Shareholder's Letter

Fiscal 2006 was an extremely eventful year for Mentor Corporation. During the year, we established a new strategic direction - one that moves us away from the company’s historical roots in the urology business. After careful analysis and review, we decided to divest our urology business and focus all of our resources on the dynamic and profitable field of aesthetic medicine, a field where we have already established a leadership position. According to the American Society for Aesthetic Plastic Surgery, Americans spent approximately $12.4 billion on cosmetic procedures in 2005. In addition,

  • The Society reported that there were more than 11.5 million aesthetic procedures performed in the U.S. in 2005 with liposuction (455,489 procedures) and breast augmentation (364,610 procedures) the number one and two most frequently performed cosmetic surgical procedures.

  • While the annual number of surgical cosmetic procedures has increased 119% since 1997, the number of non-surgical procedures, which includes dermal filler and botulinum toxin injections, has grown by an even greater 726%.

  • Injectable dermal filler and botulinum toxin procedures grew 35% and 19%, respectively, over 2004. When combined, there were almost 4.5 million of these non-invasive facial cosmetic procedures performed in 2005.

We believe that Mentor is well positioned to capture significant opportunities across both the surgical and non-surgical spectrum of cosmetic procedures. While our shift in strategic direction was clearly the major story of fiscal 2006, there were other significant milestones and accomplishments worth noting:

  • We reached an agreement to divest the urology business for a total consideration of $463 million;

  • We received an approvable letter with conditions from the FDA for our MemoryGel™ silicone gel breast implant PMA application;

  • We began the Phase 2 dose-finding study for our botulinum toxin type A product for cosmetic indications and completed patient enrollment;

  • We launched our Puragen™ hyaluronic acid-based injectable dermal filler internationally;

  • We launched our Moderate Plus Profile saline-filled breast implant line in the U.S.;

  • We completed a new 3-year syndicated credit agreement that provides up to $250 million in borrowing capacity;

  • We expanded our stock repurchase program by an incremental authorization of 5 million shares and retired a million shares through repurchase;

  • We declared total dividends of $0.71 per share; and

  • We established a relationship to distribute the NIA-24 line of science-based cosmeceutical products into the plastic surgery and dermatology channels.

Operating Results

Consistent with the applicable financial reporting rules, our financial statements report the results for our former Urology business as discontinued operations. For the full year, Mentor’s total sales for continuing and discontinued business segments were $503.7 million. Sales from continuing operations, which is comprised of sales from the aesthetic medicine business segment, were $268.3 million, an increase of 7% over the prior year. Fully diluted GAAP earnings per share were $1.29 for fiscal year 2006 versus $1.17 for fiscal year 2005. From a balance sheet perspective, we ended fiscal year 2006 with $201 million in cash and marketable securities, an increase of approximately $88 million over fiscal year 2005.

During fiscal 2006, we had two of our long time directors retire - Dr. Richard W. Young and Eugene G. Glover. Gene was one of Mentor’s three original founders in 1969 and had served continuously as a board member since the company’s founding. Dick Young had served as a member of Mentor’s board since 1990 when he was Chairman and Chief Executive Officer of an ophthalmology medical products company that Mentor acquired, Mentor O&O, Inc. The contribution and guidance provided by Dick and Gene helped drive a longstanding record of success at Mentor. On behalf of the Board of Directors and all of Mentor’s employees, I want to express our gratitude for the contributions made by Dick and Gene to Mentor and wish them the best in their well-earned retirement.

As we look forward, we are excited about the prospects for our business. We have a clear, focused direction to pursue our goals of expanding in aesthetic medicine, a market with strong patient demographics. We believe that we have the unique opportunity to leverage our existing strengths in plastic surgery and further solidify our leadership position.

Our development pipeline offers significant opportunities to broaden our portfolio of aesthetic products and create greater value for our business. This future facial aesthetic portfolio which includes PurTox™, our proprietary botulinum toxin, and Puragen, our injectable hyaluronic acid, will allow us to increase our product offering in the plastic surgery channel, as well as expand into the fast growing market of cosmetic dermatology.

We accomplished a great deal in fiscal 2006 to strategically reposition our business and believe we are on the right path to building a faster growing, more profitable company going forward. I want to thank our Board of Directors for their continued guidance and all of the Mentor employees around the world for their continued commitment in fiscal 2006. Finally, we want to thank you - our shareholders for your loyalty and continued support.

Sincerely,

Joshua H. Levine
President and Chief Executive Officer