**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 1934

For the quarterly period ended June 30, 2004

or

  TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____to _____

Commission File No. 0-7955

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

                    

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

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

Indicate by check mark whether the Registrant (1)has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or such shorterperiod that the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x    No o

Indicate by check mark whether the Registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x   No o

As of August 4, 2004 there were approximately 42,344,758 Common Shares, parvalue $.10 outstanding.

 

1

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**MENTOR CORPORATION**

INDEX

| Part I. Financial  Information |
|--------------------------------|
| Item 1.                        | Financial Statements  |
|                                | Consolidated Balance  Sheets (unaudited) - June 30, 2004 and March 31, 2004  |
|                                | Consolidated Statements of Income (unaudited) - Three Months Ended June 30, 2004 and 2003 |
|                                | Consolidated Statements of Cash Flows (unaudited) -		Three Months Ended June 30, 2004 and 2003 |
|                                | Notes to Condensed Consolidated Financial Statements - June 30, 2004 |
| Item 2.                        | Management's Discussion and Analysis of Financial Condition and Results  of Operations |
| Item 3.                        | Quantitative and Qualitative Disclosures About Market Risk |
| Item 4.                        | Controls and Procedures |
| Part II. Other  Information    |
| Item 1.                        | Legal Proceedings  |
| Item 2.                        | Changes in Securities,  Use of Proceeds, and Issuer Purchases of Equity 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

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

 

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**PART I - FINANCIAL INFORMATION**

**Item 1. Consolidated Financial Statements**

| Mentor CorporationConsolidated Balance Sheets(Unaudited)   |
|------------------------------------------------------------|
| (in thousands)                                             | **June 30, 2004** | March 31, 2004 |
| **Assets**                                                 | ** ** | ** ** |
| Current assets:                                            | ** ** | ** ** |
|   Cash and cash  equivalents                     | **$        111,868** | $        118,225 |
|   Marketable securities                          | **307** | 193 |
|   Accounts  receivable, net                      | **106,680** | 106,016 |
|   Inventories                                    | **70,106** | 67,912 |
|   Deferred  income taxes                         | **22,171** | 22,488 |
|   Prepaid  expenses and other                    | **12,912** | 13,205 |
| Total current assets                                       | **324,044** | 328,039 |
|                                                       | ** ** |  |
| Property and equipment,  net                               | **74,389** | 77,529 |
| Intangible assets, net                                     | **49,527** | 51,014 |
| Goodwill, net                                              | **23,734** | 23,711 |
| Long-term marketable  securities and investments           | **34,000** | 8,326 |
| Other assets                                               | **10,160** | 10,160 |
|                                                            | **$        515,854** | $        498,779 |
| See notes to condensed  consolidated financial statements. | ** ** |  |

 

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| Mentor CorporationConsolidated Balance Sheets(Unaudited)                          |
|-----------------------------------------------------------------------------------|
| (in thousands)                                                                    | **June 30, 2004** | March 31, 2004 |
| **Liabilities and  shareholders' equity**                                         | ** ** |  |
| Current liabilities:                                                              | ** ** |  |
|   Accounts  payable and accrued liabilities                             | **$    33,920** | $    37,126 |
|  Warranty and  related reserves                                              | **24,339** | 23,396 |
|  Accrued compensation                                                        | **17,427** | 18,212 |
|  Short-term bank  borrowings                                                 | **9,737** | 10,012 |
|  Sales returns                                                               | **10,983** | 11,797 |
|  Deferred revenue                                                            | **7,893** | 6,915 |
|   Income taxes  payable                                                 | **4,548** | 285 |
|  Current portion of  purchase price related to acquired            | ** ** |  |
|       technologies and acquisitions                           | **1,850** | 1,864 |
|   Interest  payable                                                     | **72** | 1,187 |
|   Dividends  payable                                                    | **6,346** | 6,309 |
|  Accrued royalties                                                           | **693** | 567 |
|  Other                                                                       | **13,358** | 12,260 |
| Total current liabilities                                                         | **131,166** | 129,930 |
|                                                                                   | ** ** |  |
| Deferred income taxes                                                             | **2,628** | 2,549 |
| Long-term accrued  liabilities                                                    | **18,112** | 17,996 |
|                                                                                   | ** ** |  |
| Convertible subordinated notes                                                    | **150,000** | 150,000 |
|                                                                                   | ** ** |  |
| Shareholders' equity:                                                             | ** ** |  |
|   Common Stock,  $.10 par value:                                        | ** ** |  |
|     Authorized - 150,000,000 shares;		Issued and outstanding- | ** ** |  |
|      42,308,197 shares at June 30, 2004;                           | ** ** |  |
|     42,059,136  shares at March 31, 2004;                     | **4,231** | 4,206 |
|   Capital in  excess of par value                                       | **      4,517** | **-   ** |
|   Accumulated  other comprehensive income                               | **18,919** | 19,122 |
|   Retained  earnings                                                    | **186,281** | 174,976 |
|                                                                                   | **213,948** | 198,304 |
|                                                                                   | **$    515,854** |     $    498,779 |
| See notes to condensed  consolidated financial statements.                        |  |  |

 

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| Mentor CorporationConsolidated Statements of IncomeThree Months Ended June 30, 2004 and 2003(Unaudited) |
|---------------------------------------------------------------------------------------------------------|
|                                                                                                         |  |
| (in thousands, except per  share data)                                                                  | **2004 ** | 2003  |
| Net sales                                                                                               | **$      122,432 ** | $      105,106  |
|                                                                                                         | ** ** |  |
| Costs and expenses:                                                                                     | ** ** |  |
|  Cost of sales                                                                                     | **43,975 ** | 39,373  |
| Gross Profit                                                                                            | **78,457 ** | 65,733  |
|                                                                                                         | ** ** |  |
|  Selling, general,  and administrative                                                             | **43,252 ** | 35,679  |
|  Research and  development                                                                         | **8,030 ** | 7,543  |
|                                                                                                         | **51,282 ** | 43,222  |
|                                                                                                         | ** ** |  |
| Operating income                                                                                        | **27,175 ** | 22,511  |
|                                                                                                         | ** ** |  |
|  Interest expense                                                                                  | **(1,408)** | (161) |
|  Interest income                                                                                   | **415 ** | 396  |
|  Other income  (expense), net                                                                      | **(188)** | 676  |
| Income before income  taxes                                                                             | **25,994 ** | 23,422  |
| Income taxes                                                                                            | **8,340 ** | 7,389  |
| Net income                                                                                              | **$        17,654 ** | $        16,033  |
|                                                                                                         | ** ** |  |
| Basic earnings per share                                                                                | **$            0.42 ** | $            0.35  |
| Diluted earnings per  share                                                                             | **$            0.39 ** | $            0.33  |
| Dividends per share                                                                                     | **$            0.15 ** | $            0.02  |
|                                                                                                         | ** ** |  |
| Weighted average shares outstanding:                                                                    | ** ** |  |
|    Basic                                                                                      | **42,163 ** | 46,386  |
|    Diluted                                                                                    | **45,036 ** | 48,346  |
|                                                                                                         | ** ** |  |
| See notes to condensed  consolidated financial statements.                                              | ** ** |  |

 

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| Mentor CorporationConsolidated Statements of Cash FlowsThree Months Ended June 30, 2004 and 2003(Unaudited) |
|-------------------------------------------------------------------------------------------------------------|
| (in thousands)                                                                                              | **2004 ** | 2003  |
| **Cash From Operating  Activities:**                                                                        | ** ** |  |
| Net income                                                                                                  | **$    17,654 ** | $    16,033  |
| Adjustments to derive  cash flows from operating activities:                                                | ** ** |  |
|   Depreciation                                                                                    | **3,584 ** | 3,046  |
|   Amortization                                                                                    | **1,177 ** | 761  |
|   Deferred  income taxes                                                                          | **122 ** | (1,096) |
|   Tax benefit  from exercise of stock options                                                     | **1,899 ** | 1,756  |
|   Loss (gain)  on sale of assets                                                                  | **1,360 ** | 80  |
|   Imputed  interest on long-term liabilities                                                      | **15 ** | 78  |
| Changes in operating  assets and liabilities:                                                               | ** ** |  |
|     Accounts  receivable                                                                | **(662)** | (4,288) |
|     Inventories  and other current assets                                               | **(1,998)** | (714) |
|     Accounts  payable and accrued liabilities                                           | **(1,632)** | (1,018) |
|     Income  taxes payable                                                               | **4,321 ** | 1,977  |
| Net cash provided by  operating activities                                                                  | **25,840 ** | 16,615  |
| **Cash From Investing  Activities:**                                                                        | ** ** |  |
| Purchases of property and  equipment                                                                        | **(1,490)** | (3,950) |
| Purchases of intangibles                                                                                    | **(1,512)** | (1,256) |
| Purchases of marketable  securities                                                                         | **(50,835)** | (16,018) |
| Sales of marketable  securities                                                                             | **25,006 ** | 5,007  |
| Net cash used for  investing activities                                                                     | **(28,831)** | (16,217) |
| **Cash From Financing  Activities:**                                                                        | ** ** |  |
| Proceeds from exercise of  stock options                                                                    | **2,643 ** | 3,873  |
| Dividends paid                                                                                              | **(6,346)** | (925) |
| Borrowings under line of  credit agreement                                                                  | **667 ** | 1,903  |
| Repayments under line of  credit agreement                                                                  | **(322)** | -  |
| Net cash used for  financing activities                                                                     | **(3,358)** | 4,851  |
| Effect of currency  exchange rates on cash and cash equivalents                                             | **(8)** | 226  |
| Increase (decrease) in  cash and cash equivalents                                                           | **(6,357)** | 5,475  |
| Cash and cash equivalents  at beginning of year                                                             | **118,225 ** | 105,840  |
| Cash and cash equivalents  at end of period                                                                 | **$   111,868 ** | $   111,315  |
|                                                                                                             | ** ** |  |
| See notes to condensed  consolidated financial statements.                                                  | ** ** |  |

 

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**MENTORCORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSJune 30, 2004**

**Note A - BusinessActivity**

Mentor Corporation (the "Company") wasincorporated in April 1969.  Unless the context indicates otherwise, whenwe refer to "Mentor," "we," "us,""our," or the "Company" in this Form 10-Q, we are referringto Mentor Corporation and its subsidiaries on a consolidated basis.  Wedevelop, manufacture and market a broad range of products serving the medicalspecialties market.  Our products are utilized by three primary segments,aesthetic and general surgery (plastic and reconstructive surgery), surgicalurology, and clinical and consumer healthcare.  Aesthetic and generalsurgery products include surgically implantable prostheses for plastic andreconstructive surgery as well as capital equipment and consumables used forsoft tissue aspiration or body contouring (liposuction).  Surgical urologyproducts include surgically implantable prostheses for the treatment ofimpotence, surgically implantable incontinence products, urinary care productsand brachytherapy seeds for the treatment of prostate cancer.  Clinicaland consumer healthcare products include catheters and other products for themanagement of urinary incontinence and retention. 

**Note B - Summary ofSignificant Accounting Policies**

**Principles ofConsolidation**

The consolidated financial statements include the accountsof the Company and all of its subsidiaries in which a controlling interest ismaintained.  For those subsidiaries where the Company owns less than 100%,the outside shareholders' interests are treated as minority interests. All inter-company accounts and transactions have been eliminated.  Certainprior year amounts in previously issued financial statements have beenreclassified to conform to the current year presentation.  

**Basis of Presentation**

The financial information for the three months ended June30, 2004, and 2003 is unaudited but includes all adjustments (consisting onlyof normally recurring accruals, unless otherwise indicated) which the Companyconsiders necessary for a fair presentation of the results of operations forthese periods.  Interim results are not necessarily indicative of resultsfor the full fiscal year. ** **

**Use of Estimates**

Financial statements prepared in accordance with accountingprinciples generally accepted in the United States require management to makeestimates and judgments that affect amounts and disclosures reported in thefinancial statements.  Actual results could differ from those estimates.  A discussion of the Company’s significant accounting policies isdescribed in the “Application of Critical Accounting Policies”section of “Management’s Discussion and Analysis of FinancialCondition and Results of Operations.”

**Effects of RecentAccounting Pronouncements**

In July 2004, the Financial Accounting Standards Board(FASB) released draft abstract Emerging Issue Task Force (EITF) Issue No.04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings perShare," for comment. The objective of this Issue is toprovide guidance for whether contingently convertible debt instruments shouldbe included in diluted earnings per share calculations. The draft abstractreflects the Task Force’s tentative conclusion that contingentlyconvertible debt should be included in diluted earnings per share calculations regardlessof whether or not the trigger price has been reached. The Task Force hascurrently targeted the issue to be effective for reporting periods ending after December 31, 2004.  The potential impact of the Issue, if adopted, would beto change the diluted earnings per share calculation by increasing net incomeused in the numerator by the after tax amount of interest expense related tothe convertible notes (approximately $900,000 for the quarter), and increasing weightedaverage shares outstanding used in the denominator by 5.1 million shares; thenumber of shares to be issued upon full conversion of the convertiblenotes.  The effect would decrease diluted earnings per share by $.02 centsper share for the quarter ended June 30, 2004.  We will continue tomonitor the progress of this issue and assess any potential impact upon onfuture diluted earnings per share.

 

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In March 2004, the Financial Accounting Standards Board(FASB) approved the consensus reached on the EITF Issue No. 03-1, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments.” The objective of this Issue is to provide guidance foridentifying impaired investments. EITF 03-1 also provides new disclosurerequirements for investments that are deemed to be temporarily impaired. Theaccounting provisions of EITF 03-1 are effective for all reporting periodsbeginning after June 15, 2004, while the disclosure requirements are effectiveonly for annual periods ending after June 15, 2004. We have evaluated the impact of the adoption of EITF 03-1 and do not believe it will be significant to ourresults of operations or financial position.

**Note C - InterimReporting**

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

 

|                | Fiscal 2005       | Fiscal 2004        |
|----------------|-------------------|--------------------|
| First Quarter  | July 2, 2004      | June 27, 2003      |
| Second Quarter | October 1, 2004   | September 26, 2003 |
| Third Quarter  | December 31, 2004 | January 2, 2004    |

 

The accompanying unaudited condensed consolidated financialstatements for the three-months ended June 30, 2004 and 2003 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q andArticle 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 ofmanagement, all adjustments (consisting only of normally recurring accruals,unless otherwise indicated) considered necessary for a fair presentation of theresults of operations for the indicated periods have been included. Certain amounts recorded in previous periods have been reclassified to conformto the current period presentation.  Operating results for the three-monthperiod ended June 30, 2004 is not necessarily indicative of the results for thefull fiscal year. 

 

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The balance sheet at March 31, 2004 has been derived from the audited financial statements at that date, but does not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.

The condensed consolidated financial statements should beread in conjunction with the Company's Annual Report on Form 10-K for the yearended March 31, 2004.** **

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

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

The Company considers its marketable securitiesavailable-for-sale as defined in Statement of Financial Accounting Standards (SFAS)No. 115, "Accounting for Certain Investments in Debt and EquitySecurities."  Realized gains and losses, and declines in valueconsidered to be other than temporary, are included in income.  The costof securities sold is based on the specific identification method.  Forshort-term marketable securities, there were no material realized or unrealizedgains or losses, nor were there any material differences between estimated fairvalues, based on quoted market prices, and the costs of securities in theinvestment portfolio as of June 30, 2004, and March 31, 2004.  Short-term investments, except auction rate securities, mature between three months andone year from the purchase date.  The Company's short-term marketablesecurities consist primarily of money market mutual funds, U.S. state and municipal government obligations, auction rate securities, and investmentgrade corporate obligations including commercial paper.  Auction ratesecurities carry interest or dividend rates that reset every 28 days but havecontractual maturities of greater than one year. 

The Company's long-term marketable securities andinvestments include investments in Federal Home Loan Bank and MortgageAssociation bonds (FHLA bonds) with maturities of two to four years. 

**Available-for-sale investments at June 30, 2004 were as follows**:

| ** **                                                                         | ** **                    | ** **                                             | **Gross**                                                    | **Gross**                     | **Estimated** |
|------------------------------------------------------------------------------------|-------------------------------|--------------------------------------------------------|--------------------------------------------------------------|-------------------------------|---------------|
| ** **                                                                         | ** **                    | **Adjusted**                                           | **Unrealized**                                               | **Unrealized**                | **Fair**      |
| **(in thousands)**                                                                 | **Cost**                      | **Gains**                                              | **Losses**                                                   | **Value**                     |
| **Cash balances**                                                                  | **$   14,461** | **$        -** | **$        - ** | **$   14,461** |
| **Money market mutual  funds**                                                     | **97,407**                    | **-**                                                  | **- **                                                  | **97,407**                    |
| **Marketable equity  securities**                                                  | **144**                       | **-**                                                  | **(13)**                                                     | **131**                       |
| **U.S., State and Municipal agency    obligations**                 | **34,140**                    | **-**                                                  | **(242)**                                                    | **33,898**                    |
| **Corporate debt securities**                                                      | **278**                       | **-**                                                  | **- **                                                  | **278**                       |
| **   Total  available-for-sale investments**                        | **$  146,430**      | **-**                                                  | **$      (255)**               | **$   146,175**          |
| ** **                                                                         | ** **                    | ** **                                             | ** **                                                   | ** **                    |
| **Included in cash and  cash equivalents**                                         | **111,868**                   | **-**                                                  | **- **                                                  | **111,868**                   |
| **Included in current  marketable securities**                                     | **307**                       | **-**                                                  | **- **                                                  | **307**                       |
| **Included in long-term  marketable    securities and investments** | **34,255**                    | **-**                                                  | **(255)**                                                    | **34,000**                    |
| **   Total  available-for-sale investments**                        | **$  146,430**      | **$        -** | **$      (255)**               | **$  146,175**      |

 

 

9

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Available-for-saleinvestments at March 31, 2004 were as follows:

|                                                                               |                           |                                                    | Gross                                                    | Gross                     | Estimated |
|-------------------------------------------------------------------------------|---------------------------|----------------------------------------------------|----------------------------------------------------------|---------------------------|-----------|
|                                                                               |                           | Adjusted                                           | Unrealized                                               | Unrealized                | Fair      |
| (in thousands)                                                                | Cost                      | Gains                                              | Losses                                                   | Value                     |
| Cash balances                                                                 | $   19,139 | $        - | $        -  | $   19,139 |
| Bank time deposits                                                            | -                         | -                                                  | -                                                   | -                         |
| Money market mutual funds                                                     | 99,086                    | -                                                  | -                                                   | 99,086                    |
| Marketable equity securities                                                  | 56                        | -                                                  | (8)                                                      | 48                        |
| U.S., State and Municipal  agency    obligations               | 8,193                     | -                                                  | -                                                   | 8,193                     |
| Corporate debt securities                                                     | 278                       | -                                                  | -                                                   | 278                       |
|    Total available-for-sale  investments                       | $  126,752      | -                                                  | (8)                                                      | $   126,744          |
|                                                                               |                           |                                                    |                                                          |                           |
| Included in cash and cash equivalents                                         | 118,225                   | -                                                  | -                                                   | 118,225                   |
| Included in current marketable securities                                     | 193                       | -                                                  | -                                                   | 193                       |
| Included in long-term marketable    securities and investments | 8,334                     | -                                                  | (8)                                                      | 8,326                     |
|    Total available-for-sale  investments                       | $  126,752      | $        - | $      (8)                 | $  126,744      |

** Note E -Inventories**

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

Inventoriesat June 30, 2004 and March 31, 2004 consisted of:

|  (in thousands) | **June 30,**                               | March 31                               |
|----------------------|--------------------------------------------|----------------------------------------|
| Raw materials        | **$      13,175**      | $      13,050      |
| Work in process      | **       11,982** |        11,572 |
| Finished goods       | **      44,949**       |       43,290       |
|                      | **$      70,106**      | $      67,912      |

**Note F - Property andEquipment**

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

Property and equipment at June 30, 2004 and March 31, 2004 consisted of:

| (in thousands)                     | **June 30,**                                          | March 31,                                         |
|------------------------------------|-------------------------------------------------------|---------------------------------------------------|
| Land                               | **$         561 ** | $         561  |
| Buildings                          | **       24,624 **      |        24,534       |
| Leasehold improvements             | **     24,567 **                  |      23,776                   |
| Furniture, fixtures and  equipment | **    104,468 **                       |     103,242                        |
| Construction in progress           | **       2,139 **       |        3,811        |
|                                    | **    156,359 **                       |     155,924                        |
| Less accumulated  depreciation     | **     (81,970)**                      |      (78,395)                      |
|                                    | **$   74,389 **                   | $   77,529                    |

**Note G -Warranties**

The Companyprovides an accrual for the estimated cost of product warranties and productliability claims at the time revenue is recognized.  Such accruals arebased on estimates, which are based on relevant factors such as historicalexperience, the warranty period, estimated costs, levels of insurance andinsurance retentions, identified product quality issues, if any, and, to alimited extent, information developed by the insurance company using actuarialtechniques.  The Company assesses the adequacy of these accrualsperiodically and adjusts the amounts as necessary based on actual experienceand changes in future expectations.

 

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

| (in  thousands)                          | **June 30,			2004    **     | June 30,			2003               |
|------------------------------------------|-------------------------------------------------|----------------------------------------------|
| Beginning  warranty and related reserves | **$    23,396 **            | $     19,989             |
| Costs of  warranty claims                | **       (1,101)**     |     			(989)             |
| Accruals  for product warranties         | **       2,044 ** |      			1,995  |
| Ending  warranty and related reserves    | **$     24,339 **           | $     20,995        |

** **

**Note H - Other Comprehensive Income**

The components of comprehensive income are listed below:

|                                                                                      | Three Months EndedJune 30,    |
|--------------------------------------------------------------------------------------|-------------------------------|
| (in thousands)                                                                       | **2004**                      | 2003 |
| Net income                                                                           | **$  17,654 ** | $  16,033 |
| Foreign currency  translation adjustment                                             | **(42)**                      | 5,032 |
| Unrealized gains (losses)  on marketable 		securities and investment activities, net | **(161)**                     | 121 |
| Comprehensive income                                                                 | **$  17,451 ** | $  21,186 |

 

**Note I - Stock Options**

The Company has granted options to key employees andnon-employee directors under its Amended 2000 Long-Term Incentive Plan (2000Plan) and 1991 Plan.  Options granted under both plans are exercisable infour equal annual installments beginning one year from the date of grant, andexpire ten years from the date of grant.  Options are granted at the fairmarket value as of the date of grant.  Options to purchase 732,750 sharesof common stock at $32.23 per share were granted during the quarter ended June 30, 2004. 	

Stock option exercise prices are set at the fair marketvalue of the Company's common stock on the date of grant and the related numberof shares granted is fixed at that point in time.  Therefore, under theprinciples of Accounting Principles Board (APB) Opinion 25, the Company doesnot recognize compensation expense associated with the grant of stockoptions.  SFAS 123 "Accounting for Stock-Based Compensation",requires the use of an option valuation model to provide supplementalinformation regarding options granted after fiscal 1995.  Pro formainformation regarding net income and earnings per share shown below weredetermined as if the Company had accounted for its employee stock options underthe fair value method of that statement.  The estimated fair value of theoptions is amortized ratably over the options' vesting period.  Asrequired by SFAS No. 148, "Accounting for Stock-Based Compensation -Transition and Disclosure - an amendment of FASB Statement No. 123", thefollowing table shows the estimated effect on net income and earnings per shareif the Company had applied the fair value recognition provision of SFAS 123 tostock-based employee compensation.  The Company's pro forma information isas follows:

|                                                                                                    | Three Months EndedJune 30,                                           |
|----------------------------------------------------------------------------------------------------|----------------------------------------------------------------------|
| (in thousands except per  share data)                                                              | **2004**                                                             | 2003 |
| Net income: as  reported (1)                                                                  | **$   17,654 **                                  | $   16,033  |
| Deduct: compensation  expense fair value method                                               | **(1,768)**                                                          | (1,717) |
| Net income:  pro  forma                                                                       | **$   15,886 **                                  | $   14,316  |
|                                                                                                    | ** **                                                           |  |
| Basic earnings per  share:  as reported                                                       | **$         .42 ** | $         .35  |
| Basic earnings per  share:  pro forma                                                         | **.38 **                                                        | .31  |
|                                                                                                    | ** **                                                           |  |
| Diluted earnings per  share:  as reported                                                     | **$         .39 ** | $         .33  |
| Diluted earnings per  share:  pro forma                                                       | **.35 **                                                        | .30  |
| (1)  Net income as reported includes no compensation expense associated with stock  option grants. | ** **                                                           |  |

** **

 

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**Note J - Income Taxes**

The effective rate of corporate income taxes was 32.1% and 31.5%for the three-months ended June 30, 2004 and 2003, respectively.  

**Note K - Earnings per Share**

Basic earnings per share is computed by dividing net incomeavailable to common shareholders by the weighted average number of shares ofthe Company’s common shares outstanding during the period. Dilutedearnings per share is calculated in the same manner as basic earnings per shareexcept that the number of shares outstanding is increased by potentiallydilutive common shares outstanding during the period.  Potentiallydilutive common shares consist of shares issuable under the terms of employeestock options, warrants, and the 23⁄4% convertible subordinatednotes.  A reconciliation of weighted average shares outstanding, used tocalculate basic earnings per share, to weighted average shares outstandingassuming dilution, used to calculate diluted earnings per share, follows:

|                                                          | Three Months EndedJune 30, |
|----------------------------------------------------------|----------------------------|
| (in thousands)                                           | **2004**                   | 2003 |
| Weighted average  outstanding shares:  basic   | **42,163**                 | 46,386 |
| Shares issuable upon  exercise of stock options          | **2,873**                  | 1,960 |
| Weighted average  outstanding shares:  diluted      | **45,036**                 | 48,346 |

Shares issuable through stock options are determined usingthe treasury stock method.  Certain potential shares issuable under theterms of employee stock options and upon the conversion of the 23⁄4%convertible subordinated notes were excluded from the computation of dilutedearnings per share since their exercise or conversion prices were greater thanthe market prices of the common shares during or at the end of the period, andaccordingly, their effect would have been anti-dilutive.  Additionally,during the quarter ended June 30, 2004, the price of the Company’s stockdid not exceed the specific strike prices of the convertible bond hedge or thewarrants that the Company entered into to reduce the potential dilution fromany conversion of the notes.  Both the bond hedge and the warrantstransaction may be settled at the Company’s option, either in cash orshares, and expire on January 1, 2009.  

**Note L - Share Repurchase Program**

The Company has a stock repurchase program, primarily tooffset the dilutive effect of our employee stock option program, to provideliquidity to the market and to reduce the overall number of shares outstanding. All shares repurchased under the program are retired and are no longer deemedto be outstanding.  In May 1999, the Board of Directors authorized therepurchase of 9.2 million shares of our stock.  Each year shares have beenrepurchased including 1.4 million shares for $22.3 million and 1.5 millionshares for $18.7 million in the years ended March 31, 2003 and 2002, respectively.  At March 31, 2003, 1.8 million shares were remaining under thisauthorization.  On July 31, 2003 the Board of Directors increased theauthorized number of shares to be repurchased from 1.8 million to 4 millionshares.  On December 5, 2003, the Board of Directors increased theauthorized number of shares to be repurchased by 5 million shares from 2.5million to 7.5 million shares.  During fiscal 2004, 5.4 million shares wererepurchased for $135.8 million and 3.6 million shares remained authorized forrepurchase as of March 31, 2004 and June 30, 2004.  The timing of repurchases is subject to market conditions, cash availability, and blackout periodsduring which the Company is restricted fromrepurchasing shares.  There is no guarantee that shares authorizedfor repurchase by the Board will ultimately be repurchased. There were no sharerepurchases during the quarter ended June 30, 2004.

 

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**Note M – Acquisitions and Liabilities related toacquired technology acquisitions**

**South Bay Medical LLC**

On January 19, 2001, the Company purchased the assets of South Bay Medical LLC (South Bay), a company focused on the development of a new computer-based workstation andautomated cartridge-based needle loading system for use in brachytherapyprocedures.  The acquisition was accounted for as a purchase with theresults of operations included in the Company's financial statements from thedate of acquisition.  The Company paid $2,000,000 in cash and issuedrestricted common stock valued at $4 million on the date of purchase. Additional purchase price payments will be made to South Bay over the nextseveral years as workstation sales are made.  The net present value ofthese amounts is recorded at June 30, 2004, in current accrued liabilities($850,000) and in long-term accrued liabilities ($10,550,000) as the Companybelieves it is probable these payments will be paid.  

**Prosurg,Inc.**

In December2001, the Company entered into several agreements with Prosurg, Inc., Inc. toacquire certain patent rights and obtain a source of supply of a bio-absorbableco-polymer for $2 million in cash and up to an additional $2 million upon theachievement of certain milestones.  The purchase price was allocated tointangible assets and the net present value of these amounts is recorded at June 30, 2004, in accrued liabilities ($1,000,000) and in long-term accrued liabilities($985,000) as the Company believes it is probable these payments will be paid.

**A-LifeLtd.**

On August 25, 2003, the Company completed the acquisition ofA-Life Ltd, which has developed a hyaluronic acid based dermal filler product,from Vitrolife, AB.  The acquisition was valued at $7.5 million, netof cash acquired, and was paid from existing cash balances.  The purchaseprice was allocated to the tangible and intangible net assets acquired on thebasis of their respective fair values on the acquisition date.  Thepurchase price was preliminarily allocated to accounts receivable of $36,000,other assets of $349,000, production equipment of $393,000 and intangibleassets of $6,821,000, net of accrued liabilities of $123,000. 

**Note N – Goodwill & Intangible Assets**

In 2001,the FASB issued SFAS No. 142, "Goodwill and Other IntangibleAssets".  SFAS No. 142 was effective for the Company as of April 1, 2002.  SFAS No. 142 specifies the financial accounting and reporting foracquired goodwill and other intangible assets.  Goodwill and intangibleassets that have indefinite useful lives are no longer to be amortized butrather are to be tested for impairment annually or more frequently ifimpairment indicators arise.  None of the Company's intangible assets havean indefinite life.  Intangible assets with finite lives continue to beamortized over their useful lives ranging from 3-20 years on a straight linebasis. Goodwill and intangible assets have been recorded at either incurred orallocated cost.  Allocated costs were based on respective fair values atthe date of acquisition.  

Upon theadoption of SFAS No. 142, the Company reassessed the remaining amortizationperiods of intangible assets acquired on or before June 30, 2001 and assigned all goodwill to reporting units for impairment testing.  Theimpairment tests involve the use of both estimates of fair value for theCompany's reporting units as well as discounted cash flow assumptions. Impairment tests were performed at adoption and in the fourth quarter of fiscalyears 2003 and 2004 and no impairment was noted on a result of these analyses.

 

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As of June 30, 2004 and March 31, 2004 accumulated amortization of intangible assets was $15.3million and $14.2 million respectively.

**Note O - Long-term Debt**

On December 22, 2003, the Company completed an offering of$150 million of convertible subordinated notes due January 1, 2024 pursuant to Rule 144A under the Securities Act of 1933.  The notes bear interest at23⁄4% per annum and are convertible into shares of the Company's commonstock at a conversion price of $29.289 per share and are subordinated to allexisting and future senior debt. 

Holders of the notesmay convert their notes only if any of the following conditions is satisfied:	

-  during any fiscal quarter prior to January 1,     2019, if the closing price of the Company's common stock for at least 20     trading days in the 30 consecutive trading day period ending on the first     trading day of such fiscal quarter is more than 120% of the conversion     price per share of the Company's common stock on such trading day;

- any     business day on or after January 1, 2019, if the closing price of the     Company's common stock on the immediately preceding trading day is more     than 120% of the conversion price per share of the Company's common stock     on such trading day;

- during     the five business day period after any five consecutive trading day period     if the average of the trading prices of the notes for such five     consecutive trading day period is less than 98% of the average of the     conversion values of the notes during such period, subject to certain     limitations;

- if the Company has called the notes for redemption; or

- if the Company makes certain significant distributions     to holders of its common stock or the Company enters into specified     corporate transactions.

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

Concurrent with the issuance of the convertible subordinatednotes, the Company entered into a convertible note hedge and a warrantstransaction with respect to its common stock, the exposure for which is held byCredit Suisse First Boston LLC.  Both the note hedge and the warrantstransaction may be settled at the Company's option either in cash or shares andexpire January 1, 2009.  The convertible note hedge and warrantstransactions combined are intended to reduce the potential dilution fromconversion of the notes by effectively increasing the conversion price pershare to $39.43.  The cost of the note hedge and  the proceeds ofwarrants sale have been included in stockholder's equity in accordance with theguidance in Emerging Issues Task Force No. 00-19, "Accounting forDerivative Financial Instruments Indexed to and Potentially Settled in aCompany's own Stock."  Any proceeds received or payments made upontermination of these instruments will be recorded in stockholders equity. 	

**Note P - Business Segment Information**

The Company's operationsare principally managed and reported on a product basis.  There are three reportablesegments:  aesthetic and general surgery, surgical urology, and clinicaland consumer healthcare.  The accounting policies of the reportablesegments are the same as those described in the summary of significantaccounting policies except that certain expenses such as interest and certaincorporate expenses are not allocated to the segments.

 

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The aesthetic and generalsurgery products segment consists primarily of breast implants, tissueexpanders and the Company's body contouring (liposuction) equipment anddisposables.  The surgical urology segment includes penile implants,surgical incontinence products, and brachytherapy seeds for the treatment ofprostate cancer.  The clinical and consumer healthcare segment includescatheters and other disposable products for the management of urinaryincontinence and retention.

Selected financialinformation for the Company's reportable segments for the three-month periodsended June 30, 2004 and 2003, and as of June 30, 2004 and March 31, 2003 is as follows:

|                                          | Three Months Ended  June 30,                                                    |
|------------------------------------------|--------------------------------------------------------------------------------------|
| (in thousands)                           | **2004**                                                                             | 2003 |
| **Net Sales**                            | ** **                                                                           |  |
| Aesthetic and General  Surgery           | **$     65,544 **                                      | $     55,503  |
| Surgical Urology                         | **30,984 **                                                                     | 28,089  |
| Clinical and Consumer  Healthcare        | **25,904 **                                                                     | 21,514  |
|   Total  consolidated revenues | **$   122,432 **                                                 | $   105,106  |
|                                          | ** **                                                                           |  |
|                                          | Three Months Ended June 30,                                                          |
| (in thousands)                           | **2004**                                                                             | 2003 |
| **Operating profit**                     | ** **                                                                           |  |
| Aesthetic and General  Surgery           | **$     24,399 **                                      | $     19,791  |
| Surgical Urology                         | **2,404 **                                                                      | 1,696  |
| Clinical and Consumer  Healthcare        | **3,229 **                                                                      | 3,161  |
|   Total  reportable segments   | **$     30,032 **                                      | $     24,648  |
|                                          |                                                                                      |  |
|                                          | Three Months Ended June 30,                                                          |
| (in thousands)                           | **2004**                                                                             | 2003 |
| **Operating income**                     | ** **                                                                           |  |
| Reportable segments                      | **$   30,032 **                                                  | $   24,648  |
| Corporate operating loss                 | **(2,856)**                                                                          | (2,137) |
| Interest expense                         | **(1,408)**                                                                          | (161) |
| Interest income                          | **415 **                                                                        | 396  |
| Other income                             | **(189)**                                                                            | 676  |
| Income before income  taxes              | **$   25,994 **                                                  | $   23,422  |
|                                          |                                                                                      |  |
|                                          | As of                                                                                |
|                                          | **June 30,**                                                                         | March 31, |
| (in thousands)                           | **2004   **                                                           | 2004    |
| **Identifiable assets**                  | ** **                                                                           |  |
| Aesthetic and General  Surgery           | ** $        130,551 **                       |  $        135,199  |
| Surgical Urology                         | **            117,005 **      |             114,937  |
| Clinical and Consumer  Healthcare        | **             78,167 ** |              76,695  |
|   Total  reportable segments   | ** $        325,723 **                       |  $        326,831  |
|                                          |                                                                                      |  |

 

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

CautionaryStatement:

The following discussion and analysis should be read in conjunction withour Unaudited Condensed Consolidated Financial Statements and related Notesthereto contained elsewhere in this Report.  The information contained inthis Quarterly Report on Form 10-Q is not a complete description of ourbusiness or the risks associated with an investment in our securities.  Weurge you to carefully review and consider the various disclosures made by us inthis Report and in our other reports filed with the Securities and ExchangeCommission, including our Annual Report on Form 10-K for the year endedMarch 31, 2004 and subsequent reports on Forms 10‐Q and 8‐K,which discuss our business in greater detail.

The section entitled “Risk Factors” set forth below, andsimilar discussions in our other SEC filings, discuss some of the importantrisk factors that may affect our business, results of operations and financialcondition.  These risks, in addition to the other information in thisReport and in our other filings with the SEC, should be carefully considered beforedeciding to purchase, hold or sell our securities.

All statements included in this report, other than statements orcharacterizations of historical fact, are forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995.  Examplesof forward-looking statements include, but are not limited to, statementsconcerning:

-  our anticipatedgrowth strategies;
-  our intention tointroduce or seek regulatory approval for new products;
-  our ability tocontinue to meet FDA and other regulatory requirements;
-  our anticipatedoutcomes of litigation and regulatory reviews;
-  our ability toreplace sources of supply without disruption or regulatory delay; 
-  our accountingestimates, assumptions and judgments, the market acceptance and performance ofour products, the competitive nature of and anticipated growth in our markets; 
-  our ability toconsummate acquisitions and integrate their operations successfully; and 
-  the need foradditional capital.

These forward-looking statements are based on our current expectations,estimates and projections about our industry, management’s beliefs, andcertain assumptions made by us.  Forward-looking statements can often beidentified by words such as “anticipates,” “expects,”“intends,” “plans,” “predicts,””projects,” “believes,” “seeks,”“estimates,” “may,” “will,”“should,” “would,” “could,”“potential,” “continue,”  “ongoing,” "guidance,”and similar expressions, and variations or negatives of these words.  Inaddition, any statements that refer to expectations, projections, forecasts orother characterizations of future events or circumstances, including anyunderlying assumptions, are forward-looking statements.  Theseforward-looking statements speak only as of the date of this report and arebased upon the information available to us at this time.  Such informationis subject to change, and we will not necessarily inform you of suchchanges.  These statements are not guarantees of future results and aresubject to risks, uncertainties and assumptions that are difficult topredict.  Therefore, our actual results could differ materially andadversely from those expressed in any forward-looking statement as a result ofvarious factors, some of which are listed under the section “RiskFactors” below.  We undertake no obligation to revise or updatepublicly any forward-looking statement for any reason.

**APPLICATION OF CRITICAL ACCOUNTING POLICIES**

Management's Discussion and Analysis of Financial Conditionand Results of Operations addresses our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States.  The preparation of these financialstatements requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities at the date of the financial statements, and the reportedamounts of revenues and expenses during the reporting period.  On anon-going basis, we evaluate our estimates and judgments.  We base ourestimates and judgments on historical experience and on various other factorsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources.  Actualresults may differ from these estimates under different assumptions or conditions. 	

 

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Management has identified the critical accounting policiesto be those related to revenue recognition, accounts receivable, inventories,warranties and related reserves, and goodwill and intangible assetimpairment.  These accounting polices are discussed in the “Management'sDiscussion and Analysis of Financial Condition and Results of Operations”and notes to the consolidated financial statements included in the Company'sAnnual Report on Form 10-K for the fiscal year ended March 31, 2004.

Recent Developments 

On October 25, 2003, we completed the acquisition of InformSolutions Inc., now doing business as Mentor Practice Development Serviceslocated in San Diego, California.  Inform Solutions is a leading providerof comprehensive integrated practice management software and revenueenhancement services to the plastic surgery industry.  We paid cash andcommitted to several milestone payments over the ensuing three years based uponsales and earnings.  We expect that the software and consulting revenuesgenerated by Inform Solutions will not be substantial.  We do, however,anticipate that the software and services Inform Solutions offers will assistour plastic surgery customers to better manage their practices, resulting intheir overall practice growth, which could in turn result in growth ofour aesthetic product sales, generally. 

On December 10, 2003 we completed a licensing agreement withthe Wisconsin Alumni Research Foundation (“WARF”) which gives usthe exclusive manufacturing and marketing rights to the proprietary botulinumtoxin technology developed at the University of Wisconsin-Madison.  Inexchange, we paid cash and committed to royalty payments based upon futuresales, and future payments based upon developmental milestones.  We do notexpect any revenues from products utilizing this technology in fiscal year 2005or fiscal year 2006, as the products will require additional research, clinicalstudies and regulatory approvals before they can be marketed.  

On December 22, 2003, we completed an offering of $150million of convertible subordinated notes due January 1, 2024 pursuant to Rule 144A under the Securities Act of 1933.  The notes bear interest at23⁄4% per annum and are convertible into shares of the our common stock ata conversion price of $29.289 per share and are subordinated to all existingand future senior debt.  

**RESULTS OF OPERATIONS**

Thefollowing table sets forth various items from the Consolidated Statements ofIncome as a percentage of net sales for the periods indicated:

|                                             | Quarter  Ended June 30,                                                 |
|---------------------------------------------|-------------------------------------------------------------------------|
|                                             | **2004**                                                                |  | 2003 |
| Net sales                                   | **100.0%**                                                              |  | 100.0% |
|                                             | ** **                                                              |  |  |
|  Cost of sales                         | **35.9   **                                              |  | 37.5   |
| Gross profit                                | **64.1   **                                              |  | 62.5   |
|                                             | ** **                                                              |  |  |
|  Selling, general, and  administrative | **35.3   **                                              |  | 34.0    |
|  Research and development              | **6.5   **                                               |  | 7.2    |
|                                             | **41.8   **                                              |  | 41.2    |
|                                             | ** **                                                              |  |  |
| Operating income                            | **22.3   **                                              |  | 21.3    |
|                                             | ** **                                                              |  |  |
|  Interest expense                      | **(1.2)  **                                                   |  | (0.1)   |
|  Interest income                       | **0.3   **                                               |  | 0.4    |
|  Other income, net                     | **    (0.2)  **                                     |  | 0.7    |
|                                             | ** **                                                              |  |  |
| Income before income taxes                  | **21.2   **                                              |  | 22.3    |
|                                             | ** **                                                              |  |  |
| Income taxes                                | **6.8   **                                               |  | 7.0    |
| Net income                                  | **                14.4% ** |  | 15.3**%** |

 

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**Sales**

**QuartersEnded June 30, 2004 and 2003**Sales for thequarter ended June 30, 2004 increased 16.5% to $122.4 million from $105.1million for the same quarter in the prior year.  Foreign exchange ratemovements had a favorable quarter-to-quarter impact of $2.8 million oninternational sales. We continue to expect total sales to increase in fiscal2005 at a low double digit rate over sales in fiscal 2004.  

|                                                               | Sales by Principal Product Line       |
|---------------------------------------------------------------|---------------------------------------|
|                                                               | For the Three Months Ended			June 30, |
|                                                               | **2004**                              | 2003 | Percent Change |
| Aesthetic & General  Surgery    Products   | **$   65,544**         | $   55,503 | 18.1% |
| Surgical Urology Products                                     | **30,984**                            | 28,089 | 10.3% |
| Clinical & Consumer    Healthcare Products | **25,904**                            | 21,514 | 20.4% |
| ** **                                                    | **$ 122,432**                    | $   105,106 | 16.5% |

Sales of aesthetic andgeneral surgery products increased 18.1% to $65.5 million for the quarter ended June 30, 2004 from $55.5 million for the same quarter in 2003.  Sales ofbreast implant products increased 16% to $57.4 million for the quarter from $49.5million in the same period of the prior year.  Approximately $7 million ofthe increase in breast implant products is attributable to organic growth inunit sales of our breast implants and associated products, and a shift inproduct sales to higher priced implants and the balance is the result of afavorable impact of foreign exchange rate movements.  Increased sales weredriven by strong performance in the augmentation and reconstruction marketsboth domestically and internationally. Sales of body contouring productsincreased 33% to $4.8 million for the quarter from $3.6 million over the sameperiod in the prior year.  Liposuction continues to be the leadingsurgical cosmetic procedure in the United States, and the sales of our capitalequipment and associated disposable products were the leading contributors tobody contouring sales growth for the quarter ended June 30, 2004. 

Sales of surgical urologyproducts increased 10.3% to $31.0 million for the quarter ended June 30, 2004 from $28.1 million for the same quarter in 2003.  The growth was primarilydue to increases in our women’s health and brachytherapy products andapproximately $1.1 million favorable impact of foreign exchange rate movements. Sales of women’s health products (pelvic floor products) increased84% to $5.9 million for the quarter ended June 30, 2004 compared to the quarter ended June 30, 2003.  This sales growth was primarily attributable to our ObTapeTM sling product, which was introduced in the U.S. during August 2003 and is used to treat stress urinary incontinence in women.  Brachytherapyproduct sales increased 6% to $3.9 million for the quarter ended June 30, 2004 compared to the quarter ended June 30, 2003.  Sales for our erectile dysfunction products were $6.4million for the quarter ended June 30, 2004 which is comparable to sales for the quarter ended June 30, 2003.  Sales of disposable surgical urology products were $14.9 million for the quarter ended June 30, 2004, which is comparable to sales for the quarter ended June 30, 2003.  

 

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Sales of clinical andconsumer healthcare products increased 20.4% to $25.9 million for the quarterended June 30, 2004 from $21.5 million in the same period in the prior year.  Thisgrowth primarily resulted from the reorganization of our urology sales force,which was completed in early 2004 and led to improved selling focus and highersales productivity.  Approximately $1.0 million of the sales growth was theresult of favorable impact of foreign exchange rate movements, as approximatelyhalf of these product sales are invoiced in currencies other than the U.S.Dollar.  

**Costof Sales**

Cost ofsales for the quarter ended June 30, 2004 was 35.9% of net sales, compared to 37.5%for the same quarter in the prior year. Cost of sales for the aesthetic andgeneral surgery products decreased to 25.2% from 28.8% of net sales, primarilydue to economies of scale and improved manufacturing efficiencies at our Texasfacility and at our new manufacturing facility in The Netherlands.  Cost ofsales for surgical urology products decreased to 46.0% from 46.3% of net sales,primarily due to increased sales of our women's health products which has ahigher gross margin.  Cost of sales for clinical and consumer healthcareproducts increased to 51.0% of net sales from 48.3% of net sales in the prior year,due to manufacturing inefficiencies at our foreign manufacturing facilities, anda product mix shift towards lower margin products. 

**Selling, General andAdministrative**

Selling,general and administrative expenses were $43.3 million, or 35.3% of net salesfor the quarter ended June 30, 2004, compared to $35.7 million, or 34% of netsales for the same quarter in the prior year.  General and administrativeexpenses increased primarily due to additional expenses in support of sales andmarketing initiatives, higher legal expenses from ongoing litigation, and othercharges related to continued organizational restructuring. Approximately $1.0million of the increase in selling, general, and administrative expense was theresult of impact of foreign exchange rate movements, primarily the strongerEuro.  For the fiscal yearending March 31, 2005, we currently expect sales, general and administrativeexpense to be in the range of 35% to 37% of net sales. 

**Research andDevelopment**

Research anddevelopment expenses were 6.5% of net sales for the quarter ended June 30, 2004 compared to 7.2% of net sales for the same quarter in the prior year.  Researchand development spending for the quarter ended June 30, 2004 was primarily to support key strategic product development programs including our silicone gelbreast implant PMA, the botulinum toxin program and the Hyalite dermal fillerprogram.  During the quarter, we recorded a $.8 million charge related tothe termination of a brachytherapy development project and related automatedmanufacturing equipment.  We expect the level of spending on research anddevelopment activities to be in the range of 7% to 8% of net sales for the fiscalyear ending March 31, 2005. 

 

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**Interest Expense**

Interestexpense increased by approximately $1.2 million to $1.4 million for the quarterended June 30, 2004 compared to $.2 million for the quarter ended June 30, 2003. Approximately $1.3 million of the expense relates to the $150 millionin convertible subordinated notes that we issued in December 2003 carrying acoupon rate of 2 3⁄4%.  The remaining interest expense is interest onbalances outstanding under our foreign lines of credit.  

**Income Taxes**

The effective rate ofcorporate income taxes for the three months ended June 30, 2004 was 32.1% as compared to 31.5% for the comparable period in the prior year.  We expect oureffective tax rate to be in the range of 32% to 33% for the fiscal year ending March 31, 2005.

**Net Income and Earnings Per Share**

Net income for thethree-month period ended June 30, 2004 increased 10%, or $1.6 million, to $17.6million from $16.0 million for the same quarter in the prior year. Dilutedearnings per share were $.39 and $.33 per share for the quarters ended June 30, 2004 and 2003, respectively. Diluted weighted average shares outstanding were45.036 million and 48.346 million for the quarters ended June 30, 2004 and 2003 respectively.  Diluted earnings per share had a positive impact on theyear over year quarterly comparison as a result of fewer shares outstanding primarilydue to our stock repurchase program. 

**Seasonality**

Our quarterly resultsreflect slight seasonality, as the fiscal quarter ending September 30 tends tohave the lowest revenue of all of the quarters.  This is primarily due tolower levels of sales of breast implants for augmentation, an electiveprocedure, as patients tend to take vacation, particularly in Europe, duringthis quarter.   

**LIQUIDITY AND CAPITALRESOURCES**

Our balancesheet reflected cash,cash equivalents and short-term marketable securities of $112 million at June 30, 2004, compared to $118 million at March 31, 2004.  The decrease is primarilydue to our investment of $25 million of cash into long-term marketablesecurities, primarily Federal Home Loan Bank and Federal National MortgageAssociation notes to increase our interest income on our cash reserves. Ourcash provided by operating activities has been and is expected to continue tobe our primary recurring source of funds.  Our working capital was $193million at June 30, 2004, compared to $198 million at March 31, 2004.  We generated $26 million of cash from operating activities during the threemonths ended June 30, 2004, compared to $17 million the same period theprevious year.  Approximately $1.6 million of the increase wasattributable to increased net income and $2.5 million in additionalamortization, depreciation and losses on asset disposals not requiring the useof cash.  Increased accounts receivable collection activities in thequarter provided $3.6 million in additional cash flow from operations comparedto the same quarter in the prior year.  

During the three monthsended June 30, 2004, we invested approximately $1.5 million in property andequipment, primarily for production equipment purchases. We anticipateinvesting approximately $18.5 million in the remainder of fiscal 2005 to continuefacility improvements and to purchase production equipment. 

 

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We receive cash from theexercise of employee stock options.  Employee stock option exercisesprovided $2.6 million during the three months ended June 30, 2004 compared to $3.9 million in the same period the previous year. Proceeds from theexercise of employee stock options will vary from period to period based primarilyupon fluctuations in the market value of our common shares relative to theexercise price of such options, among other factors. 

We have a stock repurchase program, primarily to offset thedilutive effect of our employee stock option program, to provide liquidity tothe market and to reduce the overall number of shares outstanding.  Allshares repurchased under the program are retired and are no longer deemed to beoutstanding.  At June 30, 2004, 3.6 million shares remained authorized forrepurchase.  The timing of repurchases is subject to market conditions,cash availability, and blackout periods during whichwe are restricted from repurchasing shares.  There is no guaranteethat shares authorized for repurchase by the Board will ultimately berepurchased.  There were no share repurchases under this program for thequarter ended June 30, 2004.

In January 2001, we completed the acquisition of the assetsof South Bay Medical.  The total consideration included $2 million incash, 470,586 restricted shares of our common stock having a fair market valueof $4 million, and $13.6 million to be paid in cash or our common stock overthe next several years.  These future payments are been recorded as an acquisitionobligation payments liability of $11.4 million at June 30, 2004.  Approximately $5.9 million of the future acquisition obligation payments is to be paid inshares of our common stock valued at fair market value on the date of issuance,over several years based on the achievement of unit sale milestones. 

In December 2001, we entered into several agreements withProsurg, Inc. to purchase certain patent rights and to secure a supply ofproduct.  The total consideration included $2.0 million in cash and $1.7million in short and long-term payments due over the next several years.  Thefuture payments have been recorded as an acquisition obligation liability atnet present value and will increase with imputed interest to $2.0 million, dueover the next several years, based on the achievement of certainmilestones.  

On September 9, 2003, we entered into several transactionsto acquire from AMI, LLC, the exclusive license, marketing and distributionrights for certain products, and a related supply agreement with Prosurg,Inc.  We paid $3 million in cash and issued 133,630 restricted shares ofour common stock valued at fair market value of $3 million.  Theagreements commit us to make additional payments totaling up to $4.5 millionupon the completion of certain developmental and regulatory milestones,expected to be achieved over the next several years. 

On October 25, 2003, we acquired Inform Solutions, Inc., fortotal consideration of $3 million in cash.  The agreement commits us tomake additional payments totaling up to $1.7 million based upon achievement offuture sales and earnings thresholds over 3 years. 

On December 22, 2003, we completed an offering of $150million of convertible subordinated notes due January 1, 2024 pursuant to Rule 144A under the Securities Act of 1933.  The notes bear interest at23⁄4% per annum and are convertible into shares of our common stock at aconversion price of $29.289 per share and are subordinated to all existing andfuture senior debt.  Concurrent with the issuance of the convertiblesubordinated notes, we entered into a convertible bond hedge and warrantstransactions with respect to our common stock, the exposure for which is heldby Credit Suisse First Boston LLC for a net cash payment of $18.5 million. Both the bond hedge and the warrants transactions may be settled at our optioneither in cash or net shares and expire January 1, 2009.  The convertible bond hedge and warrants transactions combined are intended to reduce thepotential dilution from conversion of the notes by effectively increasing theconversion price per share to $39.43. 

In July 2003, the Board ofDirectors increased the quarterly dividend rate from $.02 per share to $.15 pershare.  It is our intent to continue to pay dividends for the foreseeablefuture subject to, among other things, Board approval, cash availability, debtrestrictions and alternative cash needs.  During the quarter ended June 30, 2004 we paid a $.15 dividend. At the current annual dividend rate of $.60 pershare, the aggregate annual dividend would be approximately $25 million. OurCredit Agreement, described below, limits the aggregate amount of dividendspayable in any year to one-half of the net income of the preceding year. 

 

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We have a secured line ofcredit for borrowings up to $25 million ("Credit Agreement"), whichaccrues interest at the prevailing prime rate or 1.75% over LIBOR, at ourdiscretion.  The Credit Agreement includes certain covenants that, amongother things, limit the dividends we may pay and requires maintenance ofcertain levels of tangible net worth and debt service ratios.  At June 30, 2004, two commercial letters of credit totaling $1.3 million were outstanding andsecured by the Credit Agreement.  Accordingly, although there were noborrowings outstanding under the Credit Agreement at June 30, 2004, only $23.7 million was available for additional borrowings.

Inaddition, in February 2001, we established several lines of credit with localforeign lenders to facilitate operating cash flow needs at our foreignsubsidiaries.  These lines are at market rates of interest, unsecured, areguaranteed by us, and total $6.9 million, of which $4.5 million wasoutstanding, and $2.4 million was available at June 30, 2004.  

In fiscal2002, a line of credit of $7.5 million was established to finance theconstruction of a new facility in Leiden, the Netherlands.  The borrowingsaccrue interest at EURIBOR plus 0.75% and are secured by the new facility andother assets in The Netherlands.  At June 30, 2004, $5.5 million was outstanding and $2.0 million was available under this line.  The line ofcredit provides for conversion to a term loan at prevailing interest rates whenconstruction of the new facility is completed. 

At June 30, 2004, our total short-term borrowings under all lines of credit were $9.7 million and theweighted-average interest rate was 3.59%.  The total amount of additionalborrowings available to us under all lines of credit was $28.1 million at June 30, 2004 and March 31, 2004, respectively. 	

We enterinto various product and intellectual property acquisitions and businesscombinations.  In connection with some of these activities, we agree tomake payments to third parties when specific milestones are achieved, such asreceipt of regulatory approvals or achievement of performance or operationaltargets.  

We do nothave any off-balance sheet arrangements that are currently material orreasonably likely to be material to our financial position or results ofoperations. 

Our principal source ofliquidity at June 30, 2004 consisted of $112 million in cash, cash equivalentsand short-term marketable securities, plus $28 million available under ourexisting lines of credit.  We believe that funds generated fromoperations, our cash, cash equivalents and marketable securities and fundsavailable under our line of credit agreements will be adequate to meet ourworking capital needs and capital expenditure investment requirements andcommitments for the foreseeable future.  However, it is possible that wemay need to raise additional funds to finance unforeseen requirements or toconsummate acquisitions of other business, products or technologies. Additional funds could be raised by selling equity or debt securities to thepublic or to selected investors, or by borrowing money from financialinstitutions.  In addition, even though we may not need additional funds,we may still elect to sell additional equity or debt securities or obtaincredit facilities for other reasons.  We may not be able to obtain additionalfunds on terms that would be favorable to us, or at all.  If funds areraised by issuing additional equity securities or convertible debt securities,the ownership percentage of existing shareholders would be reduced.  Inaddition, the equity or debt securities issued by us may have rights,preferences or privileges senior to those of our common stock. 

 

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**RiskFactors**

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

The Private Securities Litigation Reform Act of 1995provides a "safe harbor" for forward-looking statements.  TheAct was designed to encourage companies to provide prospective informationabout them without fear of litigation.  The prospective information mustbe identified as forward-looking and must be accompanied by meaningfulcautionary statements identifying important factors that could cause actualresults to differ materially from those projected in the statements.  Thestatements about our business, plans, strategies, intentions, expectations andprospects contained throughout this document are based on currentexpectations.  These statements are forward-looking and actual results maydiffer materially from those predicted as of the date of this report in theforward-looking statements, which involve risks and uncertainties.  Inaddition, past financial performance is not necessarily a reliable indicator offuture performance and investors should not use historical performance toanticipate results or future period trends.  We undertake no obligation torevise or update publicly any forward-looking statements for any reason, evenif new information becomes available or other events occur in the future.

Our business faces many risks.  The risks describedbelow may not be the only risks we face.  Additional risks that we do notyet know of or that we currently think are immaterial may also impair ourbusiness operations.  If any of the events or circumstances described inthe following risks actually occurs, our business, financial condition or resultsof operations could suffer and the trading price of our common stock or thenotes offered hereby could decline. You should consider the following risks, aswell as the other information included or incorporated by reference in thisprospectus, before deciding to invest in our common stock or the notes offeredhereby. 

***Significant product liability claims or product recalls mayforce us to pay substantial damage awards and other expenses that could exceedour accruals and insurance coverage.***

The manufacture and sale of medical devices exposes us tosignificant risk of product liability claims.  In the past, and currently,we have had a number of product liability claims relating to our products, andwe may be subject to additional product liability claims in the future, some ofwhich may have a negative impact on our business.  If a product liabilityclaim or series of claims is brought against us for uninsured liabilities or inexcess of our insurance coverage, our business could suffer.  Some manufacturersthat suffered such claims in the past have been forced to cease operations oreven to declare bankruptcy. Additionally, we could experience a material designor manufacturing failure in our products, a quality system failure, othersafety issues, or heightened regulatory scrutiny that would warrant a recall ofsome of our products and could result in exposure to additional productliability claims. 

***We are subject to substantial government regulation, whichcould materially adversely affect our business.***

The production and marketing of our products and our ongoingresearch and development, pre-clinical testing and clinical trial activitiesare subject to extensive regulation and review by numerous governmentalauthorities both in the U.S. and abroad.  Most of the medical devices wedevelop must undergo rigorous pre-clinical and clinical testing and anextensive regulatory approval process before they can be marketed.  Thisprocess makes it longer, more difficult and more costly to bring our productsto market, and we cannot guarantee that any of our products will beapproved.  The pre-marketing approval process can be particularlyexpensive, uncertain and lengthy, and a number of devices for which FDAapproval has been sought by other companies have never been approved formarketing.  In addition to testing and approval procedures, extensiveregulations also govern marketing, manufacturing, distribution, labeling, andrecord-keeping procedures.  If we do not comply with applicable regulatoryrequirements, such violations could result in non-approval, suspensions ofregulatory approvals, civil penalties and criminal fines, product seizures andrecalls, operating restrictions, injunctions, and criminal prosecution. 

Delays in, withdrawal, or rejection of FDA or othergovernment entity approval of our products, may also adversely affect ourbusiness.  Such delays or rejection may be encountered due to, among otherreasons, government or regulatory delays, lack of efficacy during clinicaltrials, unforeseen safety issues, slower than expected rate of patientrecruitment for clinical trials, inability to follow patients after treatmentin clinical trials, inconsistencies between early clinical trial results andresults obtained in later clinical trials, varying interpretations of datagenerated by clinical trials, or changes in regulatory policy during the periodof product development in the U.S. and abroad.  In the U.S., there has been a continuing trend of more stringent FDA oversight in productclearance and enforcement activities, causing medical device manufacturers toexperience longer approval cycles, greater risk and uncertainty, and higherexpenses. Internationally, there is a risk that we may not be successful inmeeting the quality standards or other certification requirements.  Evenif regulatory approval of a product is granted, such approval may entaillimitations on uses for which the product may be labeled and promoted, or mayprevent us from broadening the uses of our current products for differentapplications.  In addition, we may not receive FDA approval to export ourproducts in the future, and countries to which products are to be exported maynot approve them for import. 

 

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Our manufacturing facilities also are subject to continualgovernmental review and inspection.  The FDA has stated publicly thatcompliance with manufacturing regulations will be scrutinized morestrictly.  A governmental authority may challenge our compliance withapplicable federal, state and foreign regulations.  In addition, anydiscovery of previously unknown problems with one of our products or facilitiesmay result in restrictions on the product or the facility, including withdrawalof the product from the market or other enforcement actions. 

From time to time, legislative or regulatory proposals areintroduced that could alter the review and approval process relating to medicaldevices.  It is possible that the FDA or other governmental authoritieswill issue additional regulations which would further reduce or restrict thesales of our present or proposed products.  Any change in legislation orregulations that govern the review and approval process relating to our currentand future products could make it more difficult and costly to obtain approvalfor new products, or to produce, market, and distribute existing products.

***If we are unable to continue to develop and commercializenew technologies and products, we may experience a decrease in demand for ourproducts or our products could become obsolete****.*

The medical device industry is highly competitive and issubject to significant and rapid technological change.  We believe thatour ability to develop or acquire new technologies is crucial to oursuccess.  We are continually engaged in product development, improvementprograms and required clinical studies to maintain and improve our competitiveposition.  Any significant delays in the above or termination of ourclinical trials would materially and adversely affect our development andcommercialization timelines.  We cannot guarantee that we will besuccessful in enhancing existing products, or in developing or acquiring newproducts or technologies that will timely achieve regulatory approval.  

There is also a risk that our products may not gain marketacceptance among physicians, patients and the medical communitygenerally.  The degree of market acceptance of any medical device or otherproduct that we develop will depend on a number of factors, includingdemonstrated clinical safety and efficacy, cost-effectiveness, potentialadvantages over alternative products, and our marketing and distributioncapabilities.  Physicians will not recommend our products if clinical andother data or other factors do not demonstrate their safety and efficacy comparedto other competing products, or if our products do not best meet the particularneeds of the individual patient.

Our products compete with a number of other medical productsmanufactured by major companies, and may also compete with new productscurrently under development by others.  On January 8, 2004 the FDA released new Draft Guidance for Saline, Silicone Gel, and Alternative BreastImplants.  This new draft guidance has additional requirements from theFDA's previously issued guidance document dated February 2003.  Wecompleted our PMA application to the FDA for the pre-market approval for oursilicone gel-filled implants for breast augmentation, reconstruction andrevision in December 2003, using the earlier guidance document provided by theFDA.  The FDA has indicated that our PMA "is sufficiently complete topermit a substantive review and is, therefore, suitable for filing." Any change in FDA guidance, such as that announced on January 8thby the FDA, may delay or may otherwise adversely affect our application or itsreview or approval by the FDA.  A delay, denial, or "notapprovable" response by the FDA would have a material adverse affect onour commercialization timelines, competitive position and ultimately ourrevenue and operating results.  We are in the process of amending our PMAapplication to meet the new FDA guidelines and responding to other issuesraised by the FDA, and these processes may require substantial time andexpense, with no assurances of success.  If our competitor gains FDA approvalto market its competitive products before we do, our competitive position maysuffer.  If our new products do not achieve significant market acceptance,or if our current products are not able to continue competing successfully inthe changing market, our sales and earnings may not grow as much as expected,or may even decline. 

 

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***If we suffer negative publicity concerning the safety of ourproducts, our sales may be harmed and we may be forced to withdraw products.***

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

***If changes in the economy and consumer spending reduceconsumer demand for our products, our sales and profitability could suffer.***

Certain elective procedures, such as breast augmentation,body contouring, and surgical treatment for male impotence are typically notcovered by insurance.  Adverse changes in the economy may cause consumersto reassess their spending choices and reduce the demand for these surgeriesand could have an adverse effect on consumer spending.  This shift couldhave an adverse effect on our sales and profitability. 

***If we are unable to implement new information technologysystems, our ability to manufacture and sell products, maintain regulatorycompliance and manage and report our business activities may be impaired,delayed or diminished, which would cause substantial business interruption andloss of sales, customers and profits.***

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

***If we are unable to acquire companies, businesses ortechnologies as part of our growth strategy or to successfully integrate pastacquisitions, our growth, sales and profitability could suffer.***

A significant portion of our recent growth has been theresult of acquisitions of other companies, businesses and technologies. We intend to continue to acquire other businesses and technologies tofacilitate our future business strategies, although there can be no assurancethat we will be able to identify appropriate acquisition candidates, consummatetransactions or obtain agreements with terms favorable to us.  Further,once a business is acquired, any inability to integrate the business, failureto retain and develop its workforce, or establish and maintain appropriatecommunications, performance expectations, regulatory compliance procedures,accounting controls, and reporting procedures could adversely affect our futuresales and earnings.

 

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***If our intellectual property rights do not adequatelyprotect our products or technologies, others could compete against us moredirectly, which would hurt our profitability.***

Our success depends in part on our ability to obtain patentsor rights to patents, protect trade secrets, operate without infringing uponthe proprietary rights of others, and prevent others from infringing on ourpatents, trademarks and other intellectual property rights.  We will beable to protect our intellectual property from unauthorized use by thirdparties only to the extent that it is covered by valid and enforceable patents,trademarks or licenses.  Patent protection generally involves complexlegal and factual questions and, therefore, enforceability of patent rightscannot be predicted with certainty; thus, any patents that we own or licensefrom others may not provide us with adequate protection againstcompetitors.  Moreover, the laws of certain foreign countries do notrecognize intellectual property rights or protect them to the same extent as dothe laws of the United States.  

In addition to patents and trademarks, we rely on tradesecrets and proprietary know-how.  We seek protection of these rights, inpart, through confidentiality and proprietary information agreements. These agreements may not provide sufficient protection or adequate remedies forviolation of our rights in the event of unauthorized use or disclosure ofconfidential and proprietary information.  Failure to protect ourproprietary rights could seriously impair our competitive position. 

***If third parties claim we are infringing their intellectualproperty rights, we could suffer significant litigation or licensing expensesor be prevented from marketing our products.***

Our commercial success depends significantly on our abilityto operate without infringing the patents and other proprietary rights ofothers.  However, regardless of our intent, our technologies may infringeupon the patents or violate other proprietary rights of third parties.  Inthe event of such infringement or violation, we may face expensive litigationand may be prevented from selling existing products and pursuing productdevelopment or commercialization. 

***We depend on single and sole source suppliers for certainraw materials and licensed products and the loss of any supplier couldadversely affect our ability to manufacture or sell many of our products.***

We currently rely on single or sole source suppliers for rawmaterials, including silicone, used in many of our products.  In the eventthat they cannot meet our requirements, we cannot guarantee that we would be ableto produce a sufficient amount of quality raw materials in a timelymanner.  We also depend on third party manufacturers for components andlicensed products.  If there is a disruption in the supply of theseproducts, our sales and profitability would be adversely affected. 

On February 1, 2003, our sole source brachytherapy iodineand palladium seed supply agreement with North American Scientific, Inc. (NASI)expired, and along with other factors, resulted in a loss of sales ofapproximately $10 million during fiscal 2004.  We now manufacture iodineseeds but we continue to rely on a sole source supplier for our supply ofpalladium seeds.  Future interruptions of the supply of seeds, additionalcompetition, regulatory delay, additional costs to procure seeds, or loss ofcustomers and market share may have a negative effect on revenues and theresults of operations.  For the quarter ended June 30, 2004, our sales of iodine seeds and palladium seeds were approximately $3.9 million.

***Our international business exposes us to a number of risks.***

More than one-third of our sales are derived frominternational operations.  Accordingly, any material decrease in foreignsales would have a material adverse effect on our overall sales andprofitability. Most of our international sales are denominated in Euros,British Pounds, Canadian Dollars or U.S. Dollars.  Depreciation ordevaluation of the local currencies of countries where we sell our products mayresult in our products becoming more expensive in local currency terms, thusreducing demand, which could have an adverse effect on our operatingresults.  Our operations and financial results may be adversely affectedby other international factors, including: 

-  foreigngovernment regulation of medical devices; productliability, intellectual property and other claims; 
 

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-  newexport license requirements; politicalor economic instability in our target markets; traderestrictions; changesin tax laws and tariffs; managingforeign distributors and manufacturers; managingforeign branch offices and staffing; and competition. 
***Health care reimbursement or reform legislation couldmaterially affect our business.***

If any national health care reform or other legislation orregulations are passed that imposes limits on the amount of reimbursement forcertain types of medical procedures or products, or on the number or type ofmedical procedures that may be performed, or that has the effect of restrictinga physician's ability to select specific products for use in patientprocedures, such changes could have a material adverse effect on the demand forour products.  Our revenues depend largely on U.S. and foreign governmenthealth care programs and private health insurers reimbursing patients' medicalexpenses.  Physicians, hospitals, and other health care providers may notpurchase our products if they do not receive satisfactory reimbursement fromthese third-party payers for the cost of procedures using our products. In the U.S., there have been, and we expect that there will continue to be, anumber of federal and state legislative and regulatory proposals to implementgreater governmental control over the healthcare industry and its relatedcosts.  These proposals create uncertainty as to the future of ourindustry and may have a material adverse effect on our ability to raise capitalor to form collaborations.  In a number of foreign markets, the pricingand profitability of healthcare products are subject to governmental influenceor control.  In addition, legislation or regulations that imposerestrictions on the price that may be charged for healthcare products ormedical devices may adversely affect our sales and profitability. 

***If our use of hazardous materials results in contaminationor injury, we could suffer significant financial loss.***

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

***Future changes in financial accounting standards may causeadverse unexpected revenue or expense fluctuations and affect our reportedresults of operations.***

A change in accounting standards could have a significanteffect on our reported results and may even affect our reporting oftransactions completed before the change is effective.  The FinancialAccounting Standards Board ("FASB") has issued a Proposed Statementof Financial Accounting Standards ("SFAS"), Share-Based Payment, anamendment of FASB Statements Nos. 123 and 95 ("Exposure Draft"). The Exposure Draft would eliminate the ability to account for share-basedcompensation transactions using Accounting Principles Board ("APB")Opinion No. 25, Accounting for Stock Issued to Employees, and generallywould require such transactions be accounted for using a fair-value-based methodand the resulting cost recognized in the financial statements.  Theapproval of this exposure draft or any changes requiring that we recordcompensation expense in the statement of operations for employee stock optionsusing the fair value method could have a significant negative effect on ourreported results.  New pronouncements and varying interpretations ofexisting pronouncements have occurred and may occur in the future. Changes to existing rules or current practices may adversely affect our reportedfinancial results of our business. 

 

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***Our reported earnings per share may be more volatile becauseof the contingent conversion provision of the notes.***

Holders of our 23⁄4% convertible notes are entitled toconvert the notes into our common stock during any fiscal quarter prior toJanuary 1, 2019, if the closing price of our common stock for at least 20trading days in the 30 consecutive trading day period ending on the firsttrading day of such fiscal quarter is more $35.15, if we have called the notesfor redemption, or upon other specified events.  Until one of thesecontingencies is met, the shares underlying the notes are not included in thecalculation of our basic or diluted earnings per share.  Should acontingency be met, diluted earnings per share would be expected to decrease asa result of the inclusion of the underlying shares in the diluted earnings pershare calculation.  Volatility in our common stock price could cause thiscondition to be met in one quarter and not in a subsequent quarter, increasingthe volatility of our diluted earnings per share. 

***Hedging transactions and other transactions may affect thevalue of the notes.***

In connection with the original issuance of our 23⁄4%convertible notes in December 2003, we entered into convertible note hedge andwarrant transactions with respect to our common stock with Credit Suisse FirstBoston International, an affiliate of Credit Suisse First Boston LLC, theinitial purchaser of the notes, to reduce the potential dilution from conversionof the notes up to a price of our common stock of $39.43 per share.  Inconnection with these hedging arrangements, Credit Suisse First BostonInternational, and/or its affiliates, has taken and, we expect, will continueto take positions in our common stock in secondary market transactions and/orwill enter into various derivative transactions.  Such hedgingarrangements could adversely affect the market price of our common stock. In addition, the existence of the notes may encourage short selling in ourcommon stock by market participants because the conversion of the notes coulddepress the price of our common stock. 

***Litigation may harm our business or otherwise distract ourmanagement.***

Substantial, complex or extended litigation could cause usto incur large expenditures and distract our management, and could result insignificant monetary or equitable judgments against us.  For example,lawsuits by employees, patients, customers, licensors, licensees, suppliers,distributors, stockholders, or competitors could be very costly and couldsubstantially disrupt our business.  Disputes from time to time with suchcompanies or individuals are not uncommon, and we cannot assure that we willalways be able to resolve such disputes out of court or on terms favorable tous. 

***Our publicly-filed SEC reports are reviewed by the SEC fromtime to time and any significant changes required as a result of any suchreview may result in material liability to us and have a material adverseimpact on the trading price of our common stock.***

The reports of publicly-traded companies are subject toreview by the SEC from time to time for the purpose of assisting companies incomplying with applicable disclosure requirements and to enhance the overalleffectiveness of companies public filings, and comprehensive reviews by the SECof such reports are now required at least every three years under theSarbanes-Oxley Act of 2002.  SEC reviews often occur at the time companiesfile registration statements such as the registration statement we filed inconnection with our convertible bond offering, but reviews may also beinitiated at any time by the SEC.  While we believe that our previouslyfiled SEC reports comply, and we intend that all future reports will comply inall material respects with the published rules and regulations of the SEC, wecould be required to modify or reformulate information contained in priorfilings as a result of an SEC review.  Any modification or reformulationof information contained in such reports could be significant and result inmaterial liability to us and have a material adverse impact on the tradingprice of our common stock. 

 

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***Our operating results may fluctuatesubstantially, and could precipitate unexpected movement in the price of ourcommon stock and convertible notes.*** 

Our commonstock trades on the New York Stock Exchange under the symbol"MNT."  On June 30, 2004, the closing price of our common stockon the New York Stock Exchange was $34.29 per share.  On December 22, 2003, we completed an offering of $150 million of convertible subordinatednotes ("notes") due January 1, 2024 pursuant to Rule 144A under theSecurities Act of 1933.  The notes bear interest at 23⁄4% per annum,are convertible into shares of our common stock at a conversion price of$29.289 per share and are subordinated to all existing and future senior debt.  Themarket prices of our stock and convertible securities are subject tosignificant fluctuations in response to the factors set forth above and otherfactors, many of which are beyond our control such as changes in pricingpolicies by our competitors and the timing of significant orders andshipments.  

Such factors, as well as other economic conditions, mayadversely affect the market price of our securities, including our common stockand the notes.  There could be periods in which we experience shortfallsin revenue and/or earnings from levels expected by securities analysts andinvestors, which could have an immediate and significant adverse effect on thetrading price of our securities, including our common stock and the notes.

**Item 3.**

**Quantitative And  Qualitative Disclosures About Market Risk**

There have been no material changes in our exposure tomarket risk as reported in Item 7A in our Annual Report on Form 10-K for thefiscal year ended March 31, 2004.

**Item 4.**

**Controls and Procedures**

We maintaindisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the"Exchange Act")) that are designed to ensure that informationrequired to be disclosed in our reports filed under the Exchange Act, isrecorded, processed, summarized and reported within the time periods specifiedin the SEC's rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.  In designing and evaluating the disclosure controls andprocedures, management recognized that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.

We carriedout an evaluation under the supervision and with the participation ofmanagement, including our Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of our disclosure controls andprocedures as of June 30, 2004, the end of the period covered by thisreport.  Based on that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective at the reasonable assurance level as of June 30, 2004.

 

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**PART II - OTHER INFORMATION**

**Item 1.**

**Legal Proceedings**

On February 20, 2004, we filed a patent infringement suit  in the United States Court for the District of Minnesota against American  Medical Systems, Inc. ("AMS").  The suit alleges that AMS is  inducing infringement and contributing to the infringement of our United  States Patent No. 6,638,211 B2 ("'211 Patent"), a patent involving  a method for the treatment of urinary incontinence in women, by AMS offering  for sale and selling its Monarc Subfacial Hammock in the United States.   The suit seeks******compensatory and  treble damages.  On February 23, 2004, AMS served us with a Complaint  for declaratory judgment, which was filed in the same District Court on  October 28, 2003, seeking a declaration that AMS does not infringe any valid  claim of the '211 Patent and that the claims of the '211 Patent are invalid  and unenforceable against AMS.  Because the cases involve the same  facts, they will be heard by the same judge. 

On March 4, 2004, John H. Alico, et. al., d/b/a PTF Royalty Partnership ("PTF") filed a lawsuit against  us in the Business Litigation Session of the Superior Court of Massachusetts,  Suffolk County in which PTF alleges, among other things, breach of a merger  agreement that involved our acquisition of Mentor O&O, Inc.  ("O&O"), an unrelated entity at that time, which was dated as  of March 14, 1990 ("Merger Agreement") (prior to the merger,  O&O had no affiliation with us).  PTF alleges that we breached the  terms of the Merger Agreement by failing to exert commercially reasonable and  diligent efforts to obtain approval by the FDA for a product used for the  treatment of urinary incontinence and by failing to accurately account for and  pay royalties due thereunder.  PTF seeks damages in excess of $18  million, which is the maximum amount of royalties PTF could have received  under the Merger Agreement.  After almost ten years, in or about January  2001, we elected to discontinue pursuing FDA approval for the product, given  the FDA's repeated and ongoing concerns regarding the product's use for  urinary incontinence.  We complied with all of our obligations under the  Merger Agreement, which specifically provided that we were under no obligation  to engage in efforts or expenditures in respect of the product which we in  good faith deemed to be inadvisable based on various factors.   Accordingly, we intend to vigorously defend the lawsuit.  Dr. Richard  Young, a member of our board of directors since March 1990, is a partner of  PTF and is a named plaintiff in the above action.  Dr. Young was a  shareholder and principal of O&O prior to the merger and was instrumental  in facilitating the transition after the merger.

In  addition, in the ordinary course of our business we experience other varied  types of claims that sometimes result in litigation or other legal  proceedings.  Although there can be no certainty, we do not anticipate  that any of these proceedings will have a material adverse effect on us.

  

**Item 2.**

**Changes in Securities,  Use of Proceeds and Issuer Purchases of Equity Securities**

None. 

**Item 3.**

**Defaults Upon Senior  Securities**

None. 

**Item 4.**

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

None. 

**Item 5.**

**Other Information**None.

 

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**Item 6.****Exhibits and Reports  on Form 8-K**
**(a)		Exhibits**
10.1 Employment Agreement  dated July 15, 2004, between Mentor Corporation and Peter Shepard.
10.2 Employment agreement  dated July 27, 2004, between Mentor Corporation and Bobby Purkait.

10.3 Employment agreement  dated August 6, 2004, between Mentor Corporation and Adel Michael. 

10.4 Employment agreement  dated August 6, 2004, between Mentor Corporation and Joshua Levine.

10.5 Employment agreement  dated August 6, 2004, between Mentor Corporation and Loren McFarland.

10.6 Employment agreement  dated August 6, 2004, between Mentor Corporation and Cathy Ullery.

10.7 Employment agreement  dated August 6, 2004, between Mentor Corporation and Kathleen Beauchamp.

10.8 Employment agreement  dated August 6, 2004, between Mentor Corporation and Clarke Scherff.

10.9 Amended and restated Supply Agreement, dated        July 6, 2004 by and among Nusil Corporation, SiTech Inc., and Mentor Corporation.

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,  filed herewith.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,  filed herewith.

**(b) Reports on Form  8-K**
- We       filed a report on Form 8-K on May 18, 2004 regarding our press release       announcing our fourth quarter and fiscal 2004 results.
- We       filed a report on Form 8-K on June 4, 2004 regarding our press release       announcing our new Chief Executive Officer and Chief Financial Officer       promotions.
- We       filed a report on Form 8-K on August 2, 2004 regarding our press release announcing our first quarter 2005 results.

 

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**SIGNATURES**

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

**MENTOR CORPORATION**

(Registrant)

Date:

August 9, 2004

By:

/S/JOSHUA H. LEVINEJoshua H. LevineChief Executive Officer
    
Date:

August 9, 2004

By:

/S/LOREN L .MCFARLANDLoren L. McFarlandChief Financial Officer

 

 

 

 

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