**UNITED STATES**

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

**FORM 10-Q**

 (Mark One)

[x]   QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly periodended September 30, 2002

or

[   ]   TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition periodfrom ____ to _____

Commission File No. 0-7955

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

                                                                              Minnesota                                          41-0950791                                                                              (Stateor other jurisdiction of               (IRS Employer Identification No.)                                                                             incorporationor organization)           

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

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

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

Common Shares, par value$.10 per share

                Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or such shorter period that the Registrant was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes X  No __                Indicate by check mark whether the Registrant is anaccelerated filer as defined in Rule 12b-2 of the Exchange Act).  Yes X No __

As of November 13, 2002 there were approximately 23,164,959Common Shares outstanding.

----

**MENTOR CORPORATION**

# INDEX

| Part I.  Financial Information** ** |
|------------------------------------------|
| Item  1.                                 | Consolidated  Financial Statements (unaudited)  |
|                                          | Consolidated  Balance Sheets - September 30, 2002 and March 31, 2002 |
|                                          | Consolidated  Statements of Income - Three Months Ended September 30, 2002 and 2001 |
|                                          | Consolidated  Statements of Income - Six Months Ended September 30, 2002 and 2001 |
|                                          | Condensed  Consolidated Statements of Cash Flows -   Six Months Ended September 30, 2002 and 2001 |
|                                          | Notes  to Condensed Consolidated Financial Statements - September 30, 2002 |
| Item  2.                                 | Management's  Discussion and Analysis of Results of Operations and Financial Condition |
| Item  3.                                 | Quantitative  and Qualitative Disclosures About Market Risk |
| Part II. Other Information          |
| Item  1.                                 | Legal  Proceedings  |
| Item  2.                                 | Changes  in Securities  |
| Item  3.                                 | Defaults  upon Senior Securities  |
| Item  4.                                 | Submission  of Matters to a Vote of Security Holders  |
| Item  5.                                 | Other  Information  |
| Item  6.                                 | Exhibits  and Reports on Form 8-K  |
|                                          | Signatures  |
| List of Exhibits                         |
|                                          | 99.1  CEO Certification Pursuant To 18 U.S.C. Section 1350,  As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002  99.2 CFO Certification Pursuant To 18 U.S.C. Section 1350,  As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 |

----

# PART I - FINANCIAL INFORMATION

**Item 1. Consolidated Financial Statements**

**Mentor CorporationConsolidated Balance Sheets(Unaudited)**

| (in thousands)                                             | **September  30, 2002**       | March 31,   2002                      |
|------------------------------------------------------------|-------------------------------|---------------------------------------|
| **Assets**                                                 | ** **                    | ** **                            |
| Current assets:                                            | ** **                    | ** **                            |
|   Cash and cash equivalents                      | **$   74,981** | $    60,398  |
|   Marketable securities                          | **9,195**                     | 14,106                           |
|   Accounts receivable, net                       | **61,786**                    | 64,786                           |
|   Inventories                                    | **57,021**                    | 47,404                           |
|   Deferred income taxes                          | **13,933**                    | 11,950                           |
|   Prepaid expenses and other                     | **9,822**                     | 12,488                           |
| Total current assets                                       | **226,738**                   | 211,132                          |
|                                                       | ** **                    |                                  |
| Property and equipment, net                                | **61,726**                    | 54,656                           |
| Intangible assets, net                                     | **36,254**                    | 37,588                           |
| Goodwill, net                                              | **15,103**                    | 9,155                            |
| Long-term marketable securities and  investments           | **10,581**                    | 11,752                           |
| Other assets                                               | **252**                       | 353                              |
|                                                       | **$  350,654**      | $   324,636       |
| See notes to condensed  consolidated financial statements. | ** **                    |                                  |

----

**Mentor CorporationConsolidated Balance Sheets(Unaudited)**

| (in thousands)                                                                                                                         | September 30,  2002                              | March 31,  2002           |
|----------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------|---------------------------|
| **Liabilities and shareholders' equity**                                                                                               | ** **                                       |                      |
| Current liabilities:                                                                                                                   | ** **                                       |                      |
|   Account payable                                                                                                            | **$     15,646 **  | $  17,558  |
|   Warranty and related reserves                                                                                              | **18,056 **                                 |   16,252   |
|   Accrued compensation                                                                                                       | **14,079 **                                 | 15,129               |
|   Short-term bank borrowings                                                                                                 | **9,888 **                                  | 9,470                |
|   Sales returns                                                                                                              | **7,906 **                                  | 7,806                |
|   Income taxes payable                                                                                                       | **1,110 **                                  | 3,979                |
|   Current portion of purchase  price related to acquired         technologies and acquisitions | **4,675 **                                  | 4,675                |
|   Dividends payable                                                                                                          | **696 **                                    | 704                  |
|   Accrued royalties                                                                                                          | **581 **                                    | 637                  |
|   Other                                                                                                                      | **12,234 **                                 | 8,366                |
| Total current liabilities                                                                                                              | **84,871 **                                 | 84,576               |
| Deferred income taxes                                                                                                                  | **2,107 **                                  | 3,009                |
| Long-term accrued liabilities                                                                                                          | **14,612 **                                 | 12,873               |
|                                                                                                                                        | ** **                                       |                      |
| Commitments and contingencies                                                                                                          | ** **                                       |                      |
|                                                                                                                                   | ** **                                       |                      |
| Shareholders' equity:                                                                                                                  | ** **                                       |                      |
|   Common Stock, $.10 par value:                                                                                              | ** **                                       |                      |
|     Authorized - 50,000,000 shares; Issued and outstanding-                                                        | ** **                                       |                      |
|     23,213,015 shares  at September 30, 2002;                                                                      | ** **                                       |                      |
|     23,472,952 shares  at March 31, 2002;                                                                          | **2,321 **                                  | 2,347                |
|   Capital in excess of par value                                                                                             | **-**                                            | **-   **   |
|   Foreign currency translation  adjustments                                                                                  | **(333)**                                        | (6,926)                   |
|   Net unrealized gains (losses)  on securities                                                                               | **(1,258)**                                      | 439                  |
|   Retained earnings                                                                                                          | **248,334 **                                | 228,318              |
|                                                                                                                                   | **249,064 **                                | 224,178              |
|                                                                                                                                   | **$     350,654 ** | $ 324,636       |
| See notes to condensed  consolidated financial statements.                                                                             |                                             |                      |   |
|                                                                                                                                        |                                                  |                           |  |  |

----

**Mentor CorporationConsolidated Statements of IncomeThree Months Ended September 30, 2002 and 2001(Unaudited)**

|                                  | Three Months Ended  September 30, |
|---------------------------------------|-----------------------------------|
| (in thousands, except per share data) | **2002**                          | 2001 |  
Net sales

**$    89,586 **

$    74,347 

 
** **

 

 
Costs and expenses:

** **

 

 
   Cost of sales

**37,669 **

31,618 

 
   Selling, general, and administrative

**30,157 **

25,703  

 
   Research and development

**5,365 **

5,170 

 
 

**73,191 **

62,491 

 
 

** **

 

 
Operating income

**16,395 **

11,856  

 
   Interest expense

**(236)**

(198)

 
   Interest income

**672 **

699 

 
   Other income, net

**158 **

96  

 
Income before income taxes

**16,989 **

12,453 

 
Income taxes

**4,483 **

3,964 

 
Net income

**$    12,506 **

$    8,489 

 
** **

 

 
Basic earnings per share

**$         0.54**

$      0.35 

 
Diluted earnings per share

**$         0.52**

$      0.34 

 
** **

 

 
See notes to condensed  consolidated financial statements.

 

 

 ****
**Mentor CorporationConsolidated Statements of IncomeSix Months Ended September 30, 2002 and 2001(Unaudited)**

 

Six Months Ended  September 30,

(in thousands, except per share data)

**2002**

2001

 
Net sales

**$   187,263 **

$  155,491 

 
** **

 

 
Costs and expenses:

** **

 

 
   Cost of sales

**75,914 **

64,349 

 
   Selling, general, and administrative

**62,042 **

53,745  

 
   Research and development

**10,739 **

11,242 

 
 

**148,695 **

129,336 

 
 

** **

 

 
Operating income

**38,568 **

26,155  

 
   Interest expense

**(537)**

(507)

 
   Interest income

**1,232 **

1,301 

 
   Other income, net

**1,205 **

596  

 
Income before income taxes

**40,468 **

27,545 

 
Income taxes

**11,213 **

8,766 

 
Net income

**$    29,255 **

$   18,779 

 
** **

 

 
Basic earnings per share

**$        1.25 **

$       0.79 

 
Diluted earnings per share

**$        1.20 **

$       0.76 

 
** **

 

 
See notes to condensed  consolidated financial statements.

 

 

 
**Mentor CorporationConsolidated Statements of Cash FlowsSix Months Ended September 30, 2002 and 2001(Unaudited)**

(in thousands)

**2002**

2001

**Cash From Operating Activities:**

** **

 

Income from continuing operations

**$   29,255 **

$   18,779 

Adjustments to derive cash flows from  continuing operating activities:

** **

 

  Depreciation 

**5,913 **

4,943 

  Amortization

**1,949 **

1,809 

  Deferred income taxes 

**(2,332)**

229 

  Tax benefit from exercise of  stock options

**1,103 **

2,127 

  Loss (gain) on sale of assets

**(425)**

374 

  Imputed interest on long-term  liabilities

**313 **

232 

  (Gain) loss on long-term  marketable securities 

**(403)**

(32)

  Changes in operating assets  and liabilities:

** **

 

     Accounts  receivable

**5,344 **

1,380 

     Inventories  and other current assets

**(903)**

(2,847)

     Accounts  payable and accrued liabilities

**2,714 **

6,500 

     Income taxes  payable

**(3,071)**

(3,039)

     Foreign  currency transaction gain

**(113)**

-

Net cash provided by continuing operating  activities

**39,344 **

30,455 

**Cash From Investing Activities:**

** **

 

Purchases of property and equipment

**(7,591)**

(6,589)

Purchases of intangibles

**(665)**

5 

Purchases of marketable securities

**(914)**

(222)

Sales of marketable securities

**5,005 **

- 

Acquisitions, net of cash acquired

**(10,603)**

- 

Proceeds from sale of property, equipment  and intangibles

**500 **

11 
  Other, net**                -**                 6
Net cash used for continuing investing  activities

**(14,268)**

(6,788)

**Cash From Financing Activities:**

** **

 

Repurchase of common stock

**(12,199)**

(15,091)

Proceeds from exercise of stock options

**3,203 **

5,425 

Dividends paid

**(1,413)**

(1,430)

Borrowings (repayments) under line of  credit agreements, net

**(707)**

(12,770)

Net cash used for financing activities

**(11,116)**

(23,866)

Effect of currency exchange rates on cash  and cash equivalents

**623 **

86 

Increase (decrease) in cash and cash  equivalents

**14,583 **

(113)

Cash and cash equivalents at beginning of  year

**60,398 **

63,854 

Cash and cash equivalents at end of period

$  **74,981 **

$  63,741 

**MENTORCORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSeptember 30, 2002**

**NoteA - Business Activity**

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

**NoteB - Summary of Significant Accounting Policies**

** Principlesof Consolidation**

Theconsolidated financial statements include the accounts of the Company and allof its subsidiaries in which a controlling interest is maintained.  For those subsidiaries where the Company ownsless than 100%, the outside shareholders' interests are treated as minorityinterests.  All intercompany accounts andtransactions have been eliminated. Certain prior year amounts in previously issued financial statementshave been reclassified to conform to the current year presentation.  Financial information presented in the Notesto Consolidated Financial Statements excludes discontinued operations, exceptwhere noted
Use of Estimates
Financial statements prepared inaccordance with accounting principles generally accepted in the United Statesrequire management to make estimates and judgments that affect amounts anddisclosures reported in the financial statements.  Actual results could differ from thoseestimates.

**Effectsof Recent Accounting Pronouncements**

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

InAugust 2001, the FASB issued SFAS No. 144,"Accounting for the Impairment or Disposal of Long-Lived Assets."  SFAS No. 144 supersedes SFAS No. 121,"Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed of."  SFAS No. 144 retainedsubstantially all of the requirements of SFAS No. 121 while resolving certainimplementation issues.  SFAS No. 144 iseffective for fiscal years beginning after December 15, 2001.  Adoption of SFAS No. 144 in the first quarterof fiscal 2003 had no impact on the Company's consolidated results ofoperations or financial position.

In July 2002,FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit orDisposal Activities."  Thisstatement requires companies to recognize costs associated with exit ordisposal activities when they are incurred rather than at the date of acommitment to an exit or disposal plan. Statement 146 is to be applied prospectively to exit or disposalactivities initiated after December 31, 2002. Management does not expect that adoption of this standard will have amaterial effect on the Company's consolidated results of operations orfinancial position

** NoteC - Interim Reporting**

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

Fiscal 2003

Fiscal 2002

First  Quarter

June 28,  2002

June 29,  2001

Second  Quarter

September  27, 2002

September  28, 2001

Third  Quarter

December 27,  2002

December 28,  2001

The accompanying unaudited condensed consolidatedfinancial statements for the three and six-month periods ended September 30,2002 and 2001 have been prepared in accordance with accounting principlesgenerally accepted in the United States for interim financial information andwith instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  In the opinion of management, all adjustments(consisting only of normal recurring accruals, unless otherwise indicated)considered necessary for a fair presentation of the results of operations forthe indicated periods have been included. Certain amounts recorded in previous periods have been reclassified toconform to the current period presentation. Operating results for the six months ended September 30, 2002 are notnecessarily indicative of the results for the full fiscal year.

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

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

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

All highlyliquid investments with maturities of three months or less at the date ofpurchase are considered to be cash equivalents.

The Company considers itsmarketable securities available-for-sale as defined in Statement of FinancialAccounting Standards ("SFAS") No. 115, "Accounting for CertainInvestments in Debt and Equity Securities."  Realized gains and losses and declines invalue considered to be other than temporary are included in income.  The cost of securities sold is based on thespecific identification method.  Forshort-term marketable securities, there were no materialrealized or unrealized gains or losses nor any material differences betweenestimated fair values (based on quoted market prices) and the costs ofsecurities in the investment portfolio as of September 30, 2002 and March 31,2002.  Short-term investments, exceptauction rate securities, mature between three months and one year from thepurchase date.  The Company's short-termmarketable securities consist primarily of U.S., state and municipal governmentobligations, auction rate securities, and investment grade corporateobligations including commercial paper. Auction rate securities carry interest or dividend rates that resetevery 28 days but have contractual maturities of greater than one year.  The Company's long-term marketable securitiesand investments include investments in Federal Home Loan Bank and MortgageAssociation bonds (FHLA bonds) with maturities of two to four years.  

Available-for-sale investments atSeptember 30, 2002 were as follows:

** **

** **

** **

**Gross**

**Gross**

**Estimated**

** **

** **

**Adjusted**

**Unrealized**

**Unrealized**

**Fair**

**(in thousands)**

**Cost**

**Gains**

**Losses**

**Value**

**Cash balances**

**$16,380**

**$        -**

**$          - **

**$16,380**

**Bank time deposits**

**488**

**-**

**- **

**488**

**Money market mutual funds**

**58,601**

**-**

**- **

**58,601**

**Marketable equity securities**

**2,393**

**-**

**(1,961)**

**432**

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

**18,551**

**26**

**- **

**18,577**

**Corporate debt securities**

**279**

**-**

**- **

**279**

**   Total available-for-sale investments**

**$96,692**

**$     26**

**$(1,961)**

**$94,757**

** **

** **

** **

** **

** **

**Included in cash and cash equivalents**

**$74,981**

**$       -**

**$        - **

**$74,981**

**Included in current marketable securities**

**9,195**

**-**

**- **

**9,195**

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

**12,516**

**26**

**(1,961)**

**10,581**

**   Total available-for-sale investments**

**$96,962**

**$     26**

**$(1,961)**

**$94,757**

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

 

 

 

Gross

Gross

Estimated

 

 

Adjusted

Unrealized

Unrealized

Fair

(in thousands)

Cost

Gains

Losses

Value

Cash balances

$11,417

$    -

$    -

$11,417

Bank time deposits

1,175

-

-

1,175

Money market mutual funds

48,981

-

-

48,981

Marketable equity securities

2,076

774

-

2,850

U.S., State and Municipal agency  obligations

21,653

-

(98)

21,555

Corporate debt securities

278

-

-

278

   Total available-for-sale  investments

$85,580

$774

$(98)

$86,256

 

 

 

 

Included in cash and cash equivalents

$60,398

$    -

$    -

$60,398

Included in current marketable securities

14,106

-

-

14,106

Included in long-term marketable      securities and investments

  11,076

  774

  (98)

  11,752

   Total available-for-sale  investments

$85,580

$774

$(98)

$86,256
**Note E - Inventories**
Inventoriesare stated at the lower of cost or market, cost determined by the first-in,first-out (FIFO) method.  The Companywrites down its inventory for estimated obsolescence or unmarketable inventoryequal to the difference between the cost of inventory and the estimated marketvalue based upon assumptions about future demand and market conditions.

Inventoriesat September 30, 2002 and March 31, 2002 consisted of:

(in thousands)

**September 30,**

March  31,

Raw materials

**$      11,226**

$   10,194

Work in process

**11,026**

       9,908

Finished goods

**34,769**

     27,302

 

**$      57,021**

$   47,404

** Note F - Property and Equipment**

Property andequipment is stated at cost.  Depreciationis based on the useful lives of the properties and computed using thestraight-line method.  Buildings aredepreciated over 30 years, furniture and equipment over 3 to 10 years andleasehold improvements over the shorter of their estimated remaining lives orlease term.  Significant improvements andbetterments are capitalized while maintenance and repairs are charged tooperations as incurred.

Property and equipment at September 30,2002 and March 31, 2002 consisted of:

(in thousands)

**September 30,**

March  31, 

Land

**$        447 **

$       429 

Buildings

**18,090 **

      14,601 

Leasehold improvements

**22,198 **

    24,030 

Furniture, fixtures and  equipment

**74,201 **

    63,860 

Construction in progress

**6,786 **

      6,032 

**121,722 **

   108,952 

Less accumulated  depreciation and amortization

**(59,996)**

    (54,296)

 

**$    61,726 **

$   54,656 

**NoteG - Other Comprehensive Income**

The components of comprehensive incomeare listed below:

 

Three Months Ended   September 30,

Six Months Ended   September 30,

(in thousands)

**2002**

2001

**2002**

2001

Net income

**$    12,506 **

$  8,489 

**$   29,255 **

$   18,779

Foreign currency translation adjustment

**(926)**

3,367 

**6,593 **

673

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

**(628)**

  (492)

**(1,697)**

  (13)

Comprehensive income

**$   10,952 **

$  11,364 

**$  34,151 **

$   19,439
** Note H -Income Taxes**
The effective rate of corporate income taxes was 27.7%and 31.8% for the six-month periods ended September 30, 2002 and 2001respectively. The effective tax rate for the six-month period ended September2002 reflects refunds received in the first and second quarters of fiscal 2003related to the amendment of prior year tax returns for the Company's foreignsales corporation. 

**Note I - Earnings per Share**

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

 

Three Months Ended  September 30,

Six Months Ended  September 30,

(in thousands)

**2002**

2001

**2002**

2001

Weighted average outstanding shares:  basic

**23,305**

23,982

**23,418**

23,876

Shares issuable through exercise of stock options

**836**

837

**992**

798

Weighted average outstanding shares:  diluted

**24,141**

24,819

**24,410**

24,674

Shares issuable through optionsare determined using the treasury stock method.

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

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

Selectedfinancial information for the Company's reportable segments for the three andsix-month periods ended September 30, 2002 and 2001,and as of March 31, 2002 is as follows:

Three Months Ended   September 30,

Six Months Ended  September 30,

 
(in thousands)

**2002**

2001

**2002**

2001

 
**Net Sales**

** **

 

** **

 

 
Aesthetic and General Surgery

**$      42,748**

$     36,388

**$      96,428**

$      79,326

 
Surgical Urology

**25,746**

22,535

**51,988**

46,182

 
Clinical and Consumer Healthcare 

**21,092**

15,424

**38,847**

29,983

 
  Total consolidated revenues

**$      89,586**

$     74,347

**$    187,263**

$    155,491

 
 

** **

 

 

 

 
Three Months Ended   September 30,

Six Months Ended  September 30,

 
(in thousands)

**2002**

2001

**2002**

2001

 
**Operating profit**

** **

 

 

 

 
Aesthetic and General Surgery

**$      14,415**

$       9,456

**$      34,356**

$      22,232

 
Surgical Urology

**848**

1,269

**3,093**

2,272

 
Clinical and Consumer Healthcare

**3,678**

3,160

**6,459**

5,706

 
  Total reportable segments

**$      18,941**

$     13,885

**$    43,908**

$      30,210

 
 

 

 

 

 

 
Three Months Ended   September 30,

Six Months Ended  September 30,

 
(in thousands)

**2002**

2001

**2002**

2001

 
**Operating income**

** **

 

 

 

 
Reportable segments

**$     18,941 **

$     13,885  

**$     43,908 **

$      30,210  

 
Corporate operating loss

**(2,546)**

(2,029)

**(5,340)**

(4,055)

 
Interest expense

**(236)**

(198)

**(537)**

(507)

 
Interest income

**672 **

699  

**1,232 **

1,301 

 
Other income

**158 **

96  

**1,205 **

596 

 
Income before income taxes

**$      16,989 **

$     12,453 

**$      40,468 **

$      27,545 

 
 

 

 

 

 

 
 

As of

 

 

(in thousands)

**September  30, 2002**

March 31,  2002

 
**Identifiable assets**

** **

 

 

 

 
Aesthetic and General Surgery

**$     101,954**

$    95,763  

** **

** **

 
Surgical Urology

**97,091**

88,488   

** **

** **

 
Clinical and Consumer Healthcare

**47,718**

43,506   

** **

** **

 
  Total reportable segments

**$     246,763**

$  227,757   

** **

** **

 
 

 

 

 

 

 
** ****Note L - Event Subsequent to September 30, 2002**

OnNovember 4, 2002, the Company announced that it had reached an agreement toacquire Mills Biopharmaceuticals, Inc., a manufacturer of iodine brachytherapyseeds for the treatment of prostate cancer. The transaction will be completed in February 2003 and is expected to bepaid from existing cash balances.  

**Item 2.**

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

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

**APPLICATION OFCRITICAL ACCOUNTING POLICIES**

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

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

**RESULTS OFOPERATIONSSales**Sales for the three months endedSeptember 30, 2002 increased to $89.6 million from $74.3 million for the sameperiod in 2001, an increase of 20%.  Theincrease is sales was in both domestic and international markets.  Approximately three percentage points of thegrowth was the effect of a stronger euro on reported sales and approximatelyfive percentage points related to the May 2002 acquisition of Portex Ltd. Sales in the comparable periods of the prior year were negatively affected bythe events of September 11, 2001.  The effect of the disruption to airshipments and postponed and cancelled surgeries was estimated to be over $2million. 

Sales of aesthetic and general surgery products increased 17% to $42.7million for the quarter from $36.4 million in the same quarter of the prioryear.  Sales of products used in cosmetic augmentation and forreconstruction each increased 18% over the same period in the prior year. Salesgrowth was primarily attributable to strong product demand both domestically andinternationally, the introduction of an improved tissue expander in the fourthquarter of fiscal 2002, and the benefit from the effect of the strong euro.  

Sales of surgical urology productsincreased 14% to $25.7 million for the quarter from $22.5 million in the samequarter of the prior year.   Increases insales of disposable surgical products over sales in the comparable period ofthe prior year were partially offset by a 7% decrease in penile implantsales.  Brachytherapy sales increased 6%over the same period in the prior year as unit sales increases were partiallyoffset by competitive pressures, which decreased average selling prices.  Sales of products used in pelvic floorreconstruction and incontinence including the Suspend ® sling increased 9% fromthe same period in the prior year.  

Sales of clinical and consumerhealthcare products increased 37% to $21.1 million for the quarter from $15.4million in the same quarter of the prior year. This growth primarily resulted from the inclusion of sales of productsacquired in the May 2002 acquisition of the urology business of PortexLtd.   Sales of Portex products accountedfor 26 percentage points of the year-to-year growth. Increased sales of disposable products acquired in the Porges acquisitionaccounted for approximately three percentage points of the year-to-yeargrowth.  Strong growth in theinternational sales of male external catheters was diluted by a modest increasein the sales of self-catheter products.  

For the six months ended September 30,2002 sales increased 20% from $155.5 million to $187.3 million.   Increased sales were recorded in each majorsegment and market.  International saleswere aided by a generally weaker dollar and the May 2002 acquisition PortexLtd., which accounted for approximately four percentage points and twopercentage points of the increase, respectively.  Surgical urology product revenue increased13% primarily due to the sales of disposable surgical product lines.  Aesthetic and General surgery productsincreased 22% reflecting growth in augmentation and reconstruction mammaryimplant products and increases in body contouring revenues.  Clinical and Consumer Healthcare revenueincreased 30% primarily due to sales of products acquired in the May 2002acquisition of Portex, Ltd. and growth in external catheter sales.

Sales by  Principal Product Line

For the  Three Months Ended September 30,

For the Six  Months Ended   September 30,

**2002**

  2001

Percent  Change

**2002**

  2001

Percent  Change

Aesthetic  & General Surgery      Products

**$   42,748**

  $   36,388

  17.5%

**$  96,428**

  $   79,326

  21.6%

Surgical  Urology Products

**25,746**

22,535

14.2%

**51,988**

46,182

12.6%

Clinical  & Consumer      Healthcare Products

**21,092**

  15,424

  36.7%

**38,847**

  29,983

  29.6%

** **

**$  89,586**

$   74,347

20.5%

**$187,263**

$ 155,491

20.4%

**Cost of Sales**Cost of sales as a percentage of netsales for the three and six-month periods ended September 30, 2002 were 42.0%and 40.5% compared to 42.5% and 41.4% for the same periods a year ago.  This decrease in costs as a percentage ofsales is primarily attributable to aesthetic and surgical urology productmanufacturing efficiencies achieved during the prior year and sales growthincreased at a higher percentage rate than manufacturing support costs. 

**Selling, General and Administrative**Selling,general and administrative expenses were 33.7% of net sales for the quarterended September 30, 2002, a slight decrease from 34.6% for the same period ayear ago.  For the six months endedSeptember 30, 2002, selling, general and administrative expenses were 33.1% ofnet sales compared to 34.6%.  Overall spending on selling, general and administrative expensesincreased by 15.4% from the prior year.  Thedecrease as a percentage of net sales reflects efficiencies in general andadministrative expenses and the impact of the recent acquisition of Portex (nowMentor Medical, Ltd.).  Mentor MedicalLtd. has a lower percentage of selling, general and administrative expenses tonet sales than the historical percentage rate of the Company.  

**Researchand Development**Research and development expenses as a percent of netsales for the three and six-month periods ended September 30, 2002 were 6.0%and 5.7%, respectively, compared to 7.0% and 7.2% for the same periods a yearago.  The decrease in research anddevelopment costs as a percentage of net sales is due to unusually high levelsof development costs in the prior year related to the Company's automatedbrachytherapy workstation, accelerated product enhancement projects forexisting products and new product development, along with strong sales growthin the current year.  Total spending onresearch and development decreased 4% over the comparable six-month period inthe prior year; consequently the research and development expenses as apercentage of net sales have decreased. The Company is committed to a varietyof clinical and laboratory studies in connection with its gel-filled and salinefilled mammary implants and other products.  

**Interest and Other Income and Expense**Interest expense increased to $236thousand in the second quarter of fiscal 2003, compared to $198 thousand in thesame period of the prior year.  Interestexpense includes imputed interest on long-term liabilities recorded at netpresent value related to the acquisitions of assets of SouthBay Medical andProSurg Inc. during fiscal 2001 and 2002, respectively. 

Interest income decreased to $672 thousand in thesecond quarter of fiscal 2003 from $699 thousand in the same period of theprior year.  The decrease is due to lowerprevailing interest rates on short-term investments partially offset by highercash balances available for investment. 

Other income, net primarily includesgains or losses on sales of marketable securities, and foreign currency gainsor losses related to the Company's foreign operations.  Other income, net for the six months endingSeptember 30, 2002 totals $1.2 million and includes a $500 thousand gain on thesale of an intangible asset, approximately $400 thousand on gains on sales ofmarketable securities, unrealized losses on short-term marketable securities,and approximately $504 thousand gain on foreign currency translation.  

**Income Taxes**

The effective rate of corporate income taxes for thethree and six months ended September 30, 2002 was 26.4% and 27.7% as comparedto 31.8% in both comparable periods in the prior year.  The decrease in the effective tax rate fromthe comparable periods in the prior year is a result of a higher proportion ofincome from foreign operations with lower tax rates, tax credits related toresearch and development, and refunds received in the first and second quartersof fiscal year 2003 related to the amendment of prior year tax returns for theCompany's foreign sales corporation.

**Net Income**

Net income for the three-month periodended September 30, 2002 increased 47% to $12.5 million from $8.5 million inthe comparable period in the prior year. Net income increased 56% from $18.8 million reported in the previousyear to $29.3 million for the six-months ended September 30, 2002.  Diluted earnings per share increased 53% to$.52 for the three-month period compared to $.34 for the comparable period lastyear.  Increased sales, lower cost ofgoods sold and operating expenses as a percentage of net sales, the gain onsale of an intangible asset, and a tax refund all contributed to the increasednet income.

**LIQUIDITY AND CAPITAL RESOURCES******The Company had cash, cash equivalentsand short-term marketable securities of $84 million at September 30, 2002compared to $75 million at March 31, 2002. Cash provided by operating activities has been and is expected tocontinue to be the Company's primary recurring source of funds.  The Company's working capital was $142million at September 30, 2002 compared to $127 million at March 31, 2002.  The Company generated $39.3 million of cashfrom continuing operating activities during the six months ended September 30,2002, compared to $30 million the same period the previous year.  Increased cash flow from operating activitieswas primarily the result of increased net income from continuing operations, anincrease in accrued liabilities and a decrease in other current assets due tothe receipt of $5.4 million in connection with the settlement oflitigation.  These amounts were partiallyoffset by increases in accounts receivable and inventory. 

During the six months ended September30, 2002, the Company invested $7.6 million in manufacturing equipment at thenew facility in the Netherlands and at U.S. locations, and in informationtechnology systems.  The Companyanticipates investing approximately $15 million in fiscal 2003 to complete thenew facility in the Netherlands, invest in an existing facility, purchaseproduction equipment and upgrade and replace information technology systems. 

TheCompany receives cash from the exercise of employee stock options.  Employee stock option exercises provided $3.2 million duringthe six months ended September 30, 2002 compared to $5.4 million in the sameperiod the previous year.  Proceeds fromthe exercise of employee stock options will vary from period to period basedupon, among other factors, fluctuations in the market value of the Company'scommon stock relative to the exercise price of such options. 

The Company's Board of Directors hasauthorized an ongoing stock repurchase program. The objectives of the program, among other items, are to offset thedilutive effect of the Company's employee stock option program, provideliquidity to the market and to reduce the overall number of sharesoutstanding.  Repurchases are subject tomarket conditions and cash availability. The Company repurchased 433 thousand shares for cash of $12.2 million inthe six months ended September 30, 2002.   The Company intends to continue the share repurchase program in theremainder of fiscal 2003 and 1.1 million shares remain authorized for repurchase.  

In January 2001, the Company completedthe acquisition of SouthBay Medical, a developmentstage company focused on the development of a new technology for acomputer-based workstation and automated cartridge-based needle loading systemfor use in brachytherapy procedures.  Thetotal consideration included $2 million in cash, 235,293 restricted shares ofthe Company's common stock having a fair market value of $4 million at the timeof acquisition, and $13.6 million to be paid in cash or the Company's commonstock over the next several years.  Thesefuture payments have been recorded as an acquisition obligation liability atnet present value ($11.4 million at September 30, 2002), and will continue toincrease as imputed interest is recorded. Approximately $5.9 million of the acquisition obligation liability is tobe paid in shares of the Company's common stock valued at fair market value onthe date of issuance. 

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

The Company has a secured line ofcredit ("$25M Credit Agreement") for borrowings of up to $25 million,which accrue interest at the prevailing prime rate or at a mark-up over LIBORat the Company's discretion.  The $25M CreditAgreement includes certain covenants that, among other things, limit thedividends the Company may pay and requires maintenance of certain levels oftangible net worth and debt service ratios. During fiscal 2002, the Company used the $25M Credit Agreement to guaranteethe secured loan of a vendor in the amount of $5.3 million to facilitate theramp-up of production capacity related to a new product.  Accordingly, although there were noborrowings outstanding under the $25M Credit Agreement at September 30, 2002,only $19.7 million was available for additional borrowings.

In addition,several lines of credit were established with local foreign lenders tofacilitate operating cash flow needs at our foreign subsidiaries.  These lines are at market rates of interest,are unsecured and guaranteed by Mentor Corporation, and total $6.0 million,which was outstanding, and no additional borrowings were available at September30, 2002.  

In fiscal2002, a line of credit of $5.4 million was established to finance theconstruction of a new facility in Leiden, the Netherlands.  The borrowings accrue interest at EURIBORplus 0.75% and are secured by the new facility and other assets in theNetherlands.  At September 30, 2002, $3.9million was outstanding and $1.4 million was available under this line.  The line of credit provides for conversion toa term loan at prevailing interest rates when construction of the new facilityis completed. Conversion is expected to be in the third quarter of fiscal 2003.

At September30, 2002, the total of short-term borrowings under all lines of credit was $9.9 million and the weighted-average interest rate was 4.0%.  The total amount of additional borrowingsavailable to the Company under all lines of credit was $21.1 million atSeptember 30, 2002.

TheCompany has paid a quarterly cash dividend of $.03 per share.  At the current annual rate of $.12 per share,the aggregate annual dividend would equal approximately $2.8 million.  It is the Company's intent to continue to paydividends for the foreseeable future subject to among other things, Boardapproval, cash availability and alternative cash needs.  The $25M Credit Agreement limits theaggregate amount of dividends payable in any year to one-half of the net incomeof the preceding year. 

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

On November 4, 2002, the Companyannounced that it had reached an agreement to acquire Mills Biopharmaceuticals,Inc., a manufacturer of iodine brachytherapy seeds for the treatment ofprostate cancer.  The transaction will becompleted in February 2003 and is expected to be paid from existing cashbalances. 

The following table summarizescontractual cash and other commercial commitments at September 30, 2002:

(in thousands)

 

Less Than

1-3

4-5

After 5

**Contractual  Cash Obligations**

Total

1 Year

Years

Years

Years

Operating leases

$ 38,682

$  4,000

$12,081

$ 7,635

$14,966

   Total Contractual  Cash Obligations

$ 38,682

$  4,000

$12,081

$ 7,635

$14,966

 

 

 

 

 

**Commercial  Commitments**

 

 

 

 

 

Lines of credit

$  9,888

$  9,888

$         -

$        -

$         -

Guarantees

5,300

5,300

-

-

-

Other commercial commitments

25,080

9,975

11,145

700

3,260

   Total Commercial  Commitments

$40,268

$25,163

$11,145

$   700

$ 3,260

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

The Company's principal source ofliquidity at September 30, 2002 consisted of $84 million in cash, cashequivalents and short-term marketable securities, plus $21 million availableunder the existing lines of credit.  TheCompany believes that funds generated from operations, its cash, cashequivalents and marketable securities and funds available under its line ofcredit agreements will be adequate to meet its working capital needs, capitalexpenditure requirements and commitments for at least the next 12 months.  However, it is possible that the Company mayneed to raise additional funds to finance its activities beyond the next 12months or to consummate acquisitions of other businesses, products ortechnologies.  Additional funds could beraised by selling equity or debt securities to the public or to selectedinvestors, or by borrowing money from financial institutions.  In addition, even though the Company may not needadditional funds, it may still elect to sell additional equity or debtsecurities or obtain credit facilities for other reasons.  The Company may not be able to obtainadditional funds on terms that would be favorable to the Company and itsshareholders, or at all.  If additionalfunds were raised by issuing additional equity securities or convertible debtsecurities, the ownership percentage of existing shareholders would be reduced.  In addition, the equity or debt securitiesissued by the Company may have rights, preferences or privileges senior tothose of the Company's common stock. 

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

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

The Company has an exclusive worldwidedistribution agreement with North American Scientific Inc. ("NASI"),to market and sell radioactive brachytherapy seeds for the treatment ofprostate cancer.  The products are manufacturedby NASI and are exclusively marketed and sold by the Company under the namesIoGold® and PdGold® for iodine and palladium seeds, respectively.  Sales of radioactive seeds supplied to theCompany by NASI were $6.8 million in the quarter ended September 30, 2002. Thedistribution agreement expires on January 31, 2003 but included a one-timeunilateral option for the Company to extend the agreement for three yearssubject to certain performance criteria. In August 2002, the Company notified NASI that it did not intend toexercise its option to extend the current agreement under the current terms butis willing to negotiate a new agreement with NASI on different terms.  A new agreement has not been negotiated as ofNovember 14, 2002.  NASI has announcedthat it is hiring key personnel to directly market and distribute itsbrachytherapy products. If a new agreement cannot be negotiated before theexpiration of the original agreement, NASI can cease to supply the radioactiveseeds to the Company upon expiration of the original agreement.  Following the expiration of the Agreement,NASI will be entitled to directly market its brachytherapy seeds,resulting in additional competition.  OnNovember 4, 2002 the Company announced it has reached an agreement to purchaseMills Biopharmaceutical Inc., a manufacturer of iodine brachytherapyseeds.  The purchase will be completedafter the expiration of the existing agreement with NASI.  In addition, the Company believes thatadditional satisfactory sources for similar radioactive seeds for use inbrachytherapy treatment of the prostate can be manufactured or obtained.  There is no assurance that such seeds can bemanufactured or obtained without interruption, or regulatory delay, on termssatisfactory to the Company or that such additional seeds will ultimately beacceptable to customers.  Interruption ofthe supply of seeds, additional competition, regulatory delay, additional coststo procure seeds, or loss of customers and market share may have a negativeeffect on revenues and the results of operations.  

The distribution agreement alsoprovides that NASI can terminate the Company's exclusivity with respect to anyproduct for which Mentor fails to achieve target market share in certaindesignated markets, subject to curing provisions whereby exclusivity can be maintained.  NASI has notified the Company that itbelieves the required target market share has not been achieved with respect topalladium and iodine seeds.  Theagreement specifies curing provisions and timelines once the Company hasreceived notice.  The timelines andcuring provisions currently extend beyond the scheduled end of the agreement,January 31, 2003, and while they could have resulted in NASI's ability toterminate the Company's right of exclusivity, the agreement is scheduled toexpire before the end of the applicable cure periods, although NASI has taken acontrary position with respect to palladium seeds.  Loss of exclusivity to palladium seeds beforethe agreement expires could result in additional competition as to that product(NASI has already commenced efforts to compete), which may have a negativeeffect on revenue and results of operations. 

**UnitedStates Food and Drug Administration**

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

** **In August of this year, theCenters for Medicare and Medicaid Services ("CMS") published for comment itsProposed Rule of Changes to the Medicare Outpatient Prospective Payment System(OPPS) and payment rates for calendar year 2003.  The rule determines the amount that hospitalswill be reimbursed for procedures performed on an outpatient basis and isimportant, as it determines the profitability of certain procedures for thehospital and which may impact the procedures that the facility will choose toperform.  The Company commented directlyand through industry groups on the proposed reimbursement of outpatientprocedures that include the Company's products. The products affected include penile implants for the treatment ofimpotence, iodine and palladium brachytherapy seeds for the treatment ofprostate cancer, and others products.  On November 1, 2002 CMS issued its final ruleconcerning reimbursement of outpatient procedures for 2003.  CMS considered the Company's comments andincreased its reimbursement for these procedures and committed to addressingcertain other reimbursement issues related to the Company's products.  However, the final rule results in an overallreduction in the amount of reimbursement for outpatient procedures whichinclude our penile implants for erectile dysfunction and made certain changesto the reimbursement for brachytherapy procedures which include the Company'sradioactive seed products.  Most of theCompany's domestic sales of brachytherapy seeds are reimbursed under theserules; however the effect of the changes in reimbursement procedures andamounts is expected to be minimal.  TheCompany estimates that approximately $14 million of annual revenue for ourpenile implants for the treatment of erectile dysfunction is reimbursed underthis rule or approximately four percent of total Company revenues. The Companycannot currently estimate the effect of the final rule on the Company's penileimplant customers who are reimbursed under the rule, on revenue, on theCompany's ability to secure additional reimbursement for new or improvedimplants, or ultimately, on operating results; however, the reduction inreimbursement may negatively impact the Company's results. 

**ITEM  3.**

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

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

**PART II -OTHER INFORMATION**

**Item 1.**

**Legal  Proceedings **

In 1998, the Company  learned that the FDA's Office of Criminal Investigations ("OCI")  was conducting an investigation involving the Company.  The Company understood that the  investigation was dormant until April 2000 when OCI issued a letter  requesting that the Company provide OCI with manufacturing data and other  corporate records, which the Company provided to OCI.  The Company cooperated fully with the OCI  investigation.  The OCI declined to  identify the specific focus of its investigation involving the Company, and  except as noted below, the Company has had no direct contact with OCI  regarding the investigation since January 2001 when certain additional  documents were requested and provided.   

On July 9, 2002, the  Company presented the five-year follow-up data to the FDA advisory panel  related to its saline mammary implant clinical studies.  The presentation of this data was a  condition of the PMA approval received in May of 2000.  Both the Company and its primary domestic  competitor, McGhan Medical Corporation, a subsidiary of INAMED, Inc.,  presented data on their respective studies.   Subsequent to the presentation, the Company became aware through the  media that the Chairman of the Committee on Energy and Commerce and the Chairman  of the Subcommittee on Oversight and Investigations (the "Committee") sent a  letter to the Deputy Commissioner of the FDA requesting data related to the  saline breast implant studies of both manufacturers presented to the FDA  advisory panel.  The letter further  requested that the FDA provide records related to Mentor Corporation since  January 2001, excluding the FDA's criminal investigative file.  In addition, the letter requested that the  Deputy Commissioner obtain a briefing directly from the FDA's Office of  Regulatory Affairs and the Office of Criminal Investigations "concerning the  true status of the long-standing and ongoing criminal investigation of  allegations relating to Mentor Corporation."    If the Deputy Commissioner "ascertains that this investigation is in  fact still ongoing, [the chairmen] request that [FDA] then brief the  Committee members and/or Committee staff with appropriate information  .   .  .  to assure the  Committee that FDA is actively conducting a criminal investigation."

On September 27, 2002 media  articles announced that the FDA had completed and closed its criminal  investigation of Mentor.  The media  also reported that the Chairmen of the House Subcommittee on Oversight and  Investigations wrote the FDA and asked for "all records relating to the FDA's  criminal investigation of Mentor Corporation." 

The Company has received  confirmation from the FDA Office of Criminal investigation that the criminal  investigation has been closed. 

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

**Item 2.**

**Changes in  Securities **

None 

**Item 3.**

**Defaults  Upon Senior Securities**

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

**Item 4.**

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

At  the Company's 2002 Annual Meeting of Shareholders held on September 12, 2002,  the following proposals were presented and approved:

(1)  A proposal to elect a Board of Directors of  the Company to serve until the next annual meeting, or until their successors  are elected, as follows:

**Name of Director                                   Votes  For                          Votes Withheld       **Christopher J.  Conway                           10,283,248                                   45,712  Eugene G.  Glover                                   20,384,358                                   45,712  Walter W.  Faster                                    15,458,569                              4,971,501  Michael Nakonechny                              20,304,058                                 126,012  Dr. Richard W.  Young                            20,253,806                                 176,264  Ronald J.  Rossi                                       20,306,058                                 126,012

There  were no broker non-votes.

(2)  A proposal to approve an amendment of the Company's restated Articles of  Incorporation to increase the authorized shares from 50,000,000 to  150,000,000.  The proposal received  12,896,164 votes for, and 7,504,265 votes against ratification. There were  29,638 abstentions and 3 broker non-votes.   The Company intends to file its amended restated Articles of  Incorporation to the State of Minnesota in the near future.  

(3)  A proposal to ratify the appointment of Ernst & Young LLP to act as  independent auditors of the Company for the fiscal year ending March 31,  2003.  The proposal received 20,272,888  votes for, and 29,638 against ratification.   There were 36,633 abstentions and 1 broker non-votes. 
   
**Other  Information **

**Controls and Procedures**

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

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

**Item 6.**

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

** (a)  Exhibits**

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

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

There  were no reports on Form 8-K in the quarter ended September 30, 2002.

**SIGNATURES**

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

**MENTOR CORPORATION**

(Registrant)

Date:

November  13, 2002

By:

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

 

Date:

November  13, 2002

By:

/S/ADEL MICHAEL  Adel Michael  Executive Vice President  Chief Financial Officer
****
**§ 302 CERTIFICATION**

I,Christopher J. Conway, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: November 13, 2002                                           /S/CHRISTOPHERJ. CONWAY                                                                                    Christopher J.Conway                                                                                    Presidentand Chief Executive Officer

**§ 302 CERTIFICATION**

I, Adel Michael,certify that:

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

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

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

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

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

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

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

5.  The registrant'sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant's auditors and the audit committee ofregistrant's board of directors (or persons performing the equivalentfunctions):

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

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

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

Date:  November 13, 2002                                           /S/ADELMICHAEL                                                                                    AdelMichael                                                                                    ChiefFinancial Officer

**EXHIBIT99.1**

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

In connection with the QuarterlyReport of Mentor Corporation (the "Company") on Form 10‐Q for theperiod ending September 30, 2002 as filed with the Securities and ExchangeCommission on the date hereof (the "Report"), I, Christopher J. Conway,Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.§ 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of2002, that to the best of my knowledge:

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

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

/S/CHRISTOPHERJ. CONWAYChristopher J. ConwayChief Executive OfficerNovember 13, 2002

**EXHIBIT99.2**

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

In connection with theQuarterly Report of Mentor Corporation (the "Company") on Form 10‐Qfor the period ending September 30, 2002 as filed with the Securities andExchange Commission on the date hereof (the "Report"), I, Adel Michael, ChiefFinancial Officer of the Company, certify, pursuant to 18 U.S.C.§ 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of2002, that to the best of my knowledge:

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

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

/S/ADELMICHAELAdel MichaelChief Financial OfficerNovember 13, 2002 |