##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended December 28, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No. 001-31744
 MENTOR CORPORATION
  Minnesota
    
    41-0950791(State or other jurisdiction of
    
    (IRS Employer Identification No.)incorporation or organization)
 201 Mentor Drive, Santa Barbara, California 93111
 (805) 879-6000
 þ o
 þ o o
 o þ




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##### 



MENTOR CORPORATION
  
 INDEX
 Part I. Financial InformationItem 1.
    
    Consolidated Financial Statements:Consolidated Balance Sheets (unaudited)  December 31, 2007 and March 31, 2007Consolidated Statements of Income (unaudited)  Three Months Ended December 31, 2007
and 2006Consolidated Statements of Income (unaudited)  Nine Months Ended December 31, 2007
and 2006Consolidated Statements of Cash Flows (unaudited)  Nine Months Ended December 31,
2007 and 2006Notes to Consolidated Financial Statements  December 31, 2007Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosures About Market RiskItem 4.
    
    Controls and ProceduresPart II. Other InformationItem 1.
    
    Legal ProceedingsItem 1A.
    
    Risk FactorsItem 2.
    
    Unregistered Sales of Equity Securities and Use of ProceedsItem 3.
    
    Defaults Upon Senior SecuritiesItem 4.
    
    Submission of Matters to a Vote of Security HoldersItem 5.
    
    Other InformationItem 6.
    
    ExhibitsExhibit 10.1Exhibit 10.2Exhibit 10.7Exhibit 10.8Exhibit 10.9Exhibit 10.10Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements
  
   December 31,
    
    
    March 31,(in thousands)
    
    2007
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    74,961
    
    
    $
    371,525Marketable securities
    
    
    31,686
    
    
    
    116,215Accounts receivable, net
    
    
    72,385
    
    
    
    65,419Inventories
    
    
    46,697
    
    
    
    38,073Deferred income taxes
    
    
    26,353
    
    
    
    25,892Prepaid income taxes
    
    
    9,789
    
    
    
    13,495Prepaid expenses and other
    
    
    7,994
    
    
    
    6,761Total current assets
    
    
    269,865
    
    
    
    637,380Property and equipment, net
    
    
    48,610
    
    
    
    34,683Intangible assets, net
    
    
    32,067
    
    
    
    15,963Goodwill, net
    
    
    46,197
    
    
    
    12,644Other assets
    
    
    6,681
    
    
    
    9,098Total assets
    
    $
    403,420
    
    
    $
    709,768
   3




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##### Table of Contents



December 31,
    
    
    March 31,(in thousands, except share data)
    
    2007
    
    
    2007Liabilities and shareholders equityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    38,709
    
    
    $
    32,147Sales returns
    
    
    14,881
    
    
    
    18,590Accrued compensation
    
    
    17,917
    
    
    
    14,022Deferred revenue
    
    
    12,443
    
    
    
    11,863Dividends payable
    
    
    6,745
    
    
    
    8,481Product liability reserves
    
    
    7,322
    
    
    
    6,555Short-term debt
    
    
    1,076
    
    
    
    Warranty reserve
    
    
    2,393
    
    
    
    2,989Interest payable
    
    
    2,063
    
    
    
    1,031Accrued royalties
    
    
    250
    
    
    
    230Other
    
    
    14,108
    
    
    
    16,823Total current liabilities
    
    
    117,907
    
    
    
    112,731Long-term accrued liabilities
    
    
    15,606
    
    
    
    12,169Convertible subordinated notes
    
    
    150,000
    
    
    
    150,000Other long-term debt
    
    
    2,735
    
    
    
    Commitments and contingenciesShareholders equity:Common stock, $.10 par value:Authorized -
150,000,000 shares; issued and outstanding
33,725,599 shares at December 31, 2007;
42,400,483 shares at March 31, 2007;
    
    
    3,373
    
    
    
    4,240Preferred stock, $.01 par value:Authorized - 25,000,000 shares; none issued and outstanding
    
    
    
    
    
    
    Accumulated other comprehensive income
    
    
    22,630
    
    
    
    11,342Retained earnings
    
    
    91,169
    
    
    
    419,286Total shareholders equity
    
    
    117,172
    
    
    
    434,868Total liabilities and shareholders equity
    
    $
    403,420
    
    
    $
    709,768
   4




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##### Table of Contents



(in thousands, except per share data)
    
    2007
    
    
    2006Net sales
    
    $
    92,860
    
    
    $
    75,309Cost of sales
    
    
    26,138
    
    
    
    18,925Gross profit
    
    
    66,722
    
    
    
    56,384Selling, general, and administrative
    
    
    38,884
    
    
    
    32,356Research and development
    
    
    9,690
    
    
    
    7,78048,574
    
    
    
    40,136Operating income from continuing operations
    
    
    18,148
    
    
    
    16,248Interest expense
    
    
    (1,249
    )
    
    
    (1,426
    )Interest income
    
    
    1,071
    
    
    
    6,346Other income (expense), net
    
    
    (452
    )
    
    
    (281
    )Income from continuing operations before income taxes
    
    
    17,518
    
    
    
    20,887Income taxes
    
    
    5,406
    
    
    
    6,137Income from continuing operations
    
    
    12,112
    
    
    
    14,750Loss from discontinued operations, net of tax benefit of $94 and $596,
respectively
    
    
    (170
    )
    
    
    (1,102
    )Loss on sale of discontinued operations, net of tax benefit of $13
    
    
    
    
    
    
    (20
    )Net income
    
    $
    11,942
    
    
    $
    13,628Basic earnings (loss) per shareContinuing operations
    
    $
    0.36
    
    
    $
    0.35Discontinued operations
    
    
    (0.01
    )
    
    
    (0.03
    )Basic earnings per share
    
    
    0.36
    
    
    
    0.33Diluted earnings (loss) per shareContinuing operations
    
    $
    0.32
    
    
    $
    0.32Discontinued operations
    
    
    (0.01
    )
    
    
    (0.03
    )Diluted earnings per share
    
    
    0.32
    
    
    
    0.29Dividends per share
    
    $
    0.20
    
    
    $
    0.18Weighted average shares outstandingBasic
    
    
    33,602
    
    
    
    41,916Diluted
    
    
    39,848
    
    
    
    49,144
   5




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##### Table of Contents



(in thousands, except per share data)
    
    2007
    
    
    2006Net sales
    
    $
    273,814
    
    
    $
    221,654Cost of sales
    
    
    72,842
    
    
    
    59,491Gross profit
    
    
    200,972
    
    
    
    162,163Selling, general, and administrative
    
    
    108,326
    
    
    
    90,792Research and development
    
    
    32,207
    
    
    
    24,654140,533
    
    
    
    115,446Operating income from continuing operations
    
    
    60,439
    
    
    
    46,717Interest expense
    
    
    (4,160
    )
    
    
    (4,707
    )Interest income
    
    
    7,218
    
    
    
    16,233Other income (expense), net
    
    
    (1,421
    )
    
    
    494Income from continuing operations before income taxes
    
    
    62,076
    
    
    
    58,737Income taxes
    
    
    18,191
    
    
    
    17,490Income from continuing operations
    
    
    43,885
    
    
    
    41,247(Loss) income from discontinued operations, net of tax (benefit) expense of
($152) and $2,760, respectively
    
    
    (275
    )
    
    
    1,342(Loss) gain on sale of discontinued operations, net of taxes of ($5) and
$138,341, respectively
    
    
    (12
    )
    
    
    222,162Net income
    
    $
    43,598
    
    
    $
    264,751Basic earnings (loss) per shareContinuing operations
    
    $
    1.22
    
    
    $
    0.98Discontinued operations
    
    
    (0.01
    )
    
    
    5.33Basic earnings per share
    
    
    1.21
    
    
    
    6.32Diluted earnings (loss) per shareContinuing operations
    
    $
    1.09
    
    
    $
    0.89Discontinued operations
    
    
    (0.01
    )
    
    
    4.57Diluted earnings per share
    
    
    1.08
    
    
    
    5.46Dividends per share
    
    $
    0.60
    
    
    $
    0.54Weighted average shares outstandingBasic
    
    
    36,033
    
    
    
    41,898Diluted
    
    
    42,499
    
    
    
    48,948
   6




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(in thousands)
    
    2007
    
    
    2006Operating Activities:Income from continuing operations
    
    $
    43,885
    
    
    $
    41,247Adjustments to derive cash flows from continuing operating activities:Depreciation
    
    
    6,024
    
    
    
    5,640Amortization
    
    
    3,734
    
    
    
    1,889Deferred income taxes
    
    
    (2,527
    )
    
    
    3,477Non-cash compensation
    
    
    9,128
    
    
    
    8,203Tax benefit from exercise of stock options
    
    
    2,054
    
    
    
    8,465Excess tax benefits from equity compensation
    
    
    (2,256
    )
    
    
    Loss on sale of assets
    
    
    29
    
    
    
    162Loss (gain) on long-term marketable securities, net
    
    
    (28
    )
    
    
    132Cash provided by (used in) changes in operating assets and liabilities:Accounts receivable
    
    
    (1,151
    )
    
    
    (2,351
    )Inventories
    
    
    3,360
    
    
    
    (725
    )Other current assets
    
    
    2,869
    
    
    
    285Accounts payable and accrued liabilities
    
    
    4,503
    
    
    
    3,933Income taxes payable
    
    
    
    
    
    
    (5,137
    )Net cash provided by continuing operating activities
    
    
    69,624
    
    
    
    65,220Net cash used for discontinued operating activities
    
    
    (287
    )
    
    
    (95,111
    )Net cash provided by (used for) operating activities
    
    
    69,337
    
    
    
    (29,891
    )Investing Activities:Purchases of property and equipment
    
    
    (13,683
    )
    
    
    (4,435
    )Purchases of intangibles
    
    
    
    
    
    
    (3,505
    )Purchases of marketable securities
    
    
    (44,150
    )
    
    
    (65,609
    )Sales of marketable securities
    
    
    128,294
    
    
    
    53,666Acquisition, net of cash acquired
    
    
    (53,437
    )
    
    
    Proceeds from the sale of the urology business
    
    
    
    
    
    
    458,066Other, net
    
    
    
    
    
    
    5Net cash provided by continuing investing activities
    
    
    17,024
    
    
    
    438,188Net cash used for discontinued investing activities
    
    
    
    
    
    
    (50
    )Net cash provided by investing activities
    
    
    17,024
    
    
    
    438,138Financing Activities:Repurchase of common stock
    
    
    (367,701
    )
    
    
    (88,198
    )Proceeds from exercise of stock options and ESPP
    
    
    4,982
    
    
    
    22,194Excess tax benefits from equity compensation
    
    
    2,256
    
    
    
    Dividends paid
    
    
    (22,780
    )
    
    
    (22,842
    )Repayments under line of credit agreements
    
    
    (420
    )
    
    
    (14,000
    )Net cash used for continuing financing activities
    
    
    (383,663
    )
    
    
    (102,846
    )Net cash used for financing activities
    
    
    (383,663
    )
    
    
    (102,846
    )Effect of currency exchange rates of continuing operations
    
    
    738
    
    
    
    413Effect of currency exchange rates of discontinued operations
    
    
    
    
    
    
    (120
    )(Decrease) increase in cash and cash equivalents
    
    
    (296,564
    )
    
    
    305,694Cash and cash equivalents at beginning of year
    
    
    371,525
    
    
    
    98,713Cash and cash equivalents at end of period
    
    $
    74,961
    
    
    $
    404,407
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MENTOR CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2007
 Note A  Business Activity
   
    
    Aesthetic and General Surgery  This segment includes surgically implantable
breast implants for plastic and reconstructive surgery, capital equipment and consumables
used for soft tissue aspiration or body contouring (liposuction), and facial rejuvenation
products including various types of products for skin restoration.
    
    Surgical Urology  This segment includes surgically implantable prostheses for
the treatment of impotence, surgically implantable incontinence products, urinary care
products, and brachytherapy seeds for the treatment of prostate cancer.
    
    Clinical and Consumer Healthcare  This segment includes catheters and other
products for the management of urinary incontinence and retention.
  Note B  Summary of Significant Accounting Policies
  Basis of Presentation
  Use of Estimates
   8




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Revenue Recognition
   Warranty Reserves
  Product Liability Reserves
   9




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Employee Stock-Based Payments
   Effects of Recent Accounting Pronouncements
        10




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Note C  Interim Reporting
 st
 Fiscal 2008
    
    Fiscal 2007First Quarter
    
    June 29, 2007
    
    June 30, 2006Second Quarter
    
    September 28, 2007
    
    September 29, 2006Third Quarter
    
    December 28, 2007
    
    December 29, 2006
   Note D  Cash Equivalents, Marketable Securities, and Long-Term Marketable Securities and
Investments
    11




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Gross
    
    
    Gross
    
    
    EstimatedAdjusted
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueCash balances
    
    $
    56,315
    
    
    $
    
    
    
    $
    
    
    
    $
    56,315Money market funds
    
    
    18,646
    
    
    
    
    
    
    
    
    
    
    
    18,646U.S. Government and agency obligations
    
    
    16,799
    
    
    
    6
    
    
    
    (1
    )
    
    
    16,804State and Municipal agency obligations
    
    
    14,596
    
    
    
    
    
    
    
    
    
    
    
    14,596Corporate debt securities
    
    
    285
    
    
    
    1
    
    
    
    
    
    
    
    286Total available-for-sale investments
    
    $
    106,641
    
    
    $
    7
    
    
    $
    (1
    )
    
    $
    106,647Included in cash and cash equivalents
    
    $
    74,961
    
    
    $
    
    
    
    $
    
    
    
    $
    74,961Included in current marketable securities
    
    
    31,680
    
    
    
    7
    
    
    
    (1
    )
    
    
    31,686Total available-for-sale investments
    
    $
    106,641
    
    
    $
    7
    
    
    $
    (1
    )
    
    $
    106,647
  Gross
    
    
    Gross
    
    
    EstimatedAdjusted
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueCash balances
    
    $
    146,552
    
    
    $
    
    
    
    $
    
    
    
    $
    146,552Money market funds
    
    
    224,973
    
    
    
    
    
    
    
    
    
    
    
    224,973U.S. Government and agency obligations
    
    
    23,923
    
    
    
    34
    
    
    
    (3
    )
    
    
    23,954State and Municipal agency obligations
    
    
    92,261
    
    
    
    1
    
    
    
    (1
    )
    
    
    92,261Total available-for-sale investments
    
    $
    487,709
    
    
    $
    35
    
    
    $
    (4
    )
    
    $
    487,740Included in cash and cash equivalents
    
    $
    371,525
    
    
    $
    
    
    
    $
    
    
    
    $
    371,525Included in current marketable securities
    
    
    116,184
    
    
    
    35
    
    
    
    (4
    )
    
    
    116,215Total available-for-sale investments
    
    $
    487,709
    
    
    $
    35
    
    
    $
    (4
    )
    
    $
    487,740
  Fair Values of Financial Instruments
   12




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Note E  Inventories
   (in thousands)
    
    December 31
    
    
    March 31Raw materials
    
    $
    8,075
    
    
    $
    5,924Work in process
    
    
    7,011
    
    
    
    4,961Finished goods on consignment
    
    
    16,277
    
    
    
    13,402Finished goods
    
    
    15,334
    
    
    
    13,786$
    46,697
    
    
    $
    38,073
 Note F  Property and Equipment
   (in thousands)
    
    December 31
    
    
    March 31Land
    
    $
    190
    
    
    $
    55Buildings
    
    
    12,837
    
    
    
    10,853Leasehold improvements
    
    
    23,904
    
    
    
    23,099Furniture, fixtures and equipment
    
    
    65,291
    
    
    
    59,708Construction in progress
    
    
    16,173
    
    
    
    4,217118,395
    
    
    
    97,932Less accumulated depreciation and amortization
    
    
    (69,785
    )
    
    
    (63,249
    )$
    48,610
    
    
    $
    34,683
 Note G  Product Warranties
   13




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Nine Months EndedDecember 31,(in thousands)
    
    2007
    
    
    2006Beginning warranty reserves
    
    $
    14,307
    
    
    $
    13,603Costs of warranty claims
    
    
    (2,005
    )
    
    
    (2,579
    )Accruals for product warranties
    
    
    3,030
    
    
    
    3,605Adjustments made to accruals related to pre-existing warranties
    
    
    (3,166
    )
    
    
    Ending warranty reserves
    
    $
    12,166
    
    
    $
    14,629
  Note H  Comprehensive Income
   Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    11,942
    
    
    $
    13,628
    
    
    $
    43,598
    
    
    $
    264,751Foreign currency translation adjustment
    
    
    3,407
    
    
    
    2,036
    
    
    
    11,314
    
    
    
    (6,110
    )Unrealized (gains) losses on marketable
securities and investment activities, net
    
    
    (14
    )
    
    
    (11
    )
    
    
    (28
    )
    
    
    89Comprehensive income
    
    $
    15,335
    
    
    $
    15,653
    
    
    $
    54,884
    
    
    $
    258,730
  14




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Note I  Income Taxes
  Accounting
for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109
     Note J  Earnings per Share
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net income from continuing operations: as reported
    
    $
    12,112
    
    
    $
    14,750
    
    
    $
    43,885
    
    
    $
    41,247Add back after tax interest expense on convertible notes
    
    
    802
    
    
    
    802
    
    
    
    2,406
    
    
    
    2,406Net income from continuing operations for numerator of
diluted earnings per share
    
    $
    12,914
    
    
    $
    15,552
    
    
    $
    46,291
    
    
    $
    43,653
 Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss) from discontinued operations
    
    $
    (170
    )
    
    $
    (1,122
    )
    
    $
    (287
    )
    
    $
    223,504Net income: as reported
    
    
    11,942
    
    
    
    13,628
    
    
    
    43,598
    
    
    
    264,751Add back after tax interest expense on convertible notes
    
    
    802
    
    
    
    802
    
    
    
    2,406
    
    
    
    2,406Net income for numerator of diluted earnings per share
    
    $
    12,744
    
    
    $
    14,430
    
    
    $
    46,004
    
    
    $
    267,157
  15




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Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,(in thousands, except per share data)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Weighted average outstanding shares: basic
    
    
    33,602
    
    
    
    41,916
    
    
    
    36,033
    
    
    
    41,898Restricted grants
    
    
    308
    
    
    
    185
    
    
    
    295
    
    
    
    112Shares issuable through exercise of stock options
    
    
    502
    
    
    
    869
    
    
    
    613
    
    
    
    1,065Shares issuable through convertible notes
    
    
    5,177
    
    
    
    5,153
    
    
    
    5,171
    
    
    
    5,150Shares issuable through warrants
    
    
    259
    
    
    
    1,021
    
    
    
    387
    
    
    
    723Weighted average outstanding shares: diluted
    
    
    39,848
    
    
    
    49,144
    
    
    
    42,499
    
    
    
    48,948Basic earnings (loss) per shareContinuing operations
    
    $
    0.36
    
    
    $
    0.35
    
    
    $
    1.22
    
    
    $
    0.98Discontinued operations
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    (0.01
    )
    
    $
    5.33Basic earnings per share
    
    $
    0.36
    
    
    $
    0.33
    
    
    $
    1.21
    
    
    $
    6.32Diluted earnings (loss) per shareContinuing operations
    
    $
    0.32
    
    
    $
    0.32
    
    
    $
    1.09
    
    
    $
    0.89Discontinued operations
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    (0.01
    )
    
    $
    4.57Diluted earnings per share
    
    $
    0.32
    
    
    $
    0.29
    
    
    $
    1.08
    
    
    $
    5.46
 Employee stock options, restricted shares and performance stock units
  Convertible subordinated notes and warrants
    16




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##### Table of Contents



-0-,
 Note K  Stock Options, Restricted Stock and Employee Stock Purchase Plan
 Employee Stock Purchase Plan
    The Companys Long-Term Incentive Plans
     17




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##### Table of Contents



Restricted Stock
   Weighted-averageNonvested shares (in thousands, except per share amounts)
    
    Shares
    
    
    grant date fair valueNonvested at March 31, 2007
    
    
    346
    
    
    $
    47.71Granted
    
    
    48
    
    
    
    40.73Restrictions lapsed
    
    
    (71
    )
    
    
    48.05Forfeited
    
    
    (29
    )
    
    
    41.64Nonvested at December 31, 2007
    
    
    294
    
    
    $
    46.24
 Options
   18




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##### Table of Contents



Weighted-Weighted-
    
    
    averageaverage
    
    
    remaining
    
    
    Aggregateexercise
    
    
    contractual
    
    
    intrinsic(in thousands, except per share amounts and years)
    
    Options
    
    
    price
    
    
    life (Yrs)
    
    
    valueBalance outstanding at March 31, 2007
    
    
    2,261
    
    
    $
    28.13Granted
    
    
    2,719
    
    
    
    48.26Exercised
    
    
    (316
    )
    
    
    19.56Forfeited/expired
    
    
    (77
    )
    
    
    37.75Balance outstanding at December 31, 2007
    
    
    4,587
    
    
    $
    40.51
    
    
    
    6.87
    
    
    $
    21,157Exercisable at December 31, 2007
    
    
    1,264
    
    
    $
    23.96
    
    
    
    5.30
    
    
    $
    19,564
   December 31,
    
    
    December 31,2007
    
    
    2006Risk-free interest rate
    
    
    4.3
    %
    
    
    4.6
    %Expected life (in years)
    
    
    5.0
    
    
    
    5.1Expected volatility
    
    
    33.9
    %
    
    
    30.0
    %Expected dividend yield
    
    
    1.9
    %
    
    
    1.4
    %
 Performance Award Program
    19




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##### Table of Contents



Fair marketvalue at dateNonvested performance stock units (in thousands)
    
    Shares
    
    
    of grantNonvested at March 31, 2007
    
    
    307
    
    
    $
    6,520Forfeited
    
    
    (5
    )
    
    
    (109
    )Nonvested at December 31, 2007
    
    
    302
    
    
    $
    6,411
  Three Months Ended
    
    
    Nine months EndedDecember 31
    
    
    December 31,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Stock options
    
    $
    2,516
    
    
    $
    1,297
    
    
    $
    4,252
    
    
    $
    4,068Restricted stock
    
    
    275
    
    
    
    1,069
    
    
    
    3,279
    
    
    
    2,787Performance units
    
    
    459
    
    
    
    655
    
    
    
    1,597
    
    
    
    1,348Total stock-based compensation expense, pre-tax
    
    
    3,250
    
    
    
    3,021
    
    
    
    9,128
    
    
    
    8,203Tax benefit from stock-based compensation expense
    
    
    958
    
    
    
    900
    
    
    
    2,937
    
    
    
    2,289Total stock-based compensation expense, net of tax
    
    $
    2,292
    
    
    $
    2,121
    
    
    $
    6,191
    
    
    $
    5,914
   Note L  Share Repurchase Program
    20




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Note M
 Long-Term Debt
 3 4
  
    
    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;
  21




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##### Table of Contents




    
    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 has called 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.
       22




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  
 Note N  Short Term Bank Borrowings
 Credit Agreement
        23




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Other Financing
      
   
  Note O  Related Party Transactions
   24




---



##### Table of Contents



Note P  Discontinued Operations
   Note Q  Postretirement Benefit Plan
  Note R  Contingencies
    25




---



##### Table of Contents



Note S  Business Combinations
 Perouse Acquisition
    26




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##### Table of Contents



(In thousands)Cash
    
    $
    436Accounts receivable
    
    
    3,508Inventory
    
    
    8,953Prepaid expenses and other current assets
    
    
    798Total current assets
    
    
    13,695Property, plant and equipment
    
    
    4,544Intangible assets
    
    
    18,423Goodwill
    
    
    31,064Other assets
    
    
    39Total assets acquired
    
    $
    67,765Liabilities associated with acquisition:Accounts payable and accrued liabilities
    
    $
    7,416Other long-term liabilities
    
    
    6,476Total liabilities assumed
    
    $
    13,892Net assets acquired
    
    $
    53,873
   
 Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
 Cautionary Statement:
 The following discussion and analysis should be read in conjunction with our Unaudited Consolidated
Financial Statements and related Notes thereto contained elsewhere in this Report. The information
contained in this Quarterly Report on Form 10-Q is not a complete description of our business or
the risks associated with an investment in our securities. We urge you to carefully review and
consider the various disclosures made by us in this Report and in our other reports filed with the
Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year
ended March 31, 2007, and subsequent reports on Form 8-K , both of which discuss our business in
greater detail.
 The section entitled Risk Factors set forth in Item 1A under Part II  Other Information, and
similar discussions in our other SEC filings, discuss some of the important risk factors that may
affect our business, results of operations and financial condition. These risks, in addition to
the other information in this Report and in our other filings with the SEC, should be carefully
considered before deciding to purchase, hold or sell our securities.
  27




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Various statements in this Report, in future filings by us with the SEC, in our press releases and
in our oral statements made by or with the approval of authorized personnel, constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements are based on current expectations and are indicated by words or
phrases such as anticipate, estimate, expect, intend, project, plan, believe, will,
seek, and similar words or phrases and involve known and unknown risks, uncertainties and other
factors which may cause actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by such forward-looking
statements. Some of the factors that could affect our financial performance or cause actual
results to differ from our estimates in, or underlying, such forward-looking statements are set
forth in Part II under Item 1A -Risk Factors or elsewhere in this Report. Forward-looking
statements include statements regarding, among other things:
 
    
    our anticipated operating results for fiscal year 2008;
    
    our expectations regarding future developments in the markets in which we compete and
intend to compete;
    
    our anticipated growth strategies;
    
    our intention to introduce or seek approval for new products;
    
    our ability to continue to meet United States Food and Drug Administration (FDA) and
other regulatory requirements;
    
    our anticipated outcomes of regulatory reviews;
    
    our anticipated outcomes of litigation; and
    
    our ability to replace sources of supply without disruption and regulatory delay.
 These forward-looking statements are based on our expectations and are subject to a number of risks
and uncertainties, many of which are beyond our control. Actual results could differ materially
from these forward-looking statements as a result of the facts described in Part II under Item 1A
- Risk Factors or elsewhere including, among others, problems with suppliers, changes in the
competitive marketplace, significant product liability or other claims, product recalls,
difficulties with new product development, the introduction of new products by our competitors,
changes in the economy, FDA or other regulatory delay in approval or rejection of new or existing
products, changes in Medicare, Medicaid or third-party reimbursement policies, changes in
government regulations, use of hazardous or environmentally sensitive materials, inability to
implement new information technology systems, inability to integrate new acquisitions, and other
events. We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. In light of these risks and
uncertainties, we cannot assure you that the forward-looking information contained in this Form
10-Q will, in fact, transpire.
 Company Overview
    28




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Urology Summary
   Recent Events
   29




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APPLICATION OF CRITICAL ACCOUNTING POLICIES
   Revenue Recognition
   Accounts Receivable
   30




---



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Inventories
  Warranty Reserves
  Product Liability Reserves
   31




---



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Goodwill and Intangible Asset Impairment
  Stock-Based Compensation Expense
     32




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RESULTS OF OPERATIONS
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    28.1
    
    
    
    25.1
    
    
    
    26.6
    
    
    
    26.8Gross profit
    
    
    71.9
    
    
    
    74.9
    
    
    
    73.4
    
    
    
    73.2Selling, general and administrative expense
    
    
    41.9
    
    
    
    43.0
    
    
    
    39.6
    
    
    
    41.0Research and development expense
    
    
    10.4
    
    
    
    10.3
    
    
    
    11.8
    
    
    
    11.1Operating income
    
    
    19.6
    
    
    
    21.6
    
    
    
    22.0
    
    
    
    21.1Interest expense
    
    
    (1.3
    )
    
    
    (1.9
    )
    
    
    (1.5
    )
    
    
    (2.1
    )Interest income
    
    
    1.2
    
    
    
    8.4
    
    
    
    2.6
    
    
    
    7.3Other income (expense), net
    
    
    (0.5
    )
    
    
    (0.3
    )
    
    
    (0.5
    )
    
    
    0.2Income from continuing operations before
income taxes
    
    
    19.0
    
    
    
    27.8
    
    
    
    22.6
    
    
    
    26.5Income taxes
    
    
    5.8
    
    
    
    8.2
    
    
    
    6.6
    
    
    
    7.9Net income from continuing operations
    
    
    13.2
    
    
    
    19.6
    
    
    
    16.0
    
    
    
    18.6Net income (loss) from discontinued operations
    
    
    (0.2
    )
    
    
    (1.5
    )
    
    
    (0.1
    )
    
    
    0.6Gain (loss) on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.2Net income
    
    
    13.0
    %
    
    
    18.1
    %
    
    
    15.9
    %
    
    
    119.4
    %
 For the three month period ended December 31, 2007 compared to the three month period ended
December 31, 2006
 Net Sales
    Ô
  33




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Cost of Sales and Gross Profit
  Selling, General and Administrative
  Research and Development
  Interest and Other Income and Expense
 3 4
   Income Taxes
   34




---



##### Table of Contents



Income, Net of Income Taxes and Earnings per Share from Continuing Operations
  Income from Discontinued Operations, Net of Income Taxes
  For the nine month period ended December 31, 2007, compared to the nine month period ended December
31, 2006
 Net Sales
   Ô
 Cost of Sales and Gross Profit
   35




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##### Table of Contents



Selling, General and Administrative
  Research and Development
  Interest and Other Income and Expense
 3 4
   Income Taxes
   36




---



##### Table of Contents



Income, Net of Income Taxes, and Earnings per Share from Continuing Operations
  Income from Discontinued Operations, Net of Income Taxes
  Gain on Sale of Discontinued Operations, Net of Income Taxes
  FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
     37




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##### Table of Contents



December 31,
    
    
    March 31,(in thousands)
    
    2007
    
    
    2007Cash and cash equivalents
    
    $
    74,961
    
    
    $
    371,525Marketable securities
    
    
    31,686
    
    
    
    116,215Total cash, cash equivalents and marketable securities
    
    $
    106,647
    
    
    $
    487,740Percentage of total assets
    
    
    26
    %
    
    
    69
    %
 Cash Flow Changes
  Nine Months EndedDecember 31,(in thousands)
    
    2007
    
    
    2006Net cash provided by continuing operating activities
    
    $
    69,624
    
    
    $
    65,220Net cash provided by continuing investing activities
    
    
    17,024
    
    
    
    438,188Net cash used for continuing financing activities
    
    
    (383,663
    )
    
    
    (102,846
    )Net cash used for discontinued operations
    
    
    (287
    )
    
    
    (95,281
    )Effect of currency exchange rates on cash and cash equivalents
    
    
    738
    
    
    
    413Increase (decrease) in cash and cash equivalents
    
    $
    (296,564
    )
    
    $
    305,694
 Cash Provided by Operating Activities of Continuing Operations
  Cash Provided by (Used for) Investing Activities of Continuing Operations
   38




---



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Perouse Acquisition
   Cash (Used) Provided by Discontinued Operations
  Cash Used for Financing Activities of Continuing Operations
       39




---



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Financing Arrangements
 Senior Credit Facility
      40




---



##### Table of Contents



Other Financing
      
   
   
  41




---



##### Table of Contents



Convertible Subordinated Notes
 3 4
    
 Item 3.  Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4.  Controls and Procedures
   42




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1.  Legal Proceedings
  
 Item 1A.  Risk Factors
  The FDA approval of our MemoryGel breast implants in the U.S. is conditioned on our compliance
with several significant post-approval conditions, including conducting a large scale, 10-year
study of patients who receive the implants. These conditions may adversely affect the market
acceptance and usage rates of our MemoryGel implants, may impact our ability to compete, and may
cause us to incur significant unanticipated expenses. Our failure to comply with these
conditions in a timely manner may cause delay in market acceptance or result in our inability to
continue to sell our MemoryGel implants in the U.S.
 Ô
   43




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®
 Significant product liability or other claims or product recalls may force us to pay substantial
damage awards and other expenses that could exceed our accruals and insurance coverages.
Unexpected increases in the number of limited warranty claims for our products may surpass our
product warranty reserves.
   We are subject to substantial government regulation, which could have a material adverse effect on
our business. Any delay or failure to gain regulatory approval for our products, or the ability of
our competitors to get new products, which compete with our existing products, approved before us,
could also materially adversely affect our business.
   44




---



##### Table of Contents



 
     45




---



##### Table of Contents



If we are unable to continue to develop and commercialize new technologies and products, we may
experience a decrease in demand for our products, or our products could become obsolete.
    If we are unable to compete effectively with existing or new competitors, we could experience price
reductions, reduced demand for our products, reduced margins and loss of market share, and our
business, results of operations, and financial condition would be adversely affected.
   
    
    developing and bringing new products to market before others or providing benefits
superior to those of existing products;
    
    developing new technologies to improve existing products;
    
    developing new products at a lower cost to provide the same benefits as existing
products at the same or lower price;
    
    creating or entering new markets with existing products;
    
    increasing or improving service-related programs;
    
    advertising in a manner that creates additional awareness and demand; and
    
    marketing and selling bundled products.
    46




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##### Table of Contents



If we suffer negative publicity concerning the safety of our products, our sales may be harmed and
we may be forced to withdraw products.
  If changes in the economy and consumer spending reduce consumer demand for our products, our sales
and profitability could suffer.
  If we are unable to implement new information technology systems or upgrade existing systems, our
ability to manufacture and sell products, maintain regulatory compliance, and manage and report our
business activities may be impaired, delayed, or diminished, which would cause substantial business
interruption and loss of sales, customers, and profits.
   47




---



##### Table of Contents



If we are unable to acquire companies, businesses or technologies as part of our growth strategy or
to successfully integrate past acquisitions, our growth, sales, and profitability could suffer.
   We agreed to indemnify Coloplast against specified losses in connection with Coloplasts purchase
of our Urology Business, and any demands for indemnification may result in expenses we do not
anticipate and distract the attention of our management from our continuing businesses. In
addition, we retain responsibility for various legal liabilities related to the Urology business.
  We may not realize some of the benefits of the Coloplast transaction.
  We depend upon our key personnel and our ability to attract, train, and retain employees.
   48




---



##### Table of Contents



State legislatures and taxing authorities may create new laws or change their interpretation of
existing state and local tax laws that may affect future product demand or create unforeseen tax
liabilities.
  If our intellectual property rights do not adequately protect our products or technologies, others
could compete against us more directly, which would hurt our profitability.
   If third parties claim we are infringing their intellectual property rights, we could suffer
significant litigation, indemnification, or licensing expenses or be prevented from marketing our
products.
  We depend on the continued use of our manufacturing plants and on single and sole source suppliers
for certain raw materials and licensed or manufactured products, and the loss of, or disruption to,
any plant or supplier could adversely affect our ability to manufacture or sell many of our
products.
 
  49




---



##### Table of Contents



Our international business exposes us to a number of risks.
  
    
    foreign government regulation of medical products;
    
    product liability, intellectual property and other claims;
    
    new U.S. export or local market import license requirements;
    
    political or economic instability in our target markets;
    
    trade restrictions;
    
    changes in tax laws and tariffs;
    
    managing foreign distributors and manufacturers;
    
    managing foreign branch offices and staffing; and
    
    competition.
 Health care reimbursement or reform legislation could materially affect our business.
   50




---



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If our use of hazardous materials results in contamination or injury, we could suffer significant
financial loss.
  Clostridium botulinum
   Changes in financial accounting standards may cause adverse unexpected revenue or expense
fluctuations and affect our reported results of operations.
  Our operating results may fluctuate substantially, and could precipitate unexpected movement in the
price of our common stock and convertible notes.
 3 4
  51




---



##### Table of Contents



Hedging transactions and other transactions may affect the value of the notes.
 3 4
 Our Restated Articles of Incorporation provides our Board with the authority to issue blank check
preferred stock.  The issuance of blank check preferred stock could adversely affect the market
price and the rights and powers, including voting rights, of our common stock, and decrease the
amount of earnings and assets allocable to or available for distribution to holders of our common
stock.
        52




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##### Table of Contents



Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities
      53




---



##### Table of Contents



ISSUER PURCHASES OF EQUITY SECURITIES (1) (2) (3)
 Total Number
    
    
    Maximum Numberof Shares
    
    
    of Shares that MayTotal Number
    
    
    
    
    
    
    Purchased as
    
    
    Yet Be Purchased(in thousands
    
    of Shares
    
    
    Average Price
    
    
    Part of Publicly
    
    
    Under the Plansexcept per share amounts)
    
    Purchased
    
    
    Paid per Share
    
    
    Announced Plans
    
    
    or ProgramsOctober 1  October 31, 2007
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    1,074November 1  November 30, 2007
    
    
    263
    (4)
    
    
    40.47
    
    
    
    263
    
    
    
    811December 1  December 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    811Total
    
    
    263
    
    
    $
    40.47
    
    
    
    263
    
    
    
    811
 (1)
    
    During the period, no shares were purchased under the 2007 10b5 Plan.(2)
    
    In the first quarter of fiscal 1996, our Board of Directors authorized an ongoing stock
repurchase program. The initial authorization was for the repurchase of up to one million shares.
Subsequently, the Board of Directors has authorized the repurchase of an additional 31.0 million
shares, including 5.0 million, 1.7 million and 5.0 million shares in June 2007, June 2006 and March
2006, respectively. These share amounts have been adjusted for the two-for-one stock split
affected December 2002.(3)
    
    We have not set a date for the stock repurchase program to expire.(4)
    
    Balance includes approximately 8,000 shares repurchased for payment of withholding taxes
upon the vesting of certain restricted stock grants.
 
 Item 3.  Defaults Upon Senior Securities
  
 Item 4.  Submission of Matters to a Vote of Security Holders
  
 Item 5.  Other Information
   54




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Item 6.  Exhibits
 3.1
    
    Composite Restated Articles of Incorporation of Mentor Corporation dated December 12, 2002
 Incorporated by reference to Exhibit 3.1 of the Annual Report on Form 10-K for the year ended March
31, 2003.3.2
    
    Articles of Amendment to Restated Articles of Incorporation of Mentor Corporation  Incorporated by
reference to Exhibit 3.1 of the Registrants Current Report on Form 8-K filed on October 3, 2007.3.3
    
    Amended and Restated Bylaws of Mentor Corporation dated September 17, 2007  Incorporated by reference
to Exhibit 3.2 of the Registrants Current Report on Form 8-K filed on September 21, 2007.4.1
    
    Indenture 2 3/4 % Convertible Subordinated Notes Due 2024, dated December 22, 2003  Incorporated by
reference to Exhibit 4.1 of the Registrants Quarterly Report on Form 10-Q for the quarter ended
December 31, 2003.10.1*
    
    Mentor Corporation 1991 Long-Term Incentive Plan as amended and restated as of September 17, 2007.10.2*
    
    Mentor Corporation 2005 Long-Term Incentive Plan as amended and restated as of September 17, 2007.10.3*
    
    Separation and Release Agreement dated October 27, 2007, between Mentor Corporation and Loren L.
McFarland  Incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K
filed on October 30, 2007.10.4*
    
    Consulting Agreement dated October 27, 2007, between Mentor Corporation and Loren L. McFarland 
Incorporated by reference to Exhibit 10.2 of the Registrants Current Report on Form 8-K filed on
October 30, 2007.10.5*
    
    Form of Indemnity Agreement between Mentor Corporation and Michael ONeill  Incorporated by reference
to Exhibit 10.1 of the Registrants Current Report on Form 8-K filed on November 13, 2007.10.6*
    
    Employment Agreement, dated November 13, 2007, between Mentor Corporation and Michael ONeill 
Incorporated by reference to Exhibit 10.2 of the Registrants Current Report on Form 8-K filed on
November 13, 2007.10.7*
    
    Amended and Restated Employment Agreement with Joshua Levine dated as of December 21, 2007.10.8*
    
    Amended and Restated Employment Agreement with Michael ONeill dated as of December 21, 2007.10.9*
    
    Amended and Restated Employment Agreement with Joseph A. Newcomb dated as of December 21, 2007.10.10*
    
    Amended and Restated Employment Agreement with Edward S. Northup dated as of December 21, 2007.31.1
    
    Certification of Principal Executive Officer Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002.32.1
    
    CEO Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of The
Sarbanes-Oxley Act of 2002.32.2
    
    CFO Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of The
Sarbanes-Oxley Act of 2002.
 *
    
    Management contract or compensatory plan or arrangement.
  55




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SIGNATURES
  MENTOR CORPORATION
  MENTOR CORPORATIONDATE: February 6, 2008

/s/ JOSHUA H. LEVINEJoshua H. LevinePresident and Chief Executive Officer(Principal Executive Officer) DATE: February 6, 2008

/s/
MICHAEL ONEILLMichael ONeillVice President, Chief Financial Officer and Treasurer(Principal Financial Officer)  56




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description3.1
    
    Composite Restated Articles of Incorporation of Mentor Corporation dated December 12, 2002
 Incorporated by reference to Exhibit 3.1 of the Annual Report on Form 10-K for the year ended March
31, 2003.3.2
    
    Articles of Amendment to Restated Articles of Incorporation of Mentor Corporation  Incorporated by
reference to Exhibit 3.1 of the Registrants Current Report on Form 8-K filed on October 3, 2007.3.3
    
    Amended and Restated Bylaws of Mentor Corporation dated September 17, 2007  Incorporated by reference
to Exhibit 3.2 of the Registrants Current Report on Form 8-K filed on September 21, 2007.4.1
    
    Indenture 2 3/4 % Convertible Subordinated Notes Due 2024, dated December 22, 2003  Incorporated by
reference to Exhibit 4.1 of the Registrants Quarterly Report on Form 10-Q for the quarter ended
December 31, 2003.10.1*
    
    Mentor Corporation 1991 Long-Term Incentive Plan as amended and restated as of September 17, 2007.10.2*
    
    Mentor Corporation 2005 Long-Term Incentive Plan as amended and restated as of September 17, 2007.10.3*
    
    Separation and Release Agreement dated October 27, 2007, between Mentor Corporation and Loren L.
McFarland  Incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K
filed on October 30, 2007.10.4*
    
    Consulting Agreement dated October 27, 2007, between Mentor Corporation and Loren L. McFarland 
Incorporated by reference to Exhibit 10.2 of the Registrants Current Report on Form 8-K filed on
October 30, 2007.10.5*
    
    Form of Indemnity Agreement between Mentor Corporation and Michael ONeill  Incorporated by reference
to Exhibit 10.1 of the Registrants Current Report on Form 8-K filed on November 13, 2007.10.6*
    
    Employment Agreement, dated November 13, 2007, between Mentor Corporation and Michael ONeill 
Incorporated by reference to Exhibit 10.2 of the Registrants Current Report on Form 8-K filed on
November 13, 2007.10.7*
    
    Amended and Restated Employment Agreement with Joshua Levine dated as of December 21, 2007.10.8*
    
    Amended and Restated Employment Agreement with Michael ONeill dated as of December 21, 2007.10.9*
    
    Amended and Restated Employment Agreement with Joseph A. Newcomb dated as of December 21, 2007.10.10*
    
    Amended and Restated Employment Agreement with Edward S. Northup dated as of December 21, 2007.31.1
    
    Certification of Principal Executive Officer Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002.32.1
    
    CEO Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of The
Sarbanes-Oxley Act of 2002.32.2
    
    CFO Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of The
Sarbanes-Oxley Act of 2002.
 *
    
    Management contract or compensatory plan or arrangement.
  57