**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**Washington,D.C. 20549

 

**FORM 10-Q**

 (Mark One)

x  QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly periodended December 31, 2002

or

o  TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition periodfrom ____ to _____

Commission File No. 0-7955

MENTOR CORPORATION (Exact Name of Registrant as Specified in its Charter)

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

201 Mentor Drive, SantaBarbara, California 93111(Address of Principal Executive Offices) (Zip Code)Registrant's telephone number including area code:  805/879-6000

Securities registeredpursuant to Section 12(b) of the Act:  NONE

Securities registeredpursuant to Section 12(g) of the Act:

Common Shares, par value$.10 per share

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or such shorter period that the Registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes  x    Noo

Indicate by check mark whether the Registrant is an accelerated filer (asdefined in Rule 12b-2 of the Exchange Act).  Yes  x    Noo

As of February 13, 2003 there were approximately 46,362,868Common Shares outstanding.

**MENTOR CORPORATION**
INDEX
Part I. Financial Information 

Item  1.

Consolidated  Financial Statements (unaudited) 

Consolidated  Balance Sheets - December 31, 2002 and March 31, 2002

Consolidated  Statements of Income - Three Months Ended December 31, 2002 and 2001

Consolidated  Statements of Income - Nine Months Ended December 31, 2002 and 2001

Condensed  Consolidated Statements of Cash Flows -   Nine Months Ended December 31, 2002 and 2001

Notes  to Condensed Consolidated Financial Statements - December 31, 2002

Item  2.

Management's  Discussion and Analysis of Results of Operations and Financial Condition

Item  3.

Quantitative  and Qualitative Disclosures About Market Risk

Part II. Other Information 

Item  1.

Legal  Proceedings 

Item  2.

Changes  in Securities 

Item  3.

Defaults  upon Senior Securities 

Item  4.

Submission  of Matters to a Vote of Security Holders 

Item  5.

Other  Information 

Item  6.

Exhibits  and Reports on Form 8-K 

Signatures 

List of Exhibits

99.1  CEO Certification Pursuant To 18 U.S.C. Section 1350,  As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002  99.2 CFO Certification Pursuant To 18 U.S.C. Section 1350,  As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002

Page 2
PART I - FINANCIAL INFORMATION
**Item 1.****  ConsolidatedFinancial Statements**

Mentor CorporationConsolidated Balance Sheets  (Unaudited)

(in thousands)

**December  31, 2002**

March 31,   2002

**Assets**

** **

** **

Current assets:

** **

** **

  Cash and cash equivalents

**$           77,740**

$           60,398

  Marketable securities

**8,005**

14,106

  Accounts receivable, net 

**66,255**

64,786

  Inventories

**59,967**

47,404

  Deferred income taxes

**13,946**

11,950

  Prepaid expenses and other

**10,350**

12,488

Total current assets

**236,263**

211,132

 

** **

 

Property and equipment, net

**64,732**

54,656

Intangible assets, net

**36,158**

37,588

Goodwill, net

**14,718**

9,155

Long-term marketable securities and  investments

**12,784**

11,752

Other assets

**266**

353

 

**$        364,921**

$        324,636

See notes to condensed  consolidated financial statements.

** **

 

Page 3

Mentor Corporation  Consolidated Balance Sheets  (Unaudited)

(in thousands)

**December  31, 2002**

March 31, 2002

**Liabilities and shareholders' equity**

** **

 

Current liabilities:

** **

 

  Accounts payable

**$        15,017 **

$     17,558 

  Warranty and related reserves

**18,901 **

  16,252 

  Accrued compensation

**15,611 **

15,129 

  Short-term bank borrowings

**7,919 **

9,470 

  Sales returns

**9,209 **

7,806 

  Income taxes payable

**- **

3,979 

  Current portion of purchase  price related to acquired         technologies and acquisitions

**4,675 **

  4,675 

  Dividends payable

**927 **

704 

  Accrued royalties

**687 **

637 

  Other

**12,620 **

8,366 

Total current liabilities

**85,566 **

84,576 

  Deferred income taxes

**2,034 **

  3,009 

Long-term accrued liabilities

**        14,996 **

12,873 

** **

 

Commitments and contingencies

** **

 

 

** **

 

Shareholders' equity:

** **

 

  Common Stock, $.10 par value:

** **

 

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

** **

 

    46,342,032 shares  at December 31, 2002;

** **

 

    46,945,904 shares  at March 31, 2002;

**4,634 **

4,695 

  Capital in excess of par value

**-**

**-   **

  Foreign currency translation  adjustments

**4,113 **

(6,926)

  Net unrealized gains (losses)  on securities

**(1,318)**

439 

  Retained earnings

**254,896 **

225,970 

 

**262,325 **

224,178 

 

**$     364,921 **

$    324,636 

See notes to condensed  consolidated financial statements.

 

 

Page 4

Mentor  CorporationConsolidated Statements of Income  Three Months Ended December 31, 2002 and 2001  (Unaudited)

 

Three Months Ended  December 31,

(in thousands, except per share data)

**2002**

2001

Net sales

**$       94,039 **

$       78,975 

** **

 

Costs and expenses:

** **

 

   Cost of sales

**38,167 **

32,105 

   Selling, general, and administrative

**32,194 **

27,304 

   Research and development

**5,799 **

4,779 

 

**76,160 **

64,188 

 

** **

 

Operating income

**17,879 **

14,787 

   Interest expense

**(245)**

(152)

   Interest income

**599 **

565 

   Other income (expense), net

**526 **

(826)

Income before income taxes

**18,759 **

14,374 

Income taxes

**5,777 **

4,557 

Net income

**$        12,982 **

$        9,817 

** **

 

Basic earnings per share

**$            0.28 **

$           0.21 
  Diluted earnings per share
**$            0.27 **

$           0.20 
         
See notes to condensed  consolidated financial statements.

 

 

Page 5 

****  Mentor  CorporationConsolidated Statements of Income  Nine Months Ended December 31, 2002 and 2001  (Unaudited)
 

Nine Months Ended  December 31,

(in thousands, except per share data)

**2002**

2001

Net sales

**$      281,302 **

$      234,466 

** **

 

Costs and expenses:

** **

 

   Cost of sales

**114,081 **

96,454 

   Selling, general, and administrative

**94,236 **

81,049 

   Research and development

**16,538 **

16,021 

 

**224,855 **

193,524 

 

** **

 

Operating income

**56,447 **

40,942 

   Interest expense

**(782)**

(659)

   Interest income

**1,831 **

1,866 

   Other income, net

**1,731 **

(230)

Income before income taxes

**59,227 **

41,919 

Income taxes

**16,990 **

13,323 

Net income

**$        42,237 **

$       28,596 

** **

 

Basic earnings per share

**$            0.90 **

$           0.60 

Diluted earnings per share

**$            0.87 **

$           0.58 
      
See notes to condensed  consolidated financial statements.

 

 

Page 6 

Mentor  CorporationConsolidated Statements of Cash Flows  Nine Months Ended December 31, 2002 and 2001  (Unaudited)

(in thousands)

**2002**

2001

**Cash From Operating Activities:**

** **

 

Net income

**$  42,237 **

$   28,596 

Adjustments to derive cash flows from  operating activities:

** **

 

  Depreciation 

**8,884**

7,330 

  Amortization

**2,915**

2,846 

  Deferred income taxes 

**(2,481)**

689 

  Tax benefit from exercise of  stock options

**2,567**

2,193 

  Loss (gain) on sale of assets

**(413)**

379 

  Imputed interest on long-term  liabilities

**457**

351 

  (Gain) loss on long-term  marketable securities 

**(403)**

1,021 

 Foreign  currency transaction (gain) loss

**(247)**

83 

 Changes in operating assets  and liabilities:

** **

 

     Accounts  receivable

**2,275**

308 

     Inventories  and other current assets

**(3,275)**

(2,291)

     Accounts  payable and accrued liabilities

**6,489**

9,763 

     Income taxes  payable

**(4,006)**

27 

Net cash provided by operating activities

**54,999**

51,295 

**Cash From Investing Activities:**

** **

 

Purchases of property and equipment

**(11,960)**

(11,455)

Purchases of intangibles

**(808)**

(4,297)

Purchases of marketable securities

**(3,215)**

(1,192)

Sales of marketable securities

**6,277**

(8,914)

Acquisitions, net of cash acquired

**(10,603)**

- 

Proceeds from sale of property, equipment  and intangibles

**500**

11 

Other, net

- 

6 

Net cash used for investing activities

**(19,809)**

(25,841)

**Cash From Financing Activities:**

** **

 

Repurchase of common stock

**(19,997)**

(18,715)

Proceeds from exercise of stock options

**6,358**

3,173 

Dividends paid

**(2,110)**

(2,125)

Borrowings (repayments) under line of  credit agreements, net

**(3,316)**

(8,975)

Net cash used for financing activities

**(19,065)**

(26,642)

Effect of currency exchange rates on cash  and cash equivalents

**1,217**

(60)

Increase (decrease) in cash and cash  equivalents

**17,342 **

(1,248)

Cash and cash equivalents at beginning of  year

**60,398 **

63,854 

Cash and cash equivalents at end of period

**$   77,740 **

$   62,606 

Page 7

**MENTORCORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2002Note A - Business Activity**

Mentor Corporation, (the "Company"),was incorporated in April 1969.  TheCompany develops, manufactures and markets a broad range of products formedical specialties in three reportable segments:  aesthetic and general surgery, surgicalurology, and clinical and consumer healthcare. Aesthetic and general surgery products include surgically implantableprostheses for plastic and reconstructive surgery and capital equipment usedfor liposuction.  Surgical urologyproducts include surgically implantable prostheses for the treatment ofimpotence and brachytherapy seeds for the treatment of prostate cancer.  Clinical and consumer healthcare productsinclude catheters and other products for the management of urinary incontinenceand retention.  The Company's productsare sold to hospitals, physicians and through various health care dealers,wholesalers, distributors and retail outlets by multiple sales forces.  

**NoteB - Summary of Significant Accounting Policies**

**Principlesof Consolidation**

Theconsolidated financial statements include the accounts of the Company and allof its subsidiaries in which a controlling interest is maintained.  For those subsidiaries where the Company ownsless than 100%, the outside shareholders' interests are treated as minorityinterests.  All intercompany accounts andtransactions have been eliminated. Certain prior year amounts in previously issued financial statementshave been reclassified to conform to the current year presentation.  **Use of Estimates**

Financial statements prepared inaccordance with accounting principles generally accepted in the United Statesrequire management to make estimates and judgments that affect amounts anddisclosures reported in the financial statements.  Actual results could differ from thoseestimates.
Stock Split
On December 13, 2002 the Board ofDirectors authorized a two-for-one stock split in the form of a 100% stockdividend to be distributed on or about January 17, 2003 to shareholders of recordon December 31, 2002.  All references inthe financial statements to the number of shares and per share amounts havebeen retroactively restated to reflect the increased number of common sharesoutstanding.   

**Effectsof Recent Accounting Pronouncements**

In June 2001, The Financial Accounting StandardsBoard ("FASB") issued Statement of Financial Accounting Standards("SFAS") No. 141, "Business Combinations," and SFAS No.142, "Goodwill and Other Intangible Assets."  SFAS No. 141 requires business combinationsinitiated after June 30, 2001 to be accounted for using the purchase method ofaccounting, and broadens the criteria for recording intangible assets apartfrom goodwill.  Under SFAS No. 142,goodwill and intangible assets that have indefinite useful lives will no longerbe amortized but will be tested at least annually for impairment. Intangibleassets with finite useful lives will continue to be amortized over their usefullives.  Other intangible assets, exceptthose with indefinite lives, will continue to be amortized over their usefullives. The goodwill test for impairment consists of a two-step process thatbegins with an estimation of the fair value of the reporting unit.  The first step of the test is a screen forpotential impairment and the second step measures the amount of impairment, ifany.  SFAS No. 142 requires an entity tocomplete the first step of the transitional goodwill impairment test within sixmonths of adopting the statement.  TheCompany adopted SFAS No. 141, "Business Combinations," and SFAS No.142, "Goodwill and Other Intangible Assets" on April 1, 2002.  The absence of goodwill amortization as aresult of adopting SFAS No. 142 is expected to result in an increase in pretaxincome of approximately $730,000 ($0.02 per diluted share) in fiscal 2003.  The required initial assessment forimpairment indicators has been completed and there was no indication thatgoodwill was impaired.

Page 8

InAugust 2001, the FASB issued SFAS No. 144,"Accounting for the Impairment or Disposal of Long-LivedAssets."  SFAS No. 144 supersedesSFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to be Disposed of."  SFAS No. 144 retained substantially all ofthe requirements of SFAS No. 121 while resolving certain implementationissues.  SFAS No. 144 is effective forfiscal years beginning after December 15, 2001. Adoption of SFAS No. 144 in the first quarter of fiscal 2003 had noimpact on the Company's consolidated results of operations or financialposition.

In July 2002,FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit orDisposal Activities."  Thisstatement requires companies to recognize costs associated with exit ordisposal activities when they are incurred rather than at the date of a commitmentto an exit or disposal plan.  Statement146 is to be applied prospectively to exit or disposal activities initiatedafter December 31, 2002.  Management doesnot expect that adoption of this standard will have a material effect on theCompany's consolidated results of operations or financial position.

On December 31, 2002, the Financial AccountingStandards Board issued FASB Statement No. 148, *Accountingfor Stock-Based Compensation - Transition and Disclosure*.  Statement 148 amends FASBStatement No. 123, *Accounting for Stock-Based Compensation*, to providealternative methods of transition to Statement 123's fair value method ofaccounting for stock-based employee compensation.  Statement 148 also amends the disclosureprovisions of Statement 123 and APB Opinion No. 28, *Interim FinancialReporting*, to require disclosure in the summary of significant accountingpolicies of the effects of an entity's accounting policy with respect tostock-based employee compensation on reported net income and earnings per sharein annual and interim financial statements. While the Statement does not amend Statement 123 to require companies toaccount for employee stock options using the fair value method, the disclosureprovisions of Statement 148 are applicable to all companies with stock-basedemployee compensation, regardless of whether they account for that compensationusing the fair value method of Statement 123 or the intrinsic value method ofOpinion 25. Statement No. 148 is effective for fiscalyears ending after December 15, 2002. The Company will continue to account for stock-based employeecompensation under the intrinsic value method of Opinion 25 but will adopt the disclosureprovisions of Statement No. 148 in the fourth quarter of fiscal 2003.  Management does not expect thatadoption of this standard will have a material effect on the Company'sconsolidated results of operations or financial position.

**NoteC - Interim Reporting**

The Company'sthree quarterly interim reporting periods are each thirteen-week periods endingon the Friday nearest the end of the third calendar month of each calendarquarter.  The fiscal year end remainsMarch 31st.  To facilitateease of presentation, each interim period is shown as if it ended on the lastday of the appropriate calendar month. The actual dates for each of the three interim quarter-ends are shownbelow:

Fiscal 2003

Fiscal 2002

First  Quarter

June 28,  2002

June 29,  2001

Second  Quarter

September  27, 2002

September  28, 2001

Third  Quarter

December 27,  2002

December 28,  2001

The accompanying unaudited condensed consolidatedfinancial statements for the three and nine-month periods ended December 31,2002 and 2001 have been prepared in accordance with accounting principlesgenerally accepted in the United States for interim financial information andwith instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  In the opinion of management, all adjustments(consisting only of normal recurring accruals, unless otherwise indicated)considered necessary for a fair presentation of the results of operations forthe indicated periods have been included. Certain amounts recorded in previous periods have been reclassified toconform to the current period presentation. Operating results for the nine months ended December 31, 2002 are notnecessarily indicative of the results for the full fiscal year.

The balance sheet at March 31, 2002 has been derivedfrom the audited financial statements at that date but does not include all ofthe information and footnotes required by accounting principles generallyaccepted in the United States for complete financial statements.

The condensed consolidated financial statements shouldbe read in conjunction with the Company's Annual Report on Form 10-K for theyear ended March 31, 2002.

Page 9

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

All highlyliquid investments with original maturities of three months or less at the dateof purchase are considered to be cash equivalents.

The Company considers itsmarketable securities available-for-sale as defined in Statement of FinancialAccounting Standards ("SFAS") No. 115, "Accounting for CertainInvestments in Debt and Equity Securities."  Realized gains and losses and declines invalue considered to be other than temporary are included in income.  The cost of securities sold is based on thespecific identification method.  Forshort-term marketable securities, there were no materialrealized or unrealized gains or losses nor any material differences betweenestimated fair values (based on quoted market prices) and the costs ofsecurities in the investment portfolio as of December 31, 2002 and March 31,2002.  Short-term investments, exceptauction rate securities, mature between three months and one year from thepurchase date.  The Company's short-termmarketable securities consist primarily of U.S., state and municipal governmentobligations, auction rate securities, and investment grade corporateobligations including commercial paper. Auction rate securities carry interest or dividend rates that reset every28 days but have contractual maturities of greater than one year.  The Company's long-term marketable securitiesand investments include investments in Federal Home Loan Bank and MortgageAssociation bonds (FHLA bonds) with maturities of two to four years.  

Available-for-sale investments atDecember 31, 2002 were as follows:

** **

** **

** **

**Gross**

**Gross**

**Estimated**

** **

** **

**Adjusted**

**Unrealized**

**Unrealized**

**Fair**

**(in thousands)**

**Cost**

**Gains**

**Losses**

**Value**

**Cash balances**

**$    15,953**

**$          -**

**$          -**

**$  15,953**

**Bank time deposits**

**-**

**-**

**-**

**-**

**Money market mutual funds**

**61,787**

**-**

**-**

**61,787**

**Marketable equity securities**

**2,393**

**-**

**(2,049)**

**344**

**U.S., State and Municipal agency      obligations**

**20,143**

**23**

**-**

**20,166**

**Corporate debt securities**

**279**

**-**

**-**

**279**

**   Total available-for-sale investments**

**$  100,555**

**$       23**

**$(2,049)**

**$  98,529**

** **

** **

** **

** **

** **

**Included in cash and cash equivalents**

**$    77,740**

**$          -**

**$          -**

**$  77,740**

**Included in current marketable securities**

**8,005**

**-**

**-**

**8,005**

**Included in long-term marketable      securities and investments**

**14,810**

**23**

**(2,049)**

**12,784**

**   Total available-for-sale investments**

**$  100,555**

**$       23**

**$(2,049)**

**$  98,529**

Available-for-sale investments atMarch 31, 2002 were as follows:

 

 

 

Gross

Gross

Estimated

 

 

Adjusted

Unrealized

Unrealized

Fair

(in thousands)

Cost

Gains

Losses

Value

Cash balances

$11,417

$    -

$    -

$11,417

Bank time deposits

1,175

-

-

1,175

Money market mutual funds

48,981

-

-

48,981

Marketable equity securities

2,076

774

-

2,850

U.S., State and Municipal agency  obligations

21,653

-

(98)

21,555

Corporate debt securities

278

-

-

278

   Total available-for-sale  investments

$85,580

$774

$(98)

$86,256

 

 

 

 

Included in cash and cash equivalents

$60,398

$    -

$    -

$60,398

Included in current marketable securities

14,106

-

-

14,106

Included in long-term marketable      securities and investments

  11,076

  774

  (98)

  11,752

   Total available-for-sale  investments

$85,580

$774

$(98)

$86,256

****Page 10 
**Note E - Inventories**

Inventoriesare stated at the lower of cost or market, cost determined by the first-in,first-out (FIFO) method.  The Companywrites down its inventory for estimated obsolescence or unmarketable inventoryequal to the difference between the cost of inventory and the estimated marketvalue based upon assumptions about future demand and market conditions.

Inventoriesat December 31, 2002 and March 31, 2002 consisted of:

(in thousands)

**December 31,**

March  31,

Raw materials

**$      14,042**

$      10,194

Work in process

**10,513**

9,908

Finished goods

**35,412**

27,302

 

**$    59,967**

$      47,404

**Note F - Property and Equipment**

Property andequipment is stated at cost. Depreciation is based on the useful lives of the properties and computedusing the straight-line method. Buildings are depreciated over 30 years, furniture and equipment over 3to 10 years and leasehold improvements over the shorter of their estimatedremaining lives or lease term. Significant improvements and betterments are capitalized whilemaintenance and repairs are charged to operations as incurred.

Property and equipment at December 31,2002 and March 31, 2002 consisted of:

(in thousands)

**December 31,**

March  31, 

Land

**$              457 **

$              429 

Buildings

**18,637 **

14,601 

Leasehold improvements

**22,692 **

24,030 

Furniture, fixtures and  equipment

**77,061 **

63,860 

Construction in progress

**8,567 **

6,032 

**127,414 **

108,952 

Less accumulated  depreciation

**(62,682)**

(54,296)

 

**$        64,732 **

$         54,656 

**NoteG - Other Comprehensive Income**

The components of comprehensive incomeare listed below:

 

Three Months Ended   December 31,

Nine Months Ended   December 31,

(in thousands)

**2002**

2001

**2002**

2001

Net income

**$    12,982 **

$     9,817 

**$   42,237 **

$   28,596 

Foreign currency translation adjustment

**4,446 **

(1,598)

**11,039 **

673 

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

**(60)**

  (331)

**(1,757)**

  (13)

Comprehensive income

**$   17,368 **

$     7,888 

**$   51,519 **

$   29,256 
**Note H -Income Taxes**
The effective rate of corporate income taxes was 28.7%and 31.8% for the nine-month periods ended December 31, 2002 and 2001respectively.  The effective tax rate forthe nine-month period ended December 2002 reflects refunds received in thefirst, second and third quarters of fiscal 2003 related to the amendment ofprior year tax returns for the Company's foreign sales corporation. 

Page 11

**Note I - Earnings per Share**

A reconciliation of weighted averageshares outstanding, used to calculate basic earnings per share, to weightedaverage shares outstanding assuming dilution, used to calculate dilutedearnings per share, follows:

 

Three Months Ended  December 31,

Nine Months Ended  December 31,

(in thousands)

**2002**

2001

**2002**

2001

Weighted average outstanding shares:  basic

**46,380**

46,766

**46,685**

47,752

Shares issuable  through exercise of stock options

**2,073**

1,452

**2,012**

1,596

Weighted average outstanding shares:  diluted

**48,453**

48,218

**48,697**

49,348

Shares issuablethrough options are determined using the treasury stock method.

Certainemployee stock options have been excluded from the computation of dilutedearnings per share because their effect would be anti-dilutive.
**Note J -Acquisition**
OnMay 6, 2002, the Company purchased the assets of the urology business of PortexLtd., a subsidiary of Smiths Group plc. The acquired business, now named Mentor Medical, Ltd., manufactures andmarkets incontinence and ostomy products primarily for the home healthcaremarket.  The products are sold mainly inthe UK, Germany and the Netherlands.  Theacquisition was valued at $11,232,000, of which $10,603,000 was paid in cash,plus an acquired liability of $629,000. The acquisition was accounted for using SFAS No. 141, "BusinessCombinations," using the purchase method of accounting, and the purchaseprice was preliminarily allocated to the tangible and intangible net assetsacquired on the basis of their respective fair values on the acquisitiondate.  The total purchase price waspreliminarily allocated to inventory of $3,547,000, buildings of $636,000,production equipment of $1,185,000, leasehold improvements of $585,000,customer base of $548,000 and goodwill and other intangibles with indefinitelives of $4,731,000. 
**Note K -Business Segment Information**
The Company'soperations are principally managed and reported on a product basis.  There are three reportable segments:  aesthetic and general surgery, surgicalurology, and clinical and consumer healthcare. The accounting policies of the reportable segments are the same as thosedescribed in the summary of significant accounting policies except that certainexpenses such as interest and certain corporate expenses are not allocated tothe segments.

The aestheticand general surgery products segment consists primarily of breast implants,tissue expanders and the Company's body contouring (liposuction) equipment anddisposables.  The surgical urologysegment includes penile implants, surgical incontinence products andbrachytherapy seeds for the treatment of prostate cancer.  The clinical and consumer healthcare segmentincludes catheters and other disposable products for the management of urinaryincontinence and retention.

Page 12

Selectedfinancial information for the Company's reportable segments for the three andnine-month periods ended December 31, 2002 and 2001,and as of March 31, 2002 is as follows:

Three Months Ended December 31,

Nine Months Ended  December 31,

(in thousands)

**2002**

2001

**2002**

2001

**Net Sales**

** **

 

** **

 

Aesthetic and General Surgery

**$      44,105**

$    38,169

**$   140,533**

$    117,495

Surgical Urology

**27,302**

23,569

**79,290**

69,751

Clinical and Consumer Healthcare 

**22,632**

17,237

**61,479**

47,220

  Total consolidated revenues

**$      94,039**

$    78,975

**$   281,302**

$    234,466

 

** **

 

 

 

Three Months Ended   December 31,

Nine Months Ended  December 31,

(in thousands)

**2002**

2001

**2002**

2001

**Operating profit**

** **

 

 

 

Aesthetic and General Surgery

**$     14,777**

$    12,108

**$     49,133**

$     34,340

Surgical Urology

**2,076**

779

**5,170**

3,050

Clinical and Consumer Healthcare

**3,821**

4,015

**10,280**

9,721

  Total reportable segments

**$     20,674**

$    16,902

**$     64,583**

$     47,111

 

 

 

 

 

Three Months Ended   December 31,

Nine Months Ended  December 31,

(in thousands)

**2002**

2001

**2002**

2001

**Operating income**

** **

 

 

 

Reportable segments

**$    20,674 **

$   16,902 

**$    64,583 **

$     47,111 

Corporate operating loss

**(2,797)**

(2,115)

**(8,136)**

(6,169)

Interest expense

**(245)**

(152)

**(782)**

(659)

Interest income

**599 **

565 

**1,831 **

1,866 

Other income

**526 **

(826)

**1,731 **

(230)

Income before income taxes

**$    18,759 **

$   14,374 

**$    59,227 **

$     41,919 

 

 

 

 

 

 

As of

 

(in thousands)

**December  31, 2002**

March 31,  2002

**Identifiable assets**

** **

 

 

 

Aesthetic and General Surgery

**$  105,927**

$   95,763

** **

** **

Surgical Urology

**102,824**

88,488

** **

** **

Clinical and Consumer Healthcare

**47,772**

43,506

** **

** **

  Total reportable segments

**$  256,523**

$ 227,757

** **

** **

 

 

 

 

 

**Note L - Event Subsequent to December 31, 2002**

OnFebruary 1, 2003, the Company completed the acquisition of MillsBiopharmaceuticals, Inc., a manufacturer of iodine brachytherapy seeds for thetreatment of prostate cancer.  Theacquisition was valued at $5,300,000, which was paid in cash.  The acquisition will be accounted for usingSFAS No. 141, "Business Combinations," using the purchase method ofaccounting, and the purchase price will be allocated to the tangible andintangible net assets acquired on the basis of their respective fair values onthe acquisition date.    

Page 13

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

Except for the historical information containedherein, the matters discussed in this Management's Discussion contain certainforward-looking statements that involve risk and uncertainty.  Such forward-looking statements arecharacterized by future or conditional verbs and include statements regardingnew and existing products, technologies and opportunities, market and industrysegment growth and demand and acceptance of new and existing products.  Such statements are only predictions and theCompany's actual results may differ materially from those anticipated in theseforward-looking statements.  Factors thatmay cause such differences include, but are not limited to, increasedcompetition, changes in product demand, changes in market acceptance, newproduct development, United States Food and Drug Administration("FDA") approval or rescission of approval, delay or rejection of newor existing products, changes in agreements with governmental agencies, changesin government regulation, supply of raw materials, changes in reimbursementpractices, adverse results of litigation and other risks identified in Form10-Q or in other documents filed by the Company with the Securities andExchange Commission.  Specific attentionshould be directed to the sections entitled "Government Regulation","Legal Proceedings", and "Factors that May Effect Future Resultsof Operations" in the Company's Annual Report on Form 10-K for the fiscalyear ended March 31, 2002.  The Companyassumes no obligation to update forward-looking statements as circumstanceschange.

**APPLICATION OFCRITICAL ACCOUNTING POLICIES**

Management's Discussion and Analysis of FinancialCondition and Results of Operations addresses Mentor Corporation's consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States.  The preparation of these financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.  Management has identified the criticalaccounting policies as those that involve the most complex or subjectivedecisions, estimates or assessments.  Onan ongoing basis, management evaluates its estimates, assessments andjudgments.  Management evaluatesestimates and judgments based on historical experience and on various otherfactors that are believed to be reasonable under the circumstances, the resultsof which form the basis for making judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates under different assumptions or conditions.  

Management has identified the critical accountingpolicies to be those related to revenue recognition, accounts receivable,inventories, warranties and related reserves, and goodwill and intangible assetimpairment.  These accounting polices arediscussed in the Management's Discussion and Analysis and notes to theconsolidated financial statements included in the Company's Annual Report onForm 10-K for the fiscal year ended March 31, 2002.

On December 12, 2002 the Board ofDirectors authorized a two-for-one stock split in the form of a 100% stock dividendto be distributed on or about January 17, 2003 to shareholders of record onDecember 31, 2002. All references to the number of shares and per share amountshave been retroactively restated to reflect the increased number of commonshares outstanding.   

**RESULTS OFOPERATIONS********Sales**Sales for the three months endedDecember 31, 2002 increased to $94.0 million from $79.0 million for the sameperiod in 2001, an increase of 19%.  Theincrease in sales was in both domestic and international markets.  Approximately three percentage points of the growth was the effect of a strongereuro on reported sales and approximately six percentage points related to the May 2002 acquisition of PortexLtd.  

Sales of aesthetic and general surgeryproducts increased 16% to $44.1 million for the quarter from $38.2 million inthe same quarter of the prior year. Total sales of breast implants products increased 16% to $39.6 millionfrom $34.3 million in the same quarter of the prior year. Sales of bodycontouring products increased 41% over the same period in the prior year.  Sales growth was primarily attributable tostrong product demand both domestically and internationally, the introductionof an improved tissue expander in the fourth quarter of fiscal 2002, and the benefitfrom the effect of the strong euro.  

Page 14

Sales of surgical urology productsincreased 16% to $27.3 million for the quarter from $23.6 million in the samequarter of the prior year.   Penileimplant sales increased 14% to $6.4 million from $5.6 million in the comparableperiod in the prior year.  Sales growthis primarily attributable to the introduction of the TitanTM in the previousquarter and marketing program efforts to increase consumer awareness.  Brachytherapy sales decreased 1% from thesame period in the prior year as unit sales increases were offset bycompetitive pressures, which decreased average selling prices.  Sales of products used in pelvic floorreconstruction and incontinence including the Suspend ® sling increased 6% fromthe same period in the prior year.  

Sales of clinical and consumerhealthcare products increased 31% to $22.6 million for the quarter from $17.2million in the same quarter of the prior year. This growth primarily resulted from the inclusion of sales of productsacquired in the May 2002 acquisition of the urology business of PortexLtd.   Sales of Portex products accountedfor 26 percentage points of the year-to-year growth.  

For the nine months ended December 31,2002 sales increased 20% from $234.5 million to $281.3 million.  Increased sales were recorded in each majorsegment and market.  International saleswere aided by a generally weaker dollar and by the May 2002 acquisition of Portex Ltd., which accounted for approximately threepercentage points and five percentage points of the increase,respectively.  Surgical urology productrevenue increased 14% primarily due to the sales of disposable surgical productlines.  Aesthetic and General surgeryproducts increased 20% reflecting growth in augmentation and reconstruction mammaryimplant products and increases in body contouring revenues.  Clinical and Consumer Healthcare revenueincreased 30% primarily due to sales of products acquired in the May 2002acquisition of Portex, Ltd. and growth in disposable products acquired in thePorges acquisition.

Sales by  Principal Product Line

For the  Three Months Ended December 31,

For the Nine  Months Ended   December 31,

**2002**

  2001

Percent  Change

**2002**

  2001

Percent  Change

Aesthetic  & General Surgery      Products

**$   44,105**

  $   38,169

  15.6%

**$ 140,533**

  $ 117,495

  19.6%

Surgical  Urology Products

**27,302**

23,569

15.8%

**79,290**

69,751

13.7%

Clinical  & Consumer      Healthcare Products

**22,632**

  17,237

  31.3%

**61,479**

  47,220

  30.2%

** **

**$  94,039**

$   78,975

19.1%

**$ 281,302**

$ 234,466

20.0%

**Cost of Sales**Cost of sales as a percentage of netsales for the three and nine-month periods ended December 31, 2002 were 40.6%for each compared to 40.7% and 41.1% for the same periods a year ago.  This decrease in costs as a percentage ofsales is primarily attributable to aesthetic and surgical urology productmanufacturing efficiencies achieved during the prior year and sales growthincreased at a higher percentage rate than manufacturing support costs. 

**Selling, General and Administrative**Selling,general and administrative expenses were 34.2% of net sales for the quarterended December 31, 2002, a slight decrease from 34.6% for the same period ayear ago.  For the nine months endedDecember 31, 2002, selling, general and administrative expenses were 33.5% ofnet sales compared to 34.6%.  Overall spending on selling, general and administrative expensesincreased by 16.3% from the prior year.  Thedecrease as a percentage of net sales reflects efficiencies in general andadministrative expenses and the impact of the recent acquisition of Portex (nowMentor Medical, Ltd.).  Mentor MedicalLtd. has a lower percentage of selling, general and administrative expenses tonet sales than the historical percentage rate of the Company.  

Page 15

**Researchand Development**Research and development expenses as a percent of netsales for the three and nine-month periods ended December 31, 2002 were 6.2%and 5.9%, respectively, compared to 6.1% and 6.8% for the same periods a yearago.  The decrease in research and developmentcosts as a percentage of net sales for the nine-month period is due tounusually high levels of development costs in the prior year related to theCompany's automated brachytherapy workstation, accelerated product enhancementprojects for existing products and new product development, along with strongsales growth in the current year.  Totalspending on research and development increased 3.2% over the comparablenine-month period in the prior year; but at a slower rate than the increase inrevenues; consequently the research and development expenses as a percentage ofnet sales have decreased.  The Company iscommitted to a variety of clinical and laboratory studies in connection withits gel-filled and saline filled mammary implants and other products.  

**Interest and Other Income and Expense**Interest expense increased to $245thousand in the third quarter of fiscal 2003, compared to $152 thousand in thesame period of the prior year.  Interestexpense includes imputed interest on long-term liabilities recorded at netpresent value related to the acquisitions of assets of SouthBay Medical andProSurg Inc. during fiscal 2001 and 2002, respectively. 

Interest income increased to $599 thousand in thethird quarter of fiscal 2003 from $565 thousand in the same period of the prioryear.  The increase is due to higher cashbalances available for investment partially offset by lower prevailing interestrates on short-term investments.

Other income, net primarily includesgains or losses on sales of marketable securities, and foreign currency gainsor losses related to the Company's foreign operations.  Other income, net for the nine months endingDecember 31, 2002 totals $1.7 million and includes, among other items, a $500thousand gain on the sale of an intangible asset, approximately $400 thousandon gains on sales of marketable securities, unrealized losses on short-termmarketable securities, and approximately $324 thousand gain on foreign currencytranslation.  

**Income Taxes**

The effective rate of corporate income taxes for thethree and nine months ended December 31, 2002 was 30.8% and 28.7% as comparedto 31.7% and 31.8% for the comparable periods in the prior year.  The decrease in the effective tax rate fromthe comparable periods in the prior year is a result of a higher proportion ofincome from foreign operations with lower tax rates, tax credits related toresearch and development, and refunds received in the first and second quartersof fiscal year 2003 related to the amendment of prior year tax returns for theCompany's foreign sales corporation.

**Net Income**

Net income for the three-month periodended December 31, 2002 increased 32.2% to $13.0 million from $9.8 million inthe comparable period in the prior year. Net income increased 47.7% from $28.6 million reported in the previousyear to $42.2 million for the nine-months ended December 31, 2002.  Diluted earnings per share increased 35% to$0.27 for the three-month period compared to $0.20 for the comparable periodlast year.  Increased sales, lower costof goods sold and operating expenses as a percentage of net sales, the gain onsale of an intangible asset, and a tax refund all contributed to the increasednet income.

Page 16

**LIQUIDITY AND CAPITAL RESOURCES******The Company had cash, cash equivalentsand short-term marketable securities of $86 million at December 31, 2002compared to $75 million at March 31, 2002. Cash provided by operating activities has been and is expected tocontinue to be the Company's primary recurring source of funds.  The Company's working capital was $151million at December 31, 2002 compared to $127 million at March 31, 2002.  The Company generated $55.0 million of cashfrom continuing operating activities during the nine months ended December 31,2002, compared to $51 million the same period the previous year.  Increased cash flow from operating activitieswas primarily the result of increased net income,partially offset by an increase in inventory and a decrease in income taxespayable. 

During the nine months ended December31, 2002, the Company invested $12.0 million in manufacturing equipment at thenew facility in the Netherlands and at U.S. locations, and in informationtechnology systems.  The Company anticipatesinvesting approximately $3 million in the fourth quarter of fiscal 2003 toexpand production equipment and facilities for brachytherapy seed production,purchase other production equipment and upgrade and replace informationtechnology systems.  

TheCompany receives cash from the exercise of employee stock options.  Employee stock option exercises provided $6.4 million duringthe nine months ended December 31, 2002 compared to $3.2 million in the sameperiod the previous year.  Proceeds fromthe exercise of employee stock options will vary from period to period basedupon, among other factors, fluctuations in the market value of the Company'scommon stock relative to the exercise price of such options. 

The Company's Board of Directors hasauthorized an ongoing stock repurchase program. The objectives of the program, among other items, are to offset thedilutive effect of the Company's employee stock option program, provideliquidity to the market and to reduce the overall number of shares outstanding.  Repurchases are subject to market conditionsand cash availability.  The Companyrepurchased 1,280 thousand shares for cash of $20 million in the nine monthsended December 31, 2002.  The Companyintends to continue the share repurchase program in the remainder of fiscal2003 and 1.9 million shares remain authorized for repurchase.  

In January 2001, the Company completedthe acquisition of SouthBay Medical, a developmentstage company focused on the development of a new technology for acomputer-based workstation and automated cartridge-based needle loading systemfor use in brachytherapy procedures.  Thetotal consideration included $2 million in cash, 470,586 restricted shares ofthe Company's common stock having a fair market value of $4 million at the timeof acquisition, and $13.6 million to be paid in cash or the Company's commonstock over the next several years.  Thesefuture payments have been recorded as an acquisition obligation liability atnet present value ($11.5 million at December 31, 2002), and will continue toincrease as imputed interest is recorded. Approximately $5.9 million of the acquisition obligation liability is tobe paid in shares of the Company's common stock valued at fair market value onthe date of issuance. 

In December 2001, the Companyentered into several agreements with ProSurg, Inc. to purchase certain patentrights and a supply of a bio-absorbable co-polymer product to be used in thesurgical treatment of incontinence.  Thetotal consideration included $2.0 million in cash and $2.7 million in short andlong-term payments due over the next several years.  The future payments have been recorded as anacquisition obligation liability at net present value and will increase withimputed interest to $3.0 million due over the next several years.  

The Company has a secured line ofcredit ("$25M Credit Agreement") for borrowings of up to $25 million,which accrue interest at the prevailing prime rate or at a mark-up over LIBORat the Company's discretion.  The $25MCredit Agreement includes certain covenants that, among other things, limit thedividends the Company may pay and requires maintenance of certain levels oftangible net worth and debt service ratios. During fiscal 2002, the Company used the $25M Credit Agreement toguarantee the secured loan of a vendor in the amount of $5.3 million tofacilitate the ramp-up of production capacity related to a new product.  Accordingly, although there were noborrowings outstanding under the $25M Credit Agreement at December 31, 2002,only $19.7 million was available for additional borrowings.

Page 17

In addition,several lines of credit were established with local foreign lenders tofacilitate operating cash flow needs at our foreign subsidiaries.  These lines are at market rates of interest,are unsecured and guaranteed by Mentor Corporation, and total $5.6 million, ofwhich $ 3.8 million was outstanding, and $1.8 million additional borrowingswere available at December 31, 2002.  

In fiscal2002, a line of credit of $6.5 million was established to finance the constructionof a new facility in Leiden, the Netherlands. The borrowings accrue interest at EURIBOR plus 0.75% and are secured bythe new facility and other assets in the Netherlands.  At December 31, 2002, $4.1 million wasoutstanding and $2.4 million was available under this line.  

At December31, 2002, the total of short-term borrowings under all lines of credit was $7.9 million and the weighted-average interest rate was 3.3%.  The total amount of additional borrowingsavailable to the Company under all lines of credit was $23.9 million atDecember 31, 2002.

TheCompany has historically paid a quarterly cash dividend of $.03 per share.  In December 2002, the Company's Board ofDirectors authorized a 2-for-1 stock split and increased the quarterly dividendon a post-split basis from $.015 per share to $.02 per share. At the new annualrate of $.08 per share, the aggregate annual dividend would equal approximately$3.7 million.  It is the Company's intentto continue to pay dividends for the foreseeable future subject to among otherthings, Board approval, cash availability and alternative cash needs.  The $25M Credit Agreement limits theaggregate amount of dividends payable in any year to one-half of the net incomeof the preceding year. 

On May 6, 2002, the Company announcedthat it had completed the acquisition of the urology business of Portex Ltd., asubsidiary of Smiths Group plc.  Theacquired business manufactures and markets incontinence and ostomy productsprimarily for the home healthcare market. The cash consideration paid for Portex Ltd. was $10.6 million fromavailable cash balances in the quarter ended June 30, 2002.   

On November 4, 2002, the Companyannounced that it had reached an agreement to acquire Mills Biopharmaceuticals,Inc., a manufacturer of iodine brachytherapy seeds for the treatment ofprostate cancer.  The transaction wascompleted on February 1, 2003 and $5.3 million was paid from existing cashbalances. 

The following table summarizescontractual cash and other commercial commitments at December 31, 2002:

(in thousands)

 

Less Than

1-3

4-5

After 5

**Contractual  Cash Obligations**

Total

1 Year

Years

Years

Years

Operating leases

$ 37,690

$  4,014

$12,052

$ 7,607

$14,017

   Total Contractual  Cash Obligations

$ 37,690

$  4,014

$12,052

$ 7,607

$14,017

 

 

 

 

 

**Commercial  Commitments**

 

 

 

 

 

Lines of credit

$  7,919

$  7,919

$         -

$        -

$         -

Guarantees

5,300

5,300

-

-

-

Other commercial commitments

20,021

4,675

11,148

700

3,498

   Total Commercial  Commitments

$33,240

$17,894

$11,148

$   700

$ 3,498

The "Less Than 1 Year" column of Other commercial commitments includes $5.3 million towardsthe acquisition of a potential supplier.   In addition, the Company, in the ordinary course of business, has at anyone time, purchase orders for raw materials and other supplies, which may inaggregate be significant but for which usage does not exceed one year.   

Page 18

The Company's principal source ofliquidity at December 31, 2002 consisted of $86 million in cash, cashequivalents and short-term marketable securities, plus $23.9 million availableunder the existing lines of credit.  TheCompany believes that funds generated from operations, its cash, cashequivalents and marketable securities and funds available under its line of creditagreements will be adequate to meet its working capital needs, capitalexpenditure requirements and commitments for at least the next 12 months.  However, it is possible that the Company mayneed to raise additional funds to finance its activities beyond the next 12months or to consummate acquisitions of other businesses, products ortechnologies.  Additional funds could beraised by selling equity or debt securities to the public or to selectedinvestors, or by borrowing money from financial institutions.  In addition, even though the Company may notneed additional funds, it may still elect to sell additional equity or debtsecurities or obtain credit facilities for other reasons.  The Company may not be able to obtainadditional funds on terms that would be favorable to the Company and itsshareholders, or at all.  If additionalfunds were raised by issuing additional equity securities or convertible debtsecurities, the ownership percentage of existing shareholders would bereduced.  In addition, the equity or debtsecurities issued by the Company may have rights, preferences or privilegessenior to those of the Company's common stock. 

**FACTORS THAT MAY AFFECT FUTURE RESULTSOF OPERATIONS**

**Forward-LookingInformation Under the Private Securities LitigationReform Action of 1995**

The Private Securities LitigationReform Act of 1995 provides a "safe harbor" for forward-lookingstatements.  The Act was designed toencourage companies to provide prospective information about them without fearof litigation.  The prospectiveinformation must be identified as forward-looking and must be accompanied bymeaningful cautionary statements identifying important factors that could causeactual results to differ materially from those projected in thestatements.  The statements about theCompany, plans, strategies, intentions, expectations and prospects containedthroughout this document are based on current expectations.  These statements are forward-looking andactual results may differ materially from those predicted as of the date ofthis report in the forward-looking statements, which involve risks anduncertainties.  In addition, pastfinancial performance is not necessarily a reliable indicator of futureperformance and investors should not use historical performance to anticipateresults or future period trends.  TheCompany does not undertake to update publicly any forward-looking statementsfor any reason, even if new information becomes available or other events occurin the future.

**DistributionAgreement with North American Scientific, Inc.**

The Company has had an exclusiveworldwide distribution agreement with North American Scientific Inc.("NASI"), to market and sell radioactive brachytherapy seeds for thetreatment of prostate cancer.  Under theagreement the products were manufactured by NASI and to be exclusively marketedand sold by the Company under the names IoGold® and PdGold® for iodine and palladium seeds, respectively.  Sales of radioactive seeds supplied to theCompany by NASI were $6.4 million in the quarter ended December 31, 2002.  The agreement included a one-time unilateraloption for the Company to extend the agreement for three years subject tocertain performance criteria; however in August 2002, the Company notified NASIthat it did not intend to exercise its option to extend the agreement under thesame terms but was willing to negotiate a new agreement with NASI on differentterms.  A new agreement was notnegotiated and the distribution agreement was to expire on January 31,2003.  NASI has begun to directly marketits brachytherapy seeds, resulting in additional competition.  

On November 4, 2002 the Companyannounced it had reached an agreement to purchase Mills Biopharmaceutical Inc.(Mills), a manufacturer of iodine brachytherapy seeds.  The purchase was completed February 1, 2003after the expiration of the agreement with NASI and the Company has begun tosupply customers with seeds manufactured by Mills.  In addition, on January 8, 2003 the Companyannounced that it had reached a nonexclusive agreement to distribute Best TMPalladium-103 brachytherapy seeds.  Inaddition, the Company believes that other satisfactory sources for similarradioactive seeds for use in brachytherapy treatment of the prostate can bemanufactured or obtained.  There is noassurance that such seeds can be manufactured or obtained on terms satisfactoryto the Company, without interruption or regulatory delay, or that suchadditional seeds will ultimately be acceptable to customers.  Interruption of the supply of seeds,additional competition, regulatory delay, additional costs to procure seeds, orloss of customers and market share may have a negative effect on revenues andthe results of operations.  

Page 19

**UnitedStates Food and Drug Administration**

On August 12, 2002 the Company received a letter fromthe United States Food and Drug Administration, ("FDA"),regarding the April 1992 agreement (commonly known as the Adjunct Study)between Mentor Corporation and the FDA that sets forth the terms and conditionsunder which Mentor may sell silicone gel-filled breast implants to physiciansparticipating in the Adjunct Study.  TheFDA requested a fifth addendum to the agreement to revise the method ofdistribution of gel-filled breast implants to physicians, provide for certainprocedures for site monitoring of protocol compliance, reconciliation andaccountability of field inventory, and a right to limit the number ofphysicians, sites, and/or patients participating in the Adjunct Study if theFDA so desires.  The Company has workedclosely with the FDA to comply with the existing agreement and to address theFDA concerns.  On October 10, 2002 theCompany received a letter from the FDA recognizing the Company's efforts toaddress the FDA concerns and outlining conditions for continuing participationin the Adjunct study.  The FDA is notrequiring a fifth addendum to the Adjunct Study agreement at this time. Theadditional conditions to the method of distribution and monitoring of protocolcompliance will require additional procedures and expenses and may have anegative effect on physician purchases of product used in the study andconsequently affect revenue.  The Companycannot currently estimate the impact of the additional conditions on revenueand the results of operations.  If theCompany is unable meet the additional conditions outlined by the FDA, the FDAcan require additional conditions, a fifth addendum to the agreement, orterminate the agreement (i.e., the Adjunct Study) if the FDA so desires.  Additional procedures or termination of theAdjunct Study may have a material negative effect on the Company's revenue, andresults of operations.  

**Medicare Reimbursement**

In August of 2002, the Centers for Medicare and MedicaidServices ("CMS") published for comment its Proposed Rule of Changes to theMedicare Outpatient Prospective Payment System (OPPS) and payment ratesfor calendar year 2003.  The ruledetermines the amount that hospitals will be reimbursed for proceduresperformed on an outpatient basis and is important, as it determines theprofitability of certain procedures for the hospital and which may impact theprocedures that the facility will choose to perform.  The Company commented directly and throughindustry groups on the proposed reimbursement of outpatient procedures thatinclude the Company's products.  Theproducts affected include penile implants for the treatment of impotence,iodine and palladium brachytherapy seeds for the treatment of prostate cancer,and other products.  On November 1, 2002CMS issued its final rule concerning reimbursement of outpatient procedures for2003.  CMS considered the Company'scomments and increased its reimbursement for these procedures and committed toaddressing certain other reimbursement issues related to the Company'sproducts.  However, the final ruleresults in an overall reduction in the amount of reimbursement for outpatientprocedures which include our penile implants for erectile dysfunction and madecertain changes to the reimbursement for brachytherapy procedures which includethe Company's radioactive seed products. Most of the Company's domestic sales of brachytherapy seeds arereimbursed under these rules; however the effect of the changes inreimbursement procedures and amounts is expected to be minimal.  The Company estimates that approximately $14million of annual revenue for its penile implants for the treatment of erectiledysfunction is reimbursed under this rule or approximately four percent oftotal Company revenues. The rule takes effect on January 1, 2003.  The Company cannot estimate the effect of thefinal rule on the Company's penile implant customers who are reimbursed underthe rule, on revenue, on the Company's ability to secure additional reimbursementfor new or improved implants, or ultimately, on operating results; however, thereduction in reimbursement may negatively impact the Company's results. 

**ITEM  3.**

**QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

There has been no material changes inthe Company's exposure to market risk as reported in Item 7A in the annualreport on Form 10-K for the fiscal year ended March 31, 2002.

Page 20

**PART II -OTHER INFORMATION**

**Item 1.**

**Legal  Proceedings **

In 1998, the Company  learned that the FDA's Office of Criminal Investigations ("OCI") was  conducting an investigation involving the Company.  The Company understood that the  investigation was dormant until April 2000 when OCI issued a letter  requesting that the Company provide OCI with manufacturing data and other  corporate records, which the Company provided to OCI.  The Company cooperated fully with the OCI  investigation.  

On July 9, 2002, the  Company presented the five-year follow-up data to the FDA advisory panel  related to its saline mammary implant clinical studies.  The presentation of this data was a  condition of the PMA approval received in May of 2000.  Subsequent to the presentation, the Company  became aware through the media that the Chairman of the Committee on Energy  and Commerce and the Chairman of the Subcommittee on Oversight and  Investigations (the "Committee") sent a letter to the Deputy Commissioner of  the FDA requesting data related to the saline breast implant studies, records  related to Mentor Corporation and the OCI investigation.  On September 27, 2002 media articles announced  that the FDA had completed and closed its criminal investigation of  Mentor.  The Company has received  confirmation from the FDA Office of Criminal investigation that the criminal  investigation has been closed.  

The Company believes that  it is in compliance with all applicable laws, rules and regulations and has  responded to all requests received to date.    

In November 2002, the  Company filed a lawsuit against North American Scientific, Inc., (NASI) for,  among other things, breach of the exclusive distribution agreement, which was  to expire on January 31, 2003.  In  response, NASI filed a counterclaim against the Company alleging various  breaches and other actions, which the Company believes are baseless and  without merit.  The Company believes that  it has been in compliance with all contractual obligations and intends to  vigorously defend itself against all allegations and to continue to pursue  its aforementioned claims against NASI. 

Page 21

**Item 2.**

**Changes in  Securities** 

On  December 13, 2002 the Board of Directors authorized a two-for-one stock split  in the form of a 100% stock dividend to be distributed on or about January  17, 2003 to shareholders of record on December 31, 2002. 

**Item 3.**

**Defaults  Upon Senior Securities** 

No  event constituting a material default has occurred respecting any senior  security of the Registrant.

**Item 4.**

**Submission  of Matters to a Vote of Security Holders** 
     None. 
**Item 5.**

**Other  Information** 

**Controls and Procedures**

** **a)**  Evaluation****of disclosure controls  and procedures. * ***Our chief executive  officer and chief financial officer, after evaluating the effectiveness of  the Company's "disclosure controls and procedures" (as defined in the  Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a  date (the "Evaluation Date") within 90 days before the filing date of  this quarterly report on Form 10-Q, have concluded that, as of the  Evaluation Date, our disclosure controls and procedures were adequate and  designed to ensure that material information relating to the Company and its  consolidated subsidiaries would be made known to them by others within those  entities.

b)  **Changes in internal  controls. **There were no significant  changes in the Company's internal controls or, to the Company's knowledge, in  other factors that could significantly affect the Company's disclosure  controls and procedures subsequent to the Evaluation Date. 

**Item 6.**

**Exhibits and  Reports on Form 8-K**

** (a)  Exhibits**

99.1 CEO  Certification Pursuant To 18 U.S.C. Section 1350,  As Adopted Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002  99.2 CFO Certification Pursuant To 18 U.S.C. Section 1350,  As Adopted Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002

**(b) Reports  on Form 8-K**

There  were no reports on Form 8-K in the quarter ended December 31, 2002.
 
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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

**MENTORCORPORATION**

(Registrant)

Date:

February  13, 2003

By:

/S/CHRISTOPHER; J. CONWAY  Christopher J. Conway  President and Chief Executive Officer

 

Date:

February  13, 2003

By:

/S/ADEL MICHAEL  Adel Michael  Executive Vice President  Chief Financial Officer

****Page 23

 

**§ 302 CERTIFICATION**

I, Christopher J.Conway, certify that:

1.      Ihave reviewed this quarterly report on Form 10‐Q of MentorCorporation;

2.      Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

3.      Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

4.      Theregistrant's other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

(a)         designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

(b)        evaluated the effectiveness of the registrant's disclosurecontrols and procedures as of a date within 90 days prior to the filing date ofthis quarterly report (the "Evaluation Date"); and

(c)         presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

5.      Theregistrant's other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant's auditors and the audit committee ofregistrant's board of directors (or persons performing the equivalentfunctions):

(a)         all significant deficiencies in the design or operationof internal controls which could adversely affect the registrant's ability torecord, process, summarize and report financial data and have identified forthe registrant's auditors any material weaknesses in internal controls; and

(b)        any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant'sinternal controls; and

6.      Theregistrant's other certifying officers and I have indicated in this quarterlyreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

Date: February 13, 2003                                             /S/CHRISTOPHERJ. CONWAY                                                                                    Christopher J.Conway                                                                                    Presidentand Chief Executive Officer

 

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**§ 302 CERTIFICATION**

I, Adel Michael,certify that:

1.         Ihave reviewed this quarterly report on Form 10‐Q of MentorCorporation;

2.         Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

3.         Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

4.         The registrant's other certifyingofficers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

(a)               designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

(b)              evaluated the effectiveness of the registrant'sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the "Evaluation Date"); and

(c)               presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

5.         The registrant's other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant's auditors and the audit committee of registrant's board ofdirectors (or persons performing the equivalent functions):

a)         allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant's ability to record, process, summarizeand report financial data and have identified for the registrant's auditors anymaterial weaknesses in internal controls; and

b)         any fraud, whether or not material, that involves managementor other employees who have a significant role in the registrant's internalcontrols; and

6.         The registrant's other certifyingofficers and I have indicated in this quarterly report whether there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

Date:  February 13, 2003                                             /S/ADELMICHAEL                                                                                    AdelMichael                                                                                    ChiefFinancial Officer

 

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**EXHIBIT99.1**

**CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002**

In connection with theQuarterly Report of Mentor Corporation (the "Company") on Form 10‐Qfor the period ending December 31, 2002 as filed with the Securities andExchange Commission on the date hereof (the "Report"), I, Christopher J.Conway, Chief Executive Officer of the Company, certify, pursuant to18 U.S.C. § 1350, as adopted pursuant to § 906 of theSarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)        The Report fully complies with therequirements of section 13(a) or 15(d) of the Securities Exchange Act of1934; and

(2)        The information contained in the Reportfairly presents, in all material respects, the financial condition and resultof operations of the Company. 

/S/CHRISTOPHERJ. CONWAYChristopher J. ConwayChief Executive Officer

February 13, 2003

 

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**EXHIBIT99.2**

**CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002**

In connection with theQuarterly Report of Mentor Corporation (the "Company") on Form 10‐Qfor the period ending December 31, 2002 as filed with the Securities andExchange Commission on the date hereof (the "Report"), I, Adel Michael, ChiefFinancial Officer of the Company, certify, pursuant to 18 U.S.C.§ 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of2002, that to the best of my knowledge:

(1)        The Report fully complies with therequirements of section 13(a) or 15(d) of the Securities Exchange Act of1934; and

(2)        The information contained in the Reportfairly presents, in all material respects, the financial condition and resultof operations of the Company. 

/S/ADELMICHAELAdel MichaelChief Financial Officer

February 13, 2003

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