted.)  Full-value awards subject totime-based vesting may not become fully vested in less than three years. Full-value awards subject to performance-based vesting may not vest in lessthan one year.  The Company retains discretion to accelerate vesting of suchawards under certain circumstances such as in connection with a termination ofthe grantee's employment, a change in control of the Company or the grantee'semployer, or a release of claims by the grantee.  The Company may also grantfull-value awards covering up to 10% of the total number of shares availablefor grant purposes under the 2005 Plan that are not subject to the foregoingvesting and acceleration restrictions.

Shareholder approval is expressly required forany increase in the number of shares of the Company's common stock that areavailable for award grant purposes under the 2005 Plan.

Personseligible to receive awards under the 2005 Plan include directors, officers oremployees of the Company, and certain of its consultants and advisors.  Thetypes of awards that may be granted under the 2005 Plan include stock options,restricted stock, stock bonuses, stock units and dividend equivalents, andother forms of awards granted or denominated in the Company's common stock orunits of the Company's common stock, as well as certain cash bonus awards. 

Themaximum number of shares of the Company's common stock that may be issued ortransferred pursuant to awards under the 2005 Plan remains at 6.0 millionshares (inclusive of approximately 4.6 million options previously granted underthe Amended 2000 Long-Term Incentive Plan).

15

On October 5, 2005 (the "Award Date"), the Compensation Committee ofthe Board of Directors of the Company, granted awards in the aggregate amountof 288,856 restricted shares of Company common stock (the "RestrictedStock") to the Company's Executive Officers and other Company Officers,and to members of the Board of Directors of the Company.  The Restricted Stockvests, and restrictions lapse, with respect to one-fifth of the total number ofshares of Restricted Stock on each of the first, second, third, fourth andfifth anniversaries of the Award Date.  The vesting schedule requirescontinued employment or service through each applicable vesting date as acondition to the vesting of theapplicableinstallment of the Restricted Stock, and carries specific share holdingrequirements during such employment or service.  

EmployeeStock Purchase Plan

On September 14, 2005 the Company's Board of Directors approved its Employee Stock Purchase Plan ("ESPP").  The StockPurchase Plan is intended to assist the Company in securing and retaining itsemployees by allowing them to participate in the ownership and growth of theCompany through the grant of certain rights to purchase shares of the Company'scommon stock at an initial discount of 5% from the fair market value of itsshares.  The granting of such rights serves as partial consideration foremployment and gives employees an additional inducement to remain in theservice of the Company and its subsidiaries and provides them with an increasedincentive to work toward the Company's success.

Under the ESPP, each eligible employee ispermitted to purchase shares of common stock through regular payroll deductionsand/or cash payments in amounts ranging from 1% to 15% of the employee'scompensation for each payroll period. The fair market value of the shares ofcommon stock which may be purchased by any employee under this or any otherplan of the Company that is intended to comply with Section 423 of theInternal Revenue Code.

The ESPP provides for a series of consecutiveoffering periods that are three months long commencing on each Grant Date. Offering periods commence on January 1, April 1, July 1 and September 1 of each year.  During eachoffering period, participating employees are able to purchase shares of commonstock at a purchase price equal to 95% of the fair market value of the commonstock at the end of each offering period.  Under terms of the ESPP, 400,000shares of common stock have been reserved for issuance to employees.  As of June 30, 2006, 1,174 shares have been purchased under the plan.

EmployeeStock-Based Payments

Wehave employee compensation plans under which various types of stock-basedinstruments have been granted. These instruments, as more fully describedbelow, principally include stock options, restricted stock and performanceunits.  As of June 30, 2006, these plans have instruments outstanding thatmight require the issuance of up to 4.1 million shares of common stock to ouremployees.  Stock-based awards under our employee compensation plans are madewith newly issued shares reserved for this purpose. 

Priorto April 1, 2006, we accounted for our employee stock-based compensation underthe recognition and measurement principles of Accounting Principles BoardOpinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and relatedInterpretations, as permitted by SFAS No. 123, "Accounting for Stock-BasedCompensation".  Under the recognition principles of APB No. 25, compensationexpense related to restricted stock and performance units was recognized in ourfinancial statements.  However, APB No. 25 generally did not require therecognition of compensation expense for our stock options because the exerciseprice of these instruments was generally equal to the market value of theunderlying common stock on the date of grant, and the related number of sharesgranted were fixed at that point in time.

Effective April 1, 2006, we adopted the fair value recognition provisions of SFAS No.123(R), "Share-Based Payment".  In addition to recognizing compensation expenserelated to restricted stock and performance units, SFAS No. 123(R) alsorequires us to recognize compensation expense related to the estimated fairvalue of stock options and other equity based compensation instruments.  We adoptedSFAS No. 123(R) using the modified-prospective-transition method.  Under thattransition method, compensation expense recognized subsequent to adoptionincludes: (a) compensation cost for all share-based payments granted prior to,but not yet vested as of April 1, 2006, based on the values estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation costfor all share-based payments granted subsequent to April 1, 2006, based on thegrant-date fair values estimated in accordance with the provisions of SFAS No.123(R).  Consistent with the modified-prospective-transition method, ourresults of operations for prior periods have not been adjusted to reflect theadoption of SFAS 123(R).  As a result of recognizing compensation expense forstock options pursuant to the provisions of SFAS No. 123(R), our income beforeincome taxes and net income for the three months ended June 30, 2006 were $1.5million and $1.3 million lower, respectively, than if we had continued toaccount for stock options under APB No. 25. In addition, both basic and dilutedearnings per share for the three months ended March 31, 2006 were $.03 lower than if we had continued to account for stock options under APB No. 25.

16

Thefollowing table reflects the components of stock-based compensation expenserecognized in our Consolidated Statements of Income for the three months ended June 30, 2006 and 2005:

Three Months Ended

June 30,

(in  thousands)

**2006**

2005

Stock options 

 $

**1,465 **

 $

- 

Restricted stock 

**763 **

- 

Performance unit plan 

**62 **

- 

Total stock-based compensation expense,  pre-tax 

**2,290 **

- 

Tax benefit from stock-based compensation  expense 

**(391)**

- 

Total stock-based compensation expense, net of  tax 

 $

**1,899 **

 $

- 

Theemployee stock-based compensation cost reflected above that would be properly capitalizedas part of inventory and included in research and development expense for thethree months ended June 30, 2006 was minor.

Theabove table does not reflect any stock option compensation for the three monthsended June 30, 2005 as we generally did not record stock option expense underAPB No. 25, as previously discussed.  The following table illustrates theeffect on net income and earnings per share for the three months ended June 30, 2005 if we had applied the fair value recognition provisions to our stock optionsas provided under SFAS No. 123:

ProForma Analysis under FAS 123

(in  thousands, except per share information)

June 30,	2005

Net income from continuing operations

 $

17,075 

Deduct:  compensation expense fair value  method 

(1,446)

Net income:  pro forma 

 $

15,629 

 
 
Earnings per share from continuing operations:

Basic:  as reported

 $

0.40 

Impact of stock option expense 

(0.03)

Basic:  pro forma 

 $

(0.37)

 
 
 
Diluted:  as reported 

 $

0.36 

Impact of stock option expense 

(0.03)

Diluted:  pro forma 

 $

0.33 

Forpurposes of this pro forma disclosure, the fair values of stock options wereestimated using the Black-Scholes option valuation model and amortized toexpense over the options' vesting periods.

We expect the impact of stock option expenseto be in the range of $0.18 to $0.20 per diluted share in fiscal year ending March 31, 2007 compared to $0.08 for fiscal year ended March 31, 2006.  The estimated impact of stock option expense for fiscal year ending March 31, 2007 is greater than the corresponding pro forma expense amount for fiscal year ended March 31, 2006 principally due to the granting of additional restricted shares andperformance units.  The estimated effect on diluted earnings per share of theannual compensation related to restricted shares and performance units isestimated to be in the range of $.08 to $0.10. 

17

EmployeeStock Options, Restricted Stock Grants and Performance Units

Severalof our equity-based compensation plans provide for grants of stock options toemployees.  For executive officers, the option exercise price is set at theclosing price of our common stock on the later of the first day of employment,the date the executive is informed of the grant, or the date our Board ofDirectors approves the grant.  For non-executive officers, the option exerciseprice is set at the closing price of our common stock on the later of the firstday of employment or the date the employee is informed of the grant.  Theseoptions normally vest over a four year period and expire ten years from thedate of grant.  These plans also provide for grants of restricted stock andperformance units.  Restricted stock grants generally vest/have restrictionswhich lapse over a five year period.   Performance stock units will vest on March 31, 2009 contingent upon achievement of specified pre-established performance goals. Eligible employees generally receive a grant of stock options and/or restrictedstock annually with the number of shares and type of instrument generallydetermined by the employee's salary grade and performance level.  In addition,certain management and professional level employees typically receive a stockoption grant upon commencement of employment.  These stock-based plans providefor accelerated vesting/lapse of restrictions if there is a change in controlas defined in the plans

Weuse the Black-Scholes option valuation model to estimate the grant date fairvalue of employee stock options. The expected volatility takes into considerationthe historical volatility in the price of our common stock to estimate thevolatility in our publicly traded instruments during the period the option isgranted. We believe the historical volatility in these instruments isindicative of expected future volatility in the price of our common stock.  Uponthe adoption of SFAS No. 123(R) the expected life of the option is estimatedusing the historical data to estimate the expected life of the options.  Therisk-free interest rates for periods within the expected life of the option arebased on the U.S. Treasury yield curve in effect during the period the optionswere granted.  Upon adoption of SFAS No. 123(R), we began using historical datato estimate forfeiture rates applied to the gross amount of expense determinedusing the option valuation model.  Prior to adoption of SFAS No. 123(R), werecognized forfeitures as they occurred.  There was no material impact uponadoption of SFAS No. 123(R) between these methods of accounting forforfeitures.  The assumptions used to estimate the fair value of the stockoptions using the Black-Scholes option valuation model were as follows for thethree months ended June 30:

**2006**

2005

Weighted average fair value of common stock	

 $

41.95 

 $

38.63 

Weighted average fair value of stock options  granted 

 $

21.91 

 $

37.06 

Risk-free interest rate 

5.1%

4.6%

Expected life (in years) 

5.7 

4.5 

Expected volatility 

35.9%

32.0%

Expected dividend yield 

1.6%

1.8%

Stockoption information with respect to our stock-based compensation plans duringthe three months ended June 30, 2006 is as follows:

(in  thousands, except per share amounts)

**Options**

**Weighted-average  exercise  price**

**Weighted-  average  remaining  contractual  life (Yrs)**

**Aggregate  intrinsic  value**

Balance unexercised at  March 31, 2006 

3,647 

 $

24.12 

7.0 

 $

70,686 

Granted 

155 

41.30 

- 

337 

Exercised 

(158)

17.39 

- 

(3,573)

Forfeited/expired 

(236)

32.38 

- 

(3,180)

Balance unexercised at  June 30, 2006 

3,408 

 $

24.64 

6.3 

 $

64,270 

 
 
 
 
 
 
 
Vested or expected to  vest at June 30, 2006

2,207 

 $

19.32 

5.2 

 $

53.4 
                     
Exercisable at June 30, 2006

2,207 

 $

19.32 

5.2 

 $

53.4 

 
18

Thetotal intrinsic value of options exercised during the three months ended June 30, 2006 was $3.6 million.

Thefair values of shares of restricted stock and performance units are determinedbased on the closing price of the Company's common stock on the grant dates.  Informationregarding our restricted stock during the three months ended June 30, 2006 is as follows:
Nonvested shares (in thousands)
**Shares**

**Weighted-  average  grant date  fair value**

Nonvested at April 1, 2006

279.1 

 $

52.71 

Granted

398.0 

41.22 

Vested

- 

- 

Forfeited

(0.4)

- 

Nonvested at June 30, 20   06

676.7 

 $

46.14 

Asof June 30, 2006, there was $26.0 million of total unrecognized compensationcost related to non-vested awards of stock options, and shares of restrictedstock.  That cost is expected to be recognized over a weighted-average period of5.2 years.  We recognize the total compensation cost on a straight-line basisover the service period for the entire award.

PerformanceAward Program

InJune and July 2006, certain management-level employees received  grants ofperformance units.  A performance unit gives the recipient the right to receivecommon stock that is contingentupon achievement of specified pre-established performance goals over aperformance period ending March 31, 2009.  The performance goals are based upon  Mentor's total shareholder return compared to the average total shareholderreturn reported by the Russell 2500 Growth Index overthe performance period.

Performanceunits are assigned a unit value based on the fair market value of the Company'scommon stock on the grant date.  The ultimate level of attainment ofperformance goals is determined at the end of the performance period andexpressed as a percentage (within a range of 0% to 200%).  This percentage ismultiplied by the number of performance units initially granted to determinethe number of shares of common stock payable to the recipient.  In addition,dividends that would have accrued over the performance period attributable tothe final share grant under the program will be payable to the recipients.

Vestingof the performance units occurs entirely on March 31, 2009.  Consequently, no performance units have yet vested and no common stock has been issued andno dividends have been accrued or paid to any recipient as of June 30, 2006.  The fair value of the performance units at the date of grant is beingamortized as compensation expense over the performance period.  Since theperformance stock units were granted at the end of the quarter ended June 30, 2006, the compensation expense for the quarter related to performance stock unitsis immaterial.

**NoteL - Share Repurchase Program**

The Company has a stock repurchase program toprovide liquidity to the market and to reduce the overall number of sharesoutstanding, which has helped offset the dilutive effects of our employee stockoption programs and the dilutive effect of EITF Issue No. 04-8 related to theinclusion of contingently convertible debt in fully diluted earnings per sharecalculations.  During fiscal 2006, approximately 996,000 shares wererepurchased from retiring board members for approximately $42.8 million, and5.3 million shares remained authorized for repurchase as of March 31, 2006.  During the quarter ended June 30, 2006, the Company repurchased 2.0million shares of its common stock for a total of $84 million from aninvestment partnership managed by ValueAct Capital.  ValueAct Capital'smanaging director, Mr. Jeff Ubben, is a member of the Company's Board ofDirectors.  The repurchase of these shares was pre-approved by the AuditCommittee and the Board of Directors with interested parties abstaining or notin attendance.  See Note P - "Related Party Transactions" for additionalinformation on the share repurchase.  

19

On June 16, 2006, we entered into a stock purchase plan with Citigroup Global MarketsInc. for the purpose of repurchasing up to $166 million worth of our commonstock under a Rule 10b5-1 Plan (the "10b5-1 Plan") compliant with Rule10b-18.  The first repurchase under the 10b5-1 Plan cannot take placeprior to the third trading day following the Company's announcement of itsfinancial results for the three months ending June 30, 2006.  Inconnection with the entry into the 10b5-1 Plan, our Board of Directors of theCompany increased the authorized number of shares available for repurchasepursuant to our stock repurchase program from 3.3 million to 5.0 millionshares.  The timing of purchases and the exact number of shares to be purchasedwill depend on market conditions.  The repurchase program and the 10b5-1Plan may be suspended or discontinued at any time.

As of June 30, 2006, approximately 5.0 million shares remain authorized for repurchase under the Company's stock repurchaseprogram.  All shares repurchased under the program have been retired andare no longer deemed to be outstanding.  The timing of repurchases issubject to market conditions and cash availability.   There is no guaranteethat the remaining shares authorized for repurchase by the Board willultimately be repurchased.  

The additional shares available for repurchase aresubject to limitations set forth in the Company's Credit Agreement previouslyentered into on May 26, 2005 and amended on May 31, 2006.  The amended Credit Agreement now permits the repurchase of up to $250,000,000 ofequity securities, a portion of which was utilized in the repurchase describedin the first paragraph above, leaving a remaining amount of $166,000,000. In addition, after the $250,000,000 is utilized for such repurchases, theCompany may repurchase during any four consecutive quarters additional equitysecurities in an amount limited to the Company's consolidated net income, lessdividends paid, for the preceding four quarters.  See Note O - "Short Term BankBorrowings" for additional information on the Credit Agreement.

**NoteM - Goodwill and Intangible Assets**

Goodwilland intangible assets have been recorded at either incurred or allocated cost. Goodwill is not amortized, but its value is tested for impairment annually, andintangible assets are amortized over their useful lives ranging from 3-20 yearson a straight line basis.  Allocated costs were based on respective fairvalues at the date of acquisition.  

Allgoodwill amounts have been assigned to reporting units, based upon specificidentification, for impairment testing.  The impairment tests involve theuse of both estimates of fair value for the Company's reporting units as wellas discounted cash flow assumptions.  Impairment tests are performed inthe fourth quarter of each fiscalyear.  No potential impairment issues were noted for the quarter ended June 30, 2006.

**NoteN - Long-Term Debt**

On December 22, 2003, the Company completed an offering of $150 million of convertible subordinated notes due January 1, 2024 pursuant to Rule 144A under the Securities Act of 1933.  The notesbear interest at 23⁄4% per annum and are convertible into shares of the Company'scommon stock at an adjusted conversion price of $29.1452 per share and aresubordinated to all existing and future senior debt. 

Holders of the notes may convert their notesonly if any of the following conditions is satisfied: 

•      during any fiscal quarter prior to January 1, 2019, if the closing price of the Company's common stock for atleast 20 trading days in the 30 consecutive trading day period ending on thefirst trading day of such fiscal quarter is more than 120% of the conversionprice per share of the Company's common stock on such trading day;

•      any business day on or after January 1, 2019, if the closing price of the Company's common stock on the immediatelypreceding trading day is more than 120% of the conversion price per share ofthe Company's common stock on such trading day;

•      during the five business dayperiod after any five consecutive trading day period if the average of thetrading prices of the notes for such five consecutive trading day period isless than 98% of the average of the conversion values of the notes during suchperiod, subject to certain limitations;

•      if the Company has called thenotes for redemption; or

•      if the Company makes certainsignificant distributions to holders of its common stock or the Company entersinto specified corporate transactions. 

20

At an initial conversion price of $29.289, each$1,000 principal amount of notes will be convertible into 34.1425 shares ofcommon stock.  As a result of the Company's recent dividend increase, theconversion price has been adjusted to $29.1452, and each $1,000 principal amount willbe convertible into 34.311 shares of common stock.

During the quarter ending June 30, 2006, one of the conditions required for conversion of the notes was satisfied and,accordingly, the holders of notes have the option to convert the notes intocommon shares at the aforementioned adjusted conversion price per share. 

Concurrent with the issuance of the convertiblesubordinated notes, the Company purchased a convertible note hedge from CreditSuisse First Boston LLC.  The note hedge expires on January 1, 2009 and gives the Company the ability to purchase shares of our common stock equal to thenumber of shares we are obligated to issue under any convertible notesconverted by the holder prior to the hedge expiration date at a purchase priceequal to the conversion price of the convertible notes.  

Concurrent with the issuance of the notes, theCompany issued warrants to Credit Suisse First Boston LLC.  The warrants areEuropean-style call warrants, which also expire on January 1, 2009.  The holder of the warrants is entitled to purchase 5.14 million shares of the Company'scommon stock at $39.2339.  The number of shares and exercise price of thewarrants are subject to adjustment from time to time in a similar manner to theconvertible notes.

Both the note hedge and the warrants may besettled either in cash or shares at the Company's option.  The Company is notobligated under either the warrants or the note hedge to settle its obligationsin cash.  Under no circumstance is the Company obligated to issue shares underthe note hedge.  The warrants do require the Company to settle its obligations thereunderin cash or shares, do permit the Company to settle its obligation inunregistered shares and contain no provision obligating the Company to settleits obligations in freely-tradable shares, and the Company is not required tomake any cash payments under the warrants for failure to have a registrationstatement declared effective.  There are no required cash payments to theholder of the warrants if the shares initially delivered upon settlement are subsequently sold by theholder and the sales proceeds are insufficient to provide the holder with anexpected return.  The Company has sufficient authorized shares to settle thewarrants and the convertible notes in shares, considering all of itsobligations under the instruments for their full terms.  The warrants, notehedge, and convertible notes each contain an express limit on the number ofshares issuable thereunder.  The warrants and note hedge expressly indicatethat the holder of the warrants has no rank higher than those of a shareholderof the stock underlying the warrants.  Under certain circumstances in a changeof control of the Company we may be required to issue additional shares under amake-whole provision under the warrant. The Company has no obligation to postcollateral under the warrants, convertible notes or note hedge.  

Thecost of the note hedge and the proceeds from the sale of warrants have beenincluded in shareholders' equity in accordance with the guidance in EITF No.00-19, "Accounting for Derivative Financial Instruments Indexed to andPotentially Settled in a Company's own Stock."  Any proceeds received orpayments made upon termination of these instruments will be recorded inshareholders' equity.

**NoteO - Short Term Bank Borrowings**

*Credit Agreement*

On May 26, 2005, the Company entered into a Credit Agreement (the "CreditAgreement") that provides a $200 million senior revolving credit facility,subject to a $20 million sublimit for the issuance of standby and commercialletters of credit, a $10 million sublimit for swing line loans and a $50 millionalternative currency sublimit.  The Credit Agreement expires on September 30, 2008.  At the election of the Company, and subject to lender approval,the amount available for borrowings under the Credit Agreement may be increasedby an additional $50 million.  Funds under the Credit Agreement areavailable to the Company to finance permitted acquisitions, for stockrepurchases up to certain dollar limitations, and for other general corporatepurposes.  The Company has three standby letters of credit totaling $2 millionoutstanding which are secured by the Credit Agreement.  Accordingly, althoughthere were no borrowings outstanding under the Credit Agreement at June 30, 2006, only $198 million was available for borrowings.  During the quarterended June 30, 2006 the Company entered into an Amendment to the CreditAgreement ("First Amendment" ) to permit the Company to consummate the sale ofits surgical urology and clinical and consumer health care segments.  Additionally,the First Amendment releases urology subsidiaries as guarantors, releases thepledges of the capital stock of urology subsidiaries, modified the minimumEBITDA, modifies certain covenants restricting the Company to enter intocertain investments, incur indebtedness and increased the amount of its equitysecurities the Company is allowed to repurchase.

21

Intereston borrowings (other than swing line loans) under the Credit Agreement is at avariable rate that is calculated, at the Company's option, at either prime rateor LIBOR, plus an additional percentage that varies depending on the Company'ssenior leverage ratio (as defined in the Credit Agreement) at the time of theborrowing.  Swing line loans bear interest at the prime rate plusadditional basis points, depending on the Company's senior leverage ratio atthe time of the loan.  In addition, the Company paid certain fees to thelenders to initiate the Credit Agreement and will pay an unused commitment feebased on the Company's senior leverage ratio and unborrowed lender commitments.

Borrowingsunder the Credit Agreement are guaranteed by one of the Company's domesticsubsidiaries and are also secured by a pledge of 100% of the outstandingcapital stock of two other domestic subsidiaries.  In addition, if theratio of total funded debt to adjusted EBITDA exceeds 2.50 to 1.00, the Companyis obligated to grant to the lenders a first priority perfected securityinterest in essentially all of its domestic assets.

TheCredit Agreement imposes certain financial and operational restrictions on theCompany and its subsidiaries, including financial covenants that require theCompany to maintain a maximum consolidated funded debt leverage ratio of notgreater than 4.00 to 1.00, a senior funded debt ratio of not greater than 2.50to 1.00, minimum quarterly EBITDA and a minimum fixed charge ratio of greaterthan 1.25 to 1.00.  The covenants also restrict the Company's ability, amongother things, to make certain investments, incur certain types of indebtednessor liens, make acquisitionsin excess of $20 million except in compliance with certain criteria, andrepurchase shares of common stock, pay dividends or dispose of assets abovespecified thresholds.  The Credit Agreement also contains customary eventsof default, including payment defaults, material inaccuracies in itsrepresentations and warranties, covenant defaults, bankruptcy and involuntaryproceedings, monetary judgment defaults in excess of specified amounts,cross-defaults to certain other agreements, change of control, and ERISAdefaults.  If an event of default occurs and is continuing, thecommitments under the Credit Agreement may be terminated and the principalamount and all accrued but unpaid interest and other amounts owed thereundermay be declared immediately due and payable.  As of June 30, 2006, all covenants and restrictions had been satisfied, and there were no borrowingsoutstanding under the Credit Agreement.  

*Loanand Overdraft Facility*

On October 4, 2005, Mentor Medical Systems B.V., ("Mentor BV"), a wholly-ownedsubsidiary of Mentor Corporation entered into a Loan and Overdraft Facility(the "Facility") with Cooperative RaboBank Leiden, Leiderdorp en OestgstgeestU.A. ("RaboBank").

TheFacility provides Mentor BV with an initial €15 million loan and overdraftfacility, which decreases by €375,000 quarterly starting in September 2006. Under the Facility, Mentor BV may borrow up to €12.5 million in fixed amountadvances, with terms of three to six months, and a further sublimit of up to €5million of loans in fixed amount advances with a term of up to 5 years.  Up to€10 million of the Facility may be drawn in the form of U.S. Dollars.  Fundsunder the Facility are available to Mentor BV to finance certain dividend paymentsto Mentor Corporation and for other normal business purposes.  As of August 4, 2006, approximately $9.5 million was outstanding under the Facility.

Intereston borrowings under the Facility is at a rate equal to 0.55% over the RaboBankbase lending rate, Euribor, or LIBOR depending upon the currency and term ofeach borrowing.  Interest rates on borrowings other than overdrafts, arefixed for the term of the advance.

Borrowingsby Mentor BV under the Facility are guaranteed by Mentor's wholly-owned subsidiary,Mentor Medical Systems C.V., through a Joint and Several Debtorshipagreement.  In addition, borrowings under the Facility are secured bycertain real estate owned by Mentor BV.

TheFacility imposes certain financial and operational restrictions on Mentor BV,including financial covenants that require Mentor BV and Mentor Medical SystemsCV to maintain a minimum combined defined solvency ratio, a maximum combineddebt leverage ratio of not greater than 4 to 1, a senior funded debt ratio ofnot greater than 2.5 to 1, minimum quarterly operational results, and a minimuminterest coverage ratio of greater than 5 to 1.  The Facility alsocontains customary events of default, including cross default and material oradverse change provisions.  If an event of default occurs, the commitmentsunder the Facility may be terminated and the principal amount and all accruedbut unpaid interest and other amounts owed thereunder may be declaredimmediately due and payable.  As of June 30, 2006, all covenants and restrictions were satisfied.

Mentor  BV paid€15,000 in certain fees to the RaboBank upon entry into the Facility, and Mentor BV will be obligated to pay, over the 10 year term of the Facility, a commitment feeof 0.25% of the committed and unborrowed balances.  Fees are payablequarterly in arrears.

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Outstanding borrowings under all creditarrangements had a weighted-average interest rate of 5.6% for the period ended June 30, 2006.  A total of $207.7 million was available under the senior revolvingcredit facility and foreign lines of credit at June 30, 2006, and approximately $202.2 million was available under all lines of credit at March 31, 2006.

**Note P - Related Party Transactions**

On June 5, 2006, the Company repurchased 2.0 million shares of its common stock from an investment partnership managed byValueAct Capital at $42.00 per share, a discount to the $42.21 closing marketon the NYSE on that date.  The 2.0 million shares were repurchasedfor a total of $84 million pursuant to the Company's continuing stockrepurchase program and represent approximately 4.6% of outstanding sharesbefore the transactions.  After the transactions, ValueAct Capital,through several of its investment partnerships, continues to own more than 2million shares of Common Stock, or approximately 5% of the outstanding sharesof the Company.  The repurchase of these shares was pre-approved by the AuditCommittee and the Board of Directors with interested parties abstaining or notin attendance.

**Note Q - Discontinued Operations**

In October, 2005, the Company announced that itwas evaluating strategic alternatives for its Urology Business that would bothenhance shareholder value and enable the Company to focus solely on itsaesthetics business.  On May 17, 2006 the Company executed a definitive agreement for the sale of the Urology Business to Coloplast for $463 million, ofwhich $456 million is in cash and $7 million is in non-cash considerationconsisting of the value of certain foreign tax credits that the Company expectsto realize arising from the transaction prior to the close.  Concurrently,certain assets of a minor urology product line were sold to an unrelated partyfor approximately $2 million at approximately book value.  The sale toColoplast was completed on June 2, 2006.  The Company received $458 million in total proceeds subject to post closing adjustments and recorded a gain of $222million, net of taxes and transaction related expenses of approximately $138million. Approximately 1,000 employees were transferred to Coloplast.  Inaccordance with SFAS No. 144 "Accounting for the Impairment or Disposal ofLong Lived Assets," the assets and liabilities related to this transactionhave been segregated from continuing operations and are reported as assets andliabilities of discontinued operations in the accompanying consolidated balancesheet as of March 31, 2006.  In addition, operations associated with thesesegments have been classified as income from discontinued operations in theaccompanying consolidated statements of income and the cash flows associatedwith discontinued operations have been segregated in the consolidatedstatements of cash flows.

Inconnection with the sale to Coloplast, the Company entered into a TransitionServices Agreement and various supply agreements.  Pursuant to the TransitionServices Agreement, in exchange for specified fees, we provide to Coloplast andColoplast provides to us, services including accounting, informationtechnology, customer support and use of facilities.  Under the supply agreementswe supply various products, including silicone gel-filled testicular implantsto Coloplast and Coloplast supplies us with components for the manufacture ofour breast implants.  These services agreements are expected to extend througha period not to exceed twelve months and the supply agreements range from aperiod of 6 - 36 months.  Costs incurred and services provided will bereimbursed by both parties.  Costs the Company incurs and reimbursement forservices provided will be classified as in discontinued operations in theconsolidated income statement.  These services and supply agreements are notexpected to have a significant impact on our future cash flows.

23

The major classes of assets and the related liabilitiesof discontinued operations included in the Company's Consolidated Balance Sheetat March 31, 2006 and those assets sold and liabilities assumed on June 2, 2006were as follows:
(in thousands)
**June  2,  2006**

March  31,  2006

Assets held for sale:

Accounts Receivable, net
** $**
**48,294 **
** $**
50,698 

Inventories

**38,827 **

38,016 

Deferred income taxes

**539 **

4,305 

Prepaid expenses and other current assets

**54,459 **

3,051 

Total current assets held for sale

**142,119 **

96,070 

** **

Property, plant and equipment, net

**30,879 **

29,497 

Intangible assets, net

**14,275 **

14,063 

Goodwill, net

**17,009 **

16,380 

Other assets

**813 **

324 

Total assets held for sale
** $**
**205,095 **
 $
156,334 

** **

Liabilities associated with assets held for sale:

** **

Accounts payable and accrued liabilities
** $**
**31,904 **
 $
27,220 

Income taxes payable

**23,440 **

1,751 

Current portion of purchase price related to acquired technologies  and acquisitions

**1,000 **

1,000 

Total current liabilities associated with assets held for sale

**56,344 **

29,971 

** **

Other long-term liabilities

**9,165 **

10,555 

Total liabilities associated with assets held for sale
** $**
**65,509 **
 $
40,526 

Net sales from discontinued operations were$38.4 million for the two month period ending June 2, 2006 and $61.2 million for the three-month period ending June 30, 2005.  Income before income taxes from discontinued operations was $368.1 million, (including a pre-tax gain of$360.8 million on the sale of our Urology Business) and $9.4 million for thetwo month period ending June 2, 2006 and three-month period ending June 30, 2005,respectively.

**Note R - Postretirement Benefit Plan**

The Company's Savings and Investment Plan isa qualified salary-reduction plan under Section 401(k) of the Internal RevenueCode in which substantially all of our U.S. employees may participate bycontributing a portion of their compensation.  The Company matchescontributions up to specified percentages of each employee's compensationdepending on how the employee allocates his or her contributions.  Chargesagainst income for the matching contributions were $0.3 million and $0.2million for the three-month periods ending June 30, 2006 and 2005, respectively.

**Note S - Contingencies**

Warranty and product liability claims are aregular and ongoing aspect of the medical device industry.  At any one time,the Company may be subject to claims against it and may be involved inlitigation.  These actions can be brought by an individual or by a groupof patients purporting to be a class action.  The Company is currentlyinvolved in a number of product liability legal actions, the outcomes of whichare not within its control and may not be known for prolonged periods of time. The Company has retained liabilities associated with warranty and productliability claims arising out of its urology products sold prior to the June 2, 2006 closing date.  No individual productliability case or group of cases, in whichthe Company is currently involved, is considered material and there are nocertified class actions currently pending against the Company.  In accordancewith SFAS No. 5 "Accounting for Contingencies", a liability is recorded in theconsolidated financial statements when a loss is known or considered probableand the amount can be reasonably estimated.  If the reasonable estimate of aknown or probable loss is a range, and no amount within the range is a betterestimate, the minimum amount of the range is accrued.  If a loss is notprobable or cannot be reasonably estimated, no liability is recorded in theconsolidated financial statements.

24

The Company carries product liabilityinsurance on all its products, except its silicone gel-filled breast implants,which in the United States are only available through a controlled clinicalstudy.  This insurance is subject to certain self-insured retention andother limits of the policy, exclusions and deductibles that the Companybelieves to be appropriate.  The Company had established reserves of $2.9million at June 30, 2006 and March 31, 2006, for product related claims to theextent that those claims may result in settlements or judgments within itsself-insured retention limits.  In addition, the Company had establishedadditional reserves of $4.1 million and $3.8 million at June 30, 2006 and March 31, 2006, respectively, through its wholly owned captive insurance companybased on actuarially determined estimates and taking the Company's excessinsurance coverage into account.  Those reserves were actuarially determinedbased on historical information, trends and certain assumptions about futureclaims and are primarily for claims that have been asserted.  Should actualproduct liability experience differ from the estimates and assumptions used todevelop these reserves, subsequent changes in these reserves will be recordedin selling, general and administrative expenses and may affect the Company'soperating results in future periods.

In addition, the Company also offers limitedwarranty coverage on some of its products (see Note G for details). While theCompany engages in extensive product quality programs and processes, includingactively monitoring and evaluating the quality of its component suppliers, thelimited warranty obligation is affected by reported rates of product problemsas well as the costs incurred in correcting product problems.  Should actual warrantyexperience differ from the estimates and assumptions used to develop thewarranty reserves, subsequent changes in the reserves will be recorded in costof sales and may affect our operating results in future periods. 

In addition, in the ordinary course of itsbusiness, the Company experiences various types of claims that sometimes resultin litigation or other legal proceedings.  The Company does not anticipatethat any of these proceedings will have a material adverse effect on theCompany.

The Company has also agreed to indemnifyColoplast against specified losses in connection with the June 2006 sale of theCompany's Urology Business.  Generally, the Company has retained responsibilityfor various legal liabilities that accrue prior to closing.  The Company alsomade representations and warranties to Coloplast about the condition of theUrology Business, including matters relating to intellectual property,regulatory compliance and environmental laws.

**Item2. - Management's Discussion and Analysis of Financial Condition and Results ofOperations**

*Cautionary Statement:*

*Thefollowing discussion and analysis should be read in conjunction with ourUnaudited Consolidated Financial Statements and related Notes thereto containedelsewhere in this Report.  The information contained in this QuarterlyReport on Form 10-Q is not a complete description of our business or therisks associated with an investment in our securities.  We urge you tocarefully review and consider the various disclosures made by us in this Reportand in our other reports filed with the Securities and Exchange Commission("SEC"), including our Annual Report on Form 10-K for the year endedMarch 31, 2006, and subsequent reports on Forms 8‐K , which discussour business in greater detail.*

*Thesection entitled "Risk Factors" set forth in Item 1A under Part II -Other Information, and similar discussions in our other SEC filings, discusssome of the important risk factors that may affect our business, results ofoperations and financial condition.  These risks, in addition to the otherinformation in this Report and in our other filings with the SEC, should becarefully considered before deciding to purchase, hold or sell our securities.*

25

*Variousstatements in this Form 10-Q, in future filings by us with the SEC, in our press releases and in our oral statements made by or with the approval of authorizedpersonnel, constitute "forward-looking statements" within the meaningof the Private Securities Litigation Reform Act of 1995.   Forward-lookingstatements are based on current expectations and are indicated by words orphrases such as "anticipate," "estimate,""expect," "intend," "project," "plan,""believe," "will," "seek," and similar words orphrases and involve known and unknown risks, uncertainties and other factorswhich may cause actual results, performance or achievements to be materiallydifferent from any future results, performance or achievements expressed orimplied by such forward-looking statements.  Some of the factors that couldaffect our financial performance or cause actual results to differ from ourestimates in, or underlying, such forward-looking statements are set forthunder "Item 1A -Risk Factors" or elsewhere in this Form 10-Q. Forward-looking statements include statements regarding, among other things:*

•     *Our anticipated growthstrategies;*

•     *Our intention to introduce orseek approval for new products;*

•     *Our ability to continue to meetUnited States Food Drug and Administration ("FDA") and other regulatoryrequirements;*

•     *Our anticipated outcomes oflitigation and regulatory reviews; *

•     *Our ability to replace sourcesof supply without disruption and regulatory delay; and*

•    *Our expectation that selling,general and administrative expenses will increase as a result of the adoption ofSFAS 123(R) - "Share-Based Payment" which requires all share-basedpayments be recognized in the financial statements.*

*These forward-looking statements are basedlargely on our expectations and are subject to a number of risks anduncertainties, many of which are beyond our control.  Actual results coulddiffer materially from these forward-looking statements as a result of thefacts described in "Item 1A - Risk Factors" or elsewhere including,among others, problems with suppliers, changes in the competitive marketplace,significant product liability, or other claims, product recalls, difficultieswith new product development, the introduction of new products by ourcompetitors, changes in the economy, FDA delay in approval or rejection of newor existing products, changes in Medicare, Medicaid or third-partyreimbursement policies, changes in government regulations, use of hazardous orenvironmentally sensitive materials, inability to implement new informationtechnology systems, inability to integrate new acquisitions, and otherevents.  We undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.  In light of these risks and uncertainties, we cannotassure you that the forward-looking information contained in this Form 10-Qwill, in fact, transpire.*

CompanyOverview

Foundedin 1969, Mentor Corporation is a leading supplier of products serving theaesthetic market.  We develop, manufacture and market a range of productsserving the aesthetic market, including plastic and reconstructive surgery. Our products include surgically implantable prosthesis for plastic andreconstructive surgery, as well as capital equipment and consumables used forsoft tissue aspiration for body contouring (liposuction).  Historically, weoperated in three reportable segments:  aesthetic and general surgery, surgicalurology, and clinical and consumer healthcare.  Our surgical and urologyproducts included surgically implantable prostheses for the treatment ofimpotence, surgically implantable incontinence products, urinary care productsand brachytherapy seedsfor the treatment of prostate cancer.  Our clinical and consumer healthcareproducts included catheters and other products for the management or urinaryincontinence and retention.  In October 2005, we began to evaluate strategicalternatives for our surgical urology and clinical and consumer healthcarebusinesses.  On May 17, 2006, we entered into a definitive purchase agreementto sell our surgical urology and clinical and consumer healthcare businesssegments (collectively, the "Urology Business") to Coloplast A/S for totalconsideration of $463 million ($456 million in cash and the remainderconsisting of the value of certain foreign tax credits that we expect torealize arising from the transaction prior to the close).  On June 2, 2006, the sale of the Urology Business was completed.  On June 1, 2006, our Porges SAS subsidiary sold certain intellectual property to Coloplastfor $52 million, which is not included in the total consideration of$463 million.  The purchase price is subject to a post-closing adjustmentbased on the working capital of the Urology Business as of the closing date,and a downward reduction in an amount equal to 50% of the amount of certaintransfer taxes and related fees incurred in connection with the transaction,50% of the cost of severance obligations in respect of certain former employeesof the Urology Business who will not continue with the Urology Businessfollowing the closing of the transaction, and certain other administrativecosts.

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Thepurchase agreement with Coloplast contain customary representations andwarranties and indemnification provisions whereby each party agrees toindemnify the other for breaches of representations and warranties, breaches ofcovenants and other matters, with our liability for breaches of representationsand warranties generally limited to 15% of the purchase price.  Pursuant to theterms of the purchase agreement, an escrow fund was established with$10 million withheld from the purchase price to secure our indemnificationobligations with respect to any breaches of our representations and warrantiesfor a period of 18 months.  In addition, the purchase agreement provides thatwe will not enter into or engage in a business that competes with the UrologyBusiness, on a worldwide basis, for a period of seven years following theclosing of the transaction.  These restrictions on competition do not apply to(i) the development, manufacture or sale of any oral pharmaceuticals orany product or treatments involving dermal fillers or other bulking agents ortoxins, including botulinum toxins, or (ii) any business acquired andoperated by us or our affiliates for so long as any such businesses generateless than $5 million in aggregate annual revenues from any competingbusiness.  These restrictions on competition terminate upon a change in controlof Mentor.

Inconnection with the sale to Coloplast, we also entered into a TransitionServices Agreement and various supply agreements.  Pursuant to the TransitionServices Agreement, in exchange for specified fees, we provide to Coloplast andColoplast provides to us, services including accounting, informationtechnology, customer support and use of facilities.  Under the supplyagreements we supply various products, including silicone gel-filled testicularimplants to Coloplast and Coloplast supplies us with components for themanufacture of our breast implants.  These services agreements are expected toextend through a period not to exceed twelve months and the supply agreementsrange from a period of 6 - 36 months.  These services and supply agreements arenot expected to have a significant impact on our future cash flows from continuingoperations.

On June 2, 2006, we also completed the sale of our intellectual property,raw materials and tangible assets for the production of silicone male externalcatheters relating to our catheter production facility in Anoka, Minnesota and our inventory of such catheters to Rochester Medical Corporation, for anaggregate purchase price of approximately $2 million.  

As a result of the sale to Coloplast, theassets and liabilities related to the Urology Business have been segregatedfrom continuing operations and are reported as assets and liabilities ofdiscontinued operations in the accompanying consolidated balance sheets.  Inaddition, operations associated with the Urology Business have been classifiedas income from discontinued operations in the accompanying consolidatedstatements of income.  Prior to being designated as discontinued operations,the Urology Business contributed approximately 47% of our consolidated netsales and approximately 27% of our operating profit in fiscal year 2006.  Werecorded a net gain on the sale of our Urology Business in the first quarter offiscal 2007.  As a result of this sale, we will be able to focus on theaesthetic market.  We intend to leverage our traditional strengths in plasticsurgery and grow our market presence in cosmetic dermatology with products forboth surgical and non-surgical procedures. 

Weemploy approximately 950 people around the world and are headquartered in Santa Barbara, California, with manufacturing and research operations in the United States, The Netherlands and the United Kingdom.  We also purchase finished products andcertain raw material components from third party manufacturers andsuppliers.  Our cost of goods sold represents raw materials, labor andoverhead, and the cost of third party finished products.  Gross marginsmay fluctuate from period to period due to changes in the selling prices of ourproducts, the mix of products sold, changes in the cost of third party finishedproducts, raw materials, labor and overhead, and changes in manufacturingprocesses and yields. 

Inaddition to our strong domestic presence, we export most of our product lines,principally to Canada, Western Europe, Central and South America, and the Pacific Rim.  Products are sold through our direct international sales offices in Canada, United Kingdom, Germany, France, Benelux, Australia, Spain and Italy, as well as throughindependent distributors in other countries.

We employ a domestic sales force for ouraesthetic surgery and body contouring product lines.  The sales forceprovides product information and specific data support and related services tophysicians, nurses and other health care professionals.  We promote ourproducts through participation in and sponsorship of medical conferences andeducational seminars, radio, newspaper, specialized websites, journaladvertising, direct mail programs, and a variety of marketing supportprograms.  In addition, we contribute to organizations that providecounseling and education for persons suffering from certain conditions, and weprovide patient education materials for most of our products to physicians foruse with their patients.  

Ourselling, general and administrative expense incorporates the expenses of oursales and marketing organization and the general and administrative expensesnecessary to support the global organization. Our sales and marketing expensesconsist primarily of salaries, commissions, and marketing program costs. General and administrative expenses incorporate the costs of finance,human resources, information services, legal and insurance costs.

27

Ourresearch and development expenses are comprised of the following types of costsincurred in performing clinical development and research and developmentactivities: salaries and benefits, allocated overhead, clinical trial andrelated clinical manufacturing costs, regulatory costs, intellectual propertyprocurement, contract services, and other outside costs.  We also conductresearch on materials technology, product design and product improvement.

Our quarterly results reflect seasonality, asthe second fiscal quarter ending September 30 tends to have the lowest revenueand profitability of all of the quarters.  This is primarily due to lower levels of sales ofbreast implants for augmentation, an elective procedure, as many surgeons andpatients take vacations during this quarter.

RecentEvents

On June 16,2006, we entered into a stock purchase plan for the purpose of repurchasing upto $166 million worth of our common stock under a Rule 10b5-1 Plan (the "10b5-1Plan") compliant with Rule 10b-18.  The first repurchase under the 10b5-1 Plancannot take place prior to the third trading day following the announcement of ourfinancial results for the three months ending June 30, 2006.  Inconnection with the entry into the 10b5-1 Plan, our Board of Directorsincreased the authorized number of shares available for repurchase pursuant toour stock repurchase program from 3.3 million to 5.0 million shares.  Thetiming of purchases and the exact number of shares to be purchased will dependon market conditions.  The repurchase program and the 10b5-1 Plan may besuspended or discontinued at any time.

On June 5,2006, we agreed to repurchase 2,000,000 shares of our common stock from aninvestment partnership managed by ValueAct Capital at $42 per share, a 0.5%discount from the closing market price quoted on the New York Stock Exchange of$42.21 on June 5, 2006.  The 2.0 million shares were repurchased for a total of$84 million pursuant to our continuing stock repurchase program and representapproximately 4.6% of outstanding shares before the transactions.  Afterthe transactions, ValueAct Capital, through several of its investmentpartnerships, continues to own more than 2 million shares of common stock, orapproximately 5% of our outstanding shares, and continues to be represented onour Board of Directors by Mr. Jeff Ubben.  The repurchase of these shareswas pre-approved by the Audit Committee and the Board of Directors withinterested parties abstaining or not in attendance.

On April 3, 2006, we submitted a pre-market approval application to the U.S. Foodand Drug Administration ("FDA") for our Contour Profile® silicone gel-filledbreast implant products ("CPGTM").  The FDA has initiated its review of ourapplication with the exception of our clinical module, which based ondiscussions with FDA will require additional information, and we are in theprocess of collecting that information.   

On July 28, 2005, we received an "approvable letter" with conditions from the FDA on our pre-market approvalapplication for our MemoryGelTM round silicone gel-filled breast implants. The approvable letter stipulates a number of conditions which we must satisfyin order to receive FDA approval to market and sell silicone gel-filled breastimplants in the United States.  These conditions were generally consistentwith those conditions that the advisory panel, composed of outside expertsselected by the FDA, had recommended in their April 2005 review of our PMAapplication.  We remain in discussion with the FDA regarding the conditions forapproval of our MemoryGelTM breast implant pre-market approval application,including discussions regarding post-market patient monitoring and datacollection.  We expect to incur additional expenses in connection with suchpost-market patient monitoring and data collection, which could besubstantial.  In addition, we cannot guarantee that the FDA will provide finalapproval, nor can we determine when the FDA's decision regarding approval willbe made. 

**APPLICATION OF CRITICAL ACCOUNTINGPOLICIES**

Management's Discussion and Analysis ofFinancial Condition and Results of Operations addresses our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States.  The preparation ofthese financial statements requires us to make estimates and assumptions thataffect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the financial statements, andthe reported amounts of revenues and expenses during the reportingperiod.  On an on-going basis, we evaluate our estimates andjudgments.  We base our estimates and judgments on historical experienceand on various other factors that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources.  Actual results may differ from these estimates underdifferent assumptions or conditions.  

We believe the following critical accountingpolicies, among others, affect our more significant judgments and estimatesused in the preparation of our consolidated financial statements. 
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Revenue Recognition

We recognize product revenue, net ofdiscounts, returns, and rebates in accordance with Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition When the Right ofReturn Exists," and Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition."

As required by these standards, revenue isrecorded when persuasive evidence of a sales arrangement exists, delivery hasoccurred, the buyer's price is fixed or determinable, contractual obligationshave been satisfied, and collectibility is reasonably assured.  Theserequirements are met, and sales and related cost of sales are recognized, uponthe shipment of products, or in the case of consignment inventories, upon thenotification of usage by the customer.  We record estimated reductions torevenue for customer programs and other volume-based incentives.  Shouldthe actual level of customer participation in these programs differ from thoseestimated, additional adjustments to revenue may be required.  We alsoallow credit for products returned within our policy terms.  We record anallowance for estimated returns at the time of sale based on historical experience,recent gross sales levels and any notification of pending returns.  Shouldthe actual returns differ from those estimated, additional adjustments torevenue and cost of sales may be required. 

Our deferred revenue consists of both currentand long term and includes funds received in connection with sales of ourEnhanced Advantage Breast Implant Limited Warranty program.  The fees receivedin connection with a sale of such a warranty are deferred and recognized asrevenue evenly over the life of the warranty term.

Accounts Receivable

We market our products to a diverse customerbase, principally throughout the United States, Canada, Western Europe, Centraland South America, and the Pacific Rim.  We grant credit terms in thenormal course of business to our customers, primarily hospitals, doctors anddistributors.  We perform ongoing credit evaluations of our customers andadjust credit limits based upon payment history and the customer's currentcredit worthiness, as determined through review of their current creditinformation.  We continuously monitor collections and payments fromcustomers and maintain allowances for doubtful accounts for estimated lossesresulting from the inability of some of our customers to make requiredpayments.  Estimated losses are based on historical experience and anyspecifically identified customer collection issues.  If the financialcondition of our customers, or the economy as a whole, were to deteriorateresulting in an impairment of our customers' ability to make payments, additionalallowances may be required.  These additional allowances for estimatedlosses would be included in selling, general and administrative expenses. 

Inventories

We value our inventory at the lower of cost,based on the first-in first-out ("FIFO") cost method, or the currentestimated market value of the inventory.  We write down our inventory forestimated obsolescence or unmarketable inventory equal to the differencebetween the cost of inventory and the estimated market value based upon assumptionsabout future demand and market conditions.  If actual future demand ormarket conditions differ from those projected by us, additional inventoryvaluation adjustments may be required.  These additional valuationadjustments would be included in cost of sales.

Warranty Reserves

Weoffer two types of warranties relating to our breast implants in the UnitedStates, Canada, and Puerto Rico: a standard limited warranty which is offeredat no additional charge and an enhanced limited warranty at an additional chargeof $100 in the U.S. ($100 CAD in Canada), which provide limited financialassistance in the event of a deflation or rupture.  Our standard limitedwarranty is also offered in certain European and other international countriesfor silicone gel-filled breast implants.  We provide an accrual for theestimated cost of breast implant warranties at the time revenue isrecognized.  Costs related to warranties are recorded in cost of sales. The estimated cost of the standard limited warranty is recorded as an expenseat the time of sale, whereas the estimated cost of the enhanced limitedwarranty is deferred and recognized as costs are incurred.  Such accruals arebased on estimates, which are based on relevant factors such as unit sales,historical experience, the limited warranty period, estimated costs, and, to alimited extent, information developed by our insurance company using actuarialtechniques.  These accruals are analyzed periodically for adequacy. While we engage in extensive product quality programs and processes, includingactively monitoring and evaluating the quality of our component suppliers, thewarranty obligation is affected by reported rates of warranty claims and levelsof financial assistance specified in the limited warranties.  Shouldactual patient claim rates reported differ from our estimates, adjustments tothe estimated warranty liability may be required.  These adjustments wouldbe included in cost of sales.

29

Product Liability Reserves

We have product liability reserves for product-relatedclaims to the extent those claims may result in litigation expenses,settlements or judgments within our self-insured retention limits.  We havealso established additional reserves, through our wholly-owned captiveinsurance company, for estimated liabilities for product-related claims basedon actuarially determined estimated liabilities, taking also into account ourexcess insurance coverages.  The actuarial valuations are based on historicalinformation and certain assumptions about future events.  Product liabilitycosts are recorded in selling, general and administrative expenses as they aredirectly under the control of our General Counsel and other general andadministrative staff and are directly impacted by our overall corporate risk managementstrategy.  Should actual product liability experience differ from the estimatesand assumptions used to develop these reserves, subsequent changes in reserveswill be recorded in selling, general and administrative expenses, and mayaffect our operating results in future periods.  

Goodwill and Intangible Asset Impairment

We evaluate long-lived assets, includinggoodwill and other intangibles, for impairment whenever events or changes incircumstances indicate that the carrying value of an asset may not berecoverable.  In addition, we evaluate goodwill and other intangiblesannually in the fourth quarter of each fiscal year.  In assessing therecoverability of goodwill and other intangibles, we must make assumptionsregarding estimated future cash flows and other factors to determine the fairvalue of the respective assets.  We adopted SFAS No. 142, "Goodwilland Other Intangible Assets," effective April 1, 2002 and analyzed goodwill and intangibles for impairment.  Impairment tests were performed atadoption, and in the fourth quarter of fiscal years 2003, 2004 and 2006, and noimpairment was noted as a result of these analyses.  The impairment testsperformed in fiscal 2005 indicated certain impaired assets, for which werecorded impairment charges in the fourth quarter of fiscal 2005. 

Stock-Based Compensation Expense forFiscal 2007 and Thereafter

Effective April 1, 2006 we adopted SFAS No. 123 (revised 2004), Share-Based Payment, or SFAS 123(R).SFAS 123(R) requires all share-based payments, including grants of stockoptions, restricted stock units and employee stock purchase rights, to berecognized in our financial statements based on their respective grant date fairvalues. Under this standard, the fair value of each employee stock option and employeestock purchase right is estimated on the date of grant using an option pricingmodel that meets certain requirements. We currently use the Black-Scholesoption pricing model to estimate the fair value of our share-based payments. The Black-Scholes model meets the requirements of SFAS 123(R) but the fairvalues generated by the model may not be indicative of the actual fair valuesof our stock-based awards as it does not consider certain factors important tostock-based awards, such as continued employment and periodic vestingrequirements and limited transferability.  The determination of the fair valueof share-based payment awards utilizing the Black-Scholes model is affected byour stock price and a number of assumptions, including expected volatility,expected life, risk-free interest rate and expected dividends. We use theimplied volatility for traded options on our stock as the expected volatilityassumption is required in the Black-Scholes model.  Our selection of theimplied volatility approach is based on the availability of data regardingactively traded options on our stock as we believe that implied volatility ismore representative than historical volatility.  The expected life of the stockoptions is based on historical and other economic data trended into thefuture.  The risk-free interest rate assumption is based on observed interestrates appropriate for the terms of our stock options and stock purchaserights.  The dividend yield assumption is based on our history and expectation ofdividend payouts.  The fair value of our restricted stock units is based on thefair market value of our common stock on the date of grant.  Stock-basedcompensation expense recognized in our financial statements in fiscal 2006 andthereafter is based on awards that are ultimately expected to vest.  The amountof stock-based compensation expense in fiscal 2007 and thereafter will bereduced for estimated forfeitures based on historical experience.  Forfeituresare required to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.  We willevaluate the assumptions used to value stock awards on a quarterly basis.  Iffactors change and we employ different assumptions, stock-based compensationexpense may differ significantly from what we have recorded in the past.  Ifthere are any modifications or cancellations of the underlying unvestedsecurities, we may be required to accelerate, increase or cancel any remainingunearned stock-based compensation expense.  To the extent that we grantadditional equity securities to employees or we assume unvested securities inconnection with any acquisitions, our stock-based compensation expense will beincreased by the additional amortization of the compensation over theunderlying instruments' remaining vesting periods.  Had we adoptedSFAS 123(R) in prior periods, the magnitude of the impact of that standardon our results of operations would have approximated the impact ofSFAS 123 assuming the application of the Black-Scholes option pricingmodel as described in the disclosure of pro forma net income and pro forma netincome per share in Note K of our "Notes to Consolidated FinancialStatements".

30

**RESULTSOF OPERATIONS**

Thefollowing table sets forth certain data from the Consolidated Statements ofIncome expressed as a percentage of net sales for the periods indicated:

Three Months Ended  June 30,

**2006**

2005

** **
Net  sales
**100.0%**

100.0%
   Cost of sales
**27.8**

24.7 
Gross  profit
**72.2**

75.3 
   Selling, general and administrative expense
**37.4**

33.7 
   Research and development expense
**9.9**

8.6 
Operating  income
**24.9**

33.0 
   Interest expense
**(2.1)** 

(1.8)
   Interest income
**3.9**

0.9 
   Other income (expense), net
**0.7**

0.1 
Income  before income taxes
**27.4**

32.2
Income  taxes
**7.7**

9.1
Net  income from continuing operations
**19.7**

23.1
Net  income from discontinued operations
**4.2**

7.3
Gain  on sale of discontinued operations
**279.9**

-
Net  income
**303.8%**

30.4%

**Forthe three-month period ended June 30, 2006 compared to the three-month period ended June 30, 2005**

Net Sales

Netsales for the three-month period ended June 30, 2006 increased 7% to $79.4 million, compared to $74.1 million for the same period in the prior year.  Foreign exchange rate movements, primarily the stronger Canadian Dollar,over the same quarter in the prior year had a favorable year-to-year impact onsales of $0.4 million.  The Euro remained relatively flat year to year.  Totalsales of breast aesthetic products increased 7% to $69.4 million for thequarter from $64.8 million for the same period in the prior year.  Increasedbreast aesthetic sales were driven by growth in silicone gel products in the domestic and international markets.  Net sales of bodycontouring products increased 3% to $5.1 million for the quarter, from $5.0million for the same period in the prior year.  Other aesthetic productssales increased 13% to $4.9 million for the quarter, from $4.3 million for thesame period in the prior year primarily as a result of increased revenue fromour facial aesthetics products, including Niadyne's NIA 24TM line ofscience-based cosmeceutical products which was launched domestically in May2006 and PuragenTM, which was launched in a variety of international markets inMay 2005.

Cost of Sales and Gross Profit

Grossprofit increased $1.6 million to $57.4 for the quarter from $55.8 million inthe same period prior year, however the gross profit percentage decreased to72.2% of net sales for the quarter compared to 75.3% for the same period in theprior year.  The decrease in gross profit was primarily due to increased costof sales as a result of additional inventory reserves for the discontinuationof certain low margin product lines in our body contouring business of $1.2million and increased product warranty expense of $0.7 million over the sameperiod in the prior year.  

31

Selling, General and Administrative

Selling,general and administrative expenses increased $4.7 million to $29.7 million, or37.4% of net sales, for the three months ended June 30, 2006, compared to $25.0million, or 33.7% of net sales, in the same period in the prior year.  Theincrease was primarily due to $2.3 million of compensation expense as a resultof the Company's adoption of SFAS 123(R) on April 1, 2006, $1.8 million in severance related expense related to our ongoing business rationalizationinitiative and an increase in convention and meeting expenses of $0.7 million. We did not incur any severance related costs during the same period in theprior year.  The increase in selling,general and administrative expenses was partially offset by the completion ofour direct-to-consumer television advertising program related to our breastimplant products, resulting in decreased expenses of approximately $1.2 million.

Weexpect to continue to incur severance related costs in the second and thirdquarters of fiscal 2007 as we continue to evaluate our corporate infrastructurein efforts to continue to improve our efficiency and profitability. 

Research and Development

Researchand development expense was $7.9 million, or 9.9% of net sales, for the threemonths ended June 30, 2006, compared to $6.3 million or 8.6% of net sales, inthe same period in the prior year.  The increase in research anddevelopment spending was primarily to support key strategic product developmentprograms and included expenses of approximately $1.2 million associated with Phase II clinical trials for our botulinum toxin project.

Interest and Other Income and Expense

Interestexpense was $1.6 million for the three months ended June 30, 2006, compared to $1.3 million in the same period in the prior year.  These costs includedinterest on our $150 million convertible subordinated notes at 23⁄4% issued inDecember 2003, interest expense on balances outstanding under our foreign linesof credit, commitment fees on our credit facilities and amortization of debtissuance costs.  The increase in interest expense was primarily attributable tohigher commitment fees and increased borrowings on our international credit facilities.

Interestincome increased $2.4 million to $3.1 million for the three months ended June30, 2006 compared to $0.7 million in the same period of the prior year as aresult of generally higher rates of interest and significantly higher balancesof cash and cash equivalents available for investment as a result of the cashproceeds received from the sale of our Urology Business.  Included in the cashbalances providing interest income at June 30, 2006 was a $10.0 million escrow account associated with the sale of the Urology Business to Coloplast.

Other income primarily includes gains orlosses on sales of marketable securities and foreign currency gains or lossesrelated to our foreign operations.  Other income for the three-monthperiod ending June 30, 2006 increased $0.5 million from the same period in theprior year.  

Income Taxes

Our effective tax rate for the three monthsended June 30, 2006 was 28.0%, compared with 28.4% for the same period in theprior year.  Our effective tax rate for the three months ended June 30, 2006 has decreased primarily due to an increase in the amount of foreign earningsintended to be invested indefinitely outside of the United States and therecognition of tax on our repatriation of foreign cash pursuant to IRC Section965 reported in the same period in the prior year.  This decrease was partiallyoffset by an increase in our tax rate related to the book treatment of employeeequity compensation as required under SFAS 123(R).  The effect of certainitems, such as the Research and Development credit, the Extraterritorial IncomeExclusion and the U.S. manufacturing deduction is approximately the same inboth the three months ending June 30, 2006 and 2005, respectively.

Net Income from Continuing Operations andEarnings Per Share

Netincome from continuing operations for the three months ended June 30, 2005 decreased 8% to $15.7 million, from $17.1 million in the same period in the prioryear.  Diluted earnings per share decreased 8% to $0.33 for the quarter,compared to $0.36 for the same period in the prior year.  

32

Net Income from Continuing Operations andEarnings Per Share

Netincome from continuing operations for the three months ended June 30, 2005 decreased 8% to $15.7 million, from $17.1 million in the same period in the prioryear.  Diluted earnings per share decreased 8% to $0.33 for the quarter,compared to $0.36 for the same period in the prior year.  

Income from Discontinued Operations, Netof Income Taxes

Incomefrom discontinued operations, net of income taxes, includes the results of ourformer surgical urology and clinical and consumer healthcare business segments,which were sold to Coloplast on June 2, 2006.  During the two month periodending June 2, 2006 and the three-month period ending June 30, 2005, income from discontinued operations, net of income taxes, was $3.4 million and $5.4 million,respectively.  This decrease is primarily the result of the shorter operatingperiod this year.  For further details regarding discontinued operations, SeeNote Q of the Notes to Consolidated Financial Statements.  

Gainon Sale of Discontinued Operations, Net of Income Taxes

Forthe quarter ended June 30, 2006, we recorded a net gain of $222.4 million aftertaxes and expenses related to the sale of our Urology Business.  We receivedproceeds of approximately $458 million in cash and the benefit of certainforeign tax credits arising before the sale.  The proceeds are subject tocustomary post closing adjustments.  

**FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES**

Cashprovided by operating activities and from the exercise of employee stockoptions have been our primary recurring sources of funds.  We recentlycompleted the sale of our Urology Business to Coloplast for total considerationof $463 million, which is subject to customary post-closing adjustments andincludes non-cash consideration consisting of the value of certain foreign taxcredits that we expect to realize arising from the transaction prior to theclose.  On the closing date of June 2, 2006, we received $446 million in cashfrom Coloplast, an additional $10 million is held under an escrow agreement inconnection with the transaction and an additional $2 million from an unrelatedthird party.  After income taxes and transaction related expenses are paid infuture quarters, we expect net after tax proceeds from the sale to beapproximately $320 million.  Income taxes and related expenses will be paidover the reminder of our fiscal year.  We believe that existing funds includingthe proceeds of this sale, cash generated from continuing operations, andexisting sources of and access to financing are adequate to satisfy our workingcapital, capital expenditure, stock repurchases, and debt service requirementsfor the foreseeable future.  We believe that the loss of future cash flows fromour discontinued surgical urology and clinical and consumer healthcare segmentswill not have a significant negative impact on our future finance levels, termsof financing or covenants.  Cash flows have been segregated between continuingoperations and discontinued operations in the Consolidated Statements of CashFlows.  

Asof June 30, 2006, we had cash, cash equivalents and short-term marketablesecurities of $578.4 million, an increase of $377.4 million from our $201.0million as of March 31, 2006.  The principal components of the increase incash, cash equivalents and marketable securities were cash proceeds generatedfrom the sale of our Urology Business of $458 million and cash generated fromoperating activities of continuing operations of $22.8 million, proceeds of $2.8million from the exercise of employee stock options and stock purchases underour Employee Stock Purchase Plan,  partially offset by $84.0 million for sharesrepurchased , $7.8 million in dividends paid, $4.5 million to reduce amountsoutstanding on existing lines of credit, $2.2 million in net purchase ofmarketable securities, cash used by operating activities of discontinuedoperations of $8.3 million and $1.3 million used for net capital expendituresof continuing operations.

33

Weinvest excess cash in marketable securities that are highly liquid, ofhigh-quality investment grade, and which have varying maturities.  Ourshort-term marketable securities consist primarily of state and municipalgovernment and government agency obligations, Federal Home Loan Bank andMortgage Association bonds, and investment grade corporate obligations,including commercial paper. 

(in  thousands)

June 30,  2006

March 31,  2006

Cash  and cash equivalents

** $**

**474,018 **

 $

98,713 

Marketable  debt securities

**104,431 **

102,241 

Total  cash, cash equivalents and marketable debt securities

** $**

**578,449 **

 $

200,954 

Percentage  of total assets

**73%**

36%

**Cash Flow Changes**

The following table summarizes our cash flowactivity:

Three months Ended  June 30,

(in thousands)

**2006**

2005

Net  cash provided by continuing operating activities

** $**

**22,798 **

$

35,091 

Net cash provided by (used in) continuing investing  activities 

**(3,538)**

1,159 

Net  cash (used in) provided by continuing financing activities 

**(93,495)**

23,044 

Net cash provided (used ) by discontinued  operations

**(8,449)**

1,406 

Proceeds from the sale of the Urology Business

**458,066 **

- 

Effect of currency exchange rates on cash and  cash equivalents 

**(77)**

(971)

Increase in cash and cash equivalents

** $**

**375,305 **

$

59,729 

*Cash Provided by Operating Activities ofContinuing Operations*

Cashprovided by operating activities of continuing operations of $22.8 million and $35.0,million for the three months ended June 30, 2006 and 2005, respectively, wasgreater than net income in those periods, due to the net impact of non-cashadjustments to income.  Non-cash adjustments include tax benefits from theexercise of employee stock options, non-cash compensation, depreciation andamortization, deferred income taxes, loss on long term marketable securitiesand loss on the disposal of assets.  For the three-month period ended June 30,2006 and 2005 operating cash flows were positively impacted in the amount of $2.9million and $3.0 million, respectively, by changes in working capitalbalances.  Our working capital was $605.7 million at June 30, 2006, and $210.0million at March 31, 2006.  

*CashUsed for Investing Activities of Continuing Operations*

Cashused in investing activities of continuing operations was primarilyattributable to purchases and sales of marketable debt and equity securities,as well as capital expenditures on property and equipment andintangibles.  For the three months ended June 30, 2006, total cash used ininvesting activities of continuing operations was $3.5 million.  Our netpurchases of marketable securities totaled $2.2 million and our capital expenditurestotaled $1.3 million.  We anticipate our capital expenditures to totalapproximately $10.0 million in fiscal 2007, as we will continue to invest infacility improvements, software to support our manufacturing processes, andproduction equipment.  For the  three months ended June 30, 2005, totalcash provided by investing activities of continuing operations was $1.2million.  This amount was primarily comprised of net sales of marketablesecurities of $2.7 million partially offset by $1.5 million in capitalexpenditures. 

34

*CashProvided by Discontinued Operations*

Cash used by discontinued operationswas $8.4 million for the three months ended June 30, 2006 and cash provided bydiscontinued operations for the three months ended June 30, 2005 was $1.4million.  The amount in 2006 was comprised of $8.3 million used byoperating activities of discontinued operations adjusted for non cash items and$0.1 million in unfavorable currency exchange rate adjustments.  In 2005,the amount was comprised of $5.2 million provided by operating activities ofdiscontinued operations, less capital expenditures of $0.6 million, $0.5 millionin unfavorable currency exchange rate adjustments, and $2.7 million repaid onlines of credit.

*CashUsed for Financing Activities of Continuing Operations*

Netcash from financing activities is primarily a result of cash provided byemployee stock option exercises, cash used in payments of dividends and ourstock repurchase program, and the net impact of our debt financing activities.

We have a stockrepurchase program, primarily to offset the dilutive effect of our employeeequity compensation program, to provide liquidity to the market, and to reducethe overall number of shares outstanding.  All shares repurchased underthe program are retired and are no longer deemed to be outstanding.   On June5, 2006, we agreed to repurchase 2 million additional shares from an investmentpartnership managed by ValueAct Capital at $42.00 per share, a discount fromthe closing market price quoted on the NYSE of $42.21 on thatdate.  The 2.0 million shares were repurchased for a total of $84million pursuant to the Company's continuing stock repurchase program.  Mr.Jeff Ubben, managing director of ValueAct Capital, is a member of our Board ofDirectors.  The repurchase of these shares was pre-approved by the AuditCommittee and the Board of Directors with interested parties abstaining or notin attendance. 

On June 16, 2006, we entered into astock purchase plan for the purpose of repurchasing shares of the Company'scommon stock.  Repurchases will be made under a Rule 10b5-1 Plan compliantwith Rule 10b-18.  The first repurchase under the 10b5-1 Plan cannot takeplace prior to the third trading day following our announcement of ourfinancial results for the three months ending June 30, 2006.  Thetiming of purchases and the exact number of shares to be purchased will dependon market conditions.  The repurchase program and the 10b5-1 Plan may besuspended or discontinued at any time.  In connection with our entry into the 10b5-1Plan, the Board of Directors increased the authorized number of sharesavailable for repurchase pursuant to our stock repurchase program and under the10b5-1 Plan from 3.3 million to 5.0 million shares.  The Board approvedthe repurchase of shares of our common stock under the 10b5-1 Plan in an amountnot to exceed $166 million in total repurchases (subject also to the 5.0million shares limitation), consistent with the limitations set forth in our$200 million Credit Agreement, dated as of May 25, 2005, as amended onMay 31, 2006. 

At August 4, 2006, 5.0 million shares remainedauthorized for repurchase.  The timing of our repurchases is subject to marketconditions, and cash availability.  There is no guarantee that sharesauthorized for repurchase by the Board will ultimately be repurchased. Additionally, our Credit Agreement as amended on May 31, 2006 limits the amountof equity securities we can repurchase to $250 million (of which $166 millionremains available for repurchase) plus a subsequent amount during any fourconsecutive quarters equal to our consolidated net income less dividends paidfor the preceding four quarters.  

On September 15, 2005, the Board of Directorsauthorized an increase in our quarterly cash dividend payable on our commonstock from $0.17 to $0.18 per share.  It is our intent to continue to paydividends for the foreseeable future subject to, among other things, Boardapproval, cash availability, debt and line of credit restrictions and alternativecash needs.  At the current annual dividend rate of $0.72 per share, theaggregate annual dividend would be approximately $30 million. 

We receive cash from the exercise of employeestock options and the ESPP plan.  Employee stock option exercises and ESPPpurchases provided $2.8 million and $30.5 million of cash in the three monthsended June 30, 2006 and 2005, respectively.  Proceeds from the exercise ofemployee stock options will vary from period to period based upon, among otherfactors, fluctuations in the market value of our common stock relative to theexercise price of such options.

35

**Financing Arrangements**

*Senior Credit Facility*

On May 26, 2005, we entered into a three-year Credit Agreement ("CreditAgreement") that provides us with a $200 million senior revolving creditfacility, subject to a $20 million sublimit for the issuance of standby andcommercial letters of credit, a $10 million sublimit for swing line loans, anda $50 million alternative currency sublimit.  At our election and subject tolender approval, the amount available for borrowings under the Credit Agreementmay be increased by an additional $50 million.  Funds are available under theCredit Agreement to finance permitted acquisitions, stock repurchases up tocertain dollar limitations, and for other general corporate purposes.  TheCompany has three standby letters of credit totaling $2 million outstandingunder the Credit Agreement.  Accordingly, although there were no borrowingsoutstanding under the Credit Agreement at June 30, 2006, only $198 million wasavailable for borrowings.  

On May 31, 2006, we amended the CreditAgreement to permit the consummation of the sale of our Urology Business. Additionally, the amendment modified the minimum Adjusted ConsolidatedEBITDA covenant that we are required to comply with under the terms of theCredit Agreement.  The amendment also amends certain negative covenantscontained in the Credit Agreement, including amendments to the covenantsrestricting our ability to make investments and incur indebtedness and anamendment increasing the amount of our equity securities that we are permittedto repurchase.  As of August 4, 2006, there were no borrowings outstandingunder the Credit Agreement.

Interest on borrowings (other than swing lineloans and alternative currency loans) under the Credit Agreement is at avariable rate that is calculated, at our option, at the prime rate, or aEurocurrency rate for deposits denominated in U.S. dollars plus an additionalpercentage that varies between 1.00% and 1.65%, depending on our seniorleverage ratio at the time of the borrowing.  Swing line loans bear interest atthe prime rate.  Alternative currency loans bear interest at the Eurocurrencyrate for deposits denominated in the applicable currency plus the sameadditional percentage.  In addition, we paid certain fees to the lenders toinitiate the Credit Agreement and will pay an unused commitment fee based onour senior leverage ratio and unborrowed lender commitments.

Borrowings under the Credit Agreement areguaranteed by certain of our domestic subsidiaries and are also secured by apledge of 100% of the outstanding capital stock of certain of our otherdomestic subsidiaries.  In addition, if the ratio of total funded debt toadjusted earnings before interest, taxes, depreciation and amortization (or"adjusted EBITDA"), exceeds 2.50 to 1.00, then we are obligated to grant to thelenders a first priority perfected security interest in essentially all of ourand our material domestic subsidiaries' assets. 

The Credit Agreement imposes certainfinancial and operational restrictions, including financial covenants thatrequire us to maintain a maximum consolidated funded debt leverage ratio of notgreater than 4.00 to 1.00, a senior funded debt ratio of not greater than 2.50to 1.00, a minimum quarterly adjusted EBITDA, and a minimum fixed charge ratioof greater than 1.25 to 1.00.  The covenants also restrict our ability, amongother things, to make certain investments, incur certain types of indebtednessor liens, make acquisitions in excess of $20 million except in compliance withcertain criteria, and repurchase shares of common stock, pay dividends ordispose of assets above specified thresholds.  The Credit Agreement alsocontains customary events of default, including payment defaults, materialinaccuracies in our representations and warranties, covenant defaults,bankruptcy and involuntary proceedings, monetary judgment defaults in excess ofspecified amounts, cross-defaults to certain other agreements, change ofcontrol, and ERISA defaults.

*Other Financing*

OnOctober 4, 2005, Mentor Medical Systems B.V. ("Mentor BV"), a wholly-ownedsubsidiary of Mentor Corporation entered into a Loan and Overdraft Facility(the "Facility") with Cooperative RaboBank Leiden, Leiderdorp en OestgstgeestU.A. ("RaboBank").

TheFacility provides Mentor BV with an initial €15 million loan and overdraftfacility, which decreases by €375,000 quarterly starting in September 2006. Under the Facility, Mentor BV may borrow up to €12.5 million in fixed amountadvances, with terms of three to six months, and a further sublimit of up to €5million of loans in fixed amount advances with a term of up to 5 years.  Up to€10 million of the Facility may be drawn in the form of U.S. dollars.  Fundsunder the Facility are available to Mentor BV to finance certain dividendpayments to Mentor Corporation and for other normal business purposes.  OnMarch 31, 2006 we borrowed $14 million under the Facility to partially fund ourrepatriation of foreign earnings for reinvestment in the U.S. and during the quarter ended June 30, 2006, $4.5 million of this amount was repaid. Accordingly $9.5 million was outstanding and $9.7 million was available underthis facility at June 30, 2006.

36

Intereston borrowings under the Facility is at a rate equal to 0.55% over the RaboBankbase lending rate, Euribor, or LIBOR depending upon the currency and term ofeach borrowing.  Interest rates on borrowings other than overdrafts, arefixed for the term of the advance.

Borrowingsby Mentor BV under the Facility are guaranteed by Mentor's wholly-ownedsubsidiary, Mentor Medical Systems C.V., through a Joint and Several Debtorshipagreement.  In addition, borrowings under the Facility are secured by amortgage on certain real estate owned by Mentor BV.

TheFacility imposes certain financial and operational restrictions on Mentor BV,including financial covenants that require Mentor BV and Mentor Medical SystemsCV to maintain a minimum combined defined solvency ratio, a maximum combineddebt leverage ratio of not greater than 4 to 1, a senior funded debt ratio ofnot greater than 2.5 to 1, minimum quarterly operational results, and a minimuminterest coverage ratio of greater than 5 to 1.  The Facility alsocontains customary events of default, including cross default and material oradverse change provisions.  If an event of default occurs, the commitmentsunder the Facility may be terminated and the principal amount and all accruedbut unpaid interest and other amounts owed thereunder may be declaredimmediately due and payable.  As of June 30, 2006, all covenants andrestrictions had been satisfied.  Mentor BV paid €15,000 in certain fees to theRaboBank upon entry into the Facility, and Mentor BV will be obligated to pay,over the 10 year term of the Facility, a commitment fee of 0.25% of thecommitted and unborrowed balances.  Fees are payable quarterly inarrears.  

Inaddition to our RaboBank Facility, we previously established several lines ofcredit with local foreign lenders to facilitate operating cash flow needs at ourforeign Urology subsidiaries.  These unsecured lines had no borrowings at March31, 2006 and were terminated with the sale of our Urology Business on June 2,2006. 

AtJune 30, 2006, our total short-term borrowings under all lines of credit were$9.5 million and the weighted-average interest rate was 5.61%.  The totalamount of additional borrowings available to us under all lines of credit was $207.7million at June 30, 2006 and $202.2 million at March 31, 2006.

*ConvertibleSubordinated Notes*

OnDecember 22, 2003, we completed an offering of $150 million of convertiblesubordinated notes due January 1, 2024, pursuant to Rule 144A under theSecurities Act of 1933.  The notes bear interest at 23⁄4% per annum and areconvertible into shares of our common stock at an initial conversion price of$29.289 per share and are subordinated to all existing and future senior debt. As a result of our recent dividend increase the conversion price has beenadjusted to $29.1452 and each $1,000 principal amount will be convertible into34.311 shares of common stock.   Concurrent with the issuance of theconvertible subordinated notes, we entered into a convertible bond hedge andwarrantstransactions with respect to our common stock, the exposure for which is heldby Credit Suisse First Boston LLC for a net cash payment of $18.5million.  Both the bond hedge and the warrants transactions may be settledat our option either in cash or net shares and expire January 1, 2009. The convertible bond hedge and warrants transactions combined are intended toreduce the potential dilution from conversion of the notes by effectivelyincreasing the conversion price per share, from our perspective, toapproximately $39.2339.

Oneof the conditions required for conversion of the notes was satisfied during thequarter ended June 30, 2006, and accordingly, the holders of notes have theoption to convert the notes into common shares at the aforementioned adjustedconversion price per share.  The warrant holder also has the right to purchase5.1 million shares when the share price of our common stock as quoted on theNYSE exceeds the current exercise price of $39.2339 per share.

We do not have any off-balance sheetarrangements that are currently material or reasonably likely to be material toour financial position or results of operations. 

We believe that funds generated fromoperations, our cash, cash equivalents and marketable securities, net after-taxproceeds from our sale of the Urology Business, plus funds available under ourline of credit agreements will be adequate to meet our working capital needsand capital expenditure investment requirements and commitments for theforeseeable future.  However, it is possible that we may need to raiseadditional funds to finance unforeseen requirements or to consummateacquisitions of other businesses, products or technologies through the sale ofequity or debt securities to the public or to selected investors, or byborrowing money from financial institutions.  In addition, even though wemay not need additional funds in the short-term, we may still elect to selladditional equity or debt securities or borrow for other reasons.  Thereare no assurances that we will be able to obtain additional funds on terms thatwould be favorable to us, or at all.  If funds are raised by issuingadditional equity securities or convertible debt securities, the ownershippercentage of existing shareholders would be reduced.  In addition, equityor debt securities issued by us may have rights, preferences or privilegessenior to those of our common stock.

37

**Item3. - Quantitative and Qualitative Disclosures about Market Risk**

Therehave been no material changes in our exposure to market risk as reported inItem 7A in our Annual Report on Form 10-K for the fiscal year ended March 31,2006.

**Item4. - Controls and Procedures**

Wemaintain disclosure controls and procedures (as defined in Rules 13a-15(e)and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the"Exchange Act")) that are designed to ensure that informationrequired to be disclosed in our reports filed or submitted under the ExchangeAct, is recorded, processed, summarized and reported within the time periodsspecified in the SEC's rules and forms, and that such information isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.  In designing and evaluating the disclosurecontrols and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

Wecarried out an evaluation under the supervision and with the participation ofmanagement, including our Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of our disclosure controls andprocedures as of June 30, 2006, the end of the period covered by thisreport.  Based on that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective at the reasonable assurance level as of June 30, 2006.

Therehave been no changes in our internal control over financial reporting (asdefined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during thequarter ended June 30, 2006 that materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.

**PARTII - OTHER INFORMATION**

**Item 1. - Legal Proceedings**

On March 4, 2004, John H. Alico, et. al., d/b/a PTF Royalty Partnership("PTF") filed a lawsuit against us in the Business Litigation Sessionof the Superior Court of Massachusetts, Suffolk County in which PTF alleges,among other things, breach of a merger agreement that involved our acquisitionof Mentor O&O, Inc. ("O&O"), an unrelated entity at thattime, which was dated as of March 14, 1990 ("Merger Agreement") (prior to the merger, O&O had no affiliation with us).  PTF alleges that webreached the terms of the Merger Agreement by failing to exert commerciallyreasonable and diligent efforts to obtain approval by the FDA for a productused for the treatment of urinary incontinence and by failing to accuratelyaccount for and pay royalties due thereunder.  PTF seeks damages in excessof $18 million, which is the maximum amount of royalties PTF could havereceived under the Merger Agreement.  After almost ten years, in or aboutJanuary 2001, we elected to discontinue pursuing FDA approval for the product,given the FDA's repeated and ongoing concerns regarding the product's use forurinary incontinence.  We complied with all of our obligations under theMerger Agreement, which specifically provided that we were under no obligationto engage in efforts or expenditures in respect of the product which we in goodfaith deemed to be inadvisable based on various factors.  Accordingly, weintend to vigorously defend the lawsuit.  

Inaddition, in the ordinary course of our business we experience other variedtypes of claims that sometimes result in litigation or other legalproceedings.  Although there can be no certainty, we do not anticipatethat any of these proceedings will have a material adverse effect on us.

**Item1A. - Risk Factors**

Therisks described below include changes from the risk factors as previouslydisclosed  in our Annual Report on Form 10-K for the fiscal year ending March31, 2006 and may not be the only risks we face.   You should consider thefollowing risks together with those set forth in our Annual Report on Form 10-Kbefore deciding to invest in our common stock or convertible notes. 

38

***Significantproduct liability claims or product recalls may force us to pay substantialdamage awards and other expenses that could exceed our accruals and insurancecoverages.***

Themanufacture and sale of medical devices and biologics exposes us to significantrisk of product liability claims.  In the past, and currently, we have hada number of product liability claims relating to our products, and we may besubject to additional product liability claims in the future, some of which mayhave a negative impact on our business.  If a product liability claim orseries of claims is brought against us for uninsured liabilities or in excessof our insurance coverage, our business could suffer.  Some manufacturersthat suffered such claims in the past have been forced to cease operations oreven to declare bankruptcy. 

Additionally,we offer product replacement and certain financial assistance for surgicalprocedures that fall within our limited warranties and coverage period ofimplantation on our breast implant products, and we accrue for those limitedwarranties.  Such accruals are based on estimates, taking into considerationrelevant factors such as historical experience, warranty periods, estimatedcosts, existence and levels of insurance and insurance retentions, identifiedproduct quality issues, if any, and, to a limited extent, information developedby the insurance company using actuarial techniques.  We assess theadequacy of these accruals periodically and adjust the amounts as necessarybased on actual experience and changes in future expectations.  We alsorecently expanded our limited warranty programs to provide certain financialassistance for surgical procedures within ten years of implantation (increasedfrom five years) and expanded the program coverage to include breast implantsales in European and certain other countries, in addition to the United States.  Changes to actual warranty claims incurred could have a material impact onthe actuarial analysis, which in turn could materially impact our reportedexpenses and results of operations.

Inaddition to product liability or warranty claims, we could experience amaterial design or manufacturing failure, a quality system failure, othersafety issues, or heightened regulatory scrutiny that would warrant a recall ofproducts we manufacture or are manufactured by another company and wedistribute.  A recall of some of our products could result in exposure toadditional product liability claims, significant expense to perform the recalland lost sales. 

***Weare subject to substantial government regulation, which could have a materialadverse affect on our business.***

Theproduction and marketing of our products and our ongoing research anddevelopment activities, including pre-clinical testing and clinical trialactivities, are subject to extensive regulation and review by numerousgovernmental authorities both in the U.S. and abroad.  Most of the medicaldevices and biologics we develop must undergo rigorous pre-clinical andclinical testing and an extensive regulatory approval process before they canbe marketed.  Certain of our products are required to undergo review by apanel of outside experts selected by the FDA, which makes a recommendation tothe FDA as to whether the product(s) should or should not be approved. This process makes it potentially longer, more difficult and/or more costly tobring our products to market, and we cannot guarantee that any of ourunapproved products will be approved or how long it may take for any one particularproduct to be approved.  The pre-marketing approval process can beparticularly expensive, uncertain and lengthy, and a number of devices forwhich FDA approval has been sought by other companies have never been approvedfor marketing.  In addition to testing and approval procedures, extensiveregulations also govern manufacturing, packaging, labeling, storage,distribution, record-keeping, advertising, and marketing procedures.  Ifwe do not comply with applicable regulatory requirements, such violations couldresult in non-approval, suspensions of clinical trials, suspension orwithdrawal of regulatory approvals, product recalls, civil penalties andcriminal fines, product seizures, operating restrictions, injunctions, andcriminal prosecution. 

39

Delaysin, withdrawal, or rejection of the FDA or other government entity approval(s)of our products, including a delay in or rejection of the approval of our roundsilicone gel-filled breast implant pre-market approval application ("PMA") or asignificant delay in acceptance of the clinical module of our Contour ProfileGel PMA, or any significant delays in our PMA filings, including our PuragenPlusTM PMA, may also adversely affect our business.  Suchdelays, withdrawals, or rejections may be encountered due to, among otherreasons, government or regulatory delays, lack of demonstrated safety orefficacy during clinical trials, safety issues, manufacturing issues, slowerthan expected rate of patient recruitment for clinical trials, inability tofollow patients after treatment in clinical trials, inconsistencies betweenearly clinical trial results and results obtained in later clinical trials,varying interpretations of data generated by clinical trials, or changes inregulatory policy or requirements in the U.S. and abroad.  In the U.S., there has been a continuing trend toward more stringent FDA requirements in the areasof product approval and enforcement, causing medical device manufacturers toexperience longer research and development timelines, longer approval cycles,greater risk and uncertainty, and higher expenses.  Internationally, there is arisk that we may not be successful in meeting the quality standards or othercertification requirements.  Even if regulatory approval of a product isgranted, such approval may entail limitations on uses for which the product maybe labeled and promoted, stringent post-marketing requirements, or may preventus from broadening the uses of our current products for differentapplications.  If we incur significant expenses, for example, inconnection with post-market patient monitoring and data collection activitiesfor our silicone gel-filled breast implants, this could have a material adverseeffect on our results of operations.  In addition, to the extent permissible bylaw, we may not receive FDA approval to export our products in the future, andcountries to which products are to be exported may not approve them forimport.  We may also be required to withdraw or recall our products after wereceive approvals and begin commercial sales if we, the FDA or a foreigngovernment agency determines that there is a higher than average incidence ofpost-treatment complications with our products as a result of subsequentclinical experience and/or data.  From time to time, we are subject to inquiryby government agencies in this regard.  

Ourmanufacturing facilities also are subject to continual governmental review andinspection.  The FDA has stated publicly that compliance withmanufacturing regulations will be scrutinized more strictly.  Agovernmental authority may challenge our compliance with applicable federal,state and/or foreign regulations.  In addition, any discovery ofpreviously unknown problems with one of our products or facilities may resultin restrictions on the product or the facility, including, but not limited to,product recalls, withdrawal of the product from the market or other enforcementactions.

Fromtime to time, legislative or regulatory proposals are introduced that, ifimplemented, could alter the review and approval process relating to medicaldevices, biologics, or related to the sale of our products.  It ispossible that the FDA or other governmental authorities will issue additionalregulations, which could further reduce or restrict the sales of our presentlymarketed products or products under development.

Anychange in legislation or regulations that govern the review and approvalprocess relating to our current and/or future products, or that restrict themanner by which we may sell our products, could make it more difficult and/orcostly to obtain approval for new products, and/or to produce, market, anddistribute existing products. 

***Ifwe are unable to continue to develop and commercialize new technologies andproducts, we may experience a decrease in demand for our products or ourproducts could become obsolete.***

Themedical device and biologics industry is highly competitive and is subject tosignificant and rapid technological change.  We believe that our abilityto develop or acquire new technologies is crucial to our success.  We arecontinually engaged in product research and development, product improvementprograms, and required clinical studies to develop new technologies and tomaintain and improve our competitive position.  Any significant delays inthe above or termination or failure of our clinical trials would materially andadversely affect our research, development and commercializationtimelines.  We cannot guarantee that we will be successful in enhancingexisting products, or in developing or acquiring new products or technologiesthat will timely achieve regulatory approval or success in the marketplace. 

Thereis also a risk that our products may not gain market acceptance amongphysicians, patients and the medical community generally.  The degree ofmarket acceptance of any medical device or other product that we develop willdepend on a number of factors, including demonstrated clinical safety andefficacy, cost-effectiveness, potential advantages over alternative products, user/patientacceptance, and our marketing and distribution capabilities.  Physicians willnot recommend our products if clinical and/or other data and/or other factorsdo not demonstrate their safety and efficacy compared to other competingproducts, or if our products do not best meet the particular needs of theindividual patient.
40
InDecember 2003, we completed our PMA application to the FDA for our MemoryGel TM siliconegel-filled implants for breast augmentation, reconstruction and revision. In August 2004, we amended our PMA application based on a revised draftguidance released by the FDA in January 2004.  On July 28, 2005, we received an "approvable" letter, with conditions, from the FDA on ourPMA application for our silicone gel-filled breast implants.  Theapprovable letter stipulates a number of conditions which we must satisfy inorder to receive FDA approval to market and sell silicone gel-filled breastimplants in the United States.  Our current discussions with FDA regardingour MemoryGelTM silicone gel-filled breast implant PMA are primarilyfocused on post-approval patient monitoring and data collection.  Despitethe approvable letter and our current discussions, the FDA may ultimatelydecide to not approve our silicone gel-filled breast implants for sale in theUnited States, or if they do approve, the FDA would most likely recommendadditional post-approval conditions or requirements, for which we would incurcosts that could be substantial, and which could potentially impact our sales andearnings, depending on the scope and complexity of the requirements. Further change in FDA regulatory requirements, including those implementedthrough new or revised FDA guidance (such as that announced on January 8, 2004 by the FDA) may delay or may otherwise adversely affect our pending PMAapplication as well as its review or approval by the FDA.  A delay ordenial response by the FDA would have a material adverse effect on ourcommercialization timelines and competitive position, and ultimately ourrevenue and operating results.  If our new products do not achievesignificant market acceptance, or if our current products do not continuecompeting successfully in the changing market, our sales and earnings may notgrow as much as expected, or may even decline.

We also have two pending applicationsfor Medical Device Licenses in Canada for our silicone gel-filled breastimplants.  An expert advisory panel was convened by the Canadian governmenton March 22, 2005 to review our pending application for Medical Device Licenses. A public forum called by Health Canada on these devices was held September 29,2005.  We cannot predict the outcome of these reviews, nor determine whenor if Health Canada will approve our product applications.  In addition,any approval could be granted with stringent post-approval conditions orrequirements, for which we would incur costs, and which could impact our salesand earnings, depending on the scope and complexity of such requirements.

Withrespect to our Puragen PlusTM program in the U.S., we identified potentialissues that required further evaluation of our clinical study data that resultedin a delay to our PMA submission timeline.  We performed this furtherevaluation, and we concurrently reviewed some of our critical productionprocesses.  Though we have developed a plan to move forward with our PuragenPlusTM PMA process, any further delays in the submission of our PMAor a delay or denial response by the FDA would have a material adverse effecton our commercialization timelines and competitive position, and ultimately ourfuture revenue and operating results.

***Ifwe are unable to compete effectively with existing or new competitors, we couldexperience price reductions, reduced demand for our products, reduced marginsand loss of market share, and our business, results of operations and financialcondition would be adversely affected.*****

Ourproducts compete with similar or other competitive medical productsmanufactured by major companies, and may also compete with new productscurrently under development by others. 

Competitionin our industry occurs on a variety of levels, including but not limited to:

•         developing and bringing new products to market before others or toprovide benefits superior to those of existing products;

•         developing new technologies to improve existing products;

•         developing new products at a lower cost to provide the samebenefits as existing products at the same or lower price;

•         creating or entering new markets with existing products;

•         increasing or improving service-related programs; and

•         advertising in a manner that creates additional awareness anddemand.

Thecompetitive environment requires an ongoing, extensive search for technologicalinnovations and the ability to market products effectively.  Consequently, wemust continue to effectively execute on various competitive levels to properlyposition our products in the marketplace and maintain our market share, revenueand gross margins. 

41

Inparticular, we face competition from Allergan, Inc., which acquired InamedCorporation in March 2006, our only current competitor in the U.S. for our breastaesthetics product line although new competitors may have initiated the processof regulatory approval.  On September 21, 2005, Inamed announced that it alsoreceived an "approvable" letter, with conditions, from the FDA for its siliconegel-filled breast implants.  If Allergan gains FDA approval to market itssilicone gel-filled breast implant products before we do, our competitiveposition will likely suffer.  As a result of Allergan's acquisition of Inamed, weare now competing against a much larger competitor with a substantially largersales force.

***Wemay not realize some of the benefits of the Coloplast transaction.***

Weanticipate that we will be able to utilize approximately $14.5 million offoreign tax credits resulting from the Coloplast transaction.  While Coloplasthas agreed to indemnify us for the availability of up to $7.1 million of thesetax credits, we cannot be sure that we will be able to utilize those taxcredits before they expire due to any number of factors including, but notlimited to, whether the credits expire due to changes in ownership in excess ofthe applicable tax rules, sufficient income in the jurisdictions in which wehave the credits and other possible reasons the tax credits might bedisallowed.  Although Coloplast has agreed to indemnify Mentor for $7.1 millionof the foreign tax credits, if the foreign tax credits are disallowed and weare not able to recover from Coloplast, we may not be able to realize the fullamount, or any, of those tax credits.

***Wemay not be successful in transitioning our business to focus solely on theaesthetic market, which may harm our prospects and operating results.***

As of June 2006, we completed the divestitureof our Urology Business, and our continuing business is now focused on the aestheticmarket.  We may not successfully improve our operating margins and net income despitethe divestiture of our Urology Business to be consistent with those ofcompetitive companies focused solely on the aesthetic market.  In addition, wemay be unsuccessful at broadening the focus of our sales force to physicianspracticing aesthetic medicine other than plastic surgeons.  In order tosuccessfully increase our sales presence to those physicians, we will berequired to develop internally or purchase additional products that will meetthe needs of those physicians and obtain regulatory approval to sell thoseproducts.  For example, we have announced a delay in the anticipated date forsubmission of our PMA for the Puragen PlusTM dermal filler product tothe FDA, which product would be marketed to dermatologists as well as plasticsurgeons.  As our remaining business is focused solely on aesthetic medicine,we may be unable to retain employees who want to work at a company with abroader product emphasis or are uncertain about their future with thecontinuing Company after the urology divestiture.  

***State legislatures and taxingauthorities may create new laws or change their interpretation of existingstate and local tax laws that may affect future product demand or createunforeseen tax liabilities.***

Ifany state legislature or other government authority creates new laws to assesssales taxes on medical procedures or products determined by them to becosmetic, our physician and patient customers may have to pay more for ourproducts and future demand may decrease.  In addition, if taxingauthorities determine that our products are cosmetic and thus taxable based ontheir interpretations of existing tax laws or that our products are otherwisetaxable, they may disallow currently available exemptions related to medicalproducts and procedures.  Such taxing authorities may then determine thatwe owe additional taxes, penalties and interest related to product sales fromprior periods.  These determinations would have a negative effect on ourresults of operations.

***Wedepend on single and sole source suppliers for certain raw materials andlicensed or manufactured products and the loss of any supplier could adverselyaffect our ability to manufacture or sell many of our products.***

Wecurrently rely on single or sole source suppliers for raw materials used inmany of our products, including silicone.  In the event that they cannotmeet our requirements, we cannot guarantee that we would be able to obtain asufficient amount of quality raw materials in a timely manner from othersuppliers.   We also depend on third party manufacturers and suppliers forcomponents and licensed products.  In connection with the sale of ourUrology Business to Coloplast, we have entered into a supply agreement withColoplast for certain components of our breast aesthetic products.  Forthe short-term, Coloplast would be our sole source for these components, and ifwe were unable to obtain the supply, our business would be harmed.  We maydetermine that we do not want to continue to purchase products from Coloplastor Coloplast may be unable to meet our needs in a timely manner, either ofwhich may disrupt our business during the period we negotiate a supply agreementwith and qualify the manufacturing process of a third party or begin productionof the components ourselves.  In addition, we depend on Niadyne, Inc. forthe supply of NIA-24 and if we were no longer able to satisfy demand for thisproduct through our relationship with Niadyne, our business could beharmed.  If there is a disruption in the supply of any of these single orsole source products, our future sales and profitability would be adverselyaffected.

 

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**Item2. - Unregistered Sales of Equity Securities, Use of Proceeds and IssuerPurchases of Equity Securities**

OurBoard of Directors has authorized a stock repurchase program, primarily tooffset the dilutive effect of our employee stock option plans, to provideliquidity to the market and to reduce the overall number of shares outstanding. All shares repurchased under the program are retired and are no longerdeemed to be outstanding.  The timing of repurchases is subject to marketconditions, cash availability, and blackout periods during which we arerestricted from repurchasing shares.  On May 31, 2006 we amended our Credit Agreement to expand the amount ofequitysecurities we can repurchase to $250 million plus a subsequent amount duringany four consecutive quarters equal to our consolidated net income lessdividends paid for the preceding four quarters.  The Credit Agreement covenantsalso restrict the Company's ability, among other things, to declare or pay cashdividends in excess of 60% of the consolidated net income of the Company andits subsidiaries for the four most recent fiscal quarters.

On June 16,2006, we entered into a stock purchase plan for the purpose of repurchasing upto $166 million worth of our common stock under a Rule 10b5-1 plan compliantwith Rule 10b-18.  The first repurchase under the 10b5-1 plan cannot takeplace prior to the third trading day following our announcement of ourfinancial results for the three months ending June 30, 2006.  In connection with the entry into the 10b5-1 plan, our Board of Directors increasedthe authorized number of shares available for repurchase pursuant to our stockrepurchase program from 3.3 million to 5.0 million shares.  The timing ofpurchases and the exact number of shares to be purchased will depend on marketconditions.  The repurchase program and the 10b5-1 plan may be suspendedor discontinued at any time. A summary ofour repurchase activity for the three months ended June 30, 2006 is as follows:

**ISSUER PURCHASES OF  EQUITY SECURITIES**

(in thousands  except per share amounts)

Total Number  of Shares  Purchased

Average Price  Paid per Share

  Total Number  of Shares  Purchased as  Part of Publicly  Announced Plans

Maximum Number  of Shares that May  Yet Be Purchased  Under the Plans  or Programs

April 1 - April 30, 2006

-

-

-

5,258

May 1 - May 31, 2006

-

-

-

5,258

June 1 - June 30, 2006

2,000

$  42.00

2,000

5,000

Total

2,000

$  42.00

2,000

a.   In the first quarter offiscal 1996, our Board of Director's authorized an ongoing stock repurchaseprogram.  The initial authorization was for the repurchase of up to one millionshares.  Subsequently the Board of directors has authorized the repurchase ofan additional 24.2 million shares including 5.0 million, 2.2 million and 5.0shares in March 2006, May 2003 and December 2003, respectively.  On June 16,2006, the Board of Directors increased the authorized number of sharesavailable for repurchase to 5.0 million shares available under the program. Theseshare amounts have been adjusted for the two-for-one stock split affectedDecember 2002.

b.   Wehave not set a date for the stock repurchase program to expire. 

**Item3. - Defaults Upon Senior Securities**

None.

**Item4. - Submission of Matters to a Vote of Security Holders**

None

**Item5. - Other Information**

None

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**Item6. Exhibits**

2.1

Revised  Binding Offer Letter from Coloplast A/S regarding purchase of Mentor Urology  Business dated May 5, 2006 Including Appendix A -- Incorporated by reference  to Exhibit 2.2 of the Registrant's Annual Report on Form 10-K for the year  ended March 31, 2006. 

2.2

Purchase  Agreement between Coloplast A/S and Mentor Corporation dated May 17, 2006 -- Incorporated by reference to Exhibit 2.3 of the Registrant's Annual Report  on Form 10-K for the year ended March 31, 2006. 

2.3

Listing  Schedules for Purchase Agreement between Coloplast A/S and Mentor Corporation  dated May 17, 2006 -- Incorporated by reference to Exhibit 2.4 of the  Registrant's Annual Report on Form 10-K for the year ended March 31, 2006. 

2.4

Side  Letter Agreement Between Coloplast A/S and Mentor Corporation dated June 2, 2006 -- Incorporated by reference to Exhibit 2.5 of the Registrant's Annual Report  on Form 10-K for the year ended March 31, 2006. 

3.1

Composite  Restated Articles of Incorporation of the Company dated December 12, 2002 -- Incorporated by reference to Exhibit 3.1 of the Registrant's Annual Report on  Form 10-K for the year ended March 31, 2003.   

3.2

Amended  and Restated Bylaws of Mentor Corporation dated September 14, 2005 -- Incorporated by reference to Exhibit 3.2 of the Registrant's Quarterly Report on Form  10-Q for the quarter ended September 30, 2005.   

4.1

Indenture  2 3/4 % Convertible Subordinated Notes Due 2024, dated December 22, 2003 --  Incorporated by reference to Exhibit 4.1 of the Registrant's Quarterly  Report on Form 10-Q for the quarter ended December 31, 2003.   

10.1

First  Amendment to Credit Agreement dated as of May 31, 2006, amending that certain Credit Agreement, dated as of May 25, 2005, by and among the Company, Bank of the West, as administrative agent, Union Bank of California, N. A., as  syndication agent, Wells Fargo Bank, National Association, as documentation  agent, and the lenders from time to time party thereto -- Incorporated by  reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K  filed on June 6, 2006. 
10.2Share Repurchase	Transaction dated June 5, 2006. 10.3*Director Fees	for Non-Employee Directors dated June 15, 2006. 10.4Mentor	Corporation --	Citigroup Global Markets Inc. Form 10b5-1 Stock Purchase Plan dated June 16,	2006. 
10.5*

Employment  Agreement between Mentor Corporation and Joseph A. Newcomb dated June 26, 2006 -- Incorporated by reference to Exhibit 10.1 of the Registrant's Current  Report on Form 8-K filed on June 28, 2006. 

10.6*

Separation  and Release Agreement dated June 24, 2006, between Mentor Corporation and A. Christopher Fawzy -- Incorporated by reference to Exhibit 10.2 of the  Registrant's Current Report on Form 8-K filed on June 28, 2006. 

10.7*

Consulting  Agreement dated June 24, 2006, between Mentor Corporation and A. Christopher  Fawzy -- Incorporated by reference to Exhibit 10.3 of the Registrant's  Current Report on Form 8-K filed on June 28, 2006. 

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**Exhibits(Continued)**
10.8*Form of Executive Performance Stock Unit	Award Agreement - Incorporated by reference to Exhibit 10.4 of the	Registrant's Current Report on Form 8-K filed on June 28, 2006. 10.9*Consulting  Agreement dated June 30, 2006, between Mentor Corporation and David Adornetto  - Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report  on Form 8-K filed on July 6, 2006. 
10.10*

Mutual  Release of Claims Agreement dated June 30, 2006, between Mentor Corporation and David Adornetto - Incorporated by reference to Exhibit 10.2 of the  Registrant's Current Report on Form 8-K filed on July 6, 2006. 

10.11*

Written  Description of Car Allowance Plan. 

31.1

Certification  of Principal Executive Officer Pursuant To  Section 302 of The Sarbanes-Oxley Act of 2002. 

31.2

Certification  of Principal Financial Officer Pursuant To   Section 302 of The Sarbanes-Oxley Act of 2002. 

32.1

CEO Certification  Pursuant To 18 U.S.C. Section 1350,  As Adopted Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002. 

32.2

CFO  Certification Pursuant To 18 U.S.C. Section 1350,  As Adopted Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002. 

*  Management contract or compensatory plan or arrangement.

**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

**MENTORCORPORATION**

(Registrant)

** **

**MENTOR CORPORATION**
   
DATE:  August 9,  2006

/s/JOSHUA H. LEVINE

Joshua  H. Levine

President  and Chief Executive Officer
   
DATE:  August 9,  2006

/s/LOREN L. MCFARLAND

Loren  L. McFarland

Vice  President, Chief Financial Officer and Treasurer

 

 

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