10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

[x]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2002
or

[   ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to _____

Commission File No. 0-7955

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

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

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

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Shares, par value $.10 per share

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in a definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K o

Based on the closing sale price on the Nasdaq National Market on June 26, 2002, the aggregate market value of the voting stock of the Registrant held by non-affiliates of the Registrant was approximately $819,826,000. For purposes of this calculation, shares held by each officer, director and holder of 10% or more of the outstanding shares of the Registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of June 26, 2002 there were approximately 23,608,813 Common Shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for its 2002 Annual Meeting of Shareholders are incorporated by reference in Part III in this Report on Form 10-K.

TABLE OF CONTENTS

ITEM	PART I	PAGE
1.	Business	4
	General	4
	Principal Products and Markets	5
	Sales by Principal Product Lines	6
	Marketing	7
	International Operations	7
	Competition	7
	Government Regulations	8
	Medicare, Medicaid and Third Party Reimbursement	10
	Product Development	13
	Patents and Licenses	13
	Raw Material Supply	14
	Employees	14
	Executive Officers of the Registrant	15
2.	Properties	16
3.	Legal Proceedings	16
4.	Submission of Matters to a Vote of Security Holders	17
	PART II
5.	Market for the Registrant's Common Equity and Related Shareholder Matters	17
6.	Selected Financial Data	18
7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
7A.	Quantitative and Qualitative Disclosures About Market Risk	29
8.	Financial Statements and Supplementary Data	29
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	29
	PART III
10.	Directors and Executive Officers of the Registrant	30
11.	Executive Compensation	30
12.	Security Ownership of Certain Beneficial Owners and Management	30
13.	Certain Relationships and Related Transactions	30
	PART IV
14.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	31
	Report of Independent Auditors	32
	Consolidated Financial Statements	33
	Signatures	57
	Exhibit Index	58

PART I

This Annual Report on Form 10-K filed on behalf of Mentor Corporation ("Mentor" or the "Company"), including information incorporated herein by reference, contains certain forward-looking statements that involve risk and uncertainty. Such forward-looking statements are characterized by future or conditional verbs and include statements regarding new and existing products, technologies and opportunities, market and industry segment growth and demand and acceptance of new and existing products. Such statements are only predictions and our actual results may differ materially from those anticipated in these forward-looking statements. Factors that may cause such differences include, but are not limited to, increased competition, changes in product demand, changes in market acceptance, new product development, United States Food and Drug Administration, " FDA", approval, delay, or rejection of new or existing products, changes in government regulation, supply of raw materials, changes in reimbursement practices, adverse results of litigation and other risks identified in this Annual Report or in other documents filed by the Company with the Securities and Exchange Commission. Specific attention should be directed to the sections entitled "Government Regulation," "Legal Proceedings," and "Factors that May Affect Future Results of Operations." The Company assumes no obligation to update forward-looking statements as circumstances change.

ITEM 1. BUSINESS.

General

The Company develops, manufactures and markets a broad range of products for the medical specialties of aesthetic and general surgery (plastic and reconstructive surgery) and urology. Aesthetic and general surgery products include surgically implantable prostheses for plastic and reconstructive surgery and capital equipment used in soft tissue aspiration. Surgical urology products include surgically implantable prostheses for the treatment of impotence and brachytherapy seeds for the treatment of prostate cancer. Clinical and consumer healthcare products include catheters and other products for the management of urinary incontinence and retention.

During fiscal 2000, the Company substantially completed the divestiture of its ophthalmology business. All sales, expenses, gains on assets sales, and other financial information for the ophthalmology business are reported, net, as a single line on the Company's financial statements.

Effective January 19, 2001, Mentor acquired the assets of South Bay Medical, LLC, a development-stage company focused on the development of a new technology for a computer-based workstation and automated cartridge-based needle loading system for use in brachytherapy procedures.

Effective February 9, 2001, Mentor acquired Porges S.A., a subsidiary of Sanofi-Synthelabo headquartered in Paris with manufacturing facilities in Sarlat, France. Porges holds a leading market share for urological products in France and has strong market position throughout Europe.

Effective December 31, 2001, the Company acquired the remaining 51% of the shares of Byron Medical, Inc. The Company now owns 100% of the shares. Byron Medical is located in Tucson, Arizona and specializes in the distribution of liposuction equipment and supplies.

Effective December 2001, the Company entered into several agreements with ProSurg, Inc. to acquire certain patent rights, and to obtain a source of supply of a bio-absorbable co-polymer product to be used in the surgical treatment of incontinence. The Company introduced the new product, Sabre™ in June 2002.

Mentor Corporation was incorporated in Minnesota in 1969.

Principal Products and Markets

Aesthetic and General Surgery Products

The Company produces a broad line of mammary prostheses, including saline-filled implants and silicone gel-filled implants. In fiscal 2002, approximately 85% of aesthetic and general surgery revenues were sales of mammary prostheses. Saline-filled breast implants accounted for approximately 67% of mammary prostheses sold in fiscal 2002.

Mammary prostheses have applications in both cosmetic and reconstructive plastic surgery procedures. These prostheses are used in cosmetic augmentation procedures to enhance breast size and shape. In the reconstruction procedure market, mammary prostheses are utilized as a surgical solution to reform the breast following a mastectomy. Breast reconstruction is a surgical option for many women following mastectomy either at the time of surgery or a later date.

The Company also offers a line of tissue expanders. Tissue expansion is a technique for growing additional tissue for reconstruction and skin graft procedures. Some of the major applications of tissue expansion developed to date include post-mastectomy breast reconstruction and the improvement of disfigurements such as burns, large scars and congenital deformities.

In September 1997, the Company began marketing the Contour Genesis^® System, an ultrasound-assisted product used for the aspiration of soft tissues in general surgery and cosmetic surgery applications. The Company has completed clinical trials using the Contour Genesis^® System in order to expand the labeling of the product to include ultrasonic-assisted liposuction and received approval from the Food and Drug Administration ("FDA") to expand the labeling in October 2001. The December 2001 acquisition of Byron Medical, Inc. expanded the Company's offering of liposuction products to include traditional and power assisted product offerings. Subsequently, the Company acquired the assets of LySonix, Inc., a former competitor in ultrasonic liposuction equipment and supplies. As a result of these two acquisitions, the Company is positioned as a broad line supplier to the entire body contouring (liposuction) market.

Surgical Urology Products

The Company's surgical urology products fall into three general categories:  erectile dysfunction products, urinary care and pelvic floor products, and cancer treatment products.

Erectile Dysfunction Products. The Company's erectile dysfunction products consist of a line of penile implants for the treatment of male sexual impotence. Penile prostheses are implanted in men who cannot achieve a natural erection of sufficient rigidity for sexual intercourse. Penile implants have become the standard of care for men who have not responded to less invasive therapies, the best known of which is Pfizer's Viagra^®. In order to respond to various physician and patient preferences, the Company manufactures several types of penile prostheses, including a hydraulic inflatable device and a malleable prosthesis. Late in fiscal year 2000, the Company introduced a major improvement to its Alpha 1 inflatable device, the Lockout^® valve. The Lockout valve was designed to prevent auto-inflation, a potential complication in this type of treatment. In May 2002, the Company received Canadian and Conformite Europeene, "CE" approval for the sale and marketing of penile implants utilizing a new Resist™ coating designed to reduce bacterial adherence.

Urinary Care and Pelvic Floor Products. The Company markets the Suspend^® Sling for use in pubovaginal sling and pelvic floor reconstruction procedures. Pubovaginal sling procedures provide relief for women suffering from stress incontinence. Pelvic floor reconstruction procedures utilizing Suspend tissue are commonly used to treat women suffering from all types of vaginal prolapse. In February 2002, the Company introduced Axis™, a dermal based tissue, which like Suspend is treated using the patented Tutoplast^® process to provide the surgeon with additional tissue choices. In March 2002, the Company announced the introduction of Sabre™ a bio-absorbable synthetic co-polymer sling to be used in the surgical treatment of incontinence.

Cancer Treatment Products. The Company serves as the marketing partner in a strategic alliance focused on the treatment of prostate cancer. The alliance is with North American Scientific, Inc. ("NASI") a producer of brachytherapy seeds for the treatment of prostate cancer. NASI manufactures and ships IoGold^® I-125 and Pd-Gold^® Pd-103 brachytherapy seeds, while the Company performs all of the sales and marketing functions. In January 2001, the Company announced the acquisition of South Bay Medical, LLCand its new technology for a computer-based workstation and automated cartridge-based needle loading system for use in brachytherapy procedures. Early in fiscal year 2002, the Company submitted a 510(k) application to the FDA for approval to market the system. The FDA had requested additional information regarding the application. The Company has responded to all of the FDA's requests and believes the FDA now has all the necessary information to grant approval. The Company expects to receive approval from the FDA in the second quarter of fiscal 2003 and to begin sales of the workstation immediately thereafter. However, there is no guarantee that the FDA will grant the approvals necessary to allow marketing of the workstation in the United States. In April 2002, the Company received the necessary approvals from the Canadian Therapeutic Products Directorate to market and sell the Isoloader™ workstation and needle loading system in Canada. The Company expects to begin sales of the lsoloader workstation into the Canadian market in the second quarter of fiscal 2003.

Clinical and Consumer Healthcare Products

The Company markets a line of male external catheters that help men manage their incontinence and a line of intermittent self-catheters for men, women and children who suffer from urinary retention. These products are disposable and are used in homes, hospitals and rehabilitation and extended care facilities.

In February 2001, the Company announced the acquisition of Porges S.A., a French company specializing in urological disposables, including diagnostic tools, and various devices for surgery and postoperative follow-up. The Company introduced the first of these products into the U.S. market in fiscal 2002.

The Company also markets a variety of other disposable products used in the management of urinary incontinence and cancer. These include leg bags and urine collection systems, organic odor eliminators, and moisturizing skin creams and ointments. In April 2001, the Company began to distribute the BTA Stat^® point-of-care bladder cancer screening test manufactured by Polymedco Inc. under an exclusive supply and distribution agreement.

The Company introduced the Self-Cath Plus™, a lubricious coated intermittent catheter along with a closed system sterile intermittent catheter in fiscal 2002.

Sales by Principal Product Lines

The following table shows the net sales attributable to each of the Company's principal product lines and the percentage contributions of such sales to total net sales for the periods indicated.

	Year Ended March 31,
	2002		2001		2000
(in thousands)	Amount	%	Amount	%	Amount	%
Aesthetic and General Surgery	$163,091	51%	$157,122	59%	$150,334	60%
Surgical Urology Products	94,341	29	62,264	23	52,794	21
Clinical and Consumer Healthcare	63,630	20	49,508	18	46,217	19
	$321,062	100%	$268,894	100%	$249,345	100%

For additional information regarding the Company's revenues, operating profits and identifiable assets attributable to the Company's business segments as well as domestic and foreign operations, see Note O of the "Notes to Consolidated Financial Statements."

Marketing

The Company employs specialized domestic sales forces for aesthetic surgery, surgical urology and disposable healthcare product lines. Each sales force provides product information or specific data support and related services to physicians, nurses and other health care professionals. The Company also markets certain products, particularly its disposable incontinence products, through a domestic network of independent hospital supply dealers and healthcare distributors, and increasingly through retail pharmacies.

The Company promotes its products through radio, magazine and journal advertising, direct mail programs, and participation in, and sponsorship of, medical conferences and educational seminars. The Company also participates in support organizations that provide counseling and education for persons suffering from specific disease states, and provides patient education materials for some of its products to physicians for use with their patients.

International Operations

The Company exports most of its products lines, principally to Canada and Western Europe. Products are sold to both independent distributors as well as through the Company's direct international sales offices in Canada, the United Kingdom, Germany, France, Japan, Benelux, Australia, Spain, Portugal and Italy. Other than sales made through the Company's international sales offices, export sales have been made in United States dollars and currency fluctuations have not significantly affected operating earnings. The Company generally does not use derivative instruments to hedge its foreign currency transactions. In fiscal 2002, sales from the direct international offices accounted for 28% of total Company sales.

In addition, the Company manufactures mammary implants in Leiden, the Netherlands, and through its acquisition of Porges, has manufacturing facilities in Sarlat, France where urological disposables distributed throughout Europe are manufactured.

Competition

The Company believes it is one of the leading suppliers in the United States of penile implants, cosmetic and reconstructive surgery products, and disposable catheter products. This belief is based upon information developed internally, public information sources, and information from independent research studies of market share.

The Company competes primarily with one other company in the domestic breast implant market, McGhan Medical Corporation, a subsidiary of INAMED, Inc. The primary competitive factors currently are product performance and quality, range of styles and sizes, proprietary design, customer service and in certain instances, price.

The Company competes with only one other company in the inflatable penile implant market, American Medical Systems, Inc. Several companies sell competing malleable penile implants. The primary competitive factors are product performance and reliability, ease of implantation and customer service. The Company believes that by providing several types of implants that emphasize high performance and reliability, it can successfully respond to various physician and patient preferences.

The Company competes with many other companies providing brachytherapy seeds for the treatment of prostate cancer, including Amersham Health Care, C.R. Bard, Inc., Theragenics Corporation and others. The primary competitive factors in this market are technologies that support efficient preparation and implantation of radioactive sources through improved product delivery, product offering and consistent quality. The Company believes that it has the second largest market share for Iodine seeds, as well as for Palladium seeds, and that its recent acquisition of South Bay Medical's automated workstation, Isoloader™, will provide the Company with a strong competitive advantage when it is approved for use in the United States by the FDA. In April 2002, the Company received the necessary approvals to market and sell the Isoloader ™ workstation and needle loading system in Canada from the Canadian Therapeutic Products Directorate.

By superior design and active marketing of catheters and other disposable incontinence products, the Company has been able to compete successfully against larger companies in this market. C.R. Bard, Inc., Hollister, Inc., Kendall (a division of Tyco HealthCare), and Coloplast Corporation are the dominant competitors in the market. As with many of its other product lines, the Company competes primarily on the basis of design and performance, and by providing product orientation, support and related services to health care professionals and consumers. The fiscal 2001 Porges S.A. acquisition provided the Company a dominant position in the European market and the Company intends to introduce several of Porges' products into the U.S. market.

Government Regulations

General

As a manufacturer of medical devices, the Company's manufacturing processes and facilities are subject to continuing review by the FDA and various state and international agencies. These agencies inspect the Company and its facilities from time to time to determine whether the Company is in compliance with various regulations relating to manufacturing practices and other requirements. The FDA has the power to prevent or limit further marketing of products based upon the results of these inspections. These regulations depend heavily on administrative interpretation by the various agencies. There can be no assurance that future interpretations made by the FDA or other regulatory bodies will not adversely affect the Company. A determination that the Company is in violation of such regulations could lead to imposition of various penalties, including the issuance of warning letters, injunctive relief (whether by adverse court ruling or by consent), product recalls, civil penalties, product seizures, or cri minal prosecution.

Medical Device Amendments of 1976

Under the "Medical Device Amendments of 1976" as amended ("the '76 Amendments"), the FDA has the authority to adopt regulations that: (i) set standards for medical devices; (ii) require proof of safety and effectiveness prior to marketing devices which the FDA believes require pre-market clearance; (iii) require test data be submitted to the FDA prior to clinical evaluation in individuals; (iv) permit detailed inspections of device manufacturing facilities; (v) establish "good manufacturing practices" ("GMPs") that must be followed in device manufacture; (vi) require reporting of certain adverse events and device malfunctions to the FDA; and (vii) prohibit device exports that do not meet certain requirements. The FDA also can regulate promotional activities by device companies. All of the Company's products are medical devices or products and are therefore subject to FDA regulation.

The '76 Amendments establish complex procedures for FDA regulation of devices. Devices are placed in three classes: Class I (general controls to preclude misbranding or adulteration, compliance with labeling and other requirements), Class II (special controls and the FDA clearance in addition to general controls), and Class III (pre-market approval application ("PMAA") before commercial marketing). Class III devices are the most extensively regulated. Class III devices require each manufacturer to submit to the FDA a PMAA that includes information on the safety and effectiveness of the device. The majority of the Company's aesthetic surgery and urology implants are in Class III, while most of its disposable incontinence products are in Classes I and II.

In 1991, the Company submitted a PMAA for its silicone gel-filled mammary prostheses to the FDA. In 1992, the FDA's outside advisory panel on aesthetic surgery products indicated that although there was insufficient data to establish with reasonable certainty that silicone gel implants were safe and effective, there was a public health need for these types of implants. The FDA adopted the recommendations of the panel.

The FDA denied the pending applications for the use of silicone gel-filled breast implants for augmentation, but provided for the continued availability of the implants for reconstruction purposes on the basis of a public health need. Since 1993, women have been required to enroll in a clinical study for future follow-up in order to receive gel-filled implants for reconstruction. Patients are required to sign an informed consent form and physicians must certify that saline implants are not a satisfactory alternative. The Company continues to ship these products under the terms of this clinical study.

In 1993, the FDA published proposed guidelines for PMAAs on the Company's hydraulic inflatable penile prostheses and saline-filled breast implants. For saline implants, the Company submitted all the required data and on May 10, 2000, the FDA approved the Company's PMAA. In conjunction with the review of data, the FDA inspected the Company's manufacturing facility in Irving, Texas and indicated the facility was in substantial compliance with the applicable regulations. In addition, the Company submitted all required data for the PMAA for its penile implants, and received FDA approval for the Company's penile implants July 14, 2000.

The Company has incurred, and will continue to incur, substantial costs relating to laboratory and clinical testing of new and existing products and the preparation and filing of documents in the formats required by the FDA. The process of obtaining marketing clearance and approvals from the FDA for new products and existing products can be time-consuming and expensive, and there is no assurance that such clearances or approvals will be granted. The Company also may encounter delays in bringing new products to market as a result of being required by the FDA to conduct and document additional investigations of product safety and effectiveness, which may adversely affect the Company's ability to commercialize additional products or additional applications for existing products.

Additional Regulations

As a manufacturer of medical devices, the Company's manufacturing processes and facilities are subject to regulation and review by international regulatory agencies for products sold internationally. The Company has obtained a Conformite Europeene, "CE" mark for its products sold in Europe by demonstrating compliance with the ISO 9001, EN46001 and ISO13485 international quality system standards. Medical device laws and regulations are also in effect in some of the other countries to which the Company exports its products. These range from comprehensive device approval requirements for some or all of the Company's medical device products to requests for product data or certifications. Failure to comply with these international regulatory standards and requirements could affect the Company's ability to market and sell its products in these markets and have a significant negative impact on sales and results of operations.

Texas Facility Review

In May 1998, the Company entered into a voluntary consent decree with the FDA, under which the Company agreed, among other things, to complete certain re-validations of the manufacturing processes in agreed upon timeframes that were identified during an FDA inspection.

The consent decree required the Company to hire expert consultants to assist in strengthening the Company's compliance program and related processes. In July 1998, the consultant reported to Mentor management and the FDA that, except for the outstanding re-validations, there were no significant areas of GMP non-compliance. The expert consultant reviewed the re-validations and reported to management and to the FDA that all re-validation projects had been completed within the agreed timeframes.

Additionally, under the terms of the consent decree, a separate expert consultant is required to conduct annual inspections of the Texas facility and issue a report annually to the FDA. The expert consultant has conducted the required annual comprehensive GMP inspections. In each of the annual inspections, 1999 to 2002, the expert consultant has found the Texas facility to be in substantial compliance with FDA good manufacturing practice regulations.

During the period May 1-10, 2000, the FDA conducted an inspection at the Texas facility to assess the procedures under which saline breast implants are manufactured. The inspection was conducted in conjunction with the FDA's final decision on Mentor's saline breast implant PMAA. The inspection resulted in the issuance of an FD483 (form used to report FDA inspection findings) with one observation related to validation of a computer system, which the Company addressed. Mentor's saline breast implant PMAA was subsequently approved.

Between the period April 16-23, 2001, the FDA conducted an inspection at the Texas facility. The inspection was a follow-up inspection related to Mentor's saline breast implant PMAA and the previous inspection. The inspection resulted in the issuance of an FD483 with two observations, one related to a manufacturing process and one related to computer software. Mentor has responded to the FDA on both observations.

In February 2002, the FDA performed a comprehensive GMP/QSR (Good Manufacturing Practice/Quality System Requirements) inspection of the Texas facility. This inspection covered all aspects of the Texas quality systems for gel and saline breast implants and tissue expanders. The inspection resulted in the issuance of an FD483 with three observations: one related to the manufacturing shell dipping process, one related to complaint analysis and one related to gowning practices. The Company has addressed each of these issues.

The Company believes that it will continue to meet the requirements of the consent decree, although there can be no assurance that it can do so. In addition, although the expert consultants have expressed their opinion as to the satisfactory completion of consent decree requirements, FDA inspectors during some future inspections may reach a different conclusion. Should the Company fail to continue to comply with the conditions of the consent decree, under its terms the FDA is allowed to order the Company to stop manufacturing or distributing the breast implants, order a recall or take other corrective actions. The Company may also be subject to penalties of $10,000 per day until compliance is achieved.

If the Company maintains continuous compliance with the terms of the consent decree for a period of five years after the completion of the re-validations, the Company can petition the courts to remove the consent decree without opposition from the government.

Environmental Regulation

The Company is also subject to regulations by the United States Environmental Protection Agency and in certain states, primarily Texas, the Company is subject to regulation by the local Air Pollution Control District as a result of some of the chemicals used in its manufacturing processes. Failure to comply with these regulations and requirements could affect the Company's ability to manufacture its products, and have a significant negative impact on sales and results of operations.

Medicare, Medicaid and Third Party Reimbursement

Healthcare providers that purchase medical devices, such as the Company's products, generally rely on third-party payers, including the Medicare and Medicaid programs and private payers, such as indemnity insurers, employer group health insurance programs and managed care plans, to reimburse all or part of the cost of the products. The Company's products are sold principally to hospitals, physicians, home healthcare suppliers, and others that receive reimbursement for the products and services they provide from these third-party payers. The Company estimates that as much as 40% or more of its product sales could be reimbursed by third-party payers. As a result, demand for the Company's products is dependent in part on the coverage and reimbursement policies of these payers. The manner in which reimbursement is sought and obtained for any of the Company's products varies based upon the type of payer involved and the setting in which the product is furnished and utilized by patients.

Discussed below are certain factors, which could have a significant impact on the future operations and financial condition of the Company. It is difficult to predict the effect of these factors on the operations of the Company; however, the factors described could have a negative impact on such operations and such effect could be material.

Medicare

Medicare is a federal program administered by the Centers for Medicare and Medicaid Services ("CMS"), formerly known as HCFA, through fiscal intermediaries and carriers. Available to individuals age 65 or over, and certain other classes of individuals, the Medicare program provides, among other things, health care benefits that cover, within prescribed limits, the major costs of most medically necessary care for such individuals, subject to certain deductibles and co-payments. There are three components to the Medicare program: Part A which covers inpatient services, home healthcare and hospice care; Part B which covers physician services, other healthcare professional services and outpatient services; and Part C or Medicare+Choice which is a program for managed care plans.

The Medicare program has established guidelines for the coverage and reimbursement of certain equipment, supplies and support services. In general, in order to be reimbursed by Medicare, a healthcare item or service furnished to a Medicare beneficiary must be reasonable and necessary for the diagnosis or treatment of an illness or injury or to improve the functioning of a malformed body part. The methodology for determining the amount of Medicare reimbursement for the Company's products varies based upon, among other things, the setting in which a Medicare beneficiary received healthcare items and services. Any changes in federal legislation, regulations and policy affecting Medicare coverage and reimbursement relative to the Company's products could have a material effect on the Company's performance. As discussed in greater detail below, the Balanced Budget Act of 1997 ("BBA"), the Balanced Budget Refinement Act of 1999 ("BBRA") and the Benefits Improvement and Protection Act of 2000 ("BIPA") also have impacted Medicare reimbursement for the Company's products.

In-Patient Hospital Setting

With the establishment of the prospective payment system in 1983, acute care hospitals are generally reimbursed by Medicare for inpatient operating costs based upon prospectively determined rates. Under the Prospective Payment System ("PPS"), acute care hospitals receive a predetermined payment rate based upon the Diagnosis-Related Group, or DRG, into which each Medicare beneficiary stay is assigned, regardless of the actual cost of the services provided. Certain additional or "outlier" payments may be made to a hospital for cases involving unusually high costs. Accordingly, acute care hospitals generally do not receive direct Medicare reimbursement under PPS for the distinct costs incurred in purchasing the Company's products. Rather, reimbursement for these costs is deemed to be included within the DRG-based payments made to hospitals for the treatment of Medicare-eligible inpatients that utilize the products. ince PPS payments are based on predetermined rates and are often less than a hospital's actual costs in furnishing care, acute care hospitals have incentives to lower their inpatient operating costs by utilizing equipment, devices and supplies, including those sold by the Company, that will reduce the length of inpatient stays, decrease labor or otherwise lower their costs. The Company's product revenue could be affected negatively if acute care hospitals discontinue product use due to insufficient reimbursement, or if other treatment options are perceived to be more profitable.

Outpatient Hospital Setting

Pursuant to the BBA, CMS implemented the hospital Outpatient Prospective Payment System ("OPPS") effective July 1, 2000. OPPS is the current payment methodology for hospital outpatient services, certain Part B services furnished to hospital inpatients who have no Part A coverage and partial hospitalization services furnished by community mental health centers. All services paid under the OPPS are classified into groups called Ambulatory Payment Classifications ("APC"). Services in each APC are similar clinically and in terms of the resources they require. Depending on the services provided, hospitals may be paid for more than one APC for a patient encounter. A payment rate is established for each APC through the application of a conversion factor that CMS updates on an annual basis. OPPS may cause providers of outpatient services with costs above the payment rate to incur losses on such services provided to Medicare beneficiaries.

The BBRA provides for temporary financial relief from the effects of OPPS through the payment of additional outlier payments and transitional pass-through payments to outpatient providers reimbursed through OPPS who qualify for such assistance. Transitional pass-through payments are required for new or innovative medical devices, drugs, and biological agents. The purpose of transitional pass-through payments is to allow for adequate payment of new and innovative technology until there is enough data to incorporate these cost for these items into the base APC group. The qualification of a device for transitional pass-through payments is temporary. Most of the categories established under the pass-through system will expire on January 1, 2003. At that time, APC payment rates will be adjusted to reflect the costs of devices (and drugs and biologicals) that received transitional pass-through payments. These adjustments will be based on claims data that reflect the use of codes for transitional pass-through devices, drugs and biologicals in conjunction with the CPT codes for the associated procedures.

The Company cannot predict the final effect that changes in OPPS regulations, its annual updates to the regulation and/or the potential retirement of any of its products from Pass-Through status will have on the company or its customers. Any such effect, however, could be negative due to loss of revenue for some products.

Home Setting

The Company's disposable urological products are also provided to Medicare beneficiaries in home care settings. Medicare, under the Part B program, reimburses beneficiaries, or suppliers accepting assignment, for the purchase or rental of covered Durable Medical Equipment ("DME") for use in the beneficiary's home or a home for the aged (as opposed to use in a hospital or skilled nursing facility setting). As long as the Medicare Part B coverage criteria are met, certain of the Company's products are reimbursed in the home setting, and reimbursed pursuant to a fee schedule payment methodology.

The BBA, as amended by the BBRA and BIPA, provides for the implementation of Home Health Prospective Payment System beginning October 1, 2000. Under Home Health PPS, most of the services which a Medicare patient receives under a plan of care, will be covered by a single payment received by the home health agency for each 60-day episode of care. After a physician prescribes a home health plan of care, the home health agency assesses the patient's condition and likely skilled nursing care, therapy, and certain other service needs, at the beginning of each episode of care. Home Health Resource Groups ("HHRG"), are used to classify patients for purposes of determining payment rates. The amount of the payment will ultimately depend upon the HHRG category of the patient and is subject to a variety of adjustments. Durable medical equipment is excluded from Home Health PPS. However, certain medical supplies currently provided by the Company in a home care environment could be subject to Home Health PPS and the effect of such regulation on future product revenues and results of operations cannot be predicted.

Medicaid

The Medicaid program is a cooperative federal/state program that provides medical assistance benefits to qualifying low income and medically needy persons. State participation in Medicaid is optional and each state is given discretion in developing and administering its own Medicaid program, subject to certain federal requirements pertaining to payment levels, eligibility criteria and minimum categories of services. The coverage, method and level of reimbursement varies from state to state and is subject to each state's budget restraints. Changes to the coverage, method or level of reimbursement for the Company's products may affect future revenue negatively if reimbursement amounts are decreased or discontinued.

Private Payers

Many third-party private payers, including indemnity insurers, employer group health insurance programs and managed care plans, presently provide coverage for the purchase of the Company's products. The scope of coverage and payment policies varies among third-party private payers. Furthermore, many such payers are investigating or implementing methods for reducing health care costs, such as the establishment of capitated or prospective payment systems. Future changes in reimbursement methods and cost control strategies may limit or discontinue reimbursement for the Company's products and could have a negative effect on future sales and results of operations.

Fraud and Abuse Laws

In addition to Medicare coverage and reimbursement limitations, other aspects of the Medicare program may negatively affect the Company. In 1977, Congress adopted the Medicare and Medicaid Anti-Fraud and Abuse Amendments of 1977, which have been strengthened by subsequent amendments and the creation of the Office of Inspector General ("OIG") to enforce compliance with the statute, as amended (the "Anti-Fraud and Abuse Law"). The Anti-Fraud and Abuse Law prohibits the knowing and willful offer, payment, solicitation, or receipt of any remuneration in any form as an inducement or reward for either the referral of patients or the arranging for reimbursable services or products. A violation of the statute is a felony and could result in civil penalties, including exclusion from the Medicare or Medicaid program, even if no criminal prosecution is initiated.

HHS (Health and Human Services) has issued regulations from time to time setting forth so-called "safe harbors," which would guarantee protection of certain limited types of arrangements from prosecution under the statute if all elements of a particular safe harbor are met. To date, twenty-one final safe harbors have been developed. However, failure to fall within a safe harbor or with each element of a particular safe harbor does not mean that an arrangement is per se in violation of the Anti-Fraud and Abuse Law. As the comments to the safe harbors indicate, the purpose of the safe harbors is not to describe all illegal conduct, but to set forth standards for certain non-violative arrangements. Nevertheless, if an arrangement implicates the Anti-Fraud and Abuse Law and full compliance with a safe harbor cannot be achieved, the Company risks greater scrutiny by the OIG and, potentially, civil and/or criminal sanctions. The Company believes its arrangements are in compliance with the federal Anti-Fraud and Abuse Law; however, no absolute assurance can be given that regulatory authorities would not take a contrary position.

Product Development

The Company is focused on the development of new products and improvements to existing products. In addition, research and development expense reflects the Company's efforts to obtain FDA approval of certain products and processes and to maintain the highest quality standards of existing products. During fiscal years 2002, 2001 and 2000, the Company spent a total of $21,806,000, $19,632,000, and $16,701,000, respectively, for research and development.

Patents and Licenses

It is the Company's policy to protect its intellectual property rights related to its products when and where possible and appropriate. The Company's patents include those relating to its penile prostheses, tissue expanders, combination breast implant and tissue expander, ultrasonic-assisted soft tissue aspiration and disposable catheters. The Company licenses technology under exclusive supplier and licensing arrangements for certain products, including brachytherapy seeds and breast implants.

In those instances where the Company has acquired technology from third parties, it has sought to obtain rights of ownership to the technology through the acquisition of underlying patents or licenses. While the Company believes design, development, regulatory and marketing aspects of the medical device business represent the principal barriers to entry into such business, it also recognizes that its patents and license rights may make it more difficult for its competitors to market products similar to those produced by the Company. Mentor can give no assurance that any of its patent rights, whether issued, subject to license, or in process, will not be circumvented or invalidated. Further, there are numerous existing and pending patents on medical products and biomaterials. There can be no assurance that the Company's existing or planned products do not or will not infringe such rights or that others will not claim such infringement. No assurance can be given that the Company will be able to prevent competitors from challenging the Company's patents or entering markets currently served by the Company.

The Company has an exclusive worldwide distribution agreement with North American Scientific Inc., "NASI", to market and sell radioactive brachytherapy seeds for the treatment of prostate cancer. The products are manufactured by NASI and are marketed and sold by the Company under the names IoGold^® and PdGold^®. The agreement expires in 2003; however the Company has a one-time unilateral option to extend the agreement for three years subject to certain performance criteria. The agreement provides that NASI can terminate the Company's exclusivity with respect to any product for which Mentor fails to achieve target market share in certain designated markets, subject to curing provisions whereby exclusivity can be maintained.

NASI has notified the Company that it believes the required target market share has not been achieved with respect to PdGold^® in 2000 and IoGold^® in 2001. Subject to a review of the performance criteria by both the Company and NASI, this shortfall could result in NASI's ability to terminate the Company's right of exclusivity, subject to the curing provisions in the agreement, or in the Company's loss of the option to extend the exclusive agreement. While the Company believes all performance criteria have been achieved, if NASI terminates the Company's exclusivity on one or both types of brachytherapy seeds, the Company may be subject to additional competition, litigation or an interruption to supply of the product. While the Company believes that additional satisfactory sources of supply exist for similar radioactive seeds for use in brachytherapy treatment of the prostate, there is no assurance that such supply can be obtained without interruption, regulatory delay or on terms satisfactory to the Company.

As a condition of employment, the Company requires each of its new employees to execute an agreement relating to confidential information and patent rights.

Raw Material Supply

The Company obtains certain raw materials and components for a number of its products from single suppliers. The Company's sources of supply could be replaced if necessary without undue disruption, but it is possible that the process of qualifying new materials and/or vendors for certain raw materials and components could cause a material interruption in manufacturing or sales. No material interruptions occurred during the last fiscal year.

The Company's inflatable penile prostheses, saline-filled mammary implants, catheters and other products are available for sale under FDA approvals and/or clearances. Gel-filled mammary implants are only available as part of the adjunct clinical study. A change in raw material, components or suppliers for these products may require a new FDA submission, subsequent review and approval. There is no assurance that such a submission would be approved without delay or at all. Any delay or failure to obtain approval may have a significant adverse impact on sales and the results of operations.

The Company licenses technology under exclusive supplier and licensing arrangements for certain products. Those products include the following: Tutogen^® processed fascia lata for the Suspend^® Sling, and Tutogen^® processed dermis for Axis™, both for used in pelvic floor reconstruction, BTA Stat^® bladder cancer test, and radioactive sources for its IoGold^® and PdGold^® brachytherapy seeds. In addition, the licensors are sole-source suppliers of these products to the Company. Any interruption in their ability to supply the product to the Company may have an adverse impact on sales and the results of operations.

Employees

As of March 31, 2002, the Company employed 1,781 people, of whom 1,086 were in manufacturing, 413 in sales and marketing, 112 in research and development and 170 in finance and administration. There has never been a work stoppage due to labor difficulties, and the Company considers its relations with its employees to be satisfactory.

Executive Officers of the Registrant

The executive officers of the Company, as well as their ages as of June 26, 2002, are listed below, followed by brief accounts of their business experience and certain other information.

Name	Age	Position
Christopher J. Conway	63	President, Chief Executive Officer, Chairman of the Board
Eugene G. Glover	59	Senior Vice President, Advanced Development
Joshua Levine	44	Senior Vice President, Sales and Marketing, Aesthetics Products
Adel Michael	58	Executive Vice President, Chief Financial Officer and Treasurer
Bobby K. Purkait	52	Senior Vice President, Science and Technology
Clarke Scherff	55	Vice President, Regulatory Compliance
Peter Shepard	56	Senior Vice President, Sales and Marketing, Urology Products

Mr. Conway is a founder of the Company and has served as Chairman of the Board since 1969. He served as Chief Executive Officer from 1969 to July 29, 1999. He resumed the positions of Chief Executive Officer and President in September 2000.

Mr. Glover is a founder of the Company and held the position of Vice President, Engineering from 1969 to 1986. In October 2000, he was appointed Senior Vice President, Advanced Development.

Mr. Levine joined the Company in October of 1996 as Vice President Sales, Aesthetic Products. In September of 1998, he was promoted to domestic Vice President Sales and Marketing Aesthetic products. In January 2000, Mr. Levine resigned from the Company to briefly join a start-up practice management organization, The Plastic Surgery Company, ("PSU"), where he was Chief Development Officer. He resigned this position at PSU in September 2000 to rejoin the Company as its Vice President Sales & Marketing. Subsequent to this resignation, PSU filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in March 2002. In November of 2001, Mr. Levine assumed global responsibilities for all aesthetic sales and marketing activities of the Company and was promoted to Senior Vice President Sales & Marketing in June of 2002.

Mr. Michael joined the Company in April 2000 as Senior Vice President, Chief Financial Officer and Treasurer. He was promoted to Executive Vice President on September 14, 2001. From 1989 to 2000 he was Vice President, Chief Financial Officer of Getz Brothers and Co., Inc., and from 1983 to 1989 he was a Group Controller for the Marmon Group, Inc.

Mr. Purkait joined the Company in February 1986 and has served in various research and development capacities. He was promoted to Vice President Science and Technology in 1988, and Senior Vice President in April 1998. In January 2002, his responsibilities were changed to focus on identifying and assessing the value and feasibility of new technologies.

Mr. Scherff joined the Company in July 1995 as Director of Regulatory Affairs through the acquisition of Optical Radiation Corporation, where he held the position of Group Vice President Quality Assurance/Regulatory Affairs from April 1993 to June 1995. He was promoted to Vice President Quality and Regulatory Assurance in June 1997 and to Vice President of Regulatory Compliance/Compliance Officer in October 2000. From 1980 to 1993, Mr. Scherff held various positions of increasing responsibility for American Hospital Corporation/Baxter Healthcare Corporation, ultimately serving as the Director of Quality Assurance.

Mr. Shepard joined the Company in 1976 as a sales representative. In 1982, he was promoted to Vice President Sales and in 1992 to Vice President Sales and Marketing for the Surgical Urology and Healthcare products. Beginning 1996, he was assigned as Vice President Business Development for the Company. In October 2000, Mr. Shepard resumed the position of Vice President Sales and Marketing for the Surgical Urology and Healthcare product lines. He was promoted to Senior Vice President Sales and Marketing, Urology and Healthcare products in May 2002.

ITEM 2. PROPERTIES.

The Company owns manufacturing, warehouse and office buildings in Minneapolis, Minnesota (161,965 sq. ft.), Sarlat, France (123,800 sq. ft.), Leiden, the Netherlands (64,500 sq. ft.) and manufacturing facilities in Anoka, Minnesota (20,000 sq. ft.). The Company leases additional office, manufacturing and warehouse facilities in Santa Barbara, California (128,000 sq. ft.), Minneapolis, Minnesota (163,000 sq. ft.), Eden Prairie, Minnesota (2,500 sq. ft.), Irving, Texas (134,000 sq. ft.) and Tucson, Arizona (19,500 sq. ft.). The Company has international sales offices located throughout ten countries where it leases office and warehouse space ranging from 1,000 to 37,000 square feet. All leases have terms ranging from 1 to 15 years, renewable on terms the Company considers favorable. For information regarding lease obligations see Note K "Commitments" under "Notes to the Consolidated Financial Statements".

The Aesthetic & General Surgery business segment utilizes the facilities in Irving, Texas, Tucson, Arizona and Leiden, the Netherlands for manufacturing, warehouse and office space. Surgical Urology utilizes the facility in Eden Prairie, Minnesota as well as sharing the Minneapolis, Minnesota and Sarlat, France facilities with the Clinical & Consumer Healthcare segment for manufacturing, warehouse and office space. The Clinical & Consumer Healthcare segment utilizes the facility in Anoka, Minnesota as well as sharing the Minneapolis, Minnesota and Sarlat, France facilities with the Surgical Urology segment for manufacturing, warehouse and office space. The Santa Barbara, California facility as well as the international sales offices serve more than one segment.

The Company believes its facilities are generally suitable and adequate to accommodate its current operations and additional suitable facilities are readily available to accommodate any future expansion as necessary.

ITEM 3. LEGAL PROCEEDINGS.

In 1998, the Company learned that the FDA's Office of Criminal Investigations ("OCI") was conducting an investigation involving the Company. The Company understood that the investigation was dormant until April 2000 when OCI issued a letter requesting that the Company provide OCI with manufacturing data and other corporate records, which the Company subsequently provided to OCI. The Company cooperated fully with the OCI investigation. The OCI declined to identify the specific focus of its investigation involving the Company, and the Company has had no direct contact with OCI regarding the investigation since January 2001 when certain documents were requested. It is not possible to predict the outcome of this investigation at this time or its potential impact on the Company. The Company believes that it is in compliance with all applicable laws, rules and regulations.

The Securities and Exchange Commission ("SEC") informed the Company that it was investigating, under a formal order of investigation, the events relating to the March 23, 2000 USA Today article entitled "Breast Implant Manufacturer Under Investigation by the FDA," which was authored by Rita Rubin, and the March 23, 2000 press release issued by Mentor responding to that article, and possibly other matters. The Company cooperated fully with the SEC's investigation. In May 2002, the Company received notification from the SEC's Division of Enforcement that "This investigation has been terminated and no enforcement action has been recommended to the Commission."

Claims related to product liability are a regular and ongoing aspect of the medical device industry. At any one time, the Company is subject to claims asserted against it and is involved in product liability litigation. These actions can be brought by an individual, and/or by a group of patients purported to be a class action. The Company has carried product liability insurance on all its products, including breast implants, subsequent to May 1991 and prior to September 1985. This insurance is subject to certain self-insured retentions and limits on the policies. From September 1985 through April 1991, the Company was self insured for the majority of its surgical implant products, but had product liability insurance on the rest of its products. From June 1992 on, the Company's insurance has excluded silicone gel-filled breast implants.

In February 1999, Mentor was the plaintiff in a jury trial defending a patent exclusively licensed to Mentor by Sonique Surgical Systems, Inc., and used in ultrasonic tissue removal. Although the jury found willful infringement, the court nonetheless entered a judgment in favor of the defendants (Medical Device Alliance, Inc., Lysonics, Inc. and Misonix, Inc.). Mentor challenged the court order and in May 2001 a Federal circuit court reversed the lower court's ruling and reinstated the jury award of damages. In April 2002, the Company received $5.4 million in full settlement of the jury award.

In addition, in the ordinary course of its business the Company experiences various types of claims that sometimes result in litigation or other legal proceedings. The Company does not anticipate that any of these proceedings will have any material adverse effect on the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.

The Common Stock of the Company is traded on the Nasdaq National Market under the symbol MNTR. There are approximately 17 market makers for the Company's stock. The following table sets forth for the period indicated the high and low sale prices for the Common Stock reported on the Nasdaq National Market.

Year Ended March 31, 2001	High	Low
Quarter ended June 30, 2000	$28.25	$14.31
Quarter ended September 30, 2000	28.00	15.75
Quarter ended December 31, 2000	20.38	15.69
Quarter ended March 31, 2001	23.88	18.25
Year Ended March 31, 2002	High	Low
Quarter ended June 30, 2001	$28.34	$22.13
Quarter ended September 30, 2001	31.44	23.94
Quarter ended December 31, 2001	30.20	23.05
Quarter ended March 31, 2002	36.08	28.08

According to the records of the Company's transfer agent, there were approximately 1,031 holders of record of the Company's Common Stock on June 26, 2002. However, the majority of shares are held by brokers and other institutions on behalf of shareholders in approximately 5,000 accounts. The actual number of total shareholders may be less due to shareholders holding accounts at more than one institution.

For the first three quarters of fiscal 2001, the Company declared and paid a quarterly dividend of $.025 per share of Common Stock. In the fourth quarter of fiscal 2001, the Board of Directors approved a 20% increase in the quarterly dividend from $.025 to $.03 per share. In fiscal 2002, the Company declared and paid a quarterly dividend of $.03 per share of common stock for all four fiscal quarters. It is the Company's intent to continue to pay dividends for the foreseeable future subject to among other things, Board approval, cash availability and alternative cash needs. The $25M Credit Agreement limits the aggregate amount of dividends payable in any year to one-half of the net income of the preceding year.

ITEM 6. SELECTED FINANCIAL DATA.

The following table summarizes certain selected financial data of the Company and should be read in conjunction with the related Consolidated Financial Statements of the Company and accompanying Notes to Consolidated Financial Statements.

	Year Ended March 31,
(in thousands, except per share data)	2002(1)	2001(1)	2000	1999	1998
Statement of Income Data:
Net sales	$ 321,062	$ 268,894	$ 249,345	$204,576	$181,613
Gross profit	190,607	164,198	154,687	126,609	121,145
Operating income	57,516	41,787	39,431	30,141	36,786
Income before income taxes -
Continuing operations	59,216	46,549	42,389	30,888	38,404
Income taxes - continuing operations	17,396	14,731	13,563	10,447	13,575
Income from continuing operations	41,820	31,818	28,826	20,441	24,829
Discontinued operations, net of income tax	-	260	7,713	(6,479)	(932)
Net income	$ 41,820	$ 32,078	$ 36,539	$ 13,962	$ 23,897
Basic earnings (loss) per share:
Continuing operations	$ 1.77	$ 1.35	$ 1.18	$ 0.83	$ 1.00
Discontinued operations	0.00	0.01	0.32	(0.26)	(0.04)
Basic earnings per share	$ 1.77	$ 1.36	$ 1.50	$ 0.57	$ 0.96
Diluted earnings (loss) per share:
Continuing operations	$ 1.71	$ 1.32	$ 1.16	$ 0.80	$ 0.94
Discontinued operations	0.00	0.01	0.30	(0.25)	(0.03)
Diluted earnings per share	$ 1.71	$ 1.33	$ 1.46	$ 0.55	$ 0.91
Dividends per common share	$ 0.12	$ 0.105	$ 0.10	$ 0.10	$ 0.10
Average outstanding shares:
Basic	23,639	23,627	24,384	24,550	24,894
Diluted	24,463	24,186	25,084	25,394	26,330
Balance Sheet Data:
Working capital	$ 126,556	$ 112,461	$ 124,141	$106,532	$115,656
Total assets	324,636	290,837	230,706	196,011	199,911
Long-term accrued liabilities, less current   portion	12,873	10,691	- -	- -	- -
Shareholders' equity	$ 224,178	$ 196,306	$ 183,642	$158,618	$164,685

(1) Results after fiscal 2000 include the impact of the Porges S.A. acquisition in February 2001.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

In May 1999, the Company announced that its Board of Directors had decided to divest the ophthalmology business, which accounted for approximately 16% of sales in fiscal 1999. The Company substantially completed the sale of the assets of the Ophthalmology division in three separate transactions throughout fiscal year 2000. Accordingly, results of operations of the ophthalmic business are reported, on a net basis, as a single line on the financials as discontinued operations.

The following table sets forth various items from the Consolidated Statements of Income as a percentage of net sales for the periods indicated:

	Year Ended March 31,
(in thousands)	2002	2001	2000
Net sales	100.0%	100.0%	100.0%
Costs and expenses
Cost of sales	40.6	38.9	38.0
Selling, general, and administrative	34.7	37.3	39.5
Research and development	6.8	7.3	6.7
Restructuring charge	-	0.9	-
Operating income from continuing operations	17.9	15.6	15.8
Interest expense	(0.3)	(0.1)	-
Interest income	0.7	1.6	1.2
Other income, net	0.1	0.3	-
Income from continuing operations before income taxes	18.4	17.4	17.0
Income taxes	5.4	5.5	5.4
Income from continuing operations	13.0	11.9	11.6
Income from discontinued operations, net of income taxes	- -	0.1	3.1
Net income	13.0%	12.0%	14.7%

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Management's Discussion and Analysis of Financial Condition and Results of Operations addresses Mentor Corporation's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue Recognition

The Company recognizes product revenue, net of discounts, returns, and rebates in accordance with Statement of Financial Accounting Standards ("SFAS") 48, "Revenue Recognition When the Right of Return Exists", and Staff Accounting Bulletin (SAB) No.101. As required by these standards, revenue is recorded when persuasive evidence of a sales arrangement exists, delivery has occurred, the buyer's price is fixed or determinable, contractual obligations have been satisfied, and collectibility is reasonably assured. These requirements are met, and sales and related cost of sales are recognized primarily upon the shipment of products, or in the case of consignment inventories, upon the notification of usage by the customer. The Company records estimated reductions to revenue for customer programs and other volume-based incentives. Should the actual level of customer participation in these programs differ from those estimated by the Company, additional adjustments to revenue are recorded. The Company also allows credit for products returned within its policy terms. The Company records at the time of sale an allowance for estimated returns, based on historical experience, recent gross sales levels and any notification of pending returns. Should the actual returns differ from those estimated by the Company, additional adjustments to revenue and cost of sales may be required.

Accounts Receivable

The Company markets its products to a diverse customer base, principally throughout the United States, Canada and Western Europe. The Company grants credit terms in the normal course of business to its customers, primarily hospitals, doctors and distributors. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current credit worthiness, as determined through review of their current credit information. The Company continuously monitors collections and payments from customers and maintains allowances for doubtful accounts for estimated losses resulting from the inability of some of its customers to make required payments. Estimated losses are based on historical experience and any specifically identified customer collection issues.  If the financial condition of the Company's customers, or the economy as whole, were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. These adjustments would be included in selling, general and administrative expenses.

Inventories

The Company values its inventory at the lower of cost, based on the first-in first-out ("FIFO") cost method, or the current estimated market value of the inventory. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand or market conditions differ from those projected by management, additional inventory valuation adjustments may be required. These adjustments would be included in cost of goods sold.

Warranties and Related Reserves

The Company provides an accrual for the estimated cost of product warranties and product liability claims at the time revenue is recognized. Such accruals are based on estimates, which are based on relevant factors such as historical experience, the warranty period, estimated costs, levels of insurance and insurance retentions, identified product quality issues, if any, and, to a limited extent, information developed by the insurance company using actuarial techniques. These accruals are analyzed periodically for adequacy. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the warranty obligation is affected by reported rates of product problems and costs incurred in correcting product problems. Should actual reported problem rates or the resulting costs differ from the Company's estimates, adjustments to the estimated warranty liability may be required. These adjustments would be included in selling, general and administrative expenses.

Goodwill and Intangible Asset Impairment

The Company currently evaluates long-lived assets, including goodwill and other intangibles, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In assessing the recoverability of goodwill and other intangibles, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets. The Company will adopt SFAS No. 142, "Goodwill and Other Intangible Assets," effective April 1, 2002 and will be required to analyze its goodwill for impairment issues during the first quarter of fiscal 2003, and then on a periodic basis thereafter. These impairment charges would be included in the results of operations.

RESULTS OF OPERATIONS

Sales

Sales for fiscal 2002 increased to $321 million from $269 million in 2001, an increase of 19%. Included in fiscal 2002 sales are twelve months of surgical urology and clinical and consumer healthcare product sales relating to the February 2001 acquisition of Porges S.A., compared to two months of sales included in the fiscal 2001. Porges product sales accounted for fifteen percentage points of the year-to-year growth. Sales also were negatively affected by the continued strength of the U.S. Dollar versus other currencies and the general economic slowdown in the economy. Foreign exchange rate movements had an unfavorable year-to-year impact on international sales of $1.4 million, or less than 1% of consolidated sales.

Sales of surgical urology products increased 52% to $94 million from $62 million in the prior year. This growth primarily resulted from the February 2001 acquisition of Porges S.A., whose product sales are included in fiscal 2002 sales for the whole year. Porges product sales accounted for forty-eight percentage points of the year-to-year growth. Penile implant sales included incremental sales of the of the Alpha 1 Inflatable device with the new Lockoutâ valve introduced late in fiscal 2000. Brachytherapy sales increased slightly over the prior year as unit sales increases were partially offset as competitive pressures decreased average selling prices.

Sales of aesthetic and general surgery products increased 4% to $163 million from $157 million in the prior year. The Company believes that the modest growth in aesthetic product sales was primarily the result of the general economic slowdown in fiscal 2002, and the events of September 11, 2001. The sales of aesthetic product used in cosmetic surgeries were substantially even with prior year sales, as these product sales are affected more than the Company's other aesthetic products and segments by general economic conditions, as a higher proportion of these cosmetic surgeries are paid directly by the patient. However, the sales of aesthetic products used in reconstructive surgeries increased 21% over prior year sales, as a high proportion of these product sales are reimbursed by third party payers.

Sales of clinical and consumer healthcare products increased 29% to $64 million from $50 million in the prior year. This growth primarily resulted from the February 2001 acquisition of Porges S.A., whose product sales are included for all of fiscal 2002.  Porges product sales accounted for twenty-four percentage points of the year-to-year growth. In addition, sales of intermittent self-catheters grew 12% with the introduction of the Self-Cath Plus™ lubricious catheter in fiscal 2002, while there was a slight decline in male external catheter sales of 7%.

Sales for fiscal 2001 increased to $269 million from $249 million in 2000, an increase of 8%. Sales were negatively affected by the continued strength of the U.S. Dollar versus other currencies and the general economic slowdown in the economy. Included in fiscal 2001 are approximately two months of surgical urology and clinical and consumer healthcare product sales from the February 2001 acquisition of Porges S.A. Porges product sales accounted for three percentage points of the year-to-year growth. Foreign exchange rate movements had an unfavorable year-to-year impact on international sales of $2.4 million, or approximately 1% of consolidated sales.

Sales of surgical urology products increased 18% to $62 million from $53 million in the prior year. This growth resulted from increased sales of the Suspendâ Sling for treating female urinary incontinence, and the February 2001 acquisition of Porges S.A. Sales of Suspendâ benefited from increased acceptance of this pelvic floor reconstruction in the treatment of prolapse.

Sales of aesthetic and general surgery products increased 5% to $157 million from $150 million in the prior year. Sales of products for reconstruction increased 6% while products used in cosmetic augmentation increased 1%. Sales of body contouring (liposuction) products declined by 14% compared to the previous year. The aesthetic product segment is affected more than the Company's other segments by general economic conditions, as a higher proportion of these surgeries are paid directly by the patient.

Sales of clinical and consumer healthcare products increased 7% from the prior year. Strong growth in the sales of intermittent catheters of 12% was partially offset by a slight decline in male external catheter sales. The results include two months of sales from the February 2001 acquisition of Porges S.A.

The Company's export sales to independent distributors accounted for 4%, 5% and 6% of net sales for fiscal years ended March 31, 2002, 2001 and 2000, respectively. In addition, 28%, 16%, and 13%, respectively, of sales in each year were from the Company's direct international sales offices.

Over the three fiscal years ended March 31, 2002, sales increases, including the effects of acquisitions, have been primarily the result of increased unit sales. General selling price changes have not been significant in recent years.

Cost of Sales

Cost of sales was 40.6% of net sales for fiscal 2002, compared to 38.9% in fiscal 2001. Fiscal 2002 included Porges product sales for the entire year as opposed to two months in fiscal year 2001. Porges products have an average cost of sales of approximately 60% as compared to a historic average of 38% for the rest of the Company's products and, consequently, the additional Porges product sales have diluted the gross margin product mix. This dilution was partially offset by manufacturing efficiencies in the aesthetic and clinical and consumer healthcare products.

Cost of sales was 38.9% of net sales for fiscal 2001, compared to 38.0% in fiscal 2000. The faster growth of products distributed under alliance agreements, such as brachytherapy seeds and the Suspend^®Sling, continues to shift the product mix towards products with gross margins of approximately 50%, which is lower than the margin generated by products manufactured and distributed by the Company. In addition, sales of Porges products late in the fiscal year diluted the gross margin product mix slightly.

Selling, General and Administrative

Selling, general and administrative expenses were 34.7% of net sales in fiscal 2002 compared to 37.3%, exclusive of the restructuring charge, in fiscal 2001. The decrease as a percentage of net sales reflects cost savings from the Company's restructuring of corporate staff during the second and third quarters of fiscal 2001 and the recent acquisition of Porges which has a lower percentage of selling, general and administrative expenses to net sales than the rest of the Company.

Selling, general and administrative expenses, exclusive of the restructuring charge, were 37.3% of net sales in fiscal 2001 compared to 39.5% in fiscal 2000. The decrease reflects lower spending on the Company's direct-to-consumer advertising campaign partially offset by increases in product liability reserves and information technology costs. In addition, cost savings from the Company's restructuring of corporate staff contributed to the improvement.

During fiscal 2001, the Company announced a reduction in corporate staff at its headquarters in Santa Barbara as part of a restructuring move to streamline operations and improve efficiency. Employees affected by the restructuring were provided with a severance package, outplacement counseling and extended benefits to help with the transition. This program resulted in a restructuring charge included in general and administrative expenses of $2.4 million.

Research and Development

Research and development expenses were 6.8% of net sales in fiscal 2002, a slight decrease from 7.3% in fiscal 2001. Overall spending on research and development increased by 11% from the prior year. Fiscal 2002 development costs relate primarily to the Company's automated brachytherapy workstation, accelerated product enhancement projects for existing products and new product development. Fiscal year 2002 also includes research and development costs related to Porges products, for which research and development expenses as a percentage of net sales have historically been lower than those for the Company's other products. Although the Company has successfully completed several PMAA submissions related to mammary and penile implants in recent years, the amount of spending on research and development is not expected to decrease as the focus of the Company's research and development efforts shifts towards product enhancements and new product development. In addition, the Company is committed to a variety of clinical and laboratory studies in connection with its gel-filled and saline filled mammary implants and other products.

Research and development expenses were 7.3% of net sales in fiscal 2001, an increase from 6.7% in the prior year. The increase was attributable to spending on the Company's ongoing clinical studies related to silicone gel mammary implants. In May 2000, the Company received FDA approval for saline-filled breast implants and, in July 2000 received similar regulatory clearance on our inflatable penile implants.

Interest and Other Income and Expense

Interest expense increased to $859 thousand in fiscal 2002, from $276 thousand in fiscal 2001. In January 2001, the Company acquired the assets of South Bay Medical LLC. Approximately $7 million of the purchase price was recorded as a long-term accrued liability at net present value. In December 2001, an additional $1.7 million of long-term accrued liability was recorded at net present value related to the acquisition of certain intangible rights from ProSurg, Inc. Imputed interest on these liabilities is charged to interest expense. This imputed interest and balances outstanding on several lines of credit established to facilitate operating cash flow needs at our foreign subsidiaries accounted for the increase in interest expense over the prior year. In fiscal 2002, $196 thousand of interest incurred on a line of credit to finance the construction of a new foreign manufacturing facility was capitalized.

Interest expense increased to $276 thousand in fiscal 2001, from $34 thousand in fiscal 2000. In the first quarter of fiscal 2001, the Company borrowed and repaid $6 million to temporarily fund its stock repurchase program. During the fourth quarter of fiscal 2001, the Company borrowed $14 million to fund its acquisition of Porges S.A. There were no borrowings in fiscal 2000, and the Company repaid $4 million borrowed in 1999 to temporarily fund the stock repurchase program.

Interest income decreased from $4.2 million in 2001 to $2.2 million in fiscal 2002. The decrease is due to lower cash and marketable security balances, lower prevailing interest rates on short term investments, and a shift in the Company's investment strategy from taxable commercial paper which has a higher pretax yield to tax free municipal bonds and similar tax advantaged investment vehicles which currently have a higher after-tax yield.

Interest income increased to $4.2 million in 2001 from $3.0 million in fiscal year 2000. The increase is a result of higher cash balances from operations and $59 million in proceeds from the sale of the assets of the ophthalmic business reported as discontinued operations which was only available for investment part of fiscal 2000. Further, the Company increased its use of fully taxable investments, which have a higher coupon rate and also benefited from higher prevailing interest rates.

Other income, net primarily includes gains or losses on sales of marketable securities, disposal of assets, and foreign currency gains or losses related to the Company's foreign operations. In fiscal 2000, the Company recorded a $3 million permanent impairment of its equity investment in Intracel Corporation. This impairment charge was offset by realized gains on the disposition of marketable securities recorded as long-term marketable securities available for sale. During fiscal 2002, the Company recorded an additional $3 million write-down of the Company's investment in Intracel Corporation upon its bankruptcy filing. At March 31, 2002 the investment in Intracel Corporation is carried at no value. Other income, net for fiscal 2002, also includes a one-time gain of $700 thousand related to the settlement of a dispute with Paradigm Medical Industries, a one-time foreign exchange gain of $720 thousand on the repayment of the 15 million euro loan to partially fund the acquisition of Porges S.A., the realized gains on the disposition of long-term marketable securities available-for-sale of $1.3 million.

In fiscal year 2001, the Company recorded a $1 million realized gain on the disposition of marketable securities recorded as long-term marketable securities available for sale.

Income Taxes

The effective rate of corporate income taxes was 29.4% for fiscal 2002 and 31.6% for fiscal 2001. The decrease in the effective tax rate from fiscal 2001 to fiscal 2002 is a result of a higher proportion of income from foreign operations with lower tax rates, increased tax-exempt interest income, tax credits related to research and development, and a refund received in the fourth quarter of fiscal year 2002 related to the amendment of prior year tax returns for the Company's foreign sales corporation.

The effective rate of corporate income taxes was approximately 31.6% for fiscal 2001, a slight decrease from the fiscal 2000 rate of 32.0%.

Discontinued Operations

In December 1998, the Company announced a restructuring plan as part of a strategic initiative to improve the profitability and competitiveness of the ophthalmic segment of its business by reducing manufacturing costs and concentrating on those products and markets capable of sustained, long-term profitable growth. During the implementation of this plan, the Board of Directors authorized management to divest of the assets and product lines of the ophthalmic business segment. The divestiture was substantially completed in fiscal 2000 resulting in income from discontinued operations, net of tax, of $7.7 million. In fiscal 2001, the Company recorded $260 thousand of income from discontinued operations, net of tax of $140 thousand, from the resolution of certain liabilities for amounts less than recorded at the time of the sale of discontinued assets.

Income From Continuing Operations

Income from continuing operations for fiscal 2002 was $42 million, compared to $32 million for the previous year, an increase of $10 million or 30%. Increased sales, primarily from the Porges S.A. acquisition in February 2001, lower cost of goods sold and lower operating expenses as a percentage of net sales, and a tax refund increased net income, while the write-down of the Company's investment in Intracel Corporation and lower investment income reduced net income.

Income from continuing operations for fiscal 2001 was $32 million, compared to $29 million for the previous year. Increased sales, lower operating expenses, and increased interest income contributed to the increase. Fiscal 2001 income from discontinued operations, net of income taxes, was $260 thousand related to the resolution of certain liabilities for amounts less than recorded at the time of disposal.

Inflation

The Company does not believe inflation has had a material impact on the Company's operations over the three-year period ended March 31, 2002.

LIQUIDITY AND CAPITAL RESOURCES

The Company had cash, cash equivalents and short-term marketable securities of $75 million and $64 million at March 31, 2002 and 2001, respectively. During the three years ended March 31, 2002, liquidity needs have been satisfied principally by cash flow from operations and, to a lesser extent from borrowings under the Company's line of credit. Despite significant acquisition and stock repurchase activities, the Company maintained its strong cash and financial position throughout fiscal 2002.

At March 31, 2002, working capital was $127 million compared to $112 million the previous year. The Company generated $58 million of cash from continuing operations during fiscal 2002, compared to $42 million the previous year. Increased income from continuing operations, and increases in accounts payable and accrued liabilities contributed to the increased cash flow. These amounts were partially offset by an increase in accounts receivable and inventory.

During fiscal 2002, the Company invested $15 million in manufacturing equipment, information technology systems, and in a new manufacturing facility in Leiden, the Netherlands. The Company anticipates investing approximately $15 million in fiscal 2003 to complete the new facility in Leiden, invest in an existing facility, purchase production equipment and upgrade and replace information technology systems.

The Company receives cash from the exercise of employee stock options. Employee stock option exercises provided $6.9 and $2.5 million of cash in fiscal 2002 and fiscal 2001, respectively. Proceeds from the exercise of employee stock options will vary from period to period based upon, among other factors, fluctuations in the market value of the Company's common stock relative to the exercise price of such options.

The Company's Board of Directors has authorized an ongoing stock repurchase program. The objectives of the program, among other items, are to offset the dilutive effect of the Company's employee stock option program, provide liquidity to the market and to reduce the overall number of shares outstanding. Repurchases are subject to market conditions and cash availability. During fiscal 2002, the Company repurchased 732 thousand shares for consideration of $18.7 million. The Company intends to continue the share repurchase program in fiscal 2003 and 1.6 million shares remain authorized for repurchase.

Certain technologies related to the manufacture of mammary prostheses were developed under a 1983 agreement with a limited partnership whereby the limited partners contributed funds towards the development of the technology in exchange for payments based upon a percentage of future sales of the products utilizing the technology. The Company paid approximately $2 million in such payments in fiscal 2000 to the partnership. The Company was the general partner for this partnership. The agreement included an option to purchase the technology and thereby terminate the partnership. In fiscal 2001, the Company exercised its option to make a lump sum payment to the limited partners in lieu of all future payments and rights according to the Agreement of Purchase and Sale between Mentor Corporation and the partnership, as amended. The limited partners could elect to be paid in cash, the Company's common stock, or a combination. This transaction was completed in the second quarter ended September 30, 2000. The limited partners elected to be paid $1.0 million in cash and 434 thousand shares of the Company's common stock. The stock, transfer of which is restricted by Rule 144, was valued at its fair market value on the date of issuance, of approximately $9 million. The decrease in payments to the partners will be offset by the increased amortization of the new intangible asset and the additional common shares outstanding, thus having a neutral effect on earnings per share.

In January 2001, the Company completed the acquisition of South Bay Medical, a development stage company focused on the development of a new technology for a computer-based workstation and automated cartridge-based needle loading system for use in Brachytherapy procedures. The total consideration included $2 million in cash, 235,293 restricted shares of the Company's Common Stock having a fair market value of $4 million, and $13.6 million to be paid in cash or the Company's Common Stock over the next several years. These future payments have been recorded as an acquisition obligation liability at net present value ($11.2 million at March 31, 2002), and will continue to increase as imputed interest is recorded. Approximately $5.9 million of the acquisition obligation liability is to be paid in shares of the Company's Common Stock valued at fair market value on the date of issuance.

In February 2001, the Company acquired Porges S.A., subsidiary of Sanofi-Synthelabo headquartered in Paris, and with manufacturing facilities in Sarlat, France. Porges holds a leading market share for urological products in France and has strong market position throughout Europe. The cash consideration paid for Porges S.A. was $32 million.

In December 2001, Company entered into several agreements with ProSurg, Inc. to purchase certain patent rights and a supply of a bio-absorbable co-polymer product to be used the surgical treatment of incontinence. The total consideration included $2.0 million in cash and $2.7 million in short and long-term payments due over the next several years. The future payments have been recorded as an acquisition obligation liability at net present value and will increase with imputed interest to $3.0 million due over the next several years.

The Company has a secured line of credit, the "$25M Credit Agreement", for borrowings up to $25 million, which accrue interest at the prevailing prime rate or at a mark-up over LIBOR at the Company's discretion. The $25M Credit Agreement includes certain covenants that, among other things, limit the dividends the Company may pay and requires maintenance of certain levels of tangible net worth and debt service ratios. During fiscal 2002, the Company used the $25M Credit Agreement to guarantee the secured loan of a vendor, in the amount of $5.3 million, to facilitate the ramp up of production capacity related to a new product. Accordingly, although there were no borrowings outstanding under the $25M Credit Agreement at March 31, 2002, only $19.7 million was available for additional borrowings.

In addition, in February 2001, several lines of credit were established with local foreign lenders to facilitate operating cash flow needs at our foreign subsidiaries. These lines are at market rates of interest, unsecured, guaranteed by Mentor Corporation, and total $5.0 million, of which $4.4 million was outstanding, and $.6 million was available at March 31, 2002.

In fiscal 2002, a line of credit of $5.6 million was established to finance the construction of a new facility in Leiden, the Netherlands. The borrowings accrue interest at EURIBOR plus 0.75% and are secured by the new facility and other assets in the Netherlands. $4.8 million was outstanding and $.8 million was available under this line at March 31, 2002. The line of credit provides for conversion to a term loan at prevailing interest rates when construction of the new facility is completed.

At March 31, 2002, the total of short-term borrowings under all lines of credit was $9.5 million and the weighted-average interest rate was 4.10%. The total amount of additional borrowings available to the Company under all lines of credit was $21.1 million and $12.1 million at March 31, 2002 and 2001, respectively. At March 31, 2001, $16.6 million was outstanding under these lines of credit at a weighted average borrowing rate of 5.96%.

Since 1995, the Company has paid a quarterly cash dividend of $.025 per share. On February 13, 2001, the Board of Directors approved an increase in the quarterly cash dividend to $.03 per share, an increase of 20%. At the current rate of $.12 per year, the aggregate annual dividend would equal approximately $2.8 million. It is the Company's intent to continue to pay dividends for the foreseeable future subject to among other things, Board approval, cash availability and alternative cash needs. The $25M Credit Agreement limits the aggregate amount of dividends payable in any year to one-half of the net income of the preceding year.

On May 6, 2002, the Company announced that it had completed the acquisition of the urology business of Portex Ltd., a subsidiary of Smiths Group plc. The acquired business manufactures and markets incontinence and ostomy products primarily for the home healthcare market. The cash consideration paid for Portex Ltd. was $10.5 million from available cash balances.

The following table summarizes contractual cash and other commercial commitments at March 31, 2002:

(in thousands)		Less Than	1-3	4-5	After 5
Contractual Cash Obligations	Total	1 Year	Years	Years	Years
Operating leases	$40,668	$3,971	$12,138	$7,691	$16,868
Total Contractual Cash Obligations	$40,668	$3,971	$12,138	$7,691	$16,868
Commercial Commitments
Lines of credit	$   9,470	$   9,470	$         -	$         -	$         -
Guarantees	5,300	5,300	-	-	-
Other commercial commitments	18,355	4,675	11,151	700	1,829
Total Commercial Commitments	$ 33,125	$ 19,445	$11,151	$     700	$  1,829

In addition the Company, in the ordinary course of business, has at any one time, purchase orders for raw materials and other supplies, which may in aggregate be significant but for which usage does not exceed one year.

The Company's principal source of liquidity at March 31, 2002 consisted of $75 million in cash, cash equivalents and short-term marketable securities, plus $21 million available under the existing lines of credit. The Company believes that funds generated from operations, its cash, cash equivalents and marketable securities and funds available under its line of credit agreements will be adequate to meet its working capital needs and capital expenditure investment requirements and commitments for at least the next 12 months. However, it is possible that the Company may need to raise additional funds to finance its activities beyond the next 12 months or to consummate acquisitions of other business, products or technologies. Additional funds could be raised by selling equity or debt securities to the public or to selected investors, or by borrowing money from financial institutions. In addition, even though the Company may not need additional funds, it may still elect to sell additional equity or debt securities or obtain credit facilities for other reasons. The Company may not be able to obtain additional funds on terms tha t would be favorable to our shareholders and the Company, or at all. If additional funds are raised by issuing additional equity securities or convertible debt securities, the ownership percentage of existing shareholders would be reduced.  In addition, the equity or debt securities issued by the Company may have rights, preferences or privileges senior to those of the Company's common stock.

FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

Except for the historical information contained herein, the matters discussed in this Management's Discussion are forward-looking statements, the accuracy of which is necessarily subject to risks and uncertainties. Actual results may differ significantly from the discussion of such matters in the forward-looking statements.

Due to the nature of the Company's products and business, the Company has been and will be involved in various legal actions arising in the course of business, some of which involve product liability and intellectual property claims. With respect to product liability issues, the litigation and regulatory risks will continue to exist even with respect to those products that have received or in the future may receive regulatory approval for commercial sale. It is possible that adverse results arising from product liability or intellectual property actions, as well as adverse results arising from regulatory or administrative proceedings, could negatively affect the Company's future results of operations.

The Company has been and may be in the future the subject of negative publicity, which can arise from various sources, ranging from the news media to legislative and regulatory investigations. There can be no assurance that such negative publicity will not result in a material adverse effect on the Company's future financial position, its results of operations or the market price of its stock. In addition, significant negative publicity could result in an increase in product liability claims.

The Company's products, development activities and manufacturing processes are subject to extensive and rigorous regulation by the FDA. The FDA regulates the introduction, manufacturing, labeling and record-keeping procedures for medical devices. The process of obtaining marketing clearance and approval from the FDA for new products and existing products can be time-consuming and expensive, and there is no assurance that such clearances or approvals will be granted or that FDA review will not involve delays that would adversely affect the Company's ability to commercialize additional products or additional applications for existing products. In addition, certain of the Company's products that are in the research and development stage may be subject to a lengthy and expensive pre-market approval process with the FDA. Product approvals by the FDA can also be withdrawn due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial approval. The FDA could also limit or prevent the manufacture or distribution of the Company's products and has the power to require the recall of such products. The FDA regulations depend heavily on administrative interpretation, and there can be no assurance that future interpretations made by the FDA or other regulatory bodies will not adversely affect the Company. The FDA, various state agencies and foreign regulatory agencies inspect the Company and its facilities from time to time to determine whether the Company is in compliance with various regulations including manufacturing practices, validation, testing, quality control, product labeling, and reporting. The FDA also reviews promotional materials for compliance with requirements. A determination that the Company is in violation of such regulations could lead to imposition of penalties, product recalls, consent decrees, product seizures, civil penalties, or prosecution.

As a manufacturer of medical devices, the Company's manufacturing processes and facilities are subject to regulation and review by international regulatory agencies for products sold internationally. The Company has obtained a CE mark (CE marking indicates conformity to the Medical Device Directives) for its products sold in Europe by demonstrating compliance with the ISO 9001, EN46001 and ISO13485 international quality system standards. Medical device laws and regulations are also in effect in some of the other countries to which the Company exports its products. These range from comprehensive device approval requirements for some or all of the Company's medical device products to requests for product data or certifications. Failure to comply with these international regulatory standards and requirements could affect the Company's ability to market and sell its products in these markets and have a significant negative impact on sales and results of operations.

A significant portion of the Company's products sales are sold to health care providers whose costs are reimbursed by third-party payers including the Medicare and Medicaid programs and private payers, such as group health insurance programs and managed care plans. The Company's products are sold principally to hospitals, physicians, home health care suppliers, and others that receive reimbursement for the products and services they provide from these third-party payers. As a result, demand for the Company's products is dependent in part on the coverage and reimbursement policies of these Third-party payers. The Company's product revenue and results of operations could be affected negatively if Third-party payers discontinue or limit reimbursement for use of the Company's products, or if other treatment options are perceived to be more profitable.

Each of the Company's major business segments operates its manufacturing, warehousing and research and development activities in a single facility. While the Company has some limited protection in the form of basic insurance coverage, the Company's operating results and financial condition would be materially adversely affected in the event of a fire or similar catastrophe.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The following discussion about the Company's market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates and foreign exchange rates. The Company generally does not use derivative instruments.

The Company maintains a portfolio of highly liquid cash equivalents, with maturities of three months or less from the date of purchase. The Company also has current marketable securities, consisting primarily of municipal bonds and commercial paper that are of limited credit risk and have contractual maturities of less than two years. Given the short-term nature of these investments, the Company is not subject to significant interest rate risk.

A portion of the Company's operations consists of sales activities in foreign markets. The Company manufactures its products primarily in the United States and Europe and sells them outside the U.S. through a combination of international distributors and wholly owned sales offices. Sales to third-party distributors and to the wholly owned sales offices are transacted in U.S. dollars or in Euros. The sales offices invoice their customers in their local currency.

As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in those foreign markets. The principal exposure on sales to third-party distributors stems from the potential for weak economic conditions in the foreign market, thus weakening the foreign currency, decreasing the customer's buying power and potentially decreasing the Company's sales. The Company's exposure on sales to its subsidiaries consists of (1) the exposure related to a weakening local currency when payment of the related payables are made resulting in more local currency to pay off the U.S. denominated payable than when it was originally recorded, thus lowering the subsidiaries' earnings, and (2) the exposure that upon translation of the subsidiaries' monthly financial statements, a weakening local currency would cause sales made in local currency to be recorded in a lower amount of U.S. dollars than if the currency had been stable as compared to the U.S. dollar. However, in the latter instance, operating expenses would also be translated at lower amounts and, accordingly, the effect on net income would be mitigated. The Company does not currently hedge any of these exposures.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The response to this item is submitted pursuant to Item 14 of this Annual Report on Form 10-K and incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required by this item, other than the information regarding Executive Officers set forth in Item 1, Business, is herein incorporated by reference to portions of the Proxy Statement for the Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended March 31, 2002.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this item is herein incorporated by reference to portions of the Proxy Statement for Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended March 31, 2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this item is herein incorporated by reference to portions of the Proxy Statement for Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended March 31, 2002.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item is herein incorporated by reference to portions of the Proxy Statement for Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended March 31, 2002.

PART IV

ITEM 14.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1)		Consolidated Financial Statements
		Report of Ernst & Young LLP, Independent Auditors
		Consolidated Balance Sheets as of March 31, 2002 and 2001
		Consolidated Statements of Income for the Years Ended March 31, 2002, 2001 and 2000
		Consolidated Statements of Changes in Shareholders' Equity for the Years Ended March 31, 2002, 2001 and 2000
		Consolidated Statements of Cash Flows for the Years Ended March 31, 2002, 2001 and 2000
		Notes to Consolidated Financial Statements
(a)(2)		Consolidated Financial Statement Schedules
		Schedule II - Valuation and Qualifying Accounts and Reserves
		All 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)		Exhibits
		The information required by this item is incorporated by reference to the Exhibit Index in this report on page 58.
(b)		Reports on Form 8-K
		None

Report of ERNST & YOUNG LLP, Independent Auditors

Board of Directors and Shareholders

Mentor Corporation

We have audited the accompanying consolidated balance sheets of Mentor Corporation as of March 31, 2002 and 2001, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended March 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mentor Corporation at March 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ERNST & YOUNG LLP

Los Angeles, California

May 13, 2002

MENTOR CORPORATION
CONSOLIDATED BALANCE SHEETS

	March 31,
(in thousands)	2002	2001
Assets
Current assets:
Cash and cash equivalents	$    60,398	$ 63,854
Marketable securities	14,106	584
Accounts receivable, net of allowance for doubtful accounts of $3,870 in 2002 and $3,578 in 2001	64,786	57,427
Inventories	47,404	46,721
Deferred income taxes	11,950	10,116
Prepaid expenses and other	12,488	9,331
Total current assets	211,132	188,033
Property and equipment, net	54,656	51,149
Intangible assets, net	37,588	37,773
Goodwill, net	9,155	6,547
Long-term marketable securities and investments	11,752	5,704
Other assets	353	1,631
	$   324,636	$  290,837
Liabilities and shareholders' equity
Current liabilities:
Account payable and accrued liabilities	$    70,423	$   55,246
Income taxes payable	3,979	2,992
Dividends payable	704	710
Short-term bank borrowings	9,470	16,624
Total current liabilities	84,576	75,572
Deferred income taxes	3,009	8,268
Long-term accrued liabilities	12,873	10,691
Commitments and contingencies
Shareholders' equity:
Common Stock, $.10 par value:
Authorized - 50,000,000 shares; issued and outstanding--
23,472,952 shares in 2002;
23,671,770 shares in 2001;	2,347	2,367
Capital in excess of par value	-	7,625
Accumulated other comprehensive income (loss)	(6,487)	(4,282)
Retained earnings	228,318	190,596
	224,178	196,306
	$  324,636	$ 290,837
See notes to consolidated financial statements.

MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

	Year Ended March 31,
(in thousands, except per share data)	2002	2001	2000
Net sales	$   321,062	$ 268,894	$ 249,345
Costs and expenses:
Cost of sales	130,455	104,696	94,658
Selling, general, and administrative	111,285	100,379	98,555
Research and development	21,806	19,632	16,701
Restructuring charge	-	2,400	-
	263,546	227,107	209,914
Operating income	57,516	41,787	39,431
Interest expense	(859)	(276)	(34)
Interest income	2,217	4,209	2,982
Other income, net	342	829	10
Income from continuing operations before income taxes	59,216	46,549	42,389
Income taxes	17,396	14,731	13,563
Income from continuing operations	41,820	31,818	28,826
Income from discontinued operations, net of income taxes	-	260	7,713
Net income	$   41,820	$ 32,078	$ 36,539
Basic earnings per share:
Continuing operations	$      1.77	$ 1.35	$ 1.18
Discontinued operations	-	0.01	0.32
Basic earnings per share	$      1.77	$ 1.36	$ 1.50
Diluted earnings per share:
Continuing operations	$      1.71	$ 1.32	$ 1.16
Discontinued operations	-	0.01	0.30
Diluted earnings per share	$      1.71	$ 1.33	$ 1.46
See notes to consolidated financial statements.

MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(in thousands)	Common Shares Outstanding	Common Stock $.10 Par Value	Capital in Excess of Par Value	Accumu- lated Other Compre- hensive Income (loss)	Retained Earnings	Total
Balance March 31, 1999	24,549	$ 2,455	$ 21,502	$ (261)	$ 134,922	$ 158,618
Comprehensive income:
Net income	-	-	-	-	36,539	36,539
Foreign currency translation adjustment	- -	- -	- -	(1,553)	- -	(1,553)
Unrealized gain on investments	- -	- -	- -	4,137	- -	4,137
Comprehensive income						39,123
Exercise of stock options	572	57	5,608	-	-	5,665
Income tax benefit arising from the exercise of stock options	- -	- -	2,077	- -	- -	2,077
Repurchase of common   stock	(912)	(91)	(19,311)	- -	- -	(19,402)
Dividends declared ($.10 per share)	- -	- -	- -	- -	(2,439)	(2,439)
Balance March 31, 2000	24,209	$ 2,421	$ 9,876	$ 2,323	$ 169,022	$ 183,642
Comprehensive income:
Net income	-	-	-	-	32,078	32,078
Foreign currency translation adjustment	- -	- -	- -	(2,217)	- -	(2,217)
Unrealized loss on investments	- -	- -	- -	(4,388)	- -	(4,388)
Comprehensive income						25,473
Exercise of stock options	286	29	2,458	-	-	2,487
Issuance of common stock in acquisition of intangible assets	435	43	9,079	-	-	9,122
Issuance of common stock in acquisition of South Bay Medical LLC	235	24	3,976	-	-	4,000
Income tax benefit arising from the exercise of stock options	- -	- -	2,133	- -	- -	2,133
Repurchase of common   stock	(1,493)	(150)	(19,897)	- -	(8,022)	(28,069)
Dividends declared ($.105 per share)	- -	- -	- -	- -	(2,482)	(2,482)
Balance March 31, 2001	23,672	$ 2,367	$ 7,625	$ (4,282)	$ 190,596	$ 196,306

MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (continued)

(in thousands)	Common Shares Outstanding	Common Stock $.10 Par Value	Capital in Excess of Par Value	Accumu- lated Other Compre- hensive Income (loss)	Retained Earnings	Total
Comprehensive income:
Net income	-	-	-	-	41,820	41,820
Foreign currency translation adjustment	- -	- -	- -	(2,015)	- -	(2,015)
Unrealized loss on investments	- -	- -	- -	(190)	- -	(190)
Comprehensive income						39,615
Exercise of stock options	533	53	6,777	-	-	6,830
Income tax benefit arising from the exercise of stock options	- -	- -	2,975	- -	- -	2,975
Repurchase of common   stock	(732)	(73)	(17,377)	- -	(1,265)	(18,715)
Dividends declared ($.12 per share)	- -	- -	- -	- -	(2,833)	(2,833)
Balance March 31, 2002	23,473	$  2,347	$          -	$   (6,487)	$  228,318	$  224,178
See notes to consolidated financial statements.

MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended March 31,
(in thousands)	2002	2001	2000
Cash From Operating Activities:
Income from continuing operations	$41,820	$31,818	$28,826
Adjustments to derive cash flows from continuing operating activities:
Depreciation	9,982	8,528	7,760
Amortization	3,866	1,812	973
Deferred income taxes	(4,799)	(1,438)	529
Tax benefit from exercise of stock options	2,975	2,133	2,077
Loss (gain) on sale of assets	456	(64)	401
Imputed interest on long-term liabilities	512	-	-
(Gain) loss on long-term marketable securities and investment write-downs, net	301	(1,142)	(134)
Changes in operating assets and liabilities:
Accounts receivable	(8,366)	2,144	(7,879)
Inventories and other current assets	(5,338)	(3,063)	(5,645)
Accounts payable and accrued liabilities	16,025	3,173	11,631
Income taxes payable	997	(1,810)	(4,994)
Net cash provided by continuing operating activities	58,431	42,091	33,545
Net cash provided by (used for) discontinued operating activities	-	260	(8,557)
Net cash provided by operating activities	58,431	42,351	24,988
Cash From Investing Activities:
Purchases of property and equipment	(15,094)	(7,457)	(9,195)
Purchases of intangibles	(166)	(2,710)	(2,240)
Purchases of marketable securities	(161,200)	(75,552)	(50,715)
Sales of marketable securities	140,329	129,870	3,757
Acquisitions, net of cash acquired	(4,347)	(32,896)	-
Other, net	(46)	(56)	(1,028)
Net cash (used for) provided by continuing investing activities	(40,524)	11,199	(59,421)
Net cash provided by discontinued investing activities	-	-	59,392
Net cash (used for) provided by investing activities	(40,524)	11,199	(29)
Cash From Financing Activities:
Repurchase of common stock	(18,715)	(28,069)	(19,402)
Proceeds from exercise of stock options	6,830	2,487	5,665
Dividends paid	(2,839)	(2,380)	(2,442)
Borrowings under line of credit agreements	6,825	19,953	-
Repayments under line of credit agreements	(13,372)	(6,000)	(4,000)
Net cash used for financing activities	(21,271)	(14,009)	(20,179)
Effect of currency exchange rates on cash and cash equivalents	(92)	-	-
Increase (decrease) in cash and cash equivalents	(3,456)	39,541	4,780
Cash and cash equivalents at beginning of year	63,854	24,313	19,533
Cash and cash equivalents at end of year	$60,398	$63,854	$24,313
Supplemental cash flow information
Cash paid during the year for:
Income taxes	$ 18,945	$14,009	$ 8,365
Interest	$ 645	$   152	$ 51
Supplemental non-cash investing and financing activities
Issuance of common stock in acquisition of South Bay Medical	$ -	$ 4,000	$ -
Issuance of common stock in acquisition of intangible assets	$ -	$  9,122	$ -
Liabilities accrued related to the acquisition of intangible assets	$ 2,685	$10,720	$ -
See notes to consolidated financial statements.

MENTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002

Note A - Summary of Significant Accounting Policies

Business Activity

Mentor Corporation was incorporated in April 1969. The Company develops, manufactures and markets a broad range of products for the medical specialties of plastic and general surgery and urology. The Company's products are sold to hospitals, physicians and through various health care dealers, wholesalers, and retail outlets. The results of operations for the discontinued ophthalmic segment of the business are presented as discontinued operations and not included in continuing operations.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. For those subsidiaries where the Company owns less than 100%, the outside shareholders' interests are treated as minority interests. All intercompany accounts and transactions have been eliminated. Certain prior year amounts in previously issued financial statements have been reclassified to conform to the current year presentation. Financial information presented in the Notes to Consolidated Financial Statements excludes discontinued operations, except where noted.

Cash Equivalents, Marketable Securities, and Long-Term Marketable Securities and Investments

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

The Company considers its marketable securities available-for-sale as defined in Statement of Financial Accounting Standards No. 115. Realized gains and losses and declines in value considered to be other than temporary are included in income. The cost of securities sold is based on the specific identification method. For short-term marketable securities, there were no material realized or unrealized gains or losses nor any material differences between estimated fair values, based on quoted market prices, and the costs of securities in the investment portfolio as of March 31, 2002 and 2001. Short-term investments, except auction rate securities, mature between three months and one year from the purchase date. The Company's short-term marketable securities consist primarily of U.S., state and municipal government obligations auction rate securities, and investment grade corporate obligations including commercial paper. Auction rate securities carry interest or dividend rates that reset every 28 days but have contractual maturities of greater than one year.

The Company's long-term marketable securities and investments include investments in Federal Home Loan Bank and Mortgage Association bonds (FHLA bonds) with maturities of two to four years. During fiscal 1998, the Company made a $6 million equity investment in Intracel Corporation as part of an agreement to develop a bladder cancer treatment. The investment was valued at cost as quoted market prices were not available. During fiscal 2000, the Company recorded a $3 million charge to other income related to the investment. In September 2001, Intracel filed for protection under Chapter 11 of the Bankruptcy Code. After evaluation of the filing, the Company recorded an additional $3 million write-down as a charge to other income in the quarter ending December 31, 2001. As a result of these two write-downs, the investment in Intracel is now recorded at no value. The Company recorded a one-time gain in other income for the quarter ending December 31, 2001 upon the receipt of 350,000 shares of Paradigm in settlement of a stock registration dispute. The shares were valued at $700,000 based upon the quoted price on the date received.

During the year ended March 31, 2002, the Company sold a portion of its NASI and Paradigm securities and realized a pre-tax gain of $1.3 million, which is reflected in other income, net.

Available-for-sale investments at March 31, 2002 were as follows:

		Gross	Gross	Estimated
	Adjusted	Unrealized	Unrealized	Fair
(in thousands)	Cost	Gains	Losses	Value
Cash balances	$11,417	$    -	$    -	$11,417
Bank time deposits	1,175	-	-	1,175
Money market mutual funds	48,981	-	-	48,981
Marketable equity securities	2,076	774	-	2,850
U.S., State and Municipal agency    obligations	21,653	- -	(98)	21,555
Corporate debt securities	278	-	-	278
Investment in Intracel	-	-	-	-
Total available-for-sale investments	$85,580	$774	$(98)	$86,256
Included in cash and cash equivalents	$60,398	$    -	$    -	$60,398
Included in current marketable securities	14,106	-	-	14,106
Included in long-term marketable    securities and investments	11,076	774	(98)	11,752
Total available-for-sale investments	$85,580	$774	$(98)	$86,256

Available-for-sale investments at March 31, 2001 were as follows:

		Gross	Gross	Estimated
	Adjusted	Unrealized	Unrealized	Fair
(in thousands)	Cost	Gains	Losses	Value
Cash balances	$24,309	$      -	$      -	$24,309
Bank time deposits	25	-	-	25
Money market mutual funds	9,545	-	-	9,545
Marketable equity securities	1,737	1,339	(372)	2,704
U.S., State and Municipal agency obligations	284	-	-	284
Corporate debt securities	30,275	-	-	30,275
Investment in Intracel	3,000	-	-	3,000
Total available-for-sale investments	$69,175	$1,339	$(372)	$70,142
Included in cash and cash equivalents	$63,854	$      -	$      -	$63,854
Included in current marketable securities	584	-	-	584
Included in long-term marketable    securities and investments	4,737	1,339	(372)	5,704
Total available-for-sale investments	$69,175	$1,339	$(372)	$70,142

Concentrations and Credit Risk

The Company obtains certain raw materials and components for a number of its products from single suppliers. In most cases the Company's sources of supply could be replaced if necessary without undue disruption, but it is possible that the process of qualifying new materials and/or vendors for certain raw materials and components could cause a material interruption in manufacturing or sales. No material interruptions occurred during the last fiscal year.

The Company grants credit terms in the normal course of business to its customers, primarily hospitals, doctors and distributors. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current credit worthiness, as determined through review of their current credit information. The Company continuously monitors collections and payments from customers and maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Estimated losses are based on historical experience and any specific customer collection issues identified. Bad debts have been minimal. The Company does not normally require collateral or other security to support credit sales. No customer accounted for more than 10% of the Company's revenues or accounts receivable balance for any periods presented.

Revenue Recognition

In the United States and in those countries where the Company has sales offices, the Company employs specialized direct sales employees. The Company also markets its products through distributors in those countries where it does not have a sales office or for certain products, particularly its disposable incontinence products, through a domestic network of independent hospital supply dealers and healthcare distributors and through retail pharmacies.

The Company recognizes product revenue, net of discounts, returns, and rebates in accordance with SFAS 48, "Revenue Recognition When the Right of Return Exists", and Staff Accounting Bulletin (SAB) No.101. As required by these standards, revenue can be recorded when persuasive evidence of a sales arrangement exists, delivery has occurred, the buyer's price is fixed or determinable, contractual obligations have been satisfied, and collectibility is reasonably assured. These requirements are met, and sales and related cost of sales are recognized primarily upon the shipment of products, or in the case of consignment inventories, upon the notification of usage by the customer. The Company records estimated reductions to revenue for customer programs and other volume-based incentives. Should customer participation in these programs exceed that estimated by the Company, additional reductions to revenue may be required. The Company also allows credit for products returned within its policy terms. The Company records an allowance for estimated returns, based on historical experience, recent gross sales levels and any notification of pending returns, at the time of sale. Should the actual returns exceed those estimated by the Company, additional reductions to revenue and cost of sales may be required.

Inventories

Inventories are stated at the lower of cost or market, cost determined by the first-in, first-out (FIFO) method. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.

Property and Equipment

Property and equipment is stated at cost. Depreciation is based on the useful lives of the properties and computed using the straight-line method. Buildings are depreciated over 30 years, furniture and equipment over 3 to 10 years and leasehold improvements over the shorter of their estimated remaining lives or lease term. Significant improvements and betterments are capitalized while maintenance and repairs are charged to operations as incurred.

Intangible Assets and Goodwill

Intangible assets consist of values assigned to patents, licenses and trademarks. These are stated at cost less accumulated amortization and are amortized over their economic useful life ranging from 3 to 20 years using the straight-line method. Accumulated amortization of intangibles was $ 9,090,000 at March 31, 2002 and $5,564,000 at March 31, 2001. The excess purchase cost over fair value of net identifiable assets acquired, goodwill, has been amortized on a straight-line basis over 15 to 40 years. Accumulated amortization of goodwill was $2,127,000 at March 31, 2002 and $1,882,000 at March 31, 2001. The Company assesses on an ongoing basis the recoverability of goodwill and intangibles based on estimates of future undiscounted cash flows for the applicable business compared to net book value. If the future undiscounted cash flow estimates were less than net book value, then the net book value would then be reduced to fair value based on an estimate of discounted cash flow.

Income Taxes

Deferred income taxes are provided on the temporary differences between income for financial statement and tax purposes. The Company has not recorded a valuation allowance on its deferred tax assets as management believes that it is more likely than not that all deferred tax assets will be realized.

Stock Based Compensation

Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," encourages but does not require companies to record compensation expense for stock options at fair value. The Company has chosen to continue to account for stock options using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 ("APB Opinion 25"), "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, the Company has provided pro forma disclosures of the earnings per share as determined under the provision of SFAS 123.

Advertising Expenses

The Company expenses media advertising costs as incurred or where applicable, upon first showing. Advertising expenses for $1.4 million, $3.3 million and $7.2 million in 2002, 2001, and 2000, respectively. There were no significant capitalized advertising costs as of March 31, 2002, 2001 and 2000.

Foreign Operations

Export sales to independent distributors, principally to Canada and Western Europe, were $12,227,000, $14,175,000 and $16,121,000 in 2002, 2001 and 2000, respectively. In addition, $88,572,000, $44,182,000 and $33,241,000 of sales in 2002, 2001 and 2000, respectively, were from the Company's direct international sales offices primarily in Canada and Western Europe. Income before income taxes for foreign operations was $8,099,000, $6,384,000 and $6,416,000 for fiscal 2002, 2001 and 2000, respectively.

Foreign Currency Translation

The financial statements of the Company's non-U.S. subsidiaries are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." The assets and liabilities of certain non-U.S. subsidiaries whose "functional" currencies are other than the U.S. Dollar are translated at current rates of exchange. Revenue and expense items are translated at the average exchange rate for the year. The resulting translation adjustments are recorded directly into accumulated other comprehensive income (loss). Transaction gains and losses, other than intercompany debt deemed to be of a long-term nature, are included in net income in the period they occur. Transaction exchange gains and losses were immaterial in 2002, 2001 and 2000. The Company's use of derivatives is not significant and is only on a limited basis.

Derivative Instruments

The Company accounts for derivative instruments and hedging activities in accordance with Statement of Financial Accounting Standard No. 133 (SFAS 133) "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires all derivatives to be recorded as assets or liabilities at fair value. Changes in derivative fair values will either be recognized in earnings, offset against changes in the fair value of the related hedged assets, liabilities and firm commitments or, for forecasted transactions, recorded as a component of accumulated other comprehensive income in shareholders' equity until the hedge transactions occur and are recognized in earnings. The Company's use of derivatives is not significant and is only on a limited basis.

Effects of Recent Accounting Pronouncements

In June 2001, the FASB issued Statements of Financial Accounting Standards No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). Under SFAS 142, goodwill will no longer be amortized but will be subject to annual impairment tests. Other intangible assets, except those with indefinite lives, will continue to be amortized over their useful lives. These standards were effective for acquisitions made after June 30, 2001 and will be effective for the Company on April 1, 2002 for acquisitions made prior to June 30, 2001.

The absence of goodwill amortization is expected to result in an increase in pretax income of approximately $730,000 ($0.02 per diluted share) in fiscal 2003. The Company will perform the first of the impairment tests of goodwill as of April 1, 2002 and has not yet determined what effect the outcome of these tests will have on the Company's financial statements. Impairment tests of goodwill will be performed annually thereafter.

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets."  SFAS 144 supersedes Statement of Financial Accounting Standard No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS 144 retained substantially all of the requirements of SFAS 121 while resolving certain implementation issues. SFAS 144 is effective for fiscal years beginning after December 15, 2001, with early application encouraged. The Company will adopt SFAS 144 beginning in the quarter ending June 30, 2002 and is currently evaluating the impact of the adoption of SFAS 144.

Use of Estimates

Financial statements prepared in accordance with accounting principles generally accepted in the United States require management to make estimates and judgments that affect amounts and disclosures reported in the financial statements. Actual results could differ from those estimates.

Note B - Inventories

Inventories at March 31 consisted of:

(in thousands)	2002	2001
Raw materials	$ 10,194	$ 7,212
Work in process	9,908	9,564
Finished goods	27,302	29,945
	$ 47,404	$ 46,721

Note C - Property and Equipment

Property and equipment at March 31 consisted of:

(in thousands)	2002	2001
Land	$ 429	$ 405
Buildings	14,601	14,350
Leasehold improvements	24,030	17,580
Furniture, fixtures and equipment	63,860	60,143
Construction in progress	6,032	4,200
	108,952	96,678
Less accumulated depreciation and amortization	(54,296)	(45,529)
	$ 54,656	$ 51,149

Note D - Other Comprehensive Income

Other comprehensive income includes the net change in unrealized gains (losses) on available-for-sale securities as follows:

	Year Ended March 31,
(in thousands)	2002	2001	2000
Unrealized gains (losses) arising during period,    net of taxes of $347, ($1,963) and $3,257,    respectively	$    641	$  (3,646)	$  6,043
Reclassification adjustments for gains realized in net    income, net of taxes of $448, $400 and $1,026,    respectively	(831)	(742)	(1,906)
Change in net unrealized gains (losses) on securities	$  (190)	$  (4,388)	$   4,137

Accumulated other comprehensive income which is included in the Company's shareholders' equity at March 31 consisted of:

(in thousands)	2002	2001
Net unrealized gains on securities	$     439	$      629
Foreign currency translation adjustments	(6,926)	(4,911)
Accumulated other comprehensive income (loss)	$  6,487	$  (4,282)

Note E - Accounts Payable and Accrued Liabilities and Long-Term Accrued Liabilities

Accounts payable and accrued liabilities at March 31 consisted of:

(in thousands)	2002	2001
Trade accounts payable	$ 17,558	$ 14,731
Warranty and related reserves	16,252	12,062
Accrued compensation	15,129	11,062
Sales returns	7,806	4,913
Current portion of purchase price related to   acquired technologies and acquisitions	4,675	3,675
Accrued royalties	637	1,150
Other	8,366	7,653
	$ 70,423	$ 55,246

Long-term accrued liabilities at March 31 consisted of:

(in thousands)	2002	2001
Accrued acquisition liabilities - South Bay Medical	$ 7,517	$ 7,045
Accrued acquisition liabilities - ProSurg, Inc.	1,726	-
Deferred compensation	3,579	3,599
Other	51	47
	$ 12,873	$ 10,691

Note F - Short-Term Bank Borrowings

Credit Agreement

As of March 31, 2001 and 2002, the Company had a secured line of credit, "$25M Credit Agreement", for borrowings up to $25 million, which accrue interest at the prevailing prime rate or at a mark-up over LIBOR at the Company's discretion. The $25M Credit Agreement includes certain covenants that, among others, limit the dividends the Company may pay and requires maintenance of certain levels of tangible net worth and debt service ratios. In February 2001, the Company borrowed $14.1 million under the $25M Credit Agreement at an effective interest rate of 6.4% annually, to partially fund its acquisition of Porges S.A. In May 2001, the Company repaid the $14.1 million borrowing under the $25M Credit Agreement. However, during fiscal year 2002, the Company used the $25M Credit Agreement to guarantee the secured loan of a vendor to facilitate the ramp up of production capacity related to a new product in the amount of $5.3 million. Accordingly, although there were no borrowings outstanding under the $25M Credit Agreement at March 31, 2002, only $19.7 million was available for additional borrowings.

Foreign Lines of Credit

In addition, in February 2001, several lines of credit were established at a local level to facilitate operating cash flow needs at our foreign subsidiaries. These lines are at market rates of interest, unsecured, guaranteed by Mentor Corporation and total $5.0 million and $3.7 million at March 31, 2002 and 2001 respectively. Total borrowed and outstanding under these lines were $4.4 million and $2.5 million at March 31, 2002 and 2001 respectively. The amount available for additional borrowing was $.6 million and $1.2 million at March 31, 2002 and 2001 respectively.

In fiscal year 2002, a line of credit of $5.6 million to finance the construction of a new facility in the Netherlands was established. The borrowings accrue interest at EURIBOR plus 0.75% and are secured by the new facility and other assets in the Netherlands. $4.8 million was borrowed and outstanding under this line at March 31, 2002 and $0.8 million was available for additional borrowings.

Outstanding borrowings under all credit arrangements had a weighted-average interest rate of 4.10% and 5.96% at March 31, 2002 and 2001 respectively. A total of $21.1 million and $12.1 million was available under the $25M Credit Agreement and the foreign lines of credit at March 31, 2002 and 2001 respectively.

Note G - Stock Options

The Company has granted options to key employees and non-employee directors under its 2000 Plan and 1991 Plan. Options granted under both plans are exercisable in four equal annual installments beginning one year from the date of grant, and expire ten years from the date of grant. Options are granted at the fair market value on the date of grant. Activity in the stock option plans during fiscal 2002, 2001 and 2000 was as follows:

	At March 31
	Options Outstanding
	Number of Shares	Weighted Average Price per Share
Balance March 31, 1999	2,379,786	$ 15.04
Granted	613,000	15.84
Exercised	(577,659)	10.15
Canceled or terminated	(184,750)	19.99
Balance March 31, 2000	2,230,377	$ 16.12
Granted	1,453,550	16.39
Exercised	(286,119)	8.69
Canceled or terminated	(523,527)	18.70
Balance March 31, 2001	2,874,281	$ 16.53
Granted	965,750	26.87
Exercised	(599,017)	14.81
Canceled or terminated	(226,780)	17.88
Balance March 31, 2002	3,014,234	$    20.05

At March 31, 2002, the Company had one Plan under which stock options were available, the Amended 2000 Long-term Incentive Plan (2000 Plan), approved by the Company's shareholders on October 19, 2000 and amended by vote of the shareholders September 14, 2001. At March 31, 2002, the 2000 Plan had options for 192,000 shares granted and outstanding, and 2,808,000 shares available for grant. The 1991 Plan had options for 2,822,234 shares granted and outstanding at March 31, 2002. No additional options can be granted under the 1991 Plan.

Information regarding stock options outstanding at March 31, 2002 is as follows:

	Options Outstanding			Options Exercisable
Price Range	Number of Shares	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price	Number of Shares	Weighted-Average Exercise Price
Under $17.00	1,485,234	7.04 years	$ 14.67	582,571	$ 12.56
$17.00 to $27.00	1,396,500	7.78 years	$ 24.82	445,053	$ 22.01
Over $27.00	132,500	7.92 years	$ 29.98	52,500	$ 29.66

At March 31, 2002, 2001 and 2000, stock options to purchase 1,080,124, 1,186,595 and 1,202,852 shares, respectively, were exercisable at weighted-average prices of $17.28, $16.27 and $13.78, respectively.

Stock option exercise prices are set at the closing price of the Company's common stock on the date of grant and the related number of shares granted is fixed at that point in time. Therefore, under the principles of APB Opinion 25, the Company does not recognize compensation expense associated with the grant of stock options. SFAS 123 requires the use of an option valuation model to provide supplemental information regarding options granted after fiscal 1995. Pro forma information regarding net income and earnings per share shown below were determined as if the Company had accounted for its employee stock options under the fair value method of that statement.

The weighted average fair values of stock option granted were estimated at the date of grant using the Black-Scholes option valuation model and the following assumptions:

	Year Ended March 31,
	2002	2001	2000
Weighted average fair value of stock   options granted	$    15.84	$    10.12	$     8.67
Risk-free interest rate	4.6%	6.4%	5.5%
Expected life (in years)	7.2	7.5	7.5
Expected volatility	0.550	0.557	0.524
Expected dividend yield	0.4%	0.6%	0.7%

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options. The Company's employee stock options have characteristics significantly different from those of traded options such as vesting restrictions and extremely limited transferability. In addition, the assumptions used in option valuation models are highly subjective, particularly the expected stock price volatility of the underlying stock. Because changes in these subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not provide a reliable single measure of the fair value of its employee stock options.

For purposes of pro forma disclosure, the estimated fair value of the options is amortized ratably over the option's vesting period. The pro forma effect on net income is not representative of the pro forma effect on net income in future years because compensation expense in future years will reflect the amortization of a larger number of stock options granted in several succeeding years. The Company's pro forma information is as follows (in thousands, except per share information):

	Year Ended March 31,
(in thousands)	2002	2001	2000
Net income: as reported	$ 41,820	$ 32,078	$ 36,539
Net income: pro forma	$ 37,444	$ 28,838	$ 33,812
Basic earnings per share: as reported	$ 1.77	$ 1.36	$ 1.50
Basic earnings per share: pro forma	$ 1.58	$ 1.22	$ 1.39
Diluted earnings per share: as reported	$ 1.71	$ 1.33	$ 1.46
Diluted earnings per share: pro forma	$ 1.56	$ 1.18	$ 1.36

Note H - Income Taxes

Income tax expense from continuing operations consists of the following:

	Year Ended March 31,
(in thousands)	2002	2001	2000
Current:
Federal	$ 17,763	$ 15,605	$ 10,650
Foreign	1,621	1,411	1,036
State	1,617	1,166	1,348
	21,001	18,182	13,034
Deferred:
Federal	(2,796)	(2,936)	521
Foreign	(467)
State	(342)	(515)	8
	(3,605)	(3,451)	529
	$ 17,396	$ 14,731	$ 13,563

The reconciliation of the federal statutory rate to the Company's effective rate for continuing operations is as follows:

	Year Ended March 31,
	2002	2001	2000
Federal statutory rate	35.0%	35.0%	35.0%
Increase (decrease) resulting from:
State taxes net of federal tax benefit	1.4	1.6	1.8
Non-taxable interest and dividends	(0.1)	(0.1)	(0.1)
Research and development credit	(2.1)	(2.1)	(2.0)
Foreign Sales Corporation/ETI	(2.4)	(1.0)	(1.1)
Foreign operations	(2.5)	(2.0)	(1.9)
Non-deductible goodwill	0.1	0.1	0.2
Other	-	0.1	0.1
	29.4%	31.6%	32.0%

Significant components of the Company's deferred tax liabilities and assets at March 31 are as follows:

(in thousands)	2002	2001
Deferred tax liabilities:
Tax over book depreciation	$ (445)	$ (1,106)
Unrealized gain on long-term
marketable securities	(237)	(2,363)
Porges book over tax basis	(3,680)	(4,799)
	(4,362)	(8,268)
Deferred tax assets:
Book liabilities not deductible for tax	10,656	9,162
Inventory	890	1,056
Profit in inventory of foreign subsidiaries	1,757	1,260
	13,303	11,478
Net deferred tax assets	$ 8,941	$ 3,210

At March 31, 2002, foreign earnings of $12,510,000 have been retained indefinitely by subsidiary companies for reinvestment, on which no U.S tax has been provided. If repatriated, additional taxes of approximately $4,379,000 on these earnings, net of applicable foreign tax credit carry-forwards, would be due.

Note I - Acquisitions

Porges S.A.

On February 9, 2001, the Company purchased all of the outstanding shares of Porges S.A. ("Porges") from Sanofi-Synthelabo. Porges is a manufacturer of urological products supplying a complete range of products for the urological surgeon, including diagnostic tools and various devices for surgery and postoperative follow-up. The Company paid $32 million in consideration for all outstanding shares of Porges and all of its foreign sales offices.

The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the tangible and intangible net assets acquired on the basis of their respective fair values on the acquisition date. The fair value of assets acquired was determined based upon an internal valuation and by using a combination of methods, including an income approach for the intellectual properties and replacement cost for tangible assets.

The total purchase price was preliminarily allocated during fiscal year 2001 to tangible assets of $46,224,000, intangible assets of $4,241,000, customer base of $895,000, workforce-in-place of $1,885,000 and goodwill of $2,414,000, offset by accrued liabilities of $18,363,000 and deferred income tax liabilities of $4,799,000. In fiscal year 2002, the Company completed its review and evaluation of the technology and received a purchase price adjustment of $653,000 upon resolution of certain financial measurements. As a result of the completion of the Company's review and purchase price adjustment, the purchase price allocation was adjusted as follows: tangible assets decreased $656,000 to $45,568,000, goodwill was increased by $1,237,000 to $3,651,000, deferred taxes were increased by $651,000 to $4,148,000 and workforce-in-place was decreased by $1,885,000 to zero as it has been included in goodwill.

Goodwill has been amortized over its estimated useful life of 15 years. The other acquired intangible assets are being amortized over their estimated useful lives of 5 to 15 years. In accordance with SFAS 142, the Company will no longer amortize goodwill beginning April 1, 2002.

The following unaudited pro forma financial information presents the combined results of continuing operations of the Company and Porges as if the acquisition had occurred as of the beginning of each period presented, after giving effect to certain adjustments, including amortization of goodwill and intangible assets.

(In thousands except per share amounts)	Year Ended March 31,
	2001	2000
Net sales	$307,674	$296,244
Net income	$31,055	$28,051
Pro forma earnings per share: Basic Diluted	$ 1.31 $ 1.28	$ 1.15 $ 1.12

The pro forma results are not necessarily indicative of those that would have actually occurred had the acquisitions taken place at the beginning of the periods presented.

South Bay Medical LLC

On January 19, 2001, the Company purchased the assets of South Bay Medical LLC (South Bay), a company focused on the development of a new computer-based workstation and automated cartridge-based needle loading system for use in brachytherapy procedures. The acquisition was accounted for as a purchase with the results of operations included in the Company's financial statements from the date of acquisition. Pro forma results for fiscal 2001 and 2000, assuming the acquisition occurred at the beginning of the period, would not be materially different from the results reported. The Company paid $2,000,000 in cash and issued restricted common stock valued at $4 million on the date of purchase. Additional purchase price payments will be made to South Bay over the next several years as the workstation sales are made. The net present value of these amounts is recorded at March 31, 2002, in accrued liabilities ($3,675,000) and in long-term accrued liabilities ($7,045,000) as the Company believes it is probable these payments will be paid. The purchase price allocation included $16,820,000 allocated to patents and other intangibles that will be amortized over a period not to exceed 15 years using the straight-line method. The related acquisition agreement also provides for certain other contingent amounts to be paid to South Bay which will be expensed as earned based upon future sales levels.

The majority of the shares of South Bay are owned by individuals, who are now employees of the Company, and their spouses. These employees have directly benefited from the past payments of cash and common stock to South Bay and will benefit as future payments are made based on workstation and brachytherapy seed sales. No amounts were paid in fiscal year 2002.

Partnership Technologies

Certain technologies related to the manufacture of mammary prostheses were developed under a 1983 agreement with a limited partnership whereby the limited partners contributed funds towards the development of the technology in exchange for payments based upon a percentage of future sales of the products utilizing the technology. The Company paid to the partnership approximately $2 million of these payments in fiscal 2000. The Company was the general partner for this partnership. The agreement included an option to purchase the technology and thereby terminate the partnership. During the year ended March 31, 2001, the Company exercised its option to make a lump sum payment to the limited partners in lieu of all future payments and rights according to the Agreement of Purchase and Sale between Mentor Corporation and the Partnership, as amended. The limited partners could elect to be paid in cash, the Company's common stock, or a combination thereof. This transaction was completed on August 14, 2000. The limited partners elected to be paid $1 million in cash and 434,000 thousand shares of the Company's common stock that had a value of $9 million. As a result of this purchase, the Company recorded an intangible asset of $10 million that will be amortized using the straight-line method over its estimated useful life of 20 years.

Byron Medical, Inc.

In December 2001, the Company paid $3 million for 51% of the outstanding shares of Byron Medical, Inc. The Company had previously purchased 49% of the shares in 1998, and now owns all outstanding shares. The purchase price allocation included goodwill of $2.1 million and net assets of $900,000. Byron Medical, Inc. is located in Tucson, Arizona and specializes in the distribution of liposuction equipment and disposables.

ProSurg, Inc.

In December 2001, the Company entered into several agreements with ProSurg, Inc. to acquire certain patent rights and obtain a source of supply of a bio-absorbable co-polymer for $2 million in cash and an obligation to pay an additional $3 million upon the achievement of certain milestones. The purchase price was allocated to intangible assets and a short-term obligation of $1 million was recorded for the first milestone payment and a long-term obligation of $1.7 million, the net present value of the later milestones, was recorded as the Company believes it is probable these payments will be paid.

Note J - Earnings per Share

A reconciliation of weighted average shares outstanding, used to calculate basic earnings per share, to weighted average shares outstanding assuming dilution, used to calculate diluted earnings per share, follows:

	Year Ended March 31,
(in thousands)	2002	2001	2000
Weighted average outstanding shares: basic	23,639	23,627	24,384
Shares issuable through exercise of stock   options	824	559	700
Weighted average outstanding shares: diluted	24,463	24,186	25,084

Shares issuable through options are determined using the treasury stock method.

Options to purchase 64,767, 1,488,825, and 980,525 shares with exercise prices greater than the average market prices of common stock were outstanding during the years ended March 31, 2002, 2001 and 2000, respectively. These options were excluded from the respective computations of diluted earnings per share because their effect would be anti-dilutive.

Note K - Commitments

The Company leases certain facilities under non-cancelable operating leases with unexpired terms ranging from 1 to 12 years. Most leases contain renewal options. Rental expense for these leases was $4.1 million, $3.3 million and $3.6 million for fiscal 2002, 2001 and 2000, respectively.

Future minimum lease payments under lease arrangements at March 31, 2002 are as follows:

	(in thousands)
2003	$ 3,971
2004	4,028
2005	4,025
2006	4,085
2007	3,914
Thereafter	20,645
Total	$40,668

During fiscal year 2002, the Company used the $25M Credit Agreement to guarantee the secured loan of a vendor, in the amount of $5.3 million, to facilitate the ramp up of production capacity related to a new product. The loan is secured by the vendor's assets and the Company believes that there is adequate collateral in the case of a default. However, if the vendor does default for any reason the Company would be liable for the loan.

Note L - Related Party Transactions

Since 1991, the Company has had an exclusive license agreement with Rochester Medical Corporation ("Rochester") to market and distribute certain external catheter products developed by Rochester. The Company purchased $860,000, $59,000 and $101,000 of product from Rochester in 2002, 2001 and 2000, respectively. Several officers/founders of Rochester, a public company, are siblings of the Chairman of Mentor Corporation. The Chairman derived no financial or other benefit from transactions between the Company and Rochester.

South Bay Medical LLC

See Note I - South Bay Medical LLC for a description of amounts owed to certain employees of the Company related to the acquisition of South Bay.

Note M - Contingencies

Warranty and product liability claims are a regular and ongoing aspect of the medical device industry. At any one time, the Company is subject to claims against it and is involved in litigation. These actions can be brought by an individual, or by a group of patients purported to be a class action. The Company carries product liability insurance on all its products, except silicone gel-filled implants, which are only available within the United States through a controlled clinical study. This insurance is subject to certain self-insured retention and other limits of the policy, exclusions and deductibles that the Company believes to be appropriate.

In addition, the Company also offers warranty coverage on some of its products. The Company provides an accrual for the estimated cost of product warranties and product liability claims at the time revenue is recognized. Such accruals are based on estimates, which are based on relevant factors such as historical experience, the warranty period, estimated costs, levels of insurance and insurance retentions, identified product quality issues, if any, and to a limited extent, information developed by the insurance company using actuarial techniques. These accruals are analyzed periodically for adequacy.  While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the warranty obligation is affected by reported rates of product problems as well as the costs incurred in correcting product problems. The Company has recorded warranty and related reserves of $16,252,000 and $12,062,000 at March 31, 2002 and 2001, respectively, to cover the cost of anticipated warranty and product liability claims.

In 1998, the Company learned that the FDA's Office of Criminal Investigations "OCI" was conducting an investigation involving the Company. The Company understood that the investigation was dormant until April 2000 when OCI issued a letter requesting that the Company provide OCI with manufacturing data and other corporate records, which the Company subsequently provided to OCI. The Company cooperated fully with the OCI investigation. The OCI declined to identify the specific focus of its investigation involving the Company, and the Company has had no direct contact with OCI regarding the investigation since January 2001 when certain documents were requested. It is not possible to predict the outcome of this investigation at this time or its potential impact on the Company. The Company believes that it is in compliance with all applicable laws, rules and regulations.

The Securities and Exchange Commission (SEC) informed the Company that it was investigating, under a formal order of investigation, the events relating to the March 23, 2000 USA Today article entitled "Breast Implant Manufacturer Under Investigation by the FDA," which was authored by Rita Rubin, and the March 23, 2000 press release issued by Mentor responding to that article, and possibly other matters. The Company cooperated fully with the SEC's investigation. In May 2002, the Company received notification from the SEC 's Division of Enforcement that "This investigation has been terminated and no enforcement action has been recommended to the Commission."

In addition, in the ordinary course of its business, the Company experiences various types of claims that sometimes result in litigation or other legal proceedings. The Company does not anticipate that any of these proceedings will have a material adverse effect on the Company.

Note N - Restructuring Charges and Discontinued Operations

During fiscal 2001, the Company announced a reduction in corporate staff at its headquarters in Santa Barbara as part of a restructuring move to streamline operations and improve efficiency. Employees affected by the restructuring were provided with a severance package, outplacement counseling and extended benefits to help with the transition. This program resulted in a restructuring charge included in general and administrative expenses of $2.4 million. Substantially all amounts related to the restructuring charge were paid by March 31, 2001.

In December 1998, Mentor announced a restructuring plan as part of a strategic initiative to improve the profitability and competitiveness of its ophthalmic business by reducing manufacturing costs and concentrating on those products and markets capable of sustained, long-term profitable growth.

During the implementation of this plan, the Board of Directors authorized management to evaluate potential buyers for the product lines of the ophthalmic business segment. In March 1999, the Company adopted a plan to dispose of its ophthalmic business segment. During the quarter ended June 30, 1999, the Company completed the sale of the assets of the intraocular lens business, for cash consideration of $38.4 million and recorded a related gain of $7.5 million, net of $3.8 million in income taxes. On October 4, 1999, the Company completed the sale of the remaining assets of the ophthalmic equipment business for cash consideration of $21 million and recorded a related gain after income taxes of $1.1 million.

Consistent with the plan to dispose of its ophthalmic business segment, the net assets and operations of the ophthalmic segment of the business, comprised of the intraocular lens products and ophthalmic equipment product lines, have been classified as discontinued operations.

The results of discontinued operations for the two years ending March 31, 2001 and 2000 are as follows:

	Year Ended March 31,
(in thousands)	2001	2000
Revenues	$        -	$ 14,660
Income before income taxes	400	169
Income tax expense	(140)	(973)
Income (loss) from discontinued operations	260	(804)
Gain from disposal, net of income taxes of $8,933	-	8,517 (1)
Income from discontinued operations	$     260	$ 7,713

⁽¹⁾ Income taxes as a percent of the income before income taxes, and the gain from disposal are higher than the statutory income tax rate due to non-deductible goodwill included in the sale and Puerto Rico tollgate taxes arising from the repatriation of earnings.

Remaining assets and liabilities related to discontinued operations at March 31, 2002 and 2001 are nominal.

Note O - Business Segment Information

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

The aesthetic and general surgery products segment consists primarily of breast implants, tissue expanders and the Company's body contouring equipment and disposables. The surgical urology segment includes penile implants, surgical incontinence products and brachytherapy seeds for the treatment of prostate cancer. The clinical and consumer healthcare segment includes catheters and other products for the management of urinary incontinence and retention.

Selected financial information for the Company's reportable segments for the years ended March 31, is as follows:

	Year Ended March 31,
(in thousands)	2002	2001	2000
Net Sales
Aesthetic and General Surgery	$ 163,091	$ 157,122	$ 150,334
Surgical Urology	94,341	62,264	52,794
Clinical and Consumer Healthcare	63,630	49,508	46,217
Total consolidated revenues	$ 321,062	$ 268,894	$ 249,345
	Year Ended March 31,
(in thousands)	2002	2001	2000
Operating profit
Aesthetic and General Surgery	$ 49,516	$ 34,792	$ 32,994
Surgical Urology	6,945	6,405	6,729
Clinical and Consumer Healthcare	11,927	8,897	8,388
Total reportable segments	$ 68,388	$ 50,094	$ 48,111
	At March 31,
(in thousands)	2002	2001	2000
Identifiable assets
Aesthetic and General Surgery	$ 95,763	$ 84,363	$ 76,649
Surgical Urology	88,488	82,152	27,672
Clinical and Consumer Healthcare	43,506	41,302	27,032
Total reportable segments	$ 227,757	$ 207,817	$ 131,353
	Year Ended March 31,
(in thousands)	2002	2001	2000
Depreciation and amortization
Aesthetic and General Surgery	$ 3,617	$ 3,160	$ 2,934
Surgical Urology	4,400	1,676	1,043
Clinical and Consumer Healthcare	2,808	2,599	2,515
Total reportable segments	10,825	7,435	6,492
Corporate and other	3,023	2,905	2,241
	$ 13,848	$ 10,340	$ 8,733
	Year Ended March 31,
(in thousands)	2002	2001	2000
Capital expenditures
Aesthetic and General Surgery	$ 12,782	$ 3,782	$ 1,452
Surgical Urology	5,017	1,385	2,333
Clinical and Consumer Healthcare	1,561	2,105	855
Total reportable segments	19,360	7,272	4,640
Corporate and other	492	3,033	6,805
	$ 19,852	$ 10,305	$ 11,445

The following tables reconcile segment information to the amounts shown on the consolidated financial statements.
	Year Ended March 31,
(in thousands)	2002	2001	2000
Operating profit from continuing   operations
Reportable segments	$ 68,388	$ 50,094	$ 48,111
Corporate operating loss	(10,872)	(8,307)	(8,680)
Interest expense	(859)	(276)	(34)
Interest income	2,217	4,209	2,982
Other income	342	829	10
Income from continuing operations   before taxes	$ 59,216	$ 46,549	$ 42,389
	At March 31,
(in thousands)	2002	2001	2000
Identifiable assets
Reportable segments	$ 227,757	$ 207,817	$ 131,353
Corporate and other	98,163	83,020	99,353
Consolidated assets	$ 325,920	$ 290,837	$ 230,706
Selected financial information for the Company's operations by geographic area is as follows:
	Year Ended March 31,
(in thousands)	2002	2001	2000
Geographic area revenue
United States	$ 220,264	$ 210,370	$ 199,982
Foreign	100,798	58,524	49,363
Consolidated total	$ 321,062	$ 268,894	$ 249,345
	At March 31,
(in thousands)	2002	2001	2000
Geographic area long-lived assets
United States	$ 71,627	$ 72,272	$ 42,948
Foreign	29,771	23,197	1,976
Consolidated total	$ 101,398	$ 95,469	$ 44,924

Note P - Quarterly Financial Data (Unaudited)

The following is a summary of unaudited quarterly results of operations.

(in thousands, except per share data)	Quarter
Year Ended March 31, 2002	First	Second	Third	Fourth
Net sales	$ 81,144	$ 74,347	$ 78,975	$ 86,596
Gross profit	48,413	42,729	46,870	52,595
Income from continuing operations	14,299	11,856	14,787	16,574
Net income	10,290	8,489	9,817	13,224
Basic earnings per share:
Continuing operations	$       0.43	$      0.35	$       0.42	$       0.57
Discontinued operations	-	-	-	-
Basic earnings per share	$       0.43	$      0.35	$       0.42	$       0.57
Diluted earnings per share:
Continuing operations	$       0.42	$      0.34	$       0.41	$       0.54
Discontinued operations	-	-	-	-
Diluted earnings per share	$       0.42	$      0.34	$       0.41	$       0.54
Year Ended March 31, 2001	First	Second	Third	Fourth
Sales, as originally reported	$ 66,785	$ 60,349	$ 60,978	$ 77,874
Reclassification of outbound shipping   costs to cost of sales	750	689	623	846
Net sales	67,535	61,038	61,601	78,720
Gross profit	41,834	37,092	38,448	46,824
Income from continuing operations	8,333	6,023	7,178	10,284
Income (loss) from discontinued   operations	- -	- -	- -	260
Net income	8,333	6,023	7,178	10,544
Basic earnings per share:
Continuing operations	$ 0.35	$ 0.25	$ 0.31	$ 0.44
Discontinued operations	-	-	-	0.01
Basic earnings per share	$ 0.35	$ 0.25	$ 0.31	$ 0.45
Diluted earnings per share:
Continuing operations	$ 0.34	$ 0.25	$ 0.30	$ 0.43
Discontinued operations	-	-	-	0.01
Diluted earnings per share	$ 0.34	$ 0.25	$ 0.30	$ 0.44

Note Q - Event Subsequent to March 31, 2002 (Unaudited)

On May 6, 2002, the Company announced that it had completed the acquisition of the urology business of Portex Ltd., a subsidiary of Smiths Group plc. The acquired business, now named Mentor Medical Ltd. manufactures and markets incontinence and ostomy products primarily for the home healthcare market. The products are sold mainly in the UK, Germany and the Netherlands. The acquisition was valued at 7.25 million sterling, or about $10.5 million, and was paid in cash.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)

COL. A	COL. B	COL. C		COL. D	COL. E
		Additions
Description	Balance at Beginning of Period	Charged to Costs and Expenses	Charged to Other Accounts	Deductions	Balance at End of Period
Year Ended March 31, 2002
Deducted from asset accounts:
Allowance for doubtful accounts	$  3,578	$ 2,374	$(259)	$   1,823	$  3,870
Liability Reserves:
Warranty and related reserves	$12,062	$ 8,337	$       -	$   4,147	$16,252
Accrued sales returns and allowances	4,913	2,893	-	-	7,806
	$16,975	$11,230	$       -	$   4,147	$24,058
Year Ended March 31, 2001
Deducted from asset accounts:
Allowance for doubtful accounts	$ 2,976	$ 1,569	$  219	$  1,186	$   3,578
Liability Reserves:
Warranty and related reserves	$ 6,563	$ 9,463	$      -	$ 3,964	$ 12,062
Accrued sales returns and allowances	6,401	-	-	1,488	4,913
	$ 12,964	$ 9,463	$      -	$ 5,452	$ 16,975
Year Ended March 31, 2000
Deducted from asset accounts:
Allowance for doubtful accounts	$ 2,072	$ 1,888	$      -	$    984	$   2,976
Liability Reserves:
Warranty and related reserves	$ 4,248	$ 6,515	$      -	$ 4,200	$   6,563
Accrued sales returns and allowances	5,126	1,275	-	-	6,401
	$ 9,374	$ 7,790	$      -	$ 4,200	$  12,964

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

                                                                MENTOR CORPORATION

                                                                /s/CHRISTOPHER J. CONWAY
                                                                Christopher J. Conway
                                                                President and Chief Executive Officer

DATE: June 26, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant, and in the capacities and on the dates indicated:

Signatures	Title	Date Signed
/s/CHRISTOPHER J. CONWAY Christopher J. Conway	President and Chief Executive Officer (Principal Executive Officer)	June 26, 2002
/s/ADEL MICHAEL Adel Michael	Executive Vice President Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)	June 26, 2002
/s/WALTER W. FASTER Walter W. Faster	Director	June 26, 2002
/s/EUGENE G. GLOVER Eugene G. Glover	Director	June 26, 2002
/s/MICHAEL NAKONECHNY Michael Nakonechny	Director	June 26, 2002
/s/DR. RICHARD W. YOUNG Dr. Richard W. Young	Director	June 26, 2002
/s/RONALD J. ROSSI Ronald J. Rossi	Director	June 26, 2002

EXHIBIT INDEX

Regulation S-K Exhibit Table Item Number	Description of Exhibit
3(a)	Composite Restated Articles of Incorporation of the Company dated April 1, 1998.
3(b)	Composite Restated By-Laws of the Company dated October 1, 1987.
10(a)*	Mentor Corporation 1991 Stock Option Plan -- Incorporated by reference to Registration Statement on Form S-8, Registration No. 33-48815, filed June 24, 1992.
10(b)	Lease Agreement, dated November 9, 1989, between Mentor Corporation and Skyway Business Center Joint Venture.
10(c)	First Amendment to Lease Agreement, dated December 1, 1993, between Mentor Corporation and Skyway Business Center Joint Venture.
10(d)	Security Agreement, dated May 22, 1995, between Mentor Corporation and Sanwa Bank California - -- Incorporated by reference to Exhibit 10.16 of the Registrant's Annual Report on Form 10-K for the year ended March 31, 1995.
10(e)	Guarantor Security Agreement, dated May 22, 1995, between Mentor Corporation and its subsidiaries and Sanwa Bank California - -- Incorporated by reference to Exhibit 10.17 of the Registrant's Annual Report on Form 10-K for the year ended March 31, 1995.
10(f)	Lease Agreement, dated July 23, 1990, between Mentor Corporation and SB Corporate Center, Ltd., covering 201 Mentor Drive - -- Incorporated by reference to Exhibit (m) of the Registrant's Annual Report on Form 10-K for the year ended March 31, 1991.
10(g)	Lease Agreement, dated August 19, 1998, between Mentor Corporation and SB Corporate Center, LLC, covering 301 Mentor Drive - -- Incorporated by reference to Exhibit (n) of the Registrant's Annual Report on Form 10-K for the year ended March 31, 1999.
10(h)*	Transition Agreement, dated August 1, 1999, between Mentor Corporation and Christopher Conway - -- Incorporated by reference to Exhibit 10(s) of the Registrant's Annual Report on Form 10-K for the year ended March 31, 2000.
10(i)*	Employment Agreement, dated April 1, 2000, between Mentor Corporation and Adel Michael - -- Incorporated by reference to Exhibit 10(u) of the Registrant's Annual Report on Form 10-K for the year ended March 31, 2000.
10(j)*	Transition and Non-Compete Agreement, dated September 28, 2000, between Mentor Corporation and Anthony R. Gette - -- Incorporated by reference to Exhibit 10(r) of the Registrant's Annual Report on Form 10-K for the year ended March 31, 2001.
10(k)*	Employment Agreement, dated October 16, 2000, between Mentor Corporation and Eugene G. Glover - -- Incorporated by reference to Exhibit 10(a) of the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 2000.
10(l)*	Employment Agreement, dated November 28, 2000, between Mentor Corporation and Ramona Schwab - -- Incorporated by reference to Exhibit 10(b) of the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 2000.
10(m)*	Employment Agreement, dated November 28, 2000, between Mentor Corporation and Bobby K. Purkait - -- Incorporated by reference to Exhibit 10(c) of the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 2000.
10(n)	Purchase Agreement, dated February 8, 2001, between Mentor Corporation and Sanofi-Synthelabo and Synthelabo Biomedical -- Incorporated by reference to Exhibit 10(v) of the Registrant's Annual Report on Form 10-K for the year ended March 31, 2001.
10(o)	Purchase Agreement, dated January 19, 2001, between Mentor Corporation and South Bay Medical LLC - -- Incorporated by reference to Exhibit 10(w) of the Registrant's Annual Report on Form 10-K for the year ended March 31, 2001.
10(p)	Amended and Restated Credit Agreement, dated October 25, 2000, between Mentor Corporation and Sanwa Bank California - -- Incorporated by reference to Exhibit 10(x) of the Registrant's Annual Report on Form 10-K for the year ended March 31, 2001.
10(q)	First Amendment to Amended and Restated Credit Agreement, dated February 2, 2001, between Mentor Corporation and Sanwa Bank California - -- Incorporated by reference to Exhibit 10(y) of the Registrant's Annual Report on Form 10-K for the year ended March 31, 2001.
10(r)	Second Amendment to Amended and Restated Credit Agreement, dated February 14, 2001, between Mentor Corporation and Sanwa Bank California - -- Incorporated by reference to Exhibit 10(z) of the Registrant's Annual Report on Form 10-K for the year ended March 31, 2001.
10(s)	Mentor Corporation 2000 Stock Option Plan -- Incorporated by reference to Registration Statement on Form S-8, Registration No. 333-73306, filed November 14, 2001.
10(t)*	Employment Agreement, dated August 3, 2000, between Mentor Corporation and Joshua Levine.
10(u)*	Employment Agreement, dated November 28, 2000, between Mentor Corporation and Peter Shepard.
10(v)*	Employment Agreement, dated November 28, 2000, between Mentor Corporation and Clarke Scherff.
21	Subsidiaries of the Company
23	Consent of Ernst & Young LLP, Independent Auditors

* Management contract or compensatory plan or arrangement. 

EXHIBIT 21

LIST OF SUBSIDIARIES OF MENTOR CORPORATION

1. Mentor Texas Inc. (Formerly Mentor H/S, Inc).

2. Mentor Minnesota Inc. (Formerly Mentor Urology, Inc.)

3. Mentor Ophthalmics, Inc. (Formerly Mentor O&O, Inc.) (Dissolved 12/31/99)

4. Mentor Caribe, Inc. (Dissolved 12/31/99)

5. Mentor ORC, Inc. (Dissolved 4/1/96)

6. Mentor Polymer Technologies Company

7. Teknar Corporation (Dissolved 4/1/96)

8. Mentor International Sales Corporation

9. Mentor International Holdings Alpha, Inc.

10. Mentor International Holdings Beta, Inc.

11. Mentor International Holdings Camda, Inc.

12. Mentor International Holdings Delta, Inc.

13. Mentor Medical Systems, Australia, Pty. Ltd.

14. Mentor Medical Systems Ltd., U.K.

15. Mentor Medical Limited, U.K.

16. Mentor Medical Systems, B.V.

17. Mentor Deutschland GMBH

18. Mentor Medical Systems, France, S.A.

19. Mentor Medical Systems, Canada, Inc.

20. MDI Company Ltd.

21. Mentor Medical Systems, Iberica, S.L.

22. Havas Medical, B.V.

23. Mentor Medical Inc.

24. Mentor Benelux B.V.

25. Mentor Japan K.K. (dissolved)

26. Mentor Medical Systems, C.V.

27. Mentor Medical Italia, S.r.l.

28. Sierra Laboratories, Inc.

29. Porges S.A. (France)

30. Porges GmbH (Germany)

31. Porges S.L. (Spain)

32. Porges S.R.L. (Italy)

33. Porges, Lda (Portugal)

34. Porges (Belgium)

35. Porges (Netherlands)

36. Porges Co, Ltd (Japan)

37. Porges U.K. Ltd (Great Britain)

EXHIBIT 23

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in Registration Statement Number 33-48815 on Form S-8 dated June 24, 1992 and Registration Statement Number 333-73306 on Form S-8 dated November 14, 2001 of our report dated May 13, 2002, with respect to the consolidated financial statements and schedule of Mentor Corporation included in the Annual Report on Form 10-K for the year ended March 31, 2002.

/s/ERNST & YOUNG LLP

Los Angeles, California

June 25, 2002

EX-3

MENTOR CORPORATION

COMPOSITE RESTATED ARTICLES OF INCORPORATION

Containing all amendments through April 1, 1998

ARTICLE I

Name

The name of this corporation shall be Mentor Corporation.

ARTICLE II

Registered Office

The location and post office address of the registered office of this corporation in Minnesota shall be 1499 West River Road North, Minneapolis, Minnesota 55411.

ARTICLE III

Duration

The duration of this corporation shall be perpetual.

ARTICLE IV

Purposes

The purposes for which this corporation is organized are general business purposes.

ARTICLE V

Powers

This corporation shall have all the powers conferred or permitted by the laws of the State of Minnesota.

ARTICLE VI

Capital Stock

A. Authorized Shares. The total authorized number of shares of this corporation shall be 50,000,000, all of which shall be common shares of the par value of $.10 per share.

B. Preemptive Rights. No holder of common shares of this corporation shall have any preferential, preemptive, or other rights of subscription to acquire any unissued securities or rights to purchase securities of this corporation now or hereafter authorized to be sold, or to any obligations convertible into securities of the corporation of any class, or to any right of subscription to any part thereof.

C. Cumulative Voting. No holder of common shares of this corporation shall be entitled to any cumulative voting rights for the election of directors or for any other purpose.

ARTICLE VII

Directors

The number and qualification of directors shall be fixed and provided in the By-Laws as amended from time to time.

ARTICLE VIII

Supersession

The foregoing Composite Restated Articles of Incorporation supersede and take the place of existing Articles of Incorporation and all amendments thereto.

ARTICLE IX

Directors' Liability

No director of this corporation shall be personally liable to this corporation or its shareholders for monetary damages for breach of fiduciary duty as a director; provided, however, that this Article shall not eliminate or limit the liability of a director to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to this corporation or its shareholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under Sections 302A.559 or 80A.23 of the Minnesota Statutes, (iv) for any transaction from which the director derived an improper personal benefit, or (v) for any act or omission occurring prior to the effective date of this Article. No amendment to or repeal of this Article shall apply to or have any effect on the liability or alleged liability of any director of this corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal.

k:\jdiggs\corporate docs\Articles of Incorporation 040198.doc

EX-3

COMPOSITE RESTATED BY-LAWS
of
MENTOR CORPORATION
Containing all amendments through October 1, 1987

SHAREHOLDERS

Section 1.01 Place of Meetings. Each meeting of the shareholders shall be held at the principal executive office of the Corporation or at such other place as may be designated by the Board of Directors or the Chief Executive Officer; provided, however, that any meeting called by or at the demand of a shareholder or shareholders shall be held in the county where the principal executive office of the Corporation is located.

Section l.02 Annual Meetings. The Board of Directors shall fix the date for the annual meeting of shareholders which is to be held in each calendar year. At the annual meeting, the shareholders shall designate the number of directors to constitute the Board of Directors, shall elect directors and shall transact such other business as may properly come before them; provided, however, that no business with respect to which special notice is required by law shall be transacted unless such notice shall have been given.

Section 1.03 Special Meetings. A special meeting of the shareholders may be called for any purpose or purposes at any

( time by the Chief Executive Officer; by the Chief Financial Officer; by the Board of Directors or any two or more members thereof; or by one or more shareholders holding not less than ten percent of the voting power of all shares of the Corporation entitled to vote, who shall demand such special meeting by written notice given to the Chief Executive Officer or the Chief Financial Officer of the Corporation specifying the purposes of such meeting, except that a special meeting for the purpose of considering any action to directly or indirectly facilitate or effect a business combination (as such term is from time to time defined in the Minnesota Business Corporation Act), including any action to change or otherwise affect the composition of the board of directors for that purpose, must be called by 25 percent or more of the voting power of all shares entitled to vote.

Section 1.04 Meetings Held Upon Shareholder Demand. Within 30

days of receipt of a demand by the Chief Executive Officer or the Chief Financial Officer from any shareholder or shareholders entitled to call a meeting of the shareholders, it shall be the duty of the Board of Directors of the Corporation to cause a special or regular meeting of shareholders, as the case may be, to be duly called and held on notice no later than ninety days after receipt of such demand. If the Board of Directors fails to cause such a meeting to be called and held as required by this Section, the shareholder or shareholders making the demand may call the meeting by giving notice as provided in Section 1.06 hereof at the expense of the Corporation.

Section 1.05 Notice of Meetings. Except as otherwise specified in Section 1.07 or required by law, written notice of each meeting of the shareholders, stating the date, time and place and, in the case of a special meeting, the purpose or purposes, shall be given at least ten days and not more than sixty days prior to the meeting to every holder of shares entitled to vote at such meeting. The business transacted at a special meeting of shareholders is limited to the purposes stated in the notice of the meeting.

Section 1.06 Waiver of Notice. A shareholder may waive notice of the date, time, place and purpose or purposes of a meeting of shareholders. A waiver of notice by a shareholder entitled to notice is effective whether given before, at or after the meeting, and whether given in writing, orally or by attendance. Attendance by a shareholder at a meeting is a waiver of notice of that meeting, unless the shareholder objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened, or objects before a vote on an item of business because the item may not lawfully be considered at that meeting and does not

( participate in the consideration of the item at that meeting.

Section 1.07 Quorum; Adjourned Meetings. The holders of a majority of the shares outstanding and entitled to vote shall constitute a quorum for the transaction of business at any annual or special meeting. In case a quorum shall not be present at a meeting, those present shall adjourn to such day as they shall by majority vote agree upon, and a notice of such adjournment shall be mailed to each shareholder entitled to vote at least five (5) days before such adjourned meeting. If a quorum is present, a meeting may be adjourned from time to time without notice other than announcement at the meeting. At adjourned meetings at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. If a quorum is present, the shareholders may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum.

Section l.08 Voting Rights. Subdivision 1. A shareholder shall have one vote for each share held which is entitled to vote. Except as otherwise required by law, a holder of shares entitled to vote may vote any portion of the shares in any way the shareholder chooses. If a shareholder votes without designating the proportion or number of shares voted in a particular way, the shareholder is deemed to have voted all of the shares in that way.

Subdivision 2. The Board may fix a date not more than sixty days before the date of a meeting of shareholders as the date for the determination of the holders of shares entitled to notice of and entitled to vote at the meeting. When a date is so fixed, only shareholders on that date are entitled to notice of and permitted to vote at that meeting of shareholders.

Section 1.9 Proxies. A shareholder may cast or authorize the casting of a vote by filing a written appointment of a proxy with an officer of the Corporation at or before the meeting at which the appointment is to be effective.

Section 1.10 Action Without a Meeting. Any action required or permitted to be taken at a meeting of the shareholders of the Corporation may be taken without a meeting by written action signed by all of the shareholders entitled to vote on that action. The written action is effective when it has been signed by all of those shareholders, unless a different effective time is provided in the written action.

DIRECTORS

Section 2.01 Number, Qualifications and Term of Office. Unti1 the first meeting of shareholders, the number of directors shall be the number named in the Articles of Incorporation. Thereafter, the number of directors shall be established by (resolution of the shareholders but shall not be less than the lesser of (i) the number of shareholders of record and beneficially or (ii) three. In the absence of such resolution, the number of directors shall be the number last fixed by the shareholders or the Articles of Incorporation. Directors need not be shareholders. Each of the directors shall hold office until the annual meeting of shareholders next held after his election and until he shall resign, or shall have been removed as hereinafter provided.

Section 2.02 Vacancies. If there be a vacancy among the directors of this Corporation by reason of death, resignation, increase in the number of directors required by Section 2.01 or otherwise, such vacancy shall be filled for the unexpired term by a majority of the remaining directors of the Board, and each person so elected shall be a director until his successor is elected by the shareholders, who may make such election at their next annual meeting or at any meeting duly called for that purpose.

Section 2.03 Removal. The entire Board of Directors or any individual director may be removed from office, with or without cause, by a vote of the shareholders holding a majority of the shares entitled to vote at an election of directors, except as otherwise provided by law where the shareholders have the right to cumulate their votes. In the event that the entire Board or any one or more directors be so removed, new directors shall be elected at the same meeting.

Section 2.04 Place of Meetings. Each meeting of the Board of Directors shall be held at the principal executive office of the Corporation or at such other place as may be designated from time to time by a majority of the members of the Board.

Section 2.05 Regular Meetings. Regular meetings of the Board of Directors for the election of officers and the transaction of any other business shall be held without notice at the place of and immediately after each regular meeting of the shareholders.

Section 2.06 Special Meetings. A special meeting of the Board of Directors may be called for any purpose or purposes at any time by any member of the Board by giving not less than twenty-four (24) hours' notice to all directors of the date, time and place of the meeting, provided that when notice is mailed, at least four days' notice shall be given. The notice need not state the purpose of the meeting.

Section 2.07 Waiver of Notice: Previously Scheduled Meetings. Subdivision 1. A director of the Corporation may waive notice of the date, time and place of a meeting of the Board. A waiver of notice by a director entitled to notice is effective whether (given before, at or after the meeting, and whether given in writing, orally or by attendance. Attendance by a director at a meeting is a waiver of notice of that meeting, unless the director objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and thereafter does not participate in the meeting.

Subdivision 2. If the day or date, time and place of a Board meeting have been provided herein or announced at a previous meeting of the Board, no notice is required. Notice of an adjourned meeting need not be given other than by announcement at the meeting at which adjournment is taken of the date, time and place at which the meeting will be reconvened.

Section 2.08 Quorum; Acts of Board. The presence in person of a majority of the directors currently holding office shall be necessary to constitute a quorum for the transaction of business. In the absence of a quorum, a majority of the directors present may adjourn a meeting from time to time without further notice until a quorum is present. If a quorum is present when a duly held meeting is convened, the directors present may continue to transact business until adjournment, even though the withdrawal of a number of the directors originally present leaves less than the proportion or number otherwise required for a quorum. Except as otherwise required by law or specified in the Articles of Incorporation of the Corporation, the Board shall take action by the affirmative vote of a majority of the directors present at a duly held meeting.

Section 2.09 Electronic Communications. A conference among directors by any means of communication through which the directors may simultaneously hear each other during the conference constitutes a Board meeting, if the same notice is given of the conference as would be required for a meeting, and if the number of directors participating in the conference would be sufficient to constitute a quorum at a meeting. A director may participate in a Board meeting not described in the immediately preceding sentence by any means of communication through which the director, other directors so participating and all directors physically present at the meeting may simultaneously hear each other during the meeting. Participation in a meeting by any means referred to in this Section 2.09 constitutes presence in person at the meeting.

Section 2.10 Absent Directors. A director of the Corporation may give advance written consent or opposition to a proposal to be acted on at a Board meeting. If the director is not present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected.

Section 2.11 Action Without a Meeting. An action required or permitted to be taken at a Board meeting may be taken without a meeting by written action signed by all of the directors. Any action, other than an action requiring shareholder approval, if the Articles of Incorporation so provide, may be taken by written action signed by the number of directors that would be required to take the same action at a meeting of the Board at which all directors were present. The written action is effective when signed by the required number of directors, unless a different effective time is provided in the written action. When written action is permitted to be taken by less than all directors, all directors shall be notified immediately of its text and effective date.

Section 2.12 Committees. Subdivision 1. A resolution approved by the affirmative vote of a majority of the Board may establish committees having the authority of the Board in the management of the business of the Corporation only to the extent provided in the resolution. Committees shall be subject at all times to the direction and control of the Board, except as provided in Section 2.13.

Subdivision 2. A committee shall consist of one or more natural persons, who need not be directors, appointed by affirmative vote of a majority of the directors present at a duly held Board meeting.

Subdivision 3. Section 2.04 and Sections 2.06 to 2.11 hereof shall apply to committees and members of committees to the same extent as those sections apply to the Board and directors.

Subdivision 4. Minutes, if any, of committee meetings shall be made available upon request to members of the committee and to any director.

Section 2.13 Committee of Disinterested Persons. Pursuant to the procedure set forth in Section 2.12, the Board may establish a committee composed of two or more disinterested directors or other disinterested persons to determine whether it is in the best interests of the Corporation to pursue a particular legal right or remedy of the Corporation and whether to cause the dismissal or discontinuance of a particular proceeding that seeks to assert a right or remedy on behalf of the Corporation. The committee, once established, is not subject to the direction or control of, or termination by, the Board. A vacancy on the committee may be filled by a majority vote of the remaining committee members. The good faith determinations of the committee are binding upon the Corporation and its directors, officers and shareholders. The committee terminates when it issues a written report of its determinations to the Board.

Section 2.14 Compensation. The Board may fix the compensation, if any, of directors.

OFFICERS

Section 3.01 Number and Designation. The Corporation shall have one or more natural persons exercising the functions of the offices of Chief Executive Officer and Chief Financial Officer. The Board of Directors may elect or appoint such other officers or agents as it deems necessary for the operation and management of the Corporation, with such powers, rights, duties and responsibilities as may be determined by the Board, including, without limitation, a President, one or more Vice Presidents, a Secretary and a Treasurer, each of whom shall have the powers, rights, duties and responsibilities set forth in these By-Laws unless otherwise determined by the Board. Any of the offices or functions of those offices may be held by the same person.

Section 3.02 Chief Executive Officer. Unless provided otherwise by a resolution adopted by the Board of Directors, the Chief Executive Officer (a) shall have general active management of the business of the Corporation; (b) shall, when present, preside at all meetings of the shareholders and Board of Directors; (c) shall see that all orders and resolutions of the Board are carried into effect; (d) may maintain records of and certify proceedings of the Board and shareholders; and (e) shall perform such other duties as may from time to time be assigned by the Board of Directors.

Section 3.03 Chief Financial Officer. Unless provided otherwise by a resolution adopted by the Board of Directors, the Chief Financial Officer (a) shall keep accurate financial records for the Corporation; (b) shall deposit all monies, drafts and checks in the name of and to the credit of the Corporation in such banks and depositories as the Board of Directors shall designate from time to time; (c) shall endorse for deposit all notes, checks and drafts received by the Corporation as ordered by the Board, making proper vouchers therefor; (d) shall disburse corporate funds and issue checks and drafts in the name of the Corporation, as ordered by the Board; (e) shall render to the Chief Executive Officer and the Board of Directors, whenever requested, an account of all of such officers transactions as Chief Financial Officer and of the financial condition of the Corporation; and (f) shall perform such other duties as may be prescribed by the Board of Directors or the Chief Executive Of ficer from time to time.

Section 3.04 President. Unless otherwise determined by the Board, the President.shall be the Chief Executive Officer of the Corporation. If an officer other than the President is designated Chief Executive Officer, the President shall perform such duties as may from time to time be assigned by the Board of Directors.

Section 3.05 Vice Presidents. Any one or more Vice Presidents, if any, may be designated by the Board of Directors as Executive Vice Presidents or Senior Vice Presidents. During the absence or disability of the President, it shall be the duty of the highest ranking Executive Vice President, and, in the absence of any such Vice President, it shall be the duty of the highest ranking Senior Vice President or other Vice President, who shall be present at the time and able to act, to perform the duties of the President. The determination of who is the highest ranking of two or more persons holding the same office shall, in the absence of specific designation of order of rank by the Board of Directors, be made on the basis of the earliest date of appointment or election, or, in the event of simultaneous appointment or election, on the basis of the longest continuous employment by the Corporation.

Section 3.06 Secretary. The Secretary, unless otherwise determined by the Board, shall attend all meetings of the shareholders and all meetings of the Board of Directors, shall record or cause to be recorded all proceedings thereof in a book to be kept for that purpose, and may certify such proceedings. Except as otherwise required or permitted by law or by these By-Laws, the Secretary shall give or cause to be given notice of all meetings of the shareholders and all meetings of the Board of Directors.

Section 3.07 Treasurer. Unless otherwise determined by the Board, the Treasurer shall be the Chief Financial Officer of the Corporation. If an officer other than the Treasurer is designated Chief Financial Officer, the Treasurer shall perform such duties as may from time to time be assigned by the Board of Directors.

Section 3.08 Authority and Duties. In addition to the foregoing authority and duties, all officers of the Corporation shall respectively have such authority and perform such duties in the management of the business of the Corporation as may be designated from time to time by the Board of Directors. Unless prohibited by a resolution approved by the affirmative vote of a majority of the directors present, an officer elected or appointed by the Board may, without the approval of the Board, delegate some or all of the duties and powers of an office to other persons.

Section 3.09 Term. Subdivision 1. All officers of the Corporation shall hold office until their respective successors are chosen and have qualified or until their earlier death, resignation or removal.

Subdivision 2. An officer may resign at any time by giving written notice to the Corporation. The resignation is effective without acceptance when the notice is given to the Corporation, unless a later effective date is specified in the notice.

Subdivision 3. An officer may be removed at any time, with or without cause, by a resolution approved by the affirmative vote of a majority of the directors present at a duly held Board meeting.

Subdivision 4. A vacancy in an office because of death, resignation, removal, disqualification or other cause may, or in the case of a vacancy in the office of Chief Executive Officer or Chief Financial Officer shall, be filled for the unexpired portion of the term by the Board.

Section 3.10 Compensation. The compensation of all officers of the Corporation shall be fixed by the Board of Directors or by the Chief Executive Officer if authorized by the Board.

INDEMNIFICATION

Section 4.01 Indemnification. The Corporation shall indemnify such persons, for such expenses and liabilities, in such manner, under such circumstances, and to such extent, as required or permitted by Minnesota Statutes, Section 302A.521, as amended from time to time, or as required or permitted by other provisions of law; provided, however, that the Corporation shall not make advances to any person other than a director of the Corporation or of another corporation at least 80% of the common stock of all classes of which is owned directly or indirectly by the Corporation (a "Subsidiary") or an officer of the Corporation or of a Subsidiary who was elected by the directors of the Corporation or Subsidiary, as the case may be; and provided, further, that the Corporation shall not indemnify any person, other than a director of the Corporation or of a Subsidiary or an officer of the Corporation or of a Subsidiary who was elected by the directors, in respect of any judgment, penalty, fine, excise tax, settlement, expense or other matter for which such person shall have been finally determined to be liable by reason of his or her negligence, recklessness or willful misconduct.

Section 4.02 Insurance. The Corporation may purchase and maintain insurance on behalf of any person in such person's official capacity against any liability asserted against and incurred by such person in or arising from that capacity, whether or not the Corporation would otherwise be required to indemnify the person against the liability.

SHARES

Section 5.01 Certificated and Uncertificated Shares. Subdivision

1. The shares of the Corporation shall be either certificated shares or uncertificated shares. Each holder of duly issued certificated shares is entitled to a certificate of shares.

Subdivision 2. Each certificate of shares of the Corporation shall bear the corporate seal, if any, and shall be signed by the Chief Executive Officer, or the President or any Vice President, and the Chief Financial Officer, or the Secretary or any Assistant Secretary, but when a certificate is signed by a transfer agent or a registrar, the signature of any such officer and the corporate seal upon such certificate may be facsimiles, engraved or printed. If a person signs or has a facsimile signature placed upon a certificate while an officer, transfer agent or registrar of the Corporation, the certificate may be issued by the Corporation, even if the person has ceased to serve in that capacity before the certificate is issued, with the same effect as if the person had that capacity at the date of its issue.

Subdivision 3. A certificate representing shares issued by the Corporation shall, if the Corporation is authorized to issue shares of more than one class or series, set forth upon the face or back of the certificate, or shall state that the Corporation will furnish to any shareholder upon request and without charge, a full statement of the designations, preferences, limitations and relative rights of the shares of each class or series authorized to be issued, so far as they have been determined, and the authority of the Board to determine the relative rights and preferences of subsequent classes or series.

Subdivision 4. A resolution approved by the affirmative vote of a majority of the directors present at a duly held meeting of the Board may provide that some or all of any or all classes and series of the shares of the Corporation will be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until the certificate is surrendered to the Corporation.

Section 5.02 Declaration of Dividends and Other Distributions. The Board of Directors shall have the authority to declare dividends

( and other distributions upon the shares of the Corporation to the extent permitted by law.

Section 5.03 Transfer of Shares. Shares of the Corporation may be transferred only on the books of the Corporation by the holder thereof, in person or by such person's attorney. In the case of certificated shares, shares shall be transferred only upon surrender and cancellation of certificates for a like number of shares. The Board of Directors, however, may appoint one or more transfer agents and registrars to maintain the share records of the Corporation and to effect transfers of shares.

Section 5.04 Record Date. The Board of Directors may fix a time, not exceeding sixty days preceding the date fixed for the payment of any dividend or other distribution, as a record date for the determination of the shareholders entitled to receive payment of such dividend or other distribution, and in such case only shareholders of record on the date so fixed shall be entitled to receive payment of such dividend or other distribution, notwithstanding any transfer of any shares on the books of the Corporation after any record date so fixed.

MISCELLANEOUS

Section 6.01 Execution of Instruments. Subdivision 1. All deeds, mortgages, bonds, checks, contracts and other instruments pertaining to the business and affairs of the Corporation shall be signed on behalf of the Corporation by the Chief Executive Officer, or the President, or any Vice President, or by such other person or persons as may be designated from time to time by the Board of Directors.

Subdivision 2. If a document must be executed by persons holding different offices or functions and one person holds such offices or exercises such functions, that person may execute the document in more than one capacity if the document indicates each such capacity.

Section 6.02 Advances. The Corporation may, without a vote of the directors, advance money to its directors, officers or employees to cover expenses that can reasonably be anticipated to be incurred by them in the performance of their duties and for which they would be entitled to reimbursement in the absence of an advance.

Section 6.03 Corporate Seal. The seal of the Corporation, if any, shall be a circular embossed seal having inscribed thereon the name of the Corporation and the following words:

"Corporate Seal Minnesota".

Section 6.04 Fiscal Year. The fiscal year of the Corporation shall be determined by the Board of Directors.

Section 6.05 Amendments. The Board of Directors shall have the power to adopt, amend or repeal the By-Laws of the Corporation, subject to the power of the shareholders to change or repeal the same, provided, however, that the Board shall not adopt, amend or repeal any By-Law fixing a quorum for meetings of shareholders, prescribing procedures for removing directors or filling vacancies in the Board, or fixing the number of directors or their classifications, qualifications or terms of office, but may adopt or amend a By-Law that increases the number of directors.

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EX-10

LEASE AGREEMENT

THIS LEASE AGREEMENT, made and entered into by and between Skyway Business Center Joint Venture, hereinafter referred to as "Landlord" and Mentor Corporation, hereinafter referred to as "Tenant",

WITNESSETH:

1. Premises and Terms. In consideration of the obligation of Tenant to pay rent herein provided, and in consideration of the other terms, provisions and covenants hereof, Landlord hereby demises and leases to Tenant, and Tenant hereby takes from Landlord certain premises situated within the County of Dallas, State of Texas, more particularly described on Exhibit "A" attached hereto and incorporated herein by reference, together with all rights, privileges, easements, appurtenances and immunities belonging to or in any way pertaining to the premises and together with the buildings and other improvements situated or to be situated upon said premises, said real property, buildings and improvements being hereinafter referred to as the "Premises".

TO HAVE AND TO HOLD the same for a term commencing on the "commencement date", as hereinafter defined, and 'ending 120 months thereafter, provided, however, that, in the event the "commencement date" is a date other than the first day of a calendar month, said term shall extend for said number of months in addition to the remainder of the calendar month following the "commencement date."

The "commencement date" shall be November 13, 1989. If this lease is executed before the Premises become vacant or otherwise available and ready for occupancy, or if any present tenant or occupant of the Premises holds over, and Landlord cannot acquire possession of the Premises prior to said "commencement date," Landlord shall not be deemed to be in default hereunder, and Tenant agrees to accept possession of the Premises at such time as Landlord is able to tender the same, which date shall thenceforth be deemed the "commencement date"; and Landlord hereby waives payment of rent covering any period prior to the tendering of possession to Tenant hereunder. After the commencement date Tenant shall, upon demand, execute and deliver to Landlord a letter of acceptance of delivery of the Premises. SEE EXHIBIT B, PARAGRAPH 23A ATTACHED HERETO AND MADE A PART HEREOF.

2. Base Rent and Security Deposit.

A. Tenant agrees to pay to Landlord rent for the Premises in advance, without demand, deduction or set off, for the entire term hereof, according to Exhibit B, Paragraph 24, attached hereto and made a part hereof. One such monthly installment shall be due and payable on the date hereof and a like monthly installment shall be due and payable, without demand, on or before the first day of each calendar month succeeding the "commencement date" during the hereby demised term, except that the rental payment for any fractional calendar month at the commencement of the lease shall be prorated.

B. In addition, Tenant agrees to deposit with Landlord on the date hereof the sum of Ten Thousand and No/100 Dollars ($10,000.00), which sum shall be hold by Landlord, without obligation for interest, as security for the performance of Tenant's covenants and obligations under this lease, it being expressly understood and agreed that such deposit is not an advance rental deposit or a measure of Landlord's damages in case of Tenant's default. Upon the occurrence of any event of default by Tenant, Landlord may, from time to time, without prejudice to any other remedy provided herein or provided by law, use such fund to the extent necessary to make good any arrears of rent or other payments due Landlord hereunder, and any other damage, injury, expense or liability caused by such event of default; and Tenant shall pay to Landlord, on demand, the amount so applied in order to restore the security deposit to its original amount. Although the security deposit shall be deemed the property of Lan dlord, any remaining balance of such deposit shall be returned by Landlord to Tenant at such time after termination of this lease that all of the Tenant's obligations under this lease have been fulfilled.

3. Use. The Premises shall be used only for the purpose of receiving, storing, shipping, manufacturing and selling (other than retail) products, materials and merchandise made and/or distributed by Tenant, and for such other lawful purposes as may be incidental thereto. Tenant shall, at its own cost and expense, obtain any and all licenses and permits necessary for any such use. Tenant shall comply with all governmental laws, ordinances and regulations applicable to the use of the Premises, and shall promptly comply with all governmental orders and directives for the correction, prevention and abatement of nuisances in or upon or connected with, the Premises, all at Tenant's sole expense. Tenant shall not permit any objectionable or unpleasant odors, smoke, dust, gas, noise or vibrations to emanate from the Premises, nor take any other action which would constitute a nuisance or would disturb or endanger any other tenants of the building in which the Premises are situated or unreasonab ly interfere with their use of their respective premises.

4. Taxes.

A. Tenant agrees to pay before they become delinquent all taxes, assessments, and governmental charges of any kind and nature whatsoever (hereinafter collectively referred to as the "taxes") lawfully levied or assessed against the Premises and the grounds, parking areas, driveways and alleys around the Premises. Tenant shall furnish to Landlord, not later than five (5) days before the date any such taxes become delinquent, official receipts of the appropriate taxing authority or other evidence satisfactory to Landlord evidencing payment thereof. If Tenant should fail to pay any taxes, assessments or governmental charges required to be paid by Tenant hereunder, in addition to any other remedies provided herein, Landlord may, if it so elects, pay, such taxes, assessments, and governmental charges. Any sums so paid by Landlord shall be deemed to be so much additional rental owing by Tenant to Landlord and due and payable, on demand, by Landlord, together with interest thereon, at the rate of ten percent (10%) per annum, after ten (10) working days of receipt by Tenant of demand from Landlord to date of repayment by Tenant.

B. In the event the Premises constitute a portion of a multiple occupancy building, in lieu of Tenant paying the "taxes" as above provided, Landlord agrees to pay, before they become delinquent, all "taxes" lawfully levied or assessed against such building and the grounds, parking areas, driveways and alleys around the building, and Tenant agrees to pay to Landlord, as additional rental, upon demand, the amount of Tenant's "proportionate share" of all such "taxes" paid by Landlord. Tenant's "proportionate share", as used in this lease, shall mean a fraction, the numerator of which is the spaced contained in the Premises and the denominator of which is the entire space contained in the Complex (as defined in Exhibit "A").

C. If, at any time during the term of this lease, the present method of taxation shall be changed so that in lieu of the whole or any part of any taxes, assessments or governmental charges levied, assessed or imposed on real estate and the improvements thereon, there shall be levied, assessed or imposed on Landlord a capital levy or other tax directly on the rents received therefrom and/or a franchise tax, assessment, levy or charge measured by or based, in whole or in part, upon such rents for the present or any future building or buildings on the Premises, then all such taxes,

assessments, levies or charges, or the part thereof so measured or based, shall be deemed to be included within the term "taxes" for the purposes hereof.

D. Tenant may, alone or along with any other tenants of said building, at its or their sole cost and expense, in its or their own name(s) and/or in the name of Landlord, dispute and contest any "taxes" by appropriate proceedings diligently conducted in good faith, but only after Tenant and all other tenants, if any, joining with Tenant in such contest, have deposited with Landlord the amount so contested and unpaid, or their proportionate shares thereof, as the case may be, which shall be held by Landlord without obligation for interest until the termination of the proceedings, at which time the amount(s) deposited shall be applied by Landlord toward the payment of the items held valid (plus any court costs, interest, penalties, and other liabilities associated with the proceedings), and Tenant's share of any excess shall be returned to Tenant. Tenant further agrees to pay to Landlord, upon demand, Tenant's share (as among all tenants who participated in the contest) of all c ourt costs, interest, penalties, and other liabilities relating to such proceedings. Tenant hereby indemnifies and agrees to hold harmless the Landlord from and against any cost, damage, or expense (including attorneys' fees) in connection with any such proceedings.

E. Any payment to be made pursuant to this Paragraph 4, with respect to the real estate tax year in which this lease commences or terminates shall be prorated.

5. Repairs and Maintenance.

A. See Exhibit B, Paragraph 23 attached hereto and made a part hereof.

B. The cost of maintenance and repair of any common party wall (any wall, divider, partition or any other structure separating the Premises from any adjacent premises occupied by other tenants) shall be shared equally by Tenant and the tenant occupying adjacent premises. Tenant shall not damage any party wall or disturb the integrity and support provided by any party wall and shall, at its sole cost and expense, promptly repair any damages or injury to any party wall caused by Tenant or its employees, agents or invitees.

C. Tenant shall, at is own cost and expense, enter into a regularly scheduled preventive maintenance/service contract with a maintenance contractor for servicing all heating and air conditioning systems and equipment within the Premises. The maintenance contractor and the contract must be approved by Landlord, which approval shall not be unreasonably withheld. The service contract must include all services suggested by the equipment manufacturer within the operation/maintenance manual and must become effective (and a copy thereof delivered to Landlord) within thirty (30) days of the date Tenant takes possession or installs equipment in the Premises.

D. Tenant shall, at all times, keep the Premises, and the adjoining parking areas, driveways and yards, in a clean and sanitary condition, free of debris.

6. Alterations.

A. Tenant shall not make any alterations, additions or improvements to the Premises without the prior written consent of Landlord which consent shall not be unreasonably withheld. Tenant may, without the consent of Landlord, but at its own cost and expense and in a good workmanlike manner make such minor alterations, additions or improvements or erect, remove or alter such partitions, or erect such shelves, bins, machinery and trade fixtures as it may deem advisable, without altering the basic character of the Premises or improvements and without overloading or damaging such Premises or improvements, and in each case complying with all applicable governmental laws, ordinances, regulations and other requirements. All alterations, additions, improvements and partitions erected by Tenant shall be and remain the property of Tenant during the term of this lease, and Tenant shall, unless Landlord otherwise elects as provided herein, remove all alterations, additions, improvements and partitions ("Alter ations") erected by Tenant as of the termination of this lease. If, upon the sole election of Landlord, Tenant shall not be required to remove said alterations, additions, and improvements made by Tenant, these shall, upon the termination of this Lease, be delivered up to the Landlord and become the property of the Landlord without payment, reimbursement, or compensation to Tenant. All shelves, bins, machinery, mechanical, plumbing, electrical, and trade fixtures installed by Tenant may be removed by Tenant, but shall be removed by Tenant if required by Landlord, upon the termination of the Lease. All removals and restoration shall be accomplished in a good and workmanlike manner so as not to damage the structural qualities of the Premises and other improvements situated on the Premises, and so as to not disturb any other tenants or occupants of the Complex. The foregoing shall not apply to furniture, moveable equipment, or personal property owned by Tenant which may be removed by Tenant at the end of th e term of this Lease, if Tenant is not then in default and if such equipment, furniture and/or moveable personal property is not then subject to any other rights, liens and interests of Landlord. In no event shall Landlord be responsible for the removal, custody, or disposition of such abandoned property of Tenant, or in any way be held liable for conversion or any action in relation to its removal, retention, or disposition.

B. All work performed by Tenant, or Tenant's contractors, vendors, or suppliers, with respect to Tenant's Alterations, shall be performed with good quality materials, in a workmanlike manner, strictly in accordance with all applicable codes, laws, ordinances, and deed restrictions.

C. Tenant agrees to provide Landlord, without limitation, prior to the commencement of any construction of Alterations on the Premises valued in excess of $20,000, the following: copies of plans and specifications; copies of signed contracts; certificates of insurance evidencing general liability in an amount to be approved by Landlord, and workers' compensation insurance in statutory limits.

D. Within thirty (30) days after the completion of the Alterations, Tenant will promptly submit to Landlord the following: original lien waivers on a form to be provided by Landlord, in addition to sworn contractor's statements which may be required by Landlord.

E. With respect to all Alterations performed by Tenant, Tenant agrees to provide one reproducible set of architectural drawings, and one copy of specifications, including but not limited to all mechanical, electrical, and plumbing, stamped "As Built" by the Tenant's architect.

F. Indemnity - Tenant shall indemnify and hold harmless Landlord from and against all costs (including attorneys' fees and costs of suit), losses, liabilities, or causes of action arising out of or relating to any Alterations performed by Tenant to the Premises, including but not limited to any mechanics, or materialmen's liens asserted in connection therewith.

G. Liens - Tenant shall not be deemed to be the agent or representative of Landlord in making any Alterations to the Premises, and shall have no right, power or authority to encumber any interest in the Premises in connection therewith, other than Tenant's leasehold estate under this Lease. However, should any mechanic's or other liens be filed against any portion of the Premises, or any interest therein by reason of Tenant's acts or omissions or because of a claim against Tenant or its contractors, Tenant shall cause the same to be canceled or discharged of record by bond or otherwise within ten (10) days after notice by Landlord. If Tenant shall fail to cancel or discharge said lien(s), within said ten (10) day period, which failure shall be default hereunder, Landlord may, at its sole option and in addition to any other remedy of Landlord hereunder, cancel or discharge the same and upon Landlord's demand, Tenant shall promptly reimburse Landlord for all costs incurred in canceling or dischar ging such lien(s).

H. Tenant is expressly prohibited from disturbing or modifying in any way the structural components of the Premises, including without limitation, any component of the foundation, or floor-slab; or any of the columns, beams, bar joists and secondary structural members, as well as the roof deck, insulation, and built-up roof system. Should Tenant desire to make any structural modifications to the Premises, Tenant must first notify Landlord in writing. Should Landlord agree to consider the modification, the Tenant shall then submit to Landlord any documentation, calculations, engineering, or any engineering or architectural certifications requested by Landlord. Said engineers and/or architects certifications and documentation shall clearly show that Tenant's desired modifications will not only meet all required building codes in force at the time, but shall also indicate that the original structural characteristics, integrity, and longevity of Premises or any portion thereof, shall be unaltered. Should Landlord, in Landlord's sole discretion, then agree to the Tenant's performance of such modifications, Tenant, at the termination of this Lease, at the option of the Landlord, shall restore the Premises to its original condition. Landlord reserves the right to waive Tenant's obligation to restore any or all of the structural modifications performed by Tenant hereunder. For purposes of this Paragraph, "disturbing" shall mean any action which adversely affects the structural design or load-bearing capabilities of the principle or secondary members of the Premises.

7. Signs. Tenant shall have the right to install signs upon the Premises only when first approved in writing by Landlord, such approval not to be unreasonably withheld and subject to any applicable governmental laws, ordinances, regulations and other requirements. Tenant shall remove all such signs by the termination of this lease. Such installations and removals shall be made in such manner as to avoid injury to or defacement of the Premises and other improvements, and Tenant shall repair any injury or defacement including without limitation discoloration, caused by such installation or removal.

8. Inspection. Landlord and Landlord's agents and representatives shall have the right to enter and inspect the Premises at any reasonable time during business hours for the purpose of ascertaining the condition of the Premises or in order to make such repairs as may be required or permitted to be made by Landlord under the terms of this lease. During the period that is six (6) months prior to the end of the term hereof, Landlord and Landlord's agents and representatives shall have the right to enter the Premises at any reasonable time during business hours for the purpose of showing the Premises, and shall have the right to erect on the Premises a suitable sign indicating that the Premises are available. Tenant shall give written notice to Landlord at least thirty (30) days prior to vacating the Premises and shall arrange to meet with Landlord for a joint inspection of the Premises at the time of vacating. In the event of Tenant's failure to give such notice or arrange such joint inspection, Landlo rd's inspection at or after Tenant's vacating the Premises shall be conclusively deemed correct for purposes of determining Tenant's responsibility for repairs and restoration.

9. Utilities. Tenant shall be responsible to make its own arrangements with all appropriate utility companies, including but not limited to water, sanitary sewer, natural gas, electricity, etc. Charges for the use of all of Tenant's utilities shall be billed from the provider of such utilities directly to the Tenant. Tenant covenants and agrees to pay all such utility bills and charges as they become due. Any required deposits shall be the sole responsibility of Tenant. Tenant further understands and agrees that Landlord has not represented that the existing utilities are sufficient for the Tenant's intended use. If any such utility services are not separately metered to Tenant, Tenant shall pay a reasonable proportion as determined under Paragraph 24B of all charges jointly metered with other premises.

10. Paragraph 10 deleted, see Paragraph 25 in Exhibit "B".

11. Insurance, Fire and Casualty Damages.

A. Landlord agrees to maintain insurance covering the building of which the premises are a part in an amount not less than eighty percent (80%) (or such greater percentage as may be necessary to comply with the provisions of any co-insurance clauses of the policy) of the "replacement cost" thereof as such term is defined in the Replacement Cost Endorsement to be attached thereto, insuring against the perils of Fire, Lighting, Extended Coverage, Vandalism and Malicious Mischief, extended by Special Extended Coverage Endorsement to insure against all other Risks of Direct Physical Loss, such coverages and endorsements to be as defined, provided and limited in the standard bureau forms prescribed by the insurance regulatory authority for the State in which the Premises are situated for use by insurance companies admitted in such state for the writing of such insurance on risks located within such state. Subject to the provisions of Paragraph 11B below, such insurance shall be for the sole benefit of L andlord and under its sole control. Tenant agrees to pay, to Landlord, as additional rent, Landlord's cost of maintaining such insurance on said building (or, in the event the Premises constitute a portion of a multiple occupancy building, Tenant's full proportionate share (as defined in Paragraph 4B above) of such cost. Said payments shall be made to Landlord in accordance with Paragraph 24B. Any payment to be made pursuant to this Paragraph 11A with respect to the year in which this lease commences or terminates shall bear the same ratio to the payment which would be required to be made for the full year as that part of such year covered by the term of this lease bears to a full year.

B. If the buildings situated upon the Premises should be damaged or destroyed by any peril covered by the insurance to be provided by Landlord under Paragraph 11A above, Tenant shall give immediate notice thereof to Landlord and Landlord shall at its sole cost and expense thereupon proceed with reasonable diligence to rebuild and repair such buildings to substantially the condition in which they existed prior to such damage or destruction, except that Landlord shall not be required to rebuild, repair or replace any part of the partitions, fixtures, additions and other improvements which may have been placed in, on or about the Premises by Tenant and except that Tenant shall pay to Landlord, upon demand, any applicable deductible amount or proportionate share thereof specified under Landlord's insurance. Such deductible amount shall not include any applicable co-insurance clause of the policy. The rent payable hereunder shall abate for the period of time commencing when the building is no longer fit for use, until such time as the Premises have been rebuilt and replaced. Notwithstanding the foregoing, in no event shall Landlord be obligated to incur costs and expenses to rebuild and repair any such damage exceeding the amount of insurance proceeds paid to Landlord plus any co-insurance and deductible required to be paid by Landlord, and available for such purpose.

C. If the buildings situated upon the Premises should be damaged or destroyed by a casualty other than a peril covered by the insurance to be provided by Landlord under Paragraph 11A above, or if any other improvements situated on the Premises should be in any manner damaged or destroyed, Tenant shall at its sole cost and expense thereupon proceed with reasonable diligence to rebuild and repair such buildings and/or their improvements to substantially the condition in which they existed prior to such damage or destruction, subject to Landlord's approval of the plans and specifications for such rebuilding and repairing, which approval shall not be unreasonably withheld.

D. Each of Landlord and Tenant hereby releases the other from any and all liability or responsibility to the other or any claiming through or under them by way of subrogation or otherwise for any loss or damage to property caused by fire or any other perils insured in policies of insurance covering such property, even if such loss or damage shall have been caused by the fault of negligence of the other party, or anyone for whom such party may be responsible, provided, however, that this release shall be applicable and in force and effect only with respect to loss or damage occurring during such times as the releasor's policies shall contain a clause or endorsement to the effect that any such release shall not adversely affect or impair said policies or prejudice the right of the releasor to recover thereunder and then only to the extent of the insurance proceeds payable under such policies. Each of Landlord and Tenant agrees that it will request its insurance carriers to include in its policies such a clause or endorsement. If extra cost shall be charged therefor, each party shall advise the other thereof and of the amount of the extra cost, and the other party, at its election, may pay the same, but shall not be obligated to do so.

12. Insurance. Landlord shall not be liable to Tenant or Tenant's employees, agents, patrons or visitors, or to any other person whomsoever, for any injury to person or damage to property on or about the Premises, resulting from and/or caused in part or whole by the negligence or misconduct of Tenant, its agents, servants or employees, or of any other person entering upon the Premises, or caused by the buildings and improvements located on the Premises becoming out of repair, or caused by leakage of gas, oil, water or steam, or by electricity emanating from the Premises, or due to any cause whatsoever, and Tenant hereby covenants and agrees that it will at all times indemnify and hold safe and harmless the property, the Landlord (including without limitation the trustee and beneficiaries if Landlord is a trust), Landlord's agents and employees from any loss, liability, claims, suits, costs, expenses, including without limitation attorneys' fees and damages, both real and alleged, arising out of any such damage or injury; except injury to persons or damage to property the sole cause of which is the gross negligence of Landlord or failure to comply with Landlord's responsibilities under Paragraph 23. Tenant shall procure and maintain throughout the term of this lease a comprehensive, general liability policy or a commercial, general liability policy, at its sole cost and expense, insuring both Landlord and Tenant against all claims, demands, or actions arising out of or in connection with: (i) the Premises; (ii) the condition of the Premises; (iii) Tenant's operations in and maintenance and use of the Premises; and (iv) Tenant's liability assumed under this lease, the limits of such policy or policies to be in the amount of not less than $1,000,000 per occurrence in respect of injury to persons (including death), and in the amount of not less than $1,000,000 per occurrence in respect of property damage or destruction including loss of use thereof. Tenant shall also carry workers compensation i nsurance in the amount required by law. Tenant shall provide property insurance on all of its contents, improvements and betterments in the amount equal to eighty percent (80%) (or such greater percentage as may be necessary to comply with the provisions of any co-insurance clauses of the policy) of their full replacement. All such policies shall be procured by Tenant from Best's rating of A+ or better insurance companies satisfactory to Landlord. Certified copies of such policies, together with receipt evidencing payment of premiums therefor, shall be delivered to Landlord within thirty (30) days after the commencement date of this lease. Not less than fifteen (15) days prior to the expiration date of any such policies, certified copies of the renewals thereof (bearing notations evidencing the payment of renewal premiums) shall be delivered to Landlord. Such policies shall further provide that not less than thirty (30) days written notice shall be given to Landlord before such policy may be cancelled, excep t that no such notice shall need to be given if a change to reduce the insurance provided still meets the minimum specified in this Paragraph. In addition, should Tenant's operations cause Landlord's insurance rates to increase, Tenant shall pay the additional cost. Tenant further covenants and agrees that throughout the term of this lease (and any renewals hereof) Tenant shall maintain a self-insurance reserve of not less than $750,000 against any products liability claims against Tenant.

13. Condemnation.

A. If the whole or any substantial part of the Premises should be taken for any public or quasi-public use under governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, and the taking would prevent or materially interfere with the use of the Premises for the purpose for which they are then being used, this lease shall terminate and the rent shall be abated during the unexpired portion of this lease, effective when the physical taking of said Premises shall occur.

B. If part of the Premises shall be taken for any public or quasi-public use under any governmental law, ordinance, or regulation, or by right of eminent domain, or by private purchase in lieu thereof, and this lease is not terminated as provided in the subParagraph above, this lease shall not terminate, but the rent payable hereunder during the unexpired portion of the lease shall be reduced to such extent as may be fair and reasonable under all of the circumstances.

C. In the event of any such taking or private purchase in lieu thereof, Landlord and Tenant shall each be entitled to receive and retain such separate awards and/or portion of lump sum awards as may be allocated to their respective interests in any condemnation proceedings.

14. Holding Over. Tenant will, at the termination of this lease by lapse of time or otherwise, yield up immediate possession to Landlord. In the event of any holding over by Tenant or any of its successors in interest after the expiration or termination of this lease, unless the parties hereto otherwise agree in writing, the hold over tenancy shall be subject to termination by Landlord at any time upon not less than five (5) days advance written notice, or by Tenant at any time upon not less than thirty (30) days advance written notice, and all of the other terms and provisions of this lease shall be applicable during that period, except that Tenant shall pay Landlord from time to time upon demand, as rental for the period of any hold over, an amount equal to one and one-half (1 1/2) the rent in effect on the termination date, computed on a daily basis for each day of the holdover period. No holding over by Tenant, whether with or without consent of Landlord, shall operate to extend this l ease except as otherwise expressly provided.

15. Quiet Enjoyment.

A. Landlord covenants that it now has, or will acquire before Tenant takes possession of the Premises, good title to the Premises, free and clear of all liens and encumbrances, excepting only the lien for current taxes not yet due, such mortgage or mortgages as are permitted by the terms of this lease, zoning ordinances, and other building and fire ordinances and governmental regulations relating to the use of such property, and easements,

restrictions, and other conditions of record. Landlord represents and warrants that it has full right and authority to enter into this lease and that Tenant, upon paying the rental herein set forth and performing its other covenants and agreements herein set forth, shall peaceably and quietly have, hold, and enjoy the Premises for the term hereof without hindrance or molestation from Landlord, subject to the terms and provisions of this lease.

B. Tenant, and its employees, customers, and licensees shall have the exclusive right to use the parking areas adjacent to the Premises, as may be designated by the Landlord in writing, subject only to such reasonable rules and regulations as Landlord may from time to time prescribe and subject to right of ingress and egress of other tenants. Landlord shall not be responsible for enforcing Tenant's exclusive parking rights against any third party.

16. Events of Default. The following events shall be deemed to be events of default by Tenant under this lease:

(a) Tenant shall fail to pay any installment of the rent hereby reserved when due, or any payment with respect to taxes, hereunder when due, or any other payment or reimbursement to Landlord required herein when due, and such failure shall continue for a period of ten (10) working days from the date such payment was due.

(b) Tenant shall become insolvent, or shall make a transfer in fraud of creditors, or shall make an assignment for the benefit of creditors.

(c) Tenant shall file a petition under any section or chapter of the National Bankruptcy Act, as amended, or under any similar law or statute of the United States or any State thereof; or Tenant shall be adjudged bankrupt or insolvent in proceedings filed against Tenant hereunder.

(d) A receiver or trustee shall be appointed for all or substantially all of the assets of Tenant.

(e) Tenant shall desert or vacate any substantial portion of the Premises.

(f) Tenant shall fail to comply with any term, provision, or covenant of this lease (other than the foregoing in this Paragraph 16), and shall not cure such failure within thirty (30) days after written notice thereof to Tenant.

17. Remedies. After written notice of default to Tenant by Landlord and Tenant fails to cure such default within thirty (30) days, and upon the occurrence of any of such events of default described in Paragraph 16 hereof, Landlord shall have the option to pursue any one or more of the following remedies without any notice or demand whatsoever:

(a) Terminate this lease, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearage in rent, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying such Premises or any part thereof, by force if necessary, without being liable for prosecution or any claim or damages therefor; and Tenant agrees to pay to Landlord on demand the amount of any loss and damage which Landlord may suffer by reason of such termination, whether through inability, to relet the Premises on satisfactory terms or otherwise.

(b) Enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying such Premises or any part thereof, by force if necessary, without being liable for prosecution or any claim for damages therefor, and relet the Premises and receive the rent therefor; and Tenant agrees to pay to the Landlord on demand any deficiency that may arise by reason of such reletting. In the event Landlord is successful in reletting the Premises at a rental in excess of that agreed to be paid by Tenant pursuant to the terms of this Agreement, Landlord and Tenant each mutually agree that Tenant shall not be entitled to such excess rental.

(c) Enter upon the Premises, by force if necessary, without being liable for prosecution or any claim for damages therefor, and do whatever Tenant is obligated to do under the terms of this lease; and Tenant agrees to reimburse Landlord, on demand, for any expenses which Landlord may incur in this effecting compliance with Tenant's obligations under this lease, and Tenant further agrees that Landlord shall not be liable for any damages resulting to the Tenant from such action, whether caused by the negligence of the Landlord or otherwise.

In the event Tenant fails to pay any installment of rent hereunder within fifteen (15) days of when such installment is due, to help defray the additional cost to Landlord for processing such late payments Tenant shall pay to Landlord on demand a late charge in an amount equal to five percent (5%) of such installment; and the failure to pay such amount within ten (10) days after demand therefor shall be an event of default hereunder. The provision for such late charge, shall be in addition to all of Landlord's other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Landlord's remedies in any manner.

Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies herein provided or any other remedies provided by law, nor shall pursuit of any remedy herein provided constitute a forfeiture or waiver of any rent due to Landlord hereunder or of any damages accruing to Landlord by reason of the violation of any of the terms, provisions and covenants herein contained. No act or thing done by the Landlord or its agents during the term hereby granted shall be deemed a termination of this lease or an acceptance of the surrender of the Premises, and no agreement to terminate this lease or to accept a surrender of said Premises shall be valid unless in writing signed by Landlord. No waiver by Landlord or any violation or breach of any of the terms, provisions, and covenants herein contained shall be deemed or construed to constitute a waiver of any other violation or breach of any of the terms, provisions and covenants herein contained. Landlord's acceptance of th e payment of rental or other payments hereunder after the occurrence of an event of default, other than that occurring under Paragraph 16A and cured as noted in Paragraph 17, shall not be construed as a waiver of such default, unless Landlord so notifies Tenant in writing. Forbearance by Landlord to enforce one or more of the remedies herein provided upon an event of default shall not be deemed or construed to constitute a wavier of such default or of Landlord's right to enforce any such remedies with respect to such default or any subsequent default. If, on account of any breach or default by Tenant in Tenant's obligations under the terms and conditions of this lease, it shall become necessary or appropriate for Landlord to employ or consult with an attorney concerning or to enforce or defend any of Landlord's rights or remedies hereunder, Tenant agrees to pay any reasonable attorneys' fees so incurred.

18. Mortgages. Tenant accepts this lease subject and subordinate to any mortgage(s) and/or deed(s) of trust now or at any time hereafter constituting a lien or charge upon the Premises or the improvements situated thereon; provided, however, that if the mortgagee, trustee, or holder of any such mortgage or deed of trust elects to have Tenant's interest in this lease superior to any such instrument, then by notice to Tenant from such mortgagee, trustee or holder, this lease shall be deemed superior to such lien, whether this lease was executed before or after said mortgage or deed of trust. Tenant shall at any time hereafter, on demand, execute any instrument, releases or other documents which may be required by any mortgagee for the purpose of subletting and subordinating this lease to the lien of any such mortgage.

19. Landlord's Default. In the event Landlord should become in default in any payments due on any such mortgage described in Paragraph 18 hereof, Tenant is hereby authorized and empowered, after giving Landlord five (5) days prior written notice of such default and Landlord's failure to cure such default, to pay any such items for and on behalf of Landlord. Landlord agrees to pay to Tenant on demand, or abate from the rental due under this lease, at the discretion of Tenant, the amount of any item so paid by Tenant for or on behalf of Landlord, together with any interest or penalty required to be paid in connection therewith; provided, however, that Tenant shall not be authorized and empowered to make any payment under the terms of this Paragraph 19, unless the item paid shall be superior to Tenant's interest hereunder. In the event Tenant pays any mortgage debt in full, in accordance with this Paragraph, it shall, at its election, be entitled to the mortgage security by assignment or subr ogation.

20. Mechanic's Liens. Tenant shall have no authority, express or implied, to create or place any liens or encumbrance, of any kind or nature whatsoever upon, or in any manner to bind, the interest of Landlord in the Premises or to charge the rentals payable hereunder for any claim in favor of any person dealing with Tenant, including those who may furnish materials or perform labor for any construction or repairs, and each such claim shall affect and each such lien shall attach to, if at all, only the leasehold interest granted to Tenant by this instrument. Tenant covenants and agrees that it will pay or cause to be paid all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed on the Premises on which any lien is or can be validly and legally asserted against its leasehold interest in the Premises or the improvements thereon and that it will save and hold Landlord harmless from any and all loss, cost or exp ense based on or arising out of asserted claims or liens against the leasehold estate or against the right, title and interest of the Landlord in the Premises or under the terms of this lease.

21. Notices. Each provision of this instrument or of any applicable governmental laws, ordinances, regulations and other requirements with references to the sending, mailing or delivery of any notice or the making of any payment by Landlord to Tenant or with reference to the sending, mailing or delivery of any notice or the making of any payment by Tenant to Landlord shall be deemed to be complied with when and if the following steps are taken:

(a) All rent and other payments required to be made by Tenant to Landlord hereunder shall be payable to Landlord at the address hereinbelow set forth or at such other address as Landlord may specify from time to time by written notice delivered in accordance herewith. Tenant's obligation to pay rent and any other amounts to Landlord under the terms of this lease shall not be deemed satisfied until such rent and other amounts have been actually received by Landlord.

(b) All payments required to be made by Landlord to Tenant hereunder shall be payable at the address herein below set forth, or at such other address within the continental United States as Tenant may specify from time to time by written notice delivered in accordance herewith.

(c) Any notice or document required or permitted to be delivered hereunder shall be deemed to be delivered whether actually received or not when deposited in the United States Mail, postage prepaid, Certified or Registered Mail, addressed to the parties hereto at the respective address set out below, or at such other address as they have theretofore specified by written notice delivered in accordance herewith:

LANDLORD: TENANT:

Skyway Business Center Joint Venture Mentor Corporation

3400 Carlisle #400 600 Pine Avenue

Dallas, TX 75204 Santa Barbara, CA 93117

Attn: Bill Heap Attn: Gary Mistlin

with a copy to:

Skyway Business Center Joint Venture

c/o Eastdil Advisers, Inc.

40 West 57^th Street

New York, NY 10019

If and when included within the term "Landlord", as used in this instrument, there are more than one person, firm or corporation, all shall jointly arrange among themselves for their joint execution of such a notice specifying some individual at some specific address for the receipt of notices and payments to Landlord; if and when included within the term "Tenant", as used in this instrument, there are more than one person, firm or corporation, all shall jointly arrange among themselves for their joint execution of such a notice specifying some individual at some specific address within the continental United States for the receipt of notices and payments to Tenant. All parties included within the terms "Landlord" and "Tenant", respectively, shall be bound by notices given in accordance with the provisions of this Paragraph to the same effect as if each had received such notice.

22. Miscellaneous.

A. Words of any gender used in this lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the content otherwise requires.

B. The terms, provisions, covenants, and conditions contained in this lease shall apply to, inure to the benefit of, and be binding upon, the parties hereto and upon their respective heirs, legal representatives, successors and permitted assigns except as otherwise herein expressly provided. Each party agrees to furnish the other, promptly upon demand, a corporate resolution, proof of due authorization by partners, or other appropriate documentation evidencing the due authorization of such party to enter into this lease.

C. The captions inserted in this lease are for convenience only and in no way define, limit or otherwise describe the scope or intent of this lease, or any provision hereof, or in any way affect the interpretation of this lease.

D. Tenant agrees from time to time within ten (10) days after request of Landlord, to deliver to Landlord, or Landlord's designee, an estoppel certificate stating that this lease is in full force and effect, the date to which rent has been paid, the unexpired term of this lease and such other matters pertaining to this lease as may be reasonably requested by Landlord. It is understood and agreed that Tenant's obligation to furnish such estoppel certificates in a timely fashion is a material inducement for Landlord's execution of this lease.

E. This lease may not be altered, changed or amended except by an instrument in writing signed by both parties.

F. All obligations of Tenant hereunder not fully performed as of the expiration or earlier termination of the term of this lease shall survive the expiration or earlier termination of the term hereof, including without limitation all payment obligations with respect to taxes and insurance and all obligations concerning the condition of the Premises. Upon the expiration or earlier termination of the term hereof, and prior to Tenant vacating the Premises, Tenant shall pay to Landlord any amount reasonably estimated by Landlord as necessary to put the Premises, including without limitation all heating and air conditioning systems and equipment therein, in good condition and repair. Tenant shall also, prior to vacating the Premises, pay to Landlord the amount, as estimated by Landlord, of Tenant's obligation hereunder for real estate taxes and insurance premiums for the year in which the lease expires or terminates. All such amounts shall be used and held by Landlord for payment of such reason able obligations of Tenant hereunder, with Tenant being liable for any additional costs therefor upon demand by Landlord, or with any excess to be returned to Tenant after all such obligations have been determined and satisfied, as the case may be. Any security deposit held by Landlord shall be credited against the amount payable by Tenant under this Paragraph 22F.

G. If any clause or provision of this lease is illegal, invalid or unenforceable under present or future laws effective during the term of this lease, then and in that event, it is the intention of the parties hereto that the remainder of this lease shall not be affected thereby, and it is also the intention of the parties of this lease that in lieu of each clause or provision of this lease that is illegal, invalid or unenforceable, there be added as a part of this lease contract a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable.

H . All references in this lease to "the date hereof" or similar references shall be deemed to refer to the last date, in point of time, on which all parties hereto have executed this lease.

I. Time is of the essence with respect to each and every obligation of the parties hereto, one to the other, except as otherwise expressly provided herein.

J. Tenant, upon initial occupancy and throughout the term of the Lease Agreement, shall furnish Landlord one set of keys to each exterior door on the Premises.

K. If any provision of this Lease or the application thereof to any person, entity or circumstance is to any extent invalid or unenforceable, the remainder of the Lease, or the application of such provision to persons or circumstances, other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each provision hereof shall be valid and enforceable to the extent permitted by law.

L. This Lease Agreement shall be construed under the laws of the State of Texas.

M. This Lease Agreement contains the entire agreement between Landlord and Tenant, and all prior correspondence, memoranda, agreements or understandings, whether written or oral, with respect hereto are merged into and superceded by this Lease Agreement.

N. Whenever in this Lease there is imposed upon Landlord the obligation to use its good faith efforts, reasonable efforts or diligence, Landlord shall be required to do so only to the extent the same is economically feasible and otherwise will not impose upon Landlord extreme financial or other business burdens.

o. If Landlord or Tenant brings any court action alleging default by the other party hereunder, the party losing such action shall pay to the prevailing party its reasonable attorneys' fees and expenses, and the same may be included by the court in its judgment.

P. Tenant acknowledges and agrees that landlord has made no express or implied representations regarding the condition of the Premises, nor the suitability of the Premises for Tenant's intended use or purpose.

22.1. Additional Provisions. See Exhibits A, B, C and D attached hereto and made a part hereof.

EXECUTED BY LANDLORD, this 9^th day of November, 1989.

LANDLORD:

Attest/Witness: Skyway Business Center Joint

Venture

_____________________

/S/WILLIAM HEAP

EXECUTED BY TENANT, this 10^th day of November, 1989.

TENANT:

Attest/Witness: Mentor Corporation

/S/GARY E. MISTLIN /S/ANTHONY R. GETTE

VP Finance President

EXHIBIT "A"

One (1) office/warehouse building containing approximately 40,248 square feet plus approximately 2,309 square feet in a mezzanine level, known locally as 3041 Skyway Circle North, Irving, Dallas County, Texas.

The Premises are a part of a commercial project, commonly known as Skyway Business Center, which is situated on 6.00 (+/-) acres of land, on which are constructed approximately 108,888 s.f. of buildings (the "Complex"), located in the Walnut Hill Business Park Sector of Las Colinas, City of Irving, Dallas County, Texas.

EXHIBIT "B"

23. A. Landlord's Obligation to Repair. Subject to the provisions of Paragraph 11 and Paragraph 13 and except for damage caused by any act or omission of Tenant, Landlord shall keep the foundation, roof and the structural portions of exterior walls of the improvements of the Property in good order, condition and repair. However, Landlord shall not be obligated to maintain or repair windows, doors, plate glass or the surfaces of walls. In addition, Landlord shall not be obligated to make any repairs under this Section until a reasonable time, but not later than thirty (30) days after receipt of written notice from Tenant of the need of such repairs. If any repairs are required to be made by Landlord, Tenant shall, at Tenant's sole cost and expense, promptly remove Tenant's fixtures, inventory, equipment and other property, to the extent required to enable Landlord to make such repairs. Landlord's liability hereunder shall be limited to the cost of such repairs or corrections. Landlord r epresents that on the Commencement Date, the plumbing, electrical system and exterior doors, and any fire protection sprinkler system, heating system, air conditioning equipment and elevators existing on the date of this Lease, are in good operating condition. Notwithstanding the foregoing, Tenant hereby (i) accepts the Premises in its present condition (i.e. "AS IS" and "WITH ALL FAULTS") and acknowledges and agrees that Landlord's obligations to repair and maintain under this Paragraph shall be limited to maintaining the foundation, roof and structural portions of the exterior walls in their condition as of the Commencement Date, normal wear and tear excepted, and (ii) acknowledges and agrees that inasmuch as Tenant is not paying any base rent on the 2,309 square feet of mezzanine level of the Premises, Landlord shall have no obligation whatsoever with respect to the maintenance and repair of any portion thereof.

B. Tenant's Obligation to Repair. Subject to the provisions of Paragraph 23A, Paragraph 11 and Paragraph 13, Tenant shall, at all times, keep that portion of the Property not required to be maintained by Landlord in good order, condition and repair, including but not limited to repairs (including all necessary replacements) of the windows, plate glass, doors, heating system, air conditioning equipment, fire protection sprinkler system, elevators, interior and exterior plumbing and the interior of the Premises in general, and including care of landscaping and regular mowing of grass and maintenance of any paving and railroad siding. In addition, Tenant shall, at Tenant's expense, repair any damage to the roof, foundation or structural portions of exterior walls caused by Tenant's acts or omissions. If Tenant fails to maintain and repair the property as required by this Section, Landlord may, on thirty (30) days' prior written notice, enter the Property and perform such maintenance or repair on behalf of Tenant, except that no notice shall be required in case of emergency, and Tenant shall reimburse Landlord for all reasonable costs incurred in performing such maintenance or repair immediately upon demand.

C. Notwithstanding the Landlord's responsibilities with respect to the costs of maintaining the structural integrity of the roof, walls, and foundation (as described more fully in Paragraph 23A and elsewhere in this Lease), and in addition to the obligations of Tenant addressed elsewhere in this Lease, it is the intent of both parties to this Lease that Tenant shall pay to Landlord, as "Additional Rent," Tenant's "full proportionate share" of all of Landlord's costs incurred in the maintenance, operation and ownership of the Property, of which the Premises are a part. Said costs shall consist of those normally incurred, or normally charged, in the maintenance, operation, and ownership of leased real property of similar age, size, location, and use. Said costs may include, but shall not be limited to the following: real estate ad valorem taxes; Las Colinas Association dues; fire, property extended coverage, liability, and "multi-peril" insurance;

property management fees and reimbursables; landscape maintenance; miscellaneous repairs and maintenance; miscellaneous administrative expenses.

D. Landlord reserves the right to perform the paving and landscape maintenance, exterior painting and common sewage line plumbing which are otherwise the Tenant's obligation addressed elsewhere in this Lease, and Tenant agrees to pay for the amount of its share, as aforesaid, of such reasonable costs and expenses, as Additional Rent.

24. A. Rental:

Years 1 and 2 shall be $2,515.50 per month ($0.75 per square foot of the ground floor area).

Years 3 and 4 shall be $10,062.00 per month ($3.00 per square foot of the ground floor area).

Years 5 through 9 shall be $15,093.00 per month ($4.50 per square foot of the ground floor area).

Year 10 shall be $16,770.00 per month ($5.00 per square foot).

B. Additional Rent - Within fifteen (15) days after the end of each quarter of each calendar year of the Lease Term, Landlord, or Landlord's representative, will prepare a statement of Additional Rent, including a summary of all reimbursable expenses for the Project, along with the calculation of the Tenant's "full proportionate share" and copies of appropriate back-up, statements, or invoices, as available and where applicable. For periods of occupancy by Tenant, which constitute a portion of a quarterly period, the "full proportionate share" will be prorated, "per diem." This statement will be forwarded to Tenant at Tenant's address by certified mail/return receipt requested. Tenant shall, within twenty-one (21) days of receipt, promptly remit to Landlord its "full proportionate share" as set forth in the statement.

For all purposes, the Tenant's "full proportionate share" shall be 36.96% (40,248/108,888 s.f.). The "full proportionate share" shall be refigured and increased by the Landlord if and when Tenant expands into the adjoining building (3015 and/or 3025 Skyway Circle North).

25. Assignment of Subletting by Tenant.

25.01. General. In the event Tenant should desire to assign this Lease or sublet the Premises or any part thereof or allow same to be used or occupied by others, Tenant shall give Landlord written notice (which shall specify the duration of said desired sublease or assignment, the date same is to occur, the exact location of the space affected thereby and the proposed rentals on a square foot basis chargeable thereunder) of such desire at least sixty (60) days in advance of the date on which Tenant desires to make such assignment or sublease or allow such a use or occupancy. Landlord shall then have a period of forty-five (45) days following receipt of such notice within which to notify Tenant in writing that Landlord elects:

(a) To terminate this Lease as to the space so affected as of the date so specified by Tenant in which event Tenant shall be relieved of all obligations hereunder as to such space arising from and after such date, or

(b) To suspend this Lease as to the space so affected as of the date and for the duration so specified by Tenant in its notice in which event Tenant will be relieved of all obligations hereunder as to such space during said suspension, including a suspension of the Rent in proportion of the portion of the Premises affected thereby (but after said suspension, if the suspension is not for the full term hereof, Tenant shall once again become liable hereunder as to the applicable space), or

(c) Permit Tenant to assign this Lease or sublet such space for the duration specified in such notice, subject to Landlord's subsequent written approval of the proposed assignee or sublessee, which approval shall not be unreasonably withheld if (i) the proposed assignee or sublessee is a respectable party of substantial financial worth (as reasonably determined solely by Landlord) and Tenant shall have provided Landlord with proof thereof, (ii) the nature and character of the proposed assignee or sublessee, its business and activities and intended use of the Premises are in Landlord's reasonable judgement consistent with the standards of the Premises, (iii) neither the proposed assignee or sublessee (nor any party which, directly or indirectly, controls or is controlled by or is under common control with the proposed assignee of sublessee) is then an occupant of any part of the Premises or a party with whom Landlord is then negotiating to lease space in the Premises or in any adjacent Buil ding owned by Landlord, (iv) the form and substance of the proposed sublease or instrument of assignment is acceptable to Landlord (which acceptance by Landlord shall not be unreasonably withheld) and is expressly subject to all of the terms and provisions of this Lease and to any matters to which this Lease is subject, (v) the proposed occupancy would not impose an extra burden upon the services to be supplied by Landlord to Tenant hereunder, (vi) Tenant enters into a written agreement with Landlord whereby it is agreed that any profit realized by Tenant as a result of said sublease or assignment and any and all sums and other considerations of whatsoever nature paid to Tenant by the assignee or sublease for or by reasons of such assignment or sublease, including, but not limited to, sums paid for the sale of Tenant's fixtures, leasehold improvements, equipment, furniture, furnishings or other personal property (that is, after deducting and giving Tenant credit for Tenant's reasonable costs directly associa ted therewith, including reasonable brokerage fees and the reasonable cost of remodeling or otherwise improving the Premises for said assignee or but excluding any free rentals or the like offered to any such sublessee or assignee) shall be payable to Landlord as it accrues as Additional Rent hereunder, and (vii) the granting of such consent will not constitute a default under any other agreement to which Landlord is a party or by which Landlord is bound.

25.02. Agreement with Landlord. No assignment or subletting by Tenant shall be effective unless Tenant shall execute, have acknowledged and deliver to Landlord, and cause each sublessee or assignee to execute, have acknowledged and deliver to Landlord, and instrument in form and substance acceptable to Landlord in which (i) such sublessee or assignee adopts this Lease and assumes and agrees to perform jointly and severally with Tenant, all of the obligations of Tenant under this Lease, as to the space transferred to it, (ii) such sublessee or assignee grants Landlord an express first and prior contract lien and security interest in its personal property brought into the transferred space to secure its obligations to Landlord thereunder, (iii) Tenant subordinates to Landlord's statutory lien, contract lien and security interest any liens, security interests or other rights which Tenant, may claim with respect to any property of such sublessee or assignee, (iv) Tenant and such sublessee or assignee agree to provide to Landlord, at their expense, direct access from a public corridor in the Premises to the transferred space, (v) such sublessee or assignee agrees to use and occupy the transferred space solely for the purpose specified in Paragraph 3 and otherwise in strict accordance with this Lease and (vi) Tenant acknowledges and agrees that, notwithstanding such subletting or assignment, Tenant remains directly and primarily liable for the performance of all the obligations of Tenant hereunder (including, without limitation, the obligation to pay rent) , and Landlord shall be permitted to enforce this Lease against Tenant or such sublessee or assignee, or both, provided, however, Landlord agrees to provide Tenant with notice of default of any such sublessee or assignee and ten (10) days following such notice to cure said default prior to commencing any action against Tenant due to such default.

25.03. Effect of Transfer. No consent by Landlord to an assignment or sublease shall be deemed in any manner to be a consent to a use not permitted under Paragraph 3. Any consent by Landlord to a particular assignment or sublease shall not constitute Landlord's consent to any other or subsequent assignment or sublease, and any proposed sublease or assignment by any assignee or sublessee shall be subject to the provisions of this Paragraph 25 as if it were a proposed sublease or assignment by Tenant. The prohibition against an assignment or sublease described in this Paragraph 25 shall be deemed to include a prohibition against Tenant's mortgaging or otherwise encumbering its leasehold estate, as well as against an assignment or sublease which may occur by operation of law, each of which shall be ineffective and void and shall constitute an event of default under this Lease unless consented to by Landlord in writing in advance.

25.04. Delivery to Landlord. In any situation in which Landlord consents to an assignment or sublease hereunder, Tenant shall promptly deliver to Landlord a fully executed copy of the final sublease agreement or assignment instrument and all ancillary agreements relating thereto.

26. Assignment by Landlord. Landlord shall have the right to transfer and assign, in whole or in part, all its rights and obligations hereunder and in the Premises, and in such event and upon such transfer (any such transferee to have the benefit of, and be subject to, the provisions of Paragraphs 27 and 28 hereof) no further liability or obligation shall thereafter accrue against Landlord hereunder. Any transferee shall agree in writing to be bound by all terms and provisions of this Lease Agreement. Landlord shall provide Tenant with a fully executed copy of such transfer and assignment agreement.

27. Peaceful Enjoyment. Landlord covenants that Tenant shall and may peacefully have, hold and enjoy the Premises, subject to the other terms hereof, provided that Tenant pays the rental and other sums herein recited to be paid by Tenant and performs all of Tenant's covenants and agreements herein contained. It is understood and agreed that this covenant and any and all other covenants of Landlord contained in this Lease shall be binding upon Landlord and its successors only with respect to breaches occurring during its and their respective ownership of the Landlord's interest hereunder.

28. Limitation of Landlord's Personal Liability. Tenant specifically agrees to look solely to Landlord's interest in the Premises for the recovery of any judgment against Landlord, it being agreed that Landlord, its officers, directors and employees shall never be personally liable for any such judgment. The provision contained in the foregoing sentence is not intended to, and shall not, limit any right that Tenant might otherwise have to obtain injunctive relief against Landlord or Landlord's successors in interest or any suit or action in connection with enforcement or collection of amounts which may become owing or payable under or on account of insurance maintained by Landlord.

29. Expansion Rights on Adjoining Space. Provided Tenant is not then in default under this Lease, Tenant is hereby granted the right to lease the adjoining building as it becomes available (3015 & 3025 Skyway Circle North) in accordance with Paragraph 30. The lease rate for the adjoining space shall be the current rate then in effect for the primary facility with the expiration date of the leases coinciding. Landlord agrees to abate the base rent on the first such secondary lease taken, if any, by Tenant for a period of twelve (12) months, although Tenant will be responsible for paying all reasonable costs of preparing such space for occupancy and "Additional Rent" as defined under Paragraph 24B, but only to the extent that the prior occupant is not obligated per their lease to pay such costs. Tenant acknowledges that there will be no lease abatement on the second such secondary lease, if any, taken by Tenant. All such expansion space will be taken by Tenant in its existing condition a t the time of the expansion, i.e. "AS IS" and "WITH ALL FAULTS".

30. Mandatory Expansion. In the event that Coroplast, the current Tenant of 3025 Skyway Circle, does not exercise its option to renew its lease on October 1, 1990, Landlord hereby agrees that Landlord shall offer to Tenant the right to lease 3025 Skyway Circle pursuant to Paragraph 29 on or about October 1, 1990, and Tenant hereby agrees that Tenant shall accept such offer. In the event that Coroplast exercises its option to renew its lease of 3025 Skyway Circle on October 1, 1990, Landlord shall offer to Tenant the right to lease 3015 Skyway Circle pursuant to Paragraph 29 on or about October 1, 1990, and Tenant hereby agrees that Tenant shall accept such offer.

Optional Expansion. In the event that Coroplast does not exercise its option to renew its lease of 3025 Skyway Circle on October 1, 1990, Landlord shall offer to Tenant the right to lease 3015 Skyway Circle pursuant to Paragraph 29 on or about December 31, 1990, and Tenant shall have the option to lease such space exercisable by written notice to Landlord within thirty (30) days after receipt of such offer from Landlord. In the event that Coroplast does exercise its option to renew its lease at 3025 Skyway Circle during 1990, and Tenant therefore leases the space at 3015 Skyway Circle, Landlord shall offer to Tenant the first right to lease 3025 Skyway Circle, pursuant to Paragraph 29, when it does become available, in approximately 1995. Tenant shall have thirty (30) days after receipt of such written offer to exercise its option.

31. Renewal option. Tenant is hereby granted two (2) options to renew any of the above space for a period of five (5) years each based on the prevailing current market rental rates not to exceed a maximum amount of one hundred twenty five percent (125%) of the last rental paid, nor be less than one hundred ten percent (110%) of the last rental paid. For each option period, Tenant must provide Landlord written notice of its intention to renew at least 120 days prior to the expiration of the current term.

32. Permits. This lease shall be contingent for ninety (90) days after full and final execution of this agreement on Tenant receiving approval by all governing authorities for their intended use.

33. Tenant Responsibility Regarding Hazardous Substances.

A. Hazardous Substances. The term "Hazardous Substances," as used in this Lease, shall include, without limitation, flammables, explosives, radioactive materials, asbestos, polychlorinated biphenyls (PCBs), chemicals known to cause cancer or reproductive toxicity, pollutants, contaminants, hazardous wastes, toxic substances or related materials, petroleum and petroleum products, and substances declared to be hazardous or toxic under any law or regulation now or hereafter enacted or promulgated by any governmental authority.

B. Tenant's Restrictions. Tenant shall not cause or permit to occur:

(1) Any violation of any federal, state, or local law, ordinance, or regulation now or hereafter enacted, related to environmental conditions on, under, or about the Premises, and arising from Tenant's use or occupancy of the Premises including, but not limited to, soil and ground water conditions; or

(2) The use, generation, release, manufacture, refining, production, processing, storage, or disposal of any Hazardous Substance in quantities in excess of one (1) gallon on, under, or about the Premises, or the transportation to or from the Premises of any Hazardous Substances, except as specifically disclosed on Schedule A to this lease or otherwise approved in writing in advance by Landlord (which approval shall not be unreasonably withheld or delayed).

C. Environmental Clean-Up

(1) Tenant shall, at Tenant's own expense, comply with all laws regulating the use, generation, storage, transportation, or disposal of Hazardous Substances ("Laws").

(2) Tenant shall, at Tenant's own expense, make all submissions to, provide all information required by, and comply with all requirements of all governmental authorities (the "Authorities") under the Laws.

(3) Should any Authority or any third party demand that a clean-up plan be prepared and that a clean-up be undertaken because of any deposit, spill, discharge, or other release of Hazardous Substances which arises or occurs at any time from Tenant's use or occupancy of the Premises, then Tenant shall, at Tenant's own expense, prepare and submit the required plans and all related bonds and other financial assurances; and Tenant shall carry out all such clean-up plans.

(4) Tenant shall promptly provide all information regarding the use, generation, storage, transportation, or disposal of Hazardous Substances that is reasonably requested by Landlord. If Tenant fails to fulfill any duty imposed under this Paragraph 33C within a reasonable time, Landlord may do so; and in such case, Tenant shall cooperate with Landlord in order to prepare all documents Landlord deems necessary or appropriate to determine the applicability of the Laws to the Premises and Tenant's use thereof, and for compliance therewith, and Tenant shall execute all documents promptly upon Landlord's request. No such action by Landlord and no attempt made by Landlord to mitigate damages under any Law shall constitute a waiver of any of Tenant's obligations under this Paragraph 33C.

(5) Tenant's obligation and liabilities under this Paragraph 33C shall survive the expiration of this Lease for a period of fifteen (15) years.

D. Tenant's Indemnity

(1) Tenant shall indemnify, defend, and hold harmless Landlord, the manager of the property, and their respective officers, directors, beneficiaries, shareholders, partners, agents, and employees from all fines, suits, procedures, claims, and actions of every kind, and all costs associated therewith (including attorneys' and consultants' fees) arising out of or in any way connected with any deposit, spill, discharge, or other release of Hazardous Substances which arises or occurs at any time from Tenant's use or occupancy of the Premises, or from Tenant's failure to provide all information, make all submissions, and take all steps required by all Authorities under the Laws and all other environmental laws.

(2) Tenant's obligations and liabilities under this Paragraph 33D shall survive the expiration of this Lease for a period of fifteen (15) years.

34. Landlord's Indemnity Regarding Hazardous substances. Landlord hereby covenants and agrees to warrant and indemnify Tenant from any cost, claims, charges or assessments arising from the clean-up of any hazardous substances which are in existence in or on the Premises prior to the commencement date of this Lease.

35. Storage Building. Landlord hereby agrees that Tenant shall have the right to construct and use an outside storage building not to exceed one thousand square feet of interior area, subject to Landlord's prior written approval of the location and construction materials, design and appearance, which approval shall not be unreasonably withheld. Tenant covenants and agrees that Tenant's construction and use of said building shall comply with all applicable rules, codes, ordinances, regulations and laws. Upon the expiration or earlier termination of this Lease Agreement, if requested by Landlord, Tenant shall remove said building and restore the Premises to its original condition, and if Tenant fails to do so, Landlord shall have the right to remove same at Tenant's expense.

EXHIBIT "C"

ERISA RIDER

Skyway Business Center Joint Venture as landlord (the "Landlord") and Mentor Corporation as tenant (the "Tenant") are executing simultaneously herewith a written lease (the "Lease") leasing certain space (the "Premises") in a building commonly known as 3041 Skyway Circle North, and more particularly described in the Lease. In consideration of the respective covenants of the parties described in the Lease, Landlord and Tenant further mutually agree as follows:

1. Default. A default under the Lease shall be deemed to have occurred if Tenant or Tenant's assignee, transferee, sublessee, mortgage or the party to whom the Tenant has made a pledge of the Premises or any part thereof (any such party being hereinafter referred to as a "Transferee") if, and only to the extent that, any such transfer shall be permitted under and shall be effected in accordance with the terms and provisions of the Lease, becomes a "party in interest" ("Party in Interest") as such term is defined in Section 3(14) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") , with respect to any employee benefit plan (collectively, as amended from time to time, the "Plans", which term shall include any successor or successors to the Plans) which has assets held in the Telephone Real Estate Equity Trust ("TREET") , which term shall include any successor to TREET, or with respect to TREET. The Plans are listed on Schedule I attached hereto and made a par t hereof.

2. Assignment and Subletting. Tenant covenants that it shall not at any time assign, transfer, mortgage or pledge the Lease or any interest of Tenant thereunder, or sublet all or any portion of the Lease, to any party which is a Party in Interest.

3. Tenant Estoppel Certificate. Tenant shall from time to time, upon not less than ten (10) days prior written request by Landlord, execute, acknowledge and deliver to Landlord a written statement certifying whether Tenant or Tenant's Transferee is a Party in Interest with respect to any of the Plans individually or with respect to TREET.

4. ERISA Representations. Tenant hereby represents and warrants to Landlord that on the date of entry into the Lease and on the Commencement Date of the Lease, Tenant is not, and shall not become at any time during the term of the Lease, a Party in Interest with respect to any of the Plans individually or with respect to TREET. In addition, Tenant acknowledges that if Tenant or Tenant's Transferee becomes a Party in Interest, the Lease may violate Section 406 of ERISA, which might result in the imposition of certain penalties and liabilities upon Tenant and Landlord. In such event, Tenant agrees to indemnify Landlord against any and all cost, charges and expenses incurred by Landlord, including the fees of counsel, agents and others retained by the Landlord, arising out of any such violation of ERISA.

5. Lease Provisions Subject to Rider. To the extent that any of the provisions of this Rider shall be deemed to be inconsistent with the provisions of the Lease, the provisions of the Rider shall be controlling.

6. Investment Management Agreement. Tenant acknowledges that Landlord has entered into this Agreement at the direction of Eastdil Advisers, Inc. (the "Manager"), acting under and pursuant to an Investment Management Agreement with American Telephone and Telegraph Company, dated as of January 1, 1984, appointing the Manager to act as Investment Manager with respect to certain assets, including the Premises, constituting part of TREET.

IN WITNESS WHEREOF, the parties hereto have executed this Exhibit "C" as of the date of the said Lease.

LANDLORD: TENANT:

Skyway Business Center Joint Venture Mentor Corporation

/S/WILLIAM HEAP /S/ANTHONY R. GETTE

A Venturer President

ATTEST:

____________________________

EASTDIL

SCHEDULE I

TREET PLAN PARTICIPANTS

The Ameritech Pension Trust

AT&T Master Pension Trust

Bell Atlantic Pension Trust

Bell Communications Research, Inc. Master Pension Trust

BellSouth Master Pension Trust

NYNEX Master Pension Trust

Master Pension Trust of the Pacific Telesis Group

Southwestern Bell Corp. Master Pension Trust

Henry S. Miller/Grubb & Ellis

EXHIBIT "D"

SALE AND/OR LEASE HAZARDOUS MATERIALS

WARNING AND DISCLAIMER

PROPERTY: 3041 Skyway Circle North, Irving, Texas

Various materials utilized in the construction of any improvements to the Property may contain materials that have been or may in the future be determined to be toxic, hazardous or undesirable and may need to be specially treated, specially handled and/or removed from the Property. For example, some electrical transformers and other electrical components can contain PCBs, and asbestos has been used in a wide variety of building components such as fire-proofing, air duct insulation, acoustical tiles, spray-on acoustical materials, linoleum, floor tiles and plaster. Due to current or prior uses, the Property or improvements may contain materials such as metals, minerals, chemicals, hydrocarbons, biological or radioactive materials and other substances which are considered, or in the future may be determined to be, toxic wastes, hazardous materials or undesirable substances. Such substances may be in above-and-below-ground containers on the Property or may be present on or in soils, water, bu ilding components or other portions of the Property in areas that may not be accessible or noticeable.

Current and future federal, state and local laws and regulations may require the clean-up of such toxic, hazardous or undesirable materials at the expense of those persons who in the past, present or future have had any interest in the Property including, but not limited to, current, past and future owners and users of the Property. Sellers/Lessors and Buyers/Tenants are advised to consult with independent legal counsel of their choice to determine their potential liability with respect to toxic, hazardous, or undesirable materials. Sellers/Lessors and Buyers/Tenants should also consult with such legal counsel to determine what provisions regarding toxic, hazardous or undesirable materials they may wish to include in purchase and sales agreements, leases, options and other legal documentation related to transactions they contemplate entering into with respect to the Property.

The real estate salespersons and brokers in this transaction have no expertise with respect to toxic wastes, hazardous materials or undesirable substances. Proper inspections of the Property by qualified experts are an absolute necessity to determine whether or not there are any current or potential toxic wastes, hazardous materials or undesirable substances in or on the Property. The real estate salespersons and brokers in this transaction have not made, nor will make, any representations, either express or implied, regarding the existence or nonexistence of toxic wastes, hazardous materials, or undesirable substances in or on the Property. Problems involving toxic wastes, hazardous materials or undesirable substances can be extremely costly to correct. It is the responsibility of Sellers/Lessors and Buyers/Tenants to retain qualified experts to deal with the detection and correction of such matters.

SELLER/LESSOR

BY:

Title:

Date:

HENRY S. MILLER/GRUBB & ELLIS

By:

Title:

Date:

BUYER/TENANT

By:

Title:

Date:

k:\home\jdiggs\corporate docs\Texas Lease.doc

EX-10

FIRST AMENDMENT TO LEASE AGREEMENT

THIS FIRST AMENDMENT TO LEASE AGREEMENT (this "First Amendment") is made and entered into as of December 1, 1993 by and between SKYWAY BUSINESS CENTER JOINT VENTURE, a Texas joint venture ("Landlord"), and MENTOR CORPORATION, a Delaware corporation ("Tenant").

R E C I T A L S:

A. Landlord and Tenant entered into that certain Lease Agreement dated as of the 9th day of September, 1989 (the "Lease"), whereby Landlord leased to Tenant one (1) office/warehouse building containing approximately 40,248 square feet plus approximately 2,309 square feet in a mezzanine level, known as 3041 Skyway Circle North, Irving, Dallas County, Texas.

B. Pursuant to Exhibit B, Paragraph 30 of the Lease entitled "Mandatory Expansion", Tenant leased from Landlord an additional 38,640 square feet in the building located at 3015 Skyway Circle (the "Mandatory Expansion Premises").

C. The Term of the Lease was to terminate November 30, 1999 and Landlord and Tenant have agreed to extend the Term as set forth herein.

NOW, THEREFORE, in consideration of Ten and No/100 Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows (capitalized terms used herein having the meaning attributed to them in the Lease unless specifically otherwise provided):

1. Expansion Premises. Subject to and upon the terms, provisions and conditions set forth in the Lease, Landlord does hereby lease to Tenant, and Tenant does hereby lease from Landlord, approximately 30,000 additional square feet in the building located at 3025 Skyway Circle (the "Expansion Premises"), which Expansion Premises shall become a part of the Premises during the term of the Lease, the Premises being stipulated for all purposes of the Lease to be as more particularly set forth on Exhibit A attached hereto and made a part hereof for all purposes.

2. Term. The term of this First Amendment shall commence on December 1, 1993, (the "Extension Term Commencement Date") and will continue thereafter through November 30, 2005 (the "Lease Termination Date"), unless sooner terminated in accordance with the terms of the Lease (as amended hereby). Landlord and Tenant agree that all terms, provisions and conditions of the Lease shall remain in full force and effect up to and until the Extension Term Commencement Date.

3. Rental. Commencing on the December 1, 1993, and thereafter until the Lease Termination Date, Tenant shall pay as rental in accordance with Section 2 of the Lease the sums specified below:

Years 1-2: Three Hundred Sixty-Four Thousand Seven Hundred Seventy Four and 80/100 Dollars ($364,774.80) per annum (approximately $3.35 per square foot of the ground floor area) payable in twenty-four (24) equal monthly installments of Thirty Thousand Three Hundred Ninety-Seven and 90/100 Dollars ($30,397.90) per month.

Years 3-5: Four Hundred Forty-Six Thousand Four Hundred Forty and 80/100 Dollars ($446,440.80) per annum. (approximately $4.10 per square foot of the ground floor area) payable in thirty-six (36) equal monthly, installments of Thirty-Seven Thousand Two Hundred Three and 40/100 Dollars ($37,203.40) per month.

Years 6-12: Five Hundred Thousand Eight Hundred Eighty-Four and 80/100 Dollars ($500,884.80) per annum (approximately $4.60 per square foot of the ground floor area) payable in eighty-four (84) equal monthly installments of Forty-One Thousand Seven Hundred Forty and 40/100 Dollars ($41,740.40) per month.

Notwithstanding the foregoing provisions of this paragraph to the contrary, if Landlord has not delivered possession of the Expansion Premises to Tenant on or prior to December 1, 1993, free from all parties in possession and with all personal property or other property belonging to the existing tenant or any other party removed therefrom, Tenant's obligation to pay rental with respect to the Expansion Premises shall not commence until the date that Landlord so delivers possession of the Expansion Premises to Tenant and the rental payable pursuant to the preceding provisions of this paragraph shall be proportionately reduced until such time as the expansion Premises have been so delivered to Tenant.

4. Condition of the Expansion Premises. Landlord agrees to furnish the Expansion Premises to Tenant in its current condition, i.e., "AS IS" and "WITH ALL FAULTS". Landlord and Tenant each agree that this document constitutes the entire agreement of the parties and there were no verbal representations, warranties or understandings pertaining to this First Amendment. TENANT FURTHER ACKNOWLEDGES AND AGREES THAT LANDLORD DOES HEREBY DISCLAIM ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THOSE OF FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE PREMISES AND/OR THE IMPROVEMENTS LOCATED THEREIN.

5. Repairs and Maintenance. The Lease is hereby amended by deleting Paragraph 5, Sections B and C and Exhibit B, Paragraph 23, Section C and D in their entirety. Landlord and Tenant hereby agree that it is the intention of the parties that this Lease is an absolute net lease whereby Tenant is responsible for all repairs and maintenance to the Premises, normal wear and tear excepted and subject to the terms and conditions of Paragraph 11 and Exhibit B, Paragraph 23A of the Lease. On or before December 1 of each year during the Term hereof, Tenant shall provide Landlord with a written annual budget for the following calendar year for repairs, maintenance and capital expenditures, copies of all service contracts and a schedule setting forth routine maintenance to be performed on the Premises. On or before the twentieth (20th) day following the end of each calendar quarter during the Term hereof, Tenant shall provide Landlord with a report describing in reasonable detail the mainte nance and repairs to the Premises and the costs and expenses incurred therefor for the preceding calendar quarter, reconciled against the annual budget. Should Landlord fail to respond within ten (10) days following the receipt of written request for approval, Landlord shall be deemed to have approved any such maintenance contractor(s). The service contract(s) must include all services suggested by the manufacturer within the operation/maintenance manual which are necessary and customary for the proper maintenance and operation of the systems and equipment and must become effective (and a copy of all such contracts thereof delivered to Landlord) within thirty (30) days of the date Tenant receives such notification by Landlord of Landlord's exercise of its rights pursuant to this section J. Landlord reserves the right, and Tenant agrees to allow Landlord access to the Premises during Tenant's normal business hours to inspect the Prem ises for any purpose. Should Tenant not properly repair or maintain the Premises in good condition and repair, normal wear and tear excepted and subject to the terms and conditions of Paragraph 11 and Exhibit B, Paragraph 23A of the Lease, and should such failure to maintain or repair continue for a period of fifteen (15) days after written notice thereof by Landlord to Tenant, Landlord may enter the Premises and perform such maintenance or repair on behalf of Tenant, except that no notice shall be required in case of emergency. Notwithstanding the foregoing, Landlord shall not enter the Premises to perform any maintenance or repairs on behalf of Tenant if the repairs are of a nature and type that cannot be reasonably repaired within said fifteen (15) day period and Tenant has commenced to make such repairs within said fifteen (15) day period and diligently completes such repairs within a reasonable period of time. Tenant shall reimburse Landlord for all reasonable costs incurred in performing such mainten ance or repair within thirty (30) days following Tenant's receipt of paid invoices evidencing costs incurred by Landlord in connection therewith. In addition, should Tenant default in Tenant's obligations to repair and maintain the Premises under this Lease and such default continues for a period of fifteen (15) days following Tenant's receipt of written notice thereof from Landlord, then Landlord shall have the right to cause Tenant, at Tenant's sole cost and expense, to enter into regularly scheduled preventative maintenance/service contracts with a third-party contractor or contractors for servicing all heating and air conditioning systems and other equipment in the Premises and for the Premises itself. Any such maintenance contractor(s) must be approved by Landlord in writing, which approval shall not be unreasonably withheld or delayed notwithstanding the foregoing, Landlord shall not cause Tenant to enter into preventative maintenance/service contracts if Tenant's default under this section is of a n ature and type that cannot reasonably be cured within said fifteen (15) day period and Tenant has commenced to cure such default within said fifteen (15) day period and diligently pursues such curative measures thereafter until such default is cured.

6. Alterations. The Lease is hereby amended by deleting Paragraph 6, Sections A, B, C, D and E in their entirety and substituting the following:

"A. Tenant shall not make any alterations, improvements or additions in or to the Premises without the prior written consent of Landlord, which consent shall be given in accordance with this Paragraph 6. Notwithstanding the foregoing, Tenant may without the consent of Landlord, but at its own cost and expense and in a good workmanlike manner make such minor non-structural alterations, additions or improvements or erect, remove or alter such partitions, or erect such shelves, bins, machinery and trade fixtures as it may deem advisable, without altering the basic character of the Premises or improvements and without overloading or damaging such Premises or improvements, and in each case complying with all applicable governmental laws, ordinances, regulations and other requirements. All alterations, additions, improvements and partitions erected by Tenant shall be and remain the property of Tenant during the term of this lease, and Tenant shall, unless Landlord otherwise elects as provided herein, remov e all alterations, additions, improvements and partitions ("Alterations") erected by Tenant as of the termination of this Lease. If, upon the sole election of landlord, Tenant shall not be required to remove said alterations, additions, and improvements made by Tenant, these shall, upon the termination of this Lease, be delivered up to the Landlord and become the property of the Landlord without payment, reimbursement, or compensation to Tenant. All shelves, bins, machinery, mechanical, plumbing, electrical, and trade fixtures installed by Tenant may be removed by Tenant, but shall be removed by Tenant if required by Landlord, upon the termination of the Lease. All removals and restoration shall be accomplished in a good and workmanlike manner so as not to damage the structural qualities of the Premises and other improvements situated on the Premises. The foregoing shall not apply to furniture, movable equipment, or personal property owned by Tenant which may be removed by Tenant at the end is of the term of this Lease, if Tenant is not then in default and if such equipment, furniture and/or movable personal property is not then subject to any other rights, liens and interests of Landlord. In no event shall Landlord be responsible for the removal, custody, or disposition of such abandoned property of Tenant, or in any way be held liable for conversion or any action in relation to its removal, retention, or disposition.

B. Prior to the construction of any Alterations which require Landlord's approval pursuant to the provisions hereof, Tenant shall cause a licensed architect and engineer reasonably acceptable to Landlord ("Tenant's Architect") to prepare at Tenant's expense construction, architectural, structural, mechanical, electrical and plumbing drawings and specifications (the "Construction Drawings") for any and all improvements, refurbishment, retrofitting or other alterations to the Premises desired by Tenant and shall deliver the Construction Drawings to Landlord. The Construction Drawings may be delivered in multiple sets with respect to distinct portions of the Premises, rather than as a single comprehensive set covering the entire Premises. The Construction Drawings shall (i) include the location and types of all partitions, doors, light fixtures, electrical and telephone outlets, and special use areas (including computer rooms, telephone rooms and kitchens), (ii) s how the locations and manufacturer's specifications for use and operation of any equipment that will necessitate special electrical voltage, circuits, wiring or other requirements, (iii) specify all wall finishes, mill work and floor coverings, (iv) indicate all critical dimensions, (v) designate the location and service areas for any special air conditioning equipment, and (vi) be in a form sufficient to secure the approval of governmental authorities with jurisdiction over the approval thereof, and shall be otherwise satisfactory, to Landlord.

Within fifteen (15) business days after delivery of each set of the Construction Drawings to Landlord (the "Construction Drawings Approval Date"), Landlord shall give written notice to Tenant and Tenant's Architect either approving same or stating the specific item(s) thereof which Landlord disapproves and the reason(s) therefor. Landlord may disapprove of any aspect of the Construction Drawings only if Landlord believes that same will have an adverse effect on (i) the structure elements of the Premises, or (ii) the exterior aesthetics of the Premises; provided, however, that Landlord's approval of the Construction Drawings shall in no manner indicate that Landlord believes the Construction Drawings are in compliance with all applicable codes, law and regulations and it shall be Tenant's obligation to obtain all such requisite approvals. In addition to the above, Tenant shall deliver to Landlord Construction Drawings for any Alterations which do not require Landlord's consent and are valued in excess of $20,000.00. Should Landlord fail to approve or disapprove of the Construction Drawings within said fifteen (15) day period, the Construction Drawings shall be deemed approved.

C. All required building and other permits in connection with the construction and completion of the Alterations shall be obtained by Tenant at Tenant's sole cost and expense.

D. If Landlord disapproves any aspect of the Construction Drawings pursuant to Section B above, Tenant shall cause Tenant's Architect to revise the applicable documentation to correct Landlords objection and shall deliver such revised documentation to Landlord. Landlord shall have five (5) business days to review the revised documentation submitted and respond in writing to Tenant and Tenant's Architect either approving the revised documentation or stating the specific item(s) thereof which Landlord disapproves and the reason(s) therefor. Should Landlord fail to approve or disapprove of the revised Construction Drawings within said five (5) day period, the revised Construction Drawings shall be deemed approved..

E. The process of revision and approval of each set of the Construction Drawings set forth in Section B shall continue until Landlord has fully approved same. Responses described in Section B shall be due by 5:00 p.m. on the date specified therefor. Any such response received after 5:00 p.m. on any day shall be deemed to be received on the next day."

This Lease is further amended by deleting Paragraph 6, Section H in its entirety.

7. Additional Rent. The Lease is hereby amended by deleting the second paragraph of Exhibit B, Paragraph 24, Section B beginning with "For all purposes" in its entirety and substituting the following in its place:

For all purposes, the Tenant's "full proportionate share" shall be 72.45% prior to the Extension Term Commencement Date and 100% after the Extension Term Commencement Date.

8. Renewal Option. (a) Subject to the terms of this Section 8, Tenant shall have and is hereby granted, two (2) options (the "First Renewal Option" and the "Second Renewal Option") to extend the term of this Lease for additional periods of five (5) years for each Renewal Option. The first renewal term (the "First Renewal Term") shall commence upon the day immediately succeeding the date of the expiration of the Term (the "First Renewal Term Commencement Date") and the second renewal term (the "Second Renewal Term") shall commence upon the day immediately succeeding the date of the expiration of the First Renewal Term (the "Second Renewal Term Commencement Date"). The First and Second Renewal Options may be exercised by Tenant giving Landlord written notice thereof at least one (1) year prior to the expiration of the Term and the expiration of the First Renewal Term, respectively, of Tenant's intent to renew. If Tenant fails to give notice of exercise of the First Renewal Option by such specified time period, Tenant's First and Second Renewal Options shall be deemed waived and of no further force and effect. It is expressly agreed that Tenant shall not have the option to extend this Lease beyond the Second Renewal Term.

(b) The right of Tenant to extend this Lease as provided for herein can be exercised only if, at the time of such exercise and upon the commencement of the First and Second Renewal Term, Tenant is not in default under this Lease beyond any applicable grace period (unless Landlord, in its sole discretion, elects to waive such condition). In the event that such condition is not satisfied or waived by Landlord, Tenant's First and Second Renewal Options may be terminated by written notice from Landlord to Tenant and of no further force and effect.

(c) If Tenant shall have elected (in accordance with and subject to the provisions hereof) to renew the term of this Lease, the First or Second Renewal Term shall be upon and subject to, all of the terms, covenants and conditions provided in this Lease, except the rental rate during the First and Second Renewal Term shall be the Market Rental Rate (as defined herein), but in no event shall the rental rate in the First Renewal Term be less than the rate of rental in effect at the expiration of the Term, such rate being equal to $500,884.80 per annum (approximately $4.60 per square foot of the ground floor area) and in no event shall the rental rate in the Second Renewal Term be less than the rate of rental in effect at the expiration of the First Renewal Term. In addition, Tenant shall continue to pay Additional Rent and all other charges and expenses payable by Tenant under the Lease during such Renewal Term. As used in this Lease, the term "Market Rental Rate" shall mean t he annual rental rates then being charged as of the commencement of the applicable renewal term in the Las Colinas area for space comparable to the space for which the Market Rental Rate is being determined (taking into consideration use, relative location of the properties being compared, definition of net rentable area, leasehold improvements provided, rental increases, rental concessions [such as moving expenses, abatements and lease assumptions], extent of services to be provided, expenses paid directly by Tenant, the time the particular rate under consideration became effective and all other relevant factors). It is agreed that bona fide written offers to lease the Premises made to Landlord by third parties (at arm's length) may be used by Landlord as an indication in determining Market Rental Rate; however, such offers by third parties shall not be conclusive for purposes of determining Market Rental Rate.

(d) Renewal Term Rental. The rental rate for the Renewal Term will be determined as follows:

(i) Landlord and Tenant will have forty-five (45) days after Landlord receives the Tenant's notice of renewal within which to agree on the then Market Rental Rate of the Premises. If' Landlord and Tenant agree on the Market Rental Rate for the Renewal Term within such forty-five (45) day period, they will amend this Lease by stating the Market Rental Rate for the Renewal Term.

(ii) If Landlord and Tenant are unable to agree on the Market Rental Rate for the Renewal Term within such forty-five (45) day period, then, the Market Rental Rate for the Renewal Term will be the Market Rental Rate of the Premises at that time, in amounts and at frequencies determined by the Qualified Brokers pursuant to subparagraph (d)(iii).

(iii) Within seven (7) days after the expiration of the forty-five (45) day period set forth in subparagraph (d)(i), Landlord and Tenant will each appoint a Qualified Broker (as defined below) to determine the Market Rental Rate for the Premises. If either Landlord or Tenant does not appoint a Qualified Broker within ten (10) days after the other has given notice of the name of its Qualified Broker, the single Qualified Broker appointed will be the sole Qualified Broker and will determine the Market Rental Rate for the Premises. If two Qualified Brokers are appointed pursuant to this subparagraph, they will meet promptly and attempt to determine the Market Rental Rate for the Premises. If they are unable to agree within thirty (30) days after the second Qualified Broker has been appointed, they will attempt to elect a third Qualified Broker within ten (10) days after the last day the two Qualified Brokers are given to determine the Market Rental Rate for the Premises. If the two Quali fied Brokers are unable to agree on the third Qualified Broker, either Landlord or Tenant, by giving ten (10) days' prior notice to the other, can apply to either the judge of any State District Court situated in Dallas County, Texas or to the President of the Dallas Chapter of the American Arbitration Association for the selection of a third Qualified Broker. Landlord and Tenant will bear one-half (1/2) of the cost of appointing the third Qualified Broker and paying the third Qualified Broker's fee. Within thirty (30) days after the selection of the third Qualified Broker, such third Qualified Broker will determine which of the determinations made by the previous two Qualified Brokers most closely approximates the Market Rental Rate for the Premises. The determination of the third Qualified Broker shall be binding upon Landlord and Tenant as the Market Rental Rate for the Premises. If the Qualified Broker's determination of the Market, Rental Rate shall not be issued until after the scheduled effective date thereof, Rental shall continue to be paid at the rate last in effect until such determination shall be issued, whereupon any amounts due from Tenant in order to give effect to such determination as of the scheduled date shall be paid on demand. As used herein, the term "Qualified Broker" means an individual real estate broker who (i) is licensed in the State of Texas by the Texas Real Estate commission (or its successor organization) as a real estate broker, (ii) has been actively and continuously engaged in leasing industrial space in Dallas County, Texas for not less than the previous ten (10) year period, (iii) during the preceding three (3) year period has individually represented a party to an industrial space lease of at least 50,000 square feet; and (iv) has not acted as a broker on behalf of Landlord or Tenant during the preceding five (5) year period.

The provisions of this Section 8 shall replace and supersede any renewal options granted in the Lease, specifically Exhibit B, Paragraph 3 1.

9. Notices. Any notice or other communications to Landlord or Tenant required or permitted to be given under this Lease shall be effectively given if delivered to such party by United States mail, certified or registered, return receipt request at the respective addresses set forth below:

Tenant: Mentor Corporation

5425 Hollister Avenue

Santa Barbara, California 93111

Attn: Gary Misttin

Landlord: Skyway Business Center Joint Venture

c/o The Heap & Lewis Company

750 North Saint Paul, Suite 400

Dallas, Texas 75201

Attn: Bill Heap

with a copy to: Skyway Business Center Joint Venture

c/o Eastdil Advisers, Inc.

40 West 57th Street

New York, NY 10019

Attn: Jonathan B. Weller

10. Brokers. Landlord agrees to pay to Franklin Management Company and The Swearingen Company (collectively, "Broker") a real estate brokerage commission as set forth in separate commission agreements between Landlord and Broker. Landlord represents and warrants to Tenant that Landlord has not employed any agents, brokers, or other parties other than Franklin Management Company in connection with this First Amendment and agrees that Landlord shall indemnify Tenant from and against all costs, expenses, attorney's fees, and other liability for commissions or other compensation claimed by any broker or agent claiming the same by, through, or under Landlord and for any costs, expenses, attorney's fees, and other liability for commissions or other compensation claimed by Grubb & Ellis arising out of that certain Commercial Listing Agreement (Exclusive) dated March 16, 1989 (the "Listing Agreement") by and between Darrow-Hildreth, Inc. and Landlord. Tenant represents and warrants to Landlord that Tenant has not employed any agents, brokers or other parties other than The Swearingen Company inconnection with this First Amendment, and agrees that Tenant shall indemnify Landlord from and against all costs, expenses, attorney's fees, and other liability for commissions or other compensation claimed by any broker or agent claiming the same by, through, or under Tenant provided that Landlord shall be responsible for the payment of all commissions or fees payable to Broker earned solely by virtue of the execution of this First Amendment. Landlord and Tenant hereby recognize and agree that rights to a brokerage commission have been asserted by both Darrow-Hildreth and Grubb & Ellis with respect to this First Amendment. Without limiting the foregoing, Landlord hereby represents to Tenant that Darrow-Hildreth does not represent Landlord with respect to this First Amendment and Landlord hereby indemnif ies and holds harmless Tenant from and against all costs, expenses, attorney's fees, and other liability for commissions or, other compensation claimed by Darrow-Hildreth. Tenant hereby represents to Landlord that Grubb & Ellis does not represent Tenant with respect to this First Amendment and Tenant hereby indemnifies and holds harmless Landlord from and against all costs, expenses, attorney's fees, and other liability for commissions or other compensation claimed by or through Grubb & Ellis as a result of any agreement by Tenant to pay Grubb & Ellis a commission or other compensation in connection with this First Amendment; provided, Tenant shall not indemnify Landlord for any claims brought by Grubb & Ellis arising out of the Listing Agreement.

11. Subordination and Non Disturbance. Landlord warrants and represents to Tenant that there is currently no mortgage, deed of trust or ground lease encumbering the Premises. Landlord agrees that Landlord shall use its diligent good faith efforts to obtain a non-disturbance agreement from the holder of any mortgage, deed of trust, security agreement or ground lease hereafter encumbering the Premises in a form mutually acceptable to Landlord and Tenant.

12. Miscellaneous. (a) Except as expressly amended hereby, all other terms, provisions and conditions of the Lease shall remain unchanged and continue to be in full force and effect.

(b) To the extent of any inconsistencies between the Lease and the First Amendment, the First Amendment shall control.

(c) Except as expressly set forth in this First Amendment or the Lease to the contrary, Landlord and Tenant hereby agree that Tenant's covenant to pay rent due under this First Amendment or the Lease, shall be separate and independent from Landlord's covenant to provide services hereunder.

(d) This First Amendment may be executed in multiple counterparts, and by the parties hereto on separate counterparts, each of which shall be deemed to be an original, and all of which together shall constitute but one agreement.

IN WITNESS WHEREOF, executed on this 1^st day of December 1993.

"Landlord"

SKYWAY BUSINESS CENTER

JOINT VENTURE,

a Texas joint venture

By: /S/WILLIAM F. HEAP

"Tenant"

MENTOR CORPORATION,

a Minnesota corporation

/S/GARY E. MISTLIN

Vice President of Finance/Treasurer

EXHIBIT A

Premises

The Premises is a commercial project, commonly known as Skyway Business Center, which is situated on 6.00 (+/-) acres of land, which consists of (i) approximately 40,248 square feet of ground floor space and 2,309 square feet in the mezzanine level located at 3041 Skyway Circle North; (ii) approximately 38,640 square feet of ground floor space located at 3015 Skyway Circle North and (iii) approximately 30,000 square feet of ground floor space located at 3025 Skyway Circle North located in the Walnut Hill Business Park Section of Las Colinas, City of Irving, Dallas County, Texas (the "Complex ").

k:\home\jdiggs\corporate docs\Texas Lease 1^st Amend.doc

EX-10

EMPLOYMENT AGREEMENT

This Employment Agreement, dated August 3, 2000 is between MENTOR MEDICAL INC. ("M.M.I."), with its executive offices at 201 Mentor Drive, Santa Barbara, California, 93111 and JOSHUA LEVINE ("EMPLOYEE") of 2677 Quail Valley Road, Solvang, CA 93463.

RECITALS

COMPANY is in the business of manufacturing and selling medical devices and related products. EMPLOYEE has experience in this business and possesses valuable skills and experience, and unique, personal knowledge about the operations of this business. EMPLOYEE is willing to be engaged by COMPANY and COMPANY is willing to engage EMPLOYEE in an executive capacity responsible for the aesthetics sales and marketing operations of the COMPANY, upon the terms and conditions set forth in this Agreement. This agreement supersedes any and all prior agreements with respect to EMPLOYEE's employment with COMPANY prior to the effective date of this agreement.

AGREEMENT

EMPLOYEE and COMPANY, intending to be legally bound, agree as follows:

1. SERVICES
1. General Services.
1. COMPANY shall employ EMPLOYEE as Vice President, Sales & Marketing - Aesthetics. EMPLOYEE shall perform the duties customarily performed by one holding such position in a similar business as that engaged in by COMPANY and shall also render such other, different and/or new services and duties as may by assigned to EMPLOYEE by COMPANY from time to time (hereinafter referred to as "Services"). EMPLOYEE shall report directly to the President of Mentor Medical Inc. ("M.M.I.")
2. EMPLOYEE shall devote his entire productive business time, ability and attention to the business of COMPANY during the term of this Agreement. EMPLOYEE shall not directly or indirectly render any services of a business, commercial, or professional nature to any other person or organization, whether for compensation or otherwise, without the prior written consent of the President, Mentor Medical Inc. The foregoing is not intended to restrict EMPLOYEE's ability to enter into passive investments which do not compete in any way with COMPANY's business.
3. EMPLOYEE hereby represents that the services to be performed by EMPLOYEE pursuant to this Agreement are of a special, unique, unusual, extraordinary, and intellectual character which gives them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in an action at law. EMPLOYEE therefore expressly agrees that COMPANY, in addition to any other rights or remedies which it may possess, shall be entitled to injunction and other equitable relief to prevent a breach of this Agreement by EMPLOYEE.

1.2 Best Efforts. EMPLOYEE shall serve COMPANY faithfully and to the best of EMPLOYEE's ability. EMPLOYEE shall use EMPLOYEE's best efforts to perform the Services. EMPLOYEE shall act at all times according to what EMPLOYEE reasonably believes is in the best interest of COMPANY. Prior to the execution of this Agreement, EMPLOYEE has received and reviewed COMPANY's Policies and Procedures and COMPANY's Employee Handbook. EMPLOYEE shall comply with COMPANY's Policies and Procedures, and practices now in effect or as later amended or adopted by COMPANY.

2. TERM

This Agreement will be renewed at the end of each term period for one year unless either party provides sixty (60) days advance notice in writing of his or it's intent not to renew the Agreement.

COMPENSATION AND BENEFITS

1. Compensation. EMPLOYEE's total compensation consists of base salary, bonus potential, stock options, and medical and other benefits generally provided to employees of COMPANY. Any compensation paid to EMPLOYEE shall be pursuant to COMPANY's policies and practices for exempt employees and shall be subject to all applicable taxes with deductions made as required by state and federal laws. Compensation provided in this Agreement is full payment for Services and EMPLOYEE shall receive no additional compensation for extraordinary services unless otherwise authorized.
1. During the term of this Agreement, COMPANY agrees to pay EMPLOYEE a base salary of One Hundred Ninety-five Thousand Dollars ($195,000.00) per year.
2. It is the COMPANY's discretion to award merit increases. The next regularly scheduled review of such merit increase shall be effective July 1, 2001 and shall be based upon COMPANY's merit increase schedule for all other exempt, professional employees.
3. EMPLOYEE shall receive an additional monthly payment of Five Thousand Dollars ($5,000.00), during the first six months of employment, totaling Thirty Thousand Dollars ($30,000.00) for the full first half year of employment.
4. EMPLOYEE shall be granted a car allowance of Six Hundred and Fifty Dollars ($650.00) per month to cover principal, interest, insurance, license fees and non-routine expenses.
5. EMPLOYEE shall also be entitled to a bonus equal to thirty percent (30%) of base salary calculated on a fiscal year basis. For the fiscal year ending March 31, 2001, EMPLOYEE shall be guaranteed a pro-rata bonus payout of 100% of bonus opportunity, subject to the number of months of EMPLOYEE's employment in the fiscal year. EMPLOYEE pro-rata bonus attainment may be higher than 100%, depending upon actual attainment, to be paid consistent with historical distribution of COMPANY's annual bonuses (on or about, June 2001). For fiscal year ending March 31, 2002, the potential bonus you will be entitled to is equal to thirty percent (30%) of base salary calculated on a fiscal year basis provided mutually designated objectives are attained.
6. EMPLOYEE shall be granted 25,000 Incentive Stock Options to purchase common stock of COMPANY to be issued on or about September 2000. Based upon performance under the plan, EMPLOYEE may also qualify for additional future grants of options to acquire common stock of COMPANY, subject to determination by the Board of Directors.
2. Business Expenses. COMPANY shall reimburse EMPLOYEE for business expenses reasonably incurred in performing Services according to COMPANY's Expense Reimbursement Policy.
3. Additional Benefits. COMPANY shall provide EMPLOYEE those additional benefits normally granted by COMPANY to its employees subject to eligibility requirements applicable to each benefit. COMPANY has no obligation to provide any other benefits unless provided for in this Agreement. Currently COMPANY provides major medical and dental benefits and eligibility to participate in COMPANY's 401(k) plan. COMPANY will recognize EMPLOYEE's original date of hire (10/21/96) and will allow immediate reinstatement of applicable benefits, including participation in COMPANY 401(k) plan and rate of vacation accrual
4. Vacation. Employee shall accrue vacation equal to fifteen (15) days per year effective with the date of this agreement. Thereafter, vacation shall accrue consistent with COMPANY's stated vacation policy. The time or times for such vacation shall be selected by Employee and approved by the President, M.M.I.
3. TERMINATION
1. Termination. This Agreement and the employment relationship between COMPANY and EMPLOYEE may be terminated as follows:
1. This Agreement shall terminate upon EMPLOYEE's death.
2. COMPANY may, at its option, either suspend compensation payments or terminate this Agreement if EMPLOYEE is disabled. If COMPANY suspends compensation payments, COMPANY shall resume compensation payments when EMPLOYEE resumes performance of the Services. If COMPANY elects to terminate this Agreement, it must first give EMPLOYEE three (3) days advance written notice. (For the purpose of this Agreement, "Disabled" means that EMPLOYEE is incapable of performing the Services because of accident, injury, or physical or mental illness for thirty (30) days, or is unable or shall have failed to perform the Services for a total period of sixty (60) days, regardless of whether such days or consecutive).
3. COMPANY may terminate this Agreement without advance notice for Cause. For the purpose of this Agreement, "Cause" shall mean any failure to comply in any material respect with this Agreement; personal or professional misconduct by EMPLOYEE (including, but not limited to, criminal activity or gross or willful neglect of duty); breach of EMPLOYEE's fiduciary duty to COMPANY of both, conduct which threatens public health or safety, or threatens to do immediate or substantial harm to COMPANY's business or reputation; or any other misconduct, deficiency, failure of performance, breach or default, reasonably capable of being remedied or corrected by EMPLOYEE, which EMPLOYEE fails to correct after having been given thirty (30) days written notice thereof. COMPANY's exercise of its right to terminate under this section shall be without prejudice to any other remedy that COMPANY may be entitled to at law, in equity, or under this Agreement.
4. This Agreement and employment relationship is terminable by either party, with or without cause, at any time by giving the other party thirty (30) days advance written notice. Nothing in this Agreement or any other document provided by COMPANY is intended to be, not should it be, construed as a guarantee that employment or any benefit will be continued for any period of time. All employees of COMPANY are employees at will and, as such, are free to resign at any time. COMPANY, likewise, retains the right to terminate the employment of any employee, including EMPLOYEE, with or without cause.
2. EMPLOYEE's Rights Upon Termination
1. Upon death or Disability of EMPLOYEE, COMPANY shall have no further obligation to EMPLOYEE under the Agreement except to distribute to EMPLOYEE's estate or designated beneficiary any unpaid compensation and reimbursable expenses earned by EMPLOYEE prior to EMPLOYEE's death or date of termination.
2. Upon termination of EMPLOYEE's employment by COMPANY without cause, COMPANY shall have not further obligation to EMPLOYEE under this Agreement except to distribute to EMPLOYEE:

1. Any compensation and reimbursable expenses owed by COMPANY through the termination date, and
2. Severance compensation totaling three (3) months base pay plus two (2) weeks base pay for each complete year of EMPLOYEE's service with COMPANY, determined at EMPLOYEE's then current rate of base pay. EMPLOYEE's prior years of employment with COMPANY will be included for purposes of this calculation. Notwithstanding the above, EMPLOYEE's severance will not be less than six months of base pay. No severance compensation shall be owing pursuant to this paragraph unless EMPLOYEE concurrently executes standard form release of all claims against COMPANY. Severance compensation pursuant to this paragraph shall be in lieu of any other severance benefit to which EMPLOYEE would otherwise be entitled under COMPANY's policies in effect on the date of execution of this Agreement. Severance compensation shall be paid upon termination of EMPLOYEE's employment and in one lump sum payment at the date of termination.

Severance compensation pursuant to this paragraph shall be in lieu of any other severance benefit to which EMPLOYEE would otherwise be entitled under COMPANY's policies in effect on the date of execution of this Agreement or thereafter. Applicable severance compensation shall be paid in one lump sum, less applicable withholdings.

1. Upon termination of EMPLOYEE's employment for Cause COMPANY shall have no further obligation to EMPLOYEE under this Agreement except to distribute to EMPLOYEE:

1. Any compensation and reimbursable expenses owed by COMPANY through the termination date.

1. COVENANTS
1. Nondisclosure and Invention Assignment. EMPLOYEE acknowledges that, as a result of performing the Services, EMPLOYEE shall have access to confidential and sensitive information concerning COMPANY's business including, but not limited to, their business operations, sales and market data, and manufacturing processes. EMPLOYEE also acknowledges that in the course of performing the Services, EMPLOYEE may develop new product ideas or inventions as a result of COMPANY's information. Accordingly, to preserve COMPANY's confidential information and to assure it the full benefit of that information EMPLOYEE shall simultaneously execute the COMPANY's standard form of Employee Confidentiality Agreement attached hereto as Exhibit A. the Employee Confidentiality Agreement is incorporated herein by this reference
2. Covenant Not to Compete. Employee shall abide by the following covenant not to compete if COMPANY, at its option upon the termination of this Agreement, exercises this Covenant Not to Compete. COMPANY shall notify EMPLOYEE within ten (10) days of the termination of this Agreement of its intention to exercise this option and make an additional payment to EMPLOYEE of six (6) months base pay determined at EMPLOYEE's then current rate of pay. EMPLOYEE agrees that for a period of two (2) years following the termination of this Agreement, he shall not directly or indirectly for, or as a member of a partnership, or as an officer, director, stockholder, employee, or representative of any company, engage, directory or indirectly, in any business activity which is the same or similar to work engaged in by EMPLOYEE as EMPLOYEE of COMPANY within the same geographic territory as EMPLOYEE's work for COMPANY and which is directly competitive with the business conducted or to EMPLOYEE's know ledge, contemplated by COMPANY at the time of termination of this Agreement.
3. Non-Disparagement. EMPLOYEE agrees and understands that the benefits accruing pursuant to this AGREEMENT may be terminated immediately by COMPANY without notice if EMPLOYEE disparages COMPANY to any COMPANY employee, customer, vendor, and/or competitor, or solicits or encourages any employee to leave COMPANY's employment, or engages in any occupation or activity in competition with COMPANY with respect to any of its products or services, or breaches COMPANY's attorney - client privilege, or engages in any unethical or unprofessional conduct detrimental to COMPANY's interests.
4. Covenant Not to Recruit. EMPLOYEE shall not, during the term of this Agreement, and for a period of one year following termination of this Agreement, directly or indirectly, either on his own behalf, or on behalf of any other individual or entity, solicit, interfere with, induce (or attempt to induce) or endeavor to entice away any employee associated with COMPANY or it's affiliates, to become affiliated with him or any other individual or entity.
2. ASSIGNMENT

Neither party may assign or otherwise dispose of its rights or obligations under this Agreement without the prior written consent of the other party except as provided in this section. COMPANY may assign and transfer its interest in this Agreement to its successor in interest who assumes COMPANY's obligations under this Agreement and in the event of a merger or consolidation of COMPANY with any other corporation, the sale by COMPANY or a major portion of its assets or its business and goodwill, or any other corporate reorganization involving COMPANY.

3. RESOLUTION OF DISPUTES
1. Venue. In the event of any dispute arising out of or in connection with this Agreement or in any way relating to the employment of EMPLOYEE which leads to the filing of litigation, the parties agree that venue and jurisdiction shall be in Santa Barbara County, California.
2. Costs and Fees. The prevailing party in any such litigation shall be entitled to an award of costs and reasonable attorneys' fees.
4. GENERAL PROVISIONS
1. Notices. Notice under this Agreement shall be sufficient only if personally delivered by a major commercial paid delivery courier service or mailed by certified or registered mail (return receipt requested) to the other party at its address set forth in the signature block below. If not received sooner, notices by mail shall be deemed received five (5) days after deposit in the United States mail.
2. Entire Agreement. With respect to its subject matter, namely, the employment by COMPANY of EMPLOYEE, this Agreement contains the entire understanding between the parties, and supersedes any prior agreements, understandings, and communications between the parties, including, but not limited to, the offer of employment dated October 21, 1996.
3. Agreement Controls. Unless otherwise provided for in this Agreement, COMPANY's policies, procedures and practices shall govern the relationship between EMPLOYEE and COMPANY. If any of COMPANY' s policies, procedures and practices conflict with this Agreement, this Agreement shall control.
4. Binding Effect. This Agreement shall inure to the benefit of and be binding upon the parties, and their respective legal representatives, successors, and assigns.
5. Amendment and Waiver. Any provision of this Agreement many be amended or modified and the observance of any provision may be waived (either retroactively or prospectively) only be written consent of the parties. Either party's failure to enforce any provisions of this Agreement shall not be construed as a waiver of that party's right to enforce such provisions.
6. Governing Law. This Agreement shall be interpreted under the laws of the State of California.
7. Force Majeure. Either party shall be temporarily excused from performing under this Agreement if any force majeure or other occurrence beyond the reasonable control of either party makes such performance impossible, except a Disability as defined in this Agreement. Under such circumstances, performance under this Agreement which related to the delay shall be suspended for the duration of the delay provided the delayed party shall resume performance of its obligations with due diligence once the delaying event subsides. In case of any such suspension, the parties shall use their best efforts to overcome the cause and effect of such suspension.
8. Attorneys' Fees. In any action under this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees and costs to be paid by the losing party.
9. Remedies. Employee acknowledges that because of the nature of COMPANY's business and the subject matter of this Agreement, a breach of this Agreement shall cause substantial injury to COMPANY for which money damages shall not provide an adequate remedy. EMPLOYEE agrees that COMPANY shall have the right to obtain injunctive relief, including the right to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction, in addition to any other remedies that COMPANY may have.
10. Severability. If any provision for this Agreement is held to be invalid, illegal, or unenforceable by any court of competent jurisdiction, that provision shall be limited or eliminated to the minimum extent necessary so this Agreement shall otherwise remain enforceable in full force and effect.
11. Construction. Headings and captions are only for convenience and are not to be used in the interpretation of this Agreement. Whenever the context requires, words, used in the singular shall be construed to include the plural and vice versa, and pronouns of any gender shall be deemed to include the masculine, feminine, or neuter gender.
12. Counterpart Copies. This Agreement shall be signed in counterpart copies of which shall represent an original document, and all of which shall constitute a single document.

The parties execute this Agreement as of the date stated above.

JOSHUA LEVINE MENTOR MEDICAL, INC.

/S/JOSHUA H. LEVINE /S/TREVOR PRITCHARD

President, Mentor Medical, Inc.

EX-10

EMPLOYMENT AGREEMENT

This Employment Agreement, dated November 28, 2000, is by and between MENTOR Corporation ("COMPANY"), with its executive offices at 201 Mentor Drive, Santa Barbara, California 93111, and Peter Shepard ("EMPLOYEE") of 1246 N. Ontare Road, Santa Barbara, California 93105.

RECITALS

COMPANY is in the business of manufacturing and selling medical devices and related products. EMPLOYEE has experience in this business and possesses valuable skills and experience, which will be used in advancing COMPANY's interests. EMPLOYEE is willing to be engaged by COMPANY and COMPANY is willing to engage EMPLOYEE in an executive capacity responsible for the Urology Sales & Marketing operations of COMPANY, upon the terms and conditions set forth in this Agreement.

AGREEMENT

EMPLOYEE and COMPANY, intending to be legally bound, agree as follows:

1. SERVICES

1.1 General Services.

1.1.1 Company shall employ EMPLOYEE as Vice President, Sales & Marketing and Urology. EMPLOYEE shall perform the duties customarily performed by one holding such position in a similar business as that engaged in by COMPANY. To the extent that they do not reduce the scope of the responsibilities described above, EMPLOYEE's duties may change from time to time on reasonable notice, based on the needs of COMPANY and EMPLOYEE's skills as determined by COMPANY. These duties shall hereinafter be referred to as "Services." EMPLOYEE shall report directly to the Chairman of the Board, President and Chief Executive Officer of Mentor Corporation.

1.1.2 In the event that EMPLOYEE shall from time to time serve COMPANY as a director or shall serve in any other office during the term of this Agreement; EMPLOYEE shall serve in such capacities without further compensation.

1.1.3. EMPLOYEE shall devote his entire working time, attention, and energies to the business of COMPANY, and shall not, during the term of this Agreement, be engaged in any other business activity whether or not such business activity is pursued for gain, profit or other pecuniary advantage, without the prior written consent of the Board of Directors of COMPANY. This shall not be construed as preventing EMPLOYEE from investing his assets in a form or manner that does not require any services on the part of EMPLOYEE in the operation or affairs of the entities in which such investments are made, or from engaging in such civic, charitable, religious, or political activities that do not interfere with the performance of EMPLOYEE's duties hereunder.

1.2 Best Abilities. EMPLOYEE shall serve COMPANY faithfully and to the best of EMPLOYEE's ability. EMPLOYEE shall use EMPLOYEE's best abilities to perform the Services. Employee shall act at all times according to what EMPLOYEE reasonably believes is in the best interests of COMPANY.

1.3 Corporate Authority. Prior to the execution of this Agreement, EMPLOYEE has received and reviewed COMPANY's Policies and Procedures and COMPANY's Employee Handbook. EMPLOYEE shall comply with COMPANY's Policies and Procedures, and practices now in effect or as later amended or adopted by COMPANY, as required of similarly-situated executives of COMPANY.

2. TERM

This Agreement shall commence upon the execution of this Agreement and shall continue until terminated as provided in Section 4 of this Agreement.

3. COMPENSATION AND BENEFITS

3.1 Compensation. EMPLOYEE's total compensation consists of base salary, bonus potential, stock options, and medical and other benefits generally provided to employees of COMPANY. Any compensation paid to EMPLOYEE shall be pursuant to COMPANY's policies and practices for exempt employees and shall be subject to all applicable laws and requirements regarding the withholding of federal, state and/or local taxes. Compensation provided in this Agreement is full payment for Services and EMPLOYEE shall receive no additional compensation for extraordinary services unless otherwise authorized. EMPLOYEE's entire compensation package will be reviewed annually by the Compensation Committee of the Board of Directors, a practice which is consistent with COMPANY's Executive Compensation Program.

3.1.1 Base Compensation. COMPANY agrees to pay EMPLOYEE an annualized base salary of One Hundred Eighty Thousand Dollars and No Cents ($180,000.00), less applicable withholdings, payable in equal installments no less frequently than semi-monthly.

2. Cash Incentive Bonus. EMPLOYEE shall be eligible for a cash incentive bonus of up to Thirty Percent of your annual base salary, subject to applicable withholdings and subject to approval by COMPANY's Compensation Committee and Board of Directors. Any cash incentive bonus shall accrue and become payable to EMPLOYEE only if EMPLOYEE is employed with COMPANY on the last day of the fiscal year for which the cash incentive bonus is calculated.
3. Stock Options. EMPLOYEE shall be granted an option for 50,000 shares of COMPANY's common stock subject to a four (4) year vesting schedule one (1) year after grant at the rate of twenty-five percent (25%) per year. Options are exercisable for a period of ten (10) years after vesting and shall be exercised in accordance with the Mentor Corporation 1991 Stock Option Plan ("Plan"), as amended from time to time. EMPLOYEE shall execute the Option Agreement and otherwise comply with the terms of the Plan with regard to the options being granted by this Agreement. This provision is subject to applicable state and federal securities laws. Based upon satisfactory performance, under the Plan, COMPANY expects that EMPLOYEE will qualify for additional grants of options to acquire common stock of COMPANY subject to determination by the Board of Directors, of an amount which is consistent with COMPANY's Executive Compensation Program. Subsequent grants, if any, shall also be subject to performance consider ations as well as the determination of the Board of Directors.

3.2 Business Expenses. COMPANY shall reimburse EMPLOYEE for business expenses reasonably incurred in performing Services according to COMPANY's Expense Reimbursement Policy.

3.3 Additional Benefits. COMPANY shall provide EMPLOYEE those additional benefits normally granted by COMPANY to its employees subject to eligibility requirements applicable to each benefit. COMPANY has no obligation to provide any other benefits unless provided for in this Agreement. Currently COMPANY provides major medical, dental, life, salary continuation, long term disability benefits and eligibility to participate in COMPANY's 401(k) plan.

3.4 Vacation. Employee shall accrue vacation equal to twenty (20) days per year, at the rate of approximately 1.67 days per month. The time or times for such vacation shall be selected by EMPLOYEE and approved by the Chairman of the Board, President and Chief Executive Officer of COMPANY.

4. TERMINATION

4.1 Circumstances Of Termination. This Agreement and the employment relationship between COMPANY and EMPLOYEE may be terminated as follows:

4.1.1 Death. This Agreement shall terminate upon EMPLOYEE's death, effective as of the date of EMPLOYEE's death.

2. Disability. COMPANY may, at its option, either suspend compensation payments or terminate this Agreement due to EMPLOYEE's Disability if EMPLOYEE is incapable, even with reasonable accommodation by COMPANY, of performing the Services because of accident, injury, or physical or mental illness for sixty (60) consecutive days, or is unable or shall have failed to perform the Services for a total period of ninety (90) within a twelve (12) month period, regardless of whether such days are consecutive. If COMPANY suspends compensation payments because of EMPLOYEE's Disability, COMPANY shall resume compensation payments when EMPLOYEE resumes performance of the Services. If COMPANY elects to terminate this Agreement due to EMPLOYEE's Disability, it must first give EMPLOYEE three (3) days advance written notice.

4.1.3 Discontinuance Of Business. If COMPANY discontinues operating its business, this Agreement shall terminate as of the last day of the month on which COMPANY ceases its entire operations with the same effect as if that last date were originally established as termination date of this Agreement.

4.1.4 For Cause. COMPANY may terminate this Agreement without advance notice for Cause. For the purpose of this Agreement, "Cause" shall mean any failure to comply in any material respect with this Agreement or any Agreement incorporated herein; personal or professional misconduct by EMPLOYEE (including, but not limited to, criminal activity or gross or willful neglect of duty); breach of EMPLOYEE's fiduciary duty to the COMPANY; conduct which threatens public health or safety, or threatens to do immediate or substantial harm to COMPANY's business or reputation; or any other misconduct, deficiency, failure of performance, breach or default, reasonably capable of being remedied or corrected by EMPLOYEE. To the extent that a breach pursuant to this Section 4.1.4 is curable by EMPLOYEE without harm to COMPANY and/or it's reputation, COMPANY shall, instead of immediately terminating EMPLOYEE pursuant to this Agreement, provide EMPLOYEE with notice of such breach, specifying the actions required to cure such breach, and EMPLOYEE shall have ten (10) days to cure such breach by performing the actions so specified. If EMPLOYEE fails to cure such breach within the ten (10) day period, COMPANY may terminate this Agreement without further notice. COMPANY's exercise of its right to terminate under this section shall be without prejudice to any other remedy to which COMPANY may be entitled at law, in equity, or under this Agreement.

5. For Convenience Of Party. This Agreement and employment relationship is terminable by either party, for convenience, with or without cause, at any time upon thirty (30) days' advance written notice to the other party.
6. Change of Control. If employment is terminated within twelve (12) months upon any of the following events EMPLOYEE shall be entitled to severance compensation pursuant to Section 4.2.6 (I) and (ii) and (iii):

1. the sale, lease or other disposition of all or substantially all of

Company's assets to a single purchaser or group of related purchasers;

(ii) the sale, lease or other disposition, in one transaction or a series of related transactions of the majority of COMPANY's outstanding capital stock; or,

(iii) the merger or consolidation of COMPANY into or with another corporation in which the stockholders of COMPANY shall own less than fifty (50%) percent of the voting securities of the surviving corporation (all of which events shall be referred to as a Change in Control).

4.2 EMPLOYEE's Rights Upon Termination

4.2.1 Death. Upon termination of this Agreement because of death of EMPLOYEE pursuant to Section 4.1.1 above, COMPANY shall have no further obligation to EMPLOYEE under the Agreement except to distribute to EMPLOYEE's estate or designated beneficiary any unpaid compensation and reimbursable expenses, less applicable withholdings, owed to EMPLOYEE prior to the date of EMPLOYEE's death.

4.2.2 Disability. Upon termination of this Agreement because of Disability of EMPLOYEE pursuant to Sections 4.1.2 above, COMPANY shall have no further obligation to EMPLOYEE under the Agreement except to distribute to EMPLOYEE's estate or designated beneficiary any unpaid compensation and reimbursable expenses, less applicable withholdings, owed to EMPLOYEE prior to the date of EMPLOYEE's termination due to Disability.

3. Discontinuance Of Business. Upon termination of this Agreement because of discontinuation of COMPANY's business pursuant to Section 4.1.3, COMPANY shall have no further obligation to EMPLOYEE under the Agreement except to distribute to EMPLOYEE any unpaid compensation and reimbursable expenses, less applicable withholdings, owed to EMPLOYEE prior to the date of termination of this Agreement.

4.2.4 Termination With Cause. Upon termination of EMPLOYEE's employment for Cause pursuant to Section 4.1.4, COMPANY shall have no further obligation to EMPLOYEE under this Agreement except to distribute to EMPLOYEE:

i. Any compensation and reimbursable expenses owed to EMPLOYEE by COMPANY through the termination date, less applicable withholdings; and

ii. Severance compensation as provided for in COMPANY's Severance Policy, if any, less applicable withholdings.

4.2.5 Termination Without Cause. Upon termination of EMPLOYEE's employment by COMPANY without cause pursuant to Section 4.1.5, COMPANY shall have no further obligation to EMPLOYEE under this Agreement except to distribute to EMPLOYEE:

1. Any compensation and reimbursable expenses owed by COMPANY to EMPLOYEE through the termination date, less applicable withholdings;
2. Severance compensation totaling three- (3) month's base pay, plus one (1) month base pay for each full year of service, determined at EMPLOYEE's then-current rate of base pay. In consideration for this severance compensation, EMPLOYEE, on behalf of himself, his agents, heirs, executors, administrators, and assigns, expressly releases and forever discharges COMPANY and its successors and assigns, and all of its respective agents, directors, officers, partners, employees, representatives, insurers, attorneys, parent companies, subsidiaries, affiliates, and joint ventures, and each of them, from any and all claims based upon acts or events that occurred on or before the date on which EMPLOYEE accepts the severance compensation, including any claim arising under any state or federal statute or common law, including, but not limited to, Title VII of the Civil Rights Act of 1964, 42 U.S.C. " 2000e, et seq., the Americans with Disabilities Act, 42 U.S.C. " 12101, et seq., the Age Discrimination i n Employment Act, 29 U.S.C. " 623, et. seq., the Worker Adjustment and Retraining Notification Act, 29 U.S.C. " 2101, et. seq., and the California Fair Employment and Housing Act, Cal. Gov't Code " 12940, et seq. EMPLOYEE acknowledges that he is familiar with section 1542 of the California Civil Code, which reads as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

EMPLOYEE expressly acknowledges and agrees that he is releasing all known and unknown claims, and that he is waiving all rights he has or may have under Civil Code Section 1542 or under any other statute or common law principle of similar effect. EMPLOYEE acknowledges that the benefits he is receiving in exchange for this Release are more than the benefits to which he otherwise would have been entitled, and that such benefits constitute valid and adequate consideration for this Release. EMPLOYEE further acknowledges that he has read this Release, understands all of its terms, and has consulted with counsel of his choosing before signing this Agreement.

Severance compensation pursuant to this paragraph shall be in lieu of any other severance benefit to which EMPLOYEE would otherwise be entitled under COMPANY's policies in effect on the date of execution of this Agreement. Severance compensation shall be paid upon termination of EMPLOYEE's employment and in one lump sum payment at the date of termination, less applicable withholdings.

6. Termination Due to Change Of Control. If employment is terminated within twelve (12) months upon any of the events delineated in Section 4.1.6 of this Agreement ("Change of Control"), COMPANY shall have no further obligation to EMPLOYEE under this Agreement except to distribute to EMPLOYEE:

1. Any compensation and reimbursable expenses owed by

COMPANY to EMPLOYEE through the termination date, less applicable withholdings;

ii. A pro-rated share of the cash incentive bonus that would be due to EMPLOYEE if EMPLOYEE had remained employed with COMPANY through the last day of the fiscal year for which the cash incentive bonus is calculated, less applicable withholdings; and

iii. Severance compensation totaling twelve (12) months base pay, plus one (1) month base pay for each full year of service, determined at EMPLOYEE's then-current rate of base pay. In consideration for this severance compensation, EMPLOYEE, on behalf of himself, his agents, heirs, executors, administrators, and assigns, expressly releases and forever discharges COMPANY and its successors and assigns, and all of its respective agents, directors, officers, partners, employees, representatives, insurers, attorneys, parent companies, subsidiaries, affiliates, and joint ventures, and each of them, from any and all claims based upon acts or events that occurred on or before the date on which EMPLOYEE accepts the severance compensation, including any claim arising under any state or federal statute or common law, including, but not limited to, Title VII of the Civil Rights Act of 1964, 42 U.S.C. '' 2000e, et seq., the Americans with Disabilities Act, 42 U.S.C. '' 12101, et seq., the Age Discrimination in Employment Act, 29 U.S.C. ''  623, et seq., the Worker Adjustment and Retraining Notification Act, 29 U.S.C. '' 2101, et seq., and the California Fair Employment and Housing Act, Cal. Gov't Code '' 12940, et seq. EMPLOYEE acknowledges that he is familiar with section 1542 of the California Civil Code, which reads as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

EMPLOYEE expressly acknowledges and agrees that he is releasing all known and unknown claims, and that he is waiving all rights he has or may have under Civil Code Section 1542 or under any other statute or common law principle of similar effect. EMPLOYEE acknowledges that the benefits he is receiving in exchange for this Release are more than the benefits to which he otherwise would have been entitled, and that such benefits constitute valid and adequate consideration for this Release. EMPLOYEE further acknowledges that he has read this Release, understands all of its terms, and has consulted with counsel of his choosing before signing this Agreement.

Severance compensation pursuant to this paragraph shall be in lieu of any other severance benefit to which EMPLOYEE would otherwise be entitled under COMPANY's policies in effect on the date of execution of this Agreement. Severance compensation shall be paid upon termination of EMPLOYEE's employment and in one lump sum payment at the date of termination, less applicable withholdings.

5. REPRESENTATIONS AND WARRANTIES

5.1 Representations of EMPLOYEE. EMPLOYEE represents and warrants that EMPLOYEE has all right, power, authority and capacity, and is free to enter into this Agreement; that by doing so, EMPLOYEE will not violate or interfere with the rights of any other person or entity; and that EMPLOYEE is not subject to any contract, understanding or obligation that will or might prevent, interfere with or impair the performance of this Agreement by EMPLOYEE. EMPLOYEE shall indemnify and hold COMPANY harmless with respect to any losses, liabilities, demands, claims, fees, expenses, damages and costs (including attorneys' fees and court costs) resulting from or arising out of any claim or action based upon EMPLOYEE's entering into this Agreement.

5.2 Representations of COMPANY. COMPANY represents and warrants that it has all right, power and authority, without the consent of any other person, to execute and deliver, and perform its obligations under, this Agreement. All corporate and other actions required to be taken by COMPANY to authorize the execution, delivery and performance of this Agreement and the consummation of all transactions contemplated hereby have been duly and properly taken. This Agreement is the lawful, valid and legally binding obligation of COMPANY enforceable in accordance with its terms.

5.3 Materiality of Representations. The representations, warranties and covenants set forth in this Agreement shall be deemed to be material and to have been relied upon by the parties hereto.

6. COVENANTS

6.1 Nondisclosure and Invention Assignment. EMPLOYEE acknowledges that, as a result of performing the Services, EMPLOYEE shall have access to confidential and sensitive information concerning COMPANY's business including, but not limited to, their business operations, sales and marketing data, and manufacturing processes. EMPLOYEE also acknowledges that in the course of performing the Services, EMPLOYEE may develop new product ideas or inventions as a result of COMPANY's information. Accordingly, to preserve COMPANY's confidential information and to assure it the full benefit of that information, EMPLOYEE shall, as a condition of employment with COMPANY, execute COMPANY's standard form of Employee Confidentiality Agreement attached hereto as Exhibit A, and execute updated versions of the Employee Confidentiality Agreement as it may be modified from time to time by COMPANY and as may be required of similarly-situated executives of COMPANY. The Employee Confidentiality Agreement is incorporated herein by this reference. EMPLOYEE's obligations under the Employee Confidentiality Agreement continue beyond the termination of this Agreement.

6.2 Covenant Not to Compete. In addition to the provisions of the Employee Confidentiality Agreement, EMPLOYEE shall abide by the following covenant not to compete if COMPANY, at its option upon the termination of this Agreement (regardless of the reason for the termination), exercises this Covenant Not to Compete. COMPANY shall notify EMPLOYEE within ten (10) days of termination of this Agreement of its intention to exercise this option and make an additional payment to EMPLOYEE of six (6) months' base pay determined at EMPLOYEE's last rate of pay with COMPANY. EMPLOYEE agrees that for a period of one (1) year following the termination of this Agreement, he shall not directly or indirectly for EMPLOYEE, or as a member of a partnership, or as an officer, director, stockholder, employee, or representative of any other entity or individual, engage, directly or indirectly, in any business activity which is the same or similar to work engaged in by EMPLOYEE on behalf of COMPANY within the same geog raphic territory as EMPLOYEE's work for COMPANY and which is directly competitive with the business conducted or to EMPLOYEE's knowledge, contemplated by COMPANY at the time of termination of this Agreement, as defined in the Employee Confidentiality Agreement incorporated into this Agreement by reference. EMPLOYEE may accept employment with an entity competing with COMPANY only if the business of that entity is diversified and EMPLOYEE is employed solely with respect to a separately-managed and separately-operated part of that entity's business that does not compete with COMPANY. Prior to accepting such employment, EMPLOYEE and the prospective employer entity shall provide COMPANY with written assurances reasonably satisfactory to COMPANY that EMPLOYEE will not render services directly or indirectly to any part of that entity's business that competes with the business of COMPANY.

6.3 Covenant to Deliver Records. All memoranda, notes, records and other documents made or compiled by EMPLOYEE, or made available to EMPLOYEE during the term of this Agreement concerning the business of COMPANY, shall be and remain COMPANY's property and shall be delivered to COMPANY upon the termination of this Agreement or at any other time on request.

6.4 Covenant Not To Recruit. EMPLOYEE shall not, during the term of this Agreement and for a period of one (1) year following termination of this Agreement, directly or indirectly, either on EMPLOYEE's own behalf, or on behalf of any other individual or entity, solicit, interfere with, induce (or attempt to induce) or endeavor to entice away any employee associated with COMPANY to become affiliated with him or any other individual or entity.

7. CERTAIN RIGHTS OF COMPANY

7.1 Announcement. COMPANY shall have the right to make public announcements concerning the execution of this Agreement and certain terms thereof.

7.2 Use of Name, Likeness and Biography. COMPANY shall have the right (but not the obligation) to use, publish and broadcast, and to authorize others to do so, the name, approved likeness and approved biographical material of EMPLOYEE to advertise, publicize and promote the business of COMPANY and its affiliates, but not for the purposes of direct endorsement without EMPLOYEE's consent. An "approved likeness" and "approved biographical material" shall be, respectively, any photograph or other depiction of EMPLOYEE, or any biographical information or life story concerning the professional career of EMPLOYEE.

7.3 Right to Insure. COMPANY shall have the right to secure in its own name, or otherwise, and at its own expense, life, health, accident or other insurance covering EMPLOYEE, and EMPLOYEE shall have no right, title or interest in and to such insurance. EMPLOYEE shall assist COMPANY in procuring such insurance by submitting to examinations and by signing such applications and other instruments as may be required by the insurance carriers to which application is made for any such insurance.

8. ASSIGNMENT

Neither party may assign or otherwise dispose of its rights or obligations under this Agreement without the prior written consent of the other party except as provided in this Section. COMPANY may assign and transfer this Agreement, or its interest in this Agreement, to any affiliate of COMPANY or to any entity that is a party to a merger, reorganization, or consolidation with COMPANY, or to a subsidiary of COMPANY, or to any entity that acquires substantially all of the assets of COMPANY or of any division with respect to which EMPLOYEE is providing services (providing such assignee assumes COMPANY's obligations under this Agreement). EMPLOYEE shall, if requested by COMPANY, perform EMPLOYEE's duties and Services, as specified in this Agreement, for the benefit of any subsidiary or other affiliate of COMPANY. Upon assignment, acquisition, merger, consolidation or reorganization, the term "COMPANY" as used herein shall be deemed to refer to such assignee or successor entity. EMPLOYEE shall not have th e right to assign EMPLOYEE's interest in this Agreement, any rights under this Agreement, or any duties imposed under this Agreement, nor shall EMPLOYEE or his spouse, heirs, beneficiaries, executors or administrators have the right to pledge, hypothecate or otherwise encumber EMPLOYEE's right to receive compensation hereunder without the express written consent of COMPANY.

9. RESOLUTION OF DISPUTES

In the event of any dispute arising out of or in connection with this Agreement or in any way relating to the employment of EMPLOYEE which leads to the filing of a lawsuit, the parties agree that venue and jurisdiction shall be in Santa Barbara County, California. The prevailing party in any such litigation shall be entitled to an award of costs and reasonable attorneys' fees to be paid by the losing party.

10. GENERAL PROVISIONS

10.1 Notices. Notice under this Agreement shall be sufficient only if personally delivered by a major commercial paid delivery courier service or mailed by certified or registered mail (return receipt requested and postage pre-paid) to the other party at its address set forth in the signature block below or to such other address as may be designated by either party in writing. If not received sooner, notices by mail shall be deemed received five (5) days after deposit in the United States mail.

10.2 Agreement Controls. Unless otherwise provided for in this Agreement, the COMPANY's policies, procedures and practices shall govern the relationship between EMPLOYEE and COMPANY. If, however, any of COMPANY's policies, procedures and/or practices conflict with this Agreement (together with any amendments hereto), this Agreement (and any amendments hereto) shall control.

10.3 Amendment and Waiver. Any provision of this Agreement may be amended or modified and the observance of any provision may be waived (either retroactively or prospectively) only by written consent of the parties. Either party's failure to enforce any provision of this Agreement shall not be construed as a waiver of that party's right to enforce such provision.

10.4 Governing Law. This Agreement and the performance hereunder shall be interpreted under the substantive laws of the State of California.

10.5 Force Majeure. Either party shall be temporarily excused from performing under this Agreement if any force majeure or other occurrence beyond the reasonable control of either party makes such performance impossible, except a Disability as defined in this Agreement, provided that the party subject to the force majeure provides notice of such force majeure at the first reasonable opportunity. Under such circumstances, performance under this Agreement which related to the delay shall be suspended for the duration of the delay provided the delayed party shall resume performance of its obligations with due diligence once the delaying event subsides. In case of any such suspension, the parties shall use their best efforts to overcome the cause and effect of such suspension.

10.6 Remedies. EMPLOYEE acknowledges that because of the nature of COMPANY's business, and the fact that the services to be performed by EMPLOYEE pursuant to this Agreement are of a special, unique, unusual, extraordinary, and intellectual character which give them a peculiar value, a breach of this Agreement shall cause substantial injury to COMPANY for which money damages cannot reasonably be ascertained and for which money damages would be inadequate. EMPLOYEE therefore agrees that COMPANY shall have the right to obtain injunctive relief, including the right to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction, in addition to any other remedies that COMPANY may have.

10.7 Severability. If any term, provision, covenant, paragraph, or condition of this Agreement is held to be invalid, illegal, or unenforceable by any court of competent jurisdiction, that provision shall be limited or eliminated to the minimum extent necessary so this Agreement shall otherwise remain enforceable in full force and effect.

10.8 Construction. Headings and captions are only for convenience and shall not affect the construction or interpretation of this Agreement. Whenever the context requires, words, used in the singular shall be construed to include the plural and vice versa, and pronouns of any gender shall be deemed to include the masculine, feminine, or neuter gender.

10.9 Counterpart Copies. This Agreement may be signed in counterpart copies, each of which shall represent an original document, and all of which shall constitute a single document.

10.10 No Adverse Construction. The rule that a contract is to be construed against the party drafting the contract is hereby waived, and shall have no applicability in construing this Agreement or the terms hereof.

10.11 Entire Agreement. With respect to its subject matter, namely, the employment by COMPANY of EMPLOYEE, this Agreement (including the documents expressly incorporated therein, such as the Employee Confidentiality Agreement), contains the entire understanding between the parties, and supersedes any prior agreements, understandings, and communications between the parties, whether oral, written, implied or otherwise, including, but not limited to, the original offer of employment letter.

10.12 Assistance of Counsel. EMPLOYEE expressly acknowledges that he was given the right to be represented by counsel of his own choosing in connection with the terms of this Agreement.

The parties execute this Agreement as of the date stated above:

PETER SHEPARD MENTOR CORPORATION

/S/PETER SHEPARD /S/CHRISTOPHER J. CONWAY

Christopher J. Conway

President and Chief Executive Officer

NOTICE ADDRESS: NOTICE ADDRESS:

1246 N. Ontare Road 201 Mentor Drive

Santa Barbara, California 93105 Santa Barbara, California 93111

EX-10

EMPLOYMENT AGREEMENT

This Employment Agreement, dated November 28, 2000, is by and between MENTOR Corporation ("COMPANY"), with its executive offices at 201 Mentor Drive, Santa Barbara, California 93111, and Clarke Scherff ("EMPLOYEE") of 5540 Pineglen Road, La Cresenta, California 91214.

RECITALS

COMPANY is in the business of manufacturing and selling medical devices and related products. EMPLOYEE has experience in this business and possesses valuable skills and experience, which will be used in advancing COMPANY's interests. EMPLOYEE is willing to be engaged by COMPANY and COMPANY is willing to engage EMPLOYEE in a capacity responsible for the Regulatory operations of COMPANY, upon the terms and conditions set forth in this Agreement.

AGREEMENT

EMPLOYEE and COMPANY, intending to be legally bound, agree as follows:

1. SERVICES

1.1 General Services.

1.1.1 Company shall employ EMPLOYEE as Vice President, Regulatory Affairs. EMPLOYEE shall perform the duties customarily performed by one holding such position in a similar business as that engaged in by COMPANY. To the extent that they do not reduce the scope of the responsibilities described above, EMPLOYEE's duties may change from time to time on reasonable notice, based on the needs of COMPANY and EMPLOYEE's skills as determined by COMPANY. These duties shall hereinafter be referred to as "Services." EMPLOYEE shall report directly to the Chairman of the Board, President and Chief Executive Officer of Mentor Corporation.

1.1.2 In the event that EMPLOYEE shall from time to time serve COMPANY as a director or shall serve in any other office during the term of this Agreement; EMPLOYEE shall serve in such capacities without further compensation.

1.1.3. EMPLOYEE shall devote his entire working time, attention, and energies to the business of COMPANY, and shall not, during the term of this Agreement, be engaged in any other business activity whether or not such business activity is pursued for gain, profit or other pecuniary advantage, without the prior written consent of the Board of Directors of COMPANY. This shall not be construed as preventing EMPLOYEE from investing his assets in a form or manner that does not require any services on the part of EMPLOYEE in the operation or affairs of the entities in which such investments are made, or from engaging in such civic, charitable, religious, or political activities that do not interfere with the performance of EMPLOYEE's duties hereunder.

1.2 Best Abilities. EMPLOYEE shall serve COMPANY faithfully and to the best of EMPLOYEE's ability. EMPLOYEE shall use EMPLOYEE's best abilities to perform the Services. Employee shall act at all times according to what EMPLOYEE reasonably believes is in the best interests of COMPANY.

1.3 Corporate Authority. Prior to the execution of this Agreement, EMPLOYEE has received and reviewed COMPANY's Policies and Procedures and COMPANY's Employee Handbook. EMPLOYEE shall comply with COMPANY's Policies and Procedures, and practices now in effect or as later amended or adopted by COMPANY, as required of similarly-situated executives of COMPANY.

2. TERM

This Agreement shall commence upon the execution of this Agreement and shall continue until terminated as provided in Section 4 of this Agreement.

3. COMPENSATION AND BENEFITS

3.1 Compensation. EMPLOYEE's total compensation consists of base salary, bonus potential, stock options, and medical and other benefits generally provided to employees of COMPANY. Any compensation paid to EMPLOYEE shall be pursuant to COMPANY's policies and practices for exempt employees and shall be subject to all applicable laws and requirements regarding the withholding of federal, state and/or local taxes. Compensation provided in this Agreement is full payment for Services and EMPLOYEE shall receive no additional compensation for extraordinary services unless otherwise authorized. EMPLOYEE's entire compensation package will be reviewed annually by the Compensation Committee of the Board of Directors, a practice which is consistent with COMPANY's Executive Compensation Program.

3.1.1 Base Compensation. COMPANY agrees to pay EMPLOYEE an annualized base salary of One Hundred Sixty Two Thousand Five Dollars and No Cents ($162,005.00), less applicable withholdings, payable in equal installments no less frequently than semi-monthly.

2. Cash Incentive Bonus. EMPLOYEE shall be eligible for a cash incentive bonus of up to Twenty Percent of your annual base salary, subject to applicable withholdings and subject to approval by COMPANY's Compensation Committee and Board of Directors. Any cash incentive bonus shall accrue and become payable to EMPLOYEE only if EMPLOYEE is employed with COMPANY on the last day of the fiscal year for which the cash incentive bonus is calculated.
3. Stock Options. EMPLOYEE shall be granted an option for 20,000 shares of COMPANY's common stock subject to a four (4) year vesting schedule one (1) year after grant at the rate of twenty-five percent (25%) per year. Options are exercisable for a period of ten (10) years after vesting and shall be exercised in accordance with the Mentor Corporation 1991 Stock Option Plan ("Plan"), as amended from time to time. EMPLOYEE shall execute the Option Agreement and otherwise comply with the terms of the Plan with regard to the options being granted by this Agreement. This provision is subject to applicable state and federal securities laws. Based upon satisfactory performance, under the Plan, COMPANY expects that EMPLOYEE will qualify for additional grants of options to acquire common stock of COMPANY subject to determination by the Board of Directors, of an amount which is consistent with COMPANY's Executive Compensation Program. Subsequent grants, if any, shall also be subject to performance consider ations as well as the determination of the Board of Directors.

3.2 Business Expenses. COMPANY shall reimburse EMPLOYEE for business expenses reasonably incurred in performing Services according to COMPANY's Expense Reimbursement Policy.

3.3 Additional Benefits. COMPANY shall provide EMPLOYEE those additional benefits normally granted by COMPANY to its employees subject to eligibility requirements applicable to each benefit. COMPANY has no obligation to provide any other benefits unless provided for in this Agreement. Currently COMPANY provides major medical, dental, life, salary continuation, long term disability benefits and eligibility to participate in COMPANY's 401(k) plan.

3.4 Vacation. Employee shall accrue vacation equal to twenty (20) days per year, at the rate of approximately 1.67 days per month. The time or times for such vacation shall be selected by EMPLOYEE and approved by the Chairman of the Board, President and Chief Executive Officer of COMPANY.

4. TERMINATION

4.1 Circumstances Of Termination. This Agreement and the employment relationship between COMPANY and EMPLOYEE may be terminated as follows:

4.1.1 Death. This Agreement shall terminate upon EMPLOYEE's death, effective as of the date of EMPLOYEE's death.

2. Disability. COMPANY may, at its option, either suspend compensation payments or terminate this Agreement due to EMPLOYEE's Disability if EMPLOYEE is incapable, even with reasonable accommodation by COMPANY, of performing the Services because of accident, injury, or physical or mental illness for sixty (60) consecutive days, or is unable or shall have failed to perform the Services for a total period of ninety (90) within a twelve (12) month period, regardless of whether such days are consecutive. If COMPANY suspends compensation payments because of EMPLOYEE's Disability, COMPANY shall resume compensation payments when EMPLOYEE resumes performance of the Services. If COMPANY elects to terminate this Agreement due to EMPLOYEE's Disability, it must first give EMPLOYEE three (3) days advance written notice.

4.1.3 Discontinuance Of Business. If COMPANY discontinues operating its business, this Agreement shall terminate as of the last day of the month on which COMPANY ceases its entire operations with the same effect as if that last date were originally established as termination date of this Agreement.

4.1.4 For Cause. COMPANY may terminate this Agreement without advance notice for Cause. For the purpose of this Agreement, "Cause" shall mean any failure to comply in any material respect with this Agreement or any Agreement incorporated herein; personal or professional misconduct by EMPLOYEE (including, but not limited to, criminal activity or gross or willful neglect of duty); breach of EMPLOYEE's fiduciary duty to the COMPANY; conduct which threatens public health or safety, or threatens to do immediate or substantial harm to COMPANY's business or reputation; or any other misconduct, deficiency, failure of performance, breach or default, reasonably capable of being remedied or corrected by EMPLOYEE. To the extent that a breach pursuant to this Section 4.1.4 is curable by EMPLOYEE without harm to COMPANY and/or it's reputation, COMPANY shall, instead of immediately terminating EMPLOYEE pursuant to this Agreement, provide EMPLOYEE with notice of such breach, specifying the actions required to cure such breach, and EMPLOYEE shall have ten (10) days to cure such breach by performing the actions so specified. If EMPLOYEE fails to cure such breach within the ten (10) day period, COMPANY may terminate this Agreement without further notice. COMPANY's exercise of its right to terminate under this section shall be without prejudice to any other remedy to which COMPANY may be entitled at law, in equity, or under this Agreement.

5. For Convenience Of Party. This Agreement and employment relationship is terminable by either party, for convenience, with or without cause, at any time upon thirty (30) days' advance written notice to the other party.
6. Change of Control. If employment is terminated within twelve (12) months upon any of the following events EMPLOYEE shall be entitled to severance compensation pursuant to Section 4.2.6 (I) and (ii) and (iii):

1. the sale, lease or other disposition of all or substantially all of

Company's assets to a single purchaser or group of related purchasers;

(ii) the sale, lease or other disposition, in one transaction or a series of related transactions of the majority of COMPANY's outstanding capital stock; or,

(iii) the merger or consolidation of COMPANY into or with another corporation in which the stockholders of COMPANY shall own less than fifty (50%) percent of the voting securities of the surviving corporation (all of which events shall be referred to as a Change in Control).

4.2 EMPLOYEE's Rights Upon Termination

4.2.1 Death. Upon termination of this Agreement because of death of EMPLOYEE pursuant to Section 4.1.1 above, COMPANY shall have no further obligation to EMPLOYEE under the Agreement except to distribute to EMPLOYEE's estate or designated beneficiary any unpaid compensation and reimbursable expenses, less applicable withholdings, owed to EMPLOYEE prior to the date of EMPLOYEE's death.

4.2.2 Disability. Upon termination of this Agreement because of Disability of EMPLOYEE pursuant to Sections 4.1.2 above, COMPANY shall have no further obligation to EMPLOYEE under the Agreement except to distribute to EMPLOYEE's estate or designated beneficiary any unpaid compensation and reimbursable expenses, less applicable withholdings, owed to EMPLOYEE prior to the date of EMPLOYEE's termination due to Disability.

3. Discontinuance Of Business. Upon termination of this Agreement because of discontinuation of COMPANY's business pursuant to Section 4.1.3, COMPANY shall have no further obligation to EMPLOYEE under the Agreement except to distribute to EMPLOYEE any unpaid compensation and reimbursable expenses, less applicable withholdings, owed to EMPLOYEE prior to the date of termination of this Agreement.

4.2.4 Termination With Cause. Upon termination of EMPLOYEE's employment for Cause pursuant to Section 4.1.4, COMPANY shall have no further obligation to EMPLOYEE under this Agreement except to distribute to EMPLOYEE:

i. Any compensation and reimbursable expenses owed to EMPLOYEE by COMPANY through the termination date, less applicable withholdings; and

ii. Severance compensation as provided for in COMPANY's Severance Policy, if any, less applicable withholdings.

4.2.5 Termination Without Cause. Upon termination of EMPLOYEE's employment by COMPANY without cause pursuant to Section 4.1.5, COMPANY shall have no further obligation to EMPLOYEE under this Agreement except to distribute to EMPLOYEE:

1. Any compensation and reimbursable expenses owed by COMPANY to EMPLOYEE through the termination date, less applicable withholdings;
2. Severance compensation totaling three- (3) month's base pay, plus one (1) month base pay for each full year of service, determined at EMPLOYEE's then-current rate of base pay. In consideration for this severance compensation, EMPLOYEE, on behalf of himself, his agents, heirs, executors, administrators, and assigns, expressly releases and forever discharges COMPANY and its successors and assigns, and all of its respective agents, directors, officers, partners, employees, representatives, insurers, attorneys, parent companies, subsidiaries, affiliates, and joint ventures, and each of them, from any and all claims based upon acts or events that occurred on or before the date on which EMPLOYEE accepts the severance compensation, including any claim arising under any state or federal statute or common law, including, but not limited to, Title VII of the Civil Rights Act of 1964, 42 U.S.C. " 2000e, et seq., the Americans with Disabilities Act, 42 U.S.C. " 12101, et seq., the Age Discrimination i n Employment Act, 29 U.S.C. " 623, et. seq., the Worker Adjustment and Retraining Notification Act, 29 U.S.C. " 2101, et. seq., and the California Fair Employment and Housing Act, Cal. Gov't Code " 12940, et seq. EMPLOYEE acknowledges that he is familiar with section 1542 of the California Civil Code, which reads as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

EMPLOYEE expressly acknowledges and agrees that he is releasing all known and unknown claims, and that he is waiving all rights he has or may have under Civil Code Section 1542 or under any other statute or common law principle of similar effect. EMPLOYEE acknowledges that the benefits he is receiving in exchange for this Release are more than the benefits to which he otherwise would have been entitled, and that such benefits constitute valid and adequate consideration for this Release. EMPLOYEE further acknowledges that he has read this Release, understands all of its terms, and has consulted with counsel of his choosing before signing this Agreement.

Severance compensation pursuant to this paragraph shall be in lieu of any other severance benefit to which EMPLOYEE would otherwise be entitled under COMPANY's policies in effect on the date of execution of this Agreement. Severance compensation shall be paid upon termination of EMPLOYEE's employment and in one lump sum payment at the date of termination, less applicable withholdings.

6. Termination Due to Change Of Control. If employment is terminated within twelve (12) months upon any of the events delineated in Section 4.1.6 of this Agreement ("Change of Control"), COMPANY shall have no further obligation to EMPLOYEE under this Agreement except to distribute to EMPLOYEE:

1. Any compensation and reimbursable expenses owed by

COMPANY to EMPLOYEE through the termination date, less applicable withholdings;

ii. A pro-rated share of the cash incentive bonus that would be due to EMPLOYEE if EMPLOYEE had remained employed with COMPANY through the last day of the fiscal year for which the cash incentive bonus is calculated, less applicable withholdings; and

iii. Severance compensation totaling twelve (12) months base pay, plus one (1) month base pay for each full year of service, determined at EMPLOYEE's then-current rate of base pay. In consideration for this severance compensation, EMPLOYEE, on behalf of himself, his agents, heirs, executors, administrators, and assigns, expressly releases and forever discharges COMPANY and its successors and assigns, and all of its respective agents, directors, officers, partners, employees, representatives, insurers, attorneys, parent companies, subsidiaries, affiliates, and joint ventures, and each of them, from any and all claims based upon acts or events that occurred on or before the date on which EMPLOYEE accepts the severance compensation, including any claim arising under any state or federal statute or common law, including, but not limited to, Title VII of the Civil Rights Act of 1964, 42 U.S.C. '' 2000e, et seq., the Americans with Disabilities Act, 42 U.S.C. '' 12101, et seq., the Age Discrimination in Employment Act, 29 U.S.C. ''  623, et seq., the Worker Adjustment and Retraining Notification Act, 29 U.S.C. '' 2101, et seq., and the California Fair Employment and Housing Act, Cal. Gov't Code '' 12940, et seq. EMPLOYEE acknowledges that he is familiar with section 1542 of the California Civil Code, which reads as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

EMPLOYEE expressly acknowledges and agrees that he is releasing all known and unknown claims, and that he is waiving all rights he has or may have under Civil Code Section 1542 or under any other statute or common law principle of similar effect. EMPLOYEE acknowledges that the benefits he is receiving in exchange for this Release are more than the benefits to which he otherwise would have been entitled, and that such benefits constitute valid and adequate consideration for this Release. EMPLOYEE further acknowledges that he has read this Release, understands all of its terms, and has consulted with counsel of his choosing before signing this Agreement.

Severance compensation pursuant to this paragraph shall be in lieu of any other severance benefit to which EMPLOYEE would otherwise be entitled under COMPANY's policies in effect on the date of execution of this Agreement. Severance compensation shall be paid upon termination of EMPLOYEE's employment and in one lump sum payment at the date of termination, less applicable withholdings.

5. REPRESENTATIONS AND WARRANTIES

5.1 Representations of EMPLOYEE. EMPLOYEE represents and warrants that EMPLOYEE has all right, power, authority and capacity, and is free to enter into this Agreement; that by doing so, EMPLOYEE will not violate or interfere with the rights of any other person or entity; and that EMPLOYEE is not subject to any contract, understanding or obligation that will or might prevent, interfere with or impair the performance of this Agreement by EMPLOYEE. EMPLOYEE shall indemnify and hold COMPANY harmless with respect to any losses, liabilities, demands, claims, fees, expenses, damages and costs (including attorneys' fees and court costs) resulting from or arising out of any claim or action based upon EMPLOYEE's entering into this Agreement.

5.2 Representations of COMPANY. COMPANY represents and warrants that it has all right, power and authority, without the consent of any other person, to execute and deliver, and perform its obligations under, this Agreement. All corporate and other actions required to be taken by COMPANY to authorize the execution, delivery and performance of this Agreement and the consummation of all transactions contemplated hereby have been duly and properly taken. This Agreement is the lawful, valid and legally binding obligation of COMPANY enforceable in accordance with its terms.

5.3 Materiality of Representations. The representations, warranties and covenants set forth in this Agreement shall be deemed to be material and to have been relied upon by the parties hereto.

6. COVENANTS

6.1 Nondisclosure and Invention Assignment. EMPLOYEE acknowledges that, as a result of performing the Services, EMPLOYEE shall have access to confidential and sensitive information concerning COMPANY's business including, but not limited to, their business operations, sales and marketing data, and manufacturing processes. EMPLOYEE also acknowledges that in the course of performing the Services, EMPLOYEE may develop new product ideas or inventions as a result of COMPANY's information. Accordingly, to preserve COMPANY's confidential information and to assure it the full benefit of that information, EMPLOYEE shall, as a condition of employment with COMPANY, execute COMPANY's standard form of Employee Confidentiality Agreement attached hereto as Exhibit A, and execute updated versions of the Employee Confidentiality Agreement as it may be modified from time to time by COMPANY and as may be required of similarly-situated executives of COMPANY. The Employee Confidentiality Agreement is incorporated herein by this reference. EMPLOYEE's obligations under the Employee Confidentiality Agreement continue beyond the termination of this Agreement.

6.2 Covenant Not to Compete. In addition to the provisions of the Employee Confidentiality Agreement, EMPLOYEE shall abide by the following covenant not to compete if COMPANY, at its option upon the termination of this Agreement (regardless of the reason for the termination), exercises this Covenant Not to Compete. COMPANY shall notify EMPLOYEE within ten (10) days of termination of this Agreement of its intention to exercise this option and make an additional payment to EMPLOYEE of six (6) months' base pay determined at EMPLOYEE's last rate of pay with COMPANY. EMPLOYEE agrees that for a period of one (1) year following the termination of this Agreement, he shall not directly or indirectly for EMPLOYEE, or as a member of a partnership, or as an officer, director, stockholder, employee, or representative of any other entity or individual, engage, directly or indirectly, in any business activity which is the same or similar to work engaged in by EMPLOYEE on behalf of COMPANY within the same geog raphic territory as EMPLOYEE's work for COMPANY and which is directly competitive with the business conducted or to EMPLOYEE's knowledge, contemplated by COMPANY at the time of termination of this Agreement, as defined in the Employee Confidentiality Agreement incorporated into this Agreement by reference. EMPLOYEE may accept employment with an entity competing with COMPANY only if the business of that entity is diversified and EMPLOYEE is employed solely with respect to a separately-managed and separately-operated part of that entity's business that does not compete with COMPANY. Prior to accepting such employment, EMPLOYEE and the prospective employer entity shall provide COMPANY with written assurances reasonably satisfactory to COMPANY that EMPLOYEE will not render services directly or indirectly to any part of that entity's business that competes with the business of COMPANY.

6.3 Covenant to Deliver Records. All memoranda, notes, records and other documents made or compiled by EMPLOYEE, or made available to EMPLOYEE during the term of this Agreement concerning the business of COMPANY, shall be and remain COMPANY's property and shall be delivered to COMPANY upon the termination of this Agreement or at any other time on request.

6.4 Covenant Not To Recruit. EMPLOYEE shall not, during the term of this Agreement and for a period of one (1) year following termination of this Agreement, directly or indirectly, either on EMPLOYEE's own behalf, or on behalf of any other individual or entity, solicit, interfere with, induce (or attempt to induce) or endeavor to entice away any employee associated with COMPANY to become affiliated with him or any other individual or entity.

7. CERTAIN RIGHTS OF COMPANY

7.1 Announcement. COMPANY shall have the right to make public announcements concerning the execution of this Agreement and certain terms thereof.

7.2 Use of Name, Likeness and Biography. COMPANY shall have the right (but not the obligation) to use, publish and broadcast, and to authorize others to do so, the name, approved likeness and approved biographical material of EMPLOYEE to advertise, publicize and promote the business of COMPANY and its affiliates, but not for the purposes of direct endorsement without EMPLOYEE's consent. An "approved likeness" and "approved biographical material" shall be, respectively, any photograph or other depiction of EMPLOYEE, or any biographical information or life story concerning the professional career of EMPLOYEE.

7.3 Right to Insure. COMPANY shall have the right to secure in its own name, or otherwise, and at its own expense, life, health, accident or other insurance covering EMPLOYEE, and EMPLOYEE shall have no right, title or interest in and to such insurance. EMPLOYEE shall assist COMPANY in procuring such insurance by submitting to examinations and by signing such applications and other instruments as may be required by the insurance carriers to which application is made for any such insurance.

8. ASSIGNMENT

Neither party may assign or otherwise dispose of its rights or obligations under this Agreement without the prior written consent of the other party except as provided in this Section. COMPANY may assign and transfer this Agreement, or its interest in this Agreement, to any affiliate of COMPANY or to any entity that is a party to a merger, reorganization, or consolidation with COMPANY, or to a subsidiary of COMPANY, or to any entity that acquires substantially all of the assets of COMPANY or of any division with respect to which EMPLOYEE is providing services (providing such assignee assumes COMPANY's obligations under this Agreement). EMPLOYEE shall, if requested by COMPANY, perform EMPLOYEE's duties and Services, as specified in this Agreement, for the benefit of any subsidiary or other affiliate of COMPANY. Upon assignment, acquisition, merger, consolidation or reorganization, the term "COMPANY" as used herein shall be deemed to refer to such assignee or successor entity. EMPLOYEE shall not have th e right to assign EMPLOYEE's interest in this Agreement, any rights under this Agreement, or any duties imposed under this Agreement, nor shall EMPLOYEE or his spouse, heirs, beneficiaries, executors or administrators have the right to pledge, hypothecate or otherwise encumber EMPLOYEE's right to receive compensation hereunder without the express written consent of COMPANY.

9. RESOLUTION OF DISPUTES

In the event of any dispute arising out of or in connection with this Agreement or in any way relating to the employment of EMPLOYEE which leads to the filing of a lawsuit, the parties agree that venue and jurisdiction shall be in Santa Barbara County, California. The prevailing party in any such litigation shall be entitled to an award of costs and reasonable attorneys' fees to be paid by the losing party.

10. GENERAL PROVISIONS

10.1 Notices. Notice under this Agreement shall be sufficient only if personally delivered by a major commercial paid delivery courier service or mailed by certified or registered mail (return receipt requested and postage pre-paid) to the other party at its address set forth in the signature block below or to such other address as may be designated by either party in writing. If not received sooner, notices by mail shall be deemed received five (5) days after deposit in the United States mail.

10.2 Agreement Controls. Unless otherwise provided for in this Agreement, the COMPANY's policies, procedures and practices shall govern the relationship between EMPLOYEE and COMPANY. If, however, any of COMPANY's policies, procedures and/or practices conflict with this Agreement (together with any amendments hereto), this Agreement (and any amendments hereto) shall control.

10.3 Amendment and Waiver. Any provision of this Agreement may be amended or modified and the observance of any provision may be waived (either retroactively or prospectively) only by written consent of the parties. Either party's failure to enforce any provision of this Agreement shall not be construed as a waiver of that party's right to enforce such provision.

10.4 Governing Law. This Agreement and the performance hereunder shall be interpreted under the substantive laws of the State of California.

10.5 Force Majeure. Either party shall be temporarily excused from performing under this Agreement if any force majeure or other occurrence beyond the reasonable control of either party makes such performance impossible, except a Disability as defined in this Agreement, provided that the party subject to the force majeure provides notice of such force majeure at the first reasonable opportunity. Under such circumstances, performance under this Agreement which related to the delay shall be suspended for the duration of the delay provided the delayed party shall resume performance of its obligations with due diligence once the delaying event subsides. In case of any such suspension, the parties shall use their best efforts to overcome the cause and effect of such suspension.

10.6 Remedies. EMPLOYEE acknowledges that because of the nature of COMPANY's business, and the fact that the services to be performed by EMPLOYEE pursuant to this Agreement are of a special, unique, unusual, extraordinary, and intellectual character which give them a peculiar value, a breach of this Agreement shall cause substantial injury to COMPANY for which money damages cannot reasonably be ascertained and for which money damages would be inadequate. EMPLOYEE therefore agrees that COMPANY shall have the right to obtain injunctive relief, including the right to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction, in addition to any other remedies that COMPANY may have.

10.7 Severability. If any term, provision, covenant, paragraph, or condition of this Agreement is held to be invalid, illegal, or unenforceable by any court of competent jurisdiction, that provision shall be limited or eliminated to the minimum extent necessary so this Agreement shall otherwise remain enforceable in full force and effect.

10.8 Construction. Headings and captions are only for convenience and shall not affect the construction or interpretation of this Agreement. Whenever the context requires, words, used in the singular shall be construed to include the plural and vice versa, and pronouns of any gender shall be deemed to include the masculine, feminine, or neuter gender.

10.9 Counterpart Copies. This Agreement may be signed in counterpart copies, each of which shall represent an original document, and all of which shall constitute a single document.

10.10 No Adverse Construction. The rule that a contract is to be construed against the party drafting the contract is hereby waived, and shall have no applicability in construing this Agreement or the terms hereof.

10.11 Entire Agreement. With respect to its subject matter, namely, the employment by COMPANY of EMPLOYEE, this Agreement (including the documents expressly incorporated therein, such as the Employee Confidentiality Agreement), contains the entire understanding between the parties, and supersedes any prior agreements, understandings, and communications between the parties, whether oral, written, implied or otherwise, including, but not limited to, the original offer of employment letter.

10.12 Assistance of Counsel. EMPLOYEE expressly acknowledges that he was given the right to be represented by counsel of his own choosing in connection with the terms of this Agreement.

The parties execute this Agreement as of the date stated above:

CLARKE SCHERFF MENTOR CORPORATION

/S/CLARKE SCHERFF /S/CHRISTOPHER J. CONWAY

Christopher J. Conway

President and Chief Executive Officer

NOTICE ADDRESS: NOTICE ADDRESS:

5540 Pineglen Road 201 Mentor Drive

La Cresenta, California 91214 Santa Barbara, California 93111