##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended
June 30, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No. 001-31744
 MENTOR CORPORATION
  Minnesota
    
    41-0950791(State or other jurisdiction of
    
    (IRS Employer Identification No.)incorporation or organization)
 201 Mentor Drive, Santa Barbara, California 93111
 (805) 879-6000
  þ o
  þ o o
  o þ




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##### 



MENTOR CORPORATION
 INDEX
 Part I. Financial InformationItem 1.
    
    Consolidated Financial Statements:Consolidated Balance Sheets (unaudited)  June 30, 2007 and March 31, 2007Consolidated Statements of Income (unaudited)  Three Months Ended June 30, 2007 and 2006Consolidated Statements of Cash Flows (unaudited)  Three Months Ended June 30, 2007 and 2006Notes to Consolidated Financial Statements  June 30, 2007Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosures About Market RiskItem 4.
    
    Controls and ProceduresPart II. Other InformationItem 1.
    
    Legal ProceedingsItem 1A.
    
    Risk FactorsItem 2.
    
    Unregistered Sales of Equity Securities and Use of ProceedsItem 3.
    
    Defaults upon Senior SecuritiesItem 4.
    
    Submission of Matters to a Vote of Security HoldersItem 5.
    
    Other InformationItem 6.
    
    ExhibitsExhibit 10.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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PART I  FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements
 
 
 June 30,
    
    
    March 31,(in thousands)
    
    2007
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    172,749
    
    
    $
    371,525Marketable securities
    
    
    118,412
    
    
    
    116,215Accounts receivable, net
    
    
    71,724
    
    
    
    65,419Inventories
    
    
    37,076
    
    
    
    38,073Deferred income taxes
    
    
    24,266
    
    
    
    25,892Prepaid income taxes
    
    
    12,710
    
    
    
    13,495Prepaid expenses and other
    
    
    5,805
    
    
    
    6,761Total current assets
    
    
    442,742
    
    
    
    637,380Property and equipment, net
    
    
    36,973
    
    
    
    34,683Intangible assets, net
    
    
    15,087
    
    
    
    15,963Goodwill, net
    
    
    12,753
    
    
    
    12,644Other assets
    
    
    10,908
    
    
    
    9,098Total assets
    
    $
    518,463
    
    
    $
    709,768
   3




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##### Table of Contents



June 30,
    
    
    March 31,(in thousands, except share data)
    
    2007
    
    
    2007Liabilities and shareholders equityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    36,081
    
    
    $
    32,147Sales returns
    
    
    16,683
    
    
    
    18,590Accrued compensation
    
    
    12,532
    
    
    
    14,022Deferred revenue
    
    
    11,892
    
    
    
    11,863Dividends payable
    
    
    7,514
    
    
    
    8,481Product liability reserves
    
    
    6,900
    
    
    
    6,555Warranty reserve
    
    
    2,301
    
    
    
    2,989Interest payable
    
    
    2,063
    
    
    
    1,031Accrued royalties
    
    
    242
    
    
    
    230Other
    
    
    13,086
    
    
    
    16,823Total current liabilities
    
    
    109,294
    
    
    
    112,731Long-term accrued liabilities
    
    
    14,295
    
    
    
    12,169Convertible subordinated notes
    
    
    150,000
    
    
    
    150,000Commitments and contingenciesShareholders equity:Common stock, $.10 par value:Authorized  150,000,000 shares; issued and outstanding
37,337,673 shares at June 30, 2007;
42,400,483 shares at March 31, 2007;
    
    
    3,734
    
    
    
    4,240Accumulated other comprehensive income
    
    
    12,976
    
    
    
    11,342Retained earnings
    
    
    228,164
    
    
    
    419,286Total shareholders equity
    
    
    244,874
    
    
    
    434,868Total liabilities and shareholders equity
    
    $
    518,463
    
    
    $
    709,768
   4




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(in thousands, except per share data)
    
    2007
    
    
    2006Net sales
    
    $
    95,564
    
    
    $
    79,437Cost of sales
    
    
    21,224
    
    
    
    22,045Gross profit
    
    
    74,340
    
    
    
    57,392Selling, general, and administrative
    
    
    36,045
    
    
    
    29,711Research and development
    
    
    10,314
    
    
    
    7,88146,359
    
    
    
    37,592Operating income from continuing operations
    
    
    27,981
    
    
    
    19,800Interest expense
    
    
    (1,464
    )
    
    
    (1,632
    )Interest income
    
    
    4,774
    
    
    
    3,064Other income (expense), net
    
    
    (294
    )
    
    
    538Income from continuing operations before income taxes
    
    
    30,997
    
    
    
    21,770Income taxes
    
    
    9,253
    
    
    
    6,096Income from continuing operations
    
    
    21,744
    
    
    
    15,674Income (loss) from discontinued operations, net of tax (benefit) expense of
($32) and $3,930, respectively
    
    
    (60
    )
    
    
    3,366Gain on sale of discontinued operations, net of taxes of $20 and $138,471
    
    
    54
    
    
    
    222,362Net income
    
    $
    21,738
    
    
    $
    241,402Basic earnings per shareContinuing operations
    
    $
    0.54
    
    
    $
    0.37Discontinued operations
    
    
    
    
    
    
    5.32Basic earnings per share
    
    
    0.54
    
    
    
    5.69Diluted earnings per shareContinuing operations
    
    $
    0.48
    
    
    $
    0.33Discontinued operations
    
    
    
    
    
    
    4.58Diluted earnings per share
    
    
    0.48
    
    
    
    4.91Dividends per share
    
    $
    0.20
    
    
    $
    0.18Weighted average shares outstandingBasic
    
    
    40,465
    
    
    
    42,443Diluted
    
    
    46,950
    
    
    
    49,316
   5




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(in thousands)
    
    2007
    
    
    2006Operating Activities:Income from continuing operations
    
    $
    21,744
    
    
    $
    15,674Adjustments to derive cash flows from continuing operating activities:Depreciation
    
    
    1,556
    
    
    
    1,806Amortization
    
    
    849
    
    
    
    563Deferred income taxes
    
    
    1,452
    
    
    
    4,342Non-cash compensation
    
    
    3,242
    
    
    
    2,290Tax benefit from exercise of stock options
    
    
    231
    
    
    
    981Excess tax benefits from equity compensation
    
    
    (134
    )
    
    
    (280
    )Loss on sale of assets
    
    
    
    
    
    
    3Loss (gain) on long-term marketable securities and investment write-downs, net
    
    
    (40
    )
    
    
    52Cash provided by (used in) changes in operating assets and liabilities:Accounts receivable
    
    
    (5,908
    )
    
    
    (2,425
    )Inventories
    
    
    1,443
    
    
    
    1,730Other current assets
    
    
    6
    
    
    
    (11,000
    )Accounts payable and accrued liabilities
    
    
    (58
    )
    
    
    1,992Income taxes payable
    
    
    
    
    
    
    (3,772
    )Net cash provided by continuing operating activities
    
    
    24,383
    
    
    
    11,956Net cash (used) provided by discontinued operating activities
    
    
    (6
    )
    
    
    2,283Net cash provided by operating activities
    
    
    24,377
    
    
    
    14,239Investing Activities:Purchases of property and equipment
    
    
    (3,717
    )
    
    
    (1,289
    )Purchases of intangibles
    
    
    
    
    
    
    (21
    )Purchases of marketable securities
    
    
    (5,711
    )
    
    
    (15,516
    )Sales of marketable securities
    
    
    3,403
    
    
    
    13,285Proceeds from the sale of the urology business
    
    
    
    
    
    
    458,066Other, net
    
    
    
    
    
    
    3Net cash provided by (used for) continuing investing activities
    
    
    (6,025
    )
    
    
    454,528Net cash used for discontinued investing activities
    
    
    
    
    
    
    (50
    )Net cash provided by (used for) investing activities
    
    
    (6,025
    )
    
    
    454,478Financing Activities:Repurchase of common stock
    
    
    (210,496
    )
    
    
    (84,000
    )Proceeds from exercise of stock options and ESPP
    
    
    1,170
    
    
    
    2,779Excess tax benefits from equity compensation
    
    
    134
    
    
    
    280Dividends paid
    
    
    (8,480
    )
    
    
    (7,774
    )Repayments under line of credit agreements
    
    
    
    
    
    
    (4,500
    )Net cash used for continuing financing activities
    
    
    (217,672
    )
    
    
    (93,215
    )Net cash used for financing activities
    
    
    (217,672
    )
    
    
    (93,215
    )Effect of currency exchange rates of continuing operations
    
    
    544
    
    
    
    (77
    )Effect of currency exchange rates of discontinued operations
    
    
    
    
    
    
    (120
    )(Decrease) increase in cash and cash equivalents
    
    
    (198,776
    )
    
    
    373,305Cash and cash equivalents at beginning of year
    
    
    371,525
    
    
    
    98,713Cash and cash equivalents at end of period
    
    $
    172,749
    
    
    $
    474,018
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MENTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
 Note A  Business Activity
  Note B  Summary of Significant Accounting Policies
   Basis of Presentation
  Use of Estimates
  Revenue Recognition
   7




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Warranty Reserves
  Product Liability Reserves
  Employee Stock-Based Payments
    8




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Effects of Recent Accounting Pronouncements
       9




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Note C  Interim Reporting
 st
 Fiscal 2008
    
    Fiscal 2007First Quarter
    
    June 29, 2007
    
    June 30, 2006Second Quarter
    
    September 28, 2007
    
    September 29, 2006Third Quarter
    
    December 28, 2007
    
    December 29, 2006
    Note D  Cash Equivalents, Marketable Securities, and Long-Term Marketable Securities and Investments
    10




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Gross
    
    
    Gross
    
    
    EstimatedAdjusted
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueCash balances
    
    $
    123,354
    
    
    $
    
    
    
    $
    
    
    
    $
    123,354Money market funds
    
    
    49,395
    
    
    
    
    
    
    
    
    
    
    
    49,395U.S. Government and agency obligations
    
    
    24,914
    
    
    
    7
    
    
    
    (24
    )
    
    
    24,897State and Municipal agency obligations
    
    
    93,233
    
    
    
    1
    
    
    
    (1
    )
    
    
    93,233Corporate debt securities
    
    
    282
    
    
    
    
    
    
    
    
    
    
    
    282Total available-for-sale investments
    
    $
    291,178
    
    
    $
    8
    
    
    $
    (25
    )
    
    $
    291,161Included in cash and cash equivalents
    
    $
    172,749
    
    
    $
    
    
    
    $
    
    
    
    $
    172,749Included in current marketable securities
    
    
    118,429
    
    
    
    8
    
    
    
    (25
    )
    
    
    118,412Total available-for-sale investments
    
    $
    291,178
    
    
    $
    8
    
    
    $
    (25
    )
    
    $
    291,161
  Gross
    
    
    Gross
    
    
    EstimatedAdjusted
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueCash balances
    
    $
    146,552
    
    
    $
    
    
    
    $
    
    
    
    $
    146,552Money market funds
    
    
    224,973
    
    
    
    
    
    
    
    
    
    
    
    224,973U.S. Government and agency obligations
    
    
    23,923
    
    
    
    34
    
    
    
    (3
    )
    
    
    23,954State and Municipal agency obligations
    
    
    92,261
    
    
    
    1
    
    
    
    (1
    )
    
    
    92,261Total available-for-sale investments
    
    $
    487,709
    
    
    $
    35
    
    
    $
    (4
    )
    
    $
    487,740Included in cash and cash equivalents
    
    $
    371,525
    
    
    $
    
    
    
    $
    
    
    
    $
    371,525Included in current marketable securities
    
    
    116,184
    
    
    
    35
    
    
    
    (4
    )
    
    
    116,215Total available-for-sale investments
    
    $
    487,709
    
    
    $
    35
    
    
    $
    (4
    )
    
    $
    487,740
  Fair Values of Financial Instruments
  Note E  Inventories
   11




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(in thousands)
    
    June 30
    
    
    March 31Raw materials
    
    $
    5,654
    
    
    $
    5,924Work in process
    
    
    5,298
    
    
    
    4,961Finished goods on consignment
    
    
    14,178
    
    
    
    13,402Finished goods
    
    
    11,946
    
    
    
    13,786$
    37,076
    
    
    $
    38,073
 Note F  Property and Equipment
   (in thousands)
    
    June 30
    
    
    March 31Land
    
    $
    55
    
    
    $
    55Buildings
    
    
    10,925
    
    
    
    10,853Leasehold improvements
    
    
    23,164
    
    
    
    23,099Furniture, fixtures and equipment
    
    
    59,930
    
    
    
    59,708Construction in progress
    
    
    7,819
    
    
    
    4,217101,893
    
    
    
    97,932Less accumulated depreciation and amortization
    
    
    (64,920
    )
    
    
    (63,249
    )$
    36,973
    
    
    $
    34,683
 Note G  Product Warranties
   12




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Three Months EndedJune 30,(in thousands)
    
    2007
    
    
    2006Beginning warranty reserves
    
    $
    14,308
    
    
    $
    13,603Costs of warranty claims
    
    
    (673
    )
    
    
    (946
    )Accruals for product warranties
    
    
    1,230
    
    
    
    1,495Adjustments made to accruals related to pre-existing warranties
    
    
    (2,914
    )
    
    
    Ending warranty reserves
    
    $
    11,951
    
    
    $
    14,152
  Note H  Comprehensive Income
   Three Months EndedJune 30,(in thousands)
    
    2007
    
    
    2006Net income
    
    $
    21,738
    
    
    $
    241,402Foreign currency translation adjustment
    
    
    1,674
    
    
    
    (8,766
    )Unrealized (gains) losses on marketable
securities and investment activities, net
    
    
    (40
    )
    
    
    52Comprehensive income
    
    $
    23,372
    
    
    $
    232,688
 Note I  Income Taxes
    13




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Note J  Earnings per Share
  Three Months EndedJune 30,(in thousands)
    
    2007
    
    
    2006Net income from continuing operations: as reported
    
    $
    21,744
    
    
    $
    15,674Add back after tax interest expense on convertible notes
    
    
    802
    
    
    
    802Net income from continuing operations for numerator of
diluted earnings per share
    
    $
    22,546
    
    
    $
    16,476
 Three Months EndedJune 30,(in thousands)
    
    2007
    
    
    2006Net income from discontinued operations
    
    $
    (6
    )
    
    $
    225,728Net income: as reported
    
    $
    21,738
    
    
    $
    241,402Add back after tax interest expense on convertible notes
    
    
    802
    
    
    
    802Net income from continuing operations for numerator of
diluted earnings per share
    
    $
    22,540
    
    
    $
    242,204
 Three Months EndedJune 30,(in thousands, except per share data)
    
    2007
    
    
    2006Weighted average outstanding shares: basic
    
    
    40,465
    
    
    
    42,443Restricted grants
    
    
    285
    
    
    
    299Shares issuable through exercise of stock options
    
    
    678
    
    
    
    1,100Shares issuable through convertible notes
    
    
    5,165
    
    
    
    5,147Shares issuable through warrants
    
    
    357
    
    
    
    327Weighted average outstanding shares: diluted
    
    
    46,950
    
    
    
    49,316Basic earnings per shareContinuing operations
    
    $
    0.54
    
    
    $
    0.37Discontinued operations
    
    $
    
    
    
    $
    5.32Basic earnings per share
    
    $
    0.54
    
    
    $
    5.69Diluted earnings per shareContinuing operations
    
    $
    0.48
    
    
    $
    0.33Discontinued operations
    
    $
    
    
    
    $
    4.58Diluted earnings per share
    
    $
    0.48
    
    
    $
    4.91
  14




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Employee stock options, restricted shares and performance stock units
  Convertible subordinated notes and warrants
    Note K  Stock Options, Restricted Stock and Employee Stock Purchase Plan
 Employee Stock Purchase Plan
    15




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The Companys Long-Term Incentive Plans
        16




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Three Months EndedJune 30,(in thousands)
    
    2007
    
    
    2006Stock options
    
    $
    962
    
    
    $
    1,465Restricted stock
    
    
    1,698
    
    
    
    763Performance units
    
    
    582
    
    
    
    62Total stock-based compensation expense, pre-tax
    
    
    3,242
    
    
    
    2,290Tax benefit from stock-based compensation expense
    
    
    (1,103
    )
    
    
    (391
    )Total stock-based compensation expense, net of tax
    
    $
    2,139
    
    
    $
    1,899
   Weighted-Weighted-
    
    
    averageaverage
    
    
    remaining
    
    
    Aggregateexercise
    
    
    contractual
    
    
    intrinsic(in thousands, except per share amounts and years)
    
    Options
    
    
    price
    
    
    life (Yrs)
    
    
    valueBalance outstanding at March 31, 2007
    
    
    2,261
    
    
    $
    28.13Granted
    
    
    
    
    
    
    Exercised
    
    
    139
    
    
    
    14.48Forfeited/expired
    
    
    25
    
    
    
    33.14Balance outstanding at June 30, 2007
    
    
    2,097
    
    
    $
    28.97
    
    
    
    6.55
    
    
    $
    26,195Exercisable at June 30, 2007
    
    
    1,415
    
    
    $
    23.83
    
    
    
    5.77
    
    
    $
    23,878
   June 30,2006Risk-free interest rate
    
    
    5.1
    %Expected life (in years)
    
    
    5.7Expected volatility
    
    
    0.35Expected dividend yield
    
    
    1.6
    %
  17




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Weighted-averageNonvested shares (in thousands, except per share amounts)
    
    Shares
    
    
    grant date fair valueNonvested at March 31, 2007
    
    
    346
    
    
    $
    47.71Granted
    
    
    
    
    
    
    Restrictions lapsed
    
    
    (30
    )
    
    
    43.28Forfeited
    
    
    (5
    )
    
    
    41.22Nonvested at June 30, 2007
    
    
    311
    
    
    $
    48.23
  Performance Award Program
     Fair marketvalue at dateNonvested performance stock units (in thousands)
    
    Shares
    
    
    of grantNonvested at March 31, 2007
    
    
    307
    
    
    $
    6,520Forfeited
    
    
    
    
    
    
    (12
    )Nonvested at June 30, 2007
    
    
    307
    
    
    $
    6,508
 Note L  Share Repurchase Program
   18




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Note M  Long-Term Debt
 3 4
  
    
    during any fiscal quarter prior to January 1, 2019, if the closing price of the
Companys common stock for at least 20 trading days in the 30 consecutive trading day
period ending on the first trading day of such fiscal quarter is more than 120% of the
conversion price per share of the Companys common stock on such trading day;
  19




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
    
    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.
       20




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Note N  Short-Term Bank Borrowings
 Credit Agreement
        21




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Loan and Overdraft Facility
      
   
  Note O  Related Party Transactions
  Note P  Discontinued Operations
   22




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Note Q  Postretirement Benefit Plan
  Note R  Contingencies
     23




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Note S  Subsequent Events
 Perouse Acquisition
   
 Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
 Cautionary Statement:
 The following discussion and analysis should be read in conjunction with our Unaudited Consolidated
Financial Statements and related Notes thereto contained elsewhere in this Report. The information
contained in this Quarterly Report on Form 10-Q is not a complete description of our business or
the risks associated with an investment in our securities. We urge you to carefully review and
consider the various disclosures made by us in this Report and in our other reports filed with the
Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year
ended March 31, 2007, and subsequent reports on Form 8-K , which discuss our business in greater
detail.
 The section entitled Risk Factors set forth in Item 1A under Part II  Other Information, and
similar discussions in our other SEC filings, discuss some of the important risk factors that may
affect our business, results of operations and financial condition. These risks, in addition to
the other information in this Report and in our other filings with the SEC, should be carefully
considered before deciding to purchase, hold or sell our securities.
 Various statements in this Report, in future filings by us with the SEC, in our press releases and
in our oral statements made by or with the approval of authorized personnel, constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements are based on current expectations and are indicated by words or
phrases such as anticipate, estimate, expect, intend, project, plan, believe, will,
seek, and similar words or phrases and involve known and unknown risks, uncertainties and other
factors which may cause actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by such forward-looking
statements. Some of the factors that could affect our financial performance or cause actual
results to differ from our estimates in, or underlying, such forward-looking statements are set
forth in Part II under Item 1A -Risk Factors or elsewhere in this Report. Forward-looking
statements include statements regarding, among other things:
 
    
    Our anticipated growth strategies;
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
    
    Our intention to introduce or seek approval for new products;
    
    Our ability to continue to meet United States Food and Drug Administration (FDA) and
other regulatory requirements;
    
    Our anticipated outcomes of litigation and regulatory reviews; and
    
    Our ability to replace sources of supply without disruption and regulatory delay.
 These forward-looking statements are based on our expectations and are subject to a number of risks
and uncertainties, many of which are beyond our control. Actual results could differ materially
from these forward-looking statements as a result of the facts described in Part II under Item 1A
- Risk Factors or elsewhere including, among others, problems with suppliers, changes in the
competitive marketplace, significant product liability or other claims, product recalls,
difficulties with new product development, the introduction of new products by our competitors,
changes in the economy, FDA or other regulatory delay in approval or rejection of new or existing
products, changes in Medicare, Medicaid or third-party reimbursement policies, changes in
government regulations, use of hazardous or environmentally sensitive materials, inability to
implement new information technology systems, inability to integrate new acquisitions, and other
events. We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. In light of these risks and
uncertainties, we cannot assure you that the forward-looking information contained in this Form
10-Q will, in fact, transpire.
 Company Overview
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Urology Summary
      26




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Recent Events
    
 APPLICATION OF CRITICAL ACCOUNTING POLICIES
   Revenue Recognition
    27




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Accounts Receivable
  Inventories
  Warranty Reserves
   28




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Product Liability Reserves
  Goodwill and Intangible Asset Impairment
  Stock-Based Compensation Expense
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RESULTS OF OPERATIONS
  Three Months EndedJune 30,2007
    
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    22.2
    
    
    
    27.8Gross profit
    
    
    77.8
    
    
    
    72.2Selling, general and administrative expense
    
    
    37.7
    
    
    
    37.4Research and development expense
    
    
    10.8
    
    
    
    9.9Operating income
    
    
    29.3
    
    
    
    24.9Interest expense
    
    
    (1.5
    )
    
    
    (2.1
    )Interest income
    
    
    5.0
    
    
    
    3.9Other income (expense), net
    
    
    (0.3
    )
    
    
    0.7Income before income taxes
    
    
    32.5
    
    
    
    27.4Income taxes
    
    
    9.7
    
    
    
    7.7Net income from continuing operations
    
    
    22.8
    
    
    
    19.7Net income (loss) from discontinued operations
    
    
    (0.1
    )
    
    
    4.2Gain on sale of discontinued operations
    
    
    0.1
    
    
    
    279.9Net income
    
    
    22.8
    %
    
    
    303.8
    %
 For the three-month period ended June 30, 2007 compared to the three-month period ended June 30, 2006
 Net Sales
   Ô
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Cost of Sales and Gross Profit
  Selling, General and Administrative
  Research and Development
  Interest and Other Income and Expense
 3 4
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Income Taxes
  Income
and Earnings per Share from Continuing Operations
  Income from Discontinued Operations, Net of Income Taxes
  Gain on Sale of Discontinued Operations, Net of Income Taxes
  FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
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June 30,
    
    
    March 31,(in thousands)
    
    2007
    
    
    2007Cash and cash equivalents
    
    $
    172,749
    
    
    $
    371,525Marketable debt securities
    
    
    118,412
    
    
    
    116,215Total cash, cash equivalents and marketable debt securities
    
    $
    291,161
    
    
    $
    487,740Percentage of total assets
    
    
    56
    %
    
    
    69
    %
 Cash Flow Changes
  Three Months EndedJune 30,(in thousands)
    
    2007
    
    
    2006Net cash provided by continuing operating activities
    
    $
    24,383
    
    
    $
    11,956Net cash provided by (used for) continuing investing activities
    
    
    (6,025
    )
    
    
    454,528Net cash used for continuing financing activities
    
    
    (217,672
    )
    
    
    (93,215
    )Net cash (used) provided by discontinued operations
    
    
    (6
    )
    
    
    2,113Effect of currency exchange rates on cash and cash equivalents
    
    
    544
    
    
    
    (77
    )Increase (decrease) in cash and cash equivalents
    
    $
    (198,776
    )
    
    $
    373,305
 Cash Provided by Operating Activities of Continuing Operations
  Cash Provided by (Used for) Investing Activities of Continuing Operations
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Cash (Used) Provided by Discontinued Operations
  Cash Used for Financing Activities of Continuing Operations
          34




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Subsequent Event
 Perouse Acquisition
    Financing Arrangements
 Senior Credit Facility
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Other Financing
      
   
   36




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Convertible Subordinated Notes
 3 4
    
 Item 3.  Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4.  Controls and Procedures
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PART II  OTHER INFORMATION
 
 Item 1.  Legal Proceedings
  
 Item 1A.  Risk Factors
  The FDA approval of our MemoryGel breast implants in the U.S. is conditioned on our compliance
with several significant post-approval conditions, including conducting a large scale, 10-year
study of patients who receive the implants. These conditions may adversely affect the market
acceptance and usage rates of our MemoryGel implants, may impact our ability to compete, and may
cause us to incur significant unanticipated expenses. Our failure to comply with these conditions
in a timely manner may cause delay in market acceptance or result in our inability to continue to
sell our MemoryGel implants in the U.S.
 Ô
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®
 Significant product liability claims or product recalls may force us to pay substantial damage
awards and other expenses that could exceed our accruals and insurance coverages.
    We are subject to substantial
government regulation, which could have a material adverse effect on
our business. Any delay or failure to gain regulatory approval for
our products, or the ability of our competitors to get new products,
which compete with our existing products, approved before us, could
also materially adversely affect our business.
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 
     If we are unable to continue to develop and commercialize new technologies and products, we may
experience a decrease in demand for our products, or our products could become obsolete.
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If we are unable to compete effectively with existing or new competitors, we could experience price
reductions, reduced demand for our products, reduced margins and loss of market share, and our
business, results of operations, and financial condition would be adversely affected.
   
    
    developing and bringing new products to market before others or providing
benefits superior to those of existing products;
    
    developing new technologies to improve existing products;
    
    developing new products at a lower cost to provide the same benefits as
existing products at the same or lower price;
    
    creating or entering new markets with existing products;
    
    increasing or improving service-related programs; and
    
    advertising in a manner that creates additional awareness and demand.
   If we suffer negative publicity concerning the safety of our products, our sales may be harmed and
we may be forced to withdraw products.
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If changes in the economy and consumer spending reduce consumer demand for our products, our sales
and profitability could suffer.
  If we are unable to implement new information technology systems or upgrade existing systems, our
ability to manufacture and sell products, maintain regulatory compliance, and manage and report our
business activities may be impaired, delayed, or diminished, which would cause substantial business
interruption and loss of sales, customers, and profits.
  If we are unable to acquire companies, businesses or technologies as part of our growth strategy or
to successfully integrate past acquisitions, our growth, sales, and profitability could suffer.
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We agreed to indemnify Coloplast against specified losses in connection with Coloplasts purchase
of our Urology Business, and any demands for indemnification may result in expenses we do not
anticipate and distract the attention of our management from our continuing businesses.
  We may not realize some of the benefits of the Coloplast transaction.
  We depend upon our key personnel and our ability to attract, train, and retain employees.
  State legislatures and taxing authorities may create new laws or change their interpretation of
existing state and local tax laws that may affect future product demand or create unforeseen tax
liabilities.
  If our intellectual property rights do not adequately protect our products or technologies, others
could compete against us more directly, which would hurt our profitability.
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If third parties claim we are infringing their intellectual property rights, we could suffer
significant litigation, indemnification, or licensing expenses or be prevented from marketing our
products.
  We depend on the continued use of our manufacturing plants and on single and sole source suppliers
for certain raw materials and licensed or manufactured products, and the loss of, or disruption to,
any plant or supplier could adversely affect our ability to manufacture or sell many of our
products.
  
 Our international business exposes us to a number of risks.
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
    
    foreign government regulation of medical products;
    
    product liability, intellectual property and other claims;
    
    new U.S. export or local market import license requirements;
    
    political or economic instability in our target markets;
    
    trade restrictions;
    
    changes in tax laws and tariffs;
    
    managing foreign distributors and manufacturers;
    
    managing foreign branch offices and staffing; and
    
    competition.
 Health care reimbursement or reform legislation could materially affect our business.
  If our use of hazardous materials results in contamination or injury, we could suffer significant
financial loss.
  Clostridium botulinum
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If our shareholders approve a proposal to amend our Restated Articles of Incorporation at the
Annual Meeting to be held on September 17, 2007, our Board would have the authority to issue blank
check preferred stock. The issuance of blank check preferred stock could adversely affect the
market price and the rights and powers, including voting rights, of our common stock, and decrease
the amount of earnings and assets allocable to or available for distribution to holders of our
common stock.
    
    
    increase the total number of authorized shares of our capital stock to 175,000,000 shares; and
    
    create a class of blank check preferred stock, par value $0.01 per share,
consisting of 25,000,000 shares.
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Changes in financial accounting standards may cause adverse unexpected revenue or expense
fluctuations and affect our reported results of operations.
  Our operating results may fluctuate substantially, and could precipitate unexpected movement in the
price of our common stock and convertible notes.
 3 4
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Hedging transactions and other transactions may affect the value of the notes.
 3 4
 
 Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities
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ISSUER PURCHASES OF EQUITY SECURITIES(1) (2) (3)Total Number
    
    
    Maximum Numberof Shares
    
    
    of Shares that MayTotal Number
    
    
    
    
    
    
    Purchased as
    
    
    Yet Be Purchased(in thousands
    
    of Shares
    
    
    Average Price
    
    
    Part of Publicly
    
    
    Under the Plansexcept per share amounts)
    
    Purchased
    
    
    Paid per Share
    
    
    Announced Plans
    
    
    or ProgramsApril 1  April 30, 2007
    
    
    573
    
    
    $
    40.24
    
    
    
    573
    
    
    
    4,237May 1  May 31, 2007
    
    
    2,367
    
    
    
    40.37
    
    
    
    2,367
    
    
    
    1,870June 1  June 30, 2007
    
    
    2,238
    (4)
    
    
    41.16
    
    
    
    2,238
    
    
    
    4,632Total
    
    
    5,178
    
    
    $
    40.69
    
    
    
    5,178
 (1)
    
    During the period, 5.2 million shares were purchased under the 10b5 Plan.(2)
    
    In the first quarter of fiscal 1996, our Board of Directors authorized an ongoing stock repurchase program. The initial authorization was for the repurchase of up to one million
shares. Subsequently, the Board of Directors has authorized the repurchase of an additional 31.0 million shares, including 5.0 million, 1.7 million and 5.0 million shares in June 2007,
June 2006 and March 2006, respectively. These share amounts have been adjusted for the two-for-one stock split affected December 2002.(3)
    
    We have not set a date for the stock repurchase program to expire.(4)
    
    Balance includes approximately five thousand shares repurchased for payment of withholding taxes upon the vesting of certain restricted stock grants.
 
 Item 3.  Defaults Upon Senior Securities
  
 Item 4.  Submission of Matters to a Vote of Security Holders
  
 Item 5.  Other Information
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Item 6. Exhibits
 2.1
    
    Revised Binding Offer Letter from Coloplast A/S regarding purchase of Mentor Urology Business dated
May 5, 2006 Including Appendix A  Incorporated by reference to Exhibit 2.2 of the Registrants
Annual Report on Form 10-K for the year ended March 31, 2006.2.2
    
    Purchase Agreement between Coloplast A/S and Mentor Corporation dated May 17, 2006  Incorporated by
reference to Exhibit 2.3 of the Registrants Annual Report on Form 10-K for the year ended March 31,
2006.2.3
    
    Listing Schedules for Purchase Agreement between Coloplast A/S and Mentor Corporation dated May 17,
2006  Incorporated by reference to Exhibit 2.4 of the Registrants Annual Report on Form 10-K for
the year ended March 31, 2006.2.4
    
    Side Letter Agreement Between Coloplast A/S and Mentor Corporation dated June 2, 2006  Incorporated
by reference to Exhibit 2.5 of the Registrants Annual Report on Form 10-K for the year ended March
31, 2006.3.1
    
    Composite Restated Articles of Incorporation of the Company dated December 12, 2002  Incorporated by
reference to Exhibit 3.1 of the Registrants Annual Report on Form 10-K for the year ended March 31,
2003.3.2
    
    Amended and Restated Bylaws of Mentor Corporation dated September 14, 2005  Incorporated by
reference to Exhibit 3.2 of the Registrants Quarterly Report on Form 10-Q for the quarter ended
September 30, 2005.4.1
    
    Indenture 2 3/4 % Convertible Subordinated Notes Due 2024, dated December 22, 2003  Incorporated by
reference to Exhibit 4.1 of the Registrants Quarterly Report on Form 10-Q for the quarter ended
December 31, 2003.10.1*
    
    Amendment to Employment Arrangement with Edward S. Northup dated July 19, 2007.31.1
    
    Certification of Principal Executive Officer Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002.32.1
    
    CEO Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of The
Sarbanes-Oxley Act of 2002.32.2
    
    CFO Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of The
Sarbanes-Oxley Act of 2002.
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SIGNATURES
  MENTOR CORPORATION
  MENTOR CORPORATIONDATE: August 7, 2007
    /s/JOSHUA H. LEVINEJoshua H. LevinePresident and Chief Executive Officer DATE: August 7, 2007
    /s/LOREN L. MCFARLANDLoren L. McFarlandVice President, Chief Financial Officer and Treasurer  51




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EXHIBIT INDEX
 ExhibitNumber
    
    Description10.1*
    
    Amendment to Employment Arrangement with Edward S. Northup dated July 19, 2007.31.1
    
    Certification of Principal Executive Officer Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002.32.1
    
    CEO Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of The
Sarbanes-Oxley Act of 2002.32.2
    
    CFO Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of The
Sarbanes-Oxley Act of 2002.
   52