**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-Q**

(Mark One)

x  QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe quarterly period ended December 31, 2003**

or

TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For thetransition period from ____ to _____Commission File No. 0-7955MENTOR CORPORATION (Exact Name of Registrant as Specified in its Charter)

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

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

Indicate by check mark whether theRegistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orsuch shorter period that the Registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days. Yes x   No  o

Indicateby check mark whether the Registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).  Yes x   No o

As of February 12, 2004,there were approximately 43,778,157 Common Shares, par value $.10 outstanding.

----

**MENTOR CORPORATIONINDEX**
| Part I. Financial  Information  |
|--------------------------------------|
| Item 1.                              | Consolidated Financial  Statements (unaudited)    |
|                                      | Consolidated Balance  Sheets - December 31, 2003 and March 31, 2003    |
|                                      | Consolidated Statements of Income - Three Months Ended December 31,  2003 and 2002  |
|                                      | Consolidated Statements of Income – Nine Months Ended December 31,  2003 and 2002  |
|                                      | Consolidated Statements of Cash Flows -  Nine Months Ended December 31, 2003 and 2002  |
|                                      | Notes to Condensed Consolidated Financial Statements - December 31,  2003  |
| Item 2.                              | Management's Discussion and Analysis of Financial Condition and  Results of Operations   |
| Item 3.                              | Quantitative and Qualitative Disclosures About Market Risk  |
| Item 4.                              | Controls and Procedures  |
| Part II. Other  Information          |
| Item 1.                              | Legal Proceedings    |
| Item 2.                              | Changes in Securities and  Use of Proceeds    |
| Item 3.                              | Defaults upon Senior  Securities    |
| Item 4.                              | Submission of Matters to  a Vote of Security Holders    |
| Item 5.                              | Other Information    |
| Item 6.                              | Exhibits  and Reports on Form 8-K

(a)     Exhibits****(b)    Reports on Form 8-K    |

----

# PART I - FINANCIAL INFORMATION

# **Item 1.  Consolidated Financial Statements**

| Mentor CorporationConsolidated Balance Sheets(Unaudited)   |
|------------------------------------------------------------|
| (in thousands)                                             | **December 31, 2003** | March 31,   2003 |
| **Assets**                                                 | ** ** | ** ** |
| Current assets:                                            | ** ** | ** ** |
|   Cash and cash  equivalents                     | **$        173,310** | $        105,840 |
|   Marketable  securities                         | **   227** |    184 |
|   Accounts  receivable, net                      | **80,620** | 79,784 |
|   Inventories                                    | **71,987** | 61,269 |
|   Deferred  income taxes                         | **16,253** | 15,253 |
|   Prepaid  expenses and other                    | **16,407** | 10,858 |
| Total current assets                                       | **358,804** | 273,188 |
|                                                       | ** ** |   |
| Property and equipment,  net                               | **79,178** | 68,671 |
| Intangible assets, net                                     | **54,158** | 35,570 |
| Goodwill, net                                              | **20,973** | 16,520 |
| Long-term marketable securities  and investments           | **9,376** | 3,741 |
| Other assets                                               | **538** | 398 |
|                                                       | **$        523,027** | $        398,088 |
| See notes to condensed  consolidated financial statements. |   |   |

----

| Mentor Corporation  Consolidated Balance Sheets  (Unaudited)                                                                           |
|----------------------------------------------------------------------------------------------------------------------------------------|
| (in thousands)                                                                                                                         | **December 31,   2003** | March 31, 2003 |
| **Liabilities and  shareholders' equity**                                                                                              | ** ** |   |
| Current liabilities:                                                                                                                   | ** ** |   |
|   Accounts  payable                                                                                                          | **$    25,654 ** | $    26,759  |
|   Warranty and  related reserves                                                                                             | **  22,535 ** |   19,989  |
|   Accrued  compensation                                                                                                      | **16,297 ** | 18,753  |
|   Short-term  bank borrowings                                                                                                | **10,337 ** | 8,176  |
|   Sales returns                                                                                                              | **11,107 ** | 10,455  |
|   Income taxes  payable                                                                                                      | **661 ** | 453  |
|   Current  portion of purchase price related to acquired         technologies and acquisitions | **5,565 ** | 5,698  |
|   Dividends  payable                                                                                                         | **6,590 ** | 925  |
|   Accrued  royalties                                                                                                         | **710 ** | 770  |
|   Other                                                                                                                      | **14,585 ** | 13,214  |
| Total current liabilities                                                                                                              | **  114,041 ** | 105,192  |
| Deferred income taxes                                                                                                                  | **2,201 ** | 2,216  |
| Long-term accrued  liabilities                                                                                                         | **15,058 ** | 13,970  |
| Convertible  subordinated notes                                                                                                        | **150,000 ** | -    |
|                                                                                                                                        | ** ** |   |
| Commitments and  contingencies                                                                                                         | ** ** |   |
|                                                                                                                                   | ** ** |   |
| Shareholders' equity:                                                                                                                  | ** ** |   |
|   Common Stock,  $.10 par value:                                                                                             | ** ** |   |
|     Authorized  - 150,000,000 shares; Issued and outstanding--                                                     | ** ** |   |
|     43,930,800  shares at December 31, 2003;                                                                       | ** ** |   |
|     46,237,324  shares at March 31, 2003;                                                                          | **4,393 ** | 4,624  |
|   Capital in  excess of par value                                                                                            | **-   ** | **-   ** |
|   Foreign  currency translation adjustments                                                                                  | **20,745 ** | 6,511  |
|   Net  unrealized (losses) on securities                                                                                     | **(10)** | (112) |
|   Retained  earnings                                                                                                         | **216,599 ** | 265,687  |
|                                                                                                                                   | **241,727 ** | 276,710  |
|                                                                                                                                   | **$   523,027 ** | $    398,088  |
| See notes to condensed  consolidated financial statements.                                                                             |   |   |

----

| Mentor Corporation  Consolidated Statements of Income  Three Months Ended December 31, 2003 and 2002  (Unaudited) |
|-------------------------------------------------------------------------------------------------------------------|
|                                                                                                              | Three Months Ended  December 31, |
| (in thousands, except per  share data)                                                                            | **2003** | 2002 |
|                                                                                                                   | ** ** |   |
| Net sales                                                                                                         | **$  106,502 ** | $    94,039  |
|   Cost  of sales                                                                                        | **40,461 **
38,167 

  Gross  profit

**66,041 **

55,872 

** **

 

Selling, general, and  administrative expense

**40,627 **

32,194 

Research and development  expense

**7,216 **

5,799 

 

**47,843 **

37,993 

 

** **

 

Operating income

**18,198 **

17,879 

 Interest expense

**(371)**

(245)

 Interest income

**394 **

599 

 Other income, net

**182 **

526 

Income before income  taxes

**18,403 **

18,759 

Income taxes

**5,863 **

5,777 

Net income

**$  12,540 **

$   12,982 

** **

 

Basic earnings per share

**$      0.27 **

$      0.28 

Diluted earnings per  share

**$      0.26 **

$      0.27 

Dividends per share

**$      0.15 **

$      0.02 

** **

 

Weighted  average shares outstanding

** **

 

Basic

**45,769 **

46,380 

Diluted

**47,916 **

48,453 

 

 

See notes to condensed  consolidated financial statements.

 

 

Mentor Corporation  Consolidated Statements of Income  Nine Months Ended December 31, 2003 and 2002  (Unaudited)

 

Nine Months Ended  December 31,

(in thousands, except per  share data)

**2003**

2002

** **

 

Net sales

**$  304,871 **

$   281,302 

Cost of sales

**115,395 **

114,081 

Gross profit

**189,476 **

167,221 

** **

 

Selling, general, and  administrative expense

**110,205 **

94,236 

Research and development  expense

**22,470 **

16,538 

 

**132,675 **

110,774 

 

** **

 

Operating income

**56,801 **

56,447 

 Interest expense

**(681)**

(782)

 Interest income

**1,113 **

1,831 

 Other income, net

**1,107 **

1,731 

Income before income  taxes

**58,340 **

59,227 

Income taxes

**18,529 **

16,990 

Net income

**$  39,811 **

$   42,237 

** **

 

Basic earnings per share

**$      0.86 **

$      0.90 

Diluted earnings per  share

**$      0.82 **

$      0.87 

Dividends per share

**$      0.32 **

$      0.05 

** **

 

Weighted  average shares outstanding

** **

 

Basic

**46,239 **

46,685 

Diluted

**48,291 **

48,697 

 

See notes to condensed  consolidated financial statements.

 

Mentor Corporation  Consolidated Statements of Cash Flows  Nine Months Ended December 31, 2003 and 2002  (Unaudited)

(in thousands)

**2003**

2002

**Cash From Operating  Activities:**

** **

 

Net income

**$      39,811 **

$      42,237 

Adjustments to derive  cash flows from operating activities:

** **

 

  Depreciation 

**9,770 **

8,884 

  Amortization

**2,522 **

2,915 

  Deferred  income taxes 

**(1,452)**

(2,481)

  Tax benefit  from exercise of stock options

**2,895 **

2,567 

  Loss (gain)  on sale of assets

**20 **

(413)

  Imputed  interest on long-term liabilities

**194 **

457 

  Loss (gain)  on sale long-term marketable securities

**136 **

(403)

** **

 

Changes in operating  assets and liabilities:

** **

 

    Accounts  receivable

**3,441 **

2,275 

    Inventories

**(6,845)**

(5,933)

    Prepaid  income taxes and other current assets

**(3,725)**

2,658 

    Accounts  payable and accrued liabilities

**1,588 **

6,489 

    Income  taxes payable

**171 **

(4,006)

    Foreign  currency transaction (gain) 

**(1,325)**

(247)

Net cash provided by  operating activities

**$     47,201 **

$     54,999 

**Cash From Investing  Activities:**

** **

 

Purchases of property and  equipment

**(14,200)**

(11,960)

Purchases of intangibles

**(3,890)**

(808)

Purchases of marketable  securities

**(28,331)**

(3,215)

Sales of marketable  securities

**21,634 **

6,277 

Acquisitions, net of cash  acquired

**(13,391)**

(10,603)

Proceeds from sale of  property, equipment and intangibles

**- **

500 

Net cash (used) for  investing activities

**(38,178)**

(19,809) 

**Cash From Financing  Activities:**

** **

 

Issuance of convertible  notes, net issuance costs

**115,540 **

- 

Sale of warrants

**11,891 **

- 

Repurchase of common  stock

**(68,895)**

(19,997)

Proceeds from exercise of  stock options

**6,896 **

6,358 

Dividends paid

**(8,855)**

(2,110)

Borrowings (repayments)  under line of credit agreements, net

**804 **

(3,316)

Net cash (used) provided by  financing activities

**57,381 **

(19,065)

Effect of currency  exchange rates on cash and cash     equivalents

**1,066 **

  1,217 

Increase in cash and cash  equivalents

**67,470 **

17,342 

Cash and cash equivalents  at beginning of year

**105,840 **

60,398 

Cash and cash equivalents  at end of period

**$    173,310 **

$    77,740 
         **Supplemental non-cash investing activity**      Issuance of common stock in acquisition of  intangible assets**$       3,000 **          $           -
 

**MENTOR CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2003**

** Note A - Business Activity**

Mentor Corporation (the "Company") wasincorporated in April 1969.  The Company develops, manufactures andmarkets a broad range of products for the medical specialties in threereportable segments: aesthetic and general surgery (plastic and reconstructivesurgery), surgical urology, and clinical and consumer healthcare.  TheCompany's products are sold by our multiple sales forces directly to hospitals,clinics and physicians, and through various healthcare dealers, wholesalers,distributors and retail outlets.  Theaesthetic and general surgery products segment consists primarily of breastimplants, tissue expanders and the Company's body contouring (liposuction)equipment and disposables.  The surgical urology segment includes penileimplants, surgical incontinence products, and brachytherapy seeds for thetreatment of prostate cancer and associated supplies and deliverysystems.  The clinical and consumer healthcare segment includes cathetersand other disposable products for the management of urinary incontinence andretention.  

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

**Principles of Consolidation**

The consolidated financial statements include the accountsof the Company and all of its subsidiaries in which a controlling interest ismaintained.  For those subsidiaries where the Company owns less than 100%,the outside shareholders' interests are treated as minority interests. All intercompany accounts and transactions have been eliminated.  Certainprior year amounts in previously issued financial statements have beenreclassified to conform to the current year presentation.  
Basisof Presentation 
The financial information for the three and nine-monthperiods ended December 31, 2003 and 2002 is unaudited but includes alladjustments (consisting only of normally recurring accruals, unless otherwiseindicated) which the Company considers necessary for a fair presentation of theresults of operations for these periods.  Interim results are not necessarilyindicative of results for the full fiscal year. ** **

**Use of Estimates**

Financial statements prepared in accordance with accountingprinciples generally accepted in the United States require management to makeestimates and judgments that affect amounts and disclosures reported in thefinancial statements.  Actual results could differ from those estimates.   A discussion of theCompany’s significant accounting policies is described in the “Applicationof Critical Accounting Policies” section of “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations.”

**Stock Split, Changes in Authorized Shares and Move to NYSE**

On December 13, 2002, the Board of Directors authorized atwo-for-one stock split in the form of a 100% stock dividend distributed on orabout January 17, 2003 to shareholders of record as of December 31, 2002. All references in the financial statements to number of shares, per shareamounts and market prices of the Company's common stock, have beenretroactively restated to reflect the increased number of common sharesoutstanding.

At the annual meeting of shareholders held on September 12,2002, the shareholders approved a proposal to amend the Company's RestatedArticles of Incorporation to increase authorized shares from 50,000,000 to150,000,000.

Effective August 5, 2003 the Company's shares began tradingon the New York Stock Exchange under the symbol MNT. 

**Effects of Recent Accounting Pronouncements**

In December 2002, the Financial Accounting Standards Board("FASB") issued Statement of Financial Accounting Standards("SFAS") 148, Accounting for Stock-Based Compensation - Transitionand Disclosure, effective for fiscal years ending after December 15,2002.  SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation,to provide alternative methods of transition for a voluntary change to the fairvalue method of accounting for stock-based employee compensation.  Inaddition, SFAS 148 amends the disclosure requirement of SFAS 123 to requiremore prominent disclosures, in both annual and interim financial statements,about the method of accounting for stock-based employee compensation and the effectof the method used on reported results.  The Company has adopted the additionaldisclosure requirements of SFAS 148 and has elected to continue to follow theintrinsic value method of accounting as prescribed by Accounting PrinciplesBoard Opinion No. 25 (or APB 25), Accounting for Stock Issued to Employees, toaccount for employee stock options.  

In May 2003, the FASB issued SFAS No. 149, "Amendmentof Statement 133 on Derivative Instruments and Hedging Activities",effective for contracts entered into or modified after September 30, 2003 andfor hedging relationships designated after September 30, 2003.  This rule amends SFAS No. 133,"Accounting for Derivative Instruments and Hedging Activities", asamended, to provide more consistent reporting of contracts as eitherderivatives or hybrid instruments.  Theadoption of SFAS No. 149 did not have a material impact on the results ofoperations or the financial position of the Company. 

In May 2003, the FASB issued SFAS No. 150, "Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity", effective for financial instruments entered into or modifiedafter May 31, 2003, and otherwise is effective at the beginning of the firstinterim period beginning after September 15, 2003.  The adoption of SFAS No. 150 did not havea material impact on the results of operations or the financial position of theCompany. 

In January 2003, the FASB issued FIN 46, Consolidation ofVariable Interest Entities ("VIE").  FIN 46 defines a variableinterest entity as a corporation, partnership, trust, or any other legalstructure that does not have equity investors with a controlling financialinterest or that has equity investors that do not provide sufficient financialresources for the entity to support its activities.  FIN 46, effective forinterests held by public companies in variable interest entities or potentialvariable interest entities created before February 1, 2003, requiresconsolidation of a VIE by the primary beneficiary of the assets, liabilities,and results of activities.  FIN 46also requires certain disclosures by all holders of a significant variableinterest in a VIE that are not the primary beneficiaries.  The adoption ofthis interpretation did not have any impact on the Company’s consolidatedfinancial position or results of operations.

**Note C - Interim Reporting**

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

Fiscal 2004

Fiscal 2003

First Quarter

June 27, 2003

June 28, 2002

Second Quarter

September 26, 2003

September 27, 2002

Third Quarter

January 2, 2004

December 27, 2002

The accompanying unaudited condensed consolidated financialstatements for the three-month and nine-month periods ended December 31, 2003and 2002 have been prepared in accordance with accounting principles generallyaccepted in the United States for interim financial information and withinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly,they do not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements.  In the opinion of management, all adjustments (consistingonly of normally recurring accruals, unless otherwise indicated) considerednecessary for a fair presentation of the results of operations for theindicated periods have been included.  Certain amounts recorded inprevious periods have been reclassified to conform to the current periodpresentation.  Operating results for the three-month and nine- monthperiods ended December 31, 2003 are not necessarily indicative of the resultsfor the full fiscal year. 

The balance sheet at March 31, 2003 has been derived fromthe audited financial statements at that date, but does not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.

The condensed consolidated financial statements should beread in conjunction with the Company's Annual Report on Form 10-K for the yearended March 31, 2003.** **

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

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

The Company considers its marketable securitiesavailable-for-sale as defined in SFAS No. 115, "Accounting for CertainInvestments in Debt and Equity Securities."  Realized gains andlosses and declines in value considered to be other than temporary are includedin income.  The cost of securities sold is based on the specificidentification method.  For short-term marketable securities, there wereno material realized or unrealized gains or losses, nor were there any materialdifferences between estimated fair values, based on quoted market prices, andthe costs of securities in the investment portfolio as of December 31, 2003 andMarch 31, 2003.  Short-term investments, except auction rate securities,mature between three months and one year from the purchase date.  TheCompany's short-term marketable securities consist primarily of money marketmutual funds, U.S., state and municipal government obligations, auction ratesecurities, and investment grade corporate obligations including commercialpaper.  Auction rate securities carry interest or dividend rates thatreset every 28 days but have contractual maturities of greater than one year.

The Company's long-term marketable securities andinvestments include investments in Federal Home Loan Bank and MortgageAssociation bonds (FHLA bonds) with maturities of two to four years.  TheCompany has an investment in Paradigm Medical Industries, Inc.  Paradigm reported financial andoperational difficulties and its quoted market prices decreased substantiallyduring the year ended March 31, 2003.  In the quarter ended March 31,2003, the Company determined the decrease in market prices were more thantemporary and recorded a one-time impairment charge of $1,857,000 pre-tax inother income, net.  The remaininginvestment in Paradigm is recorded at $122,000 at December 31, 2003.

Available-for-sale investments at December 31, 2003 were asfollows:

** **

** **

** **

**Gross**

**Gross**

**Estimated**

** **

** **

**Adjusted**

**Unrealized**

**Unrealized**

**Fair**

**(in thousands)**

**Cost**

**Gains**

**Losses**

**Value**

**Cash balances**

**$   17,243**

**$         -**

**$         - **

**$  17,243**

**Money market mutual  funds**

**156,067**

** **

** **

**156,067**

**Marketable equity  securities**

**114**

**8**

** **

**122**

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

**9,227**

** **

**(24)**

**9,203**

**Corporate debt  securities**

**278**

** **

** **

**278**

**   Total  available-for-sale investments**

**$ 182,929**

**$        8**

**$     (24)**

**$182,913**

** **

** **

** **

** **

** **

**Included in cash and  cash equivalents**

**$ 173,310**

**$         -**

**$         - **

**$173,310**

**Included in current  marketable securities**

**227**

** **

** **

**227**

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

**9,392**

**8**

**(24)**

**9,376**

**   Total  available-for-sale investments**

**$ 182,929**

**$        8**

**$     (24)**

**$182,913**

Available-for-saleinvestments at March 31, 2003 were as follows:

 

 

 

Gross

Gross

Estimated

 

 

Adjusted

Unrealized

Unrealized

Fair

(in thousands)

Cost

Gains

Losses

Value

Cash balances

$   16,733

$          -

$          -

$    16,733

Bank time deposits

-

-

-

-

Money market mutual funds

89,107

-

-

89,107

Marketable equity  securities

3,493

7

(2,040)

1,460

U.S., State and Municipal  agency      obligations

  2,184

  3

  -

  2,187

Corporate debt securities

278

-

-

278

   Total  available-for-sale investments

$ 111,795

$       10

$ (2,040)

$  109,765

 

 

 

 

Included in cash and cash  equivalents

$ 105,840

$          -

$           -

$  105,840

Included in current  marketable securities

184

-

-

184

Included in long-term  marketable      securities and investments

  5,771

  10

  (2,040)

  3,741

   Total  available-for-sale investments

$ 111,795

$       10

$ (2,040)

$  109,765

** Note E -Inventories**

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

Inventories at December 31, 2003 and March 31, 2003consisted of:

(in thousands)

**December 31,**

March 31,

Raw materials

**$         12,373**

$         12,175

Work in process

**10,178**

10,894

Finished goods

**49,436**

38,200

 

**$        71,987**

$         61,269

**Note F - Property and Equipment**

Property and equipment is stated at cost.  Depreciationis based on the useful lives of the properties and computed using thestraight-line method.  Buildings are depreciated over 30 years, furnitureand equipment over 3 to 10 years and leasehold improvements over the shorter oftheir estimated remaining lives or lease term.  Significant improvementsand betterments are capitalized while maintenance and repairs are charged tooperations as incurred.

Property and equipment at December 31, 2003 and March 31,2003 consisted of:

(in thousands)

**December 31,**

March 31, 

Land

**$         568 **

$         538 

Buildings

**24,183 **

24,595 

Leasehold improvements

**23,978 **

23,551 

Furniture, fixtures and  equipment

**96,012 **

79,032 

Construction in progress

**10,617 **

6,620 

**155,358 **

134,336 

Less accumulated  depreciation

**     (76,180)**

      (65,665)

 

**$    79,178 **

$    68,671 

**Note G - Warranties**

The Companyprovides an accrual for the estimated cost of product warranties and productliability claims at the time revenue is recognized.  Such accruals are based on estimates,which are based on relevant factors such as historical experience, the warrantyperiod, estimated costs, levels of insurance and insurance retentions, identifiedproduct quality issues, if any, and, to a limited extent, information developedby the insurance company using actuarial techniques.  The Company assesses the adequacy ofthese accruals periodically and adjusts the amounts as necessary based on actualexperience and changes in future expectations.

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

Nine Months Ended  December 31,
(in thousands)**2003 **2002 
Beginning  warranty and related reserves

**$19,989 **

$16,252  

Costs of  warranty claims

**(2,876)**

(2,997)

Accruals  for product warranties

**5,422 **

5,646 

Ending  warranty and related reserves

**$22,535 **

$18,901  

**Note H - Other Comprehensive Income**

The components of comprehensive income are listed below:

 

Three Months Ended  December 31,

Nine Months Ended   December 31,

(in thousands)

**2003** 

2002 

**2003**

2002 

Net income

**$12,540 **

$12,982 

**$39,811**

$42,237 

Foreign currency  translation adjustment

**8,381 **

4,446 

**14,239**

11,039 

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

**(44)**

(60)

**102**

(1,757)

Comprehensive income

**$20,877 **

$17,368 

**$54,152**

$51,519 
Note I - Stock Options
The Company has granted options to key employees andnon-employee directors under its Amended 2000 Long-Term Incentive Plan (2000Plan) and 1991 Plan.  Optionsgranted under both plans are exercisable in four equal annual installmentsbeginning one year from the date of grant, and expire ten years from the dateof grant.  Options are granted at the fair market value as of the date ofgrant.  Options to purchase 1,073,135 shares of common stock at $21.00 pershare were granted during the quarter ended June 30, 2003.  No grants were made in the quarter endedSeptember 30, 2003.  Options topurchase 150,000 shares of common stock at $21.70 per share were granted duringthe quarter ended December 31, 2003.

Stock option exercise prices are set at the fair marketvalue of the Company's common stock on the date of grant and the related numberof shares granted is fixed at that point in time.  Therefore, under theprinciples of APB Opinion 25, the Company does not recognize compensationexpense associated with the grant of stock options.  SFAS 123"Accounting for Stock-Based Compensation", requires the use of anoption valuation model to provide supplemental information regarding optionsgranted after fiscal 1995.  Pro forma information regarding net income andearnings per share shown below were determined as if the Company had accountedfor its employee stock options under the fair value method of that statement.  The estimated fair value of the optionsis amortized ratably over the option's vesting period.  As required bySFAS No. 148, "Accounting for Stock-Based Compensation - Transition andDisclosure - an amendment of FASB Statement No. 123", the following tableshows the estimated effect on net income and earnings per share if the Companyhad applied the fair value recognition provision of SFAS 123 to stock-basedemployee compensation.  The Company's pro forma information is as follows:

Three Months Ended  December 31,

Nine Months Ended   December 31,

(in thousands except per  share data)

**2003 **

2002 

**2003 **

2002 

Net income: as  reported (1) 

**$  12,540 **

$12,982 

**$39,811 **

$42,237 

Deduct: compensation  expense fair value    method

**(2,179)**

  (1,602)

**(5,795)**

  (4,806)

Net income:  pro  forma

**$  10,361 **

$11,380 

**$34,016 **

$37,431 

** **

 

** **

 

Basic earnings per  share:  as reported

**$       .27 **

$      .28 

**$       .86**

$      .90 

Basic earnings per  share:  pro forma 

**$       .23 **

$      .25 

**$       .74**

$      .80 

** **

 

** **

 

Diluted earnings per  share:  as reported

**$       .26 **

$      .27 

**$       .82**

$      .87 

Diluted earnings per  share:  pro forma

**$       .22 **

$      .23 

**$       .72**

$      .77 

(1) Net income as reported includes no compensation  expense associated with stock grants.

** **

 

** **

 

**Note J - Income Taxes**

The effective rate of corporate income taxes was 31.8% and 28.7%for the nine-month periods ended December 31, 2003 and 2002,respectively.  The effective tax rate for the nine-month period ended December2002 reflects refunds received in the first, second and third quarters offiscal 2003 related to the amendment of tax returns for the Company's foreignsales corporation. 

**Note K - Earnings per Share**

Basic Earnings per share is computed by dividing net incomeavailable to common shareholders by the weighted average number of shares ofthe Company’s common shares outstanding during the period. Dilutedearnings per share is calculated in the same manner as basic earnings per shareexcept that the number of shares outstanding is increased by potentiallydilutive common shares outstanding during the period.  Potentially dilutive common sharesconsist of shares issuable under the terms of employee stock options, warrants,and the 23⁄4% convertible subordinated notes.  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)

**2003**

2002

**2003**

2002

 
Weighted average  outstanding shares:  basic

**45,769**

46,380

**46,239**

46,685

 
Shares issuable upon  conversion of 23⁄4% of   convertible subordinated notes

**-**

  -

**-**

  -

 
Shares issuable upon  exercise of stock options

**2,147**

2,073

**2,052**

2,012

 
Shares issuable upon exercise  of warrants

**-**

-

**-**

-

 
Weighted average  outstanding shares:  diluted

**47,916**

48,453

**48,291**

48,697

 
Shares issuable through stock options are determined usingthe treasury stock method.  Certain potentialshares issuable under the terms of employee stock options and upon theconversion of the 23⁄4% convertible subordinated notes were excluded fromthe computation of diluted earnings per share since their exercise orconversion prices were greater than the market prices of the common sharesduring or at the end of the period, and accordingly, their effect would havebeen anti-dilutive.  Additionally,during the quarter ended December 31, 2003, the price of the Company’sstock did not exceed the specific strike prices of the convertible bond hedge orthe warrants that the Company entered into to reduce the potential dilutionfrom any conversion of the notes. Both the bond hedge and the warrants transaction may be settled at theCompany’s option, either in cash or shares, and expire on January 1,2009.  

**Note L - ShareRepurchase Program**

The Company has a stock repurchase program, primarily to offsetthe dilutive effect of our employee stock option program, to provide liquidityto the market and to reduce the overall number of shares outstanding.  Allshares repurchased under the program are retired and are no longer deemed to beoutstanding.  In May 1999, the Boardof Directors authorized the repurchase of 9.2 million shares of our stock.  Each year shares have been repurchasedincluding 1.4 million shares for $22.3 million and 1.5 million shares for $18.7million in the years ended March 31, 2003 and 2002, respectively.  At March 31, 2003, 1.8 million shareswere remaining under this authorization. On July 31, 2003 the Board of Directors increased the authorized numberof shares to be repurchased from 1.8 million to 4 million shares.  On December 5, 2003, the Board ofDirectors increased the authorized number of shares to be repurchased by 5million shares from 2.5 million to 7.5 million shares.  Since April 1, 2003, 3.4 million shareshave been repurchased for $75.1 million and 5.6 million shares remainauthorized for repurchase.  Thetiming of repurchases is subject to market conditions, cashavailability, and blackout periods during which the Company is restricted fromrepurchasing shares.  Thereis no guarantee that shares authorized for repurchase by the Board willultimately be repurchased. 

**Note M - Acquisitions**

**Portex Ltd.**

On May 6, 2002, the Company purchased the assets of theurology and ostomy businesses of Portex Ltd., a subsidiary of Smiths Groupplc.  The acquired businesses, now named Mentor Medical, Ltd.,manufactures and markets incontinence and ostomy products primarily for thehome healthcare market.  The products are sold mainly in the UK, Germanyand the Netherlands.  The acquisition was valued at $11,232,000, of which$10,603,000 was paid in cash, plus an acquired liability of $629,000.  Theacquisition was accounted for using SFAS No. 141, "BusinessCombinations," using the purchase method of accounting, and the purchaseprice was allocated to the tangible and intangible net assets acquired on thebasis of their respective fair values on the acquisition date.  The total purchaseprice was preliminarily allocated to inventory of $3,150,000, buildings of$739,000, production equipment of $1,185,000, leasehold improvements of$621,000, patents, trademarks and licenses of $731,000 and goodwill and otherintangibles with indefinite lives of $4,806,000. 

**Mills Biopharmaceuticals, Inc.**

On February 1, 2003, the Company completed the acquisitionof Mills Biopharmaceuticals, Inc., a manufacturer of iodine brachytherapy seedsfor the treatment of prostate cancer.  The acquisition was accountedfor using SFAS No. 141, "Business Combinations," using the purchasemethod of accounting, and the purchase price was allocated to the tangible andintangible net assets acquired on the basis of their respective fair values onthe acquisition date.  The acquisition was valued at $4,063,000, net ofcash acquired, and was paid from existing cash balances.  The purchaseprice was preliminarily allocated to accounts receivable of $626,000, inventoryof $322,000, other assets of $36,000, production equipment of $830,000,long-term investments, preliminarily valued at $1,100,000, and goodwill andother intangibles with indefinite lives of $1,410,000, net of accruedliabilities of $261,000. 

**A-Life Ltd**

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

**Note N –Goodwill & Intangible Assets**

The aggregate amortization expense on intangible assets recorded forthe nine months ended December 31, 2003 was $2,522,000.  The following table summarizes theestimated aggregate amortization expense for each of the five succeeding years:

  Year Ended

Estimated Amortization Expense (in  thousands)

March 31, 2004

$3,655

March 31, 2005

$3,950

March 31, 2006

$3,841

March 31, 2007

$3,666

March 31, 2008

$3,652

The changes in the carrying amount ofgoodwill at December 31, 2003 and for the year ended March 31, 2003 and 2002 areas follows:
  (in thousands)
  Aesthetic and General Surgery
Surgical   Urology
Clinical and Consumer Healthcare
  Total
Balance at March 31, 2001

$      692 

$  2,948 

$   3,055 

$    6,695 

 

 

 

 

 

Goodwill acquired during year

3,760 

-- 

--

3,760 

Goodwill amortization

(442)

(35)

(103)

(580)

 

 

 

 

 

Balance at March 31, 2002

4,010 

2,913 

2,952 

9,875 

 

 

 

 

 

Goodwill acquired during year

-- 

1,410 

5,235 

6,645 

 

 

 

 

 

Balance at  March 31, 2003

4,010 

4,323 

 8,187 

16,520 

 

 

 

 

 

**Translation  and other**

**-- **

**417 **

**1,060 **

**1,477 **

**Goodwill acquired**

**2,976 **

**-- **

**-- **

**2,976 **

 

 

 

 

 

**Balance at  December 31, 2003**

**$  6,986 **

**$  4,740**

**$  9,247 **

**$  20,973 **

**Note O - Long-term Debt**

On December 22, 2003, the Companycompleted an offering of $150 million of convertible subordinated notes dueJanuary 1, 2024 pursuant to Rule 144A under the Securities Act of 1933. Thenotes bear interest at 23⁄4% per annum and are convertible into shares ofthe Company’s common stock at a conversion price of $29.289 per share andare subordinated to all existing and future senior debt. 

Holders of the notes may convert their notes only if any of the followingconditions is satisfied: 
- during     any fiscal quarter prior to January 1, 2019, if the closing price of the     Company’s common stock for at least 20 trading days in the 30     consecutive trading day period ending on the first trading day of such     fiscal quarter is more than 120% of the conversion price per share of the     Company’s common stock on such trading day; 
- any business day on or after     January 1, 2019, if the closing price of the Company’s common stock     on the immediately preceding trading day is more than 120% of the     conversion price per share of the Company’s common stock on such     trading day; 
- during the five business day     period after any five consecutive trading day period if the average of the     trading prices of the notes for such five consecutive trading day period     is less than 98% of the average of the conversion values of the notes     during such period, subject to certain limitations; 
- if the     Company 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.

At an initial conversion price of$29.289, each $1,000 principle amount of notes will be convertible into 34.1425shares of common stock. 

Concurrent with the issuance ofthe convertible subordinated notes, the Company entered into a convertible bondhedge and a warrants transaction with respect to its common stock, the exposurefor which is held by Credit Suisse First Boston LLC.  Both the bond hedge and the warrantstransaction may be settled at the Company’s option either in cash orshares and expire January 1, 2009. The convertible bond hedge and warrants transactions combined are intendedto reduce the potential dilution from conversion of the notes.  The warrants have been included instockholder’s equity in accordance with the guidance in Emerging Issues TaskForce No. 00-19, “Accounting for Derivative Financial Instruments Indexedto and Potentially Settled in a Company’s own Stock.”

**Note P - Business Segment Information**

The Company's operations are principally managed andreported on a product basis.  There are three reportable segments: aesthetic and general surgery, surgical urology, and clinical and consumerhealthcare.  The accounting policies of the reportable segments are thesame as those described in the summary of significant accounting policiesexcept that certain corporate operating expenses and certain other expensessuch as interest are not allocated to the segments.

The aesthetic and general surgery products segment consistsprimarily of breast implants, tissue expanders and the Company's bodycontouring (liposuction) equipment and disposables.  The surgical urologysegment includes penile implants, surgical incontinence products, andbrachytherapy seeds for the treatment of prostate cancer.  The clinicaland consumer healthcare segment includes catheters and other disposableproducts for the management of urinary incontinence and retention.

Selected financial information for the Company's reportablesegments for the three-month and nine-month periods ended December 31, 2003 and2002, and as of December 31, 2003 and March 31, 2003, is as follows:

Three Months Ended   December 31,

Nine Months Ended  December 31,

 
(in  thousands)

**2003**

2002

**2003**

2002

 
**Net Sales**

** **

 

** **

 

 
Aesthetic  and General Surgery

**$     54,821 **

$     44,105 

**$     157,523 **

$    140,533 

 
Surgical  Urology

**26,521 **

27,302 

**78,513 **

79,290 

 
Clinical  and Consumer Healthcare 

**25,160 **

22,632 

**68,835 **

61,479 

 
  Total  consolidated revenues

**$   106,502 **

$     94,039 

**$     304,871 **

$    281,302 

 
 

** **

 

 

 

 
Three Months Ended   December 31,

Nine Months Ended  December 31,

 
(in  thousands)

**2003**

2002

**2003**

2002

 
**Operating profit**

** **

 

 

 

 
Aesthetic  and General Surgery

**$    18,531 **

$    14,779 

**$      54,308 **

$     49,133 

 
Surgical  Urology

**(1,277)**

2,076 

**(489)**

5,170 

 
Clinical  and Consumer Healthcare

**3,486 **

3,821 

**9,920 **

10,280 

 
  Total  reportable segments

**$    20,740 **

$    20,676 

**$      63,739 **

$     64,583 

 
 

 

 

 

 

 
Three Months Ended   December 31,

Nine Months Ended  December 31,

 
(in  thousands)

**2003**

2002

**2003**

2002

 
**Operating income**

** **

 

 

 

 
Reportable  segments

**$    20,740 **

$   20,676 

**$     63,739 **

$     64,583 

 
Corporate  operating expenses

**(2,542)**

(2,797)

**(6,938)**

(8,136)

 
Interest  expense

**(371)**

(245)

**(681)**

(782)

 
Interest  income

**394 **

599 

**1,113 **

1,831 

 
Other  income

**182 **

526 

**1,107 **

1,731 

 
Income  before income taxes

**$    18,403 **

$   18,759 

**$    58,340 **

$    59,227 

 
 

 

 

 

 

 
 

As of

 

 

  (in  thousands)

**December 31, 2003**

March 31,  2003

 
**Identifiable assets**

** **

 

 

 

 
Aesthetic  and General Surgery

**$  117,797 **

$102,570 

** **

** **

 
Surgical  Urology

**114,115 **

105,415 

** **

** **

 
Clinical  and Consumer Healthcare

**72,950 **

62,155 

** **

** **

 
  Total  reportable segments

**$  304,862 **

$270,140 

** **

** **

 
 

 

 

 

 

  
**Item 2.**

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

CautionaryStatement

You should read the following discussion andanalysis in conjunction with our Unaudited Condensed Consolidated FinancialStatements and related Notes thereto contained elsewhere in this Report.  The information contained in thisQuarterly Report on Form 10-Q is not a complete description of ourbusiness or the risks associated with an investment in our common stock.  We urge you to carefully review andconsider the various disclosures made by us in this Report and in our otherreports filed with the Securities and Exchange Commission, including our AnnualReport on Form 10-K for the year ended March 31, 2003 and subsequentreports on Forms 10‐Q and 8‐K, which discuss our business ingreater detail.

The section entitled “RiskFactors” set forth below, and similar discussions in our other SECfilings, discuss some of the important risk factors that may affect ourbusiness, results of operations and financial condition.  You should carefully consider those risks,in addition to the other information in this Report and in our other filingswith the SEC, before deciding to purchase, hold or sell our common stock.

All statements included in this Report, otherthan statements or characterizations of historical fact, are forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995.  Examples offorward-looking statements include, but are not limited to, statements concerning:
-  our anticipated growthstrategies; 
-  our intention to introduce or seekregulatory approval for new products; 
-  our ability to continueto meet FDA and other regulatory requirements; 
-  our anticipated outcomesof litigation and regulatory reviews; 
-  our ability to replacepending and possible future sources of supply without disruption or regulatory delay; 
-  our accounting estimates,assumptions and judgments, the market acceptance and performance of ourproducts, the competitive nature of and anticipated growth in our markets; 
-  our ability to consummateacquisitions and integrate their operations successfully; and 
-  the need for additionalcapital. 

These forward-looking statements are based onour current expectations, estimates and projections about our industry,management’s beliefs, and certain assumptions made by us.  Forward-looking statements can often beidentified by words such as “anticipates,” “expects,”“intends,” “plans,” “predicts,”“believes,” “seeks,” “estimates,”“may,” “will,” “should,”“would,” “could,” “potential,”“continue,” “ongoing,” and similar expressions, andvariations or negatives of these words. In addition, any statements that refer to expectations, projections,forecasts or other characterizations of future events or circumstances,including any underlying assumptions, are forward-looking statements.  These forward-looking statements speakonly as of the date of this Report and are based upon the information availableto us at this time.  Suchinformation is subject to change, and we will not necessarily inform you ofsuch changes.  These statements arenot guarantees of future results and are subject to risks, uncertainties andassumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely fromthose expressed in any forward-looking statement as a result of various factors,some of which are listed under the section “Risk Factors”below.  We undertake no obligationto revise or update publicly any forward-looking statement for any reason.

**APPLICATION OF CRITICAL ACCOUNTING POLICIES**

Management's Discussion and Analysis of Financial Conditionand Results of Operations addresses our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States.  The preparation of these financial statementsrequires us to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosure of contingent assets and liabilitiesat the date of the financial statements, and the reported amounts of revenuesand expenses during the reporting period.  On an on-going basis, weevaluate our estimates and judgments.  We base our estimates and judgmentson historical experience and on various other factors that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources.  Actual results may differ fromthese estimates under different assumptions or conditions.  

Management has identified the critical accounting policiesto be those related to revenue recognition, accounts receivable, inventories,warranties and related reserves, and goodwill and intangible assetimpairment.  These accounting polices are discussed in the “Management'sDiscussion and Analysis of Financial Condition and Results of Operations”and notes to the consolidated financial statements included in the Company'sAnnual Report on Form 10-K for the fiscal year ended March 31, 2003.

Recent Developments 

On December 13, 2002 the Board of Directors authorized atwo-for-one stock split in the form of a 100% stock dividend distributed on orabout January 17, 2003 to shareholders of record as of December 31, 2002. All references in this report to the number of shares and per share amountshave been retroactively restated to reflect the increased number of commonshares outstanding.   

On October 29, 2003, we completed the acquisition of InformSolutions Inc., based in San Diego California.  Inform Solutions is a leading provider ofcomprehensive integrated practice management software and revenue enhancementservices to the plastic surgery industry. We paid cash and committed to several milestone payments over thefollowing three years based upon sales and earnings.  We expect that the software andconsulting revenues generated by Inform Solutions will not be substantial.  We do, however, anticipate that thesoftware and services Inform Solutions offers will assist our plastic surgerycustomers to grow the cosmetic breast surgery portion of their patient mix, which would in turn result in growth of our aesthetic product sales.

On December 10, 2003 we completed a licensing agreement withthe Wisconsin Alumni Research Foundation (“WARF”) which gives usthe exclusive manufacturing and marketing rights to the proprietary botulinumtoxin technology developed at the University of Wisconsin-Madison.  In exchange, we paid cash and committedto royalty payment based upon future sales and milestone payments based upondevelopmental milestones.  We do notexpect any revenues from products utilizing this technology in fiscal year 2004or fiscal year 2005, as the products will require additional research, clinicalstudies and regulatory approvals before they can be marketed.  

On December 22, 2003, we completedan offering of $150 million of convertible subordinated notes due January 1,2024 pursuant to Rule 144A under the Securities Act of 1933.  The notes bear interest at 23⁄4% perannum and are convertible into shares of the our common stock at a conversionprice of $29.289 per share and are subordinated to all existing and futuresenior debt.  

**RESULTS OF OPERATIONS**

**For the three-month period ended December 31, 2003 comparedto the three-month period ended December 31, 2002**

**Sales**

Sales for the three-month period ended December 31, 2003increased to $106.5 million from $94.0 million in the comparable period in theprevious year, an increase of 13%.  Foreignexchange rate movements, primarily the stronger Euro, had a favorableyear-to-year impact on international sales of $5.6 million for the three-monthperiod. 

Sales of aesthetic and general surgery products increased 24%to $54.8 million for the three months ended December 31, 2003 from $44.1million in the same period in the prior year.  Total sales of breastimplant products increased 23% to $49.0 million for the quarter from $39.7million in the same period of the prior year.   Approximately $1.5 million of this increaseis attributable to the favorable impact of foreign exchange rate movements andthe balance is primarily attributable to organic growth in units sales of oursilicone gel implants and associated products used in reconstruction surgeries. Sales of body contouring productsincreased 36% to $4.1 million for the quarter from $3.0 million during the sameperiod in the prior year.  Increases in body contouring product sales areprimarily attributable to increased liposuction procedural volumes, asawareness and acceptance of this procedure increases.  In addition, other product revenuesincreased by $0.3 million, primarily related to the revenues from our acquisitionof Inform Solutions, Inc. early in the quarter. 

Sales of surgical urology products decreased 3% to $26.5million for the quarter ended December 31, 2003 from $27.3 million in the prioryear.  The $0.8 million decrease in segment revenue is the result of a $2.8million decrease in brachytherapy products sales, partially offset by a $2.3million favorable impact of foreign exchange rate variations.  In addition, penile implant sales decreased8% to $5.9 million from $6.4 million in the comparable period of the prior yearprimarily due to lower unit sales as a result of the recent introduction ofseveral new oral treatments for impotence.  Women’s Health (pelvic floor) productrevenue increased 55% to $3.9 million from $2.5 million in the comparable periodin the prior year primarily due to increased unit volumes on continued momentumof several new product introductions made late in fiscal 2002 and the August2003 introduction of our ObTapeTM sling product for pelvic floorreconstruction for female urinary incontinence to the U.S. market.  The ObTape sling utilizes a simpler andless invasive surgical technique.  Brachytherapyproducts sales decreased 44% from the comparable three-month period of theprior year, primarily as a result of interruption of our supply of palladiumradioactive seeds after the January 2003 expiration of our exclusivedistribution agreement with NASI.  Inaddition, alternative procedures, changes in Medicare reimbursement, andadditional competitive pressures have decreased procedural volumes and decreasedaverage selling prices of our brachytherapy products.  Due to difficultiesin increasing manufacturing capacity in a short time frame, we have been unableto secure sufficient new vendor supply of brachytherapy seeds to fulfillcustomer orders.  These marketfactors and supply interruptions have resulted in lost sales of approximately$3 million per quarter, and may continue through the remainder of fiscal 2004.  Sales of disposable urinary care andother products totaled $13.1 million in the three-month period ending December31, 2003 compared to $11.9 million in the same period in the prior year.  A decrease in unit sales was offset bythe favorable impact of foreign exchange rate variations estimated to be $2.3million, resulting in the overall increase.  

Sales of clinical and consumer healthcare products increased11% to $25.2 million for the quarter ended December 31, 2003, from $22.6million in the same period of the prior year.  Sales of intermittent catheters increased13%, or $1.0 million, and were partially offset by a decrease of 11%, or $0.6million, in sales of male external catheters as compared to the same period ofthe prior year.  Sales of other disposable homecare and ostomy productsincreased 22% to $11.8 million from $9.6 million in the comparable period ofthe prior year primarily due to the favorable impact of foreign exchange ratevariations of $1.7 million. 

Sales  by Principal Product Line

For  the Three Months Ended December 31,

For  the Nine Months Ended   December 31,

  (in thousands)

**2003**

  2002

Percent  Change

**2003**

  2002

Percent  Change

Aesthetic & General Surgery      Products

**$54,821**

$44,105

24%

**$157,523**

$140,533

12%

Surgical Urology Products

**26,521**

27,302

(3%)

**78,513**

79,290

(1%)

Clinical & Consumer      Healthcare Products

**25,160**

22,632

11%

**68,835**

61,479

12%

** **

**$106,502**

$94,039

13%

**$304,871**

$281,302

8%

**Gross profit**

Gross profit margin increased to 62.0%of net sales for thequarter ended December 31, 2003, compared to 59.4% for the comparable period infiscal 2003.  Gross profit for the aesthetic and general surgery products were71% of net sales, or $39 million, for the quarter ending December 31, 2003, unchangedfrom the comparable period in the prior year.  Gross profit margin for surgical urologyproducts improved to 54% of net sales, for the quarter ended December 31, 2003,compared to the 49% of net sales during the same period in the prior year.  Approximately three percentage points ofthe increase in gross margin percentage was attributable to the February 2003acquisition of Mills Biopharmaceuticals, Inc., to manufacture our own iodinebrachytherapy seeds, which added approximately $0.7 million in gross profit forthe quarter.  The balance of theimprovement was primarily the result of the significant changes in ourbrachytherapy seed business.  Decreasesin sales of brachytherapy seeds, particularly palladium seeds, aided theimprovement in gross margin percentage as these products have a relatively lowgross profit margin, approximately 30%, when purchased from othermanufacturers.  This shift inproduct mix towards higher margin products was a result of the decrease in brachytherapyseed sales as a result of decreased average selling prices, decreasedprocedural volumes and the interruption of supply of palladium seeds.  Grossprofit margins for clinical and consumer healthcare products improved to 52% ofnet sales for the quarter ended December 31, 2003, compared to 47% during thesame period in the prior year.  Theimprovement from the prior year was primarily due to efficiencies of scale andimproved manufacturing efficiencies at our manufacturing facilities, and thebenefit of foreign currency variations.

**Selling, General and Administrative**

Selling, general and administrative expenses increased to 38.1%of net sales, or $41 million, for the quarter ended December 31, 2003, comparedto 34.2%, or $32 million, for the comparable quarter in the prior year. The increase as a percentage of net sales is the result of additional sellingexpenses in the surgical urology segment, primarily in our internationaloperations related to our disposable urinary care products manufactured by Porges,which accounted for $2.9 million of the increase, and the effect of currencyrate variations, which had an unfavorable effect of $2.3 million.  In addition, general and administrativeexpenses increased primarily due to additional expenses of approximately $0.6million associated with our recently acquired subsidiaries, increasedinformation technology support, and non-capitalizable expenses related to theimplementation of our new information technology system, estimated to be $0.2million.  

**Research and Development**

Research and development expenses for the three-month periodended December 31, 2003 increased from 6.2% to 6.8% as a percentage of netsales, and were $7.2 million compared to $5.8 million for the comparable perioda year ago.  Approximately $0.7 million of the increase was attributed to theaesthetic and general surgery segment and was primarily due to increasedactivity in our breast implant studies to support our gel implant PMA.  The gel implant PMA was filed with theFDA in December 2003 and the FDA has informed us that our application forsilicone gel-filled breast implants “is sufficiently complete to permit asubstantive review and is, therefore, suitable for filing.”   Approximately $0.5 million of the increase is associated withour recently acquired subsidiaries, Mills Biopharmaceuticals, Inc., and A-Life.The remaining increase of $0.2 million is attributable to our ongoingdevelopment activities in our surgical urology segment and the development of automatedmanufacturing technologies.  Inaddition, we are committed to a variety of clinical and laboratory studies inconnection with our gel-filled and saline-filled mammary implants and otherproducts.  Weexpect to begin new clinical and laboratory studies in the near future for our newlylicensed botulinum toxin, and our recently acquired hyaluronic acid productsfor facial applications.  We expect the level of spending on researchand development activities to continue at the current levels for the remainderof fiscal 2004. 

**Interest and Other Income and Expense**

Interest expense increased to $371,000 in the third quarter offiscal 2004, compared to $245,000 in the same period of the prior year.  Interestexpense includes interest on our foreign lines of credit and imputed intereston long-term liabilities recorded at net present value related to theacquisitions of assets of South Bay Medical and PROSURG Inc. during fiscal 2001and 2002, respectively.  In lateDecember 2003, we issued 23⁄4% convertible subordinated notes totaling$150 million.  Interest expense forthe quarter includes a partial month of accrued interest payable andamortization of bond issue costs.  Theincrease in interest expense is attributable to the interest on these notes,partially offset by lower rates of interest, lower levels of borrowings on ouroperating lines and decreased levels of imputed interest on acquisitionliabilities. 

Interest income decreased to $394,000 in the third quarterof fiscal 2004, from $599,000 in the same period of the prior year.  The decrease is due to lower prevailinginterest rates on short-term investments, partially offset by higher levels ofcash balances available for investment.  The proceeds from the convertiblesubordinated notes were available for investment for only a portion of Decemberand did not impact interest income significantly.    

Other income (expense), net primarily includes gains orlosses on sales of marketable securities, disposals of non-operating assets,and foreign currency gains or losses related to our foreign operations.  Otherincome, net decreased for quarter ended December 31, 2003 to $182,000 comparedto $526,000 in the comparable period in the prior year.  This decrease was the result of thefavorable impact of the Euro’s relative strength compared to the U.S.dollar offset by a decrease in realized and unrealized gains and losses in ourportfolio of marketable securities. 

**Income Taxes**

Our effective rate of corporate income taxes for the quarterended December 31, 2003 was 31.8% as compared to 30.8% for the comparableperiod in the prior year.  The increase in the effective tax raterepresents a return to our historic effective tax rate as the prior year’srates reflected refunds received in the third quarter of fiscal year 2003related to the amendment of tax returns for our foreign sales corporation.

**Net Income**

Net income for the quarter ended December 31, 2003 decreased3% to $12.5 million from $13.0 million in the comparable period in the prioryear.  Diluted earnings per sharedecreased 4% to $0.26 for the three-month period compared to $0.27 for thecomparable period last year.  Increasedsales and lower cost of goods sold were offset by higher operating expenses, whichresulted in a decrease in operating income.  Net income was furthernegatively impacted by a slightly higher effective tax rate from the comparableperiod in the prior year. 

**For the nine-month period ended December 31, 2003 comparedto the nine-month period ended December 31, 2002.**

**Sales**

Sales for the nine months ended December 31, 2003 increasedto $304.9 million from $281.3 million for the same period in the prior year, anincrease of 8%.   Foreign exchange rate movements, primarily thestronger Euro, had a favorable year-to-year impact on international sales of $15.1million for the nine-month period ended December 31, 2003.

Sales of aesthetic and general surgery products increased 12%to $157.5 million for the nine months ended December 31, 2003 from $140.5million in the same period in the prior year.  Breast implant productsales increased 12% to $141.5 million for the nine-month period ended December31, 2003 from $126.5 million for the comparable period in the prior year.   Approximately $3.7 million of theincrease is attributable to the favorable impact of foreign exchange ratemovements and the balance is primarily attributable to organic growth in unitssales of our silicone gel implants and associated products used inreconstruction surgeries.  Bodycontouring products sales increased 23% to $11.2 million for the nine-monthperiod ended December 31, 2003 from $9.1 million for the comparable period inthe prior year.  Increases in bodycontouring product sales are primarily attributable to increased liposuctionprocedural volumes, as awareness and acceptance of this procedure increases.  These increases were partially offset bya decrease in other product revenues of $0.2 million. 

Sales of surgical urology products decreased 1% to $78.5million for the quarter ended December 31, 2003 from $79.3 million in the prioryear.  Increases in the sales of penileimplants, pelvic floor products, disposable urinary care and other productssales, along with favorable impacts of foreign exchange of $6.9 million were partiallyoffset by a $9.0 million decrease in brachytherapy product sales from thecomparable nine-month period in the prior year.  Penile implants product sales for the nine-monthperiod ended December 31, 2003 increased 1% to $17.9 million compared to $17.8million in the same period in the prior year.  Pelvic floor product revenue increased 42%to $10.0 million from $7.0 million in the same period of the prior yearprimarily due to increased unit volumes on continued momentum of several newproduct introductions made late in fiscal 2002, the introduction of the ObTape slingto the U.S market and the favorable impact of foreign currency variations of approximately$0.6 million.  Brachytherapysales decreased to $9.0, million or 46%, for the comparable nine-month periodof the prior year, as a result of interruption of our supply of palladiumradioactive seeds after the expiration of our exclusive distribution agreementwith NASI.  In addition, alternativeprocedures, changes in Medicare reimbursement, and additional competitivepressures have decreased procedural volumes and decreased average sellingprices of our brachytherapy products.  Due to difficulties in increasingmanufacturing capacity in a short time frame, we have been unable to securesufficient new vendor supply of brachytherapy seeds to fulfill customer orders. These market factors and supplyinterruptions have resulted in lost sales of approximately $3 million perquarter, and may continue through the remainder of fiscal 2004.  Sales of disposable urinary care andother products totaled $39.9 million in the nine-month period ending December 31,2003 compared to $34.7 million in the same period in the prior year.  The increase was primarily a result ofthe favorable impact of foreign exchange rate variations estimated to be $6.3million. 

Sales of clinical and consumer healthcare products increased12% to $68.8 million for the nine-month period ended December 31, 2003 comparedto $61.5 million in the same period in the prior year.  The increase included approximately $4.5million favorable impact of foreign exchange rate variations.  Sales of intermittent catheters increased$2.0 million and were partially offset by a decrease of $1.4 million in salesof male external catheters.  Salesof other disposable homecare and ostomy products increased 26% to $32.8 millionfrom $26.0 million in the comparable period of the prior year, primarily due tothe favorable impact of foreign exchange rate variations of $4.5 million. 

**Gross profit**

Gross profit margin increased to62.2% of net sales forthe nine-month period ended December 31, 2003, compared to 59.5% in thecomparable period in fiscal 2003.  Gross profit for aesthetic and generalsurgery products were 72% of net sales, or $113 million, for the nine-monthperiod ending December 31, 2003, unchanged from the comparable period in theprior year.  Gross profit margin forsurgical urology products for the nine-month period ended December 31, 2003 improvedto 53%, or $42 million, from 47% of net sales when compared with the sameperiod of the prior year.  Approximately three percentage points ofthe increase in gross margins percentage was attributable to the February 2003acquisition of Mills Biopharmaceuticals, Inc., to manufacture our own iodinebrachytherapy seeds which added approximately $2.2 million in gross profit forthe period.  The balance of thepercentage improvement is primarily the result of the significant changes inour brachytherapy seed business. Decreases in sales of brachytherapy seeds,particularly palladium seeds, aided the improvement in gross margin percentageas these products have a relatively low gross profit margin, approximately 30%,when purchased from other manufacturers.  This shift in product mix towards highermargin products was a result of the decrease in brachytherapy seed sales as a resultof decreased average selling prices, decreased procedural volumes and theinterruption of supply of palladium seeds.  Gross profit margins forclinical and consumer healthcare products for the nine-month period ended December31, 2003, increased from 48%, or $29 million, to 51% of net sales, or $35million, when compared to the same period in the prior year.  The improvement from the prior year was primarilydue to improved manufacturing efficiencies and a shift in product mix for theperiod towards higher margin products and the favorable effects of foreigncurrency variations.

**Selling, General and Administrative**

Selling, general and administrative expense increased to 36.1%of net sales, or $110 million, for the nine-month period ended December 31,2003, compared to 33.5%, or $94 million, in the comparable period of the prioryear.  The increase is the resultadditional selling expenses in the surgical urology segment, primarily in ourinternational operations related to our disposable urinary care productsmanufactured in Europe, which accounted for $3.9 million of the increase, andthe effect of currency rates variations, totaling $5.6 million.  Generaland administrative expenses increased primarily due to additional expenses ofapproximately $1.7 million associated with our recently acquired subsidiaries. In addition, non-capitalizable expenses related to the implementation of ournew information technology system and support are estimated to be $2.7 millionand were offset by an approximately $1.8 million decrease in expenses at ourcorporate headquarters. 

**Research and Development**

Research and development expenses for the nine-month periodended December 31, 2003 increased from 5.9% to 7.4% as a percentage of netsales, and were $22.5 million compared to $16.5 million for the comparableperiod a year ago.  Approximately $3.6 million of the increase is attributedto the Aesthetic and general surgery segment and is due to increased activityin our breast implant studies as we prepared to file our gel implant PMA with theFDA.  The gel implant PMA was filed with the FDA in December 2003.  Approximately $0.7 million of theincrease is associated with our recently acquired subsidiaries, Mills Biopharmaceuticals,Inc., and A-Life, and approximately $0.6 of the increase is the result offoreign currency fluctuations.  Theremaining increase of $1.1 million is primarily attributable to our ongoingdevelopment activities and the development of automated manufacturingtechnologies.  In addition, we are committedto a variety of clinical and laboratory studies in connection with ourgel-filled and saline filled mammary implants and other products.  Weexpect to begin new clinical and laboratory studies in the near future for ournewly licensed botulinum toxin, and our recently acquired hyaluronic acidproducts for facial applications.  

**Interest and Other Income and Expense**

Interest expense for the nine-month period ended December 31,2003 decreased to $681,000 from $782,000 in the comparable period in the prioryear.  Interest expense includesinterest on our foreign lines of credit and imputed interest on long-termliabilities recorded at net present value related to the acquisitions of assetsof South Bay Medical and PROSURG Inc. during fiscal 2001 and 2002,respectively.  The decrease ininterest expense is attributable to the lower rates of interest, lower levelsof borrowings and decreased levels of imputed interest on acquisitionliabilities.  Interest incomedecreased to $1.1 million for the nine-month period ended December 31, 2003compared to $1.8 million in the comparable period of the prior year.  The decrease is due to lower prevailinginterest rates on short-term investments offset by higher levels of cashbalances available for investment. 

Other income (expense), net primarily includes gains orlosses on sales of marketable securities, disposals of non-operating assets,and foreign currency gains or losses related to our foreign operations.  Forthe nine-month period ended December 31, 2003, other income (expense), netdecreased to $1.1 million from $1.7 million for the comparable period in theprior year.  The prior year amountincludes a one-time gain on the sale of an intangible asset of $500,000 in thefirst quarter and is the primary reason for the decrease from the prior year.

**Income Taxes**

Our effective rate of corporate income taxes for the nine-monthperiod ended December 31, 2003 was 31.8% as compared to 28.7% for thecomparable period in the prior year.  The increase in the effective taxrate from the comparable period in the prior year represents a return to ourhistoric effective tax rate as the prior year’s rates reflected refundsreceived in fiscal year 2003 related to the amendment of tax returns for ourforeign sales corporation.

**Net Income**

Net income for the nine-month period ended December 31, 2003decreased 6% to $39.8 million from $42.2 million in the comparable period inthe prior year.  Diluted earnings per share decreased 6% to $0.82 for the nine-monthperiod compared to $0.87 for the comparable period last year.  Increasedsales and lower cost of goods sold were offset by higher operating expenses,particularly research and development expenses, which resulted in a decrease inoperating income.  Net income was further negatively impacted by a highereffective tax rate from the comparable period in the prior year. 

**LIQUIDITY AND CAPITAL RESOURCES**

We had cash, cash equivalents and short-term marketablesecurities of $173 million at December 31, 2003, compared to $106 million atMarch 31, 2003.  Other than the proceeds of the December 2003 offering ofconvertible subordinated notes, cash provided by operating activities has beenand is expected to continue to be our primary recurring source of funds. Our working capital was $245 million at December 31, 2003, compared to $168million at March 31, 2003.  We generated $47 million of cash fromoperating activities during the nine months ended December 31, 2003, comparedto $55 million during the same period the previous year.  Decreased cashflow from operating activities was primarily the result of decreased net incomeand increased tax deposits for federal taxes due to the timing of income andextension payments.  

We anticipate investing approximately $18 million in fiscal2004 to upgrade production equipment and facilities for aesthetics production,complete brachytherapy seed production, purchase other production equipment andupgrade and replace our information technology systems with a new EnterpriseResource Planning System (ERP) by JD Edwards.  During the nine monthsended December 31, 2003, we invested $14 million in property and equipment,primarily in production equipment at our aesthetics facility in the Netherlands,healthcare production automation in our Minneapolis facility, and ininformation technology systems.  

We receive cash from the exercise of employee stockoptions.  Employee stock option exercises provided $6.9 million during thenine months ended December 31, 2003 compared to $6.4 million in the same periodthe previous year.  Proceeds from the exercise of employee stock optionswill vary from period to period based upon, among other factors, fluctuationsin the market value of our common shares relative to the exercise price of suchoptions. 

We have a stock repurchase program, primarily to offset thedilutive effect of our employee stock option program, to provide liquidity tothe market and to reduce the overall number of shares outstanding.  Allshares repurchased under the program are retired and are no longer deemed to beoutstanding.  In May 1999, the Boardof Directors authorized the repurchase of 9.2 million shares of our stock.  Each year shares have been repurchasedincluding 1.4 million shares for $22.3 million and 1.5 million shares for $18.7million in the years ended March 31, 2003, and 2002 respectively.  At March 31, 2003, 1.8 million shareswere remaining under this authorization. On July 31, 2003 the Board of Directors increased the authorized numberof shares to be repurchased from 1.8 million to 4 million shares.  On December 5, 2003, the Board ofDirectors increased the authorized number of shares to be repurchased by 5million shares from 2.5 million to 7.5 million shares.  Since April 1, 2003, 3.4 million shareshave been repurchased for $75.1 million and 5.6 million shares remainauthorized for repurchase.  Thetiming of repurchases is subject to market conditions, cashavailability, and blackout periods during which we are restricted from repurchasing shares.  There is no guarantee that sharesauthorized for repurchase by the Board will ultimately be repurchased. 

In January 2001, we completed the acquisition of South BayMedical, a development stage company focused on the development of a newtechnology for a computer-based workstation and automated cartridge-basedneedle loading system for use in brachytherapy procedures.  The totalconsideration included $2 million in cash, 470,586 restricted shares of ourcommon stock having a fair market value of $4 million, and $13.6 million to bepaid in cash or our common stock over the next several years.  Thesefuture payments have been recorded as an acquisition obligation  liability at net present value ($11.6 million at December 31, 2003), and willcontinue to increase as imputed interest is recorded.   Approximately $5.9 million of the future acquisitionobligation payments is to be paid in shares of our common stock valued at fairmarket value on the date of issuance. 

In December 2001, we entered into several agreements with PROSURG,Inc. to purchase certain patent rights and a supply of a bio-absorbableco-polymer product to be used in the surgical treatment of femaleincontinence.  The total consideration included $2.0 million in cash and$2.7 million in short and long-term payments due over the next severalyears.  The future payments have been recorded as an acquisitionobligation liability at net present value and will increase with imputedinterest to $3.0 million due over the next several years.  

On August 25, 2003, we completed the acquisition of A-LifeLtd, a subsidiary of Vitrolife AB which has developed a hyaluronic acid baseddermal filler product.  Theconsideration totaled $7.5 million of which $7.4 million was paid in cash fromexisting cash balances and the remainder in the form of accrued liabilities.

On September 9, 2003, we entered into several transactionsto acquire from AMI, LLC, the exclusive license, marketing and distribution rightsfor products utilizing licensed technologies related to treatment of uterinedisorders, and a related supply agreement with PROSURG, Inc.  We paid $3 million in cash and issued133,630 restricted shares of Mentor common stock valued at fair market value $3million based on quoted prices.  Theagreements commit Mentor to make additional payments totaling $4.5 million uponthe completion of certain developmental and regulatory milestones. 

In October 2003, we acquired Inform Solutions, Inc., fortotal consideration of $3 million in cash, paid from available cash balances.  Inform Solutions provides practicemanagement software and consulting to plastic surgeons.  The agreements commit Mentor to make additionalpayments totaling $1.7 million based upon future sales and earnings thresholds.

We have a secured line of credit for borrowings of up to $25million ("$25M Credit Agreement"), which accrue interest at theprevailing prime rate or at a mark-up over LIBOR at our discretion.  The$25M Credit Agreement includes certain covenants that, among other things,limit the dividends we may pay to one-half of the net income of the precedingyear and requires maintenance of certain levels of tangible net worth and debtservice ratios.  We use the $25M Credit Agreement to guarantee twocommercial letters of credit totaling $1.3 million.  Accordingly, althoughthere were no borrowings outstanding under the $25M Credit Agreement at December31, 2003, only $23.7 million was available for additional borrowings.

In addition, several lines of credit were established withlocal foreign lenders to facilitate operating cash flow needs at our foreignsubsidiaries.  These lines are at market rates of interest, are unsecuredand guaranteed by Mentor Corporation. They total $7.1 million, of which $4.7 million was outstanding, and $2.4million additional borrowings were available at December 31, 2003.  

In fiscal 2002, a line of credit of $7.8 million wasestablished to finance the construction of a new facility in Leiden, theNetherlands.  The line was subsequently converted to an operating line ofcredit.  The borrowings accrueinterest at EURIBOR plus 0.75% and are secured by the new facility and otherassets in the Netherlands.  At December 30, 2003, $5.6 million wasoutstanding and $2.2 million was available under this line of credit.

At December 31, 2003, the total of our short-term borrowingsunder all lines of credit was $10.3 million and the weighted-average interestrate was 3.58%.  The total amount of additional borrowings available tous under all lines of credit was $28.3 million as of December 31, 2003. 

On December 22, 2003, we completedan offering of $150 million of convertible subordinated notes due January 1,2024 pursuant to Rule 144A under the Securities Act of 1933.  The notes bear interest at 23⁄4% perannum and are convertible into shares of the our common stock at a conversionprice of $29.289 per share and are subordinated to all existing and futuresenior debt.  Concurrent with theissuance of the convertible subordinated notes, we entered into a convertiblebond hedge and warrants transactions with respect to its common stock, theexposure for which is held by Credit Suisse First Boston LLC for a net cashpayment of $18.5 million.  Both thebond hedge and the warrants transactions may be settled at our option either incash or net shares and expire January 1, 2009.  The convertible bond hedge and warrantstransactions combined are intended to reduce the potential dilution fromconversion of the notes.

For each of the first and second quarters of fiscal 2003, wepaid a quarterly cash dividend of $.03 per share.  In December 2002, ourBoard of Directors authorized a 2-for-1 stock split in the form of a 100% stockdividend and increased the quarterly dividend on a post-split basis from $.015per share to $.02 per share.  In July 2003, the Board of Directorsdeclared another increase in the quarterly dividend rate from $.02 per share to$.15 per share in an aggregate amount of $7.0 million.  It is our intent to continue to paydividends for the foreseeable future subject to, among other things, Boardapproval, cash availability, debt restrictions and alternative cash needs.

The following table summarizes contractual cash and othercommercial commitments at December 31, 2003:

(in thousands)

 

Less Than

1-3

4-5

After 5

**Contractual Cash  Obligations**

Total

1 Year

Years

Years

Years

Operating leases

$ 60,747

$   7,274

$21,392

$ 13,546

$18,535

   Total  Contractual Cash Obligations

$ 60,747

$   7,274

$21,392

$ 13,546

$18,535

 

 

 

 

 

**Commercial Commitments**

 

 

 

 

 
Long-term debt
$150,000
$          -

$          -

$          -

$150,000
Lines of credit

 10,337

 10,337

 10,337

 10,337

         -

Other commercial  commitments

20,772

7,558

9,542

1,370

2,302

   Total  Commercial Commitments

$181,109

$ 17,895

$ 9,542

$  1,370

$152,302

In addition, we have, at any one time, purchase orders in theordinary course of business for raw materials and other supplies, which may inaggregate be significant but for which usage does not exceed oneyear.   

Our principal source of liquidity at December 31, 2003consisted of $174 million in cash, cash equivalents and short-term marketablesecurities, plus $28 million available under our existing lines ofcredit.  We believe that funds generated from operations, our cash, cashequivalents and marketable securities and funds available under our line ofcredit agreements will be adequate to meet our working capital needs andcapital expenditure investment requirements and commitments for the foreseeablefuture.  However, it is possible that we may need to raise additionalfunds to finance unforeseen requirements or to consummate acquisitions of otherbusiness, products or technologies.  We believe 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 we may not have an immediate need additional funds, we may stillelect to sell additional equity or debt securities or obtain credit facilitiesfor other reasons.  We may not be able to obtain additional funds on termsthat would be favorable to us, or at all.  If funds are raised by issuingadditional equity securities or convertible debt securities, the ownershippercentage of existing shareholders would be reduced.  In addition, theequity or debt securities issued by us may have rights, preferences orprivileges senior to those of our common stock. 

**Risk Factors**

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

The Private Securities Litigation Reform Act of 1995provides a "safe harbor" for forward-looking statements.  TheAct was designed to encourage companies to provide prospective informationabout them without fear of litigation.  The prospective information mustbe identified as forward-looking and must be accompanied by meaningful cautionarystatements identifying important factors that could cause actual results todiffer materially from those projected in the statements.  The statementsabout our business, plans, strategies, intentions, expectations and prospectscontained throughout this document are based on current expectations. These statements are forward-looking and actual results may differ materiallyfrom those predicted as of the date of this report in the forward-lookingstatements, which involve risks and uncertainties.  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.  We undertake no obligation to revise or updatepublicly any forward-looking statements for any reason, even if new informationbecomes available or other events occur in the future.

*SIGNIFICANT PRODUCT LIABILITY CLAIMS ORPRODUCT RECALLS MAY FORCE US TO PAY SUBSTANTIAL DAMAGE AWARDS AND OTHEREXPENSES THAT COULD EXCEED OUR ACCRUALS AND INSURANCE COVERAGE.*

The manufacture and sale of medical devices exposes us tosignificant risk of product liability claims.  In the past, and currently, we have hada number of product liability claims relating to our products, and we may besubject to additional product liability claims in the future, some of which mayhave a negative impact on our business. If a product liability claim or series of claims is brought against usfor uninsured liabilities or in excess of our insurance coverage, our businesscould suffer.  Some manufacturersthat suffered such claims in the past have been forced to cease operations oreven to declare bankruptcy.  Additionally,we could experience a material design or manufacturing failure in our products,a quality system failure, other safety issues, or heightened regulatoryscrutiny that would warrant a recall of some of our products and could resultin exposure to additional product liability claims.

*WE ARESUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION, WHICH COULD MATERIALLY ADVERSELYAFFECT OUR BUSINESS.*

The production and marketing of our products and our ongoingresearch and development, pre-clinical testing and clinical trial activitiesare subject to extensive regulation and review by numerous governmentalauthorities both in the U.S. and abroad. Most of the medical devices we develop must undergo rigorouspre-clinical and clinical testing and an extensive regulatory approval processbefore they can be marketed.  Thisprocess makes it longer, harder and more costly to bring our products tomarket, and we cannot guarantee that any of our products will be approved.  The pre-marketing approval process canbe particularly expensive, uncertain and lengthy, and a number of devices forwhich FDA approval has been sought by other companies have never been approvedfor marketing.  In addition totesting and approval procedures, extensive regulations also govern marketing,manufacturing, distribution, labeling, and record-keeping procedures.  If we do not comply with applicableregulatory requirements, such violations could result in non-approval,suspensions of regulatory approvals, civil penalties and criminal fines,product seizures and recalls, operating restrictions, injunctions, and criminalprosecution. 

Delays in, withdrawal, or rejection of FDA or othergovernment entity approval of our products may also adversely affect ourbusiness.  Such delays or rejectionmay be encountered due to, among other reasons, government or regulatorydelays, lack of efficacy during clinical trials, unforeseen safety issues,slower than expected rate of patient recruitment for clinical trials, inabilityto follow patients after treatment in clinical trials, inconsistencies betweenearly clinical trial results and results obtained in later clinical trials,varying interpretations of data generated by clinical trials, or changes inregulatory policy during the period of product development in the U.S. andabroad.  In the U.S., there has beena continuing trend of more stringent FDA oversight in product clearance andenforcement activities, causing medical device manufacturers to experiencelonger approval cycles, greater risk and uncertainty, and higher expenses.  Internationally, there is a risk that wemay not be successful in meeting the quality standards or other certificationrequirements.  Even if regulatoryapproval of a product is granted, this approval may entail limitations on usesfor which the product may be labeled and promoted, or may prevent us from broadeningthe uses of our current products for different applications.  In addition, we may not receive FDAapproval to export our products in the future, and countries to which productsare to be exported may not approve them for import. 

Our manufacturing facilities also are subject to continualgovernmental review and inspection. The FDA has stated publicly that compliance with manufacturingregulations will be scrutinized more strictly.  A governmental authority may challengeour compliance with applicable federal, state and foreign regulations.  In addition, any discovery of previouslyunknown problems with one of our products or facilities may result inrestrictions on the product or the facility, including withdrawal of theproduct from the market or other enforcement actions. 

From time to time, legislative or regulatory proposals areintroduced that could alter the review and approval process relating to medicaldevices.  It is possible that theFDA or other governmental authorities will issue additional regulations whichwould further reduce or restrict the sales of our present or proposedproducts.  Any change in legislationor regulations that govern the review and approval process relating to ourcurrent and future products could make it more difficult and costly to obtainapproval for new products, or to produce, market, and distribute existingproducts. 

*IF WE AREUNABLE TO CONTINUE TO DEVELOP AND COMMERCIALIZE NEW TECHNOLOGIES AND PRODUCTS,WE MAY EXPERIENCE A DECREASE IN DEMAND FOR OUR PRODUCTS OR OUR PRODUCTS COULDBECOME OBSOLETE.*

The medical device industry is highly competitive and issubject to significant and rapid technological change.  We believe that our ability to developor acquire new technologies is crucial to our success.  We are continually engaged in productdevelopment, improvement programs and required clinical studies to maintain andimprove our competitive position. Any significant delays in the above or termination of our clinicaltrials would materially and adversely affect our development andcommercialization timelines.  Wecannot guarantee that we will be successful in enhancing existing products, or developor acquire new products or technologies that will timely achieve regulatoryapproval or receive market acceptance.  

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

Our products compete with a number of other medical productsmanufactured by major companies, and may also compete with new productscurrently under development by others. In October 2003, our major competitor in our aesthetic and general surgerysegment, presented its application to market silicone gel-filled breastimplants to the General and Plastic Surgery Advisory Panel of the U.S. Food andDrug Administration.  The Panelvoted their recommendation that the FDA should approve, with conditions, ourcompetitor's gel-filled breast implants for all indications – breastaugmentation, reconstruction and revision.  On January 7, 2004, our competitorannounced that it had received a “not approvable” letter from theFDA which outlined additional information it must provide prior to theFDA’s further review of its Premarket Approval (PMA) application forsilicone gel-filled breast implants.  On January 8, 2004 the FDA released new DraftGuidance for Saline, Silicone Gel, and Alternative Breast Implants.  This new draft guidance has additionalrequirements from the FDA's previously issued guidance document dated February2003.  We completed our PMAapplication to the FDA for the pre-market approval for our silicone gel-filledimplants for breast augmentation, reconstruction and revision in December 2003,using the earlier guidance document provided by the FDA.  The FDA has indicated that our PMA“is sufficiently complete to permit a substantive review and is,therefore, suitable for filing.”  Any change in FDA guidance, such as thatannounced on January 8th by the FDA, may delay our application orits review or approval by the FDA.  Adelay, denial, or “not approvable” response by the FDA would have amaterial adverse affect on our commercialization timelines, competitiveposition and ultimately our revenue and operating results.  Amending our PMA application to meet thenew FDA guidelines may require substantial time and expense.  We are drafting a proposal to addressthe additional requirements of the January 8, 2003 draft guidance document toour PMA submission.  If ourcompetitor gains FDA approval to market its competitive products before we do,our competitive position may suffer. If our new products do not achieve significant market acceptance, or ifour current products are not able to continue competing successfully in thechanging market, our sales and earnings may not grow as much as expected, ormay even decline. 

*IF WE SUFFER NEGATIVE PUBLICITYCONCERNING THE SAFETY OF OUR PRODUCTS, OUR SALES MAY BE HARMED AND WE MAY BEFORCED TO WITHDRAW PRODUCTS.*

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

*IF CHANGESIN THE ECONOMY AND CONSUMER SPENDING REDUCE CONSUMER DEMAND FOR OUR PRODUCTS,OUR SALES AND PROFITABILITY WOULD SUFFER. *

Certain elective procedures, such as breast augmentation,body contouring, and surgical treatment for male impotence are typically notcovered by insurance.  Adversechanges in the economy may cause consumers to reassess their spending choicesand reduce the demand for these surgeries and could have an adverse effect onconsumer spending.  This shift couldhave an adverse effect on our sales and profitability.  

*IF WE AREUNABLE TO IMPLEMENT NEW INFORMATION TECHNOLOGY SYSTEMS, OUR ABILITY TOMANUFACTURE AND SELL PRODUCTS, MAINTAIN REGULATORY COMPLIANCE AND MANAGE ANDREPORT OUR BUSINESS ACTIVITIES MAY BE IMPAIRED, DELAYED OR DIMINISHED, WHICHWOULD CAUSE SUBSTANTIAL BUSINESS INTERRUPTION AND LOSS OF SALES, CUSTOMERS ANDPROFITS.  *

We are in the process of implementing an enterprise resourceplanning system that will be our primary business management system for nearlyall of our businesses worldwide. Many other companies have had severe problems with computer systemimplementation of this nature and scope. We are using a controlled project plan and have assigned adequatestaffing and other resources to the project to ensure its successfulimplementation; however there is no assurance that the design will meet ourcurrent and future business needs or that it will operate as designed.  We are heavily dependent on suchcomputer systems, and any failure or delay in the system implementation wouldcause a substantial interruption to our business, additional expense, and lossof sales, customers, and profits. 

*IF WE AREUNABLE TO ACQUIRE COMPANIES, BUSINESSES OR TECHNOLOGIES AS PART OF OUR GROWTHSTRATEGY OR TO SUCCESSFULLY INTEGRATE PAST ACQUISITIONS, OUR GROWTH, SALES ANDPROFITABILITY WILL SUFFER.*

A significant portion of our recent growth has been theresult of acquisitions of other companies, businesses and technologies.  We intend to continue to acquire otherbusinesses and technologies to facilitate our future business strategies,although there can be no assurance that we will be able to identify appropriateacquisition candidates, consummate transactions or obtain agreements with termsfavorable to us.  Further, once abusiness is acquired, any inability to integrate the business, failure toretain and develop its workforce, or establish and maintain appropriatecommunications, performance expectations, regulatory compliance procedures,accounting controls, and reporting procedures could adversely affect our futuresales and earnings. 

*IF OURINTELLECTUAL PROPERTY RIGHTS DO NOT ADEQUATELY PROTECT OUR PRODUCTS ORTECHNOLOGIES, OTHERS COULD COMPETE AGAINST US MORE DIRECTLY, WHICH WOULD HURTOUR PROFITABILITY.*

Our success depends in part on our ability to obtain patentsor rights to patents, protect trade secrets, operate without infringing uponthe proprietary rights of others, and prevent others from infringing on ourpatents, trademarks and other intellectual property rights.  We will be able to protect ourintellectual property from unauthorized use by third parties only to the extentthat it is covered by valid and enforceable patents, trademarks orlicenses.  Patent protectiongenerally involves complex legal and factual questions and, therefore,enforceability of patent rights cannot be predicted with certainty; thus, anypatents that we own or license from others may not provide us with adequateprotection against competitors. Moreover, the laws of certain foreign countries do not recognizeintellectual property rights or protect them to the same extent as do the lawsof the United States. 

In addition to patents and trademarks, we rely on tradesecrets and proprietary know-how. We seek protection of these rights, in part, through confidentiality andproprietary information agreements. These agreements may not provide sufficient protection or adequateremedies for violation of our rights in the event of unauthorized use ordisclosure of confidential and proprietary information.  Failure to protect our proprietaryrights could seriously impair our competitive position. 

*IF THIRDPARTIES CLAIM WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY RIGHTS, WE COULDSUFFER SIGNIFICANT LITIGATION OR LICENSING EXPENSES OR BE PREVENTED FROMMARKETING OUR PRODUCTS.*

Our commercial success depends significantly on our abilityto operate without infringing the patents and other proprietary rights of others.  However, regardless of our intent, ourtechnologies may infringe upon the patents or violate other proprietary rightsof third parties.  In the event ofsuch infringement or violation, we may face expensive litigation and may beprevented from selling existing products and pursuing product development orcommercialization.

*WE DEPENDON SINGLE AND SOLE SOURCE SUPPLIERS FOR CERTAIN RAW MATERIALS AND LICENSEDPRODUCTS AND THE LOSS OF ANY SUPPLIER COULD ADVERSELY AFFECT OUR ABILITY TOMANUFACTURE OR SELL MANY OF OUR PRODUCTS.*

We currentlyrely on single or sole source suppliers for raw materials, including silicone,used in many of our products.  Inthe event that they cannot meet our requirements, we cannot guarantee that wewould be able to produce a sufficient amount of quality raw materials in atimely manner.  We also depend onthird party manufacturers for components and licensed products.  If there is a disruption in the supplyof these products, our sales and profitability would be adversely affected.  

OnFebruary 1, 2003, following the expiration of our sole sourcebrachytherapy seed supply agreement with North American Scientific, Inc. (NASI)supplying us with iodine and palladium seeds, we completed the acquisition ofMills Biopharmaceuticals, Inc. (Mills), a manufacturer of iodine brachytherapyseeds.  We have since begun tosupply our customers with iodine seeds manufactured by Mills.  With regard to our palladium seedsupply, on January 8, 2003, we had announced that we had reached a nonexclusiveone-year agreement with Best Medical, Inc. (Best) to distribute BestTMPalladium-103 brachytherapy seeds. The agreement with Best was renewed for an additional year.  We are also seeking other sources forsimilar radioactive seeds.  Wecannot provide assurance that such seeds can be manufactured or obtained onterms satisfactory to us, without interruption or regulatory delay, or thatsuch additional 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.  For the ninemonths ended December 31, 2003, our sales of iodine seeds and palladiumseeds were $10 million.

*OURINTERNATIONAL BUSINESS EXPOSES US TO A NUMBER OF RISKS.*

More than one-third of our sales are derived frominternational operations. Accordingly, any material decrease in foreign sales would have amaterial adverse effect on our overall sales and profitability.  Most of our international sales aredenominated in Euros, Canadian Dollars or U.S. Dollars.  Depreciation or devaluation of the localcurrencies of countries where we sell our products may result in our productsbecoming more expensive in local currency terms, thus reducing demand, whichcould have an adverse effect on our operating results.  Our operations and financial resultsalso may be significantly affected by other international factors, including:
- foreign government regulation of medical  devices; 
- product liability, intellectual property and  other claims; 
- new export 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 

If these risks actually materialize, our sales tointernational customers may decrease. 

*HEALTHCAREREIMBURSEMENT OR REFORM LEGISLATION COULD MATERIALLY AFFECT OUR BUSINESS.*

If any national healthcare reform or other legislation orregulations are passed that imposes limits on the amount of reimbursement forcertain types of medical procedures or products, or on the number or type ofmedical procedures that may be performed, or that has the effect of restrictinga physician's ability to select specific products for use in patientprocedures, such changes could have a material adverse effect on the demand forour products.  Our revenues dependlargely on U.S. and foreign government health care programs and private healthinsurers reimbursing patients’ medical expenses.  Physicians, hospitals, and other healthcare providers may not purchase our products if they do not receive satisfactoryreimbursement from these third-party payers for the cost of procedures usingour products.  In the U.S., therehave been, and we expect that there will continue to be, a number of federaland state legislative and regulatory proposals to implement greatergovernmental control over the healthcare industry and its related costs.  These proposals create uncertainty as tothe future of our industry and may have a material adverse effect on ourability to raise capital or to form collaborations.  In a number of foreign markets, thepricing and profitability of healthcare products are subject to governmentalinfluence or control.  In addition,legislation or regulations that impose restrictions on the price that may becharged for healthcare products or medical devices may adversely affect oursales and profitability. 

*IF OUR USEOF HAZARDOUS MATERIALS RESULTS IN CONTAMINATION OR INJURY, WE COULD SUFFERSIGNIFICANT FINANCIAL LOSS.*

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

*FUTURECHANGES IN FINANCIAL ACCOUNTING STANDARDS MAY CAUSE ADVERSE UNEXPECTED REVENUEOR EXPENSE FLUCTUATIONS AND AFFECT OUR REPORTED RESULTS OF OPERATIONS.*

A change in accounting standards could have a significanteffect on our reported results and may even affect our reporting oftransactions completed before the change is effective.  Any changes requiring that we recordcompensation expense in the statement of operations for employee stock optionsusing the fair value method could have a significant negative effect on ourreported results.  Newpronouncements and varying interpretations of existing pronouncements haveoccurred and may occur in the future. Changes to existing rules or current practices may adversely affect ourreported financial results of our business. 

*LITIGATIONMAY HARM OUR BUSINESS OR OTHERWISE DISTRACT OUR MANAGEMENT.*

Substantial, complex or extended litigation could cause usto incur large expenditures and distract our management, and could result insignificant monetary or equitable judgments against us.  For example, lawsuits by employees,patients, customers, licensors, licensees, suppliers, distributors,stockholders, or competitors could be very costly and substantially disrupt ourbusiness.  Disputes from time totime with such companies or individuals are not uncommon, and we cannot assurethat we will always be able to resolve such disputes out of court or on termsfavorable to us. 

OURPUBLICLY-FILED SEC REPORTS ARE REVIEWED BY THE SEC FROM TIME TO TIME AND ANYSIGNIFICANT CHANGES REQUIRED AS A RESULT OF ANY SUCH REVIEW MAY RESULT INMATERIAL LIABILITY TO US AND HAVE A MATERIAL ADVERSE IMPACT ON THE TRADINGPRICE OF OUR COMMON STOCK

The reportsof publicly-traded companies are subject to review by the SEC from time to timefor the purpose of assisting companies in complying with applicable disclosurerequirements and to enhance the overall effectiveness of companies’public filings, and comprehensive reviews of such reports are now required atleast every three years under the Sarbanes-Oxley Act of 2002.  SEC reviews often occur at the timecompanies file registration statements such as the registration statement we hadagreed to file in connection with our convertible bond offering, but reviewsmay also be initiated at any time by the SEC.  While we believe that our previouslyfiled SEC reports comply, and we intend that all future reports will comply inall material respects with the published rules and regulations of the SEC, we couldbe required to modify or reformulate information contained in prior filings asa result of an SEC review.  Anymodification or reformulation of information contained in such reports could besignificant and result in material liability to us and have a material adverseimpact on the trading price of our common stock.

In Octoberof this year, the SEC informed us that it was reviewing our Annual Report onForm 10-K for the year ended March 31, 2003 and our Quarterly Reporton Form 10-Q for the quarter ended June 30, 2003, and the SEC letterincluded a number of questions and suggestions concerning disclosures in thereviewed reports.  OnNovember 21, 2003, we replied to the SEC providing responses to questionsand indicating, in certain instances, that we had included certain requestedinformation in our Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2003 responsive to the SEC letter or that, although webelieved the disclosures were adequate, we would provide additional informationin future filings.  On January 23,2004 we were contacted by an SEC staff member assigned to review the abovementioned filings.  The staff memberinformed us that our responses to the comments and questions were acceptableand that the review of the filings was concluded.  

**Item 3.**

**Quantitative And  Qualitative Disclosures About Market Risk**

There have been no material changes in our exposure tomarket risk as reported in Item 7A in our Annual Report on Form 10-K for thefiscal year ended March 31, 2003.

**Item 4.**

**Controls and Procedures**

Based on an evaluation of the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)under the Securities Act of 1934, as amended), our Chief Executive Officer andour Chief Financial Officer have concluded that such controls and procedureswere effective as of the end of the period covered by this report.  Inconnection with such evaluation, no change in our internal control overfinancial reporting was identified that occurred during the period covered bythis report and that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

**PART II - OTHER INFORMATION**

**Item 1.**

**Legal Proceedings**

** **None   

**Item 2.**

**Changes in Securities  and Use of Proceeds**

On December 22,  2003, we completed an offering of $150 million in aggregate principal  amount of our 23⁄4% convertible subordinated notes due January 1, 2024.  From the aggregate offering price of  $150 million, we received approximately $145.9 million in net  proceeds after deducting the aggregate initial purchasers’ discount and  other fees of approximately $4.1 million.  Interest is payable on the notes on  January 1st and July 1st of each year, beginning July  1, 2004.

Holders may require us to repurchase for cash all or part  of their notes on January 1, 2009, at a price equal to 100.25% of the  principal amount of the notes being repurchased.  In addition, holders may require us to  repurchase for cash all or part of their notes on January 1, 2014 and January  1, 2019, or upon a change in control, at a price equal to 100% of the  principal amount of the notes being repurchased.

The notes will be convertible into shares of our common  stock, subject to the conditions described below, at an initial conversion  price of $29.289 per share of common stock, subject to adjustments for  certain events.  The initial  conversion price is equivalent to a conversion rate of approximately 34.1425  shares of common stock per $1,000 principal amount of notes. the notes are  convertible if any of the following conditions is satisfied:
- during any fiscal quarter prior to January 1,  2019, if the closing price of our 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  our common stock on such trading day; 
- any business day on or after January 1, 2019, if  the closing price of our common stock on the immediately preceding trading  day is more than 120% of the conversion price per share of our 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 we have called the notes for redemption;    or 
- if we make certain significant distributions to  holders of our common stock or we enter into specified corporate  transactions.

We may redeem for cash all or part of the notes on January  1, 2009, at a price equal to 100.25% of the principal amount of the notes  being redeemed, plus accrued interest.  After January 1, 2009, we may redeem  for cash all or part of the notes at a price equal to 100% of the principal  amount of the notes being redeemed, plus accrued interest.

The notes are subordinated to our existing and future  senior indebtedness and effectively subordinated to all indebtedness and  other liabilities of our subsidiaries.  Our common stock is quoted on the New  York Stock Exchange under the symbol “MNT.”  The closing price of our common stock  on the New York Stock Exchange on December 16, 2003 was $22.53 per share.  

The offer and sale of the  notes was exempt from the registration requirements of the Securities Act of  1933, as amended, pursuant to Rule 144A promulgated thereunder. We have  agreed to file a registration statement for the resale of the notes and the  shares of common stock issuable upon conversion of the notes within  90 days after the closing of the offering. 

We used $18.5 million of  the proceeds for the net cost of convertible note hedge and warrants  transactions with respect to our common stock to limit exposure to potential  dilution from conversion of the notes.  We used approximately $ 41.3million of the remaining net proceeds of the  offering for repurchases of shares of our common stock.  We intend to use the remaining $86.1million net proceeds of the offering for general  corporate purposes, which may include additional repurchases of our common  stock.  We may also use a portion  of the net proceeds for the acquisition of businesses, products, product  rights or technologies.  Pending  such uses, we intend to invest the net proceeds in investment-grade  obligations and interest-bearing money market instruments. 

**Item 3.**

**Defaults Upon Senior  Securities**

Not applicable.   

**Item 4.**

**Submission of Matters  to a Vote of Security Holders**

Not applicable.

**Item 5.**

**Other Information**

Effective August  5, 2003 the Company's shares began trading on the New York Stock Exchange  under the symbol MNT.    

**Item 6.**

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

**(a) Exhibits **

4(a)   Indenture - 2-3/4% Convertible  Subordinated Notes Due 2024, dated December 22, 2003  10(a) Option and Asset Purchase Agreement between Alchemy Engineering, LLC and  Mentor Corporation  10(b) Convertible Note Hedge Confirmation, dated December 17, 2003  10(c) Registration Rights Agreement - 2-3/4% Convertible Subordinated Notes  Due 2024, dated December 22, 2003  10(d) Warrants Confirmation, dated December 17, 2003  10(e) Purchase Agreement - 2-3/4%  Convertible Subordinated Notes Due  2024, dated December 17, 2003  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.

**(b) Reports on Form  8-K**
The following reports on Form 8-K were filed or furnished to the SEC during the three months ended December 31, 2003.
1.       On October 28, 2003, a Current Report  was filed with the SEC which furnished, under Item 12, a press release issued  by Mentor in connection with the fiscal 2004 second quarter results of operations.    2.       On November 4, 2003, a Current  Report was filed with the SEC which furnished, under Item 12, a transcript of  an investor conference call to provide additional information regarding our financial  results for our fiscal 2004 second quarter ended September 30, 2003.3.       On December 17, 2003, a Current  Report was filed with the SEC which filed, under Item 7, two press  releases.  On December 16, 2003,  Mentor Corporation issued a press release announcing its proposed private  placement of up to $150 million convertible subordinated notes.  On  December 17, 2003, Mentor Corporation issued a press release announcing the  pricing of its private placement of up to $150 million convertible  subordinated notes.  
 
**SIGNATURES**

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

**MENTOR CORPORATION**

(Registrant)

Date:

February 13, 2003

By:

/s/CHRISTOPHER J.  CONWAY  Christopher J. Conway  Chief Executive Officer

Date:

February 13, 2003

By:

/s/ADEL MICHAEL  Adel Michael  Chief Financial Officer |