##### Table of Contents



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, 2008
 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 o
 o þ
 þ o
 þ
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




---



##### 



MENTOR CORPORATION
TABLE OF CONTENTS
 ITEM
    
    
    
    PAGEPART I
    
    
    31.
    
    BusinessGeneral
    
    
    4Principal 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
    
    
    15Available Information
    
    
    161A.
    
    Risk Factors
    
    
    171B.
    
    Unresolved Staff Comments
    
    
    262.
    
    Properties
    
    
    263.
    
    Legal Proceedings
    
    
    274.
    
    Submission of Matters to a Vote of Security Holders
    
    
    27PART II
    
    
    285.
    
    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
    
    
    468.
    
    Financial Statements and Supplementary Data
    
    
    479.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    479A.
    
    Controls and Procedures
    
    
    479B.
    
    Other Information
    
    
    50PART III
    
    
    5010.
    
    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 IV
    
    
    5115.
    
    Exhibits and Financial Statement Schedules
    
    
    51Report of Independent Registered Public Accounting Firm on the Financial Statements
    
    
    52Consolidated Financial Statements
    
    
    53Signatures
    
    
    86Exhibit Index
    
    
    87Exhibit 21Exhibit 23Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




---



##### Table of Contents



PART I
 FORWARD-LOOKING STATEMENTS
  
    
    Our anticipated operating results for fiscal 2009;
 
    
    Our expectations regarding future developments in the markets in which we compete and
intend to compete;
 
    
    Our anticipated growth strategies;
 
    
    Our intention to introduce or seek approval for new products;
 
    
    Our ability to continue to meet United States Food and Drug Administration (FDA) and
other regulatory requirements;
 
    
    Our anticipated outcomes of regulatory reviews;
 
    
    Our anticipated outcomes of litigation; and
 
    
    Our ability to replace sources of supply without disruption and regulatory delay.
   3




---



##### Table of Contents



ITEM 1. BUSINESS.
  
 General
  
 Principal Products and Markets
  Year Ended March 31,2008
    
    
    2007
    
    
    2006(in thousands)
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Breast aesthetics
    
    $
    328,027
    
    
    
    87.9
    %
    
    $
    262,556
    
    
    
    87.0
    %
    
    $
    233,189
    
    
    
    87.0
    %Body contouring
    
    
    15,212
    
    
    
    4.1
    %
    
    
    16,734
    
    
    
    5.5
    %
    
    
    17,782
    
    
    
    6.6
    %Other aesthetics, including facial
products
    
    
    29,969
    
    
    
    8.0
    %
    
    
    22,684
    
    
    
    7.5
    %
    
    
    17,301
    
    
    
    6.4
    %Total
    
    $
    373,208
    
    
    
    100.0
    %
    
    $
    301,974
    
    
    
    100.0
    %
    
    $
    268,272
    
    
    
    100.0
    %
 ®
    
    
    During the third quarter of fiscal 2008, we began enrollment of our botulinum toxin type
A Phase IIIb study for the treatment of glabellar rhytides (frown lines). Enrollment was
completed in January 2008. In February 2008, we began enrollment for our Phase IIIc study,
and enrollment was completed in April 2008.
 
    
    In February 2008, FDA approval was received for Prevelle Silk, a hyaluronic acid dermal
filler containing lidocaine that is manufactured by Genzyme Corporation and distributed by
us.
  4




---



##### Table of Contents




    
    Our MemoryGel breast implants have been approved by FDA subject to post-approval
conditions, including a Post-Approval Study (PAS). To date, we have enrolled over 33,000
patients toward the PAS enrollment goal of 42,900 patients. We anticipate concluding
enrollment by the end of calendar year 2008.
 
    
    Our Contour Profile Gel breast implants submission was filed with FDA in September 2006
and is under review by the agency.
 ®
        5




---



##### Table of Contents



Sales and Marketing
    
 International Operations
   ®
  
 Competition
   6




---



##### Table of Contents



Government Regulations
 General
      7




---



##### Table of Contents



U.S. Regulation of Medical Devices
    ® ®
 Regulation of Biologics
  Additional Regulations
    8




---



##### Table of Contents



Environmental Regulation
    9




---



##### Table of Contents



Medicare, Medicaid and Third-Party Reimbursement
   Medicare Overview
     10




---



##### Table of Contents



Medicare  Outpatient Hospital Setting
     Medicaid
  Private Payors
   11




---



##### Table of Contents



Health Care Fraud and Abuse Laws and Regulations
  Federal and State Anti-Kickback Laws and Safe Harbor Provisions
    Federal False Claims Act
   12




---



##### Table of Contents



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




---



##### Table of Contents



Seasonality
  
 Working Capital
   
 Employees
  
 Discontinued Operations
    14




---



##### Table of Contents



Executive Officers of the Registrant
  Name
    
    Age
    
    PositionJoshua H. Levine
    
    49
    
    President and Chief Executive OfficerEdward S. Northup
    
    59
    
    Vice President, Chief Operating OfficerMichael ONeill
    
    48
    
    Vice President, Chief Financial Officer and TreasurerJoseph A. Newcomb
    
    57
    
    Vice President, General Counsel and Secretary
 Joshua H. Levine
 Edward S. Northup
 Michael ONeill
  15




---



##### Table of Contents



Joseph A. Newcomb
 
 Available Information
 http://www.sec.gov
 http://www.mentorcorp.com
 Forward-Looking Information Under the Private Securities Litigation Reform Action of 1995
   16




---



##### Table of Contents



ITEM 1A. RISK FACTORS.
  The FDA approval of our MemoryGel breast implants in the U.S. is conditioned on our compliance
with several significant post-approval conditions, including conducting a large scale, 10-year
study of patients who receive the implants. These conditions may adversely affect the market
acceptance and usage rates of our MemoryGel implants, may impact our ability to compete, and may
cause us to incur significant unanticipated expenses. Our failure to comply with these
conditions in a timely manner may cause delay in market acceptance or result in our inability to
continue to sell our MemoryGel implants in the U.S.
 Ô
  ®
 Significant product liability or other claims or product recalls may force us to pay substantial
damage awards and other expenses that could exceed our accruals and insurance coverages.
Unexpected increases in the number of limited warranty claims for our products may surpass our
product warranty reserves.
   17




---



##### Table of Contents



We are subject to substantial government regulation, which could have a material adverse effect on
our business. Any delay or failure to gain regulatory approval for our products, or the ability of
our competitors to get new products, which compete with our existing products, approved before us,
could also materially adversely affect our business.
  
  18




---



##### Table of Contents




     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.
    19




---



##### Table of Contents



If we are unable to compete effectively with existing or new competitors, we could experience price
reductions, reduced demand for our products, reduced margins and loss of market share, and our
business, results of operations, and financial condition would be adversely affected.
   
    
    developing and bringing new products to market before others or providing benefits
superior to those of existing products;
 
    
    developing new technologies to improve existing products;
 
    
    developing new products at a lower cost to provide the same benefits as existing
products at the same or lower price;
 
    
    creating or entering new markets with existing products;
 
    
    increasing or improving service-related programs;
 
    
    advertising in a manner that creates additional awareness and demand; and
 
    
    marketing and selling bundled products.
   If we suffer negative publicity concerning the safety of our products, our sales may be harmed and
we may be forced to withdraw products.
   20




---



##### Table of Contents



If changes in the economy and consumer spending reduce consumer demand for our products, our sales
and profitability could suffer.
  If we are unable to implement new information technology systems or upgrade existing systems, our
ability to manufacture and sell products, maintain regulatory compliance, and manage and report our
business activities may be impaired, delayed, or diminished, which would cause substantial business
interruption and loss of sales, customers, and profits.
  If we are unable to acquire companies, businesses or technologies as part of our growth strategy or
to successfully integrate past acquisitions, our growth, sales, and profitability could suffer.
    21




---



##### Table of Contents



We depend upon our key personnel and our ability to attract, train, and retain employees.
  State legislatures and taxing authorities may create new laws or change their interpretation of
existing state and local tax laws that may affect future product demand or create unforeseen tax
liabilities.
  If our intellectual property rights do not adequately protect our products or technologies, others
could compete against us more directly, which would hurt our profitability.
   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.
   22




---



##### Table of Contents



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.
   23




---



##### Table of Contents



If our use of hazardous materials results in contamination or injury, we could suffer significant
financial loss.
  Clostridium botulinum
   Changes in financial accounting standards may cause adverse unexpected revenue or expense
fluctuations and affect our reported results of operations.
   24




---



##### Table of Contents



Our operating results may fluctuate substantially, and could precipitate unexpected movement in the
price of our common stock and convertible notes.
 3 4
  Hedging transactions and other transactions may affect the value of the notes.
 3 4
 Our Restated Articles of Incorporation provide our Board with the authority to issue blank check
preferred stock. The issuance of blank check preferred stock could adversely affect the market
price and the rights and powers, including voting rights, of our common stock, and decrease the
amount of earnings and assets allocable to or available for distribution to holders of our common
stock.
      25




---



##### Table of Contents



ITEM 1B. UNRESOLVED STAFF COMMENTS.
  
 ITEM 2. PROPERTIES.
  Location
    
    Total Sq. Ft.
    
    Principal Segment and UseOwned PropertiesNetherlands
    
    65,000
    
    Manufacturing, warehousing and administrative officesMinnesota
    
    20,000
    
    Manufacturing and warehousing85,000Leased PropertiesTexas
    
    149,000
    
    Manufacturing, warehousing and administrative officesCalifornia
    
    124,000
    
    Corporate offices, research and development, and sales
and marketingArizona
    
    32,000
    
    Manufacturing, warehousing and administrative officesMauritius
    
    32,000
    
    Manufacturing and warehousingFrance
    
    27,000
    
    Manufacturing, warehousing and administrative officesUnited Kingdom
    
    11,000
    
    Warehousing and administrative officesCanada
    
    11,000
    
    Sales, warehousing and administrative officesWisconsin
    
    10,000
    
    Research and development396,000
  26




---



##### Table of Contents



ITEM 3. LEGAL PROCEEDINGS.
   
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
   27




---



##### Table of Contents



PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
  Year Ended March 31, 2008
    
    High
    
    
    LowQuarter ended March 31, 2008
    
    $
    40.82
    
    
    $
    23.95Quarter ended December 28, 2007
    
    $
    47.99
    
    
    $
    35.72Quarter ended September 28, 2007
    
    $
    48.80
    
    
    $
    39.00Quarter ended June 29, 2007
    
    $
    49.90
    
    
    $
    38.08
 Year Ended March 31, 2007
    
    High
    
    
    LowQuarter ended March 31, 2007
    
    $
    53.40
    
    
    $
    45.59Quarter ended December 29, 2006
    
    $
    54.40
    
    
    $
    44.49Quarter ended September 29, 2006
    
    $
    50.94
    
    
    $
    40.22Quarter ended June 30, 2006
    
    $
    45.31
    
    
    $
    37.25
  Dividend Policy
  Quarterly Cash Dividends DeclaredYear Ended March 31,2008
    
    
    2007
    
    
    2006First Quarter
    
    $
    0.20
    
    
    $
    0.18
    
    
    $
    0.17Second Quarter
    
    
    0.20
    
    
    
    0.18
    
    
    
    0.18Third Quarter
    
    
    0.20
    
    
    
    0.18
    
    
    
    0.18Fourth Quarter
    
    
    0.20
    
    
    
    0.20
    
    
    
    0.18Total
    
    $
    0.80
    
    
    $
    0.74
    
    
    $
    0.71
 Issuer Purchases of Equity Securities
   28




---



##### Table of Contents



ISSUER PURCHASES OF EQUITY SECURITIES(1) (2) (3)Total Number
    
    
    Maximum Numberof Shares
    
    
    of Shares that MayTotal Number
    
    
    
    
    
    
    Purchased as
    
    
    Yet Be Purchased(in thousands
    
    of Shares
    
    
    Average Price
    
    
    Part of Publicly
    
    
    Under the Plansexcept per share amounts)
    
    Purchased
    
    
    Paid per Share
    
    
    Announced Plans
    
    
    or ProgramsJanuary 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    811February 2008
    
    
    2
    (4)
    
    
    31.79
    
    
    
    
    
    
    
    809March 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    809Total
    
    
    2
    
    
    $
    31.79
    
    
    
    
    
    
    
    809
 (1)
    
    During the period, no shares were purchased under the 2007 10b5 Plan.(2)
    
    In the first quarter of fiscal 1996, our Board of Directors authorized an ongoing stock repurchase program. The initial authorization was for the repurchase of up to one
million shares. Subsequently, the Board of Directors has authorized the repurchase of an additional 31.0 million shares, including 5.0 million, 1.7 million and 5.0 million shares in
June 2007, June 2006 and March 2006, respectively. These share amounts have been adjusted for the two-for-one stock split affected December 2002.(3)
    
    We have not set a date for the stock repurchase program to expire. The 2007 10b5 Plan will terminate on June 17, 2008.(4)
    
    Balance includes approximately 2,000 shares repurchased for payment of withholding taxes upon the vesting of certain restricted stock grants.  29




---



##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA.
  Year Ended March 31,(in thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Statement of Income Data:Net sales
    
    $
    373,208
    
    
    $
    301,974
    
    
    $
    268,272
    
    
    $
    251,726
    
    
    $
    218,437Gross profit
    
    
    274,213
    
    
    
    223,318
    
    
    
    199,063
    
    
    
    187,150
    
    
    
    157,854Operating income from continuing operations
    
    
    79,071
    
    
    
    65,629
    
    
    
    69,065
    
    
    
    65,381
    
    
    
    66,206Income before income taxes -
continuing operations
    
    
    78,324
    
    
    
    82,172
    
    
    
    67,685
    
    
    
    62,745
    
    
    
    67,251Income taxes  continuing operations
    
    
    23,373
    
    
    
    24,548
    
    
    
    19,606
    
    
    
    19,937
    
    
    
    21,479Income from continuing operations
    
    
    54,951
    
    
    
    57,624
    
    
    
    48,079
    
    
    
    42,808
    
    
    
    45,772Discontinued operations, net of income tax(1)
    
    
    8,464
    
    
    
    232,990
    
    
    
    14,278
    
    
    
    12,073
    
    
    
    9,007Net income
    
    $
    63,415
    
    
    $
    290,614
    
    
    $
    62,357
    
    
    $
    54,881
    
    
    $
    54,779Basic earnings per share:Continuing operations
    
    $
    1.55
    
    
    $
    1.37
    
    
    $
    1.12
    
    
    $
    1.02
    
    
    $
    1.00Discontinued operations(1)
    
    $
    0.24
    
    
    $
    5.55
    
    
    $
    0.33
    
    
    $
    0.29
    
    
    $
    0.20Basic earnings per share
    
    $
    1.79
    
    
    $
    6.93
    
    
    $
    1.45
    
    
    $
    1.31
    
    
    $
    1.20Diluted earnings per share:Continuing operations
    
    $
    1.40
    
    
    $
    1.24
    
    
    $
    1.01
    
    
    $
    0.93
    
    
    $
    0.95Discontinued operations(1)
    
    $
    0.20
    
    
    $
    4.75
    
    
    $
    0.28
    
    
    $
    0.24
    
    
    $
    0.18Diluted earnings per share
    
    $
    1.61
    
    
    $
    5.99
    
    
    $
    1.29
    
    
    $
    1.17
    
    
    $
    1.13Dividends per common share
    
    $
    0.80
    
    
    $
    0.74
    
    
    $
    0.71
    
    
    $
    0.66
    
    
    $
    0.47Weighted average shares outstanding:Basic
    
    
    35,375
    
    
    
    41,960
    
    
    
    42,995
    
    
    
    41,921
    
    
    
    45,543Diluted
    
    
    41,449
    
    
    
    49,092
    
    
    
    50,870
    
    
    
    49,667
    
    
    
    49,272
    (2)Balance Sheet Data (continuing operations):Working capital(3)
    
    $
    171,873
    
    
    $
    534,163
    
    
    $
    210,135
    
    
    $
    155,688
    
    
    $
    155,532Total assets(3)
    
    
    440,579
    
    
    
    709,768
    
    
    
    391,771
    
    
    
    311,962
    
    
    
    312,236Long-term accrued liabilities, less current
portion(3)
    
    
    27,536
    
    
    
    21,683
    
    
    
    19,100
    
    
    
    22,639
    
    
    
    19,148Convertible subordinated notes
    
    
    150,000
    
    
    
    150,000
    
    
    
    150,000
    
    
    
    150,000
    
    
    
    150,000Shareholders equity
    
    $
    143,034
    
    
    $
    434,868
    
    
    $
    226,589
    
    
    $
    172,527
    
    
    $
    196,004
 (1)
    
    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 T  Discontinued Operations in the
Notes to Consolidated Financial Statements.(2)
    
    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.(3)
    
    Prior years have been restated to conform to current year presentation.  30




---



##### Table of Contents



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




---



##### Table of Contents



Perouse Acquisition
  Important Factors
  
    
    The performance of the U.S. economy will impact the demand for our products in the U.S. in
fiscal 2009, and continued weakness in the U.S. economy could put pressure on our revenue
growth;
    
    We are in the midst of a transition in the U.S. from saline breast implants to MemoryGel
breast implants that we expect will continue over a several year period with potentially
uneven rates of change that could cause revenues and profits to fluctuate quarter to quarter;
and
    
    We are committed to investing in the development and marketing of new aesthetics products
to expand our product portfolio, which may have the effect in the short term of increasing
our expenses faster than our revenues are anticipated to increase.
  
    
    competing to grow U.S. breast aesthetics market share through targeted marketing programs;
    
    supporting the continued transition in the U.S. from saline breast implants to MemoryGel
breast implants;
    
    launching our entry in the U.S. dermal filler market with Prevelle Silk;
    
    continuing our international breast aesthetics growth strategy by leveraging the Perouse
acquisition and investing in management and marketing infrastructure; and
    
    investing in research and development programs to expand our product portfolio and create
incremental product bundling opportunities that will allow us to better serve customers.
 APPLICATION OF CRITICAL ACCOUNTING POLICIES
   32




---



##### Table of Contents



Revenue Recognition
    Accounts Receivable
  Inventories
  Warranty Reserves
   33




---



##### Table of Contents



Product Liability Reserves
  Goodwill and Intangible Asset Impairment
  Stock-Based Compensation Expense for Fiscal 2007 and Thereafter
   34




---



##### Table of Contents



Deferred Income Taxes
    35




---



##### Table of Contents



RESULTS OF OPERATIONS
  Year Ended March 31,2008
    
    
    2007
    
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    26.5
    %
    
    
    26.0
    %
    
    
    25.8
    %Gross profit
    
    
    73.5
    %
    
    
    74.0
    %
    
    
    74.2
    %Selling, general, and administrative
    
    
    40.2
    %
    
    
    39.8
    %
    
    
    37.7
    %Research and development
    
    
    12.1
    %
    
    
    11.6
    %
    
    
    10.8
    %Long-lived asset impairment charges
    
    
    
    
    
    
    0.9
    %
    
    
    Operating income from continuing operations
    
    
    21.2
    %
    
    
    21.7
    %
    
    
    25.7
    %Interest expense
    
    
    (1.5
    )%
    
    
    (2.0
    )%
    
    
    (2.1
    )%Interest income
    
    
    2.1
    %
    
    
    7.4
    %
    
    
    1.5
    %Other (expense) income, net
    
    
    (0.8
    )%
    
    
    0.0
    %
    
    
    0.1
    %Income from continuing operations before income taxes
    
    
    21.0
    %
    
    
    27.1
    %
    
    
    25.2
    %Income taxes
    
    
    6.3
    %
    
    
    8.1
    %
    
    
    7.3
    %Income from continuing operations
    
    
    14.7
    %
    
    
    19.0
    %
    
    
    17.9
    %Income (loss) from discontinued operations, net of tax
    
    
    (0.0
    )%
    
    
    0.5
    %
    
    
    5.3
    %Gain on sale of discontinued operations, net of tax
    
    
    2.3
    %
    
    
    76.7
    %
    
    
    Net income
    
    
    17.0
    %
    
    
    96.2
    %
    
    
    23.2
    %
 YEARS ENDED MARCH 31, 2008 AND 2007
 Net Sales
  
   36




---



##### Table of Contents



Cost of Sales and Gross Profit
  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
  Income, Net of Income Taxes, and Earnings per Share from Continuing Operations
  Income from Discontinued Operations, Net of Income Taxes
  Gain on Sale of Discontinued Operations, Net of Income Taxes
  YEARS ENDED MARCH 31, 2007 AND 2006
 Sales
  Cost of Sales
   38




---



##### Table of Contents



Selling, General and Administrative
   Research and Development
  Long-Lived Asset Impairment Charges
   Interest and Other Income and Expense
 3 4
  Income Taxes
   39




---



##### Table of Contents



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
  FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
     40




---



##### Table of Contents



March 31,
    
    
    March 31,(in thousands)
    
    2008
    
    
    2007Cash and cash equivalents
    
    $
    79,697
    
    
    $
    371,525Marketable securities
    
    
    30,218
    
    
    
    116,215Total cash, cash equivalents and marketable securities
    
    $
    109,915
    
    
    $
    487,740Percentage of total assets
    
    
    25
    %
    
    
    69
    %
 Cash Flow Changes
  Year Ended March 31,(in thousands)
    
    2008
    
    
    2007
    
    
    2006Net cash provided by continuing operating activities
    
    $
    85,512
    
    
    $
    68,948
    
    
    $
    99,044Net cash provided by (used in) continuing investing activities
    
    
    4,054
    
    
    
    429,696
    
    
    
    (76,052
    )Net cash used in continuing financing activities
    
    
    (390,321
    )
    
    
    (104,653
    )
    
    
    (16,122
    )Net cash provided by (used in) discontinued operations
    
    
    8,464
    
    
    
    (121,842
    )
    
    
    15,957Effect of currency exchange rates on cash and cash equivalents
    
    
    463
    
    
    
    663
    
    
    
    (780
    )Increase (decrease) in cash and cash equivalents
    
    $
    (291,828
    )
    
    $
    272,812
    
    
    $
    22,047
 Cash Provided by Operating Activities of Continuing Operations
  Cash Provided by (Used in) Investing Activities of Continuing Operations
   41




---



##### Table of Contents



Perouse Acquisition
   Cash Used in Financing Activities of Continuing Operations
        42




---



##### Table of Contents



Cash Provided by (Used in) Discontinued Operations
  Financing Arrangements
 Senior Credit Facility
      43




---



##### Table of Contents



Other Financing
      
   
   
  44




---



##### Table of Contents



 
  
  Convertible Subordinated Notes
 3 4
  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
    
    
    20,500
    
    
    
    8,000
    
    
    
    12,500
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    21,291
    
    
    
    4,474
    
    
    
    8,534
    
    
    
    5,467
    
    
    
    2,816Purchase obligations
    
    
    20,414
    
    
    
    20,414
    
    
    
    
    
    
    
    
    
    
    
    Interest on convertible notes
    
    
    3,094
    
    
    
    3,094
    
    
    
    
    
    
    
    
    
    
    
    Loans payable
    
    
    2,555
    
    
    
    935
    
    
    
    1,296
    
    
    
    229
    
    
    
    95Capital lease obligations
    
    
    1,224
    
    
    
    144
    
    
    
    275
    
    
    
    295
    
    
    
    510Credit agreement (commitment fees)
    
    
    545
    
    
    
    159
    
    
    
    119
    
    
    
    119
    
    
    
    148Unrecognized tax benefits(1)
    
    
    1,114
    
    
    
    1,114
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    220,737
    
    
    $
    188,334
    
    
    $
    22,724
    
    
    $
    6,110
    
    
    $
    3,569
 (1)
    
    In addition to the current liabilities for unrecognized tax benefits (UTBs)
included in the table above, long-term liabilities for UTBs (net of federal tax benefits on
state taxes) and related accrued interest totaling approximately $6.6 million at March 31,
2008 are not included in the contractual commitments table because, due to their nature, there is a
high degree of uncertainty regarding the timing of future cash outflows and other events that
extinguish these liabilities.  45




---



##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  Interest Rate Risk
  3 4
  46




---



##### Table of Contents



Exchange Rate Risk
   
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
  
 ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
  
 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
        /s/ Ernst & Young LLP 
  49




---



##### 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




---



##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.(a) (1) Consolidated Financial StatementsReport of Ernst & Young LLP, Independent Registered Public Accounting FirmConsolidated Balance Sheets as of March 31, 2008 and 2007Consolidated Statements of Income for the Years Ended March 31, 2008, 2007 and 2006Consolidated Statements of Changes in Shareholders Equity for the Years Ended March 31, 2008, 2007 and
2006Consolidated Statements of Cash Flows for the Years Ended March 31, 2008, 2007 and 2006Notes 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




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
       /s/ Ernst & Young LLP 
  52




---



##### Table of Contents



MENTOR CORPORATION
 CONSOLIDATED BALANCE SHEETS
 March 31,(in thousands, except share data)
    
    2008
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    79,697
    
    
    $
    371,525Marketable securities
    
    
    30,218
    
    
    
    116,215Accounts receivable, net of allowance for doubtful accounts
of $5,510 in 2008 and $4,534 in 2007
    
    
    82,060
    
    
    
    65,419Inventories
    
    
    49,940
    
    
    
    38,073Deferred income taxes
    
    
    29,040
    
    
    
    25,892Prepaid income taxes
    
    
    8,074
    
    
    
    13,495Prepaid expenses and other
    
    
    11,233
    
    
    
    6,761Total current assets
    
    
    290,262
    
    
    
    637,380Property and equipment, net
    
    
    58,252
    
    
    
    34,683Intangible assets, net
    
    
    36,336
    
    
    
    15,963Goodwill, net
    
    
    49,707
    
    
    
    12,644Other assets
    
    
    6,022
    
    
    
    9,098Total assets
    
    $
    440,579
    
    
    $
    709,768Liabilities and shareholders equityCurrent liabilities:Account payable and accrued liabilities
    
    $
    110,706
    
    
    $
    94,736Dividends payable
    
    
    6,748
    
    
    
    8,481Short-term portion of long-term debt
    
    
    935
    
    
    
    Total current liabilities
    
    
    118,389
    
    
    
    103,217Long-term accrued liabilities
    
    
    27,536
    
    
    
    21,683Long-term debt
    
    
    1,620
    
    
    
    Convertible subordinated notes
    
    
    150,000
    
    
    
    150,000Commitments and contingenciesShareholders equity:Common stock, $.10 par value:Authorized - 150,000,000 shares; issued and outstanding 
33,739,203 shares in 2008; 
42,400,483 shares in 2007;
    
    
    3,374
    
    
    
    4,240Preferred stock, $.01 par valueAuthorized - 25,000,000 shares in 2008, none
in 2007; none issued
and outstanding
    
    
    
    
    
    
    Accumulated other comprehensive income
    
    
    31,992
    
    
    
    11,342Retained earnings
    
    
    107,668
    
    
    
    419,286Total shareholders equity
    
    
    143,034
    
    
    
    434,868Total liabilities and shareholders equity
    
    $
    440,579
    
    
    $
    709,768
   53




---



##### Table of Contents



MENTOR CORPORATION
 CONSOLIDATED STATEMENTS OF INCOME
 Year Ended March 31,(in thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2006Net sales
    
    $
    373,208
    
    
    $
    301,974
    
    
    $
    268,272Cost of sales
    
    
    98,995
    
    
    
    78,656
    
    
    
    69,209Gross profit
    
    
    274,213
    
    
    
    223,318
    
    
    
    199,063Selling, general, and administrative
    
    
    150,158
    
    
    
    120,080
    
    
    
    100,962Research and development
    
    
    44,984
    
    
    
    35,021
    
    
    
    29,036Long-lived asset impairment charges
    
    
    
    
    
    
    2,588
    
    
    
    195,142
    
    
    
    157,689
    
    
    
    129,998Operating income from continuing operations
    
    
    79,071
    
    
    
    65,629
    
    
    
    69,065Interest expense
    
    
    (5,709
    )
    
    
    (6,178
    )
    
    
    (5,690
    )Interest income
    
    
    8,034
    
    
    
    22,489
    
    
    
    4,124Other (expense) income
    
    
    (3,072
    )
    
    
    232
    
    
    
    186Income from continuing operations before income taxes
    
    
    78,324
    
    
    
    82,172
    
    
    
    67,685Income taxes
    
    
    23,373
    
    
    
    24,548
    
    
    
    19,606Income from continuing operations
    
    
    54,951
    
    
    
    57,624
    
    
    
    48,079Income (loss) from discontinued operations, net of income taxes
    
    
    (270
    )
    
    
    1,551
    
    
    
    14,278Gain on sale of discontinued operations, net of income taxes
    
    
    8,734
    
    
    
    231,439
    
    
    
    Net income
    
    $
    63,415
    
    
    $
    290,614
    
    
    $
    62,357Basic earnings per shareContinuing operations
    
    $
    1.55
    
    
    $
    1.37
    
    
    $
    1.12Discontinued operations
    
    $
    0.24
    
    
    $
    5.55
    
    
    $
    0.33Basic earnings per share
    
    $
    1.79
    
    
    $
    6.93
    
    
    $
    1.45Diluted earnings per shareContinuing operations
    
    $
    1.40
    
    
    $
    1.24
    
    
    $
    1.01Discontinued operations
    
    $
    0.20
    
    
    $
    4.75
    
    
    $
    0.28Diluted earnings per share
    
    $
    1.61
    
    
    $
    5.99
    
    
    $
    1.29Dividends per share
    
    $
    0.80
    
    
    $
    0.74
    
    
    $
    0.71Weighted average shares outstandingBasic
    
    
    35,375
    
    
    
    41,960
    
    
    
    42,995Diluted
    
    
    41,449
    
    
    
    49,092
    
    
    
    50,870
   54




---



##### Table of Contents



MENTOR CORPORATION
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
 AccumulatedCommon
    
    
    Common
    
    
    Capital in
    
    
    
    
    
    
    OtherShares
    
    
    Stock $.10
    
    
    Excess of
    
    
    Deferred
    
    
    Comprehensive
    
    
    Retained(in thousands, except per share data)
    
    Outstanding
    
    
    Par Value
    
    
    Par Value
    
    
    Compensation
    
    
    Income
    
    
    Earnings
    
    
    TotalBalance 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




---



##### Table of Contents



MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (continued)
 AccumulatedCommon
    
    
    Common
    
    
    Capital in
    
    
    
    
    
    
    OtherShares
    
    
    Stock $.10
    
    
    Excess of
    
    
    Deferred
    
    
    Comprehensive
    
    
    Retained(in thousands, except 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 123(R)
    
    
    
    
    
    
    
    
    
    
    (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
    
    
    $
    434,868Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,415
    
    
    
    63,415Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,443
    
    
    
    
    
    
    
    20,443Change in unrealized gain
(loss) on investments and
unrecognized actuarial gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    207
    
    
    
    
    
    
    
    207Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,065Exercise of stock options, net
    
    
    314
    
    
    
    32
    
    
    
    5,776
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,808Income tax benefit from the
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    3,488
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,488Issuance of restricted stock
    
    
    52
    
    
    
    5
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeiture of restricted stock
    
    
    (30
    )
    
    
    (3
    )
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of stock under
ESPP
    
    
    3
    
    
    
    
    
    
    
    99
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99Repurchase of common
stock
    
    
    (9,000
    )
    
    
    (900
    )
    
    
    (20,244
    )
    
    
    
    
    
    
    
    
    
    
    (347,239
    )
    
    
    (368,383
    )Stock based compensation
expense
    
    
    
    
    
    
    
    
    
    
    10,883
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,883Dividends declared
($.80 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,794
    )
    
    
    (27,794
    )Balance March 31, 2008
    
    
    33,739
    
    
    $
    3,374
    
    
    $
    
    
    
    $
    
    
    
    $
    31,992
    
    
    $
    107,668
    
    
    $
    143,034
   56




---



##### Table of Contents



MENTOR CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended March 31,(in thousands)
    
    2008
    
    
    2007
    
    
    2006Net income
    
    $
    63,415
    
    
    $
    290,614
    
    
    $
    62,357Less: (income) loss from discontinued operations, net of income taxes
    
    
    270
    
    
    
    (1,551
    )
    
    
    (14,278
    )Less: (gain) on sale of discontinued operations, net of income taxes
    
    
    (8,734
    )
    
    
    (231,439
    )
    
    
    Income from continuing operations
    
    $
    54,951
    
    
    $
    57,624
    
    
    $
    48,079Operating Activities:Adjustments to derive cash flows from continuing operating activities:Depreciation
    
    
    8,389
    
    
    
    7,198
    
    
    
    7,748Amortization
    
    
    5,225
    
    
    
    2,495
    
    
    
    2,274Deferred income taxes
    
    
    (2,800
    )
    
    
    4,889
    
    
    
    793Non-cash compensation
    
    
    10,883
    
    
    
    10,950
    
    
    
    1,471Tax benefit from exercise of stock options
    
    
    3,488
    
    
    
    11,870
    
    
    
    26,267Excess tax benefits from equity compensation
    
    
    (2,285
    )
    
    
    (8,643
    )
    
    
    Non-cash impairment of long-lived assets
    
    
    
    
    
    
    2,588
    
    
    
    Loss on sale of assets
    
    
    149
    
    
    
    304
    
    
    
    303Loss (gain) on long-term marketable securities and unrecognized actuarial
gains, net
    
    
    207
    
    
    
    (91
    )
    
    
    121Changes in operating assets and liabilities:Accounts receivable
    
    
    (9,334
    )
    
    
    (7,576
    )
    
    
    (2,136
    )Inventories
    
    
    2,348
    
    
    
    (2,658
    )
    
    
    (2,293
    )Other current assets
    
    
    (1,749
    )
    
    
    (17,228
    )
    
    
    (2,109
    )Accounts payable and accrued liabilities
    
    
    16,040
    
    
    
    9,063
    
    
    
    19,618Income taxes payable
    
    
    
    
    
    
    (1,837
    )
    
    
    (1,092
    )Net cash provided by continuing operating activities
    
    
    85,512
    
    
    
    68,948
    
    
    
    99,044Net cash provided by (used in) discontinued operating activities
    
    
    8,464
    
    
    
    (121,672
    )
    
    
    25,354Net cash provided by (used in) operating activities
    
    
    93,976
    
    
    
    (52,724
    )
    
    
    124,398Investing Activities:Purchases of property and equipment
    
    
    (23,381
    )
    
    
    (5,737
    )
    
    
    (8,531
    )Purchases of intangibles
    
    
    (4,313
    )
    
    
    (6,741
    )
    
    
    (1,543
    )Purchases of marketable securities
    
    
    (45,943
    )
    
    
    (77,999
    )
    
    
    (295,439
    )Sales of marketable securities
    
    
    131,117
    
    
    
    64,396
    
    
    
    229,461Proceeds from the sale of the Urology Business
    
    
    
    
    
    
    455,348
    
    
    
    Purchase of
business, net of cash acquired
    
    
    (53,460
    )
    
    
    
    
    
    
    Other, net
    
    
    34
    
    
    
    429
    
    
    
    Net cash provided by (used in) continuing investing activities
    
    
    4,054
    
    
    
    429,696
    
    
    
    (76,052
    )Net cash used in discontinued investing activities
    
    
    
    
    
    
    (50
    )
    
    
    (5,164
    )Net cash provided by (used in) investing activities
    
    
    4,054
    
    
    
    429,646
    
    
    
    (81,216
    )Financing Activities:Repurchase of common stock
    
    
    (368,383
    )
    
    
    (93,025
    )
    
    
    (42,837
    )Proceeds from exercise of stock options and ESPP
    
    
    5,907
    
    
    
    24,207
    
    
    
    43,649Excess tax benefits from equity compensation
    
    
    2,285
    
    
    
    8,643
    
    
    
    Dividends paid
    
    
    (29,526
    )
    
    
    (30,478
    )
    
    
    (29,964
    )Borrowings under line of credit agreements
    
    
    
    
    
    
    
    
    
    
    14,000Repayments of debt
    
    
    (604
    )
    
    
    (14,000
    )
    
    
    (970
    )Net cash used in continuing financing activities
    
    
    (390,321
    )
    
    
    (104,653
    )
    
    
    (16,122
    )Net cash used in discontinued financing activities
    
    
    
    
    
    
    
    
    
    
    (2,213
    )Net cash used in financing activities
    
    
    (390,321
    )
    
    
    (104,653
    )
    
    
    (18,335
    )Effect of currency exchange rates on cash and cash equivalents
    
    
    463
    
    
    
    663
    
    
    
    (780
    )Effect of currency exchange rates of discontinued operations
    
    
    
    
    
    
    (120
    )
    
    
    (2,020
    )Increase (decrease) in cash and cash equivalents
    
    
    (291,828
    )
    
    
    272,812
    
    
    
    22,047Cash and cash equivalents at beginning of year
    
    
    371,525
    
    
    
    98,713
    
    
    
    76,666Cash and cash equivalents at end of year
    
    $
    79,697
    
    
    $
    371,525
    
    
    $
    98,713Supplemental cash flow informationCash paid during the year for:Income taxes for continuing operations
    
    $
    11,778
    
    
    $
    19,927
    
    
    $
    4,601Interest for continuing operations
    
    $
    4,606
    
    
    $
    4,822
    
    
    $
    4,522
   57




---



##### Table of Contents



MENTOR CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2008
 Note A  Summary of Significant Accounting Policies
 Business Activity
   
    
    Aesthetic and General Surgery  This segment includes surgically implantable
breast implants for plastic and reconstructive surgery, capital equipment and consumables
used for soft tissue aspiration or body contouring (liposuction), and facial rejuvenation
products including various types of products for skin restoration.
    
    Surgical Urology  This segment includes surgically implantable prostheses for
the treatment of impotence, surgically implantable incontinence products, urinary care
products, and brachytherapy seeds for the treatment of prostate cancer.
    
    Clinical and Consumer Healthcare  This segment includes catheters and other
products for the management of urinary incontinence and retention.
  Principles of Consolidation
   Cash Equivalents and Marketable Securities
    58




---



##### Table of Contents



Cash and available-for-sale investments at March 31, 2008 were as follows
 Gross
    
    
    Gross
    
    
    EstimatedAdjusted
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueCash balances
    
    $
    71,756
    
    
    $
    
    
    
    $
    
    
    
    $
    71,756Money market funds
    
    
    7,941
    
    
    
    
    
    
    
    
    
    
    
    7,941U.S. Government and Agency
    
    
    15,336
    
    
    
    16
    
    
    
    
    
    
    
    15,352State and Municipal Agency obligations
    
    
    14,582
    
    
    
    3
    
    
    
    
    
    
    
    14,585Corporate debt
    
    
    281
    
    
    
    
    
    
    
    
    
    
    
    281Total available-for-sale investments
    
    $
    109,896
    
    
    $
    19
    
    
    $
    
    
    
    $
    109,915Included in cash and cash equivalents
    
    $
    79,697
    
    
    $
    
    
    
    $
    
    
    
    $
    79,697Included in current marketable securities
    
    
    30,199
    
    
    
    19
    
    
    
    
    
    
    
    30,218Total available-for-sale investments
    
    $
    109,896
    
    
    $
    19
    
    
    $
    
    
    
    $
    109,915
  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
  Fair Values of Financial Instruments
  Concentrations and Credit Risk
   59




---



##### Table of Contents



Revenue Recognition
   Inventories
  Property and Equipment
  Intangible Assets and Goodwill
   60




---



##### Table of Contents



Warranty Reserves
  Product Liability Reserves
  Employee Stock-Based Payments
    61




---



##### Table of Contents



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




---



##### Table of Contents



Use of Estimates
  Note B  Inventories
  (in thousands)
    
    2008
    
    
    2007Raw materials
    
    $
    7,327
    
    
    $
    5,924Work in process
    
    
    6,950
    
    
    
    4,961Finished goods on consignment
    
    
    18,058
    
    
    
    13,402Finished goods
    
    
    17,605
    
    
    
    13,786$
    49,940
    
    
    $
    38,073
 Note C  Property and Equipment
  (in thousands)
    
    2008
    
    
    2007Land
    
    $
    276
    
    
    $
    55Buildings
    
    
    13,909
    
    
    
    10,853Leasehold improvements
    
    
    23,747
    
    
    
    23,099Furniture, fixtures and equipment
    
    
    70,832
    
    
    
    59,708Construction in progress
    
    
    20,657
    
    
    
    4,217129,421
    
    
    
    97,932Less accumulated depreciation and amortization
    
    
    (71,169
    )
    
    
    (63,249
    )$
    58,252
    
    
    $
    34,683
  63




---



##### Table of Contents



Note D  Other Comprehensive Income
  Year Ended March 31,(in thousands)
    
    2008
    
    
    2007
    
    
    2006Unrealized gains (losses) and unrecognized actuarial
gains arising during period, net of taxes of $6, $0
and $217, respectively
    
    $
    239
    
    
    $
    32
    
    
    $
    (403
    )Reclassification adjustments for gains (losses)
realized in net income, net of taxes of $0,
$27 and $282, respectively
    
    
    (32
    )
    
    
    59
    
    
    
    524Change in net unrealized/unrecognized gains
    
    $
    207
    
    
    $
    91
    
    
    $
    121
  (in thousands)
    
    2008
    
    
    2007Net unrealized/unrecognized gains
    
    $
    239
    
    
    $
    32Foreign currency translation adjustments
    
    
    31,753
    
    
    
    11,310Accumulated other comprehensive income
    
    $
    31,992
    
    
    $
    11,342
 Note E  Accounts Payable and Accrued Liabilities and Long-Term Accrued Liabilities
  (in thousands)
    
    2008
    
    
    2007Trade accounts payable
    
    $
    43,209
    
    
    $
    32,147Accrued compensation
    
    
    22,026
    
    
    
    14,022Sales returns
    
    
    17,344
    
    
    
    18,590Product liability reserve
    
    
    6,945
    
    
    
    6,555Deferred revenue
    
    
    2,693
    
    
    
    2,349Warranty reserves
    
    
    2,534
    
    
    
    2,989Other
    
    
    15,955
    
    
    
    18,084$
    110,706
    
    
    $
    94,736
  (in thousands)
    
    2008
    
    
    2007Warranty reserves
    
    $
    9,410
    
    
    $
    11,319Deferred revenue
    
    
    9,663
    
    
    
    9,514Long-term capital lease obligations
    
    
    1,080
    
    
    
    Other
    
    
    7,383
    
    
    
    850$
    27,536
    
    
    $
    21,683
  64




---



##### Table of Contents



Note F  Short-Term Bank Borrowings
 Credit Agreement
        65




---



##### Table of Contents



Loan and Overdraft Facility
      
   
  Note G  Stock Options, Restricted Stock and Employee Stock Purchase Plan
 Employee Stock Purchase Plan
    66




---



##### Table of Contents



The Companys Long-Term Incentive Plans
      Restricted Stock
     67




---



##### Table of Contents



Weighted-average(in thousands, except per share amounts)
    
    Shares
    
    
    grant date fair valueNonvested at March 31, 2007
    
    
    346
    
    
    $
    47.71Granted
    
    
    51
    
    
    
    40.65Lapsed
    
    
    (80
    )
    
    
    48.37Forfeited
    
    
    (30
    )
    
    
    50.02Nonvested at March 31, 2008
    
    
    287
    
    
    $
    46.03
 Options
   Weighted-Weighted-
    
    
    averageaverage
    
    
    remaining
    
    
    Aggregateexercise
    
    
    contractual
    
    
    intrinsic(in thousands, except per share amounts and years)
    
    Options
    
    
    price
    
    
    life (Yrs)
    
    
    valueBalance March 31, 2005
    
    
    6,165
    
    
    $
    16.83Granted
    
    
    893
    
    
    
    37.49Exercised
    
    
    (3,162
    )
    
    
    13.79
    
    
    
    
    
    
    $
    79,379Canceled or expired
    
    
    (214
    )
    
    
    22.41Balance March 31, 2006
    
    
    3,682
    
    
    
    24.11Granted
    
    
    280
    
    
    
    46.39Exercised
    
    
    (1,277
    )
    
    
    18.89
    
    
    
    
    
    
    $
    36,865Canceled or expired
    
    
    (424
    )
    
    
    32.68Balance March 31, 2007
    
    
    2,261
    
    
    
    28.13Granted
    
    
    2,847
    
    
    
    47.80Exercised
    
    
    (328
    )
    
    
    19.69
    
    
    
    
    
    
    $
    8,041Canceled or expired
    
    
    (142
    )
    
    
    42.20Balance March 31, 2008
    
    
    4,638
    
    
    $
    40.39
    
    
    
    6.63
    
    
    $
    7,052Vested and Expected to Vest at March 31, 2008
    
    
    4,315
    
    
    $
    39.94
    
    
    
    6.55
    
    
    $
    7,052Exercisable at March 31, 2008
    
    
    1,305
    
    
    $
    24.81
    
    
    
    5.16
    
    
    $
    7,052
   68




---



##### Table of Contents



Options Outstanding
    
    
    Options ExercisableWeighted-Average
    
    
    Weighted-Number of
    
    
    Remaining
    
    
    Average
    
    
    Number of
    
    
    Weighted-AveragePrice Range
    
    Shares
    
    
    Contractual Life
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise PriceUnder $22.00
    
    
    732,501
    
    
    
    3.84
    
    
    $
    16.09
    
    
    
    732,501
    
    
    $
    16.09$22.01-$38.00
    
    
    1,061,025
    
    
    
    7.17
    
    
    $
    35.33
    
    
    
    495,578
    
    
    $
    34.40$38.01-$48.00
    
    
    779,420
    
    
    
    8.57
    
    
    $
    43.30
    
    
    
    45,750
    
    
    $
    41.62$48.01-$53.76
    
    
    2,065,000
    
    
    
    6.62
    
    
    $
    50.52
    
    
    
    31,250
    
    
    $
    52.68
   Year Ended March 31,2008
    
    
    2007
    
    
    2006Risk-free interest rate
    
    
    4.18
    %
    
    
    4.91
    %
    
    
    3.93
    %Expected life (in years)
    
    
    4.97
    
    
    
    4.77
    
    
    
    4.93Expected volatility
    
    
    0.34
    
    
    
    0.36
    
    
    
    0.32Expected dividend yield
    
    
    1.914
    %
    
    
    1.503
    %
    
    
    2.047
    %
 Performance Award Program
     69




---



##### Table of Contents



Fair marketvalue at date(in thousands)
    
    Shares
    
    
    of grantNonvested at March 31, 2007
    
    
    307
    
    
    $
    6,520Forfeited
    
    
    (5
    )
    
    
    (109
    )Nonvested at March 31, 2008
    
    
    302
    
    
    $
    6,411
  Compensation Expense
  Twelve Months Ended March 31,(in thousands)
    
    2008
    
    
    2007
    
    
    2006Stock options
    
    $
    4,367
    
    
    $
    4,425
    
    
    $
    Restricted stock
    
    
    4,361
    
    
    
    4,879
    
    
    
    1,471Performance units
    
    
    2,155
    
    
    
    1,646
    
    
    
    Total stock-based compensation expense, pre-tax
    
    
    10,883
    
    
    
    10,950
    
    
    
    1,471Tax benefit from stock-based compensation expense
    
    
    (3,371
    )
    
    
    (3,349
    )
    
    
    (544
    )Total stock-based compensation expense, net of tax
    
    $
    7,512
    
    
    $
    7,601
    
    
    $
    927
   Year EndedMarch 31,(in thousands, except per share data)
    
    2006Net income from continuing operations: as reported
    
    $
    48,079Deduct: compensation expense fair value method
    
    
    (3,900
    )Net income: pro forma
    
    $
    44,179Basic earnings per share from continuing operations: as reported
    
    $
    1.12Basic earnings per share from continuing operations: pro forma
    
    $
    1.02Net income from continuing operations: as reported
    
    $
    48,079Add back after tax interest expense on convertible notes
    
    
    3,208Net income: diluted earnings per share
    
    
    51,287Deduct: compensation expense fair value method
    
    
    (3,900
    )Net income: diluted earnings per share pro forma
    
    $
    47,387Diluted earnings per share from continuing operations: as reported
    
    $
    1.01Diluted earnings per share from continuing operations: pro forma
    
    $
    0.93
  70




---



##### Table of Contents



Note H  Income Taxes
  Year Ended March 31,(in thousands)
    
    2008
    
    
    2007
    
    
    2006Current:Federal
    
    $
    24,232
    
    
    $
    22,281
    
    
    $
    17,436State
    
    
    2,368
    
    
    
    3,379
    
    
    
    519Foreign
    
    
    796
    
    
    
    2,177
    
    
    
    1,66027,396
    
    
    
    27,837
    
    
    
    19,615Deferred:Federal
    
    
    (2,414
    )
    
    
    (2,617
    )
    
    
    637State
    
    
    (836
    )
    
    
    (246
    )
    
    
    339Foreign
    
    
    (773
    )
    
    
    (426
    )
    
    
    (985
    )(4,023
    )
    
    
    (3,289
    )
    
    
    (9
    )$
    23,373
    
    
    $
    24,548
    
    
    $
    19,606
  71




---



##### Table of Contents



(in thousands)
    
    2008
    
    
    2007Deferred tax liabilities
    
    $
    
    
    
    $
    Deferred tax assets:Book liabilities not deductible for tax
    
    $
    22,144
    
    
    $
    25,192Expenses capitalized for tax
    
    
    474
    
    
    
    471Intercompany inventory-related items
    
    
    5,658
    
    
    
    3,733Fixed assets
    
    
    2,282
    
    
    
    1,654Convertible note hedge
    
    
    1,610
    
    
    
    3,918Total deferred tax assets
    
    $
    32,168
    
    
    $
    34,968Net deferred
tax assets
    
    $
    32,168
    
    
    $
    34,968
     Balance at April 1, 2007
    
    $
    4,304Additions based on tax positions related to the current year
    
    
    1,757Additions for tax positions of prior years
    
    
    2,619Reductions for tax positions of prior years
    
    
    (448
    )Settlements
    
    
    (185
    )Statute lapses
    
    
    (54
    )Balance at March 31, 2008
    
    $
    7,993
     72




---



##### Table of Contents



Year Ended March 31,2008
    
    
    2007
    
    
    2006Federal statutory rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Increase (decrease) resulting from:State taxes net of federal tax benefit
    
    
    1.6
    
    
    
    1.4
    
    
    
    1.6Non-taxable interest and dividends
    
    
    (0.6
    )
    
    
    (1.4
    )
    
    
    (0.4
    )Research and development credit
    
    
    (1.6
    )
    
    
    (1.9
    )
    
    
    (1.7
    )ETI/MFG deduction
    
    
    (0.8
    )
    
    
    (0.4
    )
    
    
    (1.1
    )Foreign operations
    
    
    (4.3
    )
    
    
    (4.9
    )
    
    
    (7.3
    )Dividend repatriation
    
    
    
    
    
    
    
    
    
    
    2.5Equity compensation
    
    
    0.5
    
    
    
    0.8
    
    
    
    Other
    
    
    
    
    
    
    1.3
    
    
    
    0.429.8
    %
    
    
    29.9
    %
    
    
    29.0
    %
   Note I  Intangible Assets and Goodwill
      73




---



##### Table of Contents



Year Ended March 31, 2008Accumulated
    
    
    Carrying(in thousands)
    
    Original Cost
    
    
    Amortization
    
    
    Value
    
    
    Useful LifePatents
    
    $
    10,853
    
    
    $
    (1,684
    )
    
    $
    9,169
    
    
    
    5-20Licenses
    
    
    11,123
    
    
    
    (4,431
    )
    
    
    6,692
    
    
    
    3-17Trademarks
    
    
    128
    
    
    
    (64
    )
    
    
    64
    
    
    
    3-20Trade name
    
    
    4,741
    
    
    
    
    
    
    
    4,741
    
    
    IndefiniteOther intangibles
    
    
    22,807
    
    
    
    (7,137
    )
    
    
    15,670
    
    
    
    3-20Subtotal intangibles
    
    
    49,652
    
    
    
    (13,316
    )
    
    
    36,336Goodwill
    
    
    50,430
    
    
    
    (723
    )
    
    
    49,707Total intangibles and goodwill
    
    $
    100,082
    
    
    $
    (14,039
    )
    
    $
    86,043
 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
  Estimated AmortizationYear Ended
    
    Expense (in thousands)March 31, 2009
    
    $
    6,036March 31, 2010
    
    $
    5,123March 31, 2011
    
    $
    4,007March 31, 2012
    
    $
    3,452March 31, 2013
    
    $
    3,203
  (in thousands)Balance at March 31, 2006
    
    $
    11,878Currency translation
    
    
    766Balance at March 31, 2007
    
    $
    12,644Goodwill acquired
    
    
    31,769Currency translation
    
    
    5,294Balance at March 31, 2008
    
    $
    49,707
  74




---



##### Table of Contents



Note J  Acquisitions
    (In thousands)Cash
    
    $
    436Accounts receivable
    
    
    3,508Inventory
    
    
    8,953Prepaid expenses and other current assets
    
    
    798Total current assets
    
    
    13,695Property, plant and equipment
    
    
    5,226Intangible assets
    
    
    18,423Goodwill
    
    
    31,769Other assets
    
    
    39Total assets acquired
    
    $
    69,152Liabilities associated with acquisition:Accounts payable and accrued liabilities
    
    $
    8,185Other long-term liabilities
    
    
    7,071Total liabilities assumed
    
    $
    15,256Net assets acquired
    
    $
    53,896
    75




---



##### Table of Contents



Note K  Earnings per Share
  Year Ended March 31,(in thousands)
    
    2008
    
    
    2007
    
    
    2006Net income from continuing operations: as reported
    
    $
    54,951
    
    
    $
    57,624
    
    
    $
    48,079Add 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
    
    $
    58,159
    
    
    $
    60,832
    
    
    $
    51,287
 Year Ended March 31,(in thousands)
    
    2008
    
    
    2007
    
    
    2006Net income from discontinued operations
    
    $
    8,464
    
    
    $
    232,990
    
    
    $
    14,278Net income: as reported
    
    $
    63,415
    
    
    $
    290,614
    
    
    $
    62,357Add 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
    
    $
    66,623
    
    
    $
    293,822
    
    
    $
    65,565
 Year Ended March 31,(in thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2006Weighted average outstanding shares: basic
    
    
    35,375
    
    
    
    41,960
    
    
    
    42,995Restricted grants
    
    
    296
    
    
    
    152
    
    
    
    140Shares issuable through exercise of stock options
    
    
    538
    
    
    
    1,000
    
    
    
    1,901Shares issuable through convertible notes
    
    
    5,175
    
    
    
    5,151
    
    
    
    5,138Shares issuable through warrants
    
    
    65
    
    
    
    829
    
    
    
    696Weighted average outstanding shares: diluted
    
    
    41,449
    
    
    
    49,092
    
    
    
    50,870Basic earnings per shareContinuing operations
    
    $
    1.55
    
    
    $
    1.37
    
    
    $
    1.12Discontinued operations
    
    $
    0.24
    
    
    $
    5.55
    
    
    $
    0.33Basic earnings per share
    
    $
    1.79
    
    
    $
    6.93
    
    
    $
    1.45Diluted earnings per shareContinuing operations
    
    $
    1.40
    
    
    $
    1.24
    
    
    $
    1.01Discontinued operations
    
    $
    0.20
    
    
    $
    4.75
    
    
    $
    0.28Diluted earnings per share
    
    $
    1.61
    
    
    $
    5.99
    
    
    $
    1.29
 Employee stock options
   76




---



##### Table of Contents



Convertible subordinated notes and warrants
    Note L  Long-Term Debt
 3 4
  
    
    during any fiscal quarter prior to January 1, 2019, if the closing price of the
Companys common stock for at least 20 trading days in the 30 consecutive trading day
period ending on the first trading day of such fiscal quarter is more than 120% of the
conversion price per share of the Companys common stock on such trading day;
 
    
    any business day on or after January 1, 2019, if the closing price of the Companys
common stock on the immediately preceding trading day is more than 120% of the conversion
price per share of the Companys common stock on such trading day;
 
    
    during the five business day period after any five consecutive trading day period if the
average of the trading prices of the notes for such five consecutive trading day period is
less than 98% of the average of the conversion values of the notes during such period,
subject to certain limitations;
 
    
    if the Company has called the notes for redemption; or
 
    
    if the Company makes certain significant distributions to holders of its common stock or
the Company enters into specified corporate transactions.
   77




---



##### Table of Contents



Note M  Share Repurchase Program
     78




---



##### Table of Contents



Note N  Commitments
  Capital
    
    
    Operating(in thousands)
    
    Lease
    
    
    Leases2009
    
    $
    144
    
    
    $
    4,4742010
    
    
    169
    
    
    
    4,4152011
    
    
    169
    
    
    
    4,1192012
    
    
    169
    
    
    
    3,4492013
    
    
    169
    
    
    
    2,018Thereafter
    
    
    575
    
    
    
    2,816Total
    
    $
    1,395
    
    
    $
    21,291Less: Amounts representing interest costs
    
    
    171Net present value
    
    
    1,224Less: Capital lease obligations included in
short-term debt
    
    
    144Long-term capital lease obligations
    
    $
    1,080
   79




---



##### Table of Contents



Note O  Related Party Transactions
   Note P  Warranty Reserves
   Year Ended March 31,(in thousands)
    
    2008
    
    
    2007Beginning warranty reserves
    
    $
    14,308
    
    
    $
    13,603Cost of warranty claims
    
    
    (2,702
    )
    
    
    (3,225
    )Accrual for product warranties
    
    
    3,990
    
    
    
    3,930Adjustments made to accruals related to
pre-existing warranties
    
    
    (3,652
    )
    
    
    Ending warranty reserves
    
    $
    11,944
    
    
    $
    14,308
  80




---



##### Table of Contents



Note Q  Contingencies
     Note R  Long-Lived Asset Impairment Charges
  Note S  Postretirement Benefit Plans
   81




---



##### Table of Contents



Note T  Discontinued Operations
      82




---



##### Table of Contents



Note U  Segment Information for Continuing Operations
  Year Ending March 31,(in thousands)
    
    2008
    
    
    2007
    
    
    2006Principal products net salesBreast aesthetics
    
    $
    328,027
    
    
    $
    262,556
    
    
    $
    233,189Body contouring
    
    
    15,212
    
    
    
    16,734
    
    
    
    17,782Other aesthetics, including facial products
    
    
    29,969
    
    
    
    22,684
    
    
    
    17,301Consolidated total
    
    $
    373,208
    
    
    $
    301,974
    
    
    $
    268,272
 Year Ending March 31,(in thousands)
    
    2008
    
    
    2007
    
    
    2006Geographic area net salesUnited States
    
    $
    257,250
    
    
    $
    217,785
    
    
    $
    192,764Canada
    
    
    20,381
    
    
    
    16,234
    
    
    
    15,178All other countries
    
    
    95,577
    
    
    
    67,955
    
    
    
    60,330Consolidated total
    
    $
    373,208
    
    
    $
    301,974
    
    
    $
    268,272
 At March 31,(in thousands)
    
    2008
    
    
    2007Geographic area long-lived assetsUnited States
    
    $
    58,229
    
    
    $
    41,792France
    
    
    61,613
    
    
    
    26Netherlands
    
    
    17,039
    
    
    
    15,263All other countries
    
    
    7,414
    
    
    
    6,209Consolidated total
    
    $
    144,295
    
    
    $
    63,290
  83




---



##### Table of Contents



Note V  Quarterly Financial Data (Unaudited)
  (in thousands, except per share data)Year Ended March 31, 2008
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthNet sales
    
    $
    95,564
    
    
    $
    85,390
    
    
    $
    92,860
    
    
    $
    99,394Gross profit
    
    
    74,340
    
    
    
    59,910
    
    
    
    66,722
    
    
    
    73,241Net income from continuing operations
    
    
    21,744
    
    
    
    10,029
    
    
    
    12,112
    
    
    
    11,066Net income (loss) from discontinued
operations, net of tax
    
    
    (6
    )
    
    
    (111
    )
    
    
    (170
    )
    
    
    8,751Net income
    
    $
    21,738
    
    
    $
    9,918
    
    
    $
    11,942
    
    
    $
    19,817Basic earnings (loss) per shareContinuing operations
    
    $
    0.54
    
    
    $
    0.29
    
    
    $
    0.36
    
    
    $
    0.33Discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    0.26Basic earnings per share
    
    $
    0.54
    
    
    $
    0.29
    
    
    $
    0.36
    
    
    $
    0.59Diluted earnings (loss) per shareContinuing operations
    
    $
    0.48
    
    
    $
    0.27
    
    
    $
    0.32
    
    
    $
    0.30Discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    0.22Diluted earnings per share
    
    $
    0.48
    
    
    $
    0.26
    
    
    $
    0.32
    
    
    $
    0.53
 (in thousands, except per share data)Year Ended March 31, 2007
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthNet 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
  84




---



##### Table of Contents



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, 2008Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    4,534
    
    
    $
    1,598
    
    
    $
    622
    
    
    $
    5,510Liability reserves:Product liability reserves
    
    $
    6,555
    
    
    $
    503
    
    
    $
    113
    
    
    $
    6,945Accrued sales returns and allowances
    
    
    18,590
    
    
    
    5,494
    
    
    
    6,740
    
    
    
    17,344$
    25,145
    
    
    $
    5,997
    
    
    $
    6,853
    
    
    $
    24,289Year Ended March 31, 2007Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    4,616
    
    
    
    1,524
    
    
    
    1,606
    
    
    $
    4,534Liability reserves:Product liability reserves
    
    $
    6,701
    
    
    $
    418
    
    
    $
    564
    
    
    $
    6,555Accrued sales returns and allowances
    
    
    15,544
    
    
    
    12,651
    
    
    
    9,605
    
    
    
    18,590$
    22,245
    
    
    $
    13,069
    
    
    $
    10,169
    
    
    $
    25,145Year Ended March 31, 2006Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    3,839
    
    
    $
    1,804
    
    
    $
    1,027
    
    
    $
    4,616Liability reserves:Product liability reserves
    
    $
    5,232
    
    
    $
    1,732
    
    
    $
    263
    
    
    $
    6,701Accrued sales returns and allowances
    
    
    13,162
    
    
    
    9,049
    
    
    
    6,667
    
    
    
    15,544$
    18,394
    
    
    $
    10,781
    
    
    $
    6,930
    
    
    $
    22,245
  85




---



##### Table of Contents



Signatures
  MENTOR CORPORATIONDATE: May 30, 2008
    /s/ JOSHUA H. LEVINEJoshua H. LevinePresident and Chief Executive Officer  Signatures
    
    Title
    
    Date Signed/s/ Joshua H. Levine

Joshua H. Levine
    
    President, Chief Executive Officer and Director
(Principal Executive Officer)
    
    May 30, 2008/s/ Michael ONeill

Michael ONeill
    
    Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
    
    May 30, 2008/s/ Joseph E. Whitters

Joseph E. Whitters
    
    Chairman of the Board
    
    May 30, 2008/s/ Michael L. Emmons

Michael L. Emmons
    
    Director
    
    May 30, 2008/s/ Walter W. Faster

Walter W. Faster
    
    Director
    
    May 30, 2008/s/ Margaret H. Jordan

Margaret H. Jordan
    
    Director
    
    May 30, 2008/s/ Katherine S. Napier

Katherine S. Napier
    
    Director
    
    May 30, 2008/s/ Burt E. Rosen

Burt E. Rosen
    
    Director
    
    May 30, 2008
  86




---



##### Table of Contents



EXHIBIT INDEX
 Item Number2.1
    
    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, 2006.2.2
    
    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, 2006.2.3
    
    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(a) of the Registrants Annual Report on Form 10-K
for the year ended March 31, 2003.3.2
    
    Articles of Amendment to Restated Articles of Incorporation of
Mentor Corporation  Incorporated by reference to Exhibit 3.1
on Form 8-K filed on October 3, 2007.3.3
    
    Amended and Restated Bylaws of Mentor Corporation 
Incorporated by reference to Exhibit 3.2 on Form 8-K filed on
September 21, 2007.4.1
    
    Indenture 23/4% Convertible Subordinated Notes Due 2024, dated
December 22, 2003  Incorporated by reference to Exhibit 4(a)
of the Registrants Quarterly Report on Form 10-Q for the
quarter ended December 31, 2003.10.1*
    
    Mentor Corporation Employee Stock Purchase Plan 
Incorporated by reference to Exhibit 10.8 of the Registrants
Quarterly Report on Form 10-Q for the quarter ended September
30, 2005.10.2
    
    Lease Agreement, dated November 10, 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, 2002.10.3
    
    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, 2002.10.4
    
    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, 2003.10.5
    
    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, 1999.10.6
    
    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.
  87




---



##### Table of Contents



EXHIBIT INDEX (continued)
 Item Number10.7
    
    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, 2003.10.8
    
    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, 2003.10.9
    
    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, 2003.10.10
    
    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, 2004.10.11*
    
    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, 2005.10.12
    
    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, 2004.10.13*
    
    Mentor Corporation Form of 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, 2004.10.14
    
    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,
2005.10.15
    
    Credit Agreement dated May 25, 2005, between Mentor Corporation, Bank of
the West, Union Bank of California, N.A. and Wells Fargo, N.A. 
Incorporated by reference to Exhibit 99.1 of the Registrants Current
Report on Form 8-K filed June 2, 2005.10.16
    
    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, 2005.10.17*
    
    Mentor Corporation 2005 Long-Term Incentive Plan Form of 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, 2006.10.18
    
    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.
  88




---



##### Table of Contents



EXHIBIT INDEX (continued)
 Item Number10.19
    
    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, 2006.10.20*
    
    2005 Long-Term Incentive Plan 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, 2006.10.21*
    
    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, 2006.10.22*
    
    Form of Indemnification Agreement  Incorporated by reference
to Exhibit 10.1 of the Registrants Current Report on Form 8-K
filed on November 29, 2006.10.23
    
    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, 2007.10.24*
    
    Amended and Restated 2007 Strategic Equity Incentive Plan
under the 2005 Long-Term Incentive Plan  Amended September
18, 2007 Incorporated by reference to Exhibit 10.1 of the
Registrants Quarterly Report on Form 10-Q for the quarter
ended September 28, 2007.10.25*
    
    Separation and Release Agreement dated October 27, 2007,
between Mentor Corporation and Loren L. McFarland 
Incorporated by reference to Exhibit 10.1 of the Registrants
Current Report on Form 8-K filed on October 30, 2007.10.26*
    
    Consulting Agreement dated October 27, 2007, between Mentor
Corporation and Loren L. McFarland  Incorporated by
reference to Exhibit 10.2 of Registrants Current Report on
Form 8-K filed on October 30, 2007.10.27*
    
    Mentor Corporation 1991 Long-Term Incentive Plan as amended
and restated as of September 17, 2007  Incorporated by
reference to Exhibit 10.1 of the Registrants Quarterly Report
on Form 10-Q for the quarter ended December 28, 2007.10.28*
    
    Mentor Corporation 2005 Long-Term Incentive Plan as amended
and restated as of September 17, 2007  Incorporated by
reference to Exhibit 10.2 of the Registrants Quarterly Report
on Form 10-Q for the quarter ended December 28, 2007.10.29*
    
    Employment Agreement with Joshua Levine dated as of December
21, 2007  Incorporated by reference to Exhibit 10.7 of the
Registrants Quarterly Report on Form 10-Q for the quarter
ended December 28, 2007.
  89




---



##### Table of Contents



EXHIBIT INDEX (continued)
 Item Number10.30*
    
    Employment Agreement with Michael ONeill dated as of December 21, 2007  Incorporated by
reference to Exhibit 10.8 of the Registrants Quarterly Report on Form 10-Q for the quarter
ended December 28, 2007.10.31*
    
    Agreement with Joseph A. Newcomb dated as of December 21, 2007  Incorporated by reference
to Exhibit 10.9 of the Registrants Quarterly Report on Form 10-Q for the quarter ended
December 28, 2007.10.32*
    
    Employment Agreement with Edward S. Northup dated as of December 21, 2007  Incorporated by
reference to Exhibit 10.10 of the Registrants Quarterly Report on Form 10-Q for the
quarter ended December 28, 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  Michael ONeill.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  Michael ONeill.
 *
    
    Management contract or compensatory plan or arrangement.  90