** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-Q**

(Mark One)

T  QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended December 31, 2004orTRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For thetransition period from ____ to _____Commission File No. 0-7955**MENTOR CORPORATION**(Exact Name 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) Registrant's telephone number including area code:  805/879-6000

Indicate by check mark whether the Registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or such shorter period that the Registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes ( X )   No (   )Indicate by check mark whether theRegistrant is an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct).  Yes ( X )   No (   )

As of February 4, 2005there were approximately 40,522,308 Common Shares, par value $.10, outstanding. 

----

**MENTOR CORPORATION**

# INDEX 

| Part I. Financial Information |
|-------------------------------|
| Item 1.                       | Financial Statements    |
|                               | Consolidated Balance  Sheets (unaudited) - December 31, 2004 and March 31,   2004     |
|                          | Consolidated Statements of Income (unaudited) -	Three Months Ended December 31, 2004 and 2003  |
|                          | Consolidated Statements of Income (unaudited) - Nine Months  Ended December 31,   2004 and 2003  |
|                          | Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended December 31, 2004 and 2003  |
|                          | Notes to Condensed Consolidated Financial Statements	- December 31, 2004  |
| Item 2.                       | Management's Discussion and Analysis of Financial Condition and  Results of Operations  |
| Item 3.                       | Quantitative and Qualitative Disclosures About Market Risk  |
| Item 4.                       | Controls and Procedures  |
| Part II. Other Information    |
| Item 1.                       | Legal Proceedings    |
| Item 2.                       | Unregistered Sales of  Equity Securities and Use of Proceeds    |
| Item 3.                       | Defaults upon Senior  Securities    |
| Item 4.                       | Submission of Matters to  a Vote of Security Holders    |
| Item 5.                       | Other Information    |
| Item 6.                       | Exhibits   |

----

# PART I - FINANCIAL INFORMATION 

**Item 1.  Consolidated Financial Statements**

|                                                       |
|------------------------------------------------------------|
| Mentor CorporationConsolidated Balance Sheets(Unaudited)   |
| (in thousands)                                             | **December 31, 2004** | March 31,    2004 |
| **Assets**                                                 | ** ** | ** ** |
| Current assets:                                            | ** ** | ** ** |
|   Cash and cash  equivalents                     | ** $** | **60,666 ** |  $ | 118,225  |
|   Marketable  securities                         | **2,054 ** | 193  |
|   Accounts  receivable, net                      | **102,795 ** | 106,016  |
|   Inventories                                    | **78,184 ** | 67,912  |
|   Deferred  income taxes                         | **22,894 ** | 22,488  |
|   Prepaid  expenses and other                    | **20,172 ** | 13,205  |
| Total current assets                                       | **286,765 ** | 328,039  |
|                                                            | ** ** |  |
| Property and equipment,  net                               | **76,414 ** | 77,529  |
| Intangible assets, net                                     | **36,782 ** | 51,014  |
| Goodwill, net                                              | **24,661 ** | 23,711  |
| Long-term marketable  securities and investments           | **32,021 ** | 8,326  |
| Other assets                                               | **8,527 ** | 10,160  |
|                                                            | ** $** | **465,170 ** |  $ | 498,779  |
| See notes to condensed  consolidated financial statements. | ** ** |  |

----

| Mentor Corporation  Consolidated Balance Sheets  (Unaudited)                                                                     |
|----------------------------------------------------------------------------------------------------------------------------------|
| (in thousands)                                                                                                                   | **December 31,    2004** | March 31, 2004 |
| **Liabilities and  shareholders' equity**                                                                                        | ** ** |  |
| Current liabilities:                                                                                                             | ** ** |  |
|   Accounts  payable                                                                                                    | ** $** | **33,639 ** |  $ | 37,126  |
|   Warranty and  related reserves                                                                                       | **24,886 ** | 23,396  |
|   Accrued  compensation                                                                                                | **18,938 ** | 18,212  |
|   Short-term  bank borrowings                                                                                          | **8,845 ** | 10,012  |
|   Sales returns                                                                                                        | **10,035 ** | 11,797  |
|  Deferred revenue                                                                                                           | **12,706 ** | 6,915  |
|  Income taxes  payable                                                                                                      | **- ** | 285  |
|  Current  portion of purchase price related to acquired         technologies and acquisitions | **1,200 ** | 1,864  |
|   Interest  payable                                                                                                    | **- ** | 1,187  |
|   Dividends  payable                                                                                                   | **6,890 ** | 6,309  |
|   Accrued  royalties                                                                                                   | **720 ** | 567  |
|   Other                                                                                                                | **14,209 ** | 12,260  |
| Total current liabilities                                                                                                        | **132,068 ** | 129,930  |
|                                                                                                                                  | ** ** |  |
| Deferred income taxes                                                                                                            | **2,752 ** | 2,549  |
| Long-term  accrued liabilities                                                                                                   | **9,351 ** | 17,996  |
| Convertible subordinated  notes                                                                                                  | **150,000 ** | 150,000  |
|                                                                                                                                  | ** ** |  |
| Shareholders' equity:                                                                                                            | ** ** |  |
|   Common Stock,  $.10 par value:                                                                                       | ** ** |  |
|     Authorized  - 150,000,000 shares; Issued and outstanding                                                 | ** ** |  |
|     40,502,707  shares at December   31, 2004;                                                               | ** ** |  |
|     42,059,136  shares at March 31,   2004;                                                                  | **4,050 ** | 4,206  |
|   Capital in  excess of par value                                                                                      | **- ** | -  |
|  Accumulated other  comprehensive income                                                                                    | **30,887 ** | 19,122  |
|  Retained  earnings                                                                                                         | **136,062 ** | 174,976  |
|                                                                                                                                  | **170,999 ** | 198,304  |
|                                                                                                                                  | ** $** | **465,170 ** |  $ | 498,779  |
| See notes to condensed  consolidated financial statements.                                                                       | ** ** |  |

----

| Mentor Corporation  Consolidated Statements of Income  Three Months Ended December   31, 2004 and 2003  (Unaudited)                                                                                                                                                                                                                     |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                         | Three Months Ended  December 31, |
| (in thousands, except per  share data)                                                                                                                                                                                                                                                                                                  | **2004** | 2003 |
|                                                                                                                                                                                                                                                                                                                                         | ** ** |  |
| Net sales                                                                                                                                                                                                                                                                                                                               | ** $** | **120,601 ** |  $ | 106,502   |
| Cost of  sales                                                                                                                                                                                                                                                                                                                          | **42,856 ** | 40,461   |
| Gross  profit                                                                                                                                                                                                                                                                                                                           | **77,745 ** | 66,041   |
|                                                                                                                                                                                                                                                                                                                                         | ** ** |  |
| Selling, general and  administrative expense                                                                                                                                                                                                                                                                                            | **45,353 ** | 40,627   |
| Research and development  expense                                                                                                                                                                                                                                                                                                       | **8,053 ** | 7,216   |
|                                                                                                                                                                                                                                                                                                                                         | **53,406 ** | 47,843   |
|                                                                                                                                                                                                                                                                                                                                         | ** ** |  |
| Operating income                                                                                                                                                                                                                                                                                                                        | **24,339 ** | 18,198   |
| Interest expense                                                                                                                                                                                                                                                                                                                        | **(1,346)** | (371)  |
| Interest income                                                                                                                                                                                                                                                                                                                         | **683 ** | 394   |
| Other income, net                                                                                                                                                                                                                                                                                                                       | **432 ** | 182   |
| Income before income  taxes                                                                                                                                                                                                                                                                                                             | **24,108 ** | 18,403   |
| Income taxes                                                                                                                                                                                                                                                                                                                            | **7,779 ** | 5,863   |
| Net income                                                                                                                                                                                                                                                                                                                              | ** $** | **16,329 ** |  $ | 12,540   |
|                                                                                                                                                                                                                                                                                                                                         | ** ** |  |
| Basic earnings per share                                                                                                                                                                                                                                                                                                                | ** $** | **0.39 ** |  $ | 0.27  |
| Diluted earnings per  share1                                                                                                                                                                                                                                                                                                            | ** $** | **0.34 ** |  $ | 0.261 |
| Dividends per share                                                                                                                                                                                                                                                                                                                     | ** $** | **0.17 ** |  $ | 0.15  |
|                                                                                                                                                                                                                                                                                                                                         | ** ** |  |
| Weighted  average shares outstanding                                                                                                                                                                                                                                                                                                    | ** ** |  |
| Basic                                                                                                                                                                                                                                                                                                                                   | **42,367 ** | 45,769  |
| Diluted1                                                                                                                                                                                                                                                                                                                                | **49,987 ** | 48,8071 |
|                                                                                                                                                                                                                                                                                                                                         |  |  |
| See notes to condensed  consolidated financial statements.                                                                                                                                                                                                                                                                              |  |  |
|                                                                                                                                                                                                                                                                                                                                    |  |  |
|                                                                                                                                                                                                                                                                                                                                    |  |  |
|                                                                                                                                                                                                                                                                                                                                    |  |  |
|                                                                                                                                                                                                                                                                                                                                    |  |  |
|                                                                                                                                                                                                                                                                                                                                    |  |  |
|                                                                                                                                                                                                                                                                                                                                    |  |  |
| 1Diluted earnings per share and weighted average  shares outstanding for the three-months ended December 31, 2003 have been restated to reflect the additional shares that  would be issued upon conversion of our 23⁄4% convertible notes, in  accordance with recently adopted Emerging Issue Task Force (EITF) Issue No.  04-8. |

----

| Mentor Corporation  Consolidated Statements of Income  Nine Months Ended December   31, 2004 and 2003  (Unaudited)                                                                                                                                                                                                                              |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                 | Nine Months Ended  December 31, |
| (in thousands, except per  share data)                                                                                                                                                                                                                                                                                                          | **2004** | 2003 |
|                                                                                                                                                                                                                                                                                                                                                 | ** ** |  |
| Net sales                                                                                                                                                                                                                                                                                                                                       | ** $** | **351,812  ** |  $ | 304,871   |
| Cost of sales                                                                                                                                                                                                                                                                                                                                   | **127,469  ** | 115,395   |
| Gross profit                                                                                                                                                                                                                                                                                                                                    | **224,343  ** | 189,476   |
|                                                                                                                                                                                                                                                                                                                                                 | ** ** |  |
| Selling, general and  administrative expense                                                                                                                                                                                                                                                                                                    | **129,173  ** | 110,205   |
| Research and development  expense                                                                                                                                                                                                                                                                                                               | **24,636  ** | 22,470   |
|                                                                                                                                                                                                                                                                                                                                                 | **153,809  ** | 132,675   |
|                                                                                                                                                                                                                                                                                                                                                 | ** ** |  |
| Operating income                                                                                                                                                                                                                                                                                                                                | **70,534  ** | 56,801   |
| Interest expense                                                                                                                                                                                                                                                                                                                                | **(3,982)**  | (681)  |
| Interest income                                                                                                                                                                                                                                                                                                                                 | **1,631  ** | 1,113   |
| Other income  (expense), net                                                                                                                                                                                                                                                                                                                    | **249  ** | 1,107   |
| Income before income  taxes                                                                                                                                                                                                                                                                                                                     | **68,432  ** | 58,340   |
| Income taxes                                                                                                                                                                                                                                                                                                                                    | **21,915  ** | 18,529   |
| Net income                                                                                                                                                                                                                                                                                                                                      | ** $** | **46,517  ** |  $ | 39,811   |
|                                                                                                                                                                                                                                                                                                                                                 | ** ** |  |
| Basic earnings per share                                                                                                                                                                                                                                                                                                                        | ** $** | **1.10  ** |  $ | 0.86   |
| Diluted earnings per share1                                                                                                                                                                                                                                                                                                                     | ** $** | **0.98**1** ** |  $ | 0.821  |
| Dividends per share                                                                                                                                                                                                                                                                                                                             | ** $** | **0.49  ** |  $ | 0.32   |
|                                                                                                                                                                                                                                                                                                                                                 | ** ** |  |
| Weighted  average shares outstanding                                                                                                                                                                                                                                                                                                            | ** ** |  |
| Basic                                                                                                                                                                                                                                                                                                                                           | **42,360  ** | 46,239   |
| Diluted1                                                                                                                                                                                                                                                                                                                                        | **50,169**1** ** | 48,5881  |
|                                                                                                                                                                                                                                                                                                                                                 |  |  |
| See notes to condensed consolidated  financial statements.                                                                                                                                                                                                                                                                                      |  |  |
|                                                                                                                                                                                                                                                                                                                                            |  |  |
|                                                                                                                                                                                                                                                                                                                                            |  |  |
|                                                                                                                                                                                                                                                                                                                                            |  |  |
|                                                                                                                                                                                                                                                                                                                                            |  |  |
|                                                                                                                                                                                                                                                                                                                                            |  |  |
|                                                                                                                                                                                                                                                                                                                                            |  |  |
| 1Diluted earnings per share and weighted average  shares outstanding for the nine-months ended December 31, 2004 and 2003 have been restated to reflect the additional  shares that would be issued upon conversion of our 23⁄4% convertible  notes, in accordance with recently adopted Emerging Issue Task Force (EITF)  Issue No. 04-8. |

----

| Mentor Corporation  Consolidated Statements of Cash Flows  Nine Months Ended December   31, 2004 and 2003  (Unaudited) |
|------------------------------------------------------------------------------------------------------------------------|
| (in thousands)                                                                                                         |  |  |
|                                                                                                                        | **2004** | 2003 |
| **Operating  Activities:**                                                                                             | ** ** |  |
| Net income                                                                                                             | ** $** | **46,517 ** |  $ | 39,811  |
| Adjustments to derive  cash flows from operating activities:                                                           | ** ** |  |
|     Depreciation                                                                                        | **11,222 ** | 9,770  |
|     Amortization                                                                                        | **3,977 ** | 2,522  |
|     Deferred  income taxes                                                                              | **908 ** | (1,452) |
|     Tax benefit  from exercise of stock options                                                         | **5,694 ** | 2,895  |
|     (Gain) loss  on sale of assets                                                                      | **1,513 ** | 20  |
|     Imputed  interest on long-term liabilities                                                          | **15 ** | 194  |
|     (Gain) loss  on long-term marketable securities                                                     | **14 ** | 136  |
| Changes in operating assets  and liabilities:                                                                          | ** ** |  |
|     Accounts  receivable                                                                                | **8,217 ** | 3,441  |
|     Inventories                                                                                         | **(5,383)** | (6,845) |
|     Prepaid  income taxes and other current assets                                                      | **(6,316)** | (3,725) |
|     Accounts  payable and accrued liabilities                                                           | **710 ** | 263  |
|     Income  taxes payable                                                                               | **(633)** | 171  |
| Net cash provided by  operating activities                                                                             | **66,455 ** | 47,201  |
|                                                                                                                        | ** ** |  |
| **Investing  Activities:**                                                                                             | ** ** |  |
| Purchases of property and  equipment                                                                                   | **(6,818)** | (14,200) |
| Purchases of intangibles                                                                                               | **(1,507)** | (3,890) |
| Purchases of marketable  securities                                                                                    | **(144,192)** | (28,331) |
| Sales of marketable  securities                                                                                        | **118,587 ** | 21,634  |
| Acquisitions, net of cash  acquired                                                                                    | **- ** | (13,391) |
| Net cash used for  investing activities                                                                                | **(33,930)** | (38,178) |
|                                                                                                                        | ** ** |  |
| **Financing  Activities:**                                                                                             | ** ** |  |
| Issuance of convertible  notes, net of issuance costs                                                                  | **- ** | 115,540  |
| Sale of warrants                                                                                                       | **- ** | 11,891  |
| Repurchase of common  stock                                                                                            | **(79,773)** | (68,895) |
| Proceeds from exercise of  stock options                                                                               | **8,990 ** | 6,896  |
| Dividends paid                                                                                                         | **(20,623)** | (8,855) |
| Borrowings (repayments)  under line of credit agreements, net                                                          | **(518)** | 804  |
| Net cash (used) provided  by financing activities                                                                      | **(91,924)** | 57,381  |
| Effect of currency  exchange rates on cash and cash      equivalents                                    | **1,840 ** | 1,066  |
| Increase (decrease) in  cash and cash equivalents                                                                      | **(57,559)** | 67,470  |
| Cash and cash equivalents  at beginning of year                                                                        | **118,225 ** | 105,840  |
| Cash and cash equivalents  at end of period                                                                            | ** $** | **60,666 ** |  $ | 173,310  |
|                                                                                                                        | ** ** |  |
| See notes to condensed  consolidated financial statements.                                                             | ** ** |  |

----

** **

**MENTORCORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2004**

**Note A - BusinessActivity**

Mentor Corporation (the "Company") wasincorporated in April 1969.  Unless the context indicates otherwise, whenwe refer to "Mentor," "we," "us,""our," or the "Company" in this Form 10-Q, we are referringto Mentor Corporation and its subsidiaries on a consolidated basis.  Wedevelop, manufacture and market a broad range of products serving the medicalspecialties market.  Our products are utilized by three primary segments,aesthetic and general surgery (plastic and reconstructive surgery), surgicalurology, and clinical and consumer healthcare.  Aesthetic and generalsurgery products include surgically implantable prostheses for plastic andreconstructive surgery as well as capital equipment and consumables used forsoft tissue aspiration or body contouring (liposuction).  Surgical urologyproducts include surgically implantable prostheses for the treatment ofimpotence, surgically implantable incontinence products, urinary care productsand brachytherapy seeds for the treatment of prostate cancer.  Clinicaland consumer healthcare products include catheters and other products for themanagement of urinary incontinence and retention. 

**Note B - Summary ofSignificant Accounting Policies**

The consolidated financial statementsinclude the accounts of the Company and all of its subsidiaries in which acontrolling interest is maintained.  For those subsidiaries where theCompany owns less than 100%, the outside shareholders' interests are treated asminority interests.  All inter-company accounts and transactions have beeneliminated.  Certain prior year amounts in previously issued financialstatements have been reclassified or restated to conform to the current yearpresentation.

##### Basis of Presentation

The financial information for the three and nine-monthsended December 31, 2004 and 2003 is unaudited but includes all adjustments(consisting only of normally recurring accruals, unless otherwise indicated) thatthe Company considers necessary for a fair presentation of the results ofoperations for these periods.  Interim results are not necessarilyindicative of results for the full fiscal year. 

**Use of Estimates** 

Financial statements prepared in accordance with accountingprinciples generally accepted in the United States require management to make estimates and judgments thataffect amounts and disclosures reported in the financial statements. Actual results could differ from those estimates.   A discussion ofthe Company’s significant accounting policies is described in the“Application of Critical Accounting Policies” section of“Management’s Discussion and Analysis of Financial Condition andResults of Operations.”

**Effects of RecentAccounting Pronouncements**

In December 2004, the Financial Accounting Standards Board (FASB) issued arevision to FAS No. 123, Share-Based Payment.  Statement 123(R) replacesFASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedesAPB Opinion No. 25, Accounting for Stock Issued to Employees.  Statement123(R) covers a wide range of share-based compensation arrangements andrequires that the compensation cost related to these types of paymenttransactions be recognized in financial statements.  Cost will be measuredbased on the fair value of the equity or liability instruments issued. Statement 123(R) becomes effective for period starting after June 15, 2005. The Company has not completed its analysis of the impact of the adoption of123(R), however, the effect of the adoptionon earnings per share is estimated to be the same as that shown in Note K– Stock Options.

----

In November 2004, the Financial Accounting Standards Board (FASB) issuedStatement No. 151, Inventory Costs, which amends the guidance in ARB No. 43, Chapter4, Inventory Pricing.  This amendment clarifies the accounting forabnormal amounts of idle facility expense, freight, handling costs and wastedmaterial (spoilage).  This Statement requires that those items berecognized as current-period charges regardless of whether they meet thecriteria specified in ARB 43 of “so abnormal”.  In addition,this Statement requires that allocation of fixed production overheads to thecosts of conversion be based on normal capacity of the productionfacilities.  This Statement is effective for financial statements forfiscal years beginning after June 15, 2005. The impact upon adoption of SFASNo. 151 is not expected to have a material impact on the results of operationsor the financial position of the Company. 

In September 2004, the Financial Accounting Standards Board (FASB) confirmedEmerging Issue Task Force (EITF) Issue No. 04-8, "The Effect ofContingently Convertible Debt on Diluted Earnings per Share," with aneffective date of December 15, 2004. The EITF reflectsthe Task Force’s conclusion that contingently convertible debt should beincluded in diluted earnings per share calculations regardless of whether ornot the trigger price has been reached.  The Company adopted EITF 04-8 inthe quarter ending December 31, 2004 and retroactivelyrestated the weighted average shares outstanding for diluted earnings per sharefor the three-months and nine-months ended December 31, 2003 and for the nine-months ended December 31, 2004.  The impact of the EITFchanged the diluted earnings per share calculation by increasing net incomeused in the numerator by the after tax amount of interest expense related tothe convertible notes (approximately $800,000 per quarter), and increasingweighted average shares outstanding used in the denominator by approximately 5.1million shares; the number of shares to be issued upon full conversion of theconvertible notes.  The effect of the restatement was a decrease indiluted earnings per share of approximately $.02 cents per share for thequarter ended December 31, 2004 and $0.06cents per share for the nine-months ended December 31, 2004. 

In March 2004, the Financial Accounting Standards Board (FASB)approved the consensus reached on the EITF Issue No. 03-1, “The Meaningof Other-Than-Temporary Impairment and Its Application to CertainInvestments.”  The objective of this Issue is to provide guidancefor identifying impaired investments. EITF 03-1 also provides new disclosurerequirements for investments that are deemed to be temporarily impaired.  Theaccounting provisions of EITF 03-1 are effective for all reporting periodsbeginning after June 15, 2004, while thedisclosure requirements are effective only for annual periods ending after June 15, 2004.  We have evaluated the impactof the adoption of EITF 03-1 and do not believe it will be significant to ourresults of operations or financial position.

**Note C - InterimReporting**

The Company's three quarterly interim reporting periods areeach thirteen-week periods ending on the Friday nearest the end of the thirdcalendar month of each calendar quarter.  The fiscal year end remainsMarch 31st.  To facilitate ease of presentation, each interimperiod is shown as if it ended on the last day of the appropriate calendarmonth.  The actual dates for each of the three interim quarters-end areshown below: 

|                | Fiscal 2005       | Fiscal 2004        |
|----------------|-------------------|--------------------|
| First Quarter  | July 2, 2004      | June 27, 2003      |
| Second Quarter | October 1, 2004   | September 26, 2003 |
| Third Quarter  | December 31, 2004 | January 2, 2004    |

The accompanying unaudited condensed consolidated financialstatements for the three-month and nine-month periods ended December 31, 2004 and 2003 have been prepared inaccordance with accounting principles generally accepted in the United States for interim financial informationand with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes requiredby accounting principles generally accepted in the United States for complete financialstatements.  In the opinion of management, all adjustments (consistingonly of normally recurring accruals, unless otherwise indicated) considerednecessary for a fair presentation of the results of operations for theindicated periods have been included.  Certain amounts recorded inprevious periods have been reclassified or restated to conform to the current periodpresentation.  Operating results for the three-month and nine-monthperiods ended December 31, 2004 are notnecessarily indicative of the results for the full fiscal year.  

The balance sheet at March 31, 2004 has been derived from the auditedfinancial statements as of that date, but does not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements. 

The condensed consolidated financial statements should beread in conjunction with the Company's Annual Report on Form 10-K for the yearended March 31, 2004.**  **

----

**Note D - Cash Equivalents, Marketable Securities, andLong-Term Marketable Securities and Investments **

All highly liquid investments with maturities of threemonths or less at the date of purchase are considered to be cash equivalents. 

The Company considers its marketable securitiesavailable-for-sale as defined in Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt andEquity Securities."  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.  Forshort-term marketable securities, there were no material realized or unrealizedgains or losses, nor were there any material differences between estimated fairvalues, based on quoted market prices, and the costs of securities in theinvestment portfolio as of December 31, 2004,and March 31, 2004.  Short-term investments,except auction rate securities, mature between three months and one year fromthe purchase date.  The Company's short-term marketable securities consistprimarily of money market mutual funds, U.S.state and municipal government and government agency obligations, auction ratesecurities, and investment grade corporate obligations, including commercialpaper.  Auction rate securities carry interest or dividend rates thatreset every 28 days, but have contractual maturities of greater than one year. 

The Company's long-term marketable securities andinvestments include investments in Federal Home Loan Bank and MortgageAssociation bonds (FHLA bonds) with maturities of two to four years. 

**Available-for-sale investments at December 31, 2004 were as follows**: 

|                                                                                  |                  |                  | **Gross**      | **Gross**        | **Estimated** |
|----------------------------------------------------------------------------------|------------------|------------------|----------------|------------------|---------------|
|                                                                                  |                  | **Adjusted**     | **Unrealized** | **Unrealized**   | **Fair**      |
| (in thousands)                                                                   | **Cost**         | **Gains**        | **Losses**     | **Value**        |
| Cash balances                                                                    | ** $**      | **23,478 ** | ** $**    | **- **      | ** $**   | **- ** | ** $** | **23,478 ** |
| Money market mutual funds                                                        | **37,188 ** |                  |                | **37,188 ** |
| Marketable equity  securities                                                    | **144 **    |                  | **(14)**       | **130 **    |
| U.S., state and municipal agency      obligations                 | **33,935 ** |                  | **(268)**      | **33,667 ** |
| Corporate debt securities                                                        | **278 **    |                  |                | **278 **    |
|    Total  available-for-sale investments                          | ** $**      | **95,023 ** | ** $**    | **- **      | ** $**   | **(282)** | ** $** | **94,741 ** |
|                                                                                  |                  |                  |                |                  |
| Included in cash and cash  equivalents                                           | **60,666 ** |                  |                | **60,666 ** |
| Included in current  marketable securities                                       | **2,054 **  |                  |                | **2,054 **  |
| Included in long-term  marketable      securities and investments | **32,303 ** |                  | **(282)**      | **32,021 ** |
|    Total  available-for-sale investments                          | ** $**      | **95,023 ** | ** $**    | **- **      | ** $**   | **(282)** | ** $** | **94,741 ** |

 

Available-for-saleinvestments at March 31, 2004 were asfollows:

|                                                                                 |               |               | Gross      | Gross         | Estimated |
|---------------------------------------------------------------------------------|---------------|---------------|------------|---------------|-----------|
|                                                                                 |               | Adjusted      | Unrealized | Unrealized    | Fair      |
| (in thousands)                                                                  | Cost          | Gains         | Losses     | Value         |
| Cash balances                                                                   |  $       | 19,139   |  $    | -        |  $   | -  |  $ | 19,139  |
| Bank time deposits                                                              | -        | -        | -     | -        |
| Money market mutual funds                                                       | 99,086   | -        | -     | 99,086   |
| Marketable equity securities                                                    | 56       | -        | (8)        | 48       |
| U.S., state and municipal  agency      obligations               | 8,193    | -        | -     | 8,193    |
| Corporate debt securities                                                       | 278      | -        | -     | 278      |
|    Total available-for-sale  investments                         |  $       | 126,752  |  $    | -        | (8)       |  $ | 126,744  |
|                                                                                 |               |               |            |               |
| Included in cash and cash equivalents                                           | 118,225  | -        | -     | 118,225  |
| Included in current marketable securities                                       | 193      | -        | -     | 193      |
| Included in long-term marketable      securities and investments | 8,334    | -        | (8)        | 8,326    |
|    Total available-for-sale  investments                         |  $       | 126,752  |  $    | -        |  $   | (8) |  $ | 126,744  |

----

**Note E –Inventories**

Inventories are stated at the lower of cost or market, costdetermined by the first-in, first-out (FIFO) method.  The Company writesdown its inventory for estimated obsolescence or unmarketable inventory equalto the difference between the cost of inventory and the estimated market valuebased upon assumptions about future demand and market conditions. 

Inventories at December 31, 2004 and March 31, 2004 consisted of: 

| (in thousands)  | **December 31,** | March 31,        |
|-----------------|------------------|------------------|
| Raw materials   | ** $**      | **16,580 ** |  $ | 13,050  |
| Work in process | **11,039 ** | 11,572      |
| Finished goods  | **50,565 ** | 43,290      |
|                 | ** $**      | **78,184 ** |  $ | 67,912  |

**Note F - Property andEquipment**

Property and equipment is stated at cost.  Depreciationis based on the useful lives of the properties and computed using the straight-linemethod.  Buildings are depreciated over 30 years, furniture and equipmentover 3 to 10 years and leasehold improvements over the shorter of theirestimated remaining lives or lease terms.  Significant improvements andbetterments are capitalized while maintenance and repairs are charged tooperations as incurred. 

Property and equipment at December 31, 2004 and March 31, 2004 consisted of:

| (in thousands)                     | **December 31,**  | March 31,        |
|------------------------------------|-------------------|------------------|
| Land                               | ** $**       | **586 **    |  $ | 561  |
| Buildings                          | **26,227 **  | 24,534      |
| Leasehold improvements             | **25,565 **  | 23,776      |
| Furniture, fixtures and  equipment | **110,830 ** | 103,242     |
| Construction in progress           | **3,419 **   | 3,811       |
|                                    | **166,627 ** | 155,924     |
| Less accumulated  depreciation     | **(90,213)**      | (78,395)         |
|                                    | ** $**       | **76,414 ** |  $ | 77,529  |

** Note G -Warranties**

The Companyprovides an accrual for the estimated cost of product warranties and productliability claims at the time revenue is recognized.  Such accruals arebased on estimates, taking into consideration relevant factors such ashistorical experience, the warranty period, estimated costs, existence and levelsof insurance and insurance retentions, identified product quality issues, ifany, and to a limited extent, information developed by the insurance companyusing actuarial techniques.  The Company assesses the adequacy of these accrualsperiodically and adjusts the amounts as necessary based on actual experienceand changes in future expectations.

Informationon changes in the Company’s accrued warranties and related reserves areas follows:

|                                         | Nine Months Ended |
|-----------------------------------------|-------------------|
|                                         | December 31,      |
| (in  thousands)                         | **2004**          | 2003 |
| Beginning  warranty and related reserve | ** $**       | **23,396  ** |  $ | 19,989** **  |
| Costs of  warranty claims               | **(3,081)**       | (2,876) |
| Accruals  for product warranties        | **4,571 **   | 5,422  |
| Ending  warranty and related reserves   | ** $**       | **24,886  ** |  $ | 22,535** **  |

 

----

**Note H - Other Comprehensive Income **

The components of comprehensive income are listed below: 

|                                                                                           | Three Months Ended  December 31, | Nine Months Ended   December 31, |
|-------------------------------------------------------------------------------------------|----------------------------------|----------------------------------|
| (in thousands)                                                                            | **2004**                         | 2003                             | **2004** | 2003 |
| Net income                                                                                | ** $**                      | **16,329 **                 |  $ | 12,540  | ** $** | **46,517 ** |  $ | 39,811  |
| Foreign currency translation  adjustment                                                  | **10,356 **                 | 8,381                       | **11,927 ** | 14,239  |
| Unrealized (losses) on  marketable securities    and investment activities, net | **(118)**                        | (44)                             | **(162)** | 102  |
| Comprehensive income                                                                      | ** $**                      | **26,567 **                 |  $ | 20,877  | ** $** | **58,282 ** |  $ | 54,152  |

##  

**Note I - Income Taxes **

The effective rate of corporate income taxes was 32.0% and31.8% for the nine-month period ended December 31, 2004 and 2003, respectively.   

**Note J - Earnings per Share **

Basic earnings per share is computed by dividing net incomeavailable to common shareholders by the weighted average number of shares ofthe Company’s common shares outstanding during the period. Dilutedearnings per share is calculated in the same manner as basic earnings per shareexcept that when the effect is dilutive, net income is increased by the aftertax interest expense on the convertible notes, and the number of sharesoutstanding is increased by potentially dilutive common shares outstandingduring the period.  Potentially dilutive common shares consist of sharesissuable under the terms of employee stock options, warrants, and the23⁄4% convertible subordinated notes.  A reconciliation of net incomefor basic earnings per share to net income for diluted earnings per share and weightedaverage shares outstanding, used to calculate basic earnings per share, toweighted average shares outstanding assuming dilution, used to calculatediluted earnings per share, follows: 

|                                                                                           | Three Months Ended  December 31, | Nine Months Ended  December 31, |
|-------------------------------------------------------------------------------------------|----------------------------------|---------------------------------|
| (in thousands except per  share data)                                                     | **2004**                         | 2003                            | **2004** | 2003 |
| Net income: as reported1                                                                  | ** $**                      | **16,329 **                |  $ | 12,540  | ** $** | **46,517 ** |  $ | 39,811  |
| Add back after tax  interest expense on convertible note                                  | **802 **                    | 145                        | **2,406 ** | 145  |
| Net income for numerator  of diluted earnings per share                                   | ** $**                      | **17,131 **                |  $ | 12,685  | ** $** | **48,923 ** |  $ | 39,956  |
|                                                                                           | ** **                       |                                 | ** ** |  |
| 1 Net income as reported includes no  compensation expense associated with stock options. |

|                                                                                                                                                                                                                                                                                                                                                 |                             |                            |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------|---------------------------------|
|                                                                                                                                                                                                                                                                                                                                                      | Three Months Ended  December 31, | Nine Months Ended  December 31, |
| (in thousands)                                                                                                                                                                                                                                                                                                                                       | **2004**                         | 2003                            | **2004** | 2003 |
| Weighted average  outstanding shares:  basic                                                                                                                                                                                                                                                                                                    | **42,367 **                 | 45,769                     | **42,360 ** | 46,239  |
| Shares issuable through  exercise of stock options                                                                                                                                                                                                                                                                                                   | **2,492 **                  | 2,147                      | **2,685 ** | 2,052  |
| Shares issuable through  convertible notes                                                                                                                                                                                                                                                                                                           | **5,128 **                  | 891                        | **5,124 ** | 297  |
| Weighted average  outstanding shares:  diluted                                                                                                                                                                                                                                                                                                  | **49,987 **                 | 48,807                     | **50,169 ** | 48,588  |
| Basic earnings per share                                                                                                                                                                                                                                                                                                                             | ** $**                      | **0.39  **            |  $ | 0.27   | ** $** | **1.10  ** |  $ | 0.86   |
| Diluted earnings per  share2                                                                                                                                                                                                                                                                                                                         | ** $**                      | **0.34  **                 |  $ | 0.262** ** | ** $** | **0.98  ** |  $ | 0.822** ** |
|                                                                                                                                                                                                                                                                                                                                                 |                             |                            |   |   |   |   |   |   |
| 2Diluted earnings per share and weighted average  shares outstanding for the nine-months ended December 31, 2004 and 2003 have been restated to reflect the additional  shares that would be issued upon conversion of our 23⁄4% convertible  notes, in accordance with recently adopted Emerging Issue Task Force (EITF)  Issue No. 04-8. |

 

 

 

----

Shares issuable through stock options are determined usingthe treasury stock method.  Certain potential shares issuable under theterms of employee stock options were excluded from the computation of dilutedearnings per share since their exercise prices were greater than the marketprices of the common shares during or at the end of the period, andaccordingly, their effect would have been anti-dilutive.  Sharespotentially issuable upon the conversion of our 23⁄4% convertiblesubordinated notes are included in the calculation when the effect of theconversion would be dilutive on diluted earnings per share even though thenotes were not convertible because the market prices of the common shares didnot reach the required levels for the required periods of time. Additionally, during the quarter ended December 31, 2004, the price of theCompany's common shares did not exceed the specific strike prices of theconvertible note hedgeor the warrant agreements which may reduce the potential dilution from anyconversion of the notes.  Both the bond hedge and the warrants transactionmay be settled at the Company’s option, either in cash or shares, andexpire on January 1, 2009.  

##  

## Note K - Stock Options 

The Company has granted options to key employees andnon-employee directors under its Amended 2000 Long-Term Incentive Plan (2000Plan) and 1991 Plan.  Options granted under both plans are exercisable infour equal annual installments beginning one year from the date of grant, andexpire ten years from the date of grant.  Options are granted at the fairmarket value as of the date of grant. 

Stock option exercise prices are set at the fair marketvalue of the Company's common stock on the date of grant and the related numberof shares granted is fixed at that point in time.  Therefore, under theprinciples of Accounting Principles Board (APB) Opinion 25, the Company doesnot recognize compensation expense associated with the grant of stockoptions.  SFAS 123 "Accounting for Stock-Based Compensation",requires the use of an option valuation model to provide supplementalinformation regarding options granted after fiscal 1995.  Pro formainformation regarding net income and earnings per share shown below weredetermined as if the Company had accounted for its employee stock options underthe fair value method of that statement.  The estimated fair value of theoptions is amortized ratably over the options' vesting period.  Asrequired by SFAS No. 148, "Accounting for Stock-Based Compensation -Transition and Disclosure - an amendment of FASB Statement No. 123", thefollowing table shows the estimated effect on net income and earnings per shareif the Company had applied the fair value recognition provision of SFAS 123 tostock-based employee compensation.  The Company's pro forma information isas follows: 

|                                                                                                                                                                                                                                                                                                                                                                                                        | Three Months Ended  December 31, | Nine Months Ended December 31, |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------|--------------------------------|
| (in  thousands except per share data)                                                                                                                                                                                                                                                                                                                                                                  | **2004**                         | 2003                           | **2004** | 2003 |
| Net  income: as reported1                                                                                                                                                                                                                                                                                                                                                                         | ** $**                      | **16,329 **               |  $ | 12,540  | ** $** | **46,517 ** |  $ | 39,811  |
| Deduct: compensation  expense fair value method                                                                                                                                                                                                                                                                                                                                                   | **(1,642)**                      | (2,179)                        | **(5,197)** | (5,795) |
| Net  income:  pro forma                                                                                                                                                                                                                                                                                                                                                                           | ** $**                      | **14,687 **               |  $ | 10,361  | ** $** | **41,320 ** |  $ | 34,016  |
|                                                                                                                                                                                                                                                                                                                                                                                                        | ** **                       |                                | ** ** |  |
| Basic  earnings per share:  as reported                                                                                                                                                                                                                                                                                                                                                           | ** $**                      | **.39 **                  |  $ | .27  | ** $** | **1.10 ** |  $ | .86  |
| Basic  earnings per share:  pro forma                                                                                                                                                                                                                                                                                                                                                             | ** $**                      | **.35 **                  |  $ | .23  | ** $** | **.98 ** |  $ | .74  |
|                                                                                                                                                                                                                                                                                                                                                                                                        | ** **                       |                                |  |  |
| Net  income: as reported1                                                                                                                                                                                                                                                                                                                                                                         | ** $**                      | **16,329 **               |  $ | 12,540  | ** $** | **46,517 ** |  $ | 39,811  |
| Add  back after tax interest expense on convertible notes                                                                                                                                                                                                                                                                                                                                              | **802 **                    | 145                       | **2,406 ** | 145  |
| Net  income: diluted earnings per share                                                                                                                                                                                                                                                                                                                                                                | **17,131 **                 | 12,685                    | **48,923 ** | 39,956  |
| Deduct: compensation  expense fair value method                                                                                                                                                                                                                                                                                                                                                   | **(1,642)**                      | (2,179)                        | **(5,197)** | (5,795) |
| Net  income: diluted earnings per share pro forma                                                                                                                                                                                                                                                                                                                                                 | ** $**                      | **15,489 **               |  $ | 10,506  | ** $** | **43,726 ** |  $ | 34,161  |
|                                                                                                                                                                                                                                                                                                                                                                                                        | ** **                       |                                | ** ** |  |
| Diluted  earnings per share:  as reported2                                                                                                                                                                                                                                                                                                                                                        | ** $**                      | **.34 **                  |  $ | .262 | ** $** | **.98 ** |  $ | .822 |
| Diluted  earnings per share:  pro forma2                                                                                                                                                                                                                                                                                                                                                          | ** $**                      | **.29 **                  |  $ | .212 | ** $** | **.82 ** |  $ | .692 |
|                                                                                                                                                                                                                                                                                                                                                                                                   |
|     1Net income as reported includes  no compensation expense associated with stock options.** **                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                   |
|     2Diluted earnings per share and weighted average  shares outstanding for the nine-months ended December 31, 2004 and 2003 have    been restated to reflect the additional  shares that would be issued upon conversion of our 23⁄4% convertible  notes, in accordance with    recently adopted Emerging Issue Task Force (EITF)  Issue No. 04-8. |

 

----

**Note L - Share Repurchase Program **

TheCompany has a stock repurchase program to provide liquidity to the market and toreduce the overall number of shares outstanding, which has helped offset thedilutive effects of our employee stock option program (Long-Term Incentive Plan)and EITF Issue No. 04-8 related to the inclusionof contingently convertible debt in fully diluted earnings per sharecalculations.  All shares repurchased under the program are retired andare no longer deemed to be outstanding.  At March 31, 2003, 1.8 million shares remained authorized for repurchaseunder prior years Board of Directors authorization.  On July 31, 2003 the Board of Directors increasedthe authorized number of shares to be repurchased from 1.8 million to 4.0million shares.  On December 5, 2003, the Board of Directors increasedthe authorized number of shares to be repurchased by 5.0 million shares from 2.5million to 7.5 million shares.  During fiscal 2004, 5.4 million shareswere repurchased for $135.8 million and 3.6 million shares remained authorizedfor repurchase as of March 31, 2004.  Duringfiscal 2005, 2.3 million shares were repurchased for $79.8 million and 1.3million shares remained authorized for repurchase as of December 31, 2004.  See Note P – RelatedParty Transactions for additional information on the share repurchase. Thetiming of repurchases is subject to market conditions, cash availability, andblackout periods during which the Company is restricted from repurchasingshares.  There is no guarantee that shares authorized for repurchase bythe Board will ultimately be repurchased. 

**Note M - Acquisitions**

**South Bay Medical LLC**

On January 19, 2001, the Company purchased the assetsof South Bay Medical LLC (South Bay), a company focused on the development of a newcomputer-based workstation and automated cartridge-based needle loading systemfor use in brachytherapy procedures.  The acquisition was accounted for asa purchase with the results of operations included in the Company's financialstatements from the date of acquisition.  The Company paid $2 million incash and issued restricted common stock valued at $4 million on the date ofpurchase.  Additional purchase price payments will be made to South Bayover the next few years as workstation sales are made.  The net presentvalue of these amounts is recorded at December 31, 2004, in current accruedliabilities ($0.2 million) and in long-term accrued liabilities ($0.7 million)as the Company believes it is probable these payments will be made.

**Prosurg,Inc.**

In December2001, the Company entered into several agreements with Prosurg, Inc., toacquire certain patent rights and obtain a source of supply of a bio-absorbableco-polymer for $2 million in cash and up to an additional $2 million upon theachievement of certain milestones.  The purchase price was allocated tointangible assets and the net present value of these amounts is recorded at December 31, 2004, in accrued liabilities ($1.0M) andin long-term accrued liabilities ($1.0M) as the Company believes it is probablethese payments will be made.

**A-LifeLtd.**

On August 25, 2003, the Companycompleted the acquisition of A-Life Ltd, which has developed a hyaluronic acidbased dermal filler product, from Vitrolife, AB.  The acquisition wasvalued at $7.5 million; net of cash acquired, and was paid from existing cashbalances.  The purchase price was allocated to the tangible and intangiblenet assets acquired on the basis of their respective fair values on theacquisition date.  The purchase price was preliminarily allocated toaccounts receivable of $36,000, other assets of $349,000, production equipmentof $393,000 and intangible assets of $6,821,000, net of accrued liabilities of$123,000.  

**Note N – Goodwill & Intangible Assets**

In 2001,the FASB issued SFAS No. 142, "Goodwill and Other IntangibleAssets".  SFAS No. 142 was effective for the Company as of April 1, 2002.  SFAS No. 142 specifies thefinancial accounting and reporting for acquired goodwill and other intangibleassets.  Goodwill and intangible assets that have indefinite useful livesare no longer to be amortized, but rather are to be tested for impairmentannually or more frequently if impairment indicators arise.  None of theCompany's intangible assets have an indefinite life.  Intangible assetswith finite lives continue to be amortized over their useful lives ranging from3-20 years on a straight line basis.  Goodwill and intangible assets havebeen recorded at either incurred or allocated cost.  Allocated costs werebased on respective fair values at the date of acquisition.  

----

Upon theadoption of SFAS No. 142, the Company reassessed the remaining amortizationperiods of intangible assets acquired on or before June 30, 2001, and assigned all goodwill to reporting units forimpairment testing.  The impairment tests involve the use of bothestimates of fair value for the Company's reporting units as well as discountedcash flow assumptions.  Impairment tests were performed at adoption and inthe fourth quarter of fiscal years 2004 and 2003 and no impairment was noted asa result of these analyses. 

In thequarter ended December 31, 2004 the Companydetermined that certain purchase price payments to South Bay Medical related tofuture sales of workstations were no longer probable, and accordingly, reducedthe liabilities captioned “current portion of purchase price related toacquired technologies and acquisitions” and “long-term accruedliabilities” by a total of approximately $10.4 million.  This determination wasconsidered a potential impairment indicator and the Company also reduced thevalue of the patents and technologies related to the workstations based onfuture expected sales levels by $10.4 million.  The combined adjustmentshad no effect on net income. 

As of December 31, 2004 and March 31, 2004, accumulated amortization of intangible assets was $14.8million and $14.2 million, respectively.

**Note O - Long-Term Debt **

On December 22, 2003, the Company completed an offeringof $150 million of convertible subordinated notes due January 1, 2024 pursuant to Rule 144A under theSecurities Act of 1933.  The notes bear interest at 23⁄4% per annumand are convertible into shares of the Company's common stock at a conversionprice of $29.25 per share and are subordinated to all existing and futuresenior debt. 

Holders of the notes may convert their notesonly if any one 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 at least 20 trading days in the 30	consecutive trading day period ending on the first trading day of such	fiscal quarter is more than 120% of the conversion price 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	immediately preceding trading day is more than 120% of the conversion price	per share of the Company's common stock on such trading day;

- during the five business day	period after any five consecutive trading day period if the average of the	trading prices of the notes for such five consecutive trading day period is	less than 98% of the average of the conversion values of the notes during	such period, subject to certain limitations;

- if	the Company calls the notes for redemption; or

- if	the Company makes certain significant distributions to holders of its common	stock or the Company enters into specified corporate transactions.

At aninitial conversion price of $29.289, each $1,000 principle amount of notes willbe convertible into 34.1425 shares of common stock.  As a result of theCompany's recent dividend increase the conversion price has been adjusted to$29.25, and each $1,000 principle amount will be convertible into 34.1880 sharesof common stock. 

Concurrent with the issuance of the convertible subordinatednotes, the Company entered into a convertible note hedge and a warrantstransaction with respect to its common stock, the exposure for which is held byCredit Suisse First Boston LLC.  Both the note hedge and the warrantstransaction may be settled at the Company's option either in cash or shares andexpire January 1, 2009.  The convertible note hedgeand warrants transactions combined are intended to reduce the potentialdilution from conversion of the notes by effectively increasing the conversionprice per share to approximately $39.43.  The cost of the note hedge andthe proceeds of warrants sale have been included in shareholders' equity inaccordance with the guidance in Emerging Issues Task Force No. 00-19, "Accounting for Derivative FinancialInstruments Indexed to and Potentially Settled in a Company's ownStock."  Any proceeds received or payments made upon termination ofthese instruments will be recorded in shareholders' equity.

 

----

**Note P - Related Party Transactions**

On December 13, 2004, the Company repurchased 1,500,000shares of its common stock from two investment partnerships managed by VAPartners, LLC, at the time our largest shareholder, at a purchase price of$33.85 per share, the closing price of the common stock on the NYSE on that date. On December 14, the Company repurchased an additional 750,000 shares ofits common stock from the same investment partnerships at $34.00 per share, adiscount to the $34.41 closing price on the NYSE on that date.  The 2.25million shares were repurchased for a total of $76.3 million pursuant to theCompany's continuing stock repurchase program and represented approximately 5%of outstanding shares before the occurrence of the transactions.   VAPartners, LLC, through several of its investment partnerships, owned 6.9million shares representing approximately 16% of our outstanding common stockprior to these transactions.  Mr. Jeff Ubben, a managing member of VAPartners, LLC, is a member of Mentor's Boardof Directors.  The Company’s Audit Committee evaluated andpre-approved the transaction. 

**Note Q - Business Segment Information**

The Company's operationsare principally managed and reported on a product basis.  There are threereportable segments:  aesthetic and general surgery, surgical urology, andclinical and consumer healthcare.  The accounting policies of thereportable segments are the same as those described in the summary ofsignificant accounting policies except that certain expenses such as interestand certain corporate expenses are not allocated to the segments.

The aesthetic and generalsurgery products segment consists primarily of breast implants, tissueexpanders and the Company's body contouring (liposuction) equipment and disposables. The surgical urology segment includes penile implants, surgical incontinenceproducts, and brachytherapy seeds for the treatment of prostate cancer. The clinical and consumer healthcare segment includes catheters and otherdisposable products for the management of urinary incontinence and retention.

Selected financial information for the Company's reportablesegments for the three-month and nine-month periods ended December 31, 2004 and 2003 and as of December 31, 2004 and March 31, 2004 is as follows: 

|                                         | Three  Months Ended   December 31, | Nine  Months Ended  December 31, |
|-----------------------------------------|------------------------------------|----------------------------------|
| (in thousands)                          | **2004**                           | 2003                             | **2004** | 2003 |
| **Net sales**                           | ** **                         |                                  | ** ** |  |
| Aesthetic and General Surgery           | ** $**                        | **63,181 **                 |  $ | 54,821  | ** $** | **183,047 ** |  $ | 157,523  |
| Surgical Urology                        | **31,881 **                   | 26,521                      | **94,167 ** | 78,513  |
| Clinical and Consumer Healthcare        | **25,539 **                   | 25,160                      | **74,598 ** | 68,835  |
|   Total consolidated revenues | ** $**                        | **120,601 **                |  $ | 106,502  | ** $** | **351,812 ** |  $ | 304,871  |
|                                         | ** **                         |                                  |  |  |
|                                         | Three  Months Ended   December 31, | Nine  Months Ended  December 31, |
| (in thousands)                          | **2004**                           | 2003                             | **2004** | 2003 |
| **Operating profit**                    | ** **                         |                                  |  |  |
| Aesthetic and General Surgery           | ** $**                        | **23,116 **                 |  $ | 18,233  | ** $** | **67,052 ** |  $ | 53,524  |
| Surgical Urology                        | **2,602 **                    | (1,034)                          | **5,950 ** | 97  |
| Clinical and Consumer Healthcare        | **2,419 **                    | 3,541                       | **8,174 ** | 10,118  |
|   Total reportable segments   | ** $**                        | **28,137 **                 |  $ | 20,740  | ** $** | **81,176 ** |  $ | 63,739  |
|                                         |                                    |                                  |  |  |
|                                         | Three  Months Ended   December 31, | Nine  Months Ended  December 31, |
| (in thousands)                          | **2004**                           | 2003                             | **2004** | 2003 |
| **Operating income**                    | ** **                         |                                  |  |  |
| Reportable segments                     | ** $**                        | **28,137 **                 |  $ | 20,740  | ** $** | **81,176 ** |  $ | 63,739  |
| Corporate operating expenses            | **(3,798)**                        | (2,542)                          | **(10,642)** | (6,938) |
| Interest expense                        | **(1,346)**                        | (371)                            | **(3,982)** | (681) |
| Interest income                         | **683 **                      | 394                         | **1,631 ** | 1,113  |
| Other income                            | **432 **                      | 182                         | **249 ** | 1,107  |
| Income before income taxes              | ** $**                        | **24,108 **                 |  $ | 18,403  | ** $** | **68,432 ** |  $ | 58,340  |

----

|                | As  of                  |                    |
|----------------|-------------------------|--------------------|
| (in thousands) | **December   31, 2004** | March   31,   2004 |  
**Identifiable assets**

** **

 
Aesthetic and General Surgery

** $**

**136,882 **

 $

135,199 

 
Surgical Urology

**111,157 **

114,937 

 
Clinical and Consumer Healthcare

**76,356 **

76,695 

 
  Total reportable segments

** $**

**324,395 **

 $

326,831 

 
 
**Item 2.     Management'sDiscussion and Analysis of Financial Condition and Results of Operations**

*CautionaryStatement:*

*The following discussion and analysis should be read in conjunction withour Unaudited Condensed Consolidated Financial Statements and related Notesthereto contained elsewhere in this Report.  The information contained inthis Quarterly Report on Form 10-Q is not a complete description of ourbusiness or the risks associated with an investment in our securities.  Weurge you to carefully review and consider the various disclosures made by us inthis Report and in our other reports filed with the Securities and ExchangeCommission (“SEC”), including our Annual Report on Form 10-Kfor the year ended March 31, 2004, and subsequent reports on Forms 10‐Qand 8‐K, which discuss our business in greater detail. *

*The section entitled “Risk Factors” set forth below, andsimilar discussions in our other SEC filings, discuss some of the importantrisk factors that may affect our business, results of operations and financialcondition.  These risks, in addition to the other information in thisReport and in our other filings with the SEC, should be carefully consideredbefore deciding to purchase, hold or sell our securities. *

*All statements included in this Report, other than statements orcharacterizations of historical fact, are forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995.  Examplesof forward-looking statements include, but are not limited to, statementsconcerning: *

·  *ouranticipated growth strategies;*

·  *ouranticipated sales, expenses and taxes for fiscal 2005;*

·  *our intentionto introduce or seek regulatory approval for new products;*

·  *our abilityto continue to meet FDA and other regulatory requirements;*

·  *our anticipatedoutcomes of litigation and regulatory reviews;*

·  *our abilityto replace sources of supply without disruption or regulatory delay;*

·  *ouraccounting estimates, assumptions and judgments, the market acceptance andperformance of our products, the competitive nature of and anticipated growth in ourmarkets;*

·  *our abilityto consummate acquisitions and integrate their operations successfully; and*

·  *the need forcapital.*

*These forward-looking statements are based on our current expectations,estimates and projections about our industry, management’s beliefs, andcertain assumptions made by us.  Forward-looking statements can often beidentified by words such as “anticipates,” “expects,”“intends,” “plans,” “predicts,””projects,” “believes,” “seeks,”“estimates,” “may,” “will,”“should,” “would,” “could,”“potential,” “continue,”  “ongoing”,”guidance,”and similar expressions, and variations or negatives of these words.  Inaddition, any statements that refer to expectations, projections, forecasts orother characterizations of future events or circumstances, including anyunderlying assumptions, are forward-looking statements.  Theseforward-looking statements speak only as of the date of this Report and arebased upon the information available to us at this time.  Such informationis subject to change, and we will not necessarily inform you of suchchanges.  These statements are not guarantees of future results and aresubject to risks, uncertainties and assumptions that are difficult topredict.  Therefore, our actual results could differ materially andadversely from those expressed in any forward-looking statement as a result ofvarious factors, some of which are listed under the section “RiskFactors” below.  We undertake no obligation to revise or updatepublicly any forward-looking statement for any reason.*

* *

* *
**Company Overview
Founded in 1969, we are a leading supplier of medicalproducts for the global health care market.  We develop, manufacture andmarket a broad range of products serving the medical specialties market. Our products are utilized by three primary segments, aesthetic and generalsurgery (plastic and reconstructive surgery), surgical urology, and clinicaland consumer healthcare.

Our aesthetic and general surgery products includesurgically implantable prostheses for plastic and reconstructive surgery, aswell as capital equipment and consumables used for soft tissue aspiration orbody contouring (liposuction).  Our surgical urology products includesurgically implantable prostheses for the treatment of impotence, surgicallyimplantable incontinence products, urinary care products and brachytherapyseeds for the treatment of prostate cancer. Our clinical and consumerhealthcare products include catheters and other products for the management ofurinary incontinence and retention. 

We employ approximately 2,000 people around the world and areheadquartered in Santa  Barbara, California, with manufacturing and researchoperations in the United  States, France, the Netherlands and the United Kingdom. We also purchase finished products and certain raw material components fromthird party manufacturers and suppliers.  The cost of goods soldrepresents raw materials, labor and overhead, and the cost of third partyfinished products.  Gross margins may fluctuate from period to period dueto changes in the selling prices of our products, the mix of products sold,changes in the cost of third party finished products, raw materials, labor andoverhead and manufacturing efficiencies or inefficiencies. 

In addition to our strong domestic presence, we export mostof our product lines, principally to Canada, Western Europe, Central and South America, and the Pacific Rim.  Products are sold throughour direct international sales offices in Canada, the United  Kingdom, Germany, France, Japan, Benelux, Australia, Spain, Portugal and Italy, as well as through independent distributors in othercountries.

We employspecialized domestic sales forces for each of our domestic business franchises. These franchises are aesthetics surgery and urologic specialties, which includes our women's health, erectile dysfunctionand clinical and consumer healthcare, and prostate brachytherapy product lines.

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.  Generaland administrative expenses incorporate the costs of finance, human resources,information services, legal and insurance costs.

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, contract services, andother outside costs.  We also conduct research on materials technology,product design and product improvement.

Recent Developments

On October 25, 2003, we completedthe acquisition of Inform Solutions Inc., now doing business as Mentor Solutions, located in San  Diego, California.  Mentor Practice Developmentis a leading provider of comprehensive integrated practice management softwareand revenue enhancement services to the plastic surgery industry.  We paidcash for the acquisition and committed to several milestone payments over theensuing three years based upon sales and earnings.  We expect that thesoftware and consulting revenues generated by Mentor Solutions willnot be substantial.  We do, however, generally anticipate that thesoftware and services Mentor Solutions offers will assist ourplastic surgery customers to better manage their practices and increaseaesthetic surgeries, resulting in growth of our related product sales.  

On December 10, 2003 we completeda licensing agreement with the Wisconsin Alumni Research Foundation(“WARF”), which gives us the exclusive manufacturing and marketingrights to proprietary botulinum toxin technology developed at the University ofWisconsin-Madison.  In exchange, we paid cash and committed to royaltypayments based upon future sales, and future payments based upon developmentalmilestones.  We do not expect any revenues from products utilizing thistechnology in fiscal year 2005 or fiscal year 2006, as the products will requireadditional research, clinical studies and regulatory approvals before they canbe marketed. 

On December 22, 2003, we completed an offering of $150million of convertible subordinated notes due January 1, 2024 pursuant to Rule 144A under the Securities Act of1933.  The notes bear interest at 23⁄4% per annum and are convertibleinto shares of our common stock at an adjusted conversion price of $29.25 pershare and are subordinated to all existing and future senior debt. 

**APPLICATION OF CRITICAL ACCOUNTING POLICIES** 

Management's Discussion and Analysis of Financial Condition and Results ofOperations addresses our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States.  The preparation of these financial statements requires usto make estimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues and expensesduring the reporting period.  On an on-going basis, we evaluate our estimatesand judgments.  We base our estimates and judgments on historicalexperience and on various other factors that are believed to be reasonable underthe circumstances, the results of which form the basis for making judgmentsabout the carrying values of assets and liabilities that are not readilyapparent from other sources.  Actual results may differ from theseestimates under different assumptions or conditions. 

Management has identified the critical accounting policiesto be those related to revenue recognition, accounts receivable, inventories,warranties and related reserves, and goodwill and intangible assetimpairment.  These accounting polices are discussed in the“Management's Discussion and Analysis of Financial Condition and Resultsof Operations” and notes to the consolidated financial statementsincluded in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2004. 

**RESULTS OF 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 December  31,

Nine  Months Ended December  31,

**2004**

2003

**2004**

2003

** **

** **

Net sales

**100.0%**

100.0%

**100.0%**

100.0%

 Cost of sales

**35.5%**

38.0%

**36.2%**

37.9%

Gross profit

**64.5%**

62.0%

**63.8%**

62.1%

 Selling, general and administrative  expense

**37.6%**

38.1%

**36.7%**

36.1%

 Research and development expense

**6.7%**

6.8%

**7.0%**

7.4%

Operating income

**20.2%**

17.1%

**20.1%**

18.6%

 Interest expense

**(1.1)%**

(0.3)%

**(1.1)%**

(0.2)%

 Interest income

**0.6%**

0.3%

**0.5%**

0.4%

 Other income (expense), net

**0.3%**

0.2%

**-%**

0.4%

Income before income taxes

**20.0%**

17.3%

**19.5%**

19.2%

Income taxes

**6.5%**

5.5%

**6.3%**

6.1%

Net income

**13.5%**

11.8%

**13.2%**

13.1%

 

 

**For the three-month period ended December 31, 2004 compared to the three-month periodended December 31, 2003 **

**Sales** 

Sales for the three-month period ended December 31, 2004 increased 13.2% to $120.6 millionfrom $106.5 million for the same quarter in the prior year.  Foreignexchange rate movements, primarily the strengthening of the Euro, had a favorableyear-to-year impact on sales of $3.6 million for the three-month period.  Weexpect total sales to be in the range of $475 million to $480 million in fiscal2005, representing low-teen percentage growth over sales in fiscal 2004. 

Sales by Principal Product Line

Three Months Ended	December  31,

(in  thousands)

**2004**

  2003

Percent Change

Aesthetic  & General Surgery Products

** $**

**63,181 **

 $

54,821 

15.2%

Surgical  Urology Products

**31,881 **

26,521 

20.2%

Clinical  & Consumer Healthcare Products

**25,539 **

25,160 

1.5%

** **

** $**

**120,601 **

 $

106,502 

13.2%

Sales ofaesthetic and general surgery products increased 15.2% to $63.2 million for thequarter ended 

December 31, 2004, from $54.8million in the same period in the prior year.  Approximately $0.9 million ofthis increase is attributable to the favorable impact of foreign exchange ratemovements, and the balance is primarily attributable to organic growth of oursilicone gel breast implants and products associated with breast reconstructionsurgeries.  Total sales of breast implant products increased 13% to $54.2million for the quarter from $48.0 million in the same period in the prioryear.  Increased sales were driven by growth in the augmentation andreconstruction markets both domestically and internationally. Although we tryto avoid competing on price, we continue to see competitive price pressure inboth the domestic and international markets. Sales of body contouring productsincreased 14% to $4.6 million for the quarter from $4.1 million in the sameperiod in the prior year.  Liposuction continues to be the leadingsurgical cosmetic procedure in the United States, and sales of our capital equipment, associated disposableproducts, and higher average selling prices were the leading contributors tobody contouring sales growth for the quarter ended December 31, 2004.  Other aesthetic products sales increased 60% to $4.3million for the quarter from $2.7 million in the same period of the prior year,primarily as a result of increased revenue from physician participation in our“Extreme Mentor” direct to consumer television advertising program.

Sales ofsurgical urology products increased 20.2% to $31.9 million for the quarterended December 31, 2004, from $26.5 million in the sameperiod in the prior year.  Sales of our disposable urinary care productsincreased by $3.0 million to $16.1 for the quarter ended December 31, 2004 compared to $13.1 million in thesame period in the prior year.  The majority of this increase wasattributable to increased sales at our international branches.  Sales ofwomen’s health products increased 37% to $5.4 million for the three-monthsended December 31, 2004, compared to $3.9 million in theprior year.  This increase was primarily attributable to our ObTape®TMsling product, which was introduced in the United States during August 2003 for the treatment of stress urinaryincontinence. Penile implant sales increased 10% to $6.5 million, from $5.9million in the comparable period of the prior year, due to continued marketacceptance of our Titan® penile device in Europe and a reduction in the trend ofpatients sampling competitive drug therapies for erectile dysfunction, whichhad negatively impacted prior year sales.  Brachytherapy product salesincreased by 7% to $3.9 million for the quarter ended December 31, 2004, from $3.7 million in the sameperiod in the prior year, primarily as a result of higher unit sales.  Thefavorable impact of foreign exchange rate variations for the surgical urologyproduct segment, which primarily benefits our disposable urinary care products,was $1.5 million for the quarter ended December 31, 2004, compared to the prior year.

Sales of clinical and consumer healthcare products totaled$25.5 million for the quarter ended December 31, 2004, and were relatively flat comparedto the same period of the prior year.  The slight increase in revenue resultedfrom a favorable impact of foreign exchange rate variations of $1.2 million forthis segment, partially offset by a small decrease in domestic sales. 

**Gross profit** 

Gross profit increased to 64.5% of net sales for the quarter ended December 31, 2004, compared to 62.0% in thecomparable period in the prior year primarily due to lower manufacturing costsand a shift in product mix towards our higher margin segments. Gross profit foraesthetic and general surgery products improved to 76.2% of net sales, or $48.1million for the three-month period ending December 31, 2004, up from 70.9%, or $38.9 million ofnet sales in the comparable period in the prior year.  This 5.3% increasein gross profit as a percentage of net sales is primarilyattributable to favorable pricing on raw materials and overall manufacturingefficiencies at our Texas and Netherlands facilities.  Gross profit for surgical urology products improved to 55.4% ofnet sales for the quarter ended December 31, 2004, compared to 53.5% of net sales in thesame period in the prior year.  This improvement is primarily due to favorableimpact of currency fluctuation and, to a lesser degree, increased sales ofwomen’s health products, which have a higher gross margin than most otherproducts in this segment.  Gross profit for healthcare products decreasedto 47.0% of net sales for the quarter ended December 31, 2004, compared to 51.5% of net sales for the quarter ended December 31, 2003.  This decrease is primarily dueto certain manufacturing inefficiencies at our foreign manufacturing facilitiesand lower average selling prices to our international distributors.  Forthe fiscal year ending March 31, 2005, we expectoverall gross profit to be in the range of 62% to 64% of net sales. 

**Selling, General and Administrative**

Selling, general andadministrative expenses were $45.4 million, or 37.6% of net sales for thequarter ended December 31, 2004, compared to$40.6 million or 38.1% for the comparable quarter in the prior year.  Theincreased dollar amount for the period is primarily due to expenses ofapproximately $1.2 million related to our recently launched direct-to-consumertelevision advertising program, an increase of approximately $1.2 million incertain compensation expenses associated with achieving certain operatingtargets, and to a lesser extent, higher regulatory expenses related to oursilicone gel PMA filing and the effect of foreign currency fluctuations onexpenses incurred at our foreign operations.  For the fiscal year ending March 31, 2005, we expect sales, general andadministrative expense to be in the range of 35% to 37% of net sales. 

**Research and Development**

Research and developmentexpenses for the quarter ended December 31, 2004 were $8.1 million compared to $7.2 milliona year ago, approximately 6.7% and 6.8% of net sales, respectively. Research and development spending for the quarter ended December 31, 2004 was primarily to support keystrategic product development programs including our silicone gel breastimplant PMA, the botulinum toxin program, the Hyalite dermal filler program,and the continued development of automated manufacturing technologies.  Weexpect the level of spending on research and development activities to be inthe range of 7% to 8% of net sales for the fiscal year ending March 31, 2005.

**Interest and Other Income and Expense**

Interest expenseincreased approximately $1.0 million to $1.3 million for the quarter ended December 31, 2004,compared to $.4 million in the same period of the prior year.  This increaseis due to the additional interest on our $150 million in convertiblesubordinated notes issued in December 2003, carrying a coupon of 23⁄4%.  The remaining interest expense is interest on balancesoutstanding under our foreign lines of credit.  Other income increased dueto a one-time gain of approximately $0.5 million relating to insurance proceedsreceived to cover lost sales margin on inventory that was damaged.

**Income Taxes**

The effective rate of corporate income taxes for thethree-months ended December 31, 2004, was 32.3% ascompared to 31.8% for the comparable period in the prior year.  We expect oureffective tax rate to be in the range of 32% to 33% for the fiscal year ending March 31, 2005. 

**Net Income and Earnings Per Share**

Net income for the quarter ended December 31, 2004 increased 30% to $16.3 million, from $12.5 million in thecomparable period in the prior year.  Diluted earnings per share increased31% to $0.34 for the quarter, compared to a restated $0.26 for the same periodlast year.  As required by EITF 04-8, we have retroactively restated alldiluted earnings per share figures from December 2003, the date of issuance ofthe convertible subordinated notes. The effect of share repurchases was offsetby the dilutive effect to earnings per share following the adoption of the EITF,which required the inclusion, for calculation purposes, of additional sharesthat are contingently 

issuable.  As a result of our stock repurchaseprogram, we have fewer shares outstanding, resulting in a positive impact onthe year-over-year quarterly comparison of diluted earning per share.

 

**For the nine-month period ended December 31, 2004 compared to the nine-month periodended December 31, 2003. **

**Sales**

Sales increased 15.4%, or $46.9 million to $351.8 million forthe nine months ended December 31, 2004, compared to $304.9 million for thesame period in the prior year.   Foreign exchange rate movements,primarily the strengthening of the Euro, had a favorable year-to-year impact oninternational sales of $9.4 million for the nine-month period. 

Sales by Principal Product Line

Nine Months Ended   December 31,

(in  thousands)

**2004**

  2003

Percent Change

Aesthetic  & General Surgery Products

** $**

**183,047 **

 $

157,523 

16.2%

Surgical  Urology Products

**94,167 **

78,513 

19.9%

Clinical  & Consumer Healthcare Products

**74,598 **

68,835 

 8.4%

** **

** $**

**351,812 **

 $

304,871 

15.4%

Sales of aesthetic and general surgery products increased 16.2%,or $25.5 million to $183.0 million for the nine-month period ended December 31, 2004, compared to $157.5 million for thesame period in the prior year.  Approximately $2.3 million of the increaseis attributable to the favorable impact of foreign exchange rates and thebalance is due to organic growth in unit sales.  Sales of breast implants increased$19.2 million or 14% to $158.5 million for the nine-months ended December 31, 2004, compared to $139.4 million for thesame period in the prior year.  Body contouring product sales increased 19%to $13.3 million for the nine-month period ended December 31, 2004, from $11.2 million for the comparable period in the prioryear.  Increases in body contouring product sales are primarilyattributable to increased liposuction procedure volume as awareness andacceptance of this procedure increases.  Other product sales increased by 61%to $11.2 million for the nine-months ended December 31, 2004, compared to $7.0 million the sameperiod in the prior year, primarily as a result of increased revenue fromphysician participation in our “Extreme Mentor” direct-to-consumertelevision advertising program and revenue from Inform Solutions, now known as MentorSolutions, which was acquired in October 2003.Sales of surgical urology products increased 19.9%, or $15.7million to $94.2 million for the nine-month period ended December 31, 2004, compared to $78.5 million for thesame period in the prior year.  The increase in sales was primarilyattributable to a $6.5 million increase in sales of our women’s health productsprimarily from our ObTape®TM sling product, introduced inthe United States during August 2003, and a $7.1million increase in sales of our disposable urinary care products, primarilydue to beneficial impacts of currency fluctuation.  Brachytherapy productsales increased 8% to $11.6 million for the nine-months ended December 31, 2004, compared to $10.7 million for thesame period in the prior year as a result of higher unit sales.  Foreignexchange rate fluctuations favorably impacted surgical urology product sales by$4.0 million.  Sales of clinical and consumer healthcare products increasedby 8.4%, or $5.8 million, to $74.6 million for the nine-month period ended December 31, 2004, compared to $68.8 million for thesame period in the prior year. Sales of our catheter products increased $4.3million or 12% to $40.3 million for the nine-month period ended December 31, 2004, from $36.0 million for the sameperiod of the prior year.  Sales of other disposable homecare and ostomyproducts increased 5% to $34.3 million for the nine-month period ended December 31, 2004, from $32.8 million in thecomparable period of the prior year.  This increase resulted from a shiftto our premium product categories, which have higher pricing, as well as afavorable impact of foreign exchange rate variations of $3.0 million for thissegment.

**Gross profit**

Gross profit for the nine-months ended December 31, 2004, improved to 63.8% of net salesfrom 62.1% for the same period in the prior year primarily due to lowermanufacturing costs and a shift in product mix towards our higher marginproducts.  Gross profit for aesthetic and general surgery productsimproved to 75.1% of net sales, or $137.4 million, for the nine-month periodending December 31, 2004, up from $112.9million, or 71.7% of net sales, in the comparable nine-month period in theprior year.  This increase in gross profit as a percentage of net sales isprimarily attributable to favorable pricing on raw materials and manufacturingefficiencies at our Texas and Netherlands facilities.  Gross profit for surgical urologyproducts for the nine-month period ended December 31, 2004 improved to 54.4% of net sales
compared, to 52.9% of net sales for the same periodin the prior year.  The improvement in the gross profit percentage isprimarily due to increased sales of women's health products, which have a highergross margin than most other products in this segment, and the licensing of ourtrans-obturator methodpatent.  Gross profit for clinical and consumer healthcare products forthe nine-month period ended December 31, 2004decreased to 48.2% of net sales, compared to 50.9% in the prior year.  Thisdecrease is due to certain manufacturing inefficiencies at our foreignmanufacturing facilities and lower average selling prices to our internationaldistributors.
 

**Selling, General and Administrative**

Selling, general and administrative expense increased to 36.7%of net sales, or $129.2 million for the nine-month period ended December 31, 2004, compared to 36.1% or $110.2million in the comparable period of the prior year.  The increase for thisnine-month period is due to increases in a number of items. They include anincrease of approximately $2.0 million in certain compensation expenses associatedwith achieving specific operating targets, higher legal expenses ofapproximately $1.6 million due to settlement gains recognized during the prioryear nine-month period, as well as increased litigation expenses related to recentlyconcluded litigation, our recently launched direct to consumer television advertisingprogram of approximately $1.5 million, and recent acquisitions of approximately$1.2 million. In addition, to a lesser extent, higher regulatory expenserelated to the silicone gel PMA filing, increased costs associated withSarbanes-Oxley compliance, and increased support of sales and marketingcontributed to the year over year increase.  The increase in general andadministrative expense was partially offset by lower product warranty andproduct liability expenses of approximately $0.8 million. 

**Research and Development**

Research and development expenses for the nine-month periodended December 31, 2004 decreased from 7.4% to 7.0% as apercent of net sales, and was $24.6 million compared to $22.5 million for thecomparable period in the prior year.  Research and development spendingprimarily supports key strategic product development programs, including oursilicone gel breast implant PMA, the botulinum toxin program, the Hyalitedermal filler program, and the continued development of automated manufacturingtechnologies.  During the first quarter of fiscal 2005, we recorded a $0.8million charge related to the termination of a brachytherapy developmentproject and related automated manufacturing equipment. 

**Interest and Other Income and Expense**

Interest expense for the nine-month period ended December 31, 2004 increased to $4.0 from $0.7 millionin the comparable period in the prior year.  Approximately $3.1 million ofthe expense relates to the $150 million in convertible subordinated notes issuedin December 2003 with a coupon of 2 3⁄4%.  The remaining interestexpense is interest on balances outstanding under our foreign lines of credit. Other income includes a one-time gain of approximately $0.5 millionrelating to insurance proceeds received to cover lost sales margin on finishedgoods inventory that was damaged. 

**Income Taxes**

The effective rate of corporate income taxes for the nine-monthsended December 31, 2004 was 32.0% compared to 31.8% for thecomparable period in the prior year.   

**Net Income and Earnings Per Share**

Net income for the nine-month period ended December 31, 2004 increased 16.8% to $46.5 millionfrom $39.8 million in the comparable period in the prior year.  Dilutedearnings per share increased 19.5% to $0.98 for the nine-month period comparedto a restated $0.82 for the comparable period last year.  As required byEITF 04-8, we have retroactively restated all diluted earnings per sharefigures from December 2003, the date of issuance of our convertible subordinatednotes. The effect of share repurchases was offset by the dilutive effect toearnings per share following the adoption of EITF which required the inclusion,for calculation purposes, of additional shares that are contingentlyissuable.  As a result of our stock repurchase program, we have fewershares outstanding, resulting in a positive impact on the year over year nine-monthcomparison of diluted earnings per share. 

 

**LIQUIDITY AND CAPITAL RESOURCES**

Our balance sheet reflectedcash, cash equivalentsand short-term marketable securities of $62.7 million at December 31, 2004, compared to $118.4 million at March 31, 2004.  During the first quarter offiscal 2005, we invested $25 million of cash into long-term marketablesecurities, primarily Federal Home Loan Bank and Federal National MortgageAssociation notes, to increase our interest income on our cash reserves.  Ourcash provided by operating activities and the proceeds of our convertible noteshas been our primary source of funds  Cash from operating activities isexpected to continue to be our primary source of cash.  Our workingcapital was $155 million at December 31, 2004,compared to $198 million at March 31, 2004. We generated $66.5 million of cash from operating activities during the nine-monthsended December 31, 2004, compared to $47.2 million during thesame period the previous year.  Approximately $6.7 million of the increasewas attributable to higher net income, $2.9 million was attributable to additionalamortization and depreciation expense, $2.8 million was attributable toadditional tax benefit from the exercise of stock options and $1.5 million wasattributable to non-cash losses on asset disposals for the nine-month periodended December 31, 2004.  Increased accountsreceivable collection activities provided $4.8 million in additional cash flowfrom operations for the nine-months ended December 31, 2004, compared to the same period in theprior year.  

During the nine-monthsended December 31, 2004, we invested approximately $6.8million in property and equipment, primarily for production equipmentpurchases.  We anticipate additional investments of approximately $3million during the remainder of fiscal 2005 to continue facility improvementsand to purchase production equipment. 

We receive cash from theexercise of employee stock options.  Employee stock option exercisesprovided $9.0 million of cash during the nine-months ended December 31, 2004 compared to $6.9 million in thesame period the previous year.  Proceeds from the exercise of employeestock options will vary from period to period based primarily upon fluctuationsin the market value of our common shares relative to the exercise price of suchoptions, among other factors. 

We have a stock repurchase program, primarily to offset thedilutive effect of our employee stock option program, to provide liquidity tothe market, and to reduce the overall number of shares outstanding.  Allshares repurchased under the program are retired and are no longer deemed to beoutstanding.  During the quarter ended December 31, 2004, 2.3 million shares were repurchased for $79.8million.  The December repurchase included the repurchase of 2.25 millionshares from VA Partners, LLC, who was at the time, our largest shareholder. Mr. Jeff Ubben, a managing member of VA Partners, LLC, is a member of our Boardof Directors.  The transaction was at market prices and pre-approved by ourAudit Committee.  At December 31, 2004, 1.3 million shares remainedauthorized for repurchase.  The timing of repurchases is subject to marketconditions, cash availability, and blackout periods during which we arerestricted from repurchasing shares.  There is no guarantee that sharesauthorized for repurchase by the Board will ultimately be repurchased. 

In January 2001, we completed the acquisition of the assetsof South Bay Medical, LLC.  The total consideration included $2 million incash, 470,586 restricted shares of our common stock having a fair market valueof $4 million, and up to $13.6 million to be paid in cash or our common stockover the next several years.  During the quarter ended December 31, 2004, we determined that certainpurchase price payments to South Bay Medical related to future sales ofworkstations were no longer probable, and accordingly we decreased theestimated future payments due under the acquisition agreement by $10.4 millionand concurrently decreased the intangible assets related to the acquiredtechnology by the same amount.  The combined adjustments had no effect onnet income. These future payments are recorded as an acquisition obligationpayment liability of $0.9 million at December 31, 2004 

In December 2001, we entered into several agreements withProsurg, Inc. to purchase certain patent rights and to secure a supply ofproduct.  The total consideration included $2.0 million in cash and $1.7million in short and long-term payments due over the next several years. The future payments have been recorded as an acquisition obligation liability of$2.0 million, due over the next several years, based on the achievement ofcertain milestones. 

On September 9, 2003, we enteredinto several transactions to acquire from AMI, LLC, the exclusive license,marketing and distribution rights for certain product technology, andintellectual property rights, as well as a related supply agreement withProsurg, Inc.  We have paid $4.5 million in cash and issued 133,630restricted shares of our common stock valued at fair market value of $3million.  We anticipate making additional payments of $3.0 million uponthe completion of certain developmental and regulatory milestones, expected tobe achieved over the next several years. 

 

On December 22, 2003, we completed an offering of $150 millionof convertible subordinated notes due January 1, 2024 pursuant to Rule 144A under theSecurities Act of 1933.  The notes bear interest at 23⁄4% per annumand are convertible into shares of our common stock at an adjusted conversionprice of $29.25 per share and are subordinated to all existing and futuresenior debt.  Concurrent with the issuance of the convertible subordinatednotes, we entered into a convertible bond hedge and warrants transactions withrespect to our common stock, the exposure for which is held by Credit SuisseFirst Boston LLC for a net cash payment of $18.5 million.  Both the bondhedge and the warrants transactions may be settled at our option either in cashor net shares and expire January 1, 2009.  The convertible bond hedgeand warrants transactions combined are intended to reduce the potentialdilution from conversion of the notes by effectively increasing the conversionprice per share to approximately $39.43. 

In September 2004, theBoard of Directors increased our quarterly dividend rate from $.15 per share to$.17 per share.  It is our intent to continue to pay dividends for theforeseeable future subject to, among other things, Board approval, cashavailability, debt restrictions and alternative cash needs.  At thecurrent annual dividend rate of $.68 per share, the aggregate annual dividendwould be approximately $28 million. 

We had a secured line ofcredit for borrowings up to $25 million ("Credit Agreement"), whichaccrued interest at the prevailing prime rate or 1.75% over LIBOR, at ourdiscretion.  The Credit Agreement expired in September 2004 and we arecurrently negotiating a new line of credit agreement. The Credit Agreementincluded certain covenants that, among other things, limited the dividends we couldpay and required maintenance of certain levels of tangible net worth and debt serviceratios.  At December 31, 2004, we had threecommercial letters of credit totaling $2.0 million.

Inaddition, in February 2001, we established several lines of credit with local foreignlenders to facilitate operating cash flow needs at our foreignsubsidiaries.  These unsecured credit lines are at market rates ofinterest, are guaranteed by us, and total $7.7 million, of which $3.7 millionwas outstanding, and $4.0 million was available at December 31, 2004. 

In fiscal2002, we established a line of credit of $7.1 million to finance theconstruction of a new facility in Leiden, the Netherlands.  The borrowings accrueinterest at EURIBOR plus 0.75% and are secured by the new facility and otherassets in the Netherlands.  At December 31, 2004, $5.1 million was outstanding and $2.0million was available under this line of credit. 

At December 31, 2004, our total short-term borrowingsunder all lines of credit were $8.8 million and the weighted-average interestrate was 3.7%.  The total amount of additional borrowings available to usunder all lines of credit was $6.0 million and $28.1 million at December 31, 2004 and March 31, 2004, respectively. 

We enterinto various product and intellectual property acquisitions and businesscombinations.  In connection with some of these activities, we agree tomake payments to third parties when specific milestones are achieved, such asreceipt of regulatory approvals or achievement of performance or operationaltargets.  

We do nothave any off-balance sheet arrangements that are currently material orreasonably likely to be material to our financial position or results ofoperations. 

Our principal source ofliquidity at December 31, 2004 consisted of$63 million in cash, cash equivalents and short-term marketable securities, plus$32 million of highly liquid marketable securities accounted for as long termassets, plus $6 million available under our existing lines of credit.  Webelieve that funds generated from operations, our cash, cash equivalents andmarketable securities and funds available under line of credit agreements willbe adequate to meet our working capital needs and capital expenditureinvestment requirements and commitments for the foreseeable future. However, it is possible that we may need to raise additional funds to financeunforeseen requirements or to consummate acquisitions of other business,products or technologies.  Additional funds could be raised by sellingequity 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, we may still elect to sell additional equity ordebt securities or obtain credit facilities for other reasons.  We may notbe able to obtain additional funds on terms that would be favorable to us, orat all.  If funds are raised by issuing additional equity securities orconvertible debt securities, the ownership percentage of existing shareholderswould be reduced.  In addition, the equity or debt securities issued by usmay have rights, preferences or privileges senior to those of our common stock.

 

**RiskFactors**

**Forward-Looking Information Under the Private SecuritiesLitigation Reform Action of 1995 **

The Private Securities Litigation Reform Act of 1995provides a "safe harbor" for forward-looking statements.  TheAct was designed to encourage companies to provide prospective informationabout them without fear of litigation.  The prospective information mustbe identified as forward-looking and must be accompanied by meaningfulcautionary statements identifying important factors that could cause actualresults to differ materially from those projected in the statements.  Thestatements about our business, plans, strategies, intentions, expectations andprospects contained throughout this document are based on currentexpectations.  These statements are forward-looking and actual results maydiffer materially from those predicted as of the date of this report in theforward-looking statements, which involve risks and uncertainties.  Inaddition, past financial performance is not necessarily a reliable indicator offuture performance and investors should not use historical performance toanticipate results or future period trends.  We undertake no obligation torevise or update publicly any forward-looking statements for any reason, evenif new information becomes available or other events occur in the future. 

Our business faces many risks.  The risks describedbelow may not be the only risks we face.  Additional risks that we do notyet know of or that we currently think are immaterial may also impair ourbusiness operations.  If any of the events or circumstances described inthe following risks actually occurs, our business, financial condition orresults of operations could suffer and the trading price of our common stock orour convertible notes could decline. You should consider the following risks beforedeciding to invest in our common stock or convertible notes.  

***Significant product liability claims or product recalls mayforce us to pay substantial damage awards and other expenses that could exceedour accruals and insurance coverage.  ***

The manufacture and sale of medical devices exposes us tosignificant risk of product liability claims.  In the past, and currently,we have had a number of product liability claims relating to our products, andwe may be subject to additional product liability claims in the future, some ofwhich may have a negative impact on our business.  If a product liabilityclaim or series of claims is brought against us for uninsured liabilities or inexcess of our insurance coverage, our business could suffer.  Somemanufacturers that suffered such claims in the past have been forced to ceaseoperations or even to declare bankruptcy. Additionally, we could experience amaterial design or manufacturing failure in our products, a quality systemfailure, other safety issues, or heightened regulatory scrutiny that wouldwarrant a recall of some of our products and could result in exposure toadditional product liability claims.  

***We are subject to substantial government regulation, whichcould have a material adverse 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 medical devices we develop must undergo rigorouspre-clinical and clinical testing and an extensive regulatory approval processbefore they can be marketed.  Certain of our products are required toundergo review by a panel of outside experts, which makes a recommendation tothe FDA as to whether the product(s) should be approved.  This panel ofexperts, who are outside of the FDA, may or may not agree that the productshould be approved.  This process makes it longer, more difficult and morecostly to bring our products to market, and we cannot guarantee that any of ourunapproved products will be approved or how long it may take for any oneparticular product to be approved.  The pre-marketing approval process canbe particularly expensive, uncertain and lengthy, and a number of devices forwhich the FDA approval has been sought by other companies have never beenapproved for marketing.  In addition to testing and approval procedures,extensive regulations also govern manufacturing, packaging, labeling, storage,distribution, record-keeping, and advertising and marketing procedures. If we do not comply with applicable regulatory requirements, such violationscould result 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. 

Delays in,withdrawal, or rejection of the FDA or other government entity approval(s) ofour products may also adversely affect our business.  Such delays,withdrawals, or rejections may be encountered due to, among other reasons,government or regulatory delays, lack of demonstrated safety or efficacy duringclinical trials, safety issues, manufacturing issues, slower than expected rateof patient recruitment for clinical trials, inability to follow patients aftertreatment in clinical trials, inconsistencies between early clinical trialresults and results obtained in later clinical trials, varying interpretationsof data generated by clinical trials, or changes in regulatory policy orrequirements in the U.S. and abroad. 

In the U.S., there has been acontinuing trend toward more stringent FDA requirements in the areas of productapproval and enforcement, causing medical device manufacturers to experiencelonger research and development timelines, longer approval cycles, greater riskand uncertainty, and higher expenses. Internationally, there is a risk that wemay not be successful in meeting the quality standards or other certificationrequirements.  Even if regulatory approval of a product is granted, suchapproval may entail limitations on uses for which the product may be labeled andpromoted, stringent post-marketing requirements, or may prevent us frombroadening the uses of our current products for different applications.  Inaddition, to the extent permissible by law, we may not receive FDA approval toexport our products in the future, and countries to which products are to beexported may not approve them for import. 

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. 

From timeto time, legislative or regulatory proposals are introduced that, ifimplemented, could alter the review and approval process relating to medicaldevices.  It is possible that the FDA or other governmental authoritieswill issue additional regulations, which could further reduce or restrict thesales of our presently marketed products or products under development. Any change in legislation or regulations that govern the review and approvalprocess relating to our current and/or future products could make it moredifficult and/or costly to obtain approval for new products, and/or to produce,market, and distribute existing products. 

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

The medicaldevice industry is highly competitive and is subject to significant and rapidtechnological change.  We believe that our ability to develop or acquirenew technologies is crucial to our success.  We are continually engaged inproduct research and development, improvement programs, and required clinicalstudies to develop new technologies and to maintain and improve our competitiveposition.  Any significant delays in the above or termination or failureof our clinical trials would materially and adversely affect our research,development and commercialization timelines.  We cannot guarantee that wewill be successful in enhancing existing products, or in developing oracquiring new products or technologies that will timely achieve regulatoryapproval or success in the marketplace.  

There isalso a risk that our products may not gain market acceptance among physicians,patients and the medical community generally.  The degree of marketacceptance of any medical device or other product that we develop will dependon a number of factors, including demonstrated clinical safety and efficacy,cost-effectiveness, potential advantages over alternative products,user/patient acceptance, and our marketing and distribution capabilities. Physicians will not recommend our products if clinical and/or other data and/orother factors do not demonstrate their safety and efficacy compared to othercompeting products, or if our products do not best meet the particular needs ofthe individual patient.

Ourproducts also compete with a number of other similar medical productsmanufactured by major companies, and may also compete with new productscurrently under development by major companies and others.  On January 8, 2004, the FDA released a, “DraftGuidance for Saline, Silicone Gel, and Alternative Breast Implants.” This new draft guidance has additional requirements from the FDA'spreviously issued guidance document dated February 2003.  We completed ourpre-market approval (“PMA”) application to the FDA for our siliconegel-filled implants for breast augmentation, reconstruction and revision inDecember 2003, using the February 2003 guidance document previously released bythe FDA.  The Agency has indicated that our PMA "is sufficientlycomplete to permit a substantive review and is, therefore, suitable forfiling."  Any change in FDA regulatory requirements, including thoseimplemented through new or revised FDA guidance, (such as that announced onJanuary 8th by the FDA), may delay or may otherwise adversely affect ourpending PMA application as well as its review or approval by the FDA.  Adelay, denial, or "not approvable" response by the FDA would have amaterial adverse affect on our commercialization timelines, competitiveposition and ultimately our revenue and operating results.  In August2004, we amended our PMA based on the January 2004 revised (new) FDA draftguidance and responded to other issues raised by the FDA. We continue toaddress the Agency’s questions and the FDA review and approval processmay require additional substantial time and expense, with no assurances ofsuccess. In April 2005, an advisory panel composed of outside experts selectedby the FDA is expected to meet to consider questions presented to it by the FDAregarding our PMA submission and to make a recommendation to the Agencyregarding whether our PMA should be approved.  We cannot predict theoutcome of this review.  If the panel recommends against approval, thislikely will delay approval of our pending PMA application and could have asignificant adverse impact on our competitive position.  
If the panel recommends approval of our PMA application, the FDA may not agree and not follow thepanel’s recommendation.  The panel or the FDA could also recommendstringent post-marketing requirements that could impact our sales and earnings,depending on the scope and complexity of the requirements.  If ourcompetitor gains FDA approval to market its products before we do, ourcompetitive position will likely suffer.  If we achieve FDA approval tomarket our products prior to our competitor, then we may face a competitiveadvantage for an undefined period of time.  If our new products do notachieve significant market acceptance, or if our current products are not ableto continue competing successfully in the changing market, our sales andearnings may not grow as much as expected, or may even decline.  
We alsohave a pending application for a Medical Device License in Canada for our silicone gel-filledimplants.  In March 2005, an expert advisory panel of primarily Canadiangovernment officials is expected to meet to review our pending application fora Medical Device License.  We cannot predict the outcome of this review ordetermine when or if Health Canada willapprove our product application.  In addition, any approval could begranted with stringent post-marketing requirements that may impact our salesand earnings, depending on the scope and complexity of such requirements.

***If we suffer negative publicity concerning the safety of ourproducts, our sales may be harmed and we may be forced to withdraw products. ***

Physicians and potential patients may have a number ofconcerns about the safety of our products, including our breast and otherimplants, whether or not such concerns have a basis in generally acceptedscience or peer-reviewed scientific research.  Negative publicity-whetheraccurate or inaccurate-concerning our products could reduce market orgovernmental acceptance of our products and could result in decreased productdemand or product withdrawal.  In addition, significant negative publicitycould result in an increased number of product liability claims, whether or notthese claims are supported by applicable law.  

***If changes in the economy and consumer spending reduceconsumer demand for our products, our sales and profitability could suffer. ***

Certain elective procedures, such as breast augmentation,body contouring, and in some cases surgical treatment for male impotence aretypically not covered by insurance.  Adverse changes in the economy maycause consumers to reassess their spending choices and reduce the demand forthese surgeries and could have an adverse effect on consumer spending. This shift could have an adverse effect on our sales and profitability.  

***If we are unable to implement new information technologysystems, our ability to manufacture and sell products, maintain regulatorycompliance and manage and report our business activities may be impaired,delayed or diminished, which would cause substantial business interruption andloss of sales, customers and profits.  ***

We recently implemented an enterprise resource planningsystem at our major locations that will be our primary business managementsystem.  We intend to continue to implement the system for nearly all ofour businesses worldwide.  Many other companies have had severe problemswith computer system implementations of this nature and scope.  We areusing a controlled project plan and we believe we have assigned adequatestaffing and other resources to the projects to ensure its successfulimplementation; however there is no assurance that the design will meet ourcurrent and future business needs or that it will operate as designed.  Weare heavily dependent on such computer systems, and any failure or delay in thesystem implementation would cause a substantial interruption to our business,additional expense, and loss of sales, customers, and profits.  

***If we are unable to acquire companies, businesses ortechnologies as part of our growth strategy or to successfully integrate pastacquisitions, our growth, sales and profitability could suffer.  ***

A significant portion of our recent growth has been theresult of acquisitions of other companies, businesses and technologies. We intend to continue to acquire other businesses and technologies tofacilitate our future business strategies, although there can be no assurancethat we will be able to identify appropriate acquisition candidates, consummatetransactions or obtain agreements with terms favorable to us.  Further,once a business is acquired, any inability to integrate the business, failureto retain and develop its workforce, or establish and maintain appropriatecommunications, performance expectations, regulatory compliance procedures,accounting controls, and reporting procedures could adversely affect our futuresales and earnings. 

***If our intellectual property rights do not adequatelyprotect our products or technologies, others could compete against us moredirectly, which would hurt our profitability.  ***

Our success depends in part on our ability to obtain patentsor rights to patents, protect trade secrets, operate without infringing uponthe proprietary rights of others, and prevent others from infringing on ourpatents, trademarks and other intellectual property rights.  We will beable to protect our intellectual property from unauthorized use by thirdparties only to the extent that it is covered by valid and enforceable patents,trademarks or licenses.  Patent protection generally involves complexlegal and factual questions and, therefore, enforceability of patent rightscannot be predicted with certainty; thus, any patents that we own or licensefrom others may not provide us with adequate protection againstcompetitors.  Moreover, the laws of certain foreign countries do notrecognize intellectual property rights or protect them to the same extent as dothe laws of the United  States.   

In addition to patents and trademarks, we rely on tradesecrets and proprietary know-how.  We seek protection of these rights, inpart, through confidentiality and proprietary information agreements. These agreements may not provide sufficient protection or adequate remedies forviolation of our rights in the event of unauthorized use or disclosure ofconfidential and proprietary information.  Failure to protect our proprietaryrights could seriously impair our competitive position.  

***If third parties claim we are infringing their intellectualproperty rights, we could suffer significant litigation or licensing expensesor be prevented from marketing our products.  ***

Our commercial success depends significantly on our abilityto operate without infringing the patents and other proprietary rights ofothers.  However, regardless of our intent, our technologies may infringeupon the patents or violate other proprietary rights of third parties.  Inthe event of such infringement or violation, we may face expensive litigationand may be prevented from selling existing products and pursuing productdevelopment or commercialization.  

***We depend on single and sole source suppliers for certainraw materials and licensed or manufactured products and the loss of anysupplier could adversely affect our ability to manufacture or sell many of ourproducts.  ***

We currently rely on single or sole source suppliers for rawmaterials, including silicone, used in many of our products.  In the eventthat they cannot meet our requirements, we cannot guarantee that we would beable to obtain a sufficient amount of quality raw materials in a timelymanner.  We also depend on third party manufacturers for components andlicensed products, including our women’s health products and ourpalladium brachytherapy seed product.  If there is a disruption in thesupply of these products, our sales and profitability would be adverselyaffected.  

 

***Our international business exposes us to a number of risks. ***

More than one-third of our sales are derived frominternational operations.  Accordingly, any material decrease in foreignsales would have a material adverse effect on our overall sales andprofitability. Most of our international sales are denominated in Euros,British Pounds, Canadian Dollars or U.S. Dollars.  Depreciation ordevaluation of the local currencies of countries where we sell our products mayresult in our products becoming more expensive in local currency terms, thusreducing demand, which could have an adverse effect on our operatingresults.  Our operations and financial results may be adversely affectedby other international factors, including: 

•     foreigngovernment regulation of medical devices; 

•     productliability, intellectual property and other claims; 

•     newexport license requirements; 

•     politicalor economic instability in our target markets; 

•     traderestrictions; 

•     changesin tax laws and tariffs; 

•     managingforeign distributors and manufacturers; 

•     managingforeign branch offices and staffing; and 
•     competition.
 

***Health care reimbursement or reform legislation couldmaterially affect our business.***

 

If any national health care reform or other legislation orregulations are passed that imposes limits on the amount of reimbursement forcertain types of medical procedures or products, or on the number or type ofmedical procedures that may be performed, or that has the effect of restrictinga physician's ability to select specific products for use in patientprocedures, such changes could have a material adverse effect on the demand forour products.  Our revenues depend largely on U.S. and foreign government health care programs andprivate health insurers reimbursing patients' medical expenses. Physicians, hospitals, and other health care providers may not purchase ourproducts if they do not receive satisfactory reimbursement from thesethird-party payers for the cost of procedures using our products.  In the U.S., there have been, and we expect that there willcontinue to be, a number of federal and state legislative and regulatoryproposals to implement greater governmental control over the healthcareindustry and its related costs.  These proposals create uncertainty as tothe future of our industry and may have a material adverse effect on ourability to raise capital or to form collaborations.  In a number offoreign markets, the pricing and profitability of healthcare products aresubject to governmental influence or control.  In addition, legislation orregulations that impose restrictions on the price that may be charged forhealthcare products or medical devices may adversely affect our sales andprofitability.  

***If our use of hazardous materials results in contaminationor injury, we could suffer significant financial loss.  ***

Our manufacturing and research activities involve thecontrolled use of hazardous materials.  We cannot eliminate the risk ofaccidental contamination or injury from these materials.  In the event ofan accident or environmental discharge, we may be held liable for any resultingdamages, which may exceed our financial resources and any applicable insurancecoverages.  

***Future changes in financial accounting standards may causeadverse unexpected revenue or expense fluctuations and affect our reportedresults of operations.  ***

A change in accounting standards could have a significanteffect on our reported results and may even affect our reporting oftransactions completed before the change is effective.  The FinancialAccounting Standards Board ("FASB") has issued a Proposed Statementof Financial Accounting Standards ("SFAS"), Share-Based Payment, anamendment of FASB Statements Nos. 123 and 95 ("Exposure Draft"). 

 

TheExposure Draft would eliminate the ability to account for share-basedcompensation transactions using Accounting Principles Board ("APB") OpinionNo. 25, Accounting for Stock Issued to Employees, and generally would requirethat such transactions be accounted for using a fair-value-based method, and theresulting cost recognized in the financial statements.  The approval ofthis Exposure Draft or any changes requiring that we record compensation expensein the statement of operations for employee stock options using the fair valuemethod, could have a significant negative effect on our reported results. New pronouncements and varying interpretations of existing pronouncements haveoccurred and may occur in the future.  Changes to existing rules or currentpractices may adversely affect our reported financial results of our business. 

***Hedging transactions and other transactions may affect thevalue of the notes.  ***

In connection with the original issuance of our 23⁄4%convertible notes in December 2003, we entered into convertible note hedge andwarrant transactions with respect to our common stock with Credit Suisse FirstBoston International, an affiliate of Credit Suisse First Boston LLC, theinitial purchaser of the notes, to reduce the potential dilution fromconversion of the notes up to a price of our common stock of approximately $39.43per share.  In connection with these hedging arrangements, Credit SuisseFirst Boston International, and/or its affiliates, has taken and, we expect,will continue to take positions in our common stock in secondary markettransactions and/or will enter into various derivative transactions.  Suchhedging arrangements could adversely affect the market price of our commonstock.  In addition, the existence of the notes may encourage short sellingin our common stock by market participants because the conversion of the notescould depress the price of our common stock. 

*** ***

***Litigation may harm our business or otherwise distract ourmanagement. ***

Substantial, complex or extended litigation could cause usto incur large expenditures and distract our management, and could result insignificant monetary or equitable judgments against us.  For example,lawsuits by employees, patients, customers, licensors, licensees, suppliers,distributors, stockholders, or competitors could be very costly and couldsubstantially disrupt our business.  Disputes from time to time with suchcompanies or individuals are not uncommon, and we cannot assure that we willalways be able to resolve such disputes out of court or on terms favorable tous. 

***Our publicly-filed SEC reports are reviewed by the SEC fromtime to time and any significant changes required as a result of any suchreview may result in material liability to us and have a material adverseimpact on the trading price of our common stock.***

The reports of publicly-traded companies are subject toreview by the SEC from time to time for the purpose of assisting companies incomplying with applicable disclosure requirements and to enhance the overalleffectiveness of companies public filings, and comprehensive reviews by the SECof such reports are now required at least every three years under theSarbanes-Oxley Act of 2002.  SEC reviews often occur at the time companiesfile registration statements such as the registration statement we filed inconnection with our convertible note offering, but reviews may also beinitiated at any time by the SEC.  While we believe that our previouslyfiled SEC reports comply, and we intend that all future reports will comply inall material respects with the published rules and regulations of the SEC, wecould be required to modify or reformulate information contained in priorfilings as a result of an SEC review.  Any modification or reformulationof information contained in such reports could be significant and result inmaterial liability to us and have a material adverse impact on the tradingprice of our securities, including our common stock or our convertible notes. 

***Our operating results may fluctuatesubstantially, and could precipitate unexpected movement in the price of ourcommon stock and convertible notes.*** 

Our commonstock trades on the New York Stock Exchange under the symbol"MNT."  On December 31, 2004,the closing price of our common stock on the New York Stock Exchange was $33.74per share.  On December 22, 2003, we completedan offering of $150 million of convertible subordinated notes("notes") due January 1, 2024 pursuant toRule 144A under the Securities Act of 1933.  The notes bear interest at23⁄4% per annum, are convertible into shares of our common stock at anadjusted conversion price of $29.25 per share and are subordinated to allexisting and future senior debt.  The market prices of our stock and convertiblesecurities are subject to significant fluctuations in response to the factorsset forth above and other factors, many of which are beyond our control such aschanges in pricing policies by our competitors and the timing of significantorders and shipments.  

Such factors, as well as other economic conditions, may adverselyaffect the market price of our securities, including our common stock and thenotes.  There could be periods in which we experience shortfalls inrevenue and/or earnings from levels expected by securities analysts andinvestors, which could have an immediate and significant adverse effect on thetrading price of our securities, including our common stock and our convertiblenotes. 

***Our internal control over financial reporting may not beconsidered effective which could result in a loss of investor confidence in ourfinancial reports, and have an adverse effect on the price of our common stockand convertible notes. ***

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,beginning with our Annual Report on Form 10-K for the fiscal year ending March 31, 2005, we will be required to furnish a report by our management on ourinternal controls over financial reporting.  Such report will contain,among other matters, an assessment of the effectiveness of our internalcontrols over financial reporting as of the end of our fiscal year, including astatement as to whether or not our internal controls over financial reportingare effective.  This assessment must include disclosure of any materialweaknesses in our internal controls over financial reporting identified bymanagement.  This report will also contain a statement that ourindependent registered public accounting firm has issued an attestation reporton management’s assessment of internal controls. 

We are currently performing the system and processdocumentation needed to comply with Section 404 and the new standard issued bythe Public Company Accounting Oversight Board.  This processis both costly and challenging.  During this process, if we identify oneor more material weaknesses in our internal controls over financial reporting,we will be unable to assert that our internal controls are effective as ofMarch 31, 2005 (or if our independent registered public accounting firm isunable to attest that our management’s report is fairly stated or theyare unable to express an opinion on our management’s evaluation or on theeffectiveness of our internal controls), investors could lose confidence in theaccuracy and completeness of our financial reports, with in turn could have anadverse effect on our securities, including our common stock and ourconvertible notes.

**Item 3.**    **Quantitative andQualitative Disclosures about Market Risk**

There have been no materialchanges in our exposure to market risk as reported in Item 7A in our AnnualReport on Form 10-K for the fiscal year ended March 31, 2004.

**Item 4.**    **Controls and Procedures**

We maintaindisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-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 under the Exchange Act, isrecorded, processed, summarized and reported within the time periods specifiedin the SEC's rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.  In designing and evaluating the disclosure controls andprocedures, management recognized that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.

We carriedout 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 December 31, 2004, the end ofthe period covered by this report.  Based on that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective at the reasonable assurance level as of December 31, 2004.

There havebeen no changes in our internal control over financial reporting (as defined inRules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2004 that materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

**PART II – OTHER INFORMATION**

** Item 1.    LegalProceedings**

InFebruary 2004, we filed a patent infringement suit in the United StatesDistrict Court for the District of Minnesota against American Medical Systems,Inc. ("AMS").  The suitalleged that AMS was inducinginfringement and contributing to the infringement of our United States PatentNo. 6,638,211 B2 ("211 Patent"), a patent involving a method for thetreatment of urinary incontinence in women, by AMS offering for sale and selling its MonarcSubfacial Hammock in the United States.  

The suit sought******compensatory and trebledamages.  AMS subsequently served us with a Complaint for declaratoryjudgment, which AMS had filed earlier in the same DistrictCourt, seeking a declaration that AMS did not infringe any valid claim of the'211 Patent and that the claims of the '211 Patent were invalid andunenforceable against AMS.  Because the cases involved the same facts, theywere assigned to the same judge.  

On September 13, 2004, during the early stages ofthe litigation, we entered into a settlement agreement with AMS under which bothparties agreed to dismiss their respective lawsuits.  Under thesettlement agreement, the parties agreed to concurrently enter into anon-exclusive cross-license agreement covering patents and patent applicationsrelated to the field of female pelvic health.  Under the cross-license agreement,AMS made a one-time paymentto us in the amount of $2.5 million for access to the '211 Patent.

On March 4, 2004, John H. Alico, et. al., d/b/a PTFRoyalty Partnership ("PTF") filed a lawsuit against us in theBusiness Litigation Session of the Superior Court of Massachusetts, SuffolkCounty in which PTF alleges, among other things, breach of a merger agreementthat involved our acquisition of Mentor O&O, Inc. ("O&O"), anunrelated entity at that time, which was dated as of March 14, 1990 ("Merger Agreement") (prior to the merger,O&O had no affiliation with us).  PTF alleges that we breached theterms of the Merger Agreement by failing to exert commercially reasonable anddiligent efforts to obtain approval by the FDA for a product used for the treatmentof urinary incontinence and by failing to accurately account for and payroyalties due thereunder.  PTF seeks damages in excess of $18 million,which is the maximum amount of royalties PTF could have received under theMerger Agreement.  After almost ten years, in or about January 2001, weelected to discontinue pursuing FDA approval for the product, given the FDA'srepeated and ongoing concerns regarding the product's use for urinaryincontinence.  We believe we complied with all of our obligations underthe Merger Agreement, which specifically provided that we were under noobligation to engage in efforts or expenditures in respect of the product whichwe in good faith deemed to be inadvisable based on various factors. Accordingly, we intend to vigorously defend the lawsuit.  Dr. RichardYoung, a member of our Board of Directors since March 1990, is a partner of PTFand is a named plaintiff in the above action.  Dr. Young was a shareholderand principal of O&O prior to the merger and was instrumental in facilitatingthe transition after the merger.

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.

**Item 2.    UnregisteredSales of Equity Securities and Use of Proceeds**

IssuerPurchases of Equity Securities

Our Board of Directors has authorized a stockrepurchase program, primarily to offset the dilutive effect of our employeestock option plans, to provide liquidity to the market and to reduce theoverall number of shares outstanding.  All shares repurchased under theprogram are retired and are no longer deemed to be outstanding.  Thetiming of repurchases is subject to market conditions, cash availability, andblackout periods during which we are restricted fromrepurchasing shares.  We believe, but cannot be certain, that wewill continue to repurchase shares during fiscal 2005, although we cannotestimate or guarantee the amount of shares to be repurchased during thistime.  The table below sets forth certain share repurchase information forthe quarter ended December 31, 2004. 

**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

**Third Quarter 2005**

October 1 - October 31, 2004

- 

- 

- 

3,595 

November 1 - November 30, 2004

- 

- 

- 

3,595 

December 1 - December 31, 2004

2,342 

33.90 

2,342 

1,253 

**Total**

**2,342 **

** $**

**33.90 **

**2,342 **

**1,253 **

** **
****
a.      In the first quarter of fiscal 1996, our Board ofDirector's authorized an ongoing stock repurchase program.  The initialauthorization was for the repurchase of up to one million shares. Subsequently, the Board of directors has authorized the repurchase of anadditional 19.2 million shares including 2.2 million and 5.0 million shares inJuly 2003 and December 2003 respectively.  As of December 31, 2004, 1.3million shares remained authorized for repurchase. 

b.     We have not set a date for thestock repurchase program to expire. 

**Item 3.    Defaults Upon SeniorSecurities**

None. 

**Item 4.    Submissionof Matters to a Vote of Security Holders**

None.** **

**Item 5.    OtherInformation**On November 18, 2004, the Board of Directors resolved topay annual compensation to the chairperson of the Audit Committee of $5,000 inaddition to the compensation provided to all non-employee members of theboard.  The increase was made retroactively effective as of September 2004,with the appointment at that time of the chairperson of the Audit Committee.

**Item 6.    Exhibits**

               10.1 Written Description ofDirectors Fees Pursuant ToItem 601(b)(10)(iii)(A) of Regulation S-K.10.2  Summary of Material Contract to Repurchase Shares.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,filed herewith.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,filed herewith.

 

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

**MENTOR CORPORATION**

(Registrant)

Date:

February 7, 2005

By:

/s/JOSHUA H. LEVINE  Joshua H. Levine  Chief Executive Officer

Date:

February 7, 2005

By:

/s/LOREN L .MCFARLAND  Loren L. McFarland  Chief Financial Officer

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