##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended
 June 27, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No. 001-31744
 MENTOR CORPORATION
  Minnesota
    
    41-0950791(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer Identification No.)
 201 Mentor Drive, Santa Barbara, California 93111
 (805) 879-6000
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



MENTOR CORPORATION
 INDEX
 Part I. Financial InformationItem 1. Consolidated Financial Statements:Consolidated Balance Sheets (unaudited)  June 27, 2008 and March 31, 2008
    
    
    3Consolidated Statements of Income (unaudited)  Three Months Ended June 27, 2008 and June 29, 2007
    
    
    5Consolidated Statements of Cash Flows (unaudited)  Three Months Ended June 27, 2008 and June 29,
2007
    
    
    6Notes to Consolidated Financial Statements  June 27, 2008
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 4. Controls and Procedures
    
    
    39Part II. Other InformationItem 1. Legal Proceedings
    
    
    40Item 1A. Risk Factors
    
    
    40Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    50Item 3. Defaults Upon Senior Securities
    
    
    50Item 4. Submission of Matters to a Vote of Security Holders
    
    
    50Item 5. Other Information
    
    
    50Item 6. Exhibits
    
    
    51Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements
  
   June 27,
    
    
    March 31,(in thousands)
    
    2008
    
    
    2008AssetsCurrent assets:Cash and cash equivalents
    
    $
    74,635
    
    
    $
    79,697Marketable securities
    
    
    31,148
    
    
    
    30,218Accounts receivable, net
    
    
    85,869
    
    
    
    82,060Inventories
    
    
    51,275
    
    
    
    49,940Deferred income taxes
    
    
    27,406
    
    
    
    29,040Prepaid income taxes
    
    
    5,566
    
    
    
    8,074Prepaid expenses and other
    
    
    10,527
    
    
    
    11,233Total current assets
    
    
    286,426
    
    
    
    290,262Property and equipment, net
    
    
    65,852
    
    
    
    58,252Intangible assets, net
    
    
    39,419
    
    
    
    36,336Goodwill, net
    
    
    50,179
    
    
    
    49,707Other assets
    
    
    5,695
    
    
    
    6,022Total assets
    
    $
    447,571
    
    
    $
    440,579
   3




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##### Table of Contents



June 27,
    
    
    March 31,(in thousands, except share data)
    
    2008
    
    
    2008Liabilities and shareholders equityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    46,328
    
    
    $
    43,209Sales returns
    
    
    16,379
    
    
    
    17,344Accrued compensation
    
    
    14,568
    
    
    
    22,026Dividends payable
    
    
    6,752
    
    
    
    6,748Product liability reserves
    
    
    6,628
    
    
    
    6,945Deferred revenue
    
    
    2,638
    
    
    
    2,693Warranty reserve
    
    
    2,370
    
    
    
    2,534Short-term portion of long-term debt
    
    
    828
    
    
    
    935Other
    
    
    17,446
    
    
    
    15,955Total current liabilities
    
    
    113,937
    
    
    
    118,389Long-term accrued liabilities
    
    
    27,698
    
    
    
    27,536Long-term debt
    
    
    1,356
    
    
    
    1,620Convertible subordinated notes
    
    
    150,000
    
    
    
    150,000Commitments and contingenciesShareholders equity:Common stock, $.10 par value:Authorized  150,000,000 shares; issued and outstanding33,758,085 shares at June 27, 2008;33,739,203 shares at March 31, 2008;
    
    
    3,376
    
    
    
    3,374Preferred stock, $.01 par value:Authorized  25,000,000 shares; none issued and outstanding
    
    
    
    
    
    
    Capital in excess of par value
    
    
    3,348
    
    
    
    Accumulated other comprehensive income
    
    
    32,221
    
    
    
    31,992Retained earnings
    
    
    115,635
    
    
    
    107,668Total shareholders equity
    
    
    154,580
    
    
    
    143,034Total liabilities and shareholders equity
    
    $
    447,571
    
    
    $
    440,579
   4




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Three Months EndedJune 27,
    
    
    June 29,(in thousands, except per share data)
    
    2008
    
    
    2007Net sales
    
    $
    105,536
    
    
    $
    95,564Cost of sales
    
    
    29,395
    
    
    
    21,224Gross profit
    
    
    76,141
    
    
    
    74,340Selling, general, and administrative
    
    
    42,967
    
    
    
    36,045Research and development
    
    
    10,982
    
    
    
    10,31453,949
    
    
    
    46,359Operating income from continuing operations
    
    
    22,192
    
    
    
    27,981Interest expense
    
    
    (1,470
    )
    
    
    (1,464
    )Interest income
    
    
    594
    
    
    
    4,774Other income (expense), net
    
    
    34
    
    
    
    (294
    )Income from continuing operations before income taxes
    
    
    21,350
    
    
    
    30,997Income taxes
    
    
    6,248
    
    
    
    9,253Income from continuing operations
    
    
    15,102
    
    
    
    21,744Loss from discontinued operations, net of tax benefit of $212 and $32,
respectively
    
    
    (385
    )
    
    
    (60
    )Gain on sale of discontinued operations, net of tax of $20
    
    
    
    
    
    
    54Net income
    
    $
    14,717
    
    
    $
    21,738Basic earnings (loss) per shareContinuing operations
    
    $
    0.45
    
    
    $
    0.54Discontinued operations
    
    $
    (0.01
    )
    
    $
    Basic earnings per share
    
    $
    0.44
    
    
    $
    0.54Diluted earnings (loss) per shareContinuing operations
    
    $
    0.40
    
    
    $
    0.48Discontinued operations
    
    $
    (0.01
    )
    
    $
    Diluted earnings per share
    
    $
    0.40
    
    
    $
    0.48Dividends per share
    
    $
    0.20
    
    
    $
    0.20Weighted average shares outstandingBasic
    
    
    33,472
    
    
    
    40,465Diluted
    
    
    39,277
    
    
    
    46,950
   5




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Three Months Ended(in thousands)
    
    June 27, 2008
    
    
    June 29, 2007Net income:
    
    $
    14,717
    
    
    $
    21,738Less: loss from discontinued operations, net of income taxes
    
    
    385
    
    
    
    6Income from continuing operations
    
    $
    15,102
    
    
    $
    21,744Operating Activities:Adjustments to derive cash flows from continuing operating activities:Depreciation
    
    
    2,079
    
    
    
    1,556Amortization
    
    
    1,942
    
    
    
    849Deferred income taxes
    
    
    792
    
    
    
    1,452Non-cash compensation
    
    
    2,962
    
    
    
    3,242Tax benefit from exercise of stock options
    
    
    10
    
    
    
    231Excess tax benefits from equity compensation
    
    
    (107
    )
    
    
    (134
    )Loss (gain) on long-term marketable securities, net
    
    
    40
    
    
    
    (40
    )Cash provided by (used in) changes in operating assets and liabilities:Accounts receivable
    
    
    (3,907
    )
    
    
    (5,908
    )Inventories
    
    
    (1,000
    )
    
    
    1,443Other current assets
    
    
    3,742
    
    
    
    6Accounts payable and accrued liabilities
    
    
    (3,694
    )
    
    
    (58
    )Net cash provided by continuing operating activities
    
    
    17,961
    
    
    
    24,383Net cash used for discontinued operating activities
    
    
    (385
    )
    
    
    (6
    )Net cash provided by operating activities
    
    
    17,576
    
    
    
    24,377Investing Activities:Purchases of property and equipment
    
    
    (10,080
    )
    
    
    (3,717
    )Purchases of intangibles
    
    
    (5,073
    )
    
    
    Purchases of marketable securities
    
    
    (7,681
    )
    
    
    (5,711
    )Sales of marketable securities
    
    
    6,881
    
    
    
    3,403Acquisitions, net of cash acquired
    
    
    (173
    )
    
    
    Net cash used for continuing investing activities
    
    
    (16,126
    )
    
    
    (6,025
    )Financing Activities:Repurchase of common stock
    
    
    (209
    )
    
    
    (210,496
    )Proceeds from exercise of stock options and ESPP
    
    
    588
    
    
    
    1,170Excess tax benefits from equity compensation
    
    
    107
    
    
    
    134Dividends paid
    
    
    (6,748
    )
    
    
    (8,480
    )Repayments of debt
    
    
    (398
    )
    
    
    Net cash used for continuing financing activities
    
    
    (6,660
    )
    
    
    (217,672
    )Effect of currency exchange rates of continuing operations
    
    
    148
    
    
    
    544Decrease in cash and cash equivalents
    
    
    (5,062
    )
    
    
    (198,776
    )Cash and cash equivalents at beginning of year
    
    
    79,697
    
    
    
    371,525Cash and cash equivalents at end of period
    
    $
    74,635
    
    
    $
    172,749
   6




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MENTOR CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 June 27, 2008
 Note A  Business Activity
   Note B  Summary of Significant Accounting Policies
  Basis of Presentation
    Use of Estimates
  Revenue Recognition
   7




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Warranty Reserves
  Product Liability Reserves
  Employee Stock-Based Payments
  SFAS 123(R).
  8




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Effects of Recent Accounting Pronouncements
    EITF No. 07-1 EITF No. 07-1
   9




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##### Table of Contents



(FSP APB 14-1). FSP APB 14-1
  Note C  Cash Equivalents, Marketable Securities, and Long-Term Marketable Securities and
Investments
    Gross
    
    
    Gross
    
    
    EstimatedAdjusted
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueCash balances
    
    $
    69,337
    
    
    $
    
    
    
    $
    
    
    
    $
    69,337Money market funds
    
    
    5,298
    
    
    
    
    
    
    
    
    
    
    
    5,298U.S. Government and agency obligations
    
    
    16,234
    
    
    
    
    
    
    
    (36
    )
    
    
    16,198State and Municipal agency obligations
    
    
    14,667
    
    
    
    3
    
    
    
    
    
    
    
    14,670Corporate debt
    
    
    281
    
    
    
    
    
    
    
    (1
    )
    
    
    280Total available-for-sale investments
    
    $
    105,817
    
    
    $
    3
    
    
    $
    (37
    )
    
    $
    105,783Included in cash and cash equivalents
    
    $
    74,635
    
    
    $
    
    
    
    $
    
    
    
    $
    74,635Included in current marketable securities
    
    
    31,182
    
    
    
    3
    
    
    
    (37
    )
    
    
    31,148Total available-for-sale investments
    
    $
    105,817
    
    
    $
    3
    
    
    $
    (37
    )
    
    $
    105,783
  10




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##### Table of Contents



Gross
    
    
    Gross
    
    
    EstimatedAdjusted
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueCash balances
    
    $
    71,756
    
    
    $
    
    
    
    $
    
    
    
    $
    71,756Money market funds
    
    
    7,941
    
    
    
    
    
    
    
    
    
    
    
    7,941U.S. Government and agency obligations
    
    
    15,336
    
    
    
    16
    
    
    
    
    
    
    
    15,352State and Municipal agency obligations
    
    
    14,582
    
    
    
    3
    
    
    
    
    
    
    
    14,585Corporate debt
    
    
    281
    
    
    
    
    
    
    
    
    
    
    
    281Total available-for-sale investments
    
    $
    109,896
    
    
    $
    19
    
    
    $
    
    
    
    $
    109,915Included in cash and cash equivalents
    
    $
    79,697
    
    
    $
    
    
    
    $
    
    
    
    $
    79,697Included in current marketable securities
    
    
    30,199
    
    
    
    19
    
    
    
    
    
    
    
    30,218Total available-for-sale investments
    
    $
    109,896
    
    
    $
    19
    
    
    $
    
    
    
    $
    109,915
  Fair Values of Financial Instruments
       11




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##### Table of Contents



Quoted prices inactive markets for
    
    
    Significant other
    
    
    Significantidentical assets
    
    
    observable inputs
    
    
    unobservable inputs
    
    
    Balance as of(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    

June
27, 2008Assets (in thousands)Money market funds
    
    $
    5,298
    
    
    $
    
    
    
    $
    
    
    
    $
    5,298U.S. Government and agency obligations
    
    
    
    
    
    
    16,198
    
    
    
    
    
    
    
    16,198State and Municipal agency obligations
    
    
    
    
    
    
    14,670
    
    
    
    
    
    
    
    14,670Corporate debt
    
    
    
    
    
    
    280
    
    
    
    
    
    
    
    280Total
    
    $
    5,298
    
    
    $
    31,148
    
    
    $
    
    
    
    $
    36,446
  Note D  Inventories
   (in thousands)
    
    June 27, 2008
    
    
    March 31, 2008Raw materials
    
    $
    8,735
    
    
    $
    7,327Work in process
    
    
    6,503
    
    
    
    6,950Finished goods on consignment
    
    
    17,200
    
    
    
    18,058Finished goods
    
    
    18,837
    
    
    
    17,605$
    51,275
    
    
    $
    49,940
 Note E  Long-Lived Assets
   12




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##### Table of Contents



(in thousands)
    
    June 27, 2008
    
    
    March 31, 2008Land
    
    $
    275
    
    
    $
    276Buildings
    
    
    13,737
    
    
    
    13,909Leasehold improvements
    
    
    23,727
    
    
    
    23,747Furniture, fixtures and equipment
    
    
    72,067
    
    
    
    70,832Construction in progress
    
    
    29,242
    
    
    
    20,657139,048
    
    
    
    129,421Less accumulated depreciation and amortization
    
    
    (73,196
    )
    
    
    (71,169
    )$
    65,852
    
    
    $
    58,252
  Note F  Warranty Reserves
   Three Months Ended(in thousands)
    
    June 27, 2008
    
    
    June 29, 2007Beginning warranty reserves
    
    $
    11,944
    
    
    $
    14,308Costs of warranty claims
    
    
    (677
    )
    
    
    (673
    )Accruals for product warranties
    
    
    941
    
    
    
    1,230Adjustments made to accruals related to pre-existing warranties
    
    
    
    
    
    
    (2,914
    )Ending warranty reserves
    
    $
    12,208
    
    
    $
    11,951
   13




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Note G  Comprehensive Income
   Three Months Ended(in thousands)
    
    June 27, 2008
    
    
    June 29, 2007Net income
    
    $
    14,717
    
    
    $
    21,738Foreign currency translation adjustment
    
    
    269
    
    
    
    1,674Unrealized losses on marketable
securities and investment activities, net
    
    
    (40
    )
    
    
    (40
    )Comprehensive income
    
    $
    14,946
    
    
    $
    23,372
 Note H  Income Taxes
     14




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Note I  Earnings per Share
  Three Months Ended(in thousands)
    
    June 27, 2008
    
    
    June 29, 2007Net income from continuing operations: as reported
    
    $
    15,102
    
    
    $
    21,744Add back after tax interest expense on convertible notes
    
    
    802
    
    
    
    802Net income from continuing operations for numerator of
diluted earnings per share
    
    $
    15,904
    
    
    $
    22,546
 Three Months Ended(in thousands)
    
    June 27, 2008
    
    
    June 29, 2007Net loss from discontinued operations
    
    $
    (385
    )
    
    $
    (6
    )Net income: as reported
    
    
    14,717
    
    
    
    21,738Add back after tax interest expense on convertible notes
    
    
    802
    
    
    
    802Net income for numerator of diluted earnings per share
    
    $
    15,519
    
    
    $
    22,540
  Three Months Ended(in thousands, except per share data)
    
    June 27, 2008
    
    
    June 29, 2007Weighted average outstanding shares: basic
    
    
    33,472
    
    
    
    40,465Unvested restricted grants
    
    
    338
    
    
    
    285Shares issuable through exercise of stock options
    
    
    271
    
    
    
    678Shares issuable through convertible notes
    
    
    5,196
    
    
    
    5,165Shares issuable through warrants
    
    
    
    
    
    
    357Weighted average outstanding shares: diluted
    
    
    39,277
    
    
    
    46,950Basic earnings (loss) per shareContinuing operations
    
    $
    0.45
    
    
    $
    0.54Discontinued operations
    
    $
    (0.01
    )
    
    $
    Basic earnings per share
    
    $
    0.44
    
    
    $
    0.54Diluted earnings (loss) per shareContinuing operations
    
    $
    0.40
    
    
    $
    0.48Discontinued operations
    
    $
    (0.01
    )
    
    $
    Diluted earnings per share
    
    $
    0.40
    
    
    $
    0.48
 Employee stock options, restricted shares and performance stock units
   15




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Convertible subordinated notes and warrants
   -0-, 1.2 million
 Note J  Stock Options, Restricted Stock and Employee Stock Purchase Plan
 Employee Stock Purchase Plan
    16




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Long-Term Incentive Plans
      Restricted Stock
    17




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Weighted-averageNonvested shares (in thousands, except per share amounts)
    
    Shares
    
    
    grant date fair valueNonvested at March 31, 2008
    
    
    287
    
    
    $
    46.03Restrictions lapsed
    
    
    (24
    )
    
    
    41.05Forfeited
    
    
    (6
    )
    
    
    49.67Nonvested at June 27, 2008
    
    
    257
    
    
    $
    46.41
 Options
    Weighted-Weighted-
    
    
    averageaverage
    
    
    remaining
    
    
    Aggregateexercise
    
    
    contractual
    
    
    intrinsic(in thousands, except per share amounts and years)
    
    Options
    
    
    price
    
    
    life (Yrs)
    
    
    valueBalance outstanding at March 31, 2008
    
    
    4,638
    
    
    $
    40.39Granted
    
    
    46
    
    
    
    28.52Exercised
    
    
    (34
    )
    
    
    16.51Forfeited/expired
    
    
    (15
    )
    
    
    39.27Balance outstanding at June 27, 2008
    
    
    4,635
    
    
    $
    40.45
    
    
    
    6.44
    
    
    $
    7,356Vested and Expected to Vest at June 27, 2008
    
    
    4,326
    
    
    $
    40.00
    
    
    
    6.37
    
    
    $
    7,356Exercisable at June 27, 2008
    
    
    1,503
    
    
    $
    26.70
    
    
    
    5.22
    
    
    $
    7,356
     18




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June 27,2008Risk-free interest rate
    
    
    3.0
    %Expected life (in years)
    
    
    5.1Expected volatility
    
    
    34
    %Expected dividend yield
    
    
    2.8
    %
 Performance Award Program
     Fair marketvalue at dateNonvested performance stock units (in thousands)
    
    Shares
    
    
    of grantNonvested at March 31, 2008
    
    
    302
    
    
    $
    6,411Forfeited
    
    
    
    
    
    
    (2
    )Nonvested at June 27, 2008
    
    
    302
    
    
    $
    6,409
   19




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##### Table of Contents



Compensation Expense
  Three Months Ended(in thousands)
    
    June 27, 2008
    
    
    June 29, 2007Stock options
    
    $
    1,464
    
    
    $
    962Restricted stock
    
    
    976
    
    
    
    1,698Performance units
    
    
    522
    
    
    
    582Total stock-based compensation expense, pre-tax
    
    
    2,962
    
    
    
    3,242Tax benefit from stock-based compensation expense
    
    
    (856
    )
    
    
    (1,103
    )Total stock-based compensation expense, net of tax
    
    $
    2,106
    
    
    $
    2,139
  Note K  Share Repurchase Program
        20




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Note L  Long Term Debt
 3 4
  
    
    during any fiscal quarter prior to January 1, 2019, if the closing price of the
Companys common stock for at least 20 trading days in the 30 consecutive trading day
period ending on the first trading day of such fiscal quarter is more than 120% of the
conversion price per share of the Companys common stock on such trading day;
 
    
    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.
     21




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Note M  Short Term Bank Borrowings
 Credit Agreement
    22




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Other Financing
     23




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Note N  Discontinued Operations
   Note O  Postretirement Benefit Plan
  Note P  Contingencies
   24




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Note Q  Acquisitions
    25




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(In thousands)Cash
    
    $
    436Accounts receivable
    
    
    3,508Inventory
    
    
    8,953Prepaid expenses and other current assets
    
    
    980Total current assets
    
    
    13,877Property, plant and equipment
    
    
    4,934Intangible assets
    
    
    18,423Goodwill
    
    
    32,268Other assets
    
    
    39Total assets acquired
    
    $
    69,541Liabilities associated with acquisition:Accounts payable and accrued liabilities
    
    $
    7,049Other long-term liabilities
    
    
    8,424Total liabilities assumed
    
    $
    15,473Net assets acquired
    
    $
    54,068
   Note R  Capital Lease Obligations
    26




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Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis should be read in conjunction with our Unaudited Consolidated
Financial Statements and related Notes thereto contained elsewhere in this Report. The information
contained in this Quarterly Report on Form 10-Q is not a complete description of our business or
the risks associated with an investment in our securities. We urge you to carefully review and
consider the various disclosures made by us in this Report and in our other reports filed with the
Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year
ended March 31, 2008, and subsequent reports on Form 8-K , both of which discuss our business in
greater detail.
 The section entitled Risk Factors set forth in Item 1A under Part II  Other Information, and
similar discussions in our other SEC filings, discuss some of the important risk factors that may
affect our business, results of operations and financial condition. These risks, in addition to
the other information in this Report and in our other filings with the SEC, should be carefully
considered before deciding to purchase, hold or sell our securities.
 Various statements in this Report, in future filings by us with the SEC, in our press releases and
in our oral statements made by or with the approval of authorized personnel, constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements are based on current expectations and are indicated by words or
phrases such as anticipate, estimate, expect, intend, project, plan, believe, will,
seek, and similar words or phrases and involve known and unknown risks, uncertainties and other
factors which may cause actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by such forward-looking
statements. Some of the factors that could affect our financial performance or cause actual
results to differ from our estimates in, or underlying, such forward-looking statements are set
forth in Part II under Item 1A Risk Factors or elsewhere in this Report. Forward-looking
statements include statements regarding, among other things:
 
    
    our anticipated operating results for fiscal year 2009;
 
    
    our expectations regarding future developments in the markets in which we compete and
intend to compete;
 
    
    our anticipated growth strategies;
 
    
    our intention to introduce or seek approval for new products;
 
    
    our ability to continue to meet United States Food and Drug Administration (FDA) and
other regulatory requirements;
 
    
    our anticipated outcomes of regulatory reviews;
 
    
    our anticipated outcomes of litigation; and
 
    
    our ability to replace sources of supply without disruption and regulatory delay.
 These forward-looking statements are based on our expectations and are subject to a number of risks
and uncertainties, many of which are beyond our control. Actual results could differ materially
from these forward-looking statements as a result of the facts described in Part II under Item 1A
- Risk Factors or elsewhere including, among others, problems with suppliers, changes in the
competitive marketplace, significant product liability or other claims, product recalls,
difficulties with new product development, the introduction of new products by our competitors,
changes in the economy, FDA or other regulatory delay in approval or rejection of new or existing
products, changes in Medicare, Medicaid or third-party reimbursement policies, changes in
government regulations, use of hazardous or environmentally sensitive materials, inability to
implement new information technology systems, inability to integrate new acquisitions, and other
events. We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. In light of these risks and
uncertainties, we cannot assure you that the forward-looking information contained in this Form
10-Q will, in fact, transpire.
  27




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Company Overview
         28




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Perouse Acquisition
  Important Factors
  
    
    The performance of the U.S. economy will impact the demand for our products in the U.S. in
fiscal 2009, and continued weakness in the U.S. economy could put pressure on our revenue
growth and profitability;
 
    
    We are in the midst of a transition in the U.S. from saline breast implants to MemoryGel
breast implants that we expect will continue over a several year period with potentially
uneven rates of change that could cause revenues and profits to fluctuate quarter to quarter;
and
 
    
    We are committed to investing in the i) marketing of existing products and ii) development
and marketing of new aesthetics products to expand our product portfolio, which may have the
effect in the short term of increasing our expenses faster than our revenues are anticipated
to increase.
  
    
    competing to grow U.S. breast aesthetics market share through targeted marketing programs;
 
    
    supporting the continued transition in the U.S. from saline breast implants to MemoryGel
breast implants;
 
    
    launching our entry in the U.S. dermal filler market with Prevelle Silk;
 
    
    continuing our international breast aesthetics growth strategy by leveraging the Perouse
acquisition and investing in management and marketing infrastructure; and
 
    
    investing in research and development programs to expand our product portfolio and create
incremental product bundling opportunities that will allow us to better serve customers.
 Recent Events
  APPLICATION OF CRITICAL ACCOUNTING POLICIES
   29




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Revenue Recognition
    Accounts Receivable
  Inventories
   30




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Warranty Reserves
   Product Liability Reserves
  Goodwill and Intangible Asset Impairment
  Stock-Based Compensation Expense
   31




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Deferred Income Taxes
    32




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RESULTS OF OPERATIONS
  Three Months EndedJune 27, 2008
    
    
    June 29, 2007Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    27.9
    
    
    
    22.2Gross profit
    
    
    72.1
    
    
    
    77.8Selling, general and administrative expense
    
    
    40.7
    
    
    
    37.7Research and development expense
    
    
    10.4
    
    
    
    10.8Operating income
    
    
    21.0
    
    
    
    29.3Interest expense
    
    
    (1.4
    )
    
    
    (1.5
    )Interest income
    
    
    0.6
    
    
    
    5.0Other expense, net
    
    
    
    
    
    
    (0.3
    )Income from continuing operations before income taxes
    
    
    20.2
    
    
    
    32.5Income taxes
    
    
    5.9
    
    
    
    9.7Net income from continuing operations
    
    
    14.3
    
    
    
    22.8Net loss from discontinued operations
    
    
    (0.4
    )
    
    
    (0.1
    )Gain on sale of discontinued operations
    
    
    
    
    
    
    0.1Net income
    
    
    13.9
    %
    
    
    22.8
    %
 For the three month period ended June 27, 2008 compared to the three month period ended June 29,
2007
 Net Sales
   Ô
  33




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Cost of Sales and Gross Profit
  Selling, General and Administrative
  Research and Development
  Interest and Other Income and Expense
 3 4
  Income Taxes
   Income, Net of Income Taxes and Earnings per Share from Continuing Operations
   34




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Loss from Discontinued Operations, Net of Income Taxes
  FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
    (in thousands)
    
    June 27, 2008
    
    
    March 31, 2008Cash and cash equivalents
    
    $
    74,635
    
    
    $
    79,697Marketable securities
    
    
    31,148
    
    
    
    30,218Total cash, cash equivalents and marketable securities
    
    $
    105,783
    
    
    $
    109,915Percentage of total assets
    
    
    24
    %
    
    
    25
    %
 Cash Flow Changes
  Three Months Ended(in thousands)
    
    June 27, 2008
    
    
    June 29, 2007Net cash provided by continuing operating activities
    
    $
    17,961
    
    
    $
    24,383Net cash
used for continuing investing activities
    
    
    (16,126
    )
    
    
    (6,025
    )Net cash used for continuing financing activities
    
    
    (6,660
    )
    
    
    (217,672
    )Net cash used for discontinued operations
    
    
    (385
    )
    
    
    (6
    )Effect of currency exchange rates on cash and cash equivalents
    
    
    148
    
    
    
    544Decrease in cash and cash equivalents
    
    $
    (5,062
    )
    
    $
    (198,776
    )
  35




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Cash Provided by Operating Activities of Continuing Operations
  Cash Used for Investing Activities of Continuing Operations
  Cash Used for Discontinued Operations
  Cash Used for Financing Activities of Continuing Operations
      36




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Financing Arrangements
 Senior Credit Facility
      37




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Other Financing
         38




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Convertible Subordinated Notes
 3 4
      
 Item 3.  Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4.  Controls and Procedures
   39




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PART II  OTHER INFORMATION
 
 Item 1.  Legal Proceedings
   
 Item 1A.  Risk Factors
  The FDA approval of our MemoryGel breast implants in the U.S. is conditioned on our compliance
with several significant post-approval conditions, including conducting a large scale, 10-year
study of patients who receive the implants. These conditions may adversely affect the market
acceptance and usage rates of our MemoryGel implants, may impact our ability to compete, and may
cause us to incur significant unanticipated expenses. Our failure to comply with these
conditions in a timely manner may cause delay in market acceptance or result in our inability to
continue to sell our MemoryGel implants in the U.S.
 Ô
  40




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®
 Significant product liability or other claims or product recalls may force us to pay substantial
damage awards and other expenses that could exceed our accruals and insurance coverages.
Unexpected increases in the number of limited warranty claims for our products may surpass our
product warranty reserves.
    41




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We are subject to substantial government regulation, which could have a material adverse effect on
our business. Any delay or failure to gain regulatory approval for our products, or the ability of
our competitors to get new products, which compete with our existing products, approved before us,
could also materially adversely affect our business.
  ® 
    42




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If we are unable to continue to develop and commercialize new technologies and products, we may
experience a decrease in demand for our products, or our products could become obsolete.
    If we are unable to compete effectively with existing or new competitors, we could experience price
reductions, reduced demand for our products, reduced margins and loss of market share, and our
business, results of operations, and financial condition would be adversely affected.
   
    
    developing and bringing new products to market before others or providing benefits
superior to those of existing products;
 
    
    developing new technologies to improve existing products;
 
    
    developing new products at a lower cost to provide the same benefits as existing
products at the same or lower price;
 
    
    creating or entering new markets with existing products;
 
    
    increasing or improving service-related programs;
 
    
    advertising in a manner that creates additional awareness and demand; and
 
    
    marketing and selling bundled products.
  43




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If we suffer negative publicity concerning the safety of our products, our sales may be harmed and
we may be forced to withdraw products.
  If changes in the economy and consumer spending reduce consumer demand for our products, our sales
and profitability could suffer.
  If we are unable to implement new information technology systems or upgrade existing systems, our
ability to manufacture and sell products, maintain regulatory compliance, and manage and report our
business activities may be impaired, delayed, or diminished, which would cause substantial business
interruption and loss of sales, customers, and profits.
   44




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If we are unable to acquire companies, businesses or technologies as part of our growth strategy or
to successfully integrate past acquisitions, our growth, sales, and profitability could suffer.
   We depend upon our key personnel and our ability to attract, train, and retain employees.
  State legislatures and taxing authorities may create new laws or change their interpretation of
existing state and local tax laws that may affect future product demand or create unforeseen tax
liabilities.
  If our intellectual property rights do not adequately protect our products or technologies, others
could compete against us more directly, which would hurt our profitability.
   45




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If third parties claim we are infringing their intellectual property rights, we could suffer
significant litigation, indemnification, or licensing expenses or be prevented from marketing our
products.
  We depend on the continued use of our manufacturing plants and on single and sole source suppliers
for certain raw materials and licensed or manufactured products, and the loss of, or disruption to,
any plant or supplier could adversely affect our ability to manufacture or sell many of our
products.
  Our international business exposes us to a number of risks.
  
    
    foreign government regulation of medical products;
 
    
    product liability, intellectual property and other claims;
 
    
    new U.S. export or local market import license requirements;
 
    
    political or economic instability in our target markets;
 
    
    trade restrictions;
 
    
    changes in tax laws and tariffs;
 
    
    managing foreign distributors and manufacturers;
 
    
    managing foreign branch offices and staffing; and
 
    
    competition.
  46




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Health care reimbursement or reform legislation could materially affect our business.
  If our use of hazardous materials results in contamination or injury, we could suffer significant
financial loss.
  Clostridium botulinum
  47




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Changes in financial accounting standards may cause adverse unexpected revenue or expense
fluctuations and affect our reported results of operations.
  Our operating results may fluctuate substantially, and could precipitate unexpected movement in the
price of our common stock and convertible notes.
 3 4
  Hedging transactions and other transactions may affect the value of the notes.
 3 4
  48




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Our Restated Articles of Incorporation provide our Board of Directors with the authority to issue
blank check preferred stock. The issuance of blank check preferred stock could adversely
affect the market price and the rights and powers, including voting rights, of our common stock,
and decrease the amount of earnings and assets allocable to or available for distribution to
holders of our common stock.
         49




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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities
   ISSUER PURCHASES OF EQUITY SECURITIES (1)Total Number
    
    
    Maximum Numberof Shares
    
    
    of Shares that MayTotal Number
    
    
    
    
    
    
    Purchased as
    
    
    Yet Be Purchasedof Shares
    
    
    Average Price
    
    
    Part of Publicly
    
    
    Under the Plans(in thousands except per share amounts)
    
    Purchased
    
    
    Paid per Share
    
    
    Announced Plans
    
    
    or Programs(2)April 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    809May 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    809June 2008
    
    
    8
    (3)
    
    
    27.32
    
    
    
    
    
    
    
    801Total
    
    
    8
    
    
    $
    27.32
    
    
    
    
    
    
    
    801
 (1)
    
    On June 18, 2007, we entered into a Rule 10b5-1 stock purchase plan compliant with Rule 10b-18 (the
2007 10b5 Plan). The 2007 10b5 Plan terminated on June 17, 2008. No shares were purchased under the 2007
10b5 Plan during the period.(2)
    
    Reflects shares authorized for repurchase by our Board of Directors. We have not set a date for the
stock repurchase program to expire.(3)
    
    Balance includes approximately 8,000 shares repurchased for payment of withholding taxes upon the
vesting of certain restricted stock grants. 
 Item 3.  Defaults Upon Senior Securities
  
 Item 4.  Submission of Matters to a Vote of Security Holders
  
 Item 5.  Other Information
   50




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Item 6.  Exhibits
 3.1
    
    
    Composite Restated Articles of Incorporation of Mentor Corporation dated December 12, 2002
 Incorporated by reference to Exhibit 3.1 of the Annual Report on Form 10-K for the year ended March
31, 2003.3.2
    
    
    Amendment to Restated Articles of Incorporation of Mentor Corporation  Incorporated by reference to
Exhibit 3.1 of the Registrants Current Report on Form 8-K filed on October 3, 2007.3.3
    
    
    Amended and Restated Bylaws of Mentor Corporation dated September 17, 2007  Incorporated by reference
to Exhibit 3.2 of the Registrants Current Report on Form 8-K filed on September 21, 2007.4.1
    
    
    Indenture 23/4% Convertible Subordinated Notes Due 2024, dated December 22, 2003  Incorporated by
reference to Exhibit 4.1 of the Registrants Quarterly Report on Form 10-Q for the quarter ended
December 31, 2003.31.1
    
    
    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.
  51




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SIGNATURES
  MENTOR CORPORATION
(Registrant)
    MENTOR CORPORATIONDATE:  August 6, 2008
    /s/ JOSHUA H. LEVINEJoshua H. LevinePresident and Chief Executive Officer(Principal Executive Officer)DATE:  August 6, 2008
    /s/ MICHAEL ONEILLMichael ONeillVice President, Chief Financial Officer and Treasurer(Principal Financial Officer)  52




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EXHIBIT INDEX
 Exhibit No.
    
    Exhibit Title or Description3.1
    
    
    Composite Restated Articles of Incorporation of Mentor
Corporation dated December 12, 2002  Incorporated by reference
to Exhibit 3.1 of the Annual Report on Form 10-K for the year
ended March 31, 2003.3.2
    
    
    Amendment to Restated Articles of Incorporation of Mentor
Corporation  Incorporated by reference to Exhibit 3.1 of the
Registrants Current Report on Form 8-K filed on October 3,
2007.3.3
    
    
    Amended and Restated Bylaws of Mentor Corporation dated
September 17, 2007  Incorporated by reference to Exhibit 3.2
of the Registrants Current Report on Form 8-K filed on
September 21, 2007.4.1
    
    
    Indenture 23/4% Convertible Subordinated Notes Due 2024, dated
December 22, 2003  Incorporated by reference to Exhibit 4.1
of the Registrants Quarterly Report on Form 10-Q for the
quarter ended December 31, 2003.31.1
    
    
    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.
  53