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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the fiscal year ended March 31, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 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
  Title of Each Class:
    
    Name of Each Exchange on Which RegisteredCommon Shares, par value $0.10
per share
    
    New York Stock Exchange
  þ No
o
 o No þ
 þ o
 þ
  þ o o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



MENTOR CORPORATION
TABLE OF CONTENTS
 PAGEITEM
    
    PART I1.
    
    BusinessGeneral
    
    
    3Principal Products and Markets
    
    
    4Sales and Marketing
    
    
    6International Operations
    
    
    6Competition
    
    
    6Government Regulations
    
    
    7Medicare, Medicaid and Third Party Reimbursement
    
    
    10Product Development
    
    
    13Patents and Licenses
    
    
    13Raw Material Supply and Single Source Suppliers
    
    
    13Seasonality
    
    
    14Working Capital
    
    
    14Employees
    
    
    14Discontinued Operations
    
    
    14Executive Officers of the Registrant
    
    
    16Available Information
    
    
    171A.
    
    Risk Factors
    
    
    171B.
    
    Unresolved Staff Comments
    
    
    262.
    
    Properties
    
    
    273.
    
    Legal Proceedings
    
    
    284.
    
    Submission of Matters to a Vote of Security Holders
    
    
    28PART II5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    286.
    
    Selected Financial Data
    
    
    307.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    317A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    458.
    
    Financial Statements and Supplementary Data
    
    
    469.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    469A.
    
    Controls and Procedures
    
    
    479B.
    
    Other Information
    
    
    50PART III10.
    
    Directors, Executive Officers, and Corporate Governance
    
    
    5011.
    
    Executive Compensation
    
    
    5012.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    5013.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    5014.
    
    Principal Accountant Fees and Services
    
    
    50PART IV15.
    
    Exhibits and Financial Statement Schedules
    
    
    51Report of Independent Registered Public Accounting Firm on the Financial Statements
    
    
    52Consolidated Financial Statements
    
    
    53Signatures
    
    
    85Exhibit Index
    
    
    86Exhibit 21Exhibit 23Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
    2




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PART I
 FORWARD-LOOKING STATEMENTS
  §
    
    Our anticipated growth strategies;§
    
    Our intention to introduce or seek approval for new products;§
    
    Our ability to continue to meet United States Food and Drug Administration (FDA) and
other regulatory requirements;§
    
    Our anticipated outcomes of litigation and regulatory reviews; and§
    
    Our ability to replace sources of supply without disruption and regulatory delay.
  
 ITEM 1. BUSINESS.
  
 General
   3




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Principal Products and Markets
  Year Ended March 31,2007
    
    
    2006
    
    
    2005(in thousands)
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Breast implants
    
    $
    262,556
    
    
    
    87.0
    %
    
    $
    233,189
    
    
    
    87.0
    %
    
    $
    217,420
    
    
    
    86.4
    %Body contouring
    
    
    16,734
    
    
    
    5.5
    %
    
    
    17,782
    
    
    
    6.6
    %
    
    
    18,609
    
    
    
    7.4
    %Other aesthetics, including non-
surgical facial products
    
    
    22,684
    
    
    
    7.5
    %
    
    
    17,301
    
    
    
    6.4
    %
    
    
    15,697
    
    
    
    6.2
    %Total
    
    $
    301,974
    
    
    
    100.0
    %
    
    $
    268,272
    
    
    
    100.0
    %
    
    $
    251,726
    
    
    
    100.0
    %
 ®
    §
    
    On November 17, 2006, we announced that the FDA approved for sale our MemoryGelÔ
silicone gel-filled breast implants with post-approval conditions. The post-approval
conditions and other requirements associated with the FDAs approval include the following:
continuation of the Mentor Core Study through 10 years; physician training to access the
device; a large post-approval study for 10 years; completion of additional device failure
studies; focus group studies with patients on the format and content of the approved
labeling; utilization of a formal informed decision process with patient labeling;
cessation of new enrollment in the Mentor Adjunct Study; and implementation of device
tracking.
 §
    
    On May 2, 2007, we announced that the FDA approved an amendment to our MemoryGelÔ
silicone gel-filled breast implant post-approval study (PAS) protocol from a mandatory to
a voluntary patient enrollment design.
  4




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§
    
    On October 20, 2006, we received medical device licenses with terms and conditions from the
Therapeutic Products Directorate (TPD) of Health Canada to begin marketing and selling our
round and Contour Profile® silicone gel-filled breast implants in Canada for use
in augmentation, reconstruction and revision procedures.
 §
    
    On April 3, 2006, we submitted a pre-market approval application to the FDA for our
Contour Profile® silicone gel-filled breast implant products
(CPG®). The clinical portion of this application was submitted on September
30, 2006, and the application is currently under review. On September 29, 2006, we
submitted our completed modular PMA for CPG. On November 17, 2006, the FDA notified us
that they had accepted our application for filing.
  ® 
    
 
    5




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Sales and Marketing
   
 International Operations
    
 Competition
   6




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Government Regulations
 General
     U.S. Regulation of Medical Devices
 
  7




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
 ® ®
 Regulation of Biologics
 Clostridium botulinum
 Additional Regulations
     8




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Environmental Regulation
    9




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Medicare, Medicaid and Third-Party Reimbursement
   Medicare Overview
     10




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Medicare  Outpatient Hospital Setting
     Medicaid
  Private Payors
  Health Care Fraud and Abuse Laws and Regulations
   11




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Federal and State Anti-Kickback Laws and Safe Harbor Provisions
   per se
 Federal False Claims Act
     12




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Product Development
  
 Patents and Licenses
   
 Raw Material Supply and Single Source Suppliers
     13




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
 
 Seasonality
  
 Working Capital
   
 Employees
  
 Discontinued Operations
   14




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15




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Executive Officers of the Registrant
  Name
    
    Age
    
    PositionJoshua H. Levine
    
    48
    
    President and Chief Executive OfficerEdward S. Northup
    
    58
    
    Vice President, Chief Operating OfficerLoren L. McFarland
    
    48
    
    Vice President, Chief Financial Officer and TreasurerJoseph A. Newcomb
    
    56
    
    Vice President, General Counsel and SecretaryCathy S. Ullery
    
    54
    
    Vice President, Human Resources
 Joshua H. Levine
 Edward S. Northup
 Loren L. McFarland
 Joseph A. Newcomb
  16




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Cathy S. Ullery
 
 Available Information
   Forward-Looking Information Under the Private Securities Litigation Reform Action of 1995
  
 ITEM 1A. RISK FACTORS.
   17




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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
  ®
 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.
    18




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We are subject to substantial government regulation, which could have a material adverse effect on
our business.
   
  19




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If we are unable to continue to develop and commercialize new technologies and products, we may
experience a decrease in demand for our products, or our products could become obsolete.
   
 If we are unable to compete effectively with existing or new competitors, we could experience price
reductions, reduced demand for our products, reduced margins and loss of market share, and our
business, results of operations, and financial condition would be adversely affected.
   
    
    developing and bringing new products to market before others or providing
benefits superior to those of existing products;
 
    
    developing new technologies to improve existing products;
  20




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
    
    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.
  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.
   21




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If we are unable to acquire companies, businesses or technologies as part of our growth strategy or
to successfully integrate past acquisitions, our growth, sales, and profitability could suffer.
  We 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.
   22




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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.
   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.
   23




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 
 Our international business exposes us to a number of risks.
  
    
    foreign government regulation of medical products;
    
    product liability, intellectual property and other claims;
    
    new U.S. export or local market import license requirements;
    
    political or economic instability in our target markets;
    
    trade restrictions;
    
    changes in tax laws and tariffs;
    
    managing foreign distributors and manufacturers;
    
    managing foreign branch offices and staffing; and
    
    competition.
 Health care reimbursement or reform legislation could materially affect our business.
   24




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If our use of hazardous materials results in contamination or injury, we could suffer significant
financial loss.
  Clostridium botulinum
   Future changes in financial accounting standards may cause adverse unexpected revenue or expense
fluctuations and affect our reported results of operations.
  Hedging transactions and other transactions may affect the value of the notes.
 3 4
  25




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Litigation may harm our business or otherwise distract our management.
  Our publicly filed SEC reports are reviewed by the SEC from time to time and any significant
changes required as a result of any such review may result in material liability to us and have a
material adverse impact on the trading price of our common stock.
  Our operating results may fluctuate substantially and could precipitate unexpected movement in the
price of our common stock and convertible notes.
 3 4
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS.
   26




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ITEM 2. PROPERTIES.
  Location
    
    Total Sq. Ft.
    
    
    Principal Segment and UseOwned PropertiesNetherlands
    
    
    65,000
    
    
    Manufacturing, warehousing and administrative officesMinnesota
    
    
    20,000
    
    
    Manufacturing, warehousing85,000Leased PropertiesTexas
    
    
    149,000
    
    
    Manufacturing, warehousing and administrative officesCalifornia
    
    
    127,000
    
    
    Corporate offices, research and development, and sales and marketingArizona
    
    
    32,000
    
    
    Manufacturing, warehousing and administrative officesUnited Kingdom
    
    
    23,000
    
    
    Manufacturing, warehousing and administrative officesCanada
    
    
    11,000
    
    
    Sales, warehousing and administrative officesWisconsin
    
    
    10,000
    
    
    Research and development352,000
     27




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ITEM 3. LEGAL PROCEEDINGS.
   
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
  Year Ended March 31, 2007
    
    High
    
    
    LowQuarter ended March 31, 2007
    
    $
    53.21
    
    
    $
    45.97Quarter ended December 31, 2006
    
    $
    53.67
    
    
    $
    45.03Quarter ended September 30, 2006
    
    $
    50.72
    
    
    $
    40.70Quarter ended June 30, 2006
    
    $
    44.70
    
    
    $
    38.02
 Year Ended March 31, 2006
    
    High
    
    
    LowQuarter ended March 31, 2006
    
    $
    49.20
    
    
    $
    41.60Quarter ended December 31, 2005
    
    $
    56.14
    
    
    $
    43.54Quarter ended September 30, 2005
    
    $
    55.99
    
    
    $
    41.21Quarter ended June 30, 2005
    
    $
    43.03
    
    
    $
    31.90
   28




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Dividend Policy
  Quarterly Cash Dividends DeclaredYear Ended March 31,2007
    
    
    2006
    
    
    2005First Quarter
    
    $
    0.18
    
    
    $
    0.17
    
    
    $
    0.15Second Quarter
    
    
    0.18
    
    
    
    0.18
    
    
    
    0.17Third Quarter
    
    
    0.18
    
    
    
    0.18
    
    
    
    0.17Fourth Quarter
    
    
    0.20
    
    
    
    0.18
    
    
    
    0.17Total
    
    $
    0.74
    
    
    $
    0.71
    
    
    $
    0.66
 Issuer Purchases of Equity Securities
   ISSUER PURCHASES OF EQUITY SECURITIESTotal 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 ProgramsJanuary 1  January 31, 2007
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    4,913February 1  February 28, 2007
    
    
    0.1
    
    
    
    47.45
    
    
    
    0.1
    
    
    
    4,913March 1  March 31, 2007
    
    
    103.4
    
    
    
    46.64
    
    
    
    103.4
    
    
    
    4,810Total
    
    
    103.5
    
    
    $
    46.64
    
    
    
    103.5
 (1)
    
    During the period, 103,500 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 26.0 million shares, including 1.7 million and 5.0 million shares in 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.
  29




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ITEM 6. SELECTED FINANCIAL DATA.
  Year Ended March 31,(in thousands, except per share data)
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Statement of Income Data:Net sales
    
    $
    301,974
    
    
    $
    268,272
    
    
    $
    251,726
    
    
    $
    218,437
    
    
    $
    191,404Gross profit
    
    
    223,318
    
    
    
    199,063
    
    
    
    187,150
    
    
    
    157,854
    
    
    
    137,544Operating income from continuing operations(1)
    
    
    65,629
    
    
    
    69,065
    
    
    
    65,381
    
    
    
    66,206
    
    
    
    57,506Income before income taxes -
continuing operations
    
    
    82,172
    
    
    
    67,685
    
    
    
    62,745
    
    
    
    67,251
    
    
    
    59,066Income taxes  continuing operations
    
    
    24,548
    
    
    
    19,606
    
    
    
    19,937
    
    
    
    21,479
    
    
    
    17,186Income from continuing operations
    
    
    57,624
    
    
    
    48,079
    
    
    
    42,808
    
    
    
    45,772
    
    
    
    41,880Discontinued operations, net of income tax(2)
    
    
    232,990
    
    
    
    14,278
    
    
    
    12,073
    
    
    
    9,007
    
    
    
    13,940Net income
    
    $
    290,614
    
    
    $
    62,357
    
    
    $
    54,881
    
    
    $
    54,779
    
    
    $
    55,820Basic earnings per share:Continuing operations
    
    $
    1.37
    
    
    $
    1.12
    
    
    $
    1.02
    
    
    $
    1.00
    
    
    $
    0.90Discontinued operations(2)
    
    $
    5.55
    
    
    $
    0.33
    
    
    $
    0.29
    
    
    $
    0.20
    
    
    $
    0.30Basic earnings per share
    
    $
    6.93
    
    
    $
    1.45
    
    
    $
    1.31
    
    
    $
    1.20
    
    
    $
    1.20Diluted earnings per share:Continuing operations
    
    $
    1.24
    
    
    $
    1.01
    
    
    $
    0.93
    
    
    $
    0.95
    
    
    $
    0.86Discontinued operations(2)
    
    $
    4.75
    
    
    $
    0.28
    
    
    $
    0.24
    
    
    $
    0.18
    
    
    $
    0.29Diluted earnings per share
    
    $
    5.99
    
    
    $
    1.29
    
    
    $
    1.17
    
    
    $
    1.13
    
    
    $
    1.15Dividends per common share
    
    $
    0.74
    
    
    $
    0.71
    
    
    $
    0.66
    
    
    $
    0.47
    
    
    $
    0.07Weighted average shares outstanding:Basic
    
    
    41,960
    
    
    
    42,995
    
    
    
    41,921
    
    
    
    45,543
    
    
    
    46,428Diluted
    
    
    49,092
    
    
    
    50,870
    
    
    
    49,667
    
    
    
    49,272
    (3)
    
    
    48,388Balance Sheet Data (continuing operations):Working capital(4)
    
    $
    524,649
    
    
    $
    201,625
    
    
    $
    148,434
    
    
    $
    149,981
    
    
    $
    134,863Total assets(4)
    
    
    709,768
    
    
    
    391,771
    
    
    
    311,962
    
    
    
    312,236
    
    
    
    241,480Long-term accrued liabilities, less current
portion
    
    
    12,169
    
    
    
    10,590
    
    
    
    15,385
    
    
    
    13,597
    
    
    
    10,777Convertible subordinated notes
    
    
    150,000
    
    
    
    150,000
    
    
    
    150,000
    
    
    
    150,000
    
    
    
    Shareholders equity
    
    $
    434,868
    
    
    $
    226,589
    
    
    $
    172,527
    
    
    $
    196,004
    
    
    $
    276,136
 (1)
    
    In fiscal years 2007 and 2006, we recorded charges of $11.0 million and $1.5
million related to stock compensation, respectively. In addition, we reported impairment and
restructuring charges of $2.6 million and $1.7 million in fiscal 2007 and 2005, respectively.
In fiscal 2005, we reported $8.5 million in severance costs.(2)
    
    In June 2006, we sold our surgical urology and clinical and consumer
healthcare businesses. As a result, the operations for these former businesses have been
reflected as discontinued operations for all prior periods. See Note S  Discontinued
Operations in the Notes to the Consolidated Financial Statements.(3)
    
    Per share amounts and diluted shares outstanding for fiscal 2004 have been
restated to reflect the additional shares that would be issued upon conversion of our 23/4%
convertible notes, in accordance with the adoption of Emerging Issues Task Force (EITF) Issue
No. 04-8 in the quarter ended December 2004.(4)
    
    Fiscal 2006 has been restated to conform to current year presentation.
  30




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
  OVERVIEW
        31




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Urology Summary
       32




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APPLICATION OF CRITICAL ACCOUNTING POLICIES
   Revenue Recognition
    Accounts Receivable
   33




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Inventories
  Warranty Reserves
  Product Liability Reserves
  Goodwill and Intangible Asset Impairment
   34




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Stock-Based Compensation Expense for Fiscal 2007 and Thereafter
   35




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RESULTS OF OPERATIONS
  Year Ended March 31,2007
    
    
    2006
    
    
    2005Net sales
    
    
    100
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    26.0
    %
    
    
    25.8
    %
    
    
    25.7
    %Gross profit
    
    
    74.0
    %
    
    
    74.2
    %
    
    
    74.3
    %Selling, general, and administrative
    
    
    39.8
    %
    
    
    37.7
    %
    
    
    34.3
    %Research and development
    
    
    11.6
    %
    
    
    10.8
    %
    
    
    10.0
    %Long-lived
asset impairment and restructuring charges
    
    
    0.9
    %
    
    
    
    
    
    
    1.0
    %Severance charges
    
    
    
    
    
    
    
    
    
    
    3.0
    %Operating income
    
    
    21.7
    %
    
    
    25.7
    %
    
    
    26.0
    %Interest expense
    
    
    (2.0
    )%
    
    
    (2.1
    )%
    
    
    (2.0
    )%Interest income
    
    
    7.4
    %
    
    
    1.5
    %
    
    
    0.7
    %Other income, net
    
    
    0.0
    %
    
    
    0.1
    %
    
    
    0.2
    %Income before income taxes
    
    
    27.1
    %
    
    
    25.2
    %
    
    
    24.9
    %Income taxes
    
    
    8.1
    %
    
    
    7.3
    %
    
    
    7.9
    %Net income from continuing operations
    
    
    19.0
    %
    
    
    17.9
    %
    
    
    17.0
    %Income from discontinued operations, net of tax
    
    
    0.5
    %
    
    
    5.3
    %
    
    
    4.8
    %Gain on sale of discontinued operations, net of tax
    
    
    76.7
    %
    
    
    
    
    
    
    Net income
    
    
    96.2
    %
    
    
    23.2
    %
    
    
    21.8
    %
 YEARS ENDED MARCH 31, 2007 AND 2006
 Sales
    36




---



##### Table of Contents



Cost of Sales
  Selling, General and Administrative
    Research and Development
    Long-Lived Asset Impairment Charges
   Interest and Other Income and Expense
 3 4
  37




---



##### Table of Contents



Income Taxes
  Net Income from Continuing Operations and Earnings Per Share
  Income from Discontinued Operations, Net of Income Taxes
  Gain on Sale of Discontinued Operations, Net of Income Taxes
  YEARS ENDED MARCH 31, 2006 AND 2005
 Sales
   38




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##### Table of Contents



Cost of Sales
  Selling, General and Administrative
  Research and Development
  Severance Charges
  Restructuring and Long-Lived Asset Impairment Charges
 
 Interest and Other Income and Expense
 3 4
    39




---



##### Table of Contents



Income Taxes
  Net Income from Continuing Operations and Earnings Per Share
  Income from Discontinued Operations, Net of Income Taxes
  LIQUIDITY AND CAPITAL RESOURCES
   40




---



##### Table of Contents



As of March 31,(in thousands)
    
    2007
    
    
    2006Cash and cash equivalents
    
    $
    371,525
    
    
    $
    98,713Marketable debt securities
    
    
    116,215
    
    
    
    102,241Total cash, cash equivalents and marketable debt securities
    
    $
    487,740
    
    
    $
    200,954Percentage
of total assets of continuing operations
    
    
    69
    %
    
    
    51
    %
 Cash Flow Changes
  Year Ended March 31,(in thousands)
    
    2007
    
    
    2006
    
    
    2005Net cash provided by operating activities of continuing operations
    
    $
    68,948
    
    
    $
    99,044
    
    
    $
    62,591Net cash provided by (used for) investing activities of continuing
operations
    
    
    429,696
    
    
    
    (76,052
    )
    
    
    (35,032
    )Net cash used for financing activities of continuing operations
    
    
    (104,653
    )
    
    
    (16,122
    )
    
    
    (99,894
    )Net cash provided by (used for) discontinued operations
    
    
    (121,842
    )
    
    
    15,957
    
    
    
    30,128Effect of currency exchange rates on cash and cash equivalents
    
    
    663
    
    
    
    (780
    )
    
    
    648Increase (decrease) in cash and cash equivalents
    
    $
    272,812
    
    
    $
    22,047
    
    
    $
    (41,559
    )
 Cash Provided by Operating Activities of Continuing Operations
  Cash Provided by Investing Activities of Continuing Operations
   41




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##### Table of Contents



Cash Used for Financing Activities of Continuing Operations
       Cash (Used For) Provided by Discontinued Operations
   42




---



##### Table of Contents



Financing Arrangements
 Senior Credit Facility
      Other Financing
      
  43




---



##### Table of Contents




  Convertible Subordinated Notes
 3 4
   44




---



##### Table of Contents



Contractual Obligations and Commitments
  Payments Due by PeriodLess than
    
    
    1-3
    
    
    4-5
    
    
    More than(in thousands)
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsContractual ObligationsConvertible notes
    
    $
    150,000
    
    
    $
    
    
    
    $
    150,000
    
    
    $
    
    
    
    $
    Milestone commitments
    
    
    27,760
    
    
    
    12,760
    
    
    
    14,500
    
    
    
    500
    
    
    
    Operating lease obligations
    
    
    27,529
    
    
    
    4,451
    
    
    
    9,149
    
    
    
    8,020
    
    
    
    5,909Purchase obligations
    
    
    22,779
    
    
    
    16,279
    
    
    
    6,500
    
    
    
    
    
    
    
    Interest on convertible notes
    
    
    7,219
    
    
    
    4,125
    
    
    
    3,094
    
    
    
    
    
    
    
    Credit agreement (commitment fees)
    
    
    925
    
    
    
    450
    
    
    
    200
    
    
    
    100
    
    
    
    175Other long-term liabilities
    
    
    831
    
    
    
    440
    
    
    
    391
    
    
    
    
    
    
    
    Total
    
    $
    237,043
    
    
    $
    38,505
    
    
    $
    183,834
    
    
    $
    8,620
    
    
    $
    6,084
      
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
   45




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##### Table of Contents



Interest Rate Risk
  3 4
 Exchange Rate Risk
   
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
   46




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##### Table of Contents



ITEM 9A. CONTROLS AND PROCEDURES.
     47




---



##### Table of Contents



MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
     48




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 ON INTERNAL CONTROL OVER FINANCIAL REPORTING
            49




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##### Table of Contents



ITEM 9B. OTHER INFORMATION.
   
 PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
  
 ITEM 11. EXECUTIVE COMPENSATION.
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE.
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
   50




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
 Consolidated Financial Statements
 Report of Ernst & Young LLP, Independent Registered Public Accounting FirmConsolidated Balance Sheets as of March 31, 2007 and 2006Consolidated Statements of Income for the Years Ended March 31, 2007, 2006 and 2005Consolidated Statements of Changes in Shareholders Equity for the Years Ended March 31, 2007, 2006 and
2005Consolidated Statements of Cash Flows for the Years Ended March 31, 2007, 2006 and 2005Notes to Consolidated Financial Statements(a) (2)
    
    Consolidated Financial Statement SchedulesSchedule II  Valuation and Qualifying Accounts and ReservesAll other schedules are omitted because they are not required, inapplicable, or the information is
otherwise shown in the consolidated financial statements or notes thereto.(a) (3)
    
    ExhibitsThe information required by this item is incorporated by reference to the Exhibit Index in this report.
  51




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON THE FINANCIAL STATEMENTS
           52




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##### Table of Contents



MENTOR CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 March 31,(in thousands, except share data)
    
    2007
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    371,525
    
    
    $
    98,713Marketable securities
    
    
    116,215
    
    
    
    102,241Accounts receivable, net of allowance for doubtful accounts
of $4,534 in 2007 and $4,616 in 2006
    
    
    65,419
    
    
    
    58,199Inventories
    
    
    38,073
    
    
    
    35,139Deferred income taxes
    
    
    25,892
    
    
    
    21,764Prepaid income taxes
    
    
    13,495
    
    
    
    Prepaid expenses and other
    
    
    6,761
    
    
    
    5,969Current assets of discontinued operations
    
    
    
    
    
    
    96,070Total current assets
    
    
    637,380
    
    
    
    418,095Property and equipment, net
    
    
    34,683
    
    
    
    36,448Intangible assets, net
    
    
    15,963
    
    
    
    13,110Goodwill, net
    
    
    12,644
    
    
    
    11,878Other assets
    
    
    9,098
    
    
    
    8,310Non-current assets of discontinued operations
    
    
    
    
    
    
    60,264Total assets
    
    $
    709,768
    
    
    $
    548,105Liabilities and shareholders equityCurrent liabilities:Account payable and accrued liabilities
    
    $
    104,250
    
    
    $
    96,791Dividends payable
    
    
    8,481
    
    
    
    7,772Income taxes payable
    
    
    
    
    
    
    1,837Short-term bank borrowings
    
    
    
    
    
    
    14,000Current liabilities of discontinued operations
    
    
    
    
    
    
    29,971Total current liabilities
    
    
    112,731
    
    
    
    150,371Long-term accrued liabilities
    
    
    12,169
    
    
    
    10,590Convertible subordinated notes
    
    
    150,000
    
    
    
    150,000Non-current liabilities of discontinued operations
    
    
    
    
    
    
    10,555Commitments and contingenciesShareholders equity:Common Stock, $.10 par value:Authorized - 150,000,000 shares; issued and outstanding
42,400,483 shares in 2007;
43,176,495 shares in 2006;
    
    
    4,240
    
    
    
    4,318Capital in excess of par value
    
    
    
    
    
    
    36,726Accumulated other comprehensive income
    
    
    11,342
    
    
    
    16,498Retained earnings
    
    
    419,286
    
    
    
    169,047Total shareholders equity
    
    
    434,868
    
    
    
    226,589Total liabilities and shareholders equity
    
    $
    709,768
    
    
    $
    548,105
   53




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##### Table of Contents



MENTOR CORPORATION
 
 CONSOLIDATED STATEMENTS OF INCOME
 Year Ended March 31,(in thousands, except per share data)
    
    2007
    
    
    2006
    
    
    2005Net sales
    
    $
    301,974
    
    
    $
    268,272
    
    
    $
    251,726Cost of sales
    
    
    78,656
    
    
    
    69,209
    
    
    
    64,576Gross profit
    
    
    223,318
    
    
    
    199,063
    
    
    
    187,150Selling, general, and administrative
    
    
    120,080
    
    
    
    100,962
    
    
    
    86,351Research and development
    
    
    35,021
    
    
    
    29,036
    
    
    
    25,234Long-lived asset impairment and restructuring charges
    
    
    2,588
    
    
    
    
    
    
    
    1,665Severance charges
    
    
    
    
    
    
    
    
    
    
    8,519157,689
    
    
    
    129,998
    
    
    
    121,769Operating income from continuing operations
    
    
    65,629
    
    
    
    69,065
    
    
    
    65,381Interest expense
    
    
    (6,178
    )
    
    
    (5,690
    )
    
    
    (5,093
    )Interest income
    
    
    22,489
    
    
    
    4,124
    
    
    
    1,951Other income
    
    
    232
    
    
    
    186
    
    
    
    506Income from continuing operations before income taxes
    
    
    82,172
    
    
    
    67,685
    
    
    
    62,745Income taxes
    
    
    24,548
    
    
    
    19,606
    
    
    
    19,937Income from continuing operations
    
    
    57,624
    
    
    
    48,079
    
    
    
    42,808Income from discontinued operations, net of income taxes
    
    
    1,551
    
    
    
    14,278
    
    
    
    12,073Gain on sale of discontinued operations, net of tax
    
    
    231,439
    
    
    
    
    
    
    
    Net income
    
    $
    290,614
    
    
    $
    62,357
    
    
    $
    54,881Basic earnings per shareContinuing operations
    
    $
    1.37
    
    
    $
    1.12
    
    
    $
    1.02Discontinued operations
    
    $
    5.55
    
    
    $
    0.33
    
    
    $
    0.29Basic earnings per share
    
    $
    6.93
    
    
    $
    1.45
    
    
    $
    1.31Diluted earnings per shareContinuing operations
    
    $
    1.24
    
    
    $
    1.01
    
    
    $
    0.93Discontinued operations
    
    $
    4.75
    
    
    $
    0.28
    
    
    $
    0.24Diluted earnings per share
    
    $
    5.99
    
    
    $
    1.29
    
    
    $
    1.17Dividends per share
    
    $
    0.74
    
    
    $
    0.71
    
    
    $
    0.66Weighted average shares outstandingBasic
    
    
    41,960
    
    
    
    42,995
    
    
    
    41,921Diluted
    
    
    49,092
    
    
    
    50,870
    
    
    
    49,667
   54




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##### Table of Contents



MENTOR CORPORATION
 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
 AccumulatedCommon
    
    
    Common
    
    
    Capital in
    
    
    
    
    
    
    Other(in thousands,
    
    Shares
    
    
    Stock $.10
    
    
    Excess of
    
    
    Deferred
    
    
    Comprehensive
    
    
    Retainedexcept per share data)
    
    Outstanding
    
    
    Par Value
    
    
    Par Value
    
    
    Compensation
    
    
    Income
    
    
    Earnings
    
    
    TotalBalance March 31, 2004
    
    
    42,059
    
    
    $
    4,206
    
    
    $
    
    
    
    $
    
    
    
    $
    16,822
    
    
    $
    174,976
    
    
    $
    196,004Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,881
    
    
    
    54,881Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,887
    
    
    
    
    
    
    
    5,887Unrealized loss on
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (175
    )
    
    
    
    
    
    
    (175
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,593Exercise of stock options
    
    
    1,028
    
    
    
    103
    
    
    
    11,435
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,538Acceleration of options
    
    
    
    
    
    
    
    
    
    
    4,405
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,405Income tax benefit from the
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    7,184
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,184Repurchase of common
stock
    
    
    (2,341
    )
    
    
    (234
    )
    
    
    (14,605
    )
    
    
    
    
    
    
    
    
    
    
    (64,934
    )
    
    
    (79,773
    )Dividends declared
($.66 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,424
    )
    
    
    (27,424
    )Balance March 31, 2005
    
    
    40,746
    
    
    $
    4,075
    
    
    $
    8,419
    
    
    $
    
    
    
    $
    22,534
    
    
    $
    137,499
    
    
    $
    172,527Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,357
    
    
    
    62,357Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,157
    )
    
    
    
    
    
    
    (6,157
    )Change in unrealized
loss on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121
    
    
    
    
    
    
    
    121Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,321Exercise of stock options
    
    
    3,149
    
    
    
    315
    
    
    
    43,334
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,649Income tax benefit from the
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    26,267
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,267Issuance of restricted stock
    
    
    289
    
    
    
    29
    
    
    
    15,197
    
    
    
    (15,226
    )
    
    
    
    
    
    
    
    
    
    
    Forfeiture of restricted
stock
    
    
    (10
    )
    
    
    (1
    )
    
    
    (510
    )
    
    
    511
    
    
    
    
    
    
    
    
    
    
    
    Amortization of restricted
grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,471
    
    
    
    
    
    
    
    
    
    
    
    1,471Repurchase of common
stock
    
    
    (998
    )
    
    
    (100
    )
    
    
    (42,737
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,837
    )Dividends declared
($.71 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,809
    )
    
    
    (30,809
    )Balance March 31, 2006
    
    
    43,176
    
    
    $
    4,318
    
    
    $
    49,970
    
    
    $
    (13,244
    )
    
    $
    16,498
    
    
    $
    169,047
    
    
    $
    226,589
 (continued on next page)
  55




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##### Table of Contents



MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (continued)
 AccumulatedCommon
    
    
    Common
    
    
    Capital in
    
    
    
    
    
    
    Other(in thousands,
    
    Shares
    
    
    Stock $.10
    
    
    Excess of
    
    
    Deferred
    
    
    Comprehensive
    
    
    Retainedexcept per share data)
    
    Outstanding
    
    
    Par Value
    
    
    Par Value
    
    
    Compensation
    
    
    Income
    
    
    Earnings
    
    
    TotalBalance March 31, 2006
    
    
    43,176
    
    
    $
    4,318
    
    
    $
    49,970
    
    
    $
    (13,244
    )
    
    $
    16,498
    
    
    $
    169,047
    
    
    $
    226,589Comprehensive
income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    290,614
    
    
    
    290,614Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,247
    )
    
    
    
    
    
    
    (5,247
    )Change in unrealized
gain (loss) on
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91
    
    
    
    
    
    
    
    91Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    285,458Exercise of stock options
    
    
    1,294
    
    
    
    129
    
    
    
    24,008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,137Income tax benefit from the
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    11,870
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,870Issuance of restricted stock
    
    
    210
    
    
    
    21
    
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeiture of restricted
stock
    
    
    (91
    )
    
    
    (9
    )
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of stock under
ESPP
    
    
    2
    
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70Repurchase of common
stock
    
    
    (2,191
    )
    
    
    (219
    )
    
    
    (83,612
    )
    
    
    
    
    
    
    
    
    
    
    (9,194
    )
    
    
    (93,025
    )Reclass related to adoption
of SFAS 123R
    
    
    
    
    
    
    
    
    
    
    (13,244
    )
    
    
    13,244
    
    
    
    
    
    
    
    
    
    
    
    Stock based compensation
expense
    
    
    
    
    
    
    
    
    
    
    10,950
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,950Dividends declared
($.74 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,181
    )
    
    
    (31,181
    )Balance March 31, 2007
    
    
    42,400
    
    
    $
    4,240
    
    
    $
    
    
    
    $
    
    
    
    $
    11,342
    
    
    $
    419,286
    
    
    $
    434,868
   56




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##### Table of Contents



MENTOR CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended March 31,(in thousands)
    
    2007
    
    
    2006
    
    
    2005Operating Activities:Income from continuing operations
    
    $
    57,624
    
    
    $
    48,079
    
    
    $
    42,808Adjustments to derive cash flows from continuing operating activities:Depreciation
    
    
    7,198
    
    
    
    7,748
    
    
    
    7,296Amortization
    
    
    2,495
    
    
    
    2,274
    
    
    
    1,977Deferred income taxes
    
    
    4,889
    
    
    
    793
    
    
    
    (2,259
    )Non-cash compensation
    
    
    10,950
    
    
    
    1,471
    
    
    
    4,406Tax benefit from exercise of stock options
    
    
    11,870
    
    
    
    26,267
    
    
    
    7,184Excess tax benefits from equity compensation
    
    
    (8,643
    )
    
    
    
    
    
    
    Non-cash impairment of long-lived assets
    
    
    2,588
    
    
    
    
    
    
    
    186Loss on sale of assets
    
    
    304
    
    
    
    303
    
    
    
    654Loss (gain) on long-term marketable securities and investment write-downs, net
    
    
    (91
    )
    
    
    121
    
    
    
    20Changes in operating assets and liabilities:Accounts receivable
    
    
    (7,576
    )
    
    
    (2,136
    )
    
    
    (2,854
    )Inventories
    
    
    (2,658
    )
    
    
    (2,293
    )
    
    
    (3,908
    )Other current assets
    
    
    (17,228
    )
    
    
    (2,109
    )
    
    
    (1,882
    )Accounts payable and accrued liabilities
    
    
    9,063
    
    
    
    19,618
    
    
    
    9,988Income taxes payable
    
    
    (1,837
    )
    
    
    (1,092
    )
    
    
    (1,025
    )Net cash provided by continuing operating activities
    
    
    68,948
    
    
    
    99,044
    
    
    
    62,591Net cash (used in) provided by discontinued operating activities
    
    
    (121,672
    )
    
    
    25,354
    
    
    
    34,509Net cash (used in) provided by operating activities
    
    
    (52,724
    )
    
    
    124,398
    
    
    
    97,100Investing Activities:Purchases of property and equipment
    
    
    (5,737
    )
    
    
    (8,531
    )
    
    
    (6,868
    )Purchases of intangibles
    
    
    (6,741
    )
    
    
    (1,543
    )
    
    
    (507
    )Purchases of marketable securities
    
    
    (77,999
    )
    
    
    (295,439
    )
    
    
    (150,720
    )Sales of marketable securities
    
    
    64,396
    
    
    
    229,461
    
    
    
    122,855Proceeds from the sale of the urology business
    
    
    455,348
    
    
    
    
    
    
    
    Other, net
    
    
    429
    
    
    
    
    
    
    
    208Net cash provided by (used in) continuing investing activities
    
    
    429,696
    
    
    
    (76,052
    )
    
    
    (35,032
    )Net cash used for discontinued investing activities
    
    
    (50
    )
    
    
    (5,164
    )
    
    
    (2,750
    )Net cash provided by (used in) investing activities
    
    
    429,646
    
    
    
    (81,216
    )
    
    
    (37,782
    )Financing Activities:Repurchase of common stock
    
    
    (93,025
    )
    
    
    (42,837
    )
    
    
    (79,773
    )Proceeds from exercise of stock options and ESPP
    
    
    24,207
    
    
    
    43,649
    
    
    
    11,539Excess tax benefits from equity compensation
    
    
    8,643
    
    
    
    
    
    
    
    Dividends paid
    
    
    (30,478
    )
    
    
    (29,964
    )
    
    
    (26,806
    )Borrowings under line of credit agreements
    
    
    
    
    
    
    14,000
    
    
    
    Repayments under line of credit agreements
    
    
    (14,000
    )
    
    
    (970
    )
    
    
    (4,854
    )Net cash used in continuing financing activities
    
    
    (104,653
    )
    
    
    (16,122
    )
    
    
    (99,894
    )Net cash used in discontinued financing activities
    
    
    
    
    
    
    (2,213
    )
    
    
    (1,976
    )Net cash used in financing activities
    
    
    (104,653
    )
    
    
    (18,335
    )
    
    
    (101,870
    )Effect of currency exchange rates on cash and cash equivalents
    
    
    663
    
    
    
    (780
    )
    
    
    648Effect of currency exchange rates of discontinued operations
    
    
    (120
    )
    
    
    (2,020
    )
    
    
    345Increase (decrease) in cash and cash equivalents
    
    
    272,812
    
    
    
    22,047
    
    
    
    (41,559
    )Cash and cash equivalents at beginning of year
    
    
    98,713
    
    
    
    76,666
    
    
    
    118,225Cash and cash equivalents at end of year
    
    $
    371,525
    
    
    $
    98,713
    
    
    $
    76,666Supplemental cash flow informationCash paid during the year for:Income taxes for continuing operations
    
    $
    19,927
    
    
    $
    4,601
    
    
    $
    20,325Interest for continuing operations
    
    $
    4,822
    
    
    $
    4,522
    
    
    $
    4,015
   57




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MENTOR CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2007
 Note A  Summary of Significant Accounting Policies
 Business Activity
  Principles of Consolidation
   Cash Equivalents and Marketable Securities
    58




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##### Table of Contents



Available-for-sale investments at March 31, 2007 were as follows
 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
    
    
    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
  Gross
    
    
    Gross
    
    
    EstimatedAdjusted
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueCash balances
    
    $
    95,054
    
    
    $
    
    
    
    $
    
    
    
    $
    95,054Money market funds
    
    
    3,659
    
    
    
    
    
    
    
    
    
    
    
    3,659State and Municipal agency obligations
    
    
    71,374
    
    
    
    
    
    
    
    
    
    
    
    71,374Mortgage-backed securities
    
    
    30,667
    
    
    
    
    
    
    
    (85
    )
    
    
    30,582Corporate debt securities
    
    
    286
    
    
    
    
    
    
    
    (1
    )
    
    
    285Total available-for-sale investments
    
    $
    201,040
    
    
    $
    
    
    
    $
    (86
    )
    
    $
    200,954Included in cash and cash equivalents
    
    $
    98,713
    
    
    $
    
    
    
    $
    
    
    
    $
    98,713Included in current marketable securities
    
    
    102,327
    
    
    
    
    
    
    
    (86
    )
    
    
    102,241Total available-for-sale investments
    
    $
    201,040
    
    
    $
    
    
    
    $
    (86
    )
    
    $
    200,954
  Fair Values of Financial Instruments
  Concentrations and Credit Risk
    59




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Revenue Recognition
   Inventories
  Property and Equipment
  Intangible Assets and Goodwill
   60




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##### Table of Contents



Warranty Reserves
  Product Liability Reserves
  Employee Stock-Based Payments
     61




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##### Table of Contents



Income Taxes
   Advertising Expenses
  Foreign Operations
  Foreign Currency Translation
  Effects of Recent Accounting Pronouncements
   62




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63




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##### Table of Contents



Use of Estimates
  Note B  Inventories
  (in thousands)
    
    2007
    
    
    2006Raw materials
    
    $
    5,924
    
    
    $
    3,994Work in process
    
    
    4,961
    
    
    
    5,382Finished goods on consignment
    
    
    13,402
    
    
    
    11,052Finished goods
    
    
    13,786
    
    
    
    14,711$
    38,073
    
    
    $
    35,139
 Note C  Property and Equipment
  (in thousands)
    
    2007
    
    
    2006Land
    
    $
    55
    
    
    $
    55Buildings
    
    
    10,853
    
    
    
    10,053Leasehold improvements
    
    
    23,099
    
    
    
    21,952Furniture, fixtures and equipment
    
    
    59,708
    
    
    
    60,004Construction in progress
    
    
    4,217
    
    
    
    3,48197,932
    
    
    
    95,545Less accumulated depreciation and amortization
    
    
    (63,249
    )
    
    
    (59,097
    )$
    34,683
    
    
    $
    36,448
 Note D  Other Comprehensive Income
  Year Ended March 31,(in thousands)
    
    2007
    
    
    2006
    
    
    2005
 Unrealized gains (losses) arising during period,
net of taxes of $0, $217 and $137, respectively
    
    $
    32
    
    
    $
    (403
    )
    
    $
    (386
    )Reclassification adjustments for gains (losses)
realized in net income, net of taxes of $27,
$282 and $115, respectively
    
    
    59
    
    
    
    524
    
    
    
    211Change in net unrealized gains (losses) on securities
    
    $
    91
    
    
    $
    121
    
    
    $
    (175
    )
  (in thousands)
    
    2007
    
    
    2006Net unrealized (losses) gains on securities
    
    $
    32
    
    
    $
    (59
    )Foreign currency translation adjustments
    
    
    11,310
    
    
    
    16,557Accumulated other comprehensive income
    
    $
    11,342
    
    
    $
    16,498
  64




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##### Table of Contents



Note E  Accounts Payable and Accrued Liabilities and Long-Term Accrued Liabilities
  (in thousands)
    
    2007
    
    
    2006Trade accounts payable
    
    $
    32,147
    
    
    $
    27,685Sales returns
    
    
    18,590
    
    
    
    15,544Accrued compensation
    
    
    14,022
    
    
    
    17,335Deferred revenue
    
    
    11,863
    
    
    
    10,495Product liability reserve
    
    
    6,555
    
    
    
    6,701Warranty reserves
    
    
    2,989
    
    
    
    3,907Interest payable
    
    
    1,031
    
    
    
    1,031Accrued royalties
    
    
    230
    
    
    
    274Other
    
    
    16,823
    
    
    
    13,819$
    104,250
    
    
    $
    96,791
  (in thousands)
    
    2007
    
    
    2006Warranty reserves
    
    $
    11,319
    
    
    $
    9,696Other
    
    
    850
    
    
    
    894$
    12,169
    
    
    $
    10,590
 Note F  Short-Term Bank Borrowings
 Credit Agreement
      65




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##### Table of Contents



Loan and Overdraft Facility
      
   
   66




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##### Table of Contents



Note G  Stock Options, Restricted Stock and Employee Stock Purchase Plan
 Employee Stock Purchase Plan
    The Companys Long-Term Incentive Plans
      67




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##### Table of Contents



68




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##### Table of Contents



Pro Forma Analysis under SFAS 123
  Year Ended March 31,(in thousands, except per share data)
    
    2006
    
    
    2005Net income from continuing operations: as reported1
    
    $
    48,079
    
    
    $
    42,808Deduct: compensation expense fair value method
    
    
    (3,900
    )
    
    
    (5,864
    )Net income: pro forma
    
    $
    44,179
    
    
    $
    36,944Basic earnings per share from continuing operations: as reported
    
    $
    1.12
    
    
    $
    1.02Basic earnings per share from continuing operations: pro forma
    
    $
    1.02
    
    
    $
    0.88Net income from continuing operations: as reported1
    
    $
    48,079
    
    
    $
    42,808Add back after tax interest expense on convertible notes
    
    
    3,208
    
    
    
    3,208Net income: diluted earnings per share
    
    
    51,287
    
    
    
    46,016Deduct: compensation expense fair value method
    
    
    (3,900
    )
    
    
    (5,864
    )Net income: diluted earnings per share pro forma
    
    $
    47,387
    
    
    $
    40,152Diluted earnings per share from continuing operations: as reported
    
    $
    1.01
    
    
    $
    0.93Diluted earnings per share from continuing operations: pro forma
    
    $
    0.93
    
    
    $
    0.81
 1
    
    Net income for fiscal 2005 as reported includes a $4.4 million pre-tax charge associated with
accelerated vesting of stock options.
   Twelve Months EndedMarch 31,(in thousands)
    
    2007
    
    
    2006Stock options
    
    $
    4,425
    
    
    $
    Restricted stock
    
    
    4,879
    
    
    
    1,471Performance units
    
    
    1,646
    
    
    
    Total stock-based compensation expense, pre-tax
    
    
    10,950
    
    
    
    1,471Tax benefit from stock-based compensation expense
    
    
    3,349
    
    
    
    544Total stock-based compensation expense, net of tax
    
    $
    7,601
    
    
    $
    927
  69




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##### Table of Contents



Options OutstandingNumber
    
    
    Weighted Averageof Shares
    
    
    Price per ShareBalance March 31, 2004
    
    
    6,518,153
    
    
    $
    14.08Granted
    
    
    818,650
    
    
    
    32.43Exercised
    
    
    (1,028,136
    )
    
    
    11.22Canceled or terminated
    
    
    (143,936
    )
    
    
    19.77Balance March 31, 2005
    
    
    6,164,731
    
    
    $
    16.83Granted
    
    
    893,050
    
    
    
    37.49Exercised
    
    
    (3,161,517
    )
    
    
    13.79Canceled or terminated
    
    
    (214,186
    )
    
    
    22.41Balance March 31, 2006
    
    
    3,682,078
    
    
    $
    24.11Granted
    
    
    280,000
    
    
    
    46.39Exercised
    
    
    (1,276,990
    )
    
    
    18.89Canceled or terminated
    
    
    (423,540
    )
    
    
    32.68Balance March 31, 2007
    
    
    2,261,548
    
    
    $
    28.13
   Options Outstanding
    
    
    Options ExercisableWeighted-Average
    
    
    Weighted-Number of
    
    
    Remaining
    
    
    Average
    
    
    Number of
    
    
    Weighted-AveragePrice Range
    
    Shares
    
    
    Contractual Life
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise PriceUnder  $21.07
    
    
    939,304
    
    
    
    4.28
    
    
    $
    15.57
    
    
    
    828,786
    
    
    $
    14.85$21.07-$36.88
    
    
    775,494
    
    
    
    7.35
    
    
    $
    33.27
    
    
    
    288,110
    
    
    $
    31.73$36.89-$52.68
    
    
    546,750
    
    
    
    8.85
    
    
    $
    42.41
    
    
    
    61,250
    
    
    $
    38.28
   70




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##### Table of Contents



Year Ended March 31,2007
    
    
    2006
    
    
    2005Risk-free interest rate
    
    
    4.91
    %
    
    
    3.93
    %
    
    
    3.96
    %Expected life (in years)
    
    
    4.77
    
    
    
    4.93
    
    
    
    4.74Expected volatility
    
    
    0.36
    
    
    
    0.32
    
    
    
    0.32Expected dividend yield
    
    
    1.503
    %
    
    
    2.047
    %
    
    
    2.115
    %
  Weighted-averageNonvested shares (in thousands, except per share amounts)
    
    Shares
    
    
    grant date fair valueNonvested at March 31, 2006
    
    
    279
    
    
    $
    52.71Granted
    
    
    210
    
    
    
    44.38Lapsed
    
    
    (52
    )
    
    
    52.71Forfeited
    
    
    (91
    )
    
    
    52.48Nonvested at March 31, 2007
    
    
    346
    
    
    $
    47.71
  Performance Award Program
     Fair marketvalue at dateNonvested performance stock units (in thousands)
    
    Shares
    
    
    of grantNonvested at March 31, 2006
    
    
    
    
    
    $
    Granted (maximum award)
    
    
    357
    
    
    
    7,580Forfeited
    
    
    (50
    )
    
    
    (1,060
    )Nonvested at March 31, 2007
    
    
    307
    
    
    $
    6,520
  71




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##### Table of Contents



Note H  Income Taxes
  Year Ended March 31,(in thousands)
    
    2007
    
    
    2006
    
    
    2005Current:Federal
    
    $
    22,281
    
    
    $
    17,436
    
    
    $
    18,513Foreign
    
    
    2,177
    
    
    
    1,660
    
    
    
    615State
    
    
    3,379
    
    
    
    519
    
    
    
    3,44627,837
    
    
    
    19,615
    
    
    
    22,574Deferred:Federal
    
    
    (2,617
    )
    
    
    637
    
    
    
    (2,327
    )Foreign
    
    
    (426
    )
    
    
    (985
    )
    
    
    223State
    
    
    (246
    )
    
    
    339
    
    
    
    (533
    )(3,289
    )
    
    
    (9
    )
    
    
    (2,637
    )$
    24,548
    
    
    $
    19,606
    
    
    $
    19,937
  Year Ended March 31,2007
    
    
    2006
    
    
    2005Federal statutory rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Increase (decrease) resulting from:State taxes net of federal tax benefit
    
    
    1.4
    
    
    
    1.6
    
    
    
    2.2Non-taxable interest and dividends
    
    
    (1.4
    )
    
    
    (0.4
    )
    
    
    (0.1
    )Research and development credit
    
    
    (1.9
    )
    
    
    (1.7
    )
    
    
    (0.5
    )ETI/MFG deduction
    
    
    (0.4
    )
    
    
    (1.1
    )
    
    
    (0.9
    )Foreign operations
    
    
    (4.9
    )
    
    
    (7.3
    )
    
    
    (4.2
    )Dividend repatriation
    
    
    
    
    
    
    2.5
    
    
    
    Equity compensation
    
    
    0.8
    
    
    
    
    
    
    
    Other
    
    
    1.3
    
    
    
    0.4
    
    
    
    0.329.9
    %
    
    
    29.0
    %
    
    
    31.8
    %
  (in thousands)
    
    2007
    
    
    2006Deferred tax liabilities:Unrealized loss on long-term marketable securities
    
    
    
    
    
    
    (27
    )Deferred tax assets:Book liabilities not deductible for tax
    
    
    25,192
    
    
    
    20,024Inventory
    
    
    471
    
    
    
    521Profit in inventory of foreign subsidiaries
    
    
    3,733
    
    
    
    3,295Book over tax depreciation
    
    
    1,654
    
    
    
    Convertible notes hedge
    
    
    3,918
    
    
    
    6,23934,968
    
    
    
    30,079Net deferred tax assets
    
    $
    34,968
    
    
    $
    30,052
   72




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##### Table of Contents



Note I  Intangible Assets and Goodwill
     Year Ended March 31, 2007Accumulated
    
    
    Carrying(in thousands)
    
    Original Cost
    
    
    Amortization
    
    
    Value
    
    
    Useful LifePatents
    
    $
    1,103
    
    
    $
    (494
    )
    
    $
    609
    
    
    
    5-20Licenses
    
    
    11,323
    
    
    
    (3,849
    )
    
    
    7,474
    
    
    
    3-17Trademarks
    
    
    106
    
    
    
    (33
    )
    
    
    73
    
    
    
    3-20Other intangibles
    
    
    11,515
    
    
    
    (3,708
    )
    
    
    7,807
    
    
    
    3-20Subtotal intangibles
    
    
    24,047
    
    
    
    (8,084
    )
    
    
    15,963Goodwill
    
    
    13,367
    
    
    
    (723
    )
    
    
    12,644Total intangibles and goodwill
    
    $
    37,414
    
    
    $
    (8,807
    )
    
    $
    28,607
 Year Ended March 31, 2006Accumulated
    
    
    Carrying(in thousands)
    
    Original Cost
    
    
    Amortization
    
    
    Value
    
    
    Useful LifePatents
    
    $
    3,207
    
    
    $
    (1,152
    )
    
    $
    2,055
    
    
    
    5-20Licenses
    
    
    10,823
    
    
    
    (3,156
    )
    
    
    7,667
    
    
    
    3-17Trademarks
    
    
    67
    
    
    
    (23
    )
    
    
    44
    
    
    
    10-20Other intangibles
    
    
    5,672
    
    
    
    (2,328
    )
    
    
    3,344
    
    
    
    3-20Subtotal intangibles
    
    
    19,769
    
    
    
    (6,659
    )
    
    
    13,110Goodwill
    
    
    12,601
    
    
    
    (723
    )
    
    
    11,878Total intangibles and goodwill
    
    $
    32,370
    
    
    $
    (7,382
    )
    
    $
    24,988
  Year Ended
    
    Estimated Amortization Expense (in thousands)March 31, 2008
    
    $
    3,354March 31, 2009
    
    $
    2,825March 31, 2010
    
    $
    1,919March 31, 2011
    
    $
    877March 31, 2012
    
    $
    877
  73




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##### Table of Contents



(in thousands)Balance at March 31, 2005
    
    $
    11,860Goodwill acquired
    
    
    455Goodwill disposed
    
    
    (73
    )Currency translation
    
    
    (364
    )Balance at March 31, 2006
    
    $
    11,878Currency translation
    
    
    766Balance at March 31, 2007
    
    $
    12,644
 Note J  Earnings per Share
  Year Ended March 31,(in thousands)
    
    2007
    
    
    2006
    
    
    2005Net income from continuing operations: as reported
    
    $
    57,624
    
    
    $
    48,079
    
    
    $
    42,808Add back after tax interest expense on convertible note
    
    
    3,208
    
    
    
    3,208
    
    
    
    3,208Net income from continuing operations for numerator of diluted
earnings per share
    
    $
    60,832
    
    
    $
    51,287
    
    
    $
    46,016
 Year Ended March 31,(in thousands)
    
    2007
    
    
    2006
    
    
    2005Net income from discontinued operations
    
    $
    232,990
    
    
    $
    14,278
    
    
    $
    12,073Net income: as reported
    
    $
    290,614
    
    
    $
    62,357
    
    
    $
    54,881Add back after tax interest expense on convertible notes
    
    
    3,208
    
    
    
    3,208
    
    
    
    3,208Net income from continuing operations for numerator of diluted
earnings per share
    
    $
    293,822
    
    
    $
    65,565
    
    
    $
    58,089
 Year Ended March 31,(in thousands, except per share data)
    
    2007
    
    
    2006
    
    
    2005Weighted average outstanding shares: basic
    
    
    41,960
    
    
    
    42,995
    
    
    
    41,921Restricted grants
    
    
    152
    
    
    
    140
    
    
    
    Shares issuable through exercise of stock options
    
    
    1,000
    
    
    
    1,901
    
    
    
    2,620Shares issuable through convertible notes
    
    
    5,151
    
    
    
    5,138
    
    
    
    5,126Shares issuable through warrants
    
    
    829
    
    
    
    696
    
    
    
    Weighted average outstanding shares: diluted
    
    
    49,092
    
    
    
    50,870
    
    
    
    49,667Basic earnings per shareContinuing operations
    
    $
    1.37
    
    
    $
    1.12
    
    
    $
    1.02Discontinued operations
    
    $
    5.55
    
    
    $
    0.33
    
    
    $
    0.29Basic earnings per share
    
    $
    6.93
    
    
    $
    1.45
    
    
    $
    1.31Diluted earnings per shareContinuing operations
    
    $
    1.24
    
    
    $
    1.01
    
    
    $
    0.93Discontinued operations
    
    $
    4.75
    
    
    $
    0.28
    
    
    $
    0.24Diluted earnings per share
    
    $
    5.99
    
    
    $
    1.29
    
    
    $
    1.17
  74




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Employee stock options
  Convertible subordinated notes and warrants
    Note K  Long-Term Debt
 3 4
  §
    
    during any fiscal quarter prior to January 1, 2019, if the closing price of the
Companys common stock for at least 20 trading days in the 30 consecutive trading day
period ending on the first trading day of such fiscal quarter is more than 120% of the
conversion price per share of the Companys common stock on such trading day;§
    
    any business day on or after January 1, 2019, if the closing price of the Companys
common stock on the immediately preceding trading day is more than 120% of the conversion
price per share of the Companys common stock on such trading day;
  75




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##### Table of Contents



§

    
    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.
        76




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##### Table of Contents



Note L  Share Repurchase Program
      Note M  Commitments
  (in thousands)2008
    
    $
    4,4512009
    
    
    4,5852010
    
    
    4,5642011
    
    
    4,3132012
    
    
    3,707Thereafter
    
    
    5,909Total
    
    $
    27,529
   77




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##### Table of Contents



Note N  Related Party Transactions
     Note O  Warranty Reserves
   78




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##### Table of Contents



Year Ended March 31,(in thousands)
    
    2007
    
    
    2006Beginning warranty reserves
    
    $
    13,603
    
    
    $
    12,025Cost of warranty claims
    
    
    (3,225
    )
    
    
    (2,704
    )Accrual for product warranties
    
    
    3,930
    
    
    
    4,282Ending warranty reserves
    
    $
    14,308
    
    
    $
    13,603
 Note P  Contingencies
       79




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##### Table of Contents



Note Q  Long-Lived Asset Impairment Charges and Severance and Restructuring Charges
 Long-Lived Asset Impairment and Restructuring Charges
  
 Severance Charges
  Note R  Postretirement Benefit Plans
   Note S  Discontinued Operations
   80




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##### Table of Contents



As of March 31,(In thousands)
    
    2006Assets held for sale:Accounts receivable, net
    
    $
    50,698Inventories
    
    
    38,016Deferred income taxes
    
    
    4,305Prepaid expenses and other current assets
    
    
    3,051Total current assets held for sale
    
    
    96,070Property, plant and equipment, net
    
    
    29,497Intangible assets, net
    
    
    14,063Goodwill, net
    
    
    16,380Other assets
    
    
    324Total assets held for sale
    
    $
    156,334Liabilities associated with assets held for sale:Accounts payable and accrued liabilities
    
    $
    27,220Income taxes payable
    
    
    1,751Current portion of purchase price related to acquired technologies
and acquisitions
    
    
    1,000Total current liabilities associated with assets held for sale
    
    
    29,971Other long-term liabilities
    
    
    10,555Total liabilities associated with assets held for sale
    
    $
    40,526
   Note T  Segment Information for Continuing Operations
  Year Ending March 31,(in thousands)
    
    2007
    
    
    2006
    
    
    2005Principal products net salesBreast implants
    
    $
    262,556
    
    
    $
    233,189
    
    
    $
    217,420Body contouring
    
    
    16,734
    
    
    
    17,782
    
    
    
    18,609Other aesthetics, including
non-surgical facial products
    
    
    22,684
    
    
    
    17,301
    
    
    
    15,697Consolidated total
    
    $
    301,974
    
    
    $
    268,272
    
    
    $
    251,726
  81




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##### Table of Contents



Year Ending March 31,(in thousands)
    
    2007
    
    
    2006
    
    
    2005Geographic area net salesUnited States
    
    $
    217,785
    
    
    $
    192,764
    
    
    $
    186,488Canada
    
    
    16,234
    
    
    
    15,178
    
    
    
    12,641All other countries
    
    
    67,955
    
    
    
    60,330
    
    
    
    52,597Consolidated total
    
    $
    301,974
    
    
    $
    268,272
    
    
    $
    251,726
 At March 31,(in thousands)
    
    2007
    
    
    2006Geographic area long-lived assetsUnited States
    
    $
    41,792
    
    
    $
    37,763Netherlands
    
    
    15,263
    
    
    
    15,413All other countries
    
    
    6,235
    
    
    
    8,260Consolidated total
    
    $
    63,290
    
    
    $
    61,436
 Note U  Quarterly Financial Data (Unaudited)
  (in thousands, except per share data)
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthYear Ended March 31, 2007Net sales
    
    $
    79,437
    
    
    $
    66,908
    
    
    $
    75,309
    
    
    $
    80,320Gross profit
    
    
    57,392
    
    
    
    48,387
    
    
    
    56,384
    
    
    
    61,155Net income from continuing operations
    
    
    15,674
    
    
    
    10,823
    
    
    
    14,750
    
    
    
    16,377Net income (loss) from discontinued
operations, net of tax
    
    
    225,728
    
    
    
    (1,102
    )
    
    
    (1,122
    )
    
    
    9,486Net income
    
    $
    241,402
    
    
    $
    9,721
    
    
    $
    13,628
    
    
    $
    25,863Basic earnings (loss) per shareContinuing operations
    
    $
    0.37
    
    
    $
    0.26
    
    
    $
    0.35
    
    
    $
    0.39Discontinued operations
    
    $
    5.32
    
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    0.23Basic earnings per share
    
    $
    5.69
    
    
    $
    0.24
    
    
    $
    0.33
    
    
    $
    0.61Diluted earnings (loss) per shareContinuing operations
    
    $
    0.33
    
    
    $
    0.24
    
    
    $
    0.32
    
    
    $
    0.35Discontinued operations
    
    $
    4.58
    
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    0.19Diluted earnings per share
    
    $
    4.91
    
    
    $
    0.22
    
    
    $
    0.29
    
    
    $
    0.54
  82




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(in thousands, except per share data)
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthYear Ended March 31, 2006Net sales
    
    $
    74,126
    
    
    $
    58,672
    
    
    $
    63,072
    
    
    $
    72,402Gross profit
    
    
    55,780
    
    
    
    43,949
    
    
    
    46,896
    
    
    
    52,438Net income from continuing operations
    
    
    17,075
    
    
    
    8,182
    
    
    
    9,246
    
    
    
    13,576Net income from discontinued operations,
net of tax
    
    
    5,400
    
    
    
    3,936
    
    
    
    3,498
    
    
    
    1,444Net income
    
    $
    22,475
    
    
    $
    12,118
    
    
    $
    12,744
    
    
    $
    15,020Basic earnings per shareContinuing operations
    
    $
    0.41
    
    
    $
    0.19
    
    
    $
    0.21
    
    
    $
    0.31Discontinued operations
    
    $
    0.13
    
    
    $
    0.09
    
    
    $
    0.08
    
    
    $
    0.03Basic earnings per share
    
    $
    0.54
    
    
    $
    0.28
    
    
    $
    0.29
    
    
    $
    0.34Diluted earnings per shareContinuing operations
    
    $
    0.36
    
    
    $
    0.18
    
    
    $
    0.19
    
    
    $
    0.28Discontinued operations
    
    $
    0.11
    
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.03Diluted earnings per share
    
    $
    0.47
    
    
    $
    0.25
    
    
    $
    0.26
    
    
    $
    0.31
  83




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SCHEDULE II


VALUATION AND QUALIFYING ACCOUNTS AND RESERVES




AdditionsBalance at
    
    
    Charged
    
    
    
    
    
    
    Balance atBeginning
    
    
    to Costs and
    
    
    
    
    
    
    End ofDescription
    
    of Period
    
    
    Expenses
    
    
    Deductions
    
    
    PeriodYear Ended March 31, 2007Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    4,616
    
    
    
    1,524
    
    
    
    1,606
    
    
    $
    4,534Liability reserves:Warranty reserves
    
    $
    13,603
    
    
    $
    3,930
    
    
    $
    3,225
    
    
    $
    14,308Product liability reserves
    
    
    6,701
    
    
    
    418
    
    
    
    564
    
    
    
    6,555Accrued sales returns and allowances
    
    
    15,544
    
    
    
    12,651
    
    
    
    9,605
    
    
    
    18,590$
    35,848
    
    
    $
    16,999
    
    
    $
    13,394
    
    
    $
    39,453Year Ended March 31, 2006Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    3,839
    
    
    $
    1,804
    
    
    $
    1,027
    
    
    $
    4,616Liability reserves:Warranty reserves
    
    $
    12,025
    
    
    $
    4,282
    
    
    $
    2,704
    
    
    $
    13,603Product liability reserves
    
    
    5,232
    
    
    
    1,732
    
    
    
    263
    
    
    
    6,701Accrued sales returns and allowances
    
    
    13,162
    
    
    
    9,049
    
    
    
    6,667
    
    
    
    15,544$
    30,419
    
    
    $
    15,063
    
    
    $
    9,634
    
    
    $
    35,848Year Ended March 31, 2005Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    3,560
    
    
    $
    1,113
    
    
    $
    834
    
    
    $
    3,839Liability reserves:Warranty reserves
    
    $
    12,052
    
    
    $
    3,306
    
    
    $
    3,333
    
    
    $
    12,025Product liability reserves
    
    
    4,530
    
    
    
    915
    
    
    
    213
    
    
    
    5,232Accrued sales returns and allowances
    
    
    11,327
    
    
    
    8,697
    
    
    
    6,862
    
    
    
    13,162$
    27,909
    
    
    $
    12,918
    
    
    $
    10,408
    
    
    $
    30,419




84



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##### Table of Contents



Signatures
  MENTOR CORPORATIONDATE: May 30, 2007
    /s/JOSHUA H. LEVINEJoshua H. LevinePresident and Chief Executive
Officer  Signatures
    
    Title
    
    Date Signed/s/Joshua H. Levine

Joshua H. Levine
    
    President and Chief Executive Officer
(Principal Executive Officer)
    
    May 30, 2007/s/Loren L. McFarland

Loren L. McFarland
    
    Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
    
    May 30, 2007/s/Joseph E. Whitters

Joseph E. Whitters
    
    Chairman of the Board
    
    May 30, 2007/s/Michael L. Emmons

Michael L. Emmons
    
    Director
    
    May 30, 2007/s/Walter W. Faster

Walter W. Faster
    
    Director
    
    May 30, 2007/s/Margaret H. Jordan

Margaret H. Jordan
    
    Director
    
    May 30, 2007/s/Katherine S. Napier

Katherine S. Napier
    
    Director
    
    May 30, 2007/s/Ronald J. Rossi

Ronald J. Rossi
    
    Director
    
    May 30, 2007
  85




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##### Table of Contents



EXHIBIT INDEX
 Item Number2.1
    
    Binding Offer Letter from Coloplast A/S regarding purchase of
Mentor Urology Business dated March 27, 2006  Incorporated
by reference to Exhibit 2.1 of the Registrants Annual Report
on Form 10-K for the year ended March 31, 2006.2.2
    
    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, 2006.2.3
    
    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, 2006.2.4
    
    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, 2006.2.5
    
    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 23/4% Convertible Subordinated Notes Due 2024, dated
December 22, 2003 Incorporated by reference to Exhibit 4.1
of the Registrants Quarterly Report on Form 10-Q for the
quarter ended December 31, 2003.10.1*
    
    Mentor Corporation 1991 Stock Option Plan  Incorporated by
reference to Registration Statement on Form S-8, Registration
No. 333-48815, filed June 24, 1992.10.2*
    
    Mentor Corporation 2000 Stock Option Plan  Incorporated by
reference to Registration Statement on Form S-8, Registration
No. 333-73306, filed November 14, 2001.10.3*
    
    Mentor Corporation 1991 Stock Option Plan  Incorporated by
reference to Registration Statement on Form S-8, Registration
No. 333-100841, filed October 30, 2002.10.4*
    
    Mentor Corporation Employee Stock Purchase Plan 
Incorporated by reference to Exhibit 10.9 of the Registrants
Quarterly Report on Form 10-Q for the quarter ended September
30, 2005.10.5
    
    Lease Agreement, dated November 1989, between Mentor
Corporation and Skyway Business Center Joint Venture 
Incorporated by reference to Exhibit 10(b) of the Registrants
Annual Report on Form 10-K for the year ended March 31, 2002.10.6
    
    First Amendment to Lease Agreement, dated December 1, 1993,
between Mentor Corporation and Skyway Business Center Joint
Venture  Incorporated by reference to Exhibit 10(c) of the
Registrants Annual Report on Form 10-K for the year ended
March 31, 2002.
  86




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##### Table of Contents



EXHIBIT INDEX (continued)
 Item Number10.7
    
    Lease Agreement, dated July 23, 1990, between
Mentor Corporation and SB Corporate Center, Ltd.,
covering 201 Mentor Drive, Santa Barbara, CA 93111
 Incorporated by reference to Exhibit 10(f) of
the Registrants Annual Report on Form 10-K for the
year ended March 31, 2003.10.8
    
    Lease Agreement, dated August 19, 1998, between Mentor Corporation
and SB Corporate Center, LLC, covering 301 Mentor Drive 
Incorporated by reference to Exhibit 10(n) of the Registrants
Annual Report on Form 10-K for the year ended March 31, 1999.10.9
    
    Convertible Note Hedge Confirmation, dated December 17, 2003 
Incorporated by reference to Exhibit 10(b) of the Registrants
Quarterly Report on Form 10-Q for the quarter ended December 31,
2003.10.10
    
    Registration Rights Agreement  23/4% Convertible Subordinated Notes
Due 2024, dated December 22, 2003  Incorporated by reference to
Exhibit 10(c) of the Registrants Quarterly Report on Form 10-Q for
the quarter ended December 31, 2003.10.11
    
    Warrants Confirmation, dated December 17, 2003  Incorporated by
reference to Exhibit 10(d) of the Registrants Quarterly Report on
Form 10-Q for the quarter ended December 31, 2003.10.12
    
    Purchase Agreement  23/4% Convertible Subordinated Notes Due 2024,
dated December 17, 2003  Incorporated by reference to Exhibit
10(e) of the Registrants Quarterly Report on Form 10-Q for the
quarter ended December 31, 2003.10.13
    
    Collared Accelerated Share Repurchase Transaction, dated March 8,
2004  Incorporated by reference to Exhibit 10.29 of the
Registrants Annual Report on Form 10-K for the year ended March
31, 2004.10.14*
    
    Amendment to Employment Agreement between Mentor Corporation and
Eugene Glover, effective April 9, 2004  Incorporated by reference
to Exhibit 10.32 of the Registrants Annual Report on Form 10-K for
the year ended March 31, 2004.10.15
    
    Exclusive Supply Agreement between Alchemy Engineering, LLC d/b/a
SiTech, LLC and Mentor Corporation  Incorporated by reference to
Exhibit 10.33 of the Registrants Annual Report on Form 10-K for
the year ended March 31, 2004.10.16*
    
    Employment Agreement dated July 15, 2004, between Mentor
Corporation and Peter Shepard  Incorporated by reference to
Exhibit 10.1 of the Registrants Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004.10.17*
    
    Employment Agreement dated July 27, 2004, between Mentor
Corporation and Bobby Purkait  Incorporated by reference to
Exhibit 10.2 of the Registrants Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004.10.18*
    
    Employment Agreement dated August 6, 2004, between Mentor
Corporation and Adel Michael  Incorporated by reference to
Exhibit 10.3 of the Registrants Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004.
  87




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##### Table of Contents



EXHIBIT INDEX (continued)
 Item Number10.20*
    
    Employment Agreement between Mentor Corporation and Loren L. McFarland dated
August 25, 2005  Incorporated by reference to Exhibit 10.2 of the
Registrants Quarterly Report on Form 10-Q for the quarter ended September
30, 2005.10.21*
    
    Employment Agreement between Mentor Corporation and Kathleen M. Beauchamp
dated August 25, 2005  Incorporated by reference to Exhibit 10.3 of the
Registrants Quarterly Report on Form 10-Q for the quarter ended September
30, 2005.10.22*
    
    Employment Agreement between Mentor Corporation and David J. Adornetto dated
August 25, 2005  Incorporated by reference to Exhibit 10.4 of the
Registrants Quarterly Report on Form 10-Q for the quarter ended September
30, 2005.10.23*
    
    Employment Agreement between Mentor Corporation and A. Christopher Fawzy
dated August 25, 2005  Incorporated by reference to Exhibit 10.5 of the
Registrants Quarterly Report on Form 10-Q for the quarter ended September
30, 2005.10.24*
    
    Employment Agreement between Mentor Corporation and Cathy S. Ullery dated
August 25, 2005 Incorporated by reference to Exhibit 10.6 of the
Registrants Quarterly Report on Form 10-Q for the quarter ended September
30, 2005.10.25*
    
    Employment Agreement between Mentor Corporation and Clarke Scherff dated
August 25, 2005  Incorporated by reference to Exhibit 10.4 of the
Registrants Quarterly Report on Form 10-Q for the quarter ended September
30, 2006.10.26
    
    Amended and Restated Supply Agreement, dated July 6, 2004 by and among
NuSil Corporation, SiTech Inc., and Mentor Corporation  Incorporated by
reference to Exhibit 10.9 of the Registrants Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004.10.27*
    
    Mentor Corporation Option Agreement  Incorporated by reference to Exhibit
10.3 of the Registrants Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004.10.28
    
    Lease Agreement, dated March 17, 2004 between University Research Park,
Incorporated, and Mentor Corporation covering 535 Science Drive, Suites A,
B, C and D, Madison, Wisconsin Incorporated by reference to Exhibit 10.42
of the Registrants Annual Report on Form 10-K for the year ended March 31,
2005.10.29*
    
    Severance Agreement and Release dated February 16, 2005, between Mentor
Corporation and Christopher J. Conway  Incorporated by reference to
Exhibit 10.43 of the Registrants Annual Report on Form 10-K for the year
ended March 31, 2005.10.30*
    
    Severance Agreement and Release dated February 17, 2005, between Mentor
Corporation and Adel Michael  Incorporated by reference to Exhibit 10.44
of the Registrants Annual Report on Form 10-K for the year ended March 31,
2005.10.31*
    
    Release of Claims Agreement dated March 25, 2005, between Mentor
Corporation and Bobby Purkait  Incorporated by reference to Exhibit 10.45
of the Registrants Annual Report on Form 10-K for the year ended March 31,
2005.10.32
    
    Credit Agreement dated May 25, 2005, between Mentor Corporation, Bank of
the West, Union Bank of California, and Wells Fargo, N.A.  Incorporated
by reference to Exhibit 99.1 of the Registrants Current Report on Form 8-K
filed June 1, 2005.
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EXHIBIT INDEX (continued)
 Item Number10.33
    
    English translation of RaboBank Loan and Overdraft Facility
dated September 30, 2005  Incorporated by reference to
Exhibit 10.1 of the Registrants Current Report on Form 8-K
filed on October 11, 2005.10.34*
    
    Mentor Corporation 2005 Long-Term Incentive Plan Restricted
Stock Award Agreement  Incorporated by reference to Exhibit
10.41 of the Registrants Annual Report on Form 10-K for the
year ended March 31, 2006.10.35
    
    First Amendment to Credit Agreement dated as of May 31, 2006,
amending that certain Credit Agreement, dated as of May 25,
2005, by and among Mentor Corporation, Bank of the West, as
administrative agent, Union Bank of California, N. A., as
syndication agent, Wells Fargo Bank, National Association, as
documentation agent, and the lenders from time to time party
thereto.  Incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K filed on June 6, 2006.10.36
    
    Share Repurchase Transaction dated June 5, 2006 
Incorporated by reference to Exhibit 10.2 of the Registrants
Quarterly Report on Form 10-Q for the quarter ended June 30,
2006.10.37*
    
    Written Description of Director Fees for Non-Employee
Directors dated June 15, 2006  Incorporated by reference to
Exhibit 10.3 of the Registrants Quarterly Report on Form 10-Q
for the quarter ended June 30, 2006.10.38
    
    Mentor CorporationCitigroup Global Markets Inc. Form 10b5-1
Stock Purchase Plan dated June 16, 2006  Incorporated by
reference to Exhibit 10.4 of the Registrants Quarterly Report
on Form 10-Q for the quarter ended June 30, 2006.10.39*
    
    Employment Agreement between Mentor Corporation and Joseph A.
Newcomb dated June 26, 2006  Incorporated by reference to
Exhibit 10.1 of the Registrants Current Report on Form 8-K
filed on June 28, 2006.10.40*
    
    Separation and Release Agreement dated June 24, 2006, between
Mentor Corporation and A. Christopher Fawzy  Incorporated by
reference to Exhibit 10.2 of the Registrants Current Report
on Form 8-K filed on June 28, 2006.10.41*
    
    Consulting Agreement dated June 24, 2006, between Mentor
Corporation and A. Christopher Fawzy  Incorporated by
reference to Exhibit 10.3 of the Registrants Current Report
on Form 8-K filed on June 28, 2006.10.42*
    
    Form of Executive Performance Stock Unit Award Agreement 
Incorporated by reference to Exhibit 10.4 of the Registrants
Current Report on Form 8-K filed on June 28, 2006.10.43*
    
    Consulting Agreement dated June 30, 2006, between Mentor
Corporation and David Adornetto  Incorporated by reference
to Exhibit 10.1 of the Registrants Current Report on Form 8-K
filed on July 6, 2006.10.44*
    
    Mutual Release of Claims Agreement dated June 30, 2006,
between Mentor Corporation and David Adornetto  Incorporated
by reference to Exhibit 10.2 of the Registrants Current
Report on Form 8-K filed on July 6, 2006.10.45*
    
    Written Description of Car Allowance Plan  Incorporated by
reference to Exhibit 10.11 of the Registrants Quarterly
Report on Form 10-Q for the quarter ended June 30, 2006.
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EXHIBIT INDEX (continued)
 Item Number10.46*
    
    Mentor Corporation Amended 2005 Long-Term Incentive Plan effective September 13, 2006 
Incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K
filed on September 19, 2006.10.47*
    
    Form of Indemnity Agreement  Incorporated by reference to Exhibit 10.1 of the Registrants
Current Report on Form 8-K filed on November 29, 2006.10.48*
    
    Employment Agreement between Mentor Corporation and Edward S. Northup dated February 5, 2007
 Incorporated by reference to Exhibit 10.2 of the
Registrants Quarterly Report on Form 10-Q
for the quarter ended December 31, 2006.10.49
    
    Second Amendment to Credit Agreement dated as of March 30, 2007, amending that certain Credit
Agreement, dated as of May 25, 2005, and first amended May 31, 2006, by and among Mentor
Corporation, Bank of the West, as administrative agent, Union Bank of California, N.A., as
syndication agent, Wells Fargo Bank, National Association, as documentation agent, and the
lenders from time to time party thereto  Incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K filed on April 5, 2007.21
    
    Subsidiaries of the Company.23
    
    Consent of Independent Registered Public Accounting Firm.31.1
    
    Rule 13a-15(e) and 15d-15(e) Certification  Principal Executive Officer  Joshua H. Levine.31.2
    
    Rule 13a-15(e) and 15d-15(e) Certification  Principal Financial Officer  Loren L. McFarland.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002  Joshua H. Levine.32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002  Loren L. McFarland.
 *
    
    Management contract or compensatory plan or arrangement.
  90