MENTOR CORP /MN/, 10-K, 1995-06-29

MENTOR CORP /MN/
10-K, 1995-06-29
ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended March 31, 1995

Commission File No. 0-7955

MENTOR
CORPORATION

Mentor Corporation
5425 Hollister Avenue
Santa Barbara, California 93111
Telephone: 805/681-6000

A Minnesota Corporation I.R.S. Employer Identification No. 41-0950791

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 X No

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. X

The aggregate market value of the voting stock of the Company held by
non-affiliates as based upon the closing National Market System sale price on
June 27, 1995 was $292,884,525.

Number of Common Shares outstanding on June 27, 1995: 11,660,745.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's Proxy Statement for its 1995 Annual Meeting are
incorporated by reference in Part III.
<PAGE>

PART I

ITEM 1. BUSINESS.

General

The Company develops, manufactures and markets a broad range of products
for the medical specialties of plastic and reconstructive surgery, urology and
ophthalmology. Plastic surgery products include surgically implantable
prostheses for cosmetic and reconstructive surgery, principally breast implants
and tissue expanders. Urologic products include: disposable products for the
management of urinary incontinence; surgically implantable prostheses,
principally penile implants for the treatment of chronic male sexual impotence;
and diagnostic ultrasound equipment, used to help diagnose disorders of the
prostate. Ophthalmic products include: intraocular lenses, used for replacement
of a lens following cataract surgery, surgical equipment, primarily coagulators
used to control bleeding during ophthalmic and other microsurgery, and
diagnostic equipment, used to evaluate disorders of the eye.

Since 1989, the Company has incorporated or acquired several companies to
help diversify the Company's interests in the medical industry. In April 1990,
the Company acquired all of the outstanding shares of Mentor O&O, Inc. Despite
the similarity in name, Mentor O&O had not previously been affiliated with the
Company. Mentor O&O develops, manufactures and markets ophthalmic surgical and
diagnostic products. In October 1990, the Company purchased substantially all of
the assets, plus assumption of normal liabilities, of Teknar, Inc., which
supplies diagnostic ultrasound equipment for the specialties of urology and
ophthalmology. Both Mentor O&O and Teknar are 100% owned by Mentor Corporation.

In July 1991, the Company incorporated Mentor H/S, Inc. as a wholly owned
subsidiary and transferred to it all of the product lines and assets of its
existing plastic surgery business. In January 1994, the Company similarly
incorporated Mentor Urology, Inc. as a wholly owned subsidiary and transferred
to it all of the product lines and assets of its existing urologic business. In
January 1990, Mentor Polymer Technologies Company was incorporated to develop,
manufacture and distribute medically oriented materials.

During fiscal 1991, the Company established four international sales
offices to enhance and grow its market position in these countries. The office
in Canada operates as a sales branch of Mentor Corporation. Mentor Medical
Systems UK, Ltd., Mentor Deutschland, GmbH, and Mentor Medical Systems, Pty,
Ltd. (Australia) are all subsidiaries of Mentor Corporation.
<PAGE>

In November 1993, the Company established Mentor Medical Systems, B.V. in
Leiden, the Netherlands, to further its expansion into the international
marketplace. This is the Company's manufacturing and research & development
facility outside the United States.

In October 1994, the Company purchased certain assets and assumed certain
related liabilities from Optical Radiation Corporation and ORC Caribe. Such
assets comprised substantially all activities and operations of the intraocular
lens line of business previously conducted by Optical Radiation and ORC Caribe.
The Company established Mentor ORC, Inc. and Mentor Caribe, Inc. for the
acquisition of the assets acquired from Optical Radiation and ORC Caribe.

Principal Products and Markets

The Company strives to utilize its product design and marketing
capabilities, and its close working relationships with health care
professionals, to introduce products that provide superior performance
characteristics in growing markets. Because many of the Company's products
provide greater customer benefits, they generally are sold at premium prices.
However, the cost effectiveness of the Company's product in the overall
treatment of the patient is a primary consideration in new product development.
Following is a description of the Company's principal product lines and the
markets for them.

Plastic Surgery Products

The Company produces an extensive line of implants for cosmetic and
reconstructive surgery, including a line of breast implants, skin and tissue
expanders and facial and dermal implants.

Mammary prostheses may be implanted to achieve breast reconstruction
following total or partial removal (mastectomy) or to enhance breast size and
shape in cosmetic surgery. Breast reconstruction is possible for most patients
undergoing a mastectomy, either at the time of the original surgery or at a
later date.

The Company produces a broad line of mammary prostheses, including: saline
filled implants, silicone gel filled implants and an exclusive product, the
Becker(TM) expandable implant used specifically for breast reconstruction.
Mammary prostheses comprise over 90% of total plastic surgery product sales.
Saline filled breast implants accounted for over 80% of mammary prostheses sold
in fiscal 1995.
<PAGE>

By offering a combination of different types of implants in a variety of
different shapes and sizes and surfaces, the physician is able to select the
product most appropriate for the patient.

In conjunction with the settlement of its outstanding product liability
litigation, the Company had agreed to cease marketing silicone gel filled breast
implants within eighteen months after final Federal Court approval. This would
have been approximately April 1995. See Item 3 "Legal Proceedings" for a further
discussion. However, according to the terms of the settlement, if the plaintiffs
enter into a settlement agreement with other manufacturers which allows any
other company to remain in the market to manufacture and sell silicone gel
breast implants, then the Company will be allowed to continue the manufacture
and sale of these products.

It is the Company's understanding that the global settlement agreement
between the plaintiffs and Dow Corning and other manufacturers will allow
companies to remain in the silicone gel breast implant market. As a result the
Company is continuing to sell its silicone gel filled breast implants. The
Company is also currently developing gel-like alternatives to silicone. Ultimate
availability of such a new product in the domestic market will depend upon
approval by the FDA.

The Company offers a patented line of skin and 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 reconstruction, and the elimination of
disfigurements such as burns, massive scars and facial deformities.

Urology Products

The Company's Urology products fall into three general categories of
products: urologic implants, disposable health care products and urologic
ultrasound.

Urologic Implants and Potency Devices. The Company offers a broad line of
implantable urological products, including a line of penile implants for the
treatment of male sexual impotence; vacuum constriction devices, used as a first
line non-surgical treatment for impotence; and endourological stents and drains.

Penile prostheses, which accounted for over 80 percent of the Company's
urological implant sales in fiscal 1995, are implanted in men who cannot achieve
a natural erection of sufficient rigidity for sexual intercourse. In order to
respond to various physician and patient preferences, the Company manufactures
several types of penile prostheses, including two types of hydraulic inflatable
devices and two versions of a malleable prosthesis.
<PAGE>

For several years, alternative treatment methods for male impotence have
become increasingly popular. These include injection therapy and vacuum
constriction devices. These modes of treatment have been used extensively as a
first line of treatment due to their lower cost and less invasive nature. The
Company began marketing a vacuum constriction device in fiscal 1991. The vacuum
system works by creating a vacuum around the penis, causing blood to engorge the
corpora cavernosa, simulating a natural erection. The Company expects that
alternative treatment methods to permanent implants will remain an integral part
of the marketplace in the future.

Endourological stents and drains are used in conjunction with endoscopic
surgical procedures to treat kidney and other urological problems without major
invasive surgery. A major application for stents is associated with electroshock
wave lithotripsy for the non-surgical removal of kidney stones.

For several years the Company has been pursuing approval on a new urology
product, named Urethrin(TM), which is an injectable implant for the treatment of
urinary incontinence. The FDA is currently requiring the Company to submit
additional clinical data before Urethrin can be approved for marketing. The
Company has agreed with the FDA on a protocol for these clinical studies, and
will begin enrolling patients in fiscal 1996. The Company does not expect final
FDA action for at least a year. There can be no assurance as to when, if ever,
final approval will be given.

In addition to the United States market, the Company has submitted
applications for approval of Urethrin to a number of foreign regulatory
agencies. In November 1993, the Canadian Health and Welfare department approved
Urethrin for marketing in Canada. Shipments to Canada, on a limited clinical
basis, began in fiscal 1995. Initial marketing to Canada is expected to begin
early in fiscal 1996.

Health Care Products. The National Institute of Health estimates that, due
to a variety of causes, ten million men, women and children in the United States
suffer from urinary incontinence or retention--the inability to control the flow
of urine. The Company produces several proprietary, special purpose, disposable
external catheters used in homes, hospitals and extended care facilities for the
management of urinary incontinence or retention.

The Company also markets a variety of other disposable health care products
used in the management of urinary incontinence. These include leg bags and urine
collection systems, organic odor eliminators, and moisturizing skin creams and
ointments.

Urologic Ultrasound. Cancer of the prostate is a serious medical problem in
the United States. It is estimated that 10% of the male population over 50 years
of age are at risk to develop both benign and malignant prostate problems. The
<PAGE>

Company markets a dedicated transrectal ultrasound system that can be used to
help diagnose and stage cancer of the prostate.

The Company also offers a number of ancillary products, including a seeding
station for ultrasound-guided radioactive seed implantation in the treatment of
prostate cancer, a general use body probe for kidney and bladder imaging and a
biopsy guide, used to take very accurate samples of potential cancerous tissue.

Ophthalmology Products

Mentor O&O, the Company's ophthalmic subsidiary, markets surgical and
diagnostic products.

Surgical products are used mainly in cataract surgery and other
microsurgery of the eye. In October 1994, the Company acquired the intraocular
lens (IOL) product line of Optical Radiation Corporation, a subsidiary of Benson
Eyecare Corporation. Intraocular lenses are used for corrective vision following
cataract removal surgery. Other surgical products include coagulators used to
control bleeding during surgery. This is accomplished by equipment which
generates radio frequency energy and a hand-held disposable instrument which
delivers it to the surgical site. The Company also sells a line of surgical
wipes and sponges.

In fiscal 1992, the Company introduced the Odyssey(TM) phacoemulsification
system, which uses ultrasound to emulsify (dissolve) cataracts. The Odyssey
incorporates several unique design features which make it smaller and less
costly than most competitive products. This compact system eliminates the need
for an expensive, bulky cart and takes up less space in the operating room. In
addition, the system allows phacoemulsification and irrigation/aspiration to be
done at low flow rates. This greatly reduces turbulence in the eye and enhances
surgeon control during the procedure.

The Company's line of diagnostic products include a variety of equipment
used in routine eye exams and the diagnosis of cataracts and other disorders of
the eye. They include a visual acuity tester, a computerized video system that
can replace and enhance conventional eye chart systems; tonometry products,
which measures the intraocular pressure of the eye, which aids in the diagnosis
of glaucoma, and ophthalmic ultrasound.

During fiscal 1995, the Company made a strategic decision to concentrate
its efforts in the ophthalmic surgical market. The majority of the Company's
diagnostic products, such as the tonometry and ultrasound products, are integral
to this effort. However, several of the Company's smaller diagnostic product
lines, which deal more exclusively with visual testing, do not fit this strategy
and have been discontinued. These include the potential acuity meter, indirect
<PAGE>

ophthalmoscopes and a brightness acuity tester. These products accounted for
approximately $1.5 million in sales in fiscal 1995.

In all its products, the Company stresses low-cost and innovation aimed at
improving office and surgical productivity. By offering a wide variety of
products, the Company believes it has established a good working relationship
with both ophthalmologists and optometrists.

Summary of 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,

1995 1994 1993

(Dollars in thousands)

Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>

Plastic surgery products $62,964 43% $49,272 40% $45,272 40%
Urology products 53,638 37% 51,199 41% 48,643 42%
Ophthalmology products 29,792 20% 23,115 19% 21,061 18%

$146,394 100% $123,586 100% $114,976 100%
</TABLE>

Marketing

The Company employs four specialized domestic direct sales forces for its
cosmetic surgery, urologic implants, health care and ophthalmology product
lines, respectively. Each group provides product orientation and support and
related service to physicians, nurses and other health care professionals.
Reliance upon a direct sales force enables the Company to maintain active and
continuous communication with leading health care professionals in order to
identify emerging growth markets and opportunities for improved products and
product extensions.

The Company also markets certain products, particularly its health care
products, through an extensive domestic network of independent hospital supply
dealers and health care distributors, and increasingly through retail
pharmacies. In addition, the Company utilizes several major domestic health care
equipment dealers to market several of its ophthalmic products.

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

The Company exports most of its products, principally to Canada and Western
Europe. Products are sold to both independent distributors as well as through
the Company's own foreign direct sales offices. For the years ended March 31,
1995, 1994 and 1993, export sales to distributors were $21,243,000, $19,582,000
and $16,652,000, respectively. The Company's domestic sales and foreign sales
are approximately equal in profitability. Other than sales through the Company's
international sales offices, export sales have been made in United States
dollars and currency fluctuations have not constituted significant risks.

The Company has four international sales offices in Canada, the United
Kingdom, Germany and Australia. These offices warehouse product and sell through
a direct sales force in each country. The offices currently sell primarily
cosmetic and reconstructive surgery implants and urology implants. Sales are
made in the local currency of the host country. The Company feels that a local
presence in key countries will better help the Company to capitalize on the
growing international market for medical products. The Company made net sales
from these offices of $11,287,000, $9,329,000 and $9,105,000 during fiscal 1995,
1994 and 1993, respectively. The Company anticipates opening additional direct
sales offices during fiscal 1996 in France and the Netherlands.

In general, the Company maintains sufficient inventories of finished goods
both domestically and internationally to support immediate shipment of products
upon receipt of a customers order. From time to time, however, a back-order
situation may develop due to increased demand for a product or special
circumstances, such as regulatory restrictions. See "Manufacturing" for a
further discussion.

During the year ended March 31, 1995, no customer accounted for more than
10% of the Company's revenues.

Competition

The Company believes it is one of the leading suppliers in the United
States of implantable urology and cosmetic and reconstructive surgery products
and of disposable catheter products, based upon independent research studies of
market share. Many of the Company's products are premium-priced.

The Company currently competes with only one other company in the
inflatable penile market, American Medical Systems, Inc. (a subsidiary of
Pfizer, Inc.). Several implants compete with the Company's 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 which stress high performance and
reliability, it can successfully respond to various physician and patient
preferences.
<PAGE>

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

By careful design and active marketing of catheters and other disposable
health care products, the Company has been able to compete successfully against
larger companies. The Company, C.R. Bard, Inc., Hollister, Inc., E.R. Squibb &
Son, Inc., Coloplast, Inc. and Sherwood Medical are the dominant firms in the
market. As with many of the Company's other product lines, the Company competes
primarily on the basis of design and performance, and by providing product
orientation, support and related service to health care professionals and
consumers.

In the ophthalmic device market, companies compete primarily on the basis
of product quality and technology, service, reliability and price. By offering
unique, proprietary products and a broad range of niche products, the Company is
able to compete against larger companies. Various competitors include Allergan,
Inc., Canon, Inc., Nikon Inc., Alcon Laboratories Inc. (a subsidiary of Nestle
S.A.), Johnson and Johnson and Storz Instrument Co. (a division of American
Cyanamid Co.).

While the Company believes it competes successfully in its markets, many of
its competitors have substantially greater financial, technological and
marketing resources.

Government Regulation

Under the "Medical Device Amendments of 1976" (the "Medical Device Act"),
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 approval prior to clinical evaluation of human use; (iv)
permit detailed inspections of device manufacturing facilities; (v) establish
"good manufacturing practices" that must be followed in device manufacture; (vi)
require reporting of product defects to the FDA; and (vii) prohibit device
exports that do not comply with the Medical Device Act unless they comply with
established foreign regulations, do not conflict with foreign laws, and the FDA
and the health agency of the importing country determine export is not contrary
to public health. All of the Company's products are "medical devices intended
for human use" within the meaning of the Medical Device Act and are therefore
subject to FDA regulation.
<PAGE>

The Medical Device Act establishes complex procedures for compliance based
upon FDA regulations that designate devices as Class I (general controls, such
as compliance with labeling and record keeping requirements), Class II
(performance standards in addition to general controls) or Class III (pre-market
approval application "PMAA" before commercial marketing). Class III devices are
the most extensively regulated because the FDA has determined they are
life-supporting, are of substantial importance in preventing impairment of
health, or present a potential unreasonable risk of illness or injury. The
effect of classifying a device into Class III is to 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 plastic surgery and
urology implants, along with intraocular lenses, are in Class III, while most of
its disposable health care products, ophthalmology products and urological
ultrasound products are in Class I.

In April 1991, the FDA issued a final ruling requiring all manufacturers of
silicone gel filled mammary prostheses to file PMAAs for each specific mammary
prosthesis they intend to market with the FDA within 90 days after the effective
date of the regulation, or cease sale and/or distribution of their products.
PMAAs for any device, such as breast implants, which predates the 1976 Medical
Device Act, are required to be called by the FDA by December 1995. These
applications needed to include a substantial amount of test and statistical
data, including the results of laboratory, animal and clinical investigation and
testing. In July 1991, the Company submitted applications to the FDA relating to
three types of silicone gel filled implants. These included two implants which
are primarily used for cosmetic augmentation and the Becker post-mastectomy
reconstructive device.

In November 1991, the Company presented its applications to the FDA's
outside advisory panel on plastic surgery products. The purpose of this panel
was to make recommendations to the FDA on whether or not the FDA should approve
the applications. The panel concluded that there are insufficient data to
establish with reasonable certainty that silicone gel filled breast implants are
safe and effective. However, the panel voted unanimously that there is a public
health need for these types of implants, recommending that the FDA allow them to
remain on the market while the manufacturers continue to compile additional data
on their safety and effectiveness.

On January 6, 1992, the FDA requested that all United States manufacturers
voluntarily cease manufacturing and marketing these devices and that surgeons
refrain from implanting these products, pending review of additional information
by the advisory panel. The Company complied with this voluntary request. The
information that the FDA was apparently concerned about was the potential
relationship between silicone gel implants and auto immune diseases.
<PAGE>

The panel reconvened in February 1992. The panel stated that there has not
been established a cause and effect relationship between silicone gel filled
implants and immune related and connective tissue disorders. The panel believed
that further long term studies were needed to establish with certainty that gel
implants are safe and effective. It recommended that gel implants for cosmetic
augmentation be restricted to limited, controlled clinical studies, while
implants for reconstruction continue to be available to all women who need them.

In April 1992, the FDA announced that it was adopting the recommendations
of the panel. The FDA indicated it was denying the pending applications for the
use of breast implants for augmentation but would provide for the continued
availability of the implants for reconstruction purposes on the basis of a
public health need. In order to obtain silicone gel filled implants for use in
reconstruction, including the Becker device, women will be enrolled in clinical
studies for future follow-up. Patients will be required to sign an informed
consent form and physicians will have to certify that saline implants are not a
satisfactory alternative. The Company resumed shipments of these products under
the terms of this clinical study during the first quarter of fiscal 1993. In May
1992, the FDA granted the Company permission to export silicone gel filled
breast implants to those foreign countries requesting them.

To comply with the Medical Device Act, the Company has incurred, and will
continue to incur, substantial costs relating to laboratory and clinical testing
of new products and the preparation and filing of documents in the formats
required by the FDA. From time to time 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. 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 FDA has published a schedule which permits
the data required for the PMAA to be submitted in phases, beginning with
preclinical data due in 1995 and ending with final submission of prospective
clinical data in 1998. The Company intends to submit its PMAAs in a timely
fashion. The Company has begun to collect the data which will be necessary for
these applications. Although the Company believes its data should be sufficient
to satisfy FDA requirements, approval cannot be assured. Should the Company's
PMAAs be denied, it would have a material adverse effect on the Company's
operations and financial position.

Medical device laws and regulations similar to those described above are
also in effect in some of the 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.
<PAGE>

As a manufacturer of medical devices, the Company's manufacturing processes
and facilities are subject to continuing review by the FDA and various state
agencies to insure compliance with good manufacturing practices. In certain
states, primarily Texas, the Company is also subject to regulation by the local
Air Pollution Control District and the United States Environmental Protection
Agency as a result of some of the chemicals used in its manufacturing process.

Health Care Cost Containment

The cost of a significant portion of medical care in the United States is
funded by government and private insurance programs, such as Medicare and
corporate health insurance plans. Accordingly, third parties, rather than
patients, frequently pay all or a substantial portion of the costs of goods and
services delivered by health care providers. Except for breast and facial
implants used in cosmetic surgery and augmentation, the Company's medical
products are generally eligible for coverage under many of these third-party
reimbursement programs. The Company believes that eligibility for third-party
reimbursement can be an important factor in the success of medical products,
particularly in situations where there are competing products or treatments that
are also eligible for such reimbursement. Therefore, the Company attempts when
feasible to obtain eligibility of its products for such reimbursement.

Reimbursement plans, whether through government funded Medicare or private
third-party insurers, are developing increasingly sophisticated methods of
controlling health care costs through prospective reimbursement programs,
capitation programs, group buying, redesign of benefits, requirement of a second
opinion prior to major surgery, careful review of bills, encouragement of
healthier lifestyles and exploration of more cost-effective methods of
delivering health care.

These types of programs can potentially limit the amount which health care
providers may be willing to pay for medical products. In the past, the Company
has encountered instances in which reimbursement for some of its products,
particularly its hydraulic inflatable penile prosthesis was denied. The Company
has been successful in the majority of cases to get reimbursement for these
products reinstated. However, there can be no assurance that such instances will
not reoccur in the future. Any such occurrence may have a detrimental effect on
sales of the affected products.

Product Development

At March 31, 1995, the Company employed 81 people engaged in full-time
research and development. The Company expects to introduce new or improved
<PAGE>

products during fiscal 1996 in many of its principal product lines, including
mammary prostheses, ophthalmology and health care.

The Company believes its future growth will continue to depend in part upon
the introduction of new products that provide superior benefits, command premium
prices and have significant growth potential. The Company works closely with
health care professionals to ensure new product development is responsive to the
needs and concerns of health care professionals and their patients.

During fiscal 1995, 1994 and 1993, the Company spent a total of
$10,295,000, $9,137,000 and $6,944,000 respectively, for research and
development.

Patents and Licenses

It is the Company's policy to actively seek patent protection for its
products when appropriate. The Company's patents include patents relating to its
penile prostheses, tissue expanders, combination breast implant and tissue
expander, disposable catheters disposable coagulators, and visual acuity
testers.

All of the patents relating to products which produce significant revenues
have at least two years remaining until expiration. While the Company believes
its patents are valuable, it has been the Company's experience that the
knowledge, experience and creativity of its product development and marketing
staffs, and trade secret information with respect to manufacturing processes,
materials and product design, have been at least as important in maintaining
proprietary product lines. As a condition of employment, the Company requires
each of its employees to execute an agreement relating to confidential
information and patent rights.

Product Liability and Warranties

The Company attempts to conduct its product development, manufacturing,
marketing and service and support activities with careful regard for the
consequences to patients. The Company occasionally receives communications from
surgeons or patients with respect to various products claiming the products are
defective and have resulted in injury to the patient. It is the Company's policy
to replace any products claimed to have malfunctioned within a reasonable time
after sale. In the case of the Company's inflatable penile prostheses, the
Company will replace a unit after implantation upon request of the surgeon for
any reason. For the saline filled mammary prosthesis, the Company will provide a
no charge replacement in the event the prosthesis deflates. The Company provides
a limited warranty on certain of its capital equipment products against defects
<PAGE>

in workmanship and material. Estimated warranty costs are provided at the time
of sale and periodically adjusted to reflect actual experience.

Manufacturing

The Company's manufacturing facilities have been designed to accommodate
the specialized requirements for the manufacture of medical devices, including
the FDA's regulations concerning good manufacturing practices, with segregated
shipping and storage areas, production quarantine areas and, where necessary,
clean rooms having separate air filtering systems for sterile production. The
facilities also include recovery and control equipment required to maintain
compliance with applicable environmental laws and regulations.

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.

In the last two years, certain suppliers of raw materials, such as Dow
Corning, DuPont and others, announced that they will no longer supply implant or
medical grade materials for products in several markets related to reproduction,
contraception, obstetrics or cosmetic surgery, due to what they perceive as a
product liability risk in excess of the potential economic benefits of providing
these materials. Certain of the Company's products, principally breast implants
and penile implants, incorporate materials supplied by these companies. Under
guidelines established by the FDA, the Company has been successful in replacing
these materials with those being offered by other companies willing to supply
device manufacturers. The prices the Company pays for many of these replacement
materials is substantially higher than with its previous vendors. These sources
of supply are relatively new, and there can be no assurance that they will be
able to supply the Company in the quantities needed, or that regulatory or other
delays will not cause a disruption in sales of affected products. The Company
believes its supply of raw materials is adequate for the current fiscal year.
<PAGE>

Employees

As of March 31, 1995, the Company employed 1,187 people of whom 741 were in
manufacturing, 225 in sales and marketing, 81 in research and development and
140 in finance and administration. None of the Company's employees are
represented by a union. There has never been a work stoppage due to labor
difficulties, and the Company considers its relations with its employees to be
satisfactory.

ITEM 2. PROPERTIES.

The Company owns manufacturing, warehouse and office buildings in
Minneapolis, Minnesota (127,000 square feet). During fiscal 1995, the Company
sold its Stewartville, Minnesota location, which contained 30,000 square feet.
This facility had been closed in 1994 when its operations were consolidated into
the Minneapolis location. A portion of the Minneapolis facility serves as
security for the Company's outstanding industrial revenue bond, which
represented $146,000 of the Company's long-term debt at March 31, 1995.

The Company leases additional office, manufacturing and warehouse
facilities in Santa Barbara, California (40,000 square feet), Goleta, California
(19,000 square feet), Irving, Texas (109,000 square feet), Norwell,
Massachusetts (57,000 square feet) and Leiden, the Netherlands (6,500 square
feet). The Company's international sales offices, located in Australia, Canada,
Germany and the United Kingdom, lease office and warehouse space ranging from
2,000 to 5,800 square feet. All leases have terms ranging from four to ten
years, renewable on terms the Company considers favorable.

During fiscal 1994, the Company transferred its St. Louis operation to the
Company's Minneapolis facility. The lease on the St. Louis facility was
terminated in fiscal 1995. The Company completed the relocation of its Goleta
manufacturing facility to the Texas location during fiscal 1995. The lease on
this 78,000 square foot facility was terminated in 1995. In order to accommodate
certain warehouse needs and expanded office requirements, the Company leased a
19,000 square foot facility in Goleta during fiscal 1995.

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

ITEM 3. LEGAL PROCEEDINGS.

A. Claims related to product liability are a regular and ongoing aspect of
the medical device industry. At any one time, the Company has claims involved in
litigation. The Company has carried product liability insurance on all its
products, including breast implants, subsequent to May 1991 and prior to
September 1985. From June 1992 on, such insurance has excluded silicone gel
filled breast implants. This insurance is subject to certain self-insured
retentions and limits of the policy. 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, subject to certain
limits, exclusions, and deductibles which the Company believes to be
appropriate.

As a result of the controversy and related media coverage surrounding
silicone gel filled breast implants, the Company became involved in a
substantial amount of product liability litigation in fiscal 1992 and 1993.
These cases alleged design and marketing defects, failure to warn, breach of
implied and express warranties, emotional distress and gross negligence in
connection with silicone gel filled breast implants manufactured by the Company.
The complaints sought unspecified damages for medical expenses, loss of
earnings, prejudgment interest and punitive damages.

During fiscal 1994, the Company reached an agreement with the Federal
Multi-District Litigation Plaintiffs Steering Committee which settled all
outstanding breast implant litigation and claims against the Company. The
agreement established a settlement fund of $25.8 million, to be funded by the
Company and its insurers. The agreement, in which the Company denied any
wrongdoing or legal liability, covers all women who have received a silicone gel
or saline filled breast implant manufactured by the Company from March 1984 (the
date at which the Company first entered the business) through June 1, 1993.
Under the terms of the agreement, the Company made payments of $2.0 million in
May 1993, $8.7 million in November 1993 and $4.5 million in September 1994. The
November payment was funded out of insurance reimbursements. Additional payments
of $5.3 million are due in September 1995 and 1996.

The agreement was approved by the Federal Court, which certified a
mandatory class of persons, who have or may have any existing or future claim,
including claims for injuries not yet known, under any federal or state law,
based upon having received a silicone gel or saline filled breast implant prior
to June 1, 1993.
<PAGE>

B. On April 22, 1991, a class action lawsuit was filed by a shareholder of
the Company against the Company and its Chairman, in the United States District
Court for the Central District of California. That action, Oded Weiss v. Mentor
Corp. & Christopher J. Conway, USDC No. 91 2163 RJK, essentially alleges that
the Company and its Chairman made untrue statements of material fact or failed
to disclose material facts concerning the Company's Urethrin product, all in
violation of federal securities laws. The plaintiff seeks, on his behalf and on
behalf of the class, which includes all purchasers of Company stock from January
9, 1991 through April 14, 1991,(both dates inclusive), general damages and
unspecified "extraordinary equitable and/or injunctive relief", as well as
costs, attorneys' fees and pre- and post-judgment interest. In January 1992, a
court order was filed dismissing without prejudice the actions against
Christopher J. Conway. Mentor Corporation remained a defendant in this action.

On September 30, 1994, the Company reached an agreement to settle this
lawsuit. Under the agreement, in which the Company denied any wrongdoing or
legal liability, the Company gave the plaintiffs $1 million in cash and issued
them 50,000 shares of Common Stock. The Agreement was approved by the Court in
March 1995.

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

None.

ITEM 4A.EXECUTIVE OFFICERS OF THE REGISTRANT.

The executive officers of the Company are as follows:

Name Age Position

Christopher J. Conway 56 Chairman of the Board, Chief Executive
Officer and Director
Anthony R. Gette 39 President, Chief Operating Officer,
Secretary and Director
Dennis E. Condon 46 President, Mentor H/S, Inc.
Karen H. Edwards 48 Vice President, Regulatory and Legal
Affairs and Quality Assurance
William M. Freeman 56 President, Mentor O&O, Inc.
Gary E. Mistlin 43 Vice President of Finance/Treasurer and
Chief Financial Officer
Bobby K. Purkait 45 Vice President of Research & Development
Spencer M. Vawter 58 President, Mentor Urology, Inc.
<PAGE>

Mr. Conway is a founder of the Company and served as its President, Chief
Executive Officer and Chairman of the Board of Directors from its inception to
April 1987. Mr. Conway currently serves as Chief Executive Officer and Chairman
of the Board of Directors.

Mr. Gette joined the Company in December 1980 as its Corporate Controller
and has served in various executive capacities since that time. He became Vice
President, Finance in September 1983, Executive Vice President in September 1986
and President and Chief Operating Officer in April 1987. He became Secretary in
March 1986.

Mr. Condon joined the Company in April 1984 as its Director of Sales and
Marketing for plastic and general surgery products. He was promoted to
President, Mentor H/S, Inc. in July 1991. Prior to that he was Senior Vice
President, Plastic Surgery Sales and Marketing and Managing Director of
International Operations from April 1990 and Vice President, Sales and Marketing
for the Surgical Products Division from April 1985 until April 1990.

Ms. Edwards joined the Company in April 1984 as Risk Manager and has served
in various regulatory affairs and quality assurance capacities. In April 1992,
she was promoted to Vice President of Regulatory and Legal Affairs and Quality
Assurance. She had been Vice President of Regulatory Affairs and Quality
Assurance since August 1987.

Mr. Freeman joined the Company in August 1994. From 1989 to 1994 he was
Vice President & General Manager of Alcon Instrumentation Technology Center, a
subsidiary of Alcon/Nestle, a major ophthalmic company. From 1987 to 1989, he
was Division President of Cooper Surgical, a subsidiary of Coopervision, a
leading supplier of ophthalmic equipment and devices.

Mr. Mistlin joined the Company in November 1987, as Director of
Finance/Treasurer, and was promoted to Vice President of Finance/Treasurer in
April 1989.

Mr. Purkait joined the Company in February 1986, as Product Development
Manager and has served in various research & development capacities. In August
1988 he was promoted to Vice President of Research & Development.

Mr. Vawter joined the Company in March 1993. From 1989 to 1993 he was Chief
Executive Officer and President of Avalon Technology Corporation, a diagnostic
equipment company. From 1988 to 1989 he was President of Labsonics,
Incorporated, an ultrasound diagnostic company.
<PAGE>

PART II

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

The Common Stock of the Company is traded on the NASDAQ National Market
under the symbol MNTR. There are approximately 20 market makers for the
Company's stock. The following table shows the range of high and low closing
sale prices reported on the NASDAQ National Market. Quotations represent prices
between dealers, and do not reflect retail mark-ups, mark-downs or commissions.

<TABLE>
<CAPTION>
Year ended March 31, 1995 High Low

<S> <C> <C>
Quarter ended June 30, 1994 15 1/2 13
Quarter ended September 30, 1994 17 1/8 14 3/4
Quarter ended December 31, 1994 18 3/4 16
Quarter ended March 31, 1995 28 17

Year ended March 31, 1994

Quarter ended June 30, 1993 12 1/2 9 1/4
Quarter ended September 30, 1993 14 10 1/2
Quarter ended December 31, 1993 14 3/4 12
Quarter ended March 31, 1994 17 3/8 13 1/2
</TABLE>
<PAGE>

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.

<TABLE>
<CAPTION>
Year Ended March 31,

(in thousands, except per share 1995 1994 1993 1992 1991
data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net sales $ 146,394 $123,586 $ 114,976 $ 89,422 $ 73,793
Gross profit 93,598 81,131 75,165 53,815 45,340
Operating income (loss) 27,043 19,984 (2,341) 8,851 11,039
Income (loss) before income taxes 24,221 16,844 (4,730) 6,706 8,881
Net income (loss) $ 15,773 $ 11,005 $ (2,830) $ 4,510 $ 5,920

Net income (loss) per share $ 1.41 $ 1.02 $ (0.27) $ 0.42 $ 0.54
Dividends per common share $ 0.15 - $ 0.16 $ 0.16 $ 0.16
Average outstanding shares 11,187 10,805 10,654 10,789 10,934

Balance Sheet Data:
Working capital $ 53,745 $ 39,721 $ 35,188 $ 28,758 $ 28,267
Total assets 128,760 120,750 109,947 90,324 84,515
Long-term debt, less current 24,655 25,386 24,362 24,399 25,955
portion
Shareholders' equity $ 71,114 $ 54,653 $ 43,428 $ 47,728 $ 43,939
</TABLE>

SALES BY PRINCIPAL PRODUCT LINE

Year Ended March 31,
1995 1994 1993
(in thousands)
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>

Plastic Surgery Products $ 62,964 43% $ 49,272 40% $ 45,272 40%
Urology Products 53,638 37% 51,199 41% 48,643 42%
Ophthalmology Products 29,792 20% 23,115 19% 21,061 18%

$ 146,394 100% $ 123,586 100% $ 114,976 100%
</TABLE>
<PAGE>

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

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

Year Ended March 31,
1995 1994 1993
<S> <C> <C> <C>

Net sales 100.0% 100.0% 100.0%
Cost of sales 36.1 34.4 34.6
Selling, general and administrative 38.4 42.1 43.1
Research and development 7.0 7.4 6.0
Special litigation charge - - 18.3

Operating income (loss) 18.5 16.1 (2.0)
Interest income (expense), net (1.7) (2.5) (1.8)
Other expense (0.2) - (0.3)

Income (loss) before income taxes 16.6 13.6 (4.1)
Income taxes 5.8 4.7 (1.6)

Net income (loss) 10.8% 8.9% (2.5)%
</TABLE>

RESULTS OF OPERATIONS

Sales
Sales for fiscal 1995 increased 18% to $146.4 million, compared to $123.6
million the prior year. Growth was a result of strong increases in sales of
plastic surgery products and growth in sales of ophthalmology products. The
Company experienced increased unit demand for plastic surgery products. Growth
in sales of ophthalmology products was primarily a result of the acquisition in
October 1994 of the intraocular lens (IOL) product line of Optical Radiation
Corporation.

In conjunction with the settlement of its outstanding product liability
litigation (See Note H to the Consolidated Financial Statements, "Litigation"),
the Company had agreed under certain circumstances to cease marketing silicone
gel filled breast implants approximately in April 1995. However, according to
the terms of the settlement, if the plaintiffs enter into a settlement agreement
with other manufacturers which allows any other company to remain in the market
to manufacture and sell silicone gel breast implants, then the Company will also
be allowed to continue the manufacture and sale of these products.

It is the Company's understanding that the global settlement between the
plaintiffs and Dow Corning and other manufacturers allows those companies to
remain in the silicone gel breast implant market. As a result, the Company
believes it can continue to sell silicone gel filled breast implants (subject to
clinical trial protocols and other FDA restrictions).

Sales for fiscal 1994 were $123.6 million, an increase of 7% over the prior
year. Sales increased in each of the Company's basic markets. International
sales was the best performing area, increasing 12% for the year. Particularly
<PAGE>

strong were export sales to unaffiliated distributors, which were up 18%.
Plastic surgery sales showed an overall increase of 9% for the year. Sales of
saline breast implants, however, increased almost 40% over the prior year's
levels, offset by a decline in silicone gel products.

The Company's export sales to unaffiliated customers accounted for 15%, 16%
and 14% of net sales in the fiscal years ended March 31, 1995, 1994 and 1993,
respectively.

Over the three fiscal years ended March 31, 1995, sales increases have been
primarily the result of increased unit sales and a shift to higher priced
products. General selling price increases have not been significant in recent
years.

Cost Of Sales
Cost of sales was 36.1% for fiscal 1995, compared to 34.4% for the prior
year. The Company's cost of sales for its plastic surgery products was reduced
from prior years as a result of the closure of the Company's California
manufacturing facility in July 1994. This reduction was offset by startup
expenses in the Company's new manufacturing plant in the Netherlands. This plant
began to ship product during the fourth quarter of fiscal 1995.

Cost of sales was 34.4% for fiscal 1994, compared to 34.6% for fiscal 1993.
During fiscal 1994, the Company was operating two manufacturing facilities for
its plastic surgery products, during the process of transferring manufacturing
from California to Texas. This generated additional factory expense which was
not incurred in fiscal 1993. This higher level of spending continued until the
California plant closed in July 1994.

Certain suppliers of raw materials, such as Dow Corning, DuPont and others,
have announced that they will no longer supply implant or medical grade
materials for products in several markets due to what they perceive as a product
liability risk in excess of the potential economic benefits of providing these
materials. Certain of the Company's products, principally breast implants and
penile implants, incorporate materials produced by these companies. Under
guidelines established by the FDA, the Company has been successful in replacing
these materials with those being offered by other companies willing to supply
implantable device manufacturers. The prices the Company pays for many of these
replacement materials is substantially higher than with its previous vendors.
These sources of supply are relatively new, and there can be no assurances that
they will be able to supply the Company in the quantities needed. The Company
believes its supply of raw materials is adequate for the current fiscal year.

Selling, General and Administrative
Selling, general and administrative expenses decreased to 38.4% of sales in
fiscal 1995, compared to 42.1% in the previous year. During fiscal 1994, the
Company was in the process of consolidating and closing three facilities in
Santa Barbara, California, St. Louis, Missouri and Stewartville, Minnesota into
other existing operations. Included in the fiscal 1994 results was approximately
$3 million in costs associated with the consolidation. This amount includes
expenses related to employee relocation, new employee hiring and training, and
severance. These costs were completed in fiscal 1994.

Selling, general and administrative expenses were 42.0% of sales for fiscal
1994, compared to 43.1% in the previous year. Substantially reduced legal and
administrative fees in relation to breast implant litigation were the main
<PAGE>

reason for the decline. This decline was partially offset by approximately $3
million in costs related to the consolidation and closing of three facilities.

Research and Development
Research and development expenses were 7.0% of sales in fiscal 1995,
compared to 7.4% in fiscal 1994. The Company continues to spend funds on its
premarket approval applications ("PMAAs") for its silicone gel filled breast
implants, saline breast implants and penile implants. The Company is committed
to a variety of clinical and laboratory studies in connection with these
products. The Company expects to spend the same amount of money on these PMAAs
in fiscal 1996 as it did in fiscal 1995. In addition, the Company is beginning
clinical studies on several new products, specifically its Urethrin product for
treating urinary incontinence. Thus the Company expects to spend more in
research and development as a percent of sales in fiscal 1996 than it did in
fiscal 1995. Research & development expenses increased to 7.4% of sales for
fiscal 1994, compared to 6.0% for the prior year. In early 1993, the FDA
published proposed guidelines for PMAAs on the Company's saline filled breast
implants and penile implants. During the year, the Company began to incur
increased expenses to collect the data necessary for these applications,
including both human clinical studies and laboratory testing. In addition, the
Company continued to spend funds on its existing PMAAs on its silicone gel
filled breast implants.

Interest and Other Income and Expense
Interest expense decreased $273 thousand in fiscal 1995 from the prior
year, due primarily to lower balances on the Company's line of credit. Included
in interest expense for the year is $1.0 million in imputed interest on the
Litigation Settlement Obligation. In fiscal 1996, this amount will be reduced to
$700 thousand. Interest income increased from $247 thousand last year to $568
thousand this year, resulting from higher cash balances. Included in interest
income this year is $272 thousand related to foreign currency gains on the
Company's foreign operations.

In the third quarter of fiscal 1995, the Company sold its manufacturing
facility in Stewartville, Minnesota. The Company received net proceeds of
approximately $600 thousand. This transaction resulted in a book loss of
approximately $200 thousand.

Interest expense increased $882 thousand in fiscal 1994 over 1993. Lower
interest on bank borrowings was offset by $1.0 million in imputed interest
charges on the Litigation Settlement Obligation. Interest income decreased $176
thousand from the prior year, due to lower cash balances and interest rates
during the year.
<PAGE>

Income Taxes
The effective rate of corporate income taxes was an expense of 35% for both
fiscal 1995 and 1994, compared to a benefit of 40% in fiscal 1993. In fiscal
1993, the Company's effective benefit exceeded the U.S. federal statutory rate
due primarily to the preferential tax treatment of certain of the Company's
foreign sales.

Net Income
Net income per primary share in fiscal 1995 was $1.41, compared to $1.02 in
fiscal 1994. The increase was caused by the higher sales combined with a lower
percentage growth in operating expenses.

Primary earnings per share will be affected in fiscal 1996 by the Company's
call for redemption of its convertible debentures. Assuming all of the
debentures are converted into Common Stock, an additional 1.5 million shares
will be outstanding. Net of the benefit of lower interest expense, this will
cause an approximate 8% dilution in primary earnings per share.

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, 1995.

LIQUIDITY AND CAPITAL RESOURCES
During the three years ended March 31, 1995, liquidity needs have been
satisfied principally by cash flow from operations and the drawdown on available
lines of credit.

At March 31, 1995, working capital was $53.7 million compared to $39.7
million the previous year. The Company generated $13.0 million of cash from
operations during fiscal 1995, compared to $12.5 million the previous year. Net
income increased $4.8 million compared to the prior year. Of the total increase
in receivables and inventory for the current fiscal year, $2.8 million and $2.4
million, respectively, related to the acquisition of the IOL product line from
Optical Radiation Corporation.

During fiscal 1995 the Company spent $6.9 million on capital expenditures,
primarily improvements in manufacturing facilities and equipment and data
processing hardware and software. Of this amount, approximately $4.2 million was
for the buildout of its manufacturing facilities in Texas and Minneapolis. The
Company anticipates investing approximately $8 million in facilities and capital
equipment in fiscal 1996.

During fiscal 1995, the Company had up to $13 million available to it under
two lines of credit. The first is a secured $8 million revolving line of credit,
which allows for borrowings up to approximately 70% of domestic accounts
receivable. The second was an unsecured line for $5 million. Borrowings under
this line may only be used for the Company's Mentor O&O subsidiary. The maximum
amount borrowed under these lines of credit was $5.1 million in fiscal 1995. At
March 31, 1995, the Company had no borrowings outstanding under its lines of
credit. Subsequent to the fiscal year end, the Company executed a new secured
<PAGE>

$15 million Credit Agreement with another bank. This Agreement will replace the
other two lines of credit.

During fiscal 1994, the Company finalized its agreement with the Federal
Multi-District Litigation Plaintiffs Steering Committee, which settled all
outstanding breast implant litigation and claims against the Company. The
agreement established a settlement fund of $25.8 million, to be funded by the
Company and its insurers. Under the terms of the agreement, the Company made
payments of $2 million in May 1993, $8.7 million in November 1993 and $4.5
million in September 1994. The second payment was funded out of insurance
reimbursements. Additional payments of $5.3 million are due in September 1995
and 1996.

Following a successful patent infringement lawsuit against Coloplast AS in
the United Kingdom, the Company received payment of damages in the amount of
$3.4 million during July 1994. Approximately one half of the proceeds were paid
to the Company's UK distributor, DePuy International, which joined with the
Company in the legal action against Coloplast. The patent relates to the
Company's disposable self-adhering catheter for managing urinary incontinence in
males. In addition to the cash payment, the court ordered Coloplast to cease
marketing infringing products in the United Kingdom.

Since 1991, the Company has been a defendant in a shareholder class action.
See Legal Proceedings for further detail. In September 1994, the Company agreed
to settle this lawsuit, subject to approval by the Federal Court. The Company
paid $1 million in the second quarter and issued 50,000 shares of Mentor Common
Stock in the fourth quarter under the terms of the settlement.

The net effect of these two previous items was not material to the
consolidated financial statements.

In October 1994, the Company acquired the intraocular lens (IOL) operations
of Optical Radiation Corporation, a subsidiary of Benson Eyecare Corporation.
The purchase was made in exchange for $3 million in cash, the issuance of
approximately 61,000 shares of Common Stock and the assumption of certain
specified obligations.

At the Annual Meeting of Shareholders, held September 7, 1994, the Company
announced the resumption of its quarterly cash dividends. At the indicated rate
of $.20 per year, the aggregate annual dividend would equal approximately $2.2
million. In June 1993, the Company's Board of Directors had suspended dividends
on the Company's Common Stock in order to meet the Company's payment obligations
under the breast implant settlement agreement.

In May 1995, subsequent to the end of the fiscal year, the Company called
for redemption of its convertible debentures. The Redemption Date is June 30,
1995. At March 31, 1995, the outstanding balance was $24.2 million. At the
option of the debenture holders, the debentures may be converted into Common
Stock at the conversion price of $16.50. During April 1995, $8.0 million was
converted, leaving a balance of $16.2 million. The Company will be obligated to
redeem any remaining bonds not converted on June 30, 1995 at 100% of the
principal amount, plus accrued interest. No interest payment will be due to
those holders who choose to convert their debentures into Common Stock.
<PAGE>

The Company's principal source of liquidity at March 31, 1995 consisted of
$11.4 million in cash and marketable securities plus $12.3 million available
under the existing lines of credit.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The response to this item is submitted as a separate section of this Form
10-K. See Item 14.

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

None.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT.

Incorporated herein 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, 1995.
For information concerning executive officers, see Item 4A of this Annual Report
on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION.

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.

PAGE
(a)(1) Consolidated Financial Statements

Report of Independent Auditors 32

Consolidated Statements of Financial Position
as of March 31, 1995 and 1994 33

Consolidated Statements of Operations for the
Years Ended March 31, 1995, 1994, and 1993 35

Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended March 31, 1995, 1994, and 1993 36

Consolidated Statements of Cash Flows for the
Years Ended March 31, 1995, 1994 and 1993 37

Notes to Consolidated Financial Statements 38

(a)(2) Consolidated Financial Statement Schedules

Schedule II - Valuation and Qualifying Accounts and Reserves 47

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) List of exhibits:
3(a) Composite Restated Articles of Incorporation of the Company. (1)

3(b) Composite Restated Bylaws of the Company.(2)

<PAGE>

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K (continued)

(a)(3) List of exhibits (continued):

4 Mentor Corporation to Bankers Trust Company, Trustee, Indenture,
dated as of July 22, 1987; U.S. $30,000,000, 6 3/4% Convertible
Subordinated Debentures, Due 2002. (1)

Copies of constituent instruments defining rights of holders of other long-
term debt of the registrant and subsidiaries are not filed herewith, pursuant to
paragraph 4(iii)(A) of Item 601 of Regulation S-K, because the total amount of
securities authorized under any such instrument does not exceed 10% of the total
assets of the registrant and subsidiaries on a consolidated basis. The
registrant hereby agrees that it will, upon request by the Securities and
Exchange Commission, furnish to the Commission a copy of each such instrument.

10.1 Mentor Corporation 1982 Incentive Stock Option Plan and Agreement-
Registration Statement No. 2-94726.(7)(10)

10.2 Mentor Corporation Restated 1987 Non-Statutory Stock Option Plan
and Agreement - Registration Statement No.33-25865.(8)(10)

10.3 Mentor Corporation 1991 Stock Option Plan - Registration Statement
No. 33-48815.(9)(10)

10.4 Stock Option Agreement, dated September 21, 1988, between Mentor
Corporation and Anthony R. Gette.(2)(10)

10.5 Lease Agreement, dated November 9, 1989, between Mentor
Corporation and Skyway Business Center Joint Venture.(3)

10.6 First Amendment to Lease Agreement, dated December 1, 1993,
between Mentor Corporation and Skyway Business Center Joint
Venture.(6)

10.7 Revolving Credit Agreement, dated January 29, 1993, between Mentor
Corporation and Norwest Bank Minnesota, National Association.(5)

10.8 $8,000,000 Mentor Revolving Note, dated January 29, 1993, between
Mentor Corporation and Norwest Bank Minnesota, National
Association.(5)

10.9 Security Agreement, dated January 29, 1993, between Mentor
Corporation and Norwest Bank Minnesota, National Association.(5)

10.10 Security Instrument Collateral Bank Account Agreement, dated
January 29, 1993, between Mentor Corporation and Norwest Bank
Minnesota, National Association.(5)
<PAGE>

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K (continued)

(a)(3) List of exhibits (continued):

10.11 Corporate Guaranty, dated January 29, 1993, between Mentor
Corporation and Norwest Bank Minnesota, National Association.(5)

10.12 Schedule of related banking documents, dated January 29, 1993,
between Mentor Corporation and its subsidiaries and Norwest Bank
Minnesota, National Association.(5)

10.13 Amendment No. 1 to Loan Documents, dated June 29, 1993, between
Mentor Corporation and its subsidiaries and Norwest Bank Minnesota,
National Association.(6)

10.14 Credit Agreement, dated May 22, 1995, between Mentor
Corporation and Sanwa Bank California. 52

10.15 $15,000,000 Revolving Note, dated May 22, 1995, between
Mentor Corporation and Sanwa Bank California. 83

10.16 Security Agreement, dated May 22, 1995, between Mentor
Corporation and Sanwa Bank California. 85

10.17 Guarantor Security Agreement, dated May 22, 1995, between
Mentor Corporation and its subsidiaries and Sanwa Bank
California. 97

10.18 Continuing Guaranty Agreement, dated May 22, 1995, between
Mentor Corporation and Sanwa Bank California. 117

10.19 Contribution Agreement, dated May 22, 1995, between Mentor
Corporation and Sanwa Bank California. 109

10.20 Inter-Company Note, dated May 22, 1995, between Mentor
Corporation and Sanwa Bank California. 115

10.21 Lease Agreement, dated July 23, 1990, between Mentor Corporation
and SB Corporate Center, Ltd.(4)

10.22 Settlement Agreement and Stipulation, dated May 7, 1993, between
Mentor Corporation and Representative Plaintiffs.(5)

10.23 Employment Agreement, dated March 15, 1993, between Mentor
Corporation and Spencer M. Vawter. (6)(10)

10.24 Employment Agreement, dated August 5, 1994, between
Mentor O&O, Inc. and William M. Freeman. (10) 123
<PAGE>

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K (continued)

(a)(3) List of exhibits (continued):

11 Statement Regarding Computation of Per Share Earnings. 48

22 Subsidiaries of the Company. 49

23 Consent of Independent Auditors. 50

(b) Reports on Form 8-K:

None

(1) Incorporated by reference to Exhibits to Annual Report on Form 10-K for the
year ended March 31, 1988, File No. 0-7955.

(2) Incorporated by reference to Exhibits to Annual Report on Form 10-K for the
year ended March 31, 1989, File No. 0-7955.

(3) Incorporated by reference to Exhibits to Annual Report on Form 10-K for the
year ended March 31, 1990, File No. 0-7955.

(4) Incorporated by reference to Exhibits to Annual Report on Form 10-K for the
year ended March 31, 1991, File No. 0-7955.

(5) Incorporated by reference to Exhibits to Annual Report on Form 10-K for the
year ended March 31, 1993, File No. 0-7955.

(6) Incorporated by reference to Exhibits to Annual Report on Form 10-K for the
year ended March 31, 1994, File No. 0-7955.

(7) Incorporated by reference to Registration Statement on Form S-8,
Registration No. 2-94726.

(8) Incorporated by reference to the post effective amendment No. 1 to
Registration Statement on Form S-8, Registration No. 33-25865.

(9) Incorporated by reference to Registration Statement on Form S-8,
Registration No. 33-48815.

(10)Management contract or compensatory plan or arrangement.
<PAGE>

REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders of Mentor Corporation

We have audited the accompanying consolidated statements of financial
position of Mentor Corporation as of March 31, 1995 and 1994, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the three years in the period ended March 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1995, in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP
Los Angeles, California
May 8, 1995
<PAGE>

MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>

March 31, March 31,
(dollars in thousands) 1995 1994
Assets

<S> <C> <C>
Current assets:
Cash and equivalents $ 9,350 $ 6,043
Marketable securities 2,029 4,286
Accounts receivable, net of allowance for doubtful
accounts of $1,363 in 1995 and $993 in 1994 30,026 22,512
Inventories 29,994 29,074
Deferred income taxes 6,918 5,045
Other 2,741 3,148

Total current assets 81,058 70,108

Property and equipment:
Buildings and land 12,735 12,040
Equipment 30,761 29,157
43,496 41,197
Less accumulated depreciation (17,958) (16,926)
25,538 24,271

Other assets:
Deferred income taxes 1,400 4,000
Patents, licenses, trademarks and bond issuance
costs, net of accumulated amortization of 6,287 7,148
$9,127 in 1995 and $8,275 in 1994
Goodwill, net of accumulated amortization of 13,523 13,938
$2,190 in 1995 and $1,786 in 1994
Other assets 954 1,285
22,164 26,371

$ 128,760 $ 120,750
</TABLE>
<PAGE>

MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(CONTINUED)
<TABLE>
<CAPTION>

March 31, March 31,
(dollars in thousands) 1995 1994
Liabilities and shareholders' equity
<S> <C> <C>
Current liabilities:
Accounts payable $ 2,996 $ 3,558
Accrued compensation 5,620 3,147
Income taxes payable 606 -
Interest payable 1,145 1,122
Dividends payable 549 -
Sales returns 4,765 3,625
Litigation settlement obligation 5,333 5,483
Other accrued liabilities 5,568 7,995
Short-term bank borrowings and current
portion of long-term debt 731 5,457

Total current liabilities 27,313 30,387

Long-term debt 473 1,204
Litigation settlement obligation 5,678 10,324
Convertible subordinated debentures 24,182 24,182

Shareholders' equity:
Common Stock, $.10 par value: Authorized-
20,000,000 shares; Issued and outstanding -- 1,090 1,069
10,898,388 shares in 1995;
10,690,338 shares in 1994
Capital in excess of par value 15,031 12,789
Cumulative translation adjustment (283) (333)
Retained earnings 55,276 41,128
Total shareholders' equity 71,114 54,653

$ 128,760 $ 120,750

</TABLE>

See notes to consolidated financial statements
<PAGE>

MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

Year Ended March 31,
(in thousands, except per share data) 1995 1994 1993

<S> <C> <C> <C>
Net sales $ 146,394 $ 123,586 $ 114,976
Costs and expenses:
Cost of sales 52,796 42,455 39,811
Selling, general and administrative 56,260 52,010 49,562
Research and development 10,295 9,137 6,944
Special litigation charge - - 21,000
119,351 103,602 117,317

Operating income (loss) 27,043 19,984 (2,341)
Interest income 568 247 423
Interest expense (3,114) (3,387) (2,505)
Other expense (276) - (307)
Income (loss) before income taxes 24,221 16,844 (4,730)
Income tax (benefit) expense 8,448 5,839 (1,900)
Net income (loss) $ 15,773 $ 11,005 $ (2,830)

Net income (loss) per share:
Primary $ 1.41 $ 1.02 $ (0.27)
Fully diluted $ 1.30 $ 0.98 $ (0.27)
</TABLE>

See notes to consolidated financial statements
<PAGE>

MENTOR CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>

Number of Capital in Cumulative
Common Shares Par Excess of Translation Retained
(in thousands) Outstanding Value Par Value Adjustment Earnings

<S> <C> <C> <C> <C> <C>
Balance April 1, 1992 10,640 $1,064 $ 12,241 $ (236) $ 34,659

Exercise of stock options 36 4 317 - -
Dividends declared ($.16 per share) - - - - (1,706)
Foreign currency translation adjustment - - - (155) -
Income tax benefit arising from
the exercise of stock options - - 70 - -
Net loss - - - - (2,830)
Balance March 31, 1993 10,676 $1,068 $ 12,628 $ (391) $ 30,123

Exercise of stock options 14 1 161 - -
Foreign currency translation adjustment - - - 58 -
Net income - - - - 11,005
Balance March 31, 1994 10,690 $1,069 $ 12,789 $ (333) $ 41,128

Exercise of stock options 207 21 2,680 - -
Dividends declared ($.15 per share) - - - - (1,625)
Repurchase of common shares (110) (11) (2,386) - -
Income tax benefit arising from
the exercise of stock options - - 134 - -
Common shares used in business
acquisition 61 6 994 - -
Common shares used in litigation
settlement 50 5 820 - -
Foreign currency translation adjustment - - - 50 -
Net income - - - - 15,773
Balance March 31, 1995 10,898 $1,090 $ 15,031 $ (283) $ 55,276
</TABLE>

See notes to consolidated financial statements
<PAGE>

MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

Year Ended March 31,
(in thousands) 1995 1994 1993

Cash from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 15,773 $ 11,005 $ (2,830)
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 6,798 6,165 5,595
Deferred income taxes 727 (296) (7,993)
Loss on sale of assets 278 33 92
Expenses not requiring the use of cash 1,821 996 -
Litigation settlement obligation (4,483) 671 17,550

Changes in operating assets and liabilities:
Increase in accounts receivable (7,514) (1,150) (5,416)
Increase in inventories and other current assets (673) (5,106) (3,880)
(Decrease) increase in accounts payable and accrued expenses (102) 151 5,280
Increase in income taxes payable 606 - -
Decrease in other accrued liabilities (232) - -
Net cash provided by operating activities 12,999 12,469 8,398

Cash from investing activities:
Purchase of property, equipment and intangibles (6,912) (8,933) (7,295)
Proceeds from sale of property, equipment and other assets 1,015 94 166
Reduction in notes receivable 183 208 810
Purchase of marketable securities - (1,253) (1,073)
Sale of marketable securities 2,257 - -
Net cash used for investing activities (3,457) (9,884) (7,392)

Cash from financing activities:
Repurchase of common stock (2,398) - -
Exercise of stock options 2,701 162 391
Dividends paid (1,082) (427) (1,704)
Reduction in long-term debt (674) (336) (41)
Borrowings under line of credit agreements - 2,950 12,982
Payments on line of credit agreements (4,782) (4,099) (11,550)
Net cash (used for) provided by financing activities (6,235) (1,750) 78

Increase in cash and equivalents 3,307 835 1,084
Cash and equivalents at beginning of year 6,043 5,208 4,124
Cash and equivalents at end of year $ 9,350 $ 6,043 $ 5,208

Supplemental schedule of cash flow information:
Interest paid $ 2,760 $ 2,225 $ 2,347
Income taxes paid $ 6,937 $ 7,013 $ 5,599

Supplemental schedule on non-cash flow investing & financing activities:
Common shares issued to acquire equipment and intangibles $ 1,000 - -
</TABLE>

See notes to consolidated financial statements
<PAGE>

MENTOR CORPORATION

Notes to Consolidated Financial Statements

Note A Summary of Significant Accounting Policies

History and Business Activity
Mentor Corporation was incorporated in April 1969. The Company is engaged in one
industry segment - the development, manufacture and marketing of specialized
medical products. The Company's products are sold to hospitals, physicians and
through various health care dealers, wholesalers, and retail outlets.

Principles of Consolidation
The consolidated financial statements include the accounts of Mentor Corporation
and its wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated.

Cash and Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.

Marketable Securities
The Company considers its marketable securities available-for-sale as defined in
Statement of Financial Accounting Standards ("SFAS") No. 115. There were no
material realized or unrealized gains or losses nor any material differences
between estimated fair values and costs of securities in the investment
portfolio as of March 31, 1995.

Accounts Receivable and Credit Risk
The Company grants credit terms in the normal course of business to its
customers, primarily hospitals, doctors and distributors. As part of its ongoing
control procedures, the Company monitors the credit worthiness of its customers.
Bad debts have been minimal. The Company does not normally require collateral or
other security to support credit sales.

Revenue Recognition
Sales and related cost of sales are recognized primarily upon the shipment of
products. The Company allows credit for products returned within its policy
terms. Such returns are estimated and an allowance provided at the time of sale.
The Company provides a warranty on certain of its capital equipment products
against defects in workmanship and material. Estimated warranty costs are
provided at the time of sale and periodically adjusted to reflect actual
experience.

Inventories
Inventories are stated at the lower of cost or market, cost determined by the
first-in, first-out (FIFO) method.
<PAGE>

Property and Equipment
Property and equipment are stated at cost and includes interest on funds
borrowed to finance construction. Capitalized interest was $54,000 in 1995.
Depreciation is based on the useful lives of the properties and computed using
the straight-line method. Significant improvements and betterments are
capitalized while maintenance and repairs are charged to operations as incurred.

Intangible Assets
Patents, licenses and trademarks are stated at cost less accumulated
amortization and are amortized over their economic life ranging from 3 to 20
years using the straight-line method. Goodwill is amortized over 20-40 years.

Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". Deferred income taxes are
provided on the temporary differences between income for financial statement and
tax purposes.

Per Share Data
Primary income (loss) per share is computed based on the weighted average number
of Common Stock and Common Stock equivalents outstanding during each year.
Common Stock equivalents represent the dilutive effect of the assumed exercise
of certain outstanding options. The calculation of fully diluted income (loss)
per share assumes the convertible subordinated debentures were converted into
Common Stock at the beginning of the year. If the result of these assumed
conversions is dilutive, the interest requirements of the debentures are reduced
while the average number of Common Stock equivalents outstanding are increased.

Foreign Sales
Export sales, principally to Canada and Western Europe, were $21,243,000;
$19,582,000; and $16,652,000 in 1995, 1994 and 1993, respectively. In addition,
$11,287,000; $9,329,000; and $9,105,000 in sales respectively, were from the
Company's direct international sales offices established during 1991.

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
(SFAS) No. 52, "Foreign Currency Translation". Net assets of certain non-U.S.
subsidiaries whose "functional" currencies are other than the U.S. dollar are
translated at current rates of exchange. Income and expense items are translated
at the average exchange rate for the year. The resulting translation adjustments
are recorded directly into a separate component of shareholders' equity. Net
assets and the results of operations of the Company's foreign entities were not
significant on a consolidated basis.
<PAGE>

Reclassification
Certain reclassifications of previously reported amounts have been made to
conform to current year's presentation.

Note B Inventories
<TABLE>
<CAPTION>

Inventories at March 31 consisted of:
(in thousands) 1995 1994

<S> <C> <C>
Raw materials $ 9,294 $ 8,047
Work in process 5,264 5,564
Finished goods 15,436 15,463

$ 29,994 $ 29,074

</TABLE>

Note C Long-term Debt
<TABLE>
<CAPTION>

Long-term debt at March 31 consisted of:
(in thousands) 1995 1994

<S> <C> <C>
Convertible subordinated debentures, at 6.75%,
due 2002 $ 24,182 $ 24,182
Term bank loan, at 7.8%, due in monthly installments
through September 1996 1,058 1,698

City of Minneapolis, Minnesota, Industrial Development
Revenue Bonds at 7.5%, payable through 1998 146 180
25,386 26,060
Less current portion 731 674
$ 24,655 $ 25,386

</TABLE>

The 6.75% convertible subordinated debenture may be converted into shares
of Common Stock at a price of $16.50 at any time prior to maturity. They are
redeemable by the Company at 100% of face value. The Company has reserved
1,466,000 shares of Common Stock for issuance under the terms of the convertible
subordinated debentures. During April 1995, $8.0 million of the convertible
debentures were converted into 487,000 shares of Common Stock. On May 12, 1995
the Company called for the redemption of the remaining $16.2 million outstanding
of the 6 3/4% convertible debentures. The redemption date is June 30, 1995.
Assuming all of the remaining debentures are converted into common shares, an
additional 979,000 common shares will be issued.

The aggregate maturities of outstanding long-term debt during the next five
fiscal years are as follows:
1996-$731,000;
1997-$415,000;
1998-$50,000;
1999-$8,000; and none thereafter.
<PAGE>

At March 31, 1995, the Company had agreements for up to $13 million under two
credit lines, one for $8 million and one for $5 million. Borrowings under the $5
million agreement accrue interest at the prevailing prime rate, while borrowings
under the $8 million agreement accrue interest at the prevailing prime rate plus
one and one-half percent. At March 31, 1995, the Company had no amounts
outstanding under either of its available lines of credit. The Company had $12.3
million available under its credit arrangements.

Subsequent to the fiscal year end, the Company executed a new secured $15
million Credit Agreement with another bank. This Agreement will replace the
other two lines of credit. Borrowings under the Credit Agreement will accrue
interest at the prevailing prime rate. The Credit Agreement includes certain
covenants, which, among others, limit the dividends the Company may pay and
require maintenance of certain levels of tangible net worth and debt service
ratios. An annual commitment fee of .25% will be paid on the unused portion of
the $15 million credit line.

During 1994, the Company completed the construction of certain production
equipment in the Minneapolis facility. A portion of the construction cost was
funded under a $2 million interim equipment financing agreement. Upon completion
of the equipment in 1994, the $2 million advance was converted into a 3 year
fully amortized term loan at 7.8% interest. The loan is secured by the
production equipment.
<PAGE>

Note D Stock Options

The Company has granted options to key employees and non-employee directors
under a qualified 1991 Plan, a non-qualified 1987 Plan, and a qualified 1982
Plan. Options granted under all plans are exercisable in four equal cumulative
installments beginning one year from the date of grant. Options issued under the
1991 and 1987 Plans expire in ten years, while options under the 1982 Plan
expire in five years. Options issued under the plans are granted at the fair
market value on the date of grant. Activity in the stock option plans during
fiscal 1995, 1994 and 1993 was as follows:

<TABLE>
<CAPTION>
Options Outstanding
Shares
Total Exercisable Price per Share

<S> <C> <C> <C> <C>
Balance April 1, 1992 922,473 374,225 $ 8.00 to $ 20.13

Granted 218,000 - 10.50 to 15.50
Exercisable - 209,625 10.13 to 20.13
Exercised (35,425) (35,425) 8.00 to 12.50
Cancelled or terminated (52,000) (21,625) 11.75 to 20.13
Balance March 31, 1993 1,053,048 526,800 $ 8.00 to $ 20.13

Granted 178,400 - 11.13 to 13.75
Exercisable - 223,205 10.50 to 20.13
Exercised (14,250) (14,250) 8.00 to 15.13
Cancelled or terminated (26,875) (12,875) 10.50 to 16.50
Balance March 31, 1994 1,190,323 722,880 $ 8.00 to $ 20.13

Granted 310,000 - 13.50 to 23.88
Exercisable - 197,643 10.50 to 20.13
Exercised (207,375) (207,375) 8.00 to 20.13
Cancelled or terminated (68,375) (10,525) 10.50 to 16.50
Balance March 31, 1995 1,224,573 702,623 $ 8.00 to $ 23.88
</TABLE>

At March 31, 1995 there were 293,850 shares available for grant under the 1991
Plan. There are no additional shares available for grant under either the 1987
or 1982 Plans.

During fiscal 1989, the Company granted an officer a non-qualified stock option
to purchase 50,000 shares of Common Stock, at $10.75 per share. At March 31,
1995, there were options for 50,000 shares of Stock outstanding and exercisable
under this option. This option expires in September 1998.
<PAGE>

Note E Income Taxes
<TABLE>
<CAPTION>

Year Ended March 31,
(in thousands) 1995 1994 1993

<S> <C> <C> <C>
Current:
Federal $ 6,644 $ 5,392 $ 5,317
State 546 743 776
Foreign 531 - -
7,721 6,135 6,093
Deferred:
Federal 676 (302) (7,239)
State 51 6 (754)
727 (296) (7,993)
$ 8,448 $ 5,839 $ (1,900)
</TABLE>

The reconciliation of the federal statutory rate to the Company's effective rate
is as follows:
<TABLE>
<CAPTION>

Year Ended March 31,
1995 1994 1993
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% (34.0)%
Increase (decrease) resulting from:
State tax, net of federal tax benefit 1.9 3.1 2.3
Non-taxable interest and dividends (0.2) (0.3) (1.2)
Research and development credit (1.8) (2.2) (1.3)
Foreign Sales Corporation (1.3) (1.7) (6.2)
Foreign losses without benefits 0.2 3.1 -
Benefit of tax law changes - (3.0) -
Non-deductible goodwill 0.8 1.1 4.2
Charitable contributions of inventory - (0.2) (1.9)
Other 0.3 (0.2) (2.1)
34.9% 34.7% (40.2)%
</TABLE>
Significant components of the Company's deferred tax liabilities and assets are
as follows:
<TABLE>
<CAPTION>

March 31,
(in thousands) 1995 1994 1993
<S> <C> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ 1,279 $ 1,288 $ 1,100
Installment sale for tax purposes - 47 91
Other - 5 11
Total deferred tax liabilities 1,279 1,340 1,202

Deferred tax assets:
Book reserves not deductible for tax 3,536 3,543 1,874
Uniform capitalization 676 571 752
Litigation settlement obligation 4,166 5,871 6,965
Profit on sales to foreign subsidiaries 1,219 400 360
Total deferred tax assets 9,597 10,385 9,951
Net deferred tax assets $ 8,318 $ 9,045 $ 8,749
</TABLE>
<PAGE>

Note F Commitments

The Company leases certain facilities under operating leases with unexpired
terms ranging from one to twelve years. Most leases contain renewal options.
Rental expense for these leases was $2,147,000, $2,736,000 and $2,537,000 for
fiscal 1995, 1994 and 1993, respectively.

Future minimum lease payments under lease arrangements at March 31, 1995 are as
follows:
(in thousands)
1996 $ 2,134
1997 1,701
1998 1,530
1999 1,493
2000 1,280
Thereafter 3,145
Total $ 11,283

Note G Related Party Transactions

In April 1991, the Company entered into an agreement with Rochester Medical
Corporation (Rochester). Under the terms of the agreement, the Company received
an exclusive license to market and distribute certain external catheter products
developed by Rochester, in exchange for a payment of $500,000. No purchases of
product were made in 1995. The Company purchased $1,645,000 and $328,000 of
product from Rochester in 1994 and 1993 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.

Note H Litigation

Claims related to product liability are a regular and ongoing aspect of the
medical device industry. At any one time, the Company has claims involved in
litigation. The Company has carried product liability insurance on all its
products, including breast implants, subsequent to May 1991 and prior to
September 1985. From June 1992 on, such insurance has excluded silicone gel
filled breast implants. This insurance is subject to certain self-insured
retentions and limits of the policy. 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, subject to certain
limits, exclusions and deductibles which the Company believes to be appropriate.
With the exception of its silicone breast implant products, which are covered by
the settlement agreement, the Company does maintain a reserve ($2,000,000 and
$1,200,000 at March 31, 1995 and 1994, respectively) in an amount it believes to
be reasonably sufficient to cover the cost of anticipated product liability
claims.
<PAGE>

As a result of the controversy and related media coverage surrounding silicone
gel filled breast implants, the Company became involved in a substantial amount
of product liability litigation in fiscal 1992 and 1993. These cases alleged
design and marketing defects, failure to warn, breach of implied and express
warranties, emotional distress and gross negligence in connection with silicone
gel filled breast implants manufactured by the Company. The complaints sought
unspecified damages for medical expenses, loss of earnings, prejudgment interest
and punitive damages.

During fiscal 1994, the Company reached an agreement with the Federal Multi-
District Plaintiffs Steering Committee which settled all outstanding breast
implant litigation and claims against the Company. The agreement established a
settlement fund of $25.8 million, which will be funded by the Company and its
insurers. The agreement, in which the Company denies any wrongdoing or legal
liability, covers all women who have received a silicone gel or saline filled
breast implant manufactured by the Company from March 1984 (the date at which
the Company first entered the business) through June 1, 1993. The agreement was
approved by the Federal Court, which certified a mandatory class of persons, who
have or may have any existing or future claim, including claims for injuries not
yet known, under any federal or state law, based upon having received a silicone
gel or saline filled breast implant prior to June 1, 1993.

Under the terms of the agreement, the Company made payments of $2.0 million in
May 1993, $8.7 million in November 1993, and $4.5 million in September 1994. The
second payment was funded out of insurance reimbursements. Additional payments
of $5.3 million are due in both September 1995 and 1996.

As a result of the settlement agreement, the Company recorded a pretax charge of
$21,000,000 in the fourth quarter of fiscal 1993. This charge included the
present value of the settlement payments, net of estimated insurance
reimbursement, certain expenses related to the agreement, plus an accrual for
future expenses to conclude the terms of the agreement.

In April 1991, a class action lawsuit was filed by a shareholder of the Company
against the Company and its Chairman. That action, Oded Weiss v. Mentor Corp. &
Christopher J. Conway, essentially alleged that the Company and its Chairman
made untrue statements of material fact or failed to disclose material facts
concerning the Company's Urethrin product, all in violation of federal
securities laws. The plaintiffs sought, on his behalf and on behalf of the
class, which included all purchasers of Company stock from January 9, 1991
through April 14, 1991, (both dates inclusive), general damages and unspecified
"extraordinary equitable and/or injunctive relief", as well as costs, attorneys'
fees and pre- and post-judgment interest. In January 1992, a court order was
filed dismissing without prejudice the actions against defendant Christopher J.
Conway.

In September 1994, the Company reached an agreement to settle this lawsuit.
Under the agreement, in which the Company denied any wrongdoing or legal
liability, the Company paid the plaintiffs $1 million in cash and 50,000 shares
of Common Stock. The settlement was approved by the Federal Court in March 1995.
<PAGE>

In addition, in the ordinary course of its business the Company experiences
various types of claims which 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.

Note I Quarterly Financial Data (Unaudited)

The following is a summary of unaudited quarterly results of operations:
<TABLE>
<CAPTION>

Quarter
(in thousands, except per share data) First Second Third Fourth
Year Ended March 31, 1995
<S> <C> <C> <C> <C>
Net sales $ 34,729 $ 32,687 $ 38,127 $ 40,851
Gross profit 22,390 21,425 24,720 25,063
Net income 3,690 3,400 4,197 4,486
Net income per share:
Primary $ 0.34 $ 0.31 $ 0.38 $ 0.39
Fully diluted $ 0.32 $ 0.29 $ 0.35 $ 0.36

Year Ended March 31, 1994
Net sales $ 31,028 $ 29,329 $ 31,183 $ 32,046
Gross profit 20,829 19,154 20,085 21,063
Net income 2,340 2,586 2,933 3,146
Net income per share:
Primary $ 0.22 $ 0.24 $ 0.27 $ 0.29
Fully diluted $ 0.22 $ 0.23 $ 0.26 $ 0.28
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
MENTOR CORPORATION AND SUBSIDIARIES

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)

COL A COL. B COL. C COL. D COL. E

Additions
Balance at Charged to Charged to Balance
Beginning Costs and Other at End of
Description of Period Expenses Accounts Deductions Period
Year Ended March 31, 1995:
Deducted from asset accounts:
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 993 $ 674 $ 282 $ 586 (1) $ 1,363

Liability Reserves:
Product liability $ 1,200 $ 1,242 $ - $ 442 (2) $ 2,000
Accrued sales returns and allowances 3,625 1,145 - 5 (3) 4,765
$ 4,825 $ 2,387 $ - $ 447 $ 6,765

Year Ended March 31, 1994
Deducted from asset accounts:
Allowance for doubtful accounts $ 904 $ 315 $ - $ 226 (1) $ 993

Liability Reserves:
Product liability $ 1,000 $ 672 $ - $ 472 (2) $ 1,200
Accrued sales returns and allowances 3,033 625 - 33 (3) 3,625
$ 4,033 $ 1,297 $ - $ 505 $ 4,825

Year Ended March 31, 1993
Deducted from asset accounts:
Allowance for doubtful accounts $ 426 $ 685 $ - $ 207 (1) $ 904

Liability Reserves:
Product liability $ 1,000 $ 4,323 $ - $ 4,323 (2) $ 1,000
Accrued sales returns and allowances 904 2,405 - 276 (3) 3,033
$ 1,904 $ 6,728 $ - $ 4,599 $ 4,033

</TABLE>

(1) Uncollected accounts written off, net of recoveries.
(2) Product liability claims paid.
(3) Sales rebates.

EXHIBIT 11
<TABLE>
<CAPTION>

STATEMENT REGARDING THE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)

Year Ended March 31,
1995 1994 1993
PRIMARY:

<S> <C> <C> <C>
Primary Earnings (Loss) $15,773 $11,005 ($2,830)

Average Shares Outstanding 10,820 10,678 10,654

Net Effect of Dilutive Stock Options--Based on
the Treasury Stock Method using Average
Stock Market Price 367 127 0 (1)

Total Shares for Primary Earnings 11,187 10,805 10,654

Primary Earnings (Loss) Per Share $ 1.41 $ 1.02 ($ 0.27)

FULLY DILUTED:
Primary Earnings (Loss) $15,773 $11,005 ($2,830)

Interest and Related Expenses on 6 3/4%
Debentures Eliminated, Net of Tax 1,116 1,116 1,114

Fully Diluted Earnings (Loss) $16,889 $12,121 ($1,716)

Average Shares Outstanding 10,820 10,678 10,654

Net Effect of Dilutive Stock Options--Based on
the Treasury Stock Method using the Higher of
Ending and Average Stock Market Prices 693 164 161

Additional Shares Issued in Assumed
Conversion of 6 3/4% Debentures at $16.50 Per
Share 1,466 1,466 1,466

Total Shares for Fully Diluted Earnings 12,979 12,308 12,281

Fully Diluted Earnings (Loss) Per Share $ 1.30 $ 0.98 ($ 0.14)(2)
</TABLE>

(1) In 1993 the net effect of the Treasury Stock Method on stock options
produced an anti-dilutive result because of the net loss. Accordingly,
only weighted average shares outstanding were used in the calculation
of Primary Earnings Per Share.

(2) The Primary Earnings Per Share amount was used for both Primary and Fully
Diluted presentation on the income statement because the Fully Diluted
Earnings Per Share calculation produced an anti-dilutive result.

EXHIBIT 22

LIST OF
SUBSIDIARIES OF MENTOR CORPORATION

1. Mentor H/S, Inc.

2. Mentor Urology, Inc.

3. Mentor O&O, Inc.

4. Mentor Caribe, Inc.

5. Mentor ORC, Inc.

6. Mentor Polymer Technologies Company

7. Teknar Corporation

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, Pty. Ltd. (Australia)

14. Mentor Medical Systems, UK, Ltd.

15. Mentor Medical Systems, B.V.

16. Mentor Deutschland GmbH

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in this Annual Report on Form 10- K
of Mentor Corporation of our report dated May 8, 1995, included in the 1995
Annual Report to shareholders of Mentor Corporation.

Our audits also included the financial statement schedules, listed in Item
14(a). The schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.

We also consent to the incorporation by reference (1) Registration Statement
Number 2-94726 on Form S-8 dated December 26, 1984, (2) Registration Statement
Number 33-25865 on Form S-8 dated December 22, 1988, (3) Registration Statement
Number 33-48815 on Form S-8 dated June 24, 1992, (4) Registration Statement
Number 33-58761 on Form S-3 dated May 22, 1995 of our report dated May 8, 1995
with respect to the consolidated financial statements and schedule of Mentor
Corporation incorporated by reference in the Annual Report on Form 10-K for the
year ended March 31, 1995.

ERNST & YOUNG LLP

Los Angeles, California
June 26, 1995
<PAGE>

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Mentor Corporation 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, Chairman

DATE: June 27, 1995

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:

/s/CHRISTOPHER J. CONWAY Chairman, Chief June 27, 1995
Christopher J. Conway Executive Officer
and Director (Principal
Executive Officer)

/s/ANTHONY R. GETTE President and Secretary June 27, 1995
Anthony R. Gette and Director

/s/GARY E. MISTLIN Vice President of Finance/ June 27, 1995
Gary E. Mistlin Treasurer
(Principal Financial and
Accounting Officer)

/s/WALTER W. FASTER Director June 27, 1995
Walter W. Faster

/s/EUGENE G. GLOVER Director June 27, 1995
Eugene G. Glover

/s/MICHAEL NAKONECHNY Director June 27, 1995
Michael Nakonechny

/s/BYRON G. SHAFFER Director June 27, 1995
Byron G. Shaffer

/s/DR. RICHARD W. YOUNG Director June 27, 1995
Dr. Richard W. Young

CREDIT AGREEMENT

Dated as of May 22, 1995

between

MENOR CORPORATION

and

SANWA BANK CALIFORNIA

<PAGE>

CREDIT AGREEMENT
THIS CREDIT AGREEMENT (the "AGREEMENT") is made and dated as of the 22 day
of May, 1995, by and between SANWA BANK CALIFORNIA ("Lender") and MENTOR
CORPORATION, a Minnesota corporation (the "Borrower").

RECITALS
A. The Borrower has requested Lender to extend credit to the Borrower, and
Lender has agreed to do so.
B. The Borrower and Lender desire to set forth herein the mutually agreed
upon terms and conditions of such credit extension.
NOW, THEREFORE, in consideration of the above Recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:

AGREEMENT
1. Definitions. For purposes of this Agreement, the terms set forth below
shall have the following meanings:
"Affiliate" shall mean, as to any Person, any other Person directly
or indirectly controlling, controlled by or under direct or indirect common
control with, such Person. "Control" as used herein means the power to
direct the management and policies of such corporation.
"Agreement" shall mean this Agreement, as the same may be amended,
extended or replaced from time to time.
"Applicable IBO Rate" shall mean with respect to any Interest Period for
a Eurodollar Loan, the rate per annum (rounded upward, if necessary, to the
next higher 1/100 of one percent (0.01%)) calculated in accordance with the
following formula:
IR
Applicable IBO Rate = 1-IRP + 2.00%
where

IR = IBO Rate for such Interest Period
IRP = IBO Reserve Percentage
<PAGE>

"Applicable Reference Rate" shall mean, with respect to any Loans that
are Reference Rate Loans, the Reference Rate, as from time to time in
effect.

"Business Day" shall mean any day other than a Saturday, a Sunday or a day
on which banks in Los Angeles, California are authorized or obligated to close
their regular banking business.

"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
rules and regulations issued thereunder as from time to time in effect.

"Collateral" shall mean the Borrower's and Guarantors' personal property
(tangible and intangible) which are covered by the Security Documents.

"Commonly Controlled Entity" of a Person shall mean a Person, whether or
not incorporated, which is under common control with such Person within the
meaning of Section 414(c) of the Internal Revenue Code.

"Compliance Certificate" shall mean a compliance certificate substantially
in the form of Exhibit I attached hereto duly executed by a Responsible Officer
of the Borrower.

"Contractual Obligation" as to any Person shall mean any provision of any
security issued by such Person or of any agreement, instrument or undertaking to
which such Person is a party or by which it or any of its property is bound.

"Contribution Agreement" shall have the meaning given to such term in
Paragraph 3(i) below.

"Credit Limit" shall mean, with respect to Revolving Loans and Outstanding
Letters of Credit, $15,000,000, as such amount may be increased or decreased by
written agreement of the Borrower and Lender.

"Current Assets" shall mean the consolidated current assets of the Borrower
and its Subsidiaries as determined in accordance with GAAP.

"Current Liabilities" shall mean the consolidated current liabilities of
the Borrower and its Subsidiaries as determined in accordance with GAAP.

"Effective Tangible Net Worth" shall mean (i) the gross book value of the
assets of the Borrower and its Subsidiaries appearing on a balance sheet
prepared in accordance with GAAP plus (ii) Subordinated Debt minus (iii) loans
to stockholders and employees of the Borrower and its Subsidiaries minus (iv)
all liabilities and the net book value of all assets of the Borrower and its
Subsidiaries which would be treated as intangibles under GAAP, including,
without limitation, unamortized debt discount and expense, covenants not to
compete, customer lists, unamortized research and development expense,
unamortized deferred charges and costs, goodwill, trademarks, service marks,
trade names, patents, copyrights and licenses.
<PAGE>

"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations issued thereunder as from time to time in
effect.

"Eurodollar Business Day" shall mean a Business Day upon which commercial
banks in London, England, New York, New York, and Los Angeles, California are
open for domestic and international business.

"Eurodollar Loan" shall mean Loans hereunder at such time as they are made
and/or being maintained at a rate of interest based upon the IBO Rate.

"Event Of Default" shall have the meaning given such term in Paragraph 8
below.

"Fixed Loan" shall mean a Loan hereunder at such time as they are made
and/or maintained at a rate of interest based upon the Fixed Rate.

"Fixed Rate" shall mean a fixed rate per annum equal to 2% in excess of any
pricing index agreed upon by the Borrower and Lender after the date of this
Agreement as set forth in a writing signed by such parties.

"Funded Debt" of any Person shall mean, at any date, without duplication,
(a) all obligations of such Person for borrowed money, (b) all obligations of
such Person evidenced by bonds, debentures, notes, or similar instruments, (c)
all obligations of such Person to pay the deferred purchase price of property or
services, except trade accounts payable arising in the ordinary course of
business, (d) all obligations of such Person as lessee under capital leases, (e)
all Indebtedness of any other Person secured by a Lien on any asset of such
Person, and (f) all Funded Debt of any other Person guaranteed by such Person.

"GAAP" shall mean generally accepted accounting principles in the United
States of America in effect from time to time.

"Governmental Authority" shall mean any nation or government, any state or
other political subdivision thereof, or any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.

"Guarantors" shall mean Mentor H/S, Inc., Mentor O&O, Inc., Mentor Urology,
Inc., Mentor ORC, Inc., Mentor Caribe and any other of the Borrower's
Significant Subsidiaries that the Lender may from time to time notify the
Borrower in writing shall become a Guarantor.

"Guarantees" shall have the meaning given such term in Paragraph 3 (i)
below.

"IBO Rate" shall mean with respect to any Interest Period for a Eurodollar
Loan, the rate per annum at which Sanwa Bank California would quote to banks in
the London interbank eurocurrency market at approximately 11:00 a.m. (London
time) two Eurodollar Business Days prior to the first day of the proposed
<PAGE>

Interest Period for Eurodollar Loans for deposits in immediately available U.S.
dollars in an amount equal to the aggregate amount of Eurodollar Loans proposed
to be subject to such rate during such Interest Period and for a period of time
equal to such Interest Period.

"IBO Reserve Percentage" shall mean for any day, that percentage expressed
as a decimal, which is in effect on such day, as specified by the Board of
Governors of the Federal Reserve System (or any successor) for determining the
maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) which is imposed on eurocurrency liabilities.

"Indebtedness" of any Person shall mean all items of indebtedness which, in
accordance with GAAP and industry practices, would be included in determining
liabilities as shown on the liability side of a balance sheet of such Person as
of the date as of which indebtedness is to be determined, including, without
limitation, all obligations for money borrowed and capitalized lease
obligations, and shall also include all indebtedness and liabilities of any
other Person assumed or guaranteed by such Person or in respect of which such
Person is secondarily or contingently liable (other than by endorsement of
instruments in the course of collection) whether by reason of any agreement to
acquire such indebtedness or to supply or advance sums or otherwise.

"Inter-Company Note" shall mean a promissory note in favor of the Borrower
from each of its Subsidiaries substantially in the form of Exhibit K attached
hereto.

"Interest Period" shall mean (i) with respect to any Fixed Loan, the period
of 30, 60, 90, 120 or 180 days as agreed upon by Lender and the Borrower and
(ii) with respect to any Eurodollar Loan, the period commencing on the date
advanced and ending one, two, three or six months thereafter, all as designated
in the related Loan Request; provided, however, that (1) any Interest Period
which would otherwise end on a day which is not a Eurodollar Business Day shall
be extended to the next succeeding Eurodollar Business Day unless by such
extension it would fall in another calendar month, in which case such Interest
Period shall end on the immediately preceding Eurodollar Business Day, and (2)
any Interest Period applicable to a Eurodollar Loan which begins on a day for
which there is no numerically corresponding day in the calendar month during
which such Interest Period is to end shall, subject to the provisions of clause
(1) hereof, end on the last day of such calendar month. No Interest Period shall
extend beyond the Maturity Date.

"L/C Documents" shall have the meaning given such term in Paragraph 3(b)
below.

"L/C Drawing" shall have the meaning given such term in Paragraph 3(c)
below.

"L/C Sublimit" shall mean $3,000,000.
<PAGE>

"Letters Of Credit" shall have the meaning given such term in Paragraph
2(a) below.

"Letter Of Credit Request" shall mean a request for a Letter Of Credit in
form satisfactory to the Lender.

"Lien" shall mean any security interest, mortgage, pledge, privilege, lien,
claim on property, charge or encumbrance (including any conditional sale or
other title retention agreement), any lease in the nature thereof, and the
filing of or agreement to give any financing statement under the Uniform
Commercial Code of any jurisdiction. "Loan Documents" shall mean this Agreement,
the Notes, the Security Documents, the Guarantees, the Contribution Agreements,
the Inter-Company Note, and each other document, instrument or agreement
executed by the Borrower or a Guarantor in connection herewith or therewith, as
any of the same may be amended, extended or replaced from time to time.

"Loan Maturity Date" shall mean the earlier of: (a) September 15, 1997, as
such date may be extended from time to time in writing by the Borrower and
Lender (b) the date Lender terminates its obligation to make further Loans
pursuant to Paragraph 8 below; or (c) the date the Credit Limit is reduced to
$0.00.

"Loan Request" shall mean a request for a Loan in the form attached hereto
as Exhibit J, or in other form satisfactory to Lender.

"Loans" shall have the meaning given in Paragraph 2(a) below.

"Note" shall mean the note delivered by the Borrower to Lender in the form
attached hereto as Exhibit A.

"Obligations" shall mean any and all debts, obligations and liabilities of
the Borrower to Lender arising out of or related to the Loan Documents (whether
principal, interest, fees or otherwise, now existing or hereafter arising,
whether voluntary or involuntary, whether or not jointly owed with others,
whether direct or indirect, absolute or contingent, contractual or tortious,
liquidated or unliquidated, arising by operation of law or otherwise, whether or
not from time to time decreased or extinguished and later increased, created or
incurred, and whether or not extended, modified, rearranged, restructured,
refinanced or replaced, including without limitation, modifications to interest
rates or other payment terms of such debts, obligations or liabilities).

"Outstanding Letter Of Credit" shall mean (i) any Letter Of Credit which
has not been cancelled, expired, un-utilized or fully drawn down, (ii) that
certain Letter Of Credit number SB2321 dated as of February 10, 1995 issued by
Lender in favor of the Aetna Casualty & Surety Company in the amount of
$1,000,000 and (iii) the amount of any unreimbursed L/C Drawings.
<PAGE>

"Person" shall mean any corporation, natural person, firm, joint venture,
partnership, trust, unincorporated organization, government or any department or
agency of any government.

"Potential Default" shall mean an event which but for the lapse of time or
the giving of notice, or both, would constitute an Event Of Default.

"Proceeds" shall mean whatever is receivable or received when Collateral or
Proceeds are sold, collected, exchanged or otherwise disposed of, whether such
disposition is voluntary or involuntary, and includes, without limitation, all
rights to payment, including return premiums, with respect to any insurance
relating thereto.

"Reference Rate" shall mean the fluctuating per annum rate announced from
time to time by Sanwa Bank California in Los Angeles, California, as its
"Reference Rate". The Reference Rate is a rate set by Sanwa Bank California
based upon various factors including Sanwa Bank California's costs and desired
return, general economic conditions, and other factors, and is used as a
reference point for pricing some loans, which may be priced at, above or below
the Reference Rate.

"Reference Rate Loan" shall mean Loans hereunder at such time as they are
made and/or being maintained at a rate of interest based on the Reference Rate.

"Requirements Of Law" shall mean as to any Person the Certificate of
Incorporation and By-Laws or other organizational or governing documents of such
Person, and any law, treaty, rule or regulation, or a final and binding
determination of an arbitrator or a determination of a court or other
Governmental Authority, in each case applicable to or binding upon such Person
or any of its property or to which such Person or any of its property is
subject. "Responsible Officer" shall mean the chief financial officer or, in the
absence of the chief financial officer, such officer as the chief financial
officer shall advise Lender in writing is a "Responsible Officer" for purposes
of this Agreement.

"Security Agreement" shall have the meaning given such term in Paragraph
3(k) below.

"Security Documents" shall have the meaning given such term in Paragraph
3(k) below.

"Significant Subsidiary" shall mean any Subsidiary which, based on
consolidating statements most recently delivered to the Lender, either (i) has
revenue, including sales to unaffiliated customers and affiliated customers
equal to 10% or more of combined revenue of the Borrower or (ii) has combined
tangible assets equal to 10% or more of the combined tangible assets of the
Borrower.
<PAGE>

"Subordinated Debt" shall mean Indebtedness of the Borrower outstanding on
the date of this Agreement pursuant to the terms of which such Indebtedness is
subordinated to the Obligations on terms and conditions satisfactory to Lender.

"Subsidiary" shall mean any Person more than fifty percent (50%) of the
equity of which has by the terms thereof ordinary voting power to elect the
board of directors, managers or trustees of the entity (irrespective of whether
or not at the time stock of any other class or classes of such Person shall have
or might have voting power by reason of the happening of any contingency) or
shall, at the time as of which any determination is being made, be owned, either
directly or through Subsidiaries.

2. Credit Facilities.
2(a) Credit Limits.
(1) Revolving Loans. On the terms and subject to the conditions set
forth herein, Lender agrees that it shall from time to time to and including the
Loan Maturity Date (as such term and capitalized terms not otherwise defined
herein are defined in Paragraph 1 above) make revolving Loans (the "Loans" or a
"Loan") to the Borrower in an aggregate amount with all its other outstanding
Loans and Outstanding Letters Of Credit not to exceed at any one time the Credit
Limit. Loans may be repaid and reborrowed in accordance with this Agreement.

(2) Letters Of Credit. On the terms and subject to the conditions set
forth herein, the Lender agrees to issue for the account of the Borrower from
time to time from the date hereof to and including the 30th day immediately
preceding the Loan Maturity Date, its Letters Of Credit (a "Letter Of Credit"
and collectively the "Letters Of Credit") in an aggregate amount with other
Outstanding Letters Of Credit not to exceed the L/C Sublimit. No commercial
Letter of Credit shall expire more than one year from the date of its issuance;
no standby Letter of Credit shall expire more than one year from the date of its
issuance. The aggregate of Outstanding Letters Of Credit and outstanding Loans
shall not exceed at any one time the Credit Limit. No Letter Of Credit may have
an expiration date later than thirty (30) days prior to the Loan Maturity Date.
Letters Of Credit may be commercial letters of credit or stand-by Letters of
Credit.

2(b) Maintenance of Loans. Loans shall be maintained, at the election of
the Borrower made from time to time as permitted herein, as Reference Rate Loans
and/or Eurodollar Loans and/or Fixed Loans or any combination thereof.

2(c) Calculation of Interest. The Borrower shall pay interest on Loans
outstanding hereunder from the date disbursed to but not including the date of
payment at a rate per annum equal to, at the option of and as selected by the
Borrower from time to time (subject to the provisions of Paragraphs 2(f), (g)
and (h) below): (1) with respect to each Loan which is a Eurodollar Loan, at the
Applicable IBO Rate for the applicable Interest Period, (2) with respect to each
Loan which is a Reference Rate Loan, at a fluctuating rate per annum equal to
<PAGE>

the Applicable Reference Rate during the applicable calculation period, and (3)
with respect to Fixed Loans, the Fixed Rate for the applicable Interest Period.

2(d) Payment of Interest. Interest accruing on Reference Rate Loans and
Fixed Loans outstanding hereunder shall be payable monthly, in arrears, for each
month on or before the tenth Business Day of the next succeeding month, and,
with respect to Fixed Loans, on the last day of the relevant Interest Period.
Interest accruing on Eurodollar Loans shall be payable in arrears: (1) in the
case of Eurodollar Loans with Interest Periods ending from one month to three
months from the date advanced, at the end of the applicable Interest Period
therefor; and (2) in the case of Eurodollar Loans with Interest Periods ending
later than three months from the date advanced, at the end of each three month
period from the date advanced, and then at the end of the applicable Interest
Period therefor. A final payment of interest shall be payable, with respect to
Loans, on the Loan Maturity Date. The Borrower hereby irrevocably authorizes and
directs Lender to collect interest when due by debiting the amount of interest
payable from any collected funds then on deposit in such account maintained by
the Borrower with Lender as the Borrower shall designate, but no failure by
Lender to so debit such account and no insufficiency in the amount on deposit in
such account shall excuse the Borrower from making any payment in full when due.
In accordance with its usual procedures, Lender will notify the Borrower of the
date and approximate amount of any such debit prior to the date thereof.
2(e) Repayment of Principal. (1) Subject to the prepayment requirements of
Paragraph 2(h) below, the Borrower shall pay:
(I) the principal amount of all Loans remaining outstanding on the Loan
Maturity Date.

(ii) The Borrower hereby irrevocably authorizes and directs Lender to
collect principal on the Loans when due by debiting the amount of principal
payable from any collected funds then on deposit in such account maintained by
the Borrower with Lender as the Borrower shall designate, but no failure by
Lender to so debit such account and no insufficiency in the amount on deposit in
such account shall excuse the Borrower from making any payment in full when due.

2(f) Election of Type of Loan; Conversion Options.
(1) The Borrower may elect from time to time to have Loans funded (i) as
Reference Rate Loans or Fixed Loans by giving Lender prior irrevocable notice no
later than 11:00 a.m. (Los Angeles time) on the proposed date of borrowing of
such election, and (ii) as Eurodollar Loans by giving Lender at least three
Eurodollar Business Days' prior irrevocable notice of such election. The
Borrower may elect from time to time to (i) convert Loans outstanding as
Eurodollar Loans or Fixed Loans to Reference Rate Loans by giving Lender at
least one Business Day's prior irrevocable notice of such election, and (ii)
convert Loans outstanding as Reference Rate Loans to Eurodollar Loans or Fixed
Loans by giving Lender at least three Business Days' prior irrevocable notice of
such election. Any such conversion of Eurodollar Loans or Fixed Loans may only
<PAGE>

be made on the last day of the applicable Interest Period. All such elections
shall be evidenced by the delivery by the Borrower to Lender within the required
time frame of a duly executed Loan Request. No Reference Rate Loan shall be
converted into a Eurodollar Loan or Fixed Loans if an Event Of Default or
Potential Default has occurred and is continuing on the day occurring three
Eurodollar Business Days or, in the case of Fixed Loans, one Business Day prior
to the date of the conversion requested by the Borrower. All or any part of
outstanding Loans may be converted as provided in this Paragraph 2(f)(1),
provided that partial conversions shall be in a principal amount of $1,000,000
or whole multiples of $500,000 in excess thereof, and in the case of conversions
into Eurodollar Loans or Fixed Loans, after giving effect thereto the aggregate
of the then number of respective Eurodollar Loans and Fixed Loans of Lender
having a different Interest Period does not exceed five.

(2) Any Eurodollar Loan or Fixed Loan may be continued as such upon the
expiration of the Interest Period with respect thereto by giving Lender at least
three Eurodollar Business Days', or in the case of Fixed Loans, one Business
Days' prior irrevocable notice of such election as set forth on a duly executed
Loan Request; provided, however, that no Eurodollar Loan or Fixed Loan may be
continued as such when any Event Of Default or Potential Default has occurred
and is continuing, but shall be automatically converted to a Reference Rate Loan
on the last day of the then current Interest Period applicable thereto, and
Lender shall notify the Borrower promptly that such automatic conversion will
occur. If the Borrower shall fail to give notice as provided above, the Borrower
shall be deemed to have elected to convert the affected Eurodollar Loan or Fixed
Loan to a Reference Rate Loan on the last day of the relevant Interest Period.

2(g) Inability to Determine Rate. In the event that Lender shall have
determined (which determination shall be conclusive and binding upon the
Borrower) that by reason of circumstances affecting the interbank eurodollar
market adequate and reasonable means do not exist for ascertaining the IBO Rate
for any Interest Period, Lender shall forthwith give notice to the Borrower. If
such notice is given: (1) no Loan may be funded as a Eurodollar Loan, (2) any
Loan that was to have been or would be converted to a Eurodollar Loan shall,
subject to the provisions hereof, be continued as a Reference Rate Loan, and (3)
any outstanding Eurodollar Loan shall be converted, on the last day of the then
current Interest Period with respect thereto, to a Reference Rate Loan.

2(h) Illegality. Notwithstanding any other provisions herein, if any law,
regulation, treaty or directive or any change therein or in the interpretation
or application thereof, shall make it unlawful for Lender to make or maintain
Eurodollar Loans as contemplated by this Agreement: (1) the commitment of Lender
hereunder to make or to continue Eurodollar Loans or to convert Reference Rate
Loans to Eurodollar Loans shall forthwith be cancelled and (2) Lender's Loans
then outstanding as Eurodollar Loans, if any, shall be converted automatically
to Reference Rate Loans or, at the request of the Borrower, Fixed Loans at the
end of their respective Interest Periods or within such earlier period as
required by law. In the event of a conversion of any such Loan prior to the end
of its applicable Interest Period the Borrower hereby agrees promptly to pay
<PAGE>

Lender upon demand in writing setting forth in reasonable detail the calculation
of the amount so demanded, the amounts required pursuant to Paragraph 2(k)
below, it being agreed and understood that such conversion shall constitute a
prepayment for all purposes hereof. The provisions hereof shall survive the
termination of this Agreement and payment of the outstanding Loans and all other
amounts payable hereunder.

2(i) Requirements Of Law; Increased Costs. In the event that any applicable
law, order, regulation, treaty or directive issued by any central bank or other
Governmental Authority, agency or instrumentality or in the governmental or
judicial interpretation or application thereof, or compliance by Lender with any
request or directive (whether or not having the force of law) issued by any
central bank or other Governmental Authority, agency or instrumentality:
(1) Does or shall subject Lender to any tax of any kind whatsoever with
respect to this Agreement or any Loans made or Letters Of Credit issued
hereunder, or change the basis of taxation of payments to Lender of principal,
fee, interest or any other amount payable hereunder (except for change in the
rate of tax on the overall net income of Lender);

(2) Does or shall impose, modify or hold applicable any reserve, capital
requirement, special deposit, compulsory loan or similar requirements against
assets held by, or deposits or other liabilities in or for the account of,
advances or Loans by, or other credit extended by, or any other acquisition of
funds by, any office of Lender which are not otherwise included in the
determination of interest payable on the Obligations; or

(3) Does or shall impose on Lender any other condition; and the result of
any of the foregoing is to increase the cost to Lender of making, renewing or
maintaining any Loan or to reduce any amount receivable in respect thereof or
the rate of return on the capital of Lender, then, in any such case, the
Borrower shall promptly pay to Lender, upon its written demand made to the
Borrower, any additional amounts necessary to compensate Lender for such
additional cost or reduced amounts receivable or rate of return as determined by
Lender with respect to this Agreement or Loans made or Letters Of Credit issued
hereunder. If Lender becomes entitled to claim any additional amounts pursuant
to this Paragraph 2(i), it shall promptly notify the Borrower of the event by
reason of which it has become so entitled. A certificate as to any additional
amounts payable pursuant to the foregoing sentence containing the calculation
thereof in reasonable detail submitted by Lender to the Borrower shall be
conclusive in the absence of manifest error. The provisions hereof shall survive
the termination of this Agreement and payment of the outstanding Loans and all
other amounts payable hereunder.
2(j) Funding. Lender shall be entitled to fund all or any portion of its
Loans in any manner it may determine in its sole discretion, including, without
limitation, in the Grand Cayman inter-bank market, the London inter-bank market
and within the United States, but all calculations and transactions hereunder
shall be conducted as though Lender actually funds all Eurodollar Loans through
the purchase in London of offshore dollar deposits in the amount of the relevant
<PAGE>

Eurodollar Loan in maturities corresponding to the applicable Interest Period.

2(k) Prepayment Premium. In addition to all other payment obligations
hereunder, in the event: (1) any Loan which is outstanding as a Eurodollar Loan
is prepaid prior to the last day of the applicable Interest Period, whether
following a voluntary prepayment, a mandatory prepayment or otherwise, or (2)
the Borrower shall fail to continue or to make a conversion to a Eurodollar Loan
or Fixed Loan after the Borrower has given notice thereof as provided in
Paragraph 2(f) above, or (3) any Loan which is outstanding as a Fixed Loan is
paid on a day other than the dates fixed for payment under this Agreement, or
(4) the Borrower shall fail to continue or to make a conversion to Reference
Rate Loans after the Borrower has given notice thereof as provided in Paragraph
2(f) above, then the Borrower shall immediately pay to Lender an additional
premium sum compensating Lender for actual losses, and reasonable costs and
expenses incurred by Lender in connection with such prepayment, including,
without limitation, those incurred in connection with redeployment of funds all
as set forth in a certificate from the Lender setting forth in reasonable detail
the nature and amount thereof.

3. Miscellaneous Provisions.

3(a) Use of Proceeds. The proceeds of the Loans shall be utilized by the
Borrower for working capital, including, without limitation, capital
expenditures and acquisitions. Letters Of Credit shall be used for conduct of
business in the ordinary course.

3(b) Request For Loans and Letters Of Credit; Making of Loans and Issuance
of Letters Of Credit

(1) The Loans. If the Borrower desires to borrow hereunder, the Borrower
shall deliver a Loan Request to Lender which shall be delivered telephonically
no later than 10:00 a.m. (Los Angeles time) and immediately confirmed by
facsimile transmission, on the day notice of borrowing is required to be given
for the type of Loan being requested pursuant to Paragraph 2(f)(1) above. If the
Loan is for the benefit of a Guarantor, such Loan Request shall direct Lender to
disburse the proceeds of such Loan to an account of such Guarantor. Each Loan
shall be in a minimum amount not less than $500,000 and in increments of
$500,000 in excess thereof in the case of a Eurodollar Loan, and in a minimum
amount not less than $100,000 and in increments of $100,000 in excess thereof in
the case of a Reference Rate Loan or a Fixed Loan.

(2) Letters Of Credit. If the Borrower desires to request a Letter Of
Credit hereunder, the Borrower shall deliver a Letter Of Credit Request (which
shall be completed in form and substance satisfactory to the Lender) to the
Lender which shall be delivered by telefacsimile transmission at least three (3)
Business Days prior to the requested date of issuance. If the Letter of Credit
is for the benefit of a Guarantor, such Letter of Credit Request shall notify
the Lender of the identity of such Guarantor. Each such Letter Of Credit Request
shall be accompanied by all other documents, instruments, and agreements as the
Lender may reasonably request in connection with such request (the "L/C
<PAGE>

Documents"). The Lender shall issue its Letter Of Credit in accordance with the
terms of such notice.

3(c) Evidence of Repayment Obligations.

(1) The Loans. The obligation of the Borrower to repay the Loans shall be
evidenced by a revolving note payable to the order of Lender in the form of that
attached hereto as Exhibits A (the "Note"). Upon any advance, conversion or
prepayment as provided in this Agreement with respect to any Loan, Lender is
hereby authorized to record the date and amount of each such advance and
conversion made by Lender, or the date and amount of each such payment or
prepayment of principal of the Loan made by Lender, the applicable Interest
Period and interest rate with respect thereto, on the schedules annexed to and
constituting a part of the Note and any such recordation shall constitute prima
facie evidence of the accuracy of the information so recorded absent manifest
error. The failure of Lender to make any such notation shall not affect in any
manner or to any extent the Borrower's Obligations hereunder.

(2) Letters Of Credit. Each drawing under a Letter Of Credit (an "L/C
Drawing") shall be payable in full by the Borrower on the date thereof, without
demand or notice of any kind. If the Borrower desires to repay an L/C Drawing
from the proceeds of a Loan, the Borrower may request a Loan in accordance with
the other terms and conditions of this Agreement and, if disbursed on the date
of such drawing, shall be applied in payment of such obligation by the Borrower.
If any L/C Drawing shall not be repaid when due in accordance with the terms of
this Agreement, the Borrower shall reimburse Lender for each such L/C Drawing
together with interest thereon until paid at the rate set forth in Paragraph
3(e) below. The obligation of the Borrower to reimburse the Lender for L/C
Drawings shall be absolute, irrevocable and unconditional under any and all
circumstances whatsoever and irrespective of any set-off, counterclaim or
defense to payment which the Borrower may have or have had against the Lender
(except such as may arise out of the Lender's negligence or willful misconduct
hereunder) or any other Person, including, without limitation, any set-off,
counterclaim or defense based upon or arising out of:

(a) Any lack of validity or enforceability of this Agreement or any of
the other Loan Documents;

(b) Any amendment or waiver of or any consent to departure from the
terms of any Letter Of Credit;

(c) The existence of any claim, set-off, defense or other right which
the Borrower or any other Person may have at any time against any beneficiary or
any transferee of any Letter Of Credit (or any Person for whom any such
beneficiary or any such transferee may be acting); or
(d) Any allegation that any demand, statement or any other document
presented under any Letter Of Credit is forged, fraudulent, invalid or
<PAGE>

insufficient in any respect, or any statement therein being untrue or inaccurate
in any respect whatsoever or any variations in punctuation, capitalization,
spelling or format of the drafts or any statements presented in connection with
any L/C Drawing.

3(d) Nature and Place of Payments. All payments made on account of the
Obligations shall be made by the Borrower, without setoff or counterclaim, in
lawful money of the United States of America in immediately available funds,
free and clear of and without deduction for any taxes, fees or other charges of
any nature whatsoever imposed by any taxing authority and must be received by
Lender by 11:00 a.m. (Los Angeles time) on the day of payment, it being
expressly agreed and understood that if a payment is received after 11:00 a.m.
(Los Angeles time) by Lender, such payment will be considered to have been made
by the Borrower on the next succeeding Business Day and interest thereon shall
be payable by the Borrower at the Applicable Reference Rate during such
extension. If any payment required to be made by the Borrower hereunder becomes
due and payable on a day other than a Business Day, the due date thereof shall
be extended to the next succeeding Business Day and interest thereon shall be
payable at the then applicable rate during such extension.

3(e) Default Interest. After the occurrence of and during the continuance
of an Event Of Default, Lender, in its sole discretion, may determine that all
Obligations shall bear interest from the date due until paid in full at a per
annum rate equal to three percent (3%) above the Reference Rate.

3(f) Computations. All computations of interest and fees payable hereunder
shall be based upon a year of 360 days for the actual number of days elapsed.

3(g) Prepayments.
(1) The Borrower may prepay Reference Rate Loans hereunder in whole or in
part at any time. Eurodollar Loans and Fixed Loans may only be paid at the end
of their respective Interest Periods.

(2) The Borrower shall pay in connection with any prepayment hereunder,
whether voluntary or mandatory, all interest accrued but unpaid on Loans to
which such prepayment is applied, and all prepayment premiums, if any, on
Eurodollar Loans to which such prepayment is applied, concurrently with payment
to Lender of any principal amounts.

(3) Subject to the other terms and conditions of this Agreement, the
Borrower may, from time to time, reduce the Credit Limit, in increments of not
less than $5,000,000, to an amount not less than the aggregate Loans outstanding
and Outstanding Letters Of Credit.

3(h) Fees.
<PAGE>

(1) Commitment Fee. The Borrower shall pay to Lender within two weeks of
receipt of a billing as of the last day of each calendar quarter for such
calendar quarter a commitment fee, computed at the per annum rate of one-quarter
of one percent (0.25%) of: (1) the Credit Limit, minus (2) the daily average
amount of Loans and Outstanding Letters of Credit outstanding during the
applicable computation period.

(2) Letter Of Credit Fees. On or prior to the issuance of each commercial
Letter Of Credit, the Borrower shall pay to Bank a Letter Of Credit fee equal to
an amount as may be required by the Lender in accordance with its standard fee
structure for such Letters of Credit as set forth in Schedule 3(h)(2) attached
hereto. With respect to each standby Letter of Credit, the Borrower shall pay to
Bank on or prior to the date of issuance a non-refundable Letter Of Credit
commission equal to the per annum rate of 1.00% on the face amount of such
standby Letters Of Credit.

(3) Other Fees. The Borrower shall pay such other fees as it shall from
time to time agree upon in connection with this Agreement pursuant to letter
agreements entered into with reference to this paragraph.
3(i) Guarantees; Contribution Agreements. As support for the Obligations,
the Borrower will cause to be executed and delivered to Lender a guarantee in
the form attached hereto as Exhibit C (the "Guarantees" or a "Guarantee") by
each of the Guarantors. In connection with such Guarantees, the Borrower will
cause to be executed and delivered a Contribution Agreement in the form attached
hereto as Exhibit D ("Contribution Agreement") by each of the Guarantors. The
agreements of the Borrower under this Paragraph 3(i) are on-going, and, from
time to time, the Borrower will cause any Guarantor that becomes such after the
date of this Agreement to execute and deliver a Guaranty and Contribution
Agreement in accordance with this Paragraph 3(i).

3(j) Collateral Security; Additional Documents. As collateral security for
the Obligations, the Borrower shall execute and deliver and cause to be executed
and delivered to Lender for its benefit: (1) a Security Agreement from the
Borrower and from each of the Guarantors substantially in the forms attached
hereto respectively as Exhibits B-1 and B-2 (the "Security Agreements" or a
"Security Agreement"), pursuant to which the Borrower and each Guarantor shall
pledge, assign and grant to Lender, for its benefit, a first priority security
interest in and Lien upon the Collateral (including, without limitation, the
Inter-Company Notes) and (2) such UCC-1 financing statements as Lender may
require. The Borrower further agrees to execute and deliver or to cause to be
executed and delivered to Lender from time to time, for each Guarantor that
becomes such after the date of this Agreement, a Security Agreement, a Guarantee
and such UCC-1 financing as Lender may reasonably require and, for the Borrower
and all Guarantors, such confirmatory Security Agreements, financing statements,
consents of and notices to third parties and such documents, instruments and
agreements, including, without limitation, relating to the creation or
perfection of Liens under any relevant state or Federal law, or the law of any
relevant foreign jurisdiction as Lender may reasonably request which are in
Lender's judgment necessary or desirable to obtain for Lender the benefit of the
Security Agreements and the Collateral (the Security Agreements, the UCC-1
<PAGE>

financing statements referred to in subparagraph (2) above, and such additional
documents, instruments and agreements being referred to herein as the "Security
Documents"). The Borrower agrees to cause each Significant Subsidiary that
becomes such after the date hereof to execute and deliver an Inter-Company Note
in favor of the Borrower.

4. Conditions to Making Loans.

4(a) First Credit. As conditions precedent to the obligations of Lender,
satisfactory to Lender in form and substance, to make the first Loan and of the
Lender to issue the first Letter Of Credit:
(1) The Borrower shall have delivered or shall have had delivered to Lender
each of the following:

(i) A duly executed copy of this Agreement;

(ii) Duly executed copies of each of the other Loan Documents;

(iii) Such credit applications, financial statements, authorizations, and
such information concerning the Borrower and its business, operations and
condition (financial and otherwise) as Lender may reasonably request;

(iv) Certified copies of resolutions of the Board of Directors of the
Borrower and each Guarantor approving the execution and delivery of the Loan
Documents to which it is a party;
(v) A certificate of the Secretary or an Assistant Secretary of
the Borrower and each Guarantor certifying the names and true signatures of
the officers of the Borrower and each Guarantor authorized to sign the
Loan Documents to which it is a party;

(vi) An opinion of counsel for the Borrower and each Guarantor,
except Mentor Caribe, in the form of Exhibit E attached hereto and covering
such other matters as Lender may reasonably request;

(vii) A copy of the Certificate of Incorporation of the Borrower and each
Guarantor, certified by the Secretary of State of the State of its incorporation
as of a recent date;

(viii)A copy of each of the Articles of Incorporation and Bylaws of the
Borrower and each Guarantor, certified by the Secretary or an Assistant
Secretary of the Borrower or Guarantor, as the case may be, as of the date of
this Agreement as being accurate and complete;

(ix) A certificate of good standing or status of the Borrower and
each Guarantor from the Secretary of State of the State of its incorporation and
each jurisdiction where it is qualified to do business as of a recent date;
<PAGE>

(x) Payment of fees payable on or prior to the effective date of
this Agreement pursuant to Paragraph 3(h) above;

(xi) A search report showing only such financing statements and
other filings of record as to the Collateral as shall be acceptable to Lender;
and

(xii) A copy of insurance policies or a certificate of insurance evidencing
compliance by the Borrower under Paragraph 6(i) below.

(2) All fees and other amounts payable hereunder prior to such date shall
have been paid, and all acts and conditions (including, without limitation, the
obtaining of any necessary regulatory approvals and the making of any required
filings, recordings or registrations) required to be done and performed and to
have happened precedent to the execution, delivery and performance of the Loan
Documents and to constitute the same legal, valid and binding obligations,
enforceable in accordance with their respective terms, shall have been done and
performed and shall have happened in due and strict compliance with all
applicable laws.

4(b) Ongoing Loans and Letters Of Credit. As conditions precedent to
Lender's obligation to make any Loan, including the first Loan, and the Lender's
obligations to issue any Letter Of Credit, including the first Letter Of Credit,
at and as of the date of the funding or issuance thereof;

(1) There shall have been delivered to Lender: (I) in the case of the Loan,
a Loan Request, and (ii) in the case of the Letter Of Credit, a Letter Of Credit
Request and the related L/C Documents;

(2) The representations and warranties of the Borrower and each Guarantor
contained in the Loan Documents shall be accurate and complete in all material
respects as if made on and as of such date;

(3) There shall not have occurred an Event Of Default or Potential Default
not otherwise cured or waived; and

(4) Following the making of such Loan or issuance of such Letter Of Credit,
the aggregate principal amount of Loans outstanding and Outstanding Letters Of
Credit will not exceed the limitation of Paragraphs 2(a) above.

By delivering a Loan Request to Lender or a Letter Of Credit Request to the
Lender hereunder, or by requesting the conversion of a Loan into a Loan of a
different type, or the continuation of a Loan pursuant to Paragraph 2(f) above,
the Borrower shall be deemed to have represented and warranted the accuracy and
completeness of the statements set forth in subparagraphs (b)(2) through (b)(4)
above.

5. Representations and Warranties of the Borrower.
<PAGE>

As an inducement to Lender to enter into this Agreement and to make Loans
and to issue Letters Of Credit as provided herein, the Borrower represents and
warrants to Lender that:

5(a) Financial Position. The financial statements of the Borrower dated
December 31, 1994 which have heretofore been furnished to Lender, present fairly
in all material respects and, except as otherwise agreed by Lender, present
fairly in accordance with GAAP the financial position of the Borrower and its
consolidated Subsidiaries at such dates and the consolidated and consolidating
results of their operations and changes in their cash flows for the fiscal
periods then ended.

5(b) No Change. Since the date of the financial statements described in the
preceding Paragraph 5(a), there has been no material adverse change in the
business, operations, assets or financial or other condition of the Borrower or
the Borrower and the Guarantors taken as a whole or the Borrower and its
consolidated Subsidiaries taken as a whole. Since such date, the Borrower has
not entered into, incurred or assumed any long-term debt, mortgages, material
leases or material oral or written commitments not disclosed to the Lender prior
to the date of this Agreement.

5(c) Corporate Existence; Compliance with Law. The Borrower and each
Guarantor (1) is duly organized, validly existing and in good standing as a
corporation under the laws of the state of its incorporation and is qualified to
do business in each jurisdiction where its ownership of property or conduct of
business requires such qualification and where failure to qualify would have a
material adverse effect on it or its property and/or business or on the ability
of the Borrower to pay or perform the Obligations, (2) has the corporate power
and authority and the legal right to own and operate its property and to conduct
business in the manner in which it does and proposes so to do, and (3) is in
compliance in all material respects with all Requirements Of Law and Contractual
Obligations.

5(d) Corporate Power; Authorization; Enforceable Obligations. The Borrower
and each Guarantor has the corporate power and authority and the legal right to
execute, deliver and perform the Loan Documents to which it is a party and has
taken all necessary corporate action to authorize the execution, delivery and
performance of the Loan Documents. The Loan Documents have been duly executed
and delivered on behalf of the Borrower and each Guarantor and constitute legal,
valid and binding obligations of the Borrower and each Guarantor enforceable
against the Borrower and each Guarantor in accordance with their respective
terms, subject to the effect of applicable bankruptcy and other similar laws
affecting the rights of creditors generally and the effect of equitable
principles whether applied in an action at law or a suit in equity.

5(e) No Legal Bar. The execution, delivery and performance of the Loan
Documents, the borrowings hereunder and the use of the proceeds thereof, will
not violate any Requirement Of Law or any Contractual Obligations of the
Borrower or create or result in the creation of any Lien on any assets of the
Borrower or any Guarantor.
<PAGE>

5(f) No Material Litigation. Except as disclosed on Exhibit F hereto, no
litigation, investigation or proceeding of or before any arbitrator or
Governmental Authority is pending or, to the knowledge of the Borrower,
threatened by or against the Borrower or any of its Subsidiaries or against any
of such parties' properties or revenues which is likely to be adversely
determined and which, if adversely determined, is likely to have a material
adverse effect on the business, operations, property or financial or other
condition of the Borrower. By making this representation, the Borrower is not
representing that any litigation, investigation or proceeding disclosed on
Exhibit F hereto is, if adversely determined, likely to have a material adverse
effect on the business, operations, property or financial or other condition of
the Borrower nor that any such litigation is likely to be adversely determined.

5(g) Taxes. The Borrower and each of its Subsidiaries have filed or caused
to be filed all tax returns that are required to be filed and have paid all
taxes shown to be due and payable on said returns or on any assessments made
against them or any of their property other than with respect to immaterial
taxes and other than taxes which are being contested in good faith by
appropriate proceedings and as to which the Borrower or applicable Subsidiary
has established adequate reserves in conformity with GAAP.

5(h) Investment Company Act. The Borrower is not an "investment company" or
a company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.

5(i) Subsidiaries. Attached hereto as Exhibit G is an accurate and complete
list of all presently existing Subsidiaries of the Borrower, their respective
jurisdictions of incorporation and qualification and the percentage of their
capital stock owned by the Borrower or other Subsidiaries. All of the issued and
outstanding shares of capital stock of such Subsidiaries have been duly
authorized and issued and are fully paid and non-assessable.

5(j) Federal Reserve Board Regulations. Neither the Borrower nor any of the
Guarantors is engaged or will engage, principally or as one of its important
activities, in the business of extending credit for the purpose of "purchasing"
or "carrying" any "margin stock" within the respective meanings of such terms
under Regulation U. No part of the proceeds of any Loan issued hereunder will be
used for "purchasing" or "carrying" "margin stock" as so defined or for any
purpose which violates, or which would be inconsistent with, the provisions of
the Regulations of the Board of Governors of the Federal Reserve System.

5(k) ERISA. If the Borrower has a pension, profit sharing or retirement
plan subject to ERISA, such plan has been and will continue to be funded in
accordance with its terms and otherwise complies with and continues to comply
with the requirements of ERISA.

5(l) Assets. The Borrower and each of its Subsidiaries has good and
marketable title to all property and assets reflected in the financial
statements referred to in Paragraph 5(a) above, except property and assets sold
or otherwise disposed of in the ordinary course of business subsequent to the
respective dates thereof. Except as reflected in the financial statements
referred to in Paragraph 5(a) above or as permitted under Paragraph 7(a) below,
neither the Borrower nor any of the Guarantors has outstanding Liens on any of
<PAGE>

its properties or assets nor are there any security agreements to which the
Borrower or any of the Guarantors is a party, or title retention agreements,
whether in the form of leases or otherwise, of any personal property.

5(m) Securities Acts. Neither the Borrower nor any Guarantor has issued any
unregistered securities in violation of the registration requirements of Section
5 of the Securities Act of 1933, as amended, or any other law, and is not
violating any rule, regulation or requirement under the Securities Act of 1933,
as amended, or the Securities and Exchange Act of 1934, as amended. The Borrower
is not required to qualify an indenture under the Trust Indenture Act of 1939,
as amended, in connection with its execution and delivery of the Notes.

5(n) Consents, etc. No consent, approval, authorization of, or
registration, declaration or filing with any Governmental Authority is required
on the part of the Borrower or any Guarantor in connection with the execution
and delivery of the Loan Documents or the performance of or compliance with the
terms, provisions and conditions hereof or thereof.

6. Affirmative Covenants. The Borrower hereby covenants and agrees with
Lender that, as long as any Obligations remain unpaid or Lender has any
obligation to make Loans hereunder or the Lender has any obligation to issue
Letters Of Credit for the account of the Borrower, the Borrower shall and shall
cause each Guarantor to:

6(a) Financial Statements. Furnish or cause to be furnished to Lender:
(1) Within 120 days after the last day of each fiscal year of the Borrower,
(a) the form of 10K of Borrower filed with the Securities & Exchange Commission
for such fiscal year containing the audited consolidated balance sheet of the
Borrower and its consolidated Subsidiaries as at the end of, and the related
consolidated statements of income, shareholders' equity and cash flows for such
year, and the comparative financial statements as at the end of, and for, the
preceding fiscal year all prepared in accordance with GAAP accompanied by an
opinion of independent certified public accountants of nationally recognized
standing, and (b) the unaudited consolidating balance sheet of the Borrower and
its consolidated Subsidiaries as at the end of the related fiscal year and the
unaudited consolidating statement of income for such fiscal year in each case
consistent with prior practice certified by a Responsible Officer of the
Borrower that they fairly present the financial condition of the Borrower and
its consolidated Subsidiaries, as of the dates indicated and the results of
their operations and cash flows for the periods indicated all in conformity with
GAAP.
(2) Within sixty (60) days after the last day of the Borrower's fiscal
quarter (except the last quarter) the form of 10Q of the Borrower filed with the
Securities & Exchange Commission for such quarter containing the consolidated
and consolidating balance sheet of the Borrower and its Subsidiaries as of the
end of, and the related consolidated statements of income and shareholders'
equity for the quarter and for the period from the beginning of the then current
fiscal year to the end of such quarter.
<PAGE>

6(b) Certificates; Reports; Other Information. Furnish or cause to be
furnished to Lender:

(1) Not later than sixty (60) days after the end of each fiscal quarter of
Borrower, a Compliance Certificate of a Responsible Officer of the Borrower;

(2) Promptly, such additional financial and other information, including,
without limitation, financial statements of the Borrower or any Affiliate, if
available to the Borrower, as the Lender may from time to time reasonably
request; and

(3) On each June 30th and December 31st, a written statement setting forth
all product liability litigation or proceeding affecting the Borrower or any of
the Subsidiaries or the Collateral, including, without limitation, a summary of
each litigation or proceeding and a description of the product involved.

6(c) Payment of Indebtedness. Pay, discharge or otherwise satisfy at or
before maturity or before it becomes delinquent, defaulted or accelerated, as
the case may be, all its Indebtedness (including taxes), except Indebtedness
being contested in good faith and for which provision is made to the
satisfaction of Lender for the payment thereof in the event the Borrower or any
Guarantor is found to be obligated to pay such Indebtedness and which
Indebtedness is thereupon promptly paid by the Borrower or any Guarantor.

6(d) Maintenance of Existence and Properties. Maintain its corporate
existence and maintain all rights, privileges, licenses, approvals, franchises,
properties and assets, necessary or desirable in the normal conduct of its
business, and comply in all material respects with all Contractual Obligations
and Requirements Of Law.

6(e) Inspection of Property; Books and Records; Discussions. (1) Keep
proper books of record and account on the same fiscal year basis as maintained
on the date of this Agreement in which full, true and correct entries in
conformity with GAAP and all Requirements of Law shall be made of all dealings
and transactions in relation to its business and activities and (2) permit
representatives of Lender (i) to visit and inspect any of its properties and
examine and make abstracts from and copies of any of its books and records at
any reasonable time and as often as may reasonably be desired by the Lender,
(ii) to (at a cost reimbursed pursuant to Paragraph 6(g) below) audit its
accounts receivable and inventory, and (iii) with prior notice to the Borrower,
to discuss the business, operations, properties and financial and other
condition of the Borrower and any of the Guarantors with officers and, in the
reasonable discharge of its rights and obligations, employees of such parties,
and with their independent certified public accountants. Without limiting the
generality of the foregoing, the Borrower agrees that it will and will cause
each Guarantor to maintain such inter-company books and records as shall
evidence the value and benefit received by each Guarantor from Loans and Letters
Of Credit.

6(f) Notices. Promptly give written notice to Lender of:

(1) The occurrence of any Potential Default or Event Of Default;
<PAGE>

(2) Any litigation or proceeding (except those which are based solely on
product liability theories), including, without limitation, any substantial
dispute with any governmental or law enforcement agency, in an aggregate amount
in excess of $500,000 affecting the Borrower or any of its Subsidiaries or the
Collateral;

(3) Any litigation or proceeding initiated by any Person who is not a
citizen of the United States; and

(4) A material adverse change in the business, operations, property or
financial or other condition of the Borrower or any of the Guarantors.

6(g) Expenses. Pay all reasonable out-of-pocket expenses (including fees
and disbursements of counsel, including the reasonable allocated cost of inside
counsel): (1) of the Lender, in an aggregate amount not to exceed $8,000
incident to the preparation, negotiation, arrangement, closing, waiver to,
amendment or modification of, and administration of the Loan Documents, and the
protection of the rights of Lender under the Loan Documents, and (2) of Lender
incident to the enforcement of payment of the Obligations, whether by judicial
proceedings or otherwise, including, without limitation, in connection with
bankruptcy, insolvency, liquidation, reorganization, moratorium or other similar
proceedings involving the Borrower or any Guarantor. The obligations of the
Borrower under this Paragraph 6(g) shall be effective and enforceable whether or
not any Loan is made hereunder and shall survive payment of all other
Obligations. For the convenience of the Borrower, Lender agrees that, prior to
incurring any such costs, fees or expenses for counsel or consultants, it will
so notify the Borrower together with an estimate of the costs, fees or expenses
anticipated to be incurred.

6(h) Loan Documents. Use the Loans and Letters Of Credit as contemplated by
Paragraph 3(a) and comply with and observe all terms and conditions of the Loan
Documents.

6(i) Insurance. Obtain and maintain insurance with responsible companies in
such amounts and against such risks as are usually carried by corporations
engaged in similar businesses similarly situated, and furnish Lender on request
full information as to all such insurance and obtain loss-payee endorsements
thereon in favor of Lender. Such insurance coverage shall include, without
limitation, product liability insurance covering all products either (i) with an
insurance carrier rated by Best's Rating Service as "A VIII" or better or (ii)
with the prior written approval of Lender, which shall not be unreasonably
withheld, through self- insurance or a captive insurance company. Lender
recognizes that as of the date of this Agreement, silicone breast implant
products are self-insured by the Borrower.

6(j) Hazardous Materials. The Borrower shall indemnify and hold harmless
Lender from any loss or liability directly or indirectly arising out of the use,
generation, manufacture, production, storage, release, threatened release,
discharge, disposal or presence of a hazardous substance. This indemnity will
apply whether the hazardous substance is on, under or about the Borrower's or a
Guarantor's property or operations or property leased to the Borrower or a
Guarantor. The indemnity includes but is not limited to reasonable attorneys'
fees. The indemnity extends to Lender and its respective parents, subsidiaries
<PAGE>

and all of their directors, officers, employees, agents, successors, attorneys
and assigns. For these purposes, the term "hazardous substances" means any
substance which is or becomes designated as "hazardous" or "toxic" under any
federal, state or local law. This indemnity is without limitation and will
survive repayment of the Borrower's Obligations.

7. Negative Covenants. The Borrower hereby agrees that, as long as any
Obligations remain unpaid or Lender has any obligation to make Loans hereunder
or the Lender has any obligation to issue Letters Of Credit hereunder, the
Borrower shall not and shall not permit any Guarantor to, directly or
indirectly, without the prior consent of the Lender which shall not be
unreasonably withheld:

7(a) Liens. Create, incur, assume or suffer to exist, any Lien upon any of
its property or assets except:

(1) Liens or charges for current taxes, assessments or other governmental
charges which are not delinquent or which remain payable without penalty, or the
validity of which are contested in good faith by appropriate proceedings upon
stay of execution of the enforcement thereof, provided the Borrower shall have
set aside on its books and shall maintain adequate reserves for the payment of
same in conformity with GAAP;

(2) Liens, deposits or pledges made to secure statutory obligations, surety
or appeal bonds, or bonds for the release of attachments or for stay of
execution, or to secure the performance of bids, tenders, contracts (other than
for the payment of borrowed money), leases or for purposes of like general
nature in the ordinary course of the Borrower's business;

(3) Liens in favor of Lender;

(4) Liens in existence on the date hereof, with all liens securing
obligations in excess of $100,000 as set forth on Exhibit H;

(5) Any Lien securing obligations individually or in aggregate with
associated Liens in amounts not to exceed $100,000 incurred in the ordinary
course of business; and

(6) Liens on property of Mentor Medical Systems B.V. located in the
Netherlands.

7(b) Funded Debt. Create, incur, assume or suffer to exist, or otherwise
become or be liable in respect of any Funded Debt except:
(1) The Obligations;

(2) Indebtedness on endorsements of instruments for collection in the
ordinary course of business;
<PAGE>

(3) Funded Debt on bonds or undertakings incurred in the ordinary course of
business;

(4) Funded Debt reflected in the financial statements referred to in
Paragraph 5(a) above; and

(5) Funded Debt due to any holder of a Lien permitted under Paragraph 7(a)
above.

7(c) Consolidation and Merger. Liquidate or dissolve or enter into any
consolidation or merger in which Borrower is not the surviving corporation.

7(d) Acquisitions; Investments; Advances. Purchase or acquire or incur
liability for the purchase or acquisition of any or all of the assets or
business of any Person, other than purchases, acquisitions, and incurrences of
liability not in the nature of a business acquisition and made in the ordinary
course of business as conducted on the date of this Agreement; or, make or
commit to make any advance, loan or extension of credit or purchase any stock,
bonds, notes, debentures, or other securities of, forgive any Indebtedness of,
or make any other investment in, any Person other than:

(1) Investments by the Borrower in Guarantors; and

(2) Investments in an aggregate amount not in excess of Five Million
Dollars ($5,000,000) in any fiscal year for the acquisition of a business or
product line not outside of the medical device field; and

For purposes of this definition, "Investment" shall mean any direct or indirect
purchase or other acquisition by that Person of, or a beneficial interest in,
stock, or other securities of any other Person, or any direct or indirect loan,
advance (other than advances to employees for moving and travel expenses,
drawing accounts and similar expenditures in the ordinary course of business) or
capital contribution by that Person to any other Person, including all
indebtedness and accounts receivable from that other Person which are not
current assets or did not arise from sales to that other Person in the ordinary
course of business. The amount of any Investment shall be the original cost of
such Investment plus the cost of all additions thereto, without any adjustments
for increases or decreases in value, or write-ups, write-downs or write-offs
with respect to such Investment.

7(e) Payment of Dividends. Except to the Borrower, declare or pay any
dividends upon its shares of stock now or hereafter outstanding or make any
distribution of assets to its stockholders as such, whether in cash, property or
securities except (i) dividends payable in shares of capital stock and cash in
lieu of fractional shares or in options, warrants or other rights to purchase
shares of capital stock and (ii) dividends paid in any year in an aggregate
amount not in excess of one-half of the Borrower's consolidated net income for
the preceding fiscal year.
<PAGE>

7(f) Purchase or Retirement of Stock. Acquire, purchase, redeem or retire
any shares of its capital stock now or hereafter outstanding in excess of
$3,000,000.00 on an annual basis.

7(g) Sale of Assets. Sell, lease, assign, transfer or otherwise dispose of
any of its assets (other than excess, obsolete or worn out property), whether
now owned or hereafter acquired, other than (i) in the ordinary course of
business as presently conducted and at fair market value or (ii) in an aggregate
amount not to exceed $500,000 in any fiscal year, and not enter into any sale
and leaseback agreement relating to its assets without the prior written consent
of Lender.

7(h) Conduct of Business, etc.

(1) Engage in any business activities substantially different from the
Borrower's and the applicable Guarantor's business as conducted on the date of
this Agreement; or

(2) Enter into or agree to enter into any leveraged lease or similar
transaction pursuant to which it extends financing accommodations to any other
Person.

7(i) Financial Covenants. On a consolidated basis for the Borrower and its
Subsidiaries calculated in accordance with GAAP:

(1) permit its Effective Tangible Net Worth at any one time to be less than
the sum of $65,000,000 for each fiscal quarter after the date of this Agreement;

(2) permit the ratio of (i) all liabilities of the Borrower and its
Subsidiaries which, in accordance with GAAP and industry practices are shown on
the liability side of a balance sheet to (ii) Effective Tangible Net Worth at
any one time to be greater than 1.00 to 1.00;

(3) permit the ratio of (i) cash, short-term cash investments, marketable
securities not classified as long-term investments plus accounts receivable of
the Borrower and its Subsidiaries to (ii) current liabilities of the Borrower
and its Subsidiaries (including without limitation the Loans) at any one time to
be less than .85 to 1.00; or

(4) permit the net income of the Borrower to be less than $1.00 in any
fiscal quarter as calculated only for such fiscal quarter.

7(j) Subordinated Debt. Amend, modify or waive any material terms or
conditions of the Subordinated Debt.

8. Events of Default. Upon the occurrence of any of the following events
(an "Event Of Default"):
<PAGE>

8(a) The Borrower shall fail to pay any principal on the Loans on the date
when due or fail to pay within ten (10) days of the date when due any interest
or other Obligation under the Loan Documents; or

8(b) Any representation or warranty made by the Borrower or any Guarantor
in any Loan Documents or in connection with any Loan Documents shall be
materially inaccurate or incomplete in any respect on or as of the date made; or

8(c) The Borrower shall fail to maintain its corporate existence or shall
default in any material respect in the observance or performance of any covenant
or agreement contained in Paragraph 7 above; or

8(d) The Borrower or any Guarantor shall fail to observe or perform in any
material respect any other term or provision contained in the Loan Documents and
such failure shall continue for thirty (30) days after the Lender notifies the
Borrower thereof; or

8(e) The Borrower or any of its Subsidiaries shall default in any payment
of principal of or interest on any Indebtedness (other than the Obligations) in
an aggregate amount in excess of $100,000 or any other event shall occur the
effect of such is to permit such Indebtedness to be declared or otherwise to
become due prior to its stated maturity; or

8(f) (1) The Borrower or any of its Subsidiaries shall commence any case,
proceeding or other action (i) under any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief entered
with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to it or its debts, or
(ii) seeking appointment of a receiver, trustee, custodian or other similar
official for it or for all or any substantial part of its assets, or the
Borrower or any of its Subsidiaries shall make a general assignment for the
benefit of its creditors; or (2) there shall be commenced against the Borrower
or any of its Subsidiaries, any case, proceeding or other action of a nature
referred to in clause (1) above which (i) results in the entry of an order for
relief or any such adjudication or appointment, or (ii) remains undismissed,
undischarged or unbonded for a period of thirty (30) days; or (3) there shall be
commenced against the Borrower or any of its Subsidiaries, any case, proceeding
or other action seeking issuance of a warrant of attachment, execution,
distraint or similar process against all or substantially all of its assets
which results in the entry of an order for any such relief which shall not have
been vacated, discharged, stayed, satisfied or bonded or appealed against
pending appeal within thirty (30) days from the entry thereof; or (4) the
Borrower or any of its Subsidiaries, shall take any action in furtherance of, or
indicating its consent to, approval of, or acquiescence in (other than in
connection with a final settlement), any of the acts set forth in clause (1),
(2) or (3) above; or (5) the Borrower or any of its Subsidiaries, shall
generally not, or shall be unable to, or shall admit in writing its inability to
pay its debts as they become due; or

8(g) One or more judgments or decrees for an aggregate amount in excess of
$10,000,000 shall be entered against the Borrower or any of its Subsidiaries
<PAGE>

within any fiscal year of Borrower and all such judgments or decrees shall not
have been vacated, discharged, stayed, satisfied or bonded pending appeal within
thirty (30) days from the entry thereof or in any event later than five days
prior to the date of any proposed sale thereunder; or

8(h) Except for planned closures during holiday or vacation periods or
closures due to fire, earthquake, flood, government action, strike, lockout or
other similar event, the Borrower or any Guarantor shall voluntarily suspend the
transaction of business for more than five days in any calendar year; or

8(i) Any Guarantor shall fail to observe or comply with any term or
condition of its Guarantee or shall attempt to rescind or revoke its Guarantee,
with respect to future transactions or otherwise or any Guarantee shall cease to
be in full force and effect; or

8(j) Lender shall fail to have an enforceable Lien (subject only to such
prior Liens as Lender shall have consented to in writing) on the Collateral; or

8(k) Any financial or other information delivered by Borrower to Lender
proves to be false or misleading in any material respect.

THEN:

(1) Automatically upon the occurrence of an Event Of Default under
Paragraph 8(j) above; and

(2) At the option of Lender upon the occurrence of an Event Of Default
under Paragraph 8(a) above,

Lender's obligation to make Loans or to issue Letters Of Credit shall terminate
and the principal balance of outstanding Loans and interest accrued but unpaid
thereon and the aggregate contingent obligation of the Borrower to reimburse
Lender, or in the case of subparagraph (2) above Lender, for future L/C Drawings
with respect to Outstanding Letters Of Credit shall become immediately due and
payable, without demand upon or presentment to the Borrower, which are expressly
waived by the Borrower, and Lender may immediately exercise all rights, powers
and remedies available to them, or it, at law, in equity or otherwise. Any
amounts paid by the Borrower to Lender hereunder on account of Outstanding
Letters Of Credit shall be held by Lender as cash Collateral for the obligations
of the Borrower with respect to L/C Drawings relating thereto, and the Borrower
hereby grants to Lender a first perfected security interest in said cash and
authorizes Lender to apply such cash on account of future L/C Drawings as such
L/C Drawings become payable by the Borrower.

9. Miscellaneous Provisions.

9(a) No Assignment. The Borrower may not assign its rights or obligations
under this Agreement without the prior written consent of Lender. Subject to the
foregoing, all provisions contained in this Agreement or any document or
agreement referred to herein or relating hereto shall inure to the benefit of
<PAGE>

Lender, its successors and assigns, and shall be binding upon the Borrower, its
successors and assigns.

9(b) Amend; No Waiver. This Agreement may not be amended or terms or
provisions hereof waived unless such amendment or waiver is in writing and
signed by Lender and the Borrower. It is expressly agreed and understood that
the failure by Lender to elect to accelerate amounts outstanding hereunder
and/or to terminate the obligation of Lender to make Loans hereunder shall not
constitute an amendment or waiver of any term or provision of this Agreement. No
delay or failure by Lender to exercise any right, power or remedy shall
constitute a waiver thereof by Lender, and no single or partial exercise by
Lender of any right, power or remedy shall preclude other or further exercise
thereof or any exercise of any other rights, powers or remedies.

9(c) Cumulative Rights. The rights, powers and remedies of Lender hereunder
are cumulative and in addition to all rights, power and remedies provided under
any and all agreements between the Borrower and Lender relating hereto, at law,
in equity or otherwise.

9(d) Entire Agreement. This Agreement and the documents and agreements
referred to herein embody the entire agreement and understanding between the
parties hereto and supersede all prior agreements and understandings relating to
the subject matter hereof and thereof.

9(e) Survival. All representations, warranties, covenants and agreements
herein contained on the part of the Borrower shall survive the termination of
this Agreement and shall be effective until the Obligations are paid and
performed in full or longer as expressly provided herein.

9(f) Notices. All notices, consents, requests and demands to or upon the
respective parties hereto shall be:

(1) in writing and delivered in person or transmitted by overnight courier,
telex, telecopy, facsimile, or certified or registered U.S. mail, postage
prepaid, return receipt requested;

(2) shall be deemed to have been given or made (i) if delivered in person
on a Business Day during normal business hours of the recipient, then on the
date of receipt and, otherwise, on the next succeeding Business Day; (ii) if
delivered by overnight courier service, on the Business Day next succeeding the
day of sending; (iii) if delivered by telex, telecopy, or facsimile, during
normal business hours of the recipient, then on the date sent and, otherwise, on
the next succeeding Business Day; and (iv) if delivered by U.S. mail, on the
third business day after deposit in a regular depository of the United States
mail; and
<PAGE>

(3) addressed as set forth on the signature pages hereof, or such other
address as either party may designate by notice to the other in accordance with
the terms of this Paragraph 10(f).

9(g) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
choice of law rules.

9(h) Consent to Jurisdiction. The parties hereto agree that any legal
action or proceeding with respect to this Agreement or any other agreement
executed in connection herewith or any action or proceeding to execute or
otherwise enforce any judgement obtained against the Borrower for any of its
property, may be brought in the courts of the State of California or in the
courts of the United Sates for the Central District of California, and hereby
irrevocably submit to the personal non-exclusive jurisdiction of such courts.

9(i) Counterparts. This Agreement and the other Loan Documents may be
executed in any number of counterparts, all of which together shall constitute
one agreement.

9(j) Accounting Terms. All accounting terms not otherwise defined herein
are used with the meanings given such terms under GAAP.

9(k) Set Off. Lender may exercise their right of set-off against the
Obligations to the same extent as if the Obligations were unsecured.

9(l) Costs and Expenses; Attorneys' Fees. In any judicial action between
the Lender and the Borrower to enforce any of the provisions of the Loan
Documents, whether or not such action or proceeding is prosecuted to final
judgment and in addition to any other remedy, the non-prevailing party shall pay
to the prevailing party all reasonable costs and expenses, including reasonable
attorneys' fees and costs (including the allocated costs of internal counsel),
incurred in connection therewith by the prevailing party.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.

MENTOR CORPORATION, a
Minnesota corporation,
as the Borrower

By: /s/ GARY E. MISTLIN
Print Name: Gary E. Mistlin
Title: Vice President of Finance/Treasurer

Address: MENTOR CORPORATION
5425 Hollister
Santa Barbara, CA 93111

<PAGE>

SANWA BANK CALIFORNIA, as Lender

By: /s/ DONNA K. OWEN
Print Name: Donna K. Owen
Title: Vice President, Commercial
Banking Officer

Address: Sanwa Bank California
15165 Ventura Blvd.
Suite 445
Sherman Oaks, CA 91403

<PAGE>

SCHEDULE OF EXHIBITS AND SCHEDULES

EXHIBIT DOCUMENT
A Form of Revolving Note
B-1 Form of Security Agreement (Borrower)
B-2 Form of Security Agreement (Guarantor)
C Guaranty Agreement
D Contribution Agreement
E Form of Opinion of Counsel to Borrower and Each Guarantor
F Litigation Disclosure
G List of Subsidiaries
H Permitted Liens
I Form of Compliance Certificate
J Form of Loan Request
K Form of Inter-Company Note

SCHEDULE DOCUMENT
3(h)(2) Fee Structure for Letters of Credit

Exhibit A
To Credit Agreement

FORM OF
REVOLVING LOAN NOTE

$15,000,000 As of May 22 1995

FOR VALUE RECEIVED, the undersigned MENTOR CORPORATION, a Minnesota
corporation ("Borrower"), hereby unconditionally promises to pay to the order of
SANWA BANK CALIFORNIA ("Lender") the unpaid principal amount of each Loan made
by Lender under the Credit Agreement referred to below in accordance with the
provisions of such Credit Agreement, provided that on or before the Loan
Maturity Date, Borrower shall pay in full the unpaid principal amount of all
Loans made by Lender to Borrower under the Credit Agreement referred to below.

Borrower also promises to pay interest on the unpaid principal amount
hereof from the date hereof until paid at the rates and at the times which shall
be determined in accordance with the provisions of that certain Credit Agreement
dated as of May 22, 1995 entered into among Borrower and Lender (as the same may
be amended from time to time, the "Credit Agreement"), and to pay all sums owed
to Lender under the Credit Agreement. Any amounts not paid when due under this
Note shall bear interest at the rate specified in the Credit Agreement.

All payments of principal and interest shall be made to Lender in United
States Dollars in immediately available funds at 15165 Ventura Boulevard, #445,
Sherman Oaks, California 91403.

The type, amounts and dates of all Loans and the amounts and dates of all
payments and prepayment hereon shall be endorsed by the holder hereof on a
schedule to be attached hereto; provided, however, that the failure by the
holder to make such endorsements shall in no way detract from Borrower's
obligations hereunder.

This Note is the "Note" referred to in the Credit Agreement and is subject
to the terms and conditions thereof. The Credit Agreement provides, inter alia,
for the prepayment in whole or in part hereof or the acceleration of the
maturity hereof upon the occurrence of certain events stated therein and for the
payment of attorneys' fees incurred to enforce payment hereof. Capitalized terms
used herein and not otherwise defined herein shall have the meanings assigned in
the Credit Agreement.
<PAGE>

This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of California.

Mentor Corporation, a Minnesota corporation

By: /s/ GARY E. MISTLIN

Print Name: Gary E. Mistlin

Title: Vice President of Finance/Treasurer

Exhibit B-1
To Credit Agreement
FORM OF SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the "Security Agreement") is made and dated as of
the 22 day of May, 1995 by and between MENTOR CORPORATION, a Minnesota
corporation ("Debtor"), and SANWA BANK CALIFORNIA, a California bank ("Lender").

RECITALS

A. Pursuant to that certain Credit Agreement dated as of May 22, 1995
between Debtor and Lender (as amended, modified or waived from time to time, the
"Agreement"), Lender has agreed to extend credit to Debtor on the terms and
subject to the conditions set forth therein. All terms not otherwise defined
herein are used with the same meanings as set forth in the Agreement.

B. To induce Lender to extend such credit, Debtor has agreed to pledge and
to grant to Lender a security interest in and lien upon certain property of
Debtor described more particularly herein.

NOW, THEREFORE, in consideration of the above Recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Debtor hereby agrees as follows:

AGREEMENT

1. Grant of Security Interest. Debtor hereby pledges and grants to Lender a
security interest in the property described in Paragraph 2 below (collectively
and severally, the "Collateral") to secure payment and performance of the
obligations described in Paragraph 3 below (collectively and severally, the
"Obligations").

2. Collateral. The Collateral shall consist of the following, whether now
owned or hereafter acquired:
(a) Accounts, Etc. All present and future accounts, and other rights of
Debtor to the payment of money no matter how evidenced, including, without
limitation, all government contracts, all chattel paper, instruments and other
writings evidencing any such right, and all goods repossessed or returned in
connection therewith;
<PAGE>

(b) Inventory. All inventory of Debtor, and all raw materials, work in
process, materials used or consumed in Debtor's business and finished goods,
together with all additions and accessions thereto and replacements therefor,
and products thereof;

(c) Equipment. All equipment of Debtor, including, without limitation,
all machinery, tools, dies, blueprints, catalogues, computer hardware and
software, furniture, furnishings and fixtures;

(d) Documents and Instruments. All documents and instruments of Debtor,
including, without limitation, the Inter-Company Notes;

(e) General Intangibles, Etc. All now existing or hereafter acquired
general intangibles of every nature, all permits, regulatory approvals,
copyrights, patents, trademarks, service marks, trade names, mask works, good
will, licenses, and all other intellectual property owned by Debtor or used in
Debtor's business;

(f) Deposit Accounts. All deposit accounts, now existing or hereafter
arising, maintained in Debtor's name with any financial institution and any and
all deposits at any time held therein;

(g) Property in Lender's Possession. All other property of Debtor now or
hereafter in the possession, custody or control of Lender, including, without
limitation, all deposit accounts of Debtor with Lender, and all property of
Debtor in which Lender now has or hereafter acquires a security interest;

(h) Partnership Interests. All partnership interests together with all
now existing or hereafter arising rights of Debtor to receive distributions of
payments from such partnership(s), whether in cash or in kind, and whether such
distributions or payments are on account of Debtor's interest as a partner,
creditor or otherwise;

(i) Other Goods. All of Debtor's other goods;

(j) Books and Records. All now existing and hereafter acquired books and
records relating to the foregoing Collateral and all equipment containing such
books and records; and

(k) Proceeds. All proceeds of the foregoing Collateral. For purposes of
this Security Agreement, the term "proceeds" includes whatever is receivable or
received when Collateral or proceeds is sold, collected, exchanged or otherwise
disposed of, whether such disposition is voluntary or involuntary, and includes,
without limitation, all rights to payment, including return premiums, with
respect to any insurance relating thereto.

Notwithstanding anything herein to the contrary, no asset shall become
Collateral hereunder if, as of the date of inclusion: (i) such asset is subject
to a security interest in favor of a person other than Lender; (ii) pursuant to
an agreement between such person and Debtor, Debtor has agreed not to grant a
security interest on such asset to another secured party; and (iii) such
<PAGE>

agreement by Debtor was entered into by Debtor in the ordinary course of
business as conducted on the date of this Security Agreement; provided that if,
thereafter, such agreement shall no longer be in effect, then such asset shall
automatically become Collateral hereunder.

3. Obligations. The Obligations secured by this Security Agreement shall
consist of any and all debts, obligations and liabilities of Debtor to Lender
arising out of, connected with or related to the Agreement and this Security
Agreement, whether now existing or hereafter arising, voluntary or involuntary,
whether due or not due, whether or not jointly owed with others, direct or
indirect, absolute or contingent, liquidated or unliquidated, or whether
incurred directly or acquired by Lender by assignment or otherwise and whether
or not from time to time decreased or extinguished and later increased, created
or incurred.

4. Representations and Warranties. In addition to any representations and
warranties of Debtor set forth in any other agreement with or for the benefit of
Lender, which are incorporated herein by this reference, Debtor hereby
represents and warrants that:

(a) Ownership of Collateral. Debtor is the sole owner of and has good
and marketable title to the Collateral (or, in the case of after-acquired
Collateral, at the time the Debtor acquires rights in the Collateral, will be
the sole owner thereof);

(b) Priority. Except for security interests in favor of Lender and other
Liens permitted under the Credit Agreement, no Person has (or, in the case of
after-acquired Collateral, at the time Debtor acquires rights therein, will
have) any right, title, claim or interest (by way of security interest or other
Lien or charge) in, against or to the Collateral;

(c) Accuracy of Information. All information heretofore, herein or
hereafter supplied to Lender by or on behalf of Debtor with respect to the
Collateral is true and correct;

(d) Delivery of Documents, Etc. Debtor has delivered to Lender all
instruments, documents, chattel paper and other items of Collateral in which a
security interest is or may be perfected only by possession;

(e) Exclusion of Certain Collateral. Unless otherwise agreed by Lender,
the Collateral does not include any aircraft, watercraft or vessels, railroad
cars, railroad equipment, locomotives or other rolling stock intended for a use
related to interstate commerce. A buyer of any Collateral from Debtor pursuant
to a sale not prohibited by this Security Agreement or the Agreement may take
such Collateral free of the security interest created by this Security Agreement
without necessity of further release by Lender.

5. Covenants and Agreements of Debtor. In addition to all covenants and
agreements of Debtor set forth in any other agreement with Lender, which are
incorporated herein by this reference, Debtor hereby agrees:

(a) Preservation of Collateral. To do all acts that may be necessary to
maintain, preserve and protect the Collateral;
<PAGE>

(b) Use of Collateral. Not to use or permit any Collateral to be used
unlawfully or in violation of any provision of this Security Agreement, any
other agreement with Lender related hereto or any applicable statute, regulation
or ordinance or any policy of insurance covering the Collateral;
(c) Defense of Litigation. To appear in and defend any action or
proceeding which may affect its title to or Lender's interest in the Collateral;

(d) Possession of Collateral. Not to surrender or lose possession of
(other than to Lender), sell, encumber, lease, rent, or otherwise dispose of or
transfer any Collateral or right or interest therein except as hereinafter
provided, and to keep the Collateral free of all levies and security interests
or other liens or charges except those approved in writing by Lender; provided
that, unless an Event of Default shall occur, Debtor may, in the ordinary course
of business, sell or lease any Collateral consisting of inventory and license
intellectual property;

(e) Compliance With Law. To comply with all laws, regulations and
ordinances relating to the possession, operation, maintenance and control of the
Collateral;

(f) Standard of Care by Lender. That such care as Lender gives to the
safekeeping of its own property of like kind shall constitute reasonable care of
the Collateral when in Lender's possession;

(g) Delivery of After-Acquired Collateral. To the extent a security
interest in any Collateral acquired by the Debtor after the date of this
Security Agreement may be perfected by possession, to account fully for and
promptly deliver to Lender, in the form received, to all documents, chattel
paper, instruments and agreements constituting Collateral hereunder and all
proceeds of the Collateral received, all endorsed to Lender or in blank, as
requested by Lender, and accompanied by such stock powers as appropriate and
until so delivered all such documents, instruments, agreements and proceeds
shall be held by Debtor in trust for Lender separate from all other property of
Debtor and identified as the property of Lender;

(h) Maintenance of Records. To keep separate, accurate and complete
records of the Collateral and to provide Lender with such records and such other
reports and information relating to the Collateral as Lender may reasonably
request from time to time;

(i) Further Assurances. To procure, execute and deliver from time to
time any endorsements, notifications, registrations, assignments, financing
statements, certificates of title, ship mortgages, aircraft mortgages, copyright
mortgages, assignments or mortgages of patents, mortgages of mask works,
mortgages for filing pursuant to the Interstate Commerce Act, and other writings
deemed necessary or appropriate by Lender to perfect, maintain and protect its
security interest in the Collateral hereunder and the priority thereof; and to
take such other actions as Lender may request to protect the value of the
Collateral and of Lender's security interest in the Collateral, including,
without limitation, provision of assurances from third parties regarding the
<PAGE>

Lender's access to, right to foreclose on or sell, Collateral and right to
realize the practical benefits of such foreclosure or sale;

(j) Payment of Lender's Costs and Expenses. To reimburse Lender upon demand
for any costs and expenses, including, without limitation, reasonable attorneys'
fees, that Lender may incur while exercising any right, power or remedy provided
by this Security Agreement or by law, all of which costs and expenses are
included in the Obligations secured hereby;

(k) Notification Regarding Certain Types of Collateral. To promptly notify
Lender of inclusion in the Collateral after the date hereof of any aircraft,
watercraft or vessels, railroad cars, railroad equipment, locomotives or other
rolling stock intended for a use related to interstate commerce;

(l) Notice of Changes. To give Lender thirty (30) days prior written notice
of any change in Debtor's residence or chief place of business or legal name or
trade name(s) or style(s) set forth in the penultimate paragraph of this
Security Agreement;

(m) Location of Records. To keep the records concerning the Collateral at
the location(s) set forth in Schedule A attached hereto and not to remove such
records from such location(s) without prior notice to Lender;

(n) Purchase Money Agreement. If Lender gives value to enable Debtor to
acquire rights in or the use of any Collateral, to use such value for such
purpose;

(o) Care for Collateral by Debtor. To keep the Collateral in good condition
and repair and not to cause or permit any waste or unusual or unreasonable
depreciation of the Collateral;

(p) Inspection by Lender. At any time, with reasonable advance notice, upon
demand by Lender, to exhibit to and allow inspection by Lender (or persons
designated by Lender) of the Collateral;

(q) Location of Collateral. To keep the Collateral at the location(s) set
forth in Schedule A attached hereto and, except as otherwise permitted by the
Agreement, not to remove the Collateral from such location(s) without prior
notice to Lender; and

(r) Insurance. To insure the Collateral, with Lender named as loss payee,
in form and amounts, with companies, and against risks and liabilities
reasonably satisfactory to Lender, and hereby assigns the policies to Lender,
agrees to deliver them to Lender at its request, and agrees that Lender may make
any claim thereunder, cancel the insurance on default by Debtor, collect and
receive payment of and endorse any instrument in payment of loss or return
premium or other refund or return, and apply such amounts received, at the
Lender's election, to replacement of Collateral or to the Obligations.
Notwithstanding the foregoing, so long as no Potential Default or Event of
Default (as each such term is defined in the Agreement) shall have occurred and
be continuing, Lender may not make any claim under, collect or receive payment
<PAGE>

of or endorse any instrument in payment under any such insurance except that
Lender may collect or receive payment under insurance that Debtor does not
reasonably expect to apply to replacement or repair of the Collateral in respect
of which paid within a reasonable period after receipt.

6. Authorized Action by Lender. After the occurrence of a Potential Default
or Event of Default, Debtor hereby agrees that from time to time, without
affecting or impairing in any way the rights of Lender with respect to the
Collateral, the obligations of the Debtor hereunder or the Obligations, Lender
may, but shall not be obligated to and shall incur no liability to Debtor or any
third party for failure to take any act which Debtor is obligated by this
Security Agreement to do and to exercise such rights and powers as Debtor might
exercise with respect to the Collateral, and Debtor hereby irrevocably appoints
Lender as its attorney-in-fact to exercise such rights and powers, including
without limitation: (i) collect by legal proceedings or otherwise and endorse,
receive and receipt for all dividends, interest, payments, proceeds and other
sums and property now or hereafter payable on or on account of the Collateral;
(ii) enter into any extension, reorganization, deposit, merger, consolidation or
other agreement pertaining to, or deposit, surrender, accept, hold or apply
other property in exchange for the Collateral; (iii) insure, process and
preserve the Collateral; (iv) transfer the Collateral to its own or its
nominee's name; (v) make any compromise or settlement, and take any action it
deems advisable, with respect to the Collateral; and (vi) to notify any account
debtor on any Collateral to make payment directly to Lender.

7. Default. A default under this Security Agreement shall be deemed to
exist upon the occurrence of any Event of Default.

8. Remedies. Upon the occurrence of any such Event of Default, Lender may,
at its option, and in addition to all rights and remedies available to Lender
under any other agreement do any one or more of the following:

(a) General Enforcement. Foreclose or otherwise enforce the Lender's
security interest in any manner permitted by law, or provided for in this
Security Agreement;

(b) Sale, Etc. Sell, lease or otherwise dispose of any Collateral at one or
more public or private sales at Lender's place of business or any other place or
places, including, without limitation, any broker's board or securities
exchange, whether or not such Collateral is present at the place of sale, for
cash or credit or future delivery, on such terms and in such manner as Lender
may determine;

(c) Costs of Remedies. Recover from Debtor all costs and expenses,
including, without limitation, reasonable attorneys' fees, incurred or paid by
Lender in exercising any right, power or remedy provided by this Security
Agreement or by law;

(d) Assembly of Collateral. Require Debtor to assemble the Collateral and
make it available to Lender at a place to be designated by Lender;
<PAGE>

(e) Take Possession of Collateral. Enter onto property where any Collateral
is located and take possession thereof with or without judicial process;

(f) Preparation of Collateral for Sale. Prior to the disposition of the
Collateral, store, process, repair or recondition it or otherwise prepare it for
disposition in any manner and to the extent Lender deems appropriate and in
connection with such preparation and disposition, without charge, use any
trademark, tradename, copyright, patent or technical process used by Debtor;

(g) Manner of Sale of Collateral. Debtor shall be given five (5) business
days' prior notice of the time and place of any public sale or of the time after
which any private sale or other intended disposition of Collateral is to be
made, which notice Debtor hereby agrees shall be deemed reasonable notice
thereof;

(h) Delivery to and Rights of Purchaser. Upon any sale or other disposition
pursuant to this Security Agreement, Lender shall have the right to deliver,
assign and transfer to the purchaser thereof the Collateral or portion thereof
so sold or disposed of. Each purchaser at any such sale or other disposition
(including Lender) shall hold the Collateral free from any claim or right of
whatever kind, including any equity or right of redemption of Debtor and Debtor
specifically waives (to the extent permitted by law) all rights of redemption,
stay or appraisal which it has or may have under any rule of law or statute now
existing or hereafter adopted.

9. Cumulative Rights. The rights, powers and remedies of Lender under this
Security Agreement shall be in addition to all rights, powers and remedies given
to Lender by virtue of any statute or rule of law, the Agreement or any other
agreement, all of which rights, powers and remedies shall be cumulative and may
be exercised successively or concurrently without impairing the Lender's
security interest in the Collateral.

10. Waiver. Any waiver, forbearance or failure or delay by Lender in
exercising any right, power or remedy shall not preclude the further exercise
thereof, and every right, power or remedy of Lender shall continue in full force
and effect until such right, power or remedy is specifically waived in a writing
executed by Lender. Debtor waives any right to require Lender to proceed against
any person or to exhaust any Collateral or to pursue any remedy in Lender's
power.

11. Setoff. Debtor agrees that Lender may exercise its rights of setoff
with respect to the Obligations in the same manner as if the Obligations were
unsecured.

12. Binding Upon Successors. All rights of Lender under this Security
Agreement shall inure to the benefit of its successors and assigns, and all
obligations of Debtor shall bind its heirs, executors, administrators,
successors and assigns.

13. Entire Agreement; Severability. This Security Agreement contains the
entire security agreement between Lender and Debtor. If any of the provisions of
this Security Agreement shall be held invalid or unenforceable, this Security
Agreement shall be construed as if not containing those provisions and the
<PAGE>

rights and obligations of the parties hereto shall be construed and enforced
accordingly.

14. References. The singular includes the plural. If more than one executes
this Security Agreement, the term Debtor shall be deemed to refer to each of the
undersigned Debtors as well as to all of them, and their obligations and
agreements hereunder shall be joint and several. If any of the undersigned is a
married person, recourse may be had against his or her separate property for the
Obligations.

15. Choice of Law. This Security Agreement shall be construed in accordance
with and governed by the laws of the State of California, and, where applicable
and except as otherwise defined herein, terms used herein shall have the
meanings given them in the Uniform Commercial Code of such state.

16. Amendment. This Security Agreement may not be amended or modified
except by a writing signed by each of the parties hereto.

17. Residence; Collateral Location Records. Debtor represents that its
residence or chief place of business is set forth below its signature hereto;
that the only trade name(s) or style(s) of Debtor are set forth on Schedule B;
and that, except as otherwise disclosed to Lender in writing prior to the date
hereof, the Collateral and Debtor's records concerning the Collateral are
located at its chief place of business or the locations set forth in Schedule A.
<PAGE>

18. Addresses for Notices. All demands, notices and other communications to
Debtor or Lender provided for hereunder shall be made or given as set forth in
the Agreement. EXECUTED as of the 22 day of May, 1995.

DEBTOR:

MENTOR CORPORATION , a
Minnesota corporation
By: /s/ GARY E. MISTLIN
Its: Vice President of Finance/Treasurer
Address: 5425 Hollister
Santa Barbara, CA 93111

LENDER:

SANWA BANK CALIFORNIA,
a California Bank
By: /s/ DONNA K. OWEN
Its: Vice President, Commercial Banking Officer
Address: 15165 Ventura Blvd. #445
Sherman Oaks, CA 91403

<PAGE>

Schedule A
To Security Agreement

LOCATION OF COLLATERAL

1. Mentor Corporation

a. 5425 Hollister Avenue
Santa Barbara, CA 93111

b. 26 Castillian Ave.
Goleta, CA 93117

2. Mentor H/S, Inc.

a. 3041 Skyway Circle North
Irving, TX 75038

b. 3025 Skyway Circle North
Irving, TX 75038

c. 3015 Skyway Circle North
Irving, TX 75038

3. Mentor Urology, Inc.

a. 1601 West River Road North
Minneapolis, MN 55411

b. 1499 West River Road North
Minneapolis, MN 55411

c. 1525 West River Road North
Minneapolis, MN 55411

d. 1615 West River Road North
Minneapolis, MN 55411
<PAGE>

4. Mentor O&O, Inc.

a. 3000 Longwater Drive
Norwell, MA 02061

b. 11 Commerce Road
Rockland, MA 02370

5. Mentor ORC, Inc.

a. 1300 Optical Drive
Azusa, CA 91702

b. 3000 Longwater Drive
Norwell, MA 02061

c. 11 Commerce Road
Rockland, MA 02370

6. Mentor Caribe, Inc.

a. El Jibaro Industrial Park, Lot 2
Cidra, PR 00739
<PAGE>

Schedule B
TRADE NAMES AND STYLES OF DEBTOR

None.

Exhibit B-2
To Credit Agreement
FORM OF
GUARANTOR SECURITY AGREEMENT

THIS GUARANTOR SECURITY AGREEMENT (the "Security Agreement") is made and
dated this 22 day of May, 1995 by and among each guarantor signatory hereto
(individually, a "Guarantor" and, collectively, the "Guarantors") and SANWA BANK
CALIFORNIA, a California bank ("Lender"). RECITALS

A. Pursuant to that certain Credit Agreement dated as of May 22 1995 among
Mentor Corporation ("Borrower") and Lender (as amended, modified or waived from
time to time, the "Agreement"), Lender has agreed to extend credit to Borrower
on the terms and subject to the conditions set forth therein. All terms not
otherwise defined herein are used with the same meanings as set forth in the
Agreement.

B. Guarantor is a subsidiary of Borrower. Guarantor is or from time to time
may be indebted to Lender pursuant to that certain Continuing Guaranty dated May
22, 1995 (as amended, modified or waived from time to time, the "Guaranty")
under which Guarantor guaranteed the credit extended to Borrower under the
Agreement. All terms not otherwise defined herein are used with the same meaning
as set forth in the Agreement.

C. To induce Lender to extend credit to Borrower under the Agreement,
Guarantor has agreed to pledge and to grant to Lender a security interest in and
lien upon certain property of Guarantor described more particularly herein as
Collateral Security for obligations of the Guarantor under its Guaranty.

NOW, THEREFORE, in consideration of the above Recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Guarantor hereby agrees as follows:

AGREEMENT
1. Grant of Security Interest. Guarantor hereby pledges and grants to
Lender a security interest in the property described in Paragraph 2 below
(collectively and severally, the "Collateral") to secure payment and performance
of the obligations described in Paragraph 3 below (collectively and severally,
the "Obligations").
2. Collateral. The Collateral shall consist of the following:
<PAGE>

(a) Accounts, Etc. All present and future accounts, and other rights of
Guarantor to the payment of money no matter how evidenced, all chattel paper,
instruments and other writings evidencing any such right, and all goods
repossessed or returned in connection therewith;

(b) Inventory. All inventory of Guarantor, now owned or hereafter
acquired, and all raw materials, work in process, materials used or consumed in
Guarantor's business and finished goods, together with all additions and
accessions thereto and replacements therefor, and products thereof;

(c) Equipment. All equipment of Guarantor, now owned or hereafter
acquired, including, without limitation, all machinery, tools, dies, blueprints,
catalogues, computer hardware and software, furniture, furnishings and fixtures;

(d) Documents and Instruments. All documents and instruments of
Guarantor, now owned or hereafter acquired;

(f) Deposit Accounts. All deposit accounts, now existing or hereafter
arising, maintained in Guarantor's name with any financial institution and any
and all deposits at any time held therein;

(g) Property in the Lender's Possession. All other property of Guarantor
now or hereafter in the possession, custody or control of Lender, including,
without limitation, all deposit accounts of Guarantor with Lender, and all
property of Guarantor in which Lender now has or hereafter acquires a security
interest;

(h) Specific Goods. All of Guarantor's other goods;

(i) Books and Records. All now existing and hereafter acquired books and
records relating to the foregoing Collateral and all equipment containing such
books and records; and

(j) Proceeds. All proceeds of the foregoing Collateral. For purposes of
this Security Agreement, the term "proceeds" includes whatever is receivable or
received when Collateral or proceeds is sold, collected, exchanged or otherwise
disposed of, whether such disposition is voluntary or involuntary, and includes,
without limitation, all rights to payment, including return premiums, with
respect to any insurance relating thereto.

an agreement between such person and Guarantor, Guarantor has agreed not to
grant a security interest in such asset to another secured party, and (iii) such
agreement by Guarantor was entered into by Guarantor in the ordinary course of
business as conducted on the date of this Security Agreement; provided that if,
thereafter, such agreement shall no longer be in effect, then such asset shall
automatically become Collateral hereunder.

3. Obligations. The Obligations secured by this Security Agreement shall
consist of any and all debts, obligations and liabilities of Guarantor to Lender
arising out of, connected with or related to the Guaranty and this Security
Agreement, whether now existing or hereafter arising, voluntary or involuntary,
whether due or not due, whether or not jointly owed with others, direct or
indirect, absolute or contingent, liquidated or unliquidated, or whether
incurred directly or acquired by Lender by assignment or otherwise and whether
or not from time to time decreased or extinguished and later increased, created
or incurred.

4. Representations and Warranties. In addition to any representations and
warranties of Guarantor set forth in any other agreement with or for the benefit
of Lender, which are incorporated herein by this reference, Guarantor hereby
represents and warrants that:

(a) Other Representations. All representations and warranties made by
the Borrower with respect to the Guarantor or the Collateral in the Agreement or
in any other Loan Document is and will be true and correct in all material
respects when made;

(b) Ownership of Collateral. Guarantor is the sole owner of and has good
and marketable title to the Collateral (or, in the case of after-acquired
Collateral, at the time Guarantor acquires rights in the Collateral, will be the
sole owner thereof);

(c) Priority. Except for security interests in favor of Lender and other
Liens permitted under the Credit Agreement, no person has (or, in the case of
after-acquired Collateral, at the time Guarantor acquires rights therein, will
have) any right, title, claim or interest (by way of security interest or other
lien or charge) in, against or to the Collateral;

(d) Accuracy of Information. All information heretofore, herein or
hereafter supplied to Lender by or on behalf of Guarantor with respect to the
Collateral is true and correct;

(e) Delivery of Documents, Etc. Guarantor has delivered to Lender all
instruments, documents, chattel paper and other items of Collateral in which a
security interest is or may be perfected only by possession; and

(f) Exclusion of Certain Collateral. Unless otherwise agreed by Lender,
the Collateral does not include any aircraft, watercraft or vessels, railroad
cars, railroad equipment, locomotives or other rolling stock intended for a use
related to interstate commerce. A buyer of any Collateral from Guarantor
pursuant to a sale not prohibited in this Security Agreement or the Agreement
may take such Collateral free of the security interest created by this Security
Agreement without necessity of further release by Lender.
<PAGE>

5. Covenants and Agreements of Guarantor. In addition to all covenants and
agreements of Guarantor set forth in any other agreement with Lender, which are
incorporated herein by this reference, Guarantor hereby agrees:

(a) Preservation of Collateral. To do all acts that may be necessary to
maintain, preserve and protect the Collateral;

(c) Defense of Litigation. To appear in and defend any action or
proceeding which may affect its title to or Lender's interest in the Collateral;

(d) Possession of Collateral. Not to surrender or lose possession of
(other than to Lender), sell, encumber, lease, rent, or otherwise dispose of or
transfer any Collateral or right or interest therein except as hereinafter
provided, and to keep the Collateral free of all levies and security interests
or other liens or charges except those approved in writing by Lender; provided
that, unless an Event of Default shall occur, Guarantor may, in the ordinary
course of business, sell or lease any Collateral consisting of inventory;

(e) Compliance With Law. To comply with all laws, regulations and
ordinances relating to the possession, operation, maintenance and control of the
Collateral;

(f) Standard of Care by Lender. That such care as Lender gives to the
safekeeping of its own property of like kind shall constitute reasonable care of
the Collateral when in Lender's possession;

(g) Delivery of After-Acquired Collateral. To account fully for and
promptly deliver to Lender, in the form received, all documents, chattel paper,
instruments and agreements constituting Collateral hereunder and all proceeds of
the Collateral received, all endorsed to Lender or in blank, as requested by
Lender, and accompanied by such stock powers as appropriate and until so
delivered all such documents, instruments, agreements and proceeds shall be held
by Guarantor in trust for Lender, separate from all other property of Guarantor
and identified as the property of Lender;

security interest in the Collateral hereunder and the priority thereof; and to
take such other actions as Lender may request to protect the value of the
Collateral and of Lender's security interest in the Collateral, including,
without limitation, provision of assurances from third parties regarding
Lender's access to, right to foreclose on or sell, Collateral and right to
realize the practical benefits of such foreclosure or sale;

(j) Payment of Lender's Costs and Expenses. To reimburse Lender upon
demand for any costs and expenses, including, without limitation, reasonable
attorneys' fees, Lender may incur while exercising any right, power or remedy
provided by this Security Agreement or by law, all of which costs and expenses
are included in the Obligations secured hereby;

(k) Notification Regarding Certain Types of Collateral. To promptly
notify Lender of inclusion in the Collateral after the date hereof of any
aircraft, watercraft or vessels, railroad cars, railroad equipment, locomotives
or other rolling stock intended for a use related to interstate commerce;

(l) Notice of Changes. To give Lender thirty (30) days prior written
notice of any change in Guarantor's residence or chief place of business or
legal name or trade name(s) or style(s) set forth in the penultimate paragraph
of this Security Agreement;

(m) Location of Records. To keep the records concerning the Collateral
of the location(s) set forth in Exhibit A and not to remove such records from
such location(s) without prior notice to Lender;

(n) Purchase Money Agreement. If Lender gives value to enable Guarantor
to acquire rights in or the use of any Collateral, to use such value for such
purpose;

(o) Care for Collateral by Guarantor. To keep the Collateral in good
condition and repair and not to cause or permit any waste or unusual or
unreasonable depreciation of the Collateral;

(p) Inspection by Lender. At any time, with reasonable advance notice,
upon demand by Lender, to exhibit to and allow inspection by Lender (or persons
designated by Lender) of the Collateral;

(q) Location of Collateral. To keep the Collateral at the location(s)
set forth on Schedule A and, except as otherwise permitted by the Agreement, not
to remove the Collateral from such location(s) without prior notice to Lender;

election, to replacement of Collateral or to the Obligations. Notwithstanding
the foregoing, so long as no Potential Default or Event of Default (as each such
term is defined in the Agreement) shall have occurred and be continuing, Lender
may not make any claim under, collect or receive payment of or endorse any
instrument in payment under any such insurance except that Lender may collect or
receive payment under insurance that Guarantor does not reasonably expect to
apply to replacement or repair of the Collateral in respect of which paid within
a reasonable period after receipt; and

6. Authorized Action by Lender. After the occurrence of a Potential Default
or Event of Default, Guarantor hereby agrees that from time to time, without
affecting or impairing in any way the rights of Lender with respect to the
Collateral, the obligations of the Guarantor hereunder or the Obligations,
Lender may, but shall not be obligated to and shall incur no liability to
Guarantor or any third party for failure to take any act which Guarantor is
obligated by this Security Agreement to do and to exercise such rights and
powers as Guarantor might exercise with respect to the Collateral, and Guarantor
hereby irrevocably appoints Lender as its attorney-in-fact to exercise such
rights and powers, including without limitation: (i) collect by legal
proceedings or otherwise and endorse, receive and receipt for all dividends,
interest, payments, proceeds and other sums and property now or hereafter
payable on or on account of the Collateral; (ii) enter into any extension,
reorganization, deposit, merger, consolidation or other agreement pertaining to,
or deposit, surrender, accept, hold or apply other property in exchange for the
Collateral; (iii) insure, process and preserve the Collateral; (iv) transfer the
Collateral to its own or its nominee's name; (v) make any compromise or
settlement, and take any action it deems advisable, with respect to the
Collateral; and (vi) to notify any account debtor on any Collateral to make
payment directly to Lender.

7. Default. A default under this Security Agreement shall be deemed to
exist upon the occurrence of any Event of Default.

8. Remedies. Upon the occurrence of any such Event of Default, Lender may
at its option and in addition to all rights and remedies available to Lender
under any other agreement do any one or more of the following:

(a) General Enforcement. Foreclose or otherwise enforce Lender's
security interest in any manner permitted by law, or provided for in this
Security Agreement;

(b) Sale, Etc. Sell, lease or otherwise dispose of any Collateral at one
or more public or private sales at Lender's place of business or any other place
or places, including, without limitation, any broker's board or securities
exchange, whether or not such Collateral is present at the place of sale, for
cash or credit or future delivery, on such terms and in such manner as Lender
may determine;

(c) Costs of Remedies. Recover from Guarantor all costs and expenses,
including, without limitation, reasonable attorneys' fees, incurred or paid by
Lender in exercising any right, power or remedy provided by this Security
Agreement or by law;
<PAGE>

(d) Assembly of Collateral. Require Guarantor to assemble the Collateral
and make it available to Lender at a place to be designated by Lender;

(e) Take Possession of Collateral. Enter onto property where any
Collateral is located and take possession thereof with or without judicial
process;

(g) Manner of Sale of Collateral. Guarantor shall be given five (5)
business days' prior notice of the time and place of any public sale or of the
time after which any private sale or other intended disposition of Collateral is
to be made, which notice Guarantor hereby agrees shall be deemed reasonable
notice thereof.

(h) Delivery to and Rights of Purchaser. Upon any sale or other
disposition pursuant to this Security Agreement, Lender shall have the right to
deliver, assign and transfer to the purchaser thereof the Collateral or portion
thereof so sold or disposed of. Each purchaser at any such sale or other
disposition (including Lender) shall hold the Collateral free from any claim or
right of whatever kind, including any equity or right of redemption of Guarantor
and Guarantor specifically waives (to the extent permitted by law) all rights of
redemption, stay or appraisal which it has or may have under any rule of law or
statute now existing or hereafter adopted.

10. Waiver. Any waiver, forbearance or failure or delay by Lender in
exercising any right, power or remedy shall not preclude the further exercise
thereof, and every right, power or remedy of Lender shall continue in full force
and effect until such right, power or remedy is specifically waived in a writing
executed by Lender. Guarantor waives any right to require Lender to proceed
against any person or to exhaust any Collateral or to pursue any remedy in
Lender's power.

11. Setoff. Guarantor agrees that Lender may exercise its rights of setoff
with respect to the Obligations in the same manner as if the Obligations were
unsecured.

12. Binding Upon Successors. All rights of Lender under this Security
Agreement shall inure to the benefit of its successors and assigns, and all
obligations of Guarantor shall bind its heirs, executors, administrators,
successors and assigns.
<PAGE>

13. Entire Agreement; Severability. This Security Agreement contains the
entire security agreement between Lender and Guarantor. If any of the provisions
of this Security Agreement shall be held invalid or unenforceable, this Security
Agreement shall be construed as if not containing those provisions and the
rights and obligations of the parties hereto shall be construed and enforced
accordingly.

14. References. The singular includes the plural. If more than one executes
this Security Agreement, the term Guarantor shall be deemed to refer to each of
the undersigned Guarantors as well as to all of them, and their obligations and
agreements hereunder shall be joint and several. If any of the undersigned is a
married person, recourse may be had against his or her separate property for the
Obligations.

16. Amendment. This Security Agreement may not be amended or modified
except by a writing signed by each of the parties hereto.

17. Residence; Collateral Location Records. Guarantor represents that its
residence or chief place of business is set forth below its signature hereto;
that the only trade name(s) or style(s) of Guarantor are set forth on Schedule
B; and that, except as otherwise disclosed to Lender in writing prior to the
date hereof, the Collateral and Guarantor's records concerning the Collateral
are located at the locations listed in Schedule A.

18. Addresses for Notices. All demands, notices and other communications to
Guarantor or Lender provided for hereunder shall be made or given as set forth
in Paragraph 10(f) of the Agreement which is hereby incorporated herein by
reference.

EXECUTED this 22 day of May, 1995.

GUARANTORS:
MENTOR H/S, INC. a Delaware corporation
By: /s/ GARY E. MISTLIN
Its: Treasurer
Address: 3041 Skyway Circle North
Irving, Texas 75038

<PAGE>

MENTOR O&O, INC., a Massachusetts corporation
By: /s/ GARY E. MISTLIN
Its: Treasurer
Address: 3000 Longwater Drive
Norwell, Mass 02061

MENTOR UROLOGY, INC., a Delaware corporation
By: /s/ GARY E. MISTLIN
Its: Treasurer
Address: 1601 West River Road North
Minneapolis, MN 55411

MENTOR ORC, INC., a Delaware corporation
By: /s/ GARY E. MISTLIN
Its: Treasurer
Address: 1300 Optical Drive
Azusa, CA 91702

MENTOR CARIBE, a Delaware corporation
By: /s/ GARY E. MISTLIN
Its: Treasurer
Address: 5425 Hollister Ave.
Santa Barbara, CA 93111

LENDER:
SANWA BANK CALIFORNIA, a California bank
By: /s/ DONNA K. OWEN
Its: Vice President, Commercial Banking Officer
Address: 15165 Ventura, #445
Sherman Oaks, CA 91403
<PAGE>

Schedule A
To Guarantor Security Agreement

LOCATIONS OF COLLATERAL

1. Mentor Corporation

a. 5425 Hollister Avenue
Santa Barbara, CA 93111

b. 26 Castillian Ave.
Goleta, CA 93117

2. Mentor H/S, Inc.

a. 3041 Skyway Circle North
Irving, TX 75038

b. 3025 Skyway Circle North
Irving, TX 75038

c. 3015 Skyway Circle North
Irving, TX 75038

3. Mentor Urology, Inc.

a. 1601 West River Road North
Minneapolis, MN 55411

b. 1499 West River Road North
Minneapolis, MN 55411

c. 1525 West River Road North
Minneapolis, MN 55411

d. 1615 West River Road North
Minneapolis, MN 55411
<PAGE>

4. Mentor O&O, Inc.

a. 3000 Longwater Drive
Norwell, MA 02061

b. 11 Commerce Road
Rockland, MA 02370

5. Mentor ORC, Inc.

a. 1300 Optical Drive
Azusa, CA 91702

b. 3000 Longwater Drive
Norwell, MA 02061

c. 11 Commerce Road
Rockland, MA 02370

6. Mentor Caribe, Inc.

a. El Jibaro Industrial Park, Lot 2
Cidra, PR 00739
<PAGE>

Schedule B
TRADE NAMES OR STYLES

None.

Exhibit D
To Credit Agreement
FORM OF
CONTRIBUTION AGREEMENT

This CONTRIBUTION AGREEMENT ("Agreement") is made as of the 22 day of May,
1995, among each of the undersigned ("Guarantors").

RECITALS

A. The Guaranteed Indebtedness. Mentor Corporation, a Minnesota Corporation
(the "Borrower") is or from time to time may be indebted under a Credit
Agreement dated as of May 22, 1995 between the Borrower and Sanwa Bank
California ("Lender").

B. The Guarantees. All such indebtedness (the "Indebtedness") of the
Borrower is or from time to time may be guaranteed by the parties hereto.

C. Purpose of Agreement. The Guarantors wish to enter into this Agreement
to effect an equitable sharing of their risk in guaranteeing and securing the
Indebtedness.

NOW, THEREFORE, in consideration of the above Recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:

1. If any Guarantor makes a payment in respect of the Indebtedness which is
less than its Proportionate Share, such Guarantor shall pay to the other
Guarantors an amount such that the net payments made by the Guarantors in
respect of the Indebtedness shall be equal to their respective Proportionate
Shares. For purposes hereof, "Proportionate Share" means, as to any Guarantor, a
fraction the numerator of which is such Guarantor's net worth (disregarding the
effect of this Agreement and any guarantees thereof by the undersigned) as of
the date of payment made or to be made by such Guarantor and the denominator of
which is the net worth (disregarding the effect of this Agreement and any
guarantees thereof by the undersigned) of all Guarantors as of such date.
Notwithstanding anything to the contrary contained in this paragraph or in this
Agreement, no liability or obligation of the Borrower to any Guarantor shall be
paid nor shall it be deemed owed pursuant to this Agreement until the
Indebtedness shall be paid in full.

2. Each party hereto represents and warrants to each other party hereto and
to their respective successors and assigns that:
<PAGE>

(a) the execution, delivery and performance by each party hereto of this
Agreement are within such party's corporate powers, have been duly authorized by
all necessary corporate action, require no action by or in respect of, or filing
with, any governmental body, agency or official and do not contravene, or
constitute a default under, any provision of applicable law or regulation, the
violation of which might materially adversely affect the condition, financial or
otherwise, operations, properties or prospects of the Borrower and the
Guarantors, taken as a whole, or of the certificate of incorporation or bylaws
of such party or of any agreement, judgment, injunction, order, decree or of the
instrument binding upon such party or result in the creation or imposition of
any lien, security interest or other charge or encumbrance on any asset of such
party; and

(b) this Agreement constitutes a legal, valid and binding agreement of each
party hereto, enforceable against such party in accordance with its terms.

3. No failure or delay by any Guarantor in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and non-exclusive of any rights or remedies
provided by law.

4. Any provision of this Agreement may be amended or waived if, but only
if, such amendment or waiver is in writing and is signed by the parties hereto
and consented to by Lender.

5. The provisions of this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.

6. This Agreement shall be governed by, and construed in accordance with,
the laws of the State of California.

7. This Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. This Agreement shall become effective
as to each party hereto when a counterpart hereof shall have been signed by such
party.
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.

MENTOR H/S, INC. a Delaware corporation
By: /s/ GARY E. MISTLIN
Its: Treasurer
Address: 3041 Skyway Circle North
Irving, Texas 75038

MENTOR O&O, INC., a Massachusetts corporation
By: /s/ GARY E. MISTLIN
Its: Treasurer
Address: 3000 Longwater Drive
Norwell, Mass 02061

MENTOR UROLOGY, INC., a Delaware corporation
By: /s/ GARY E. MISTLIN
Its: Treasurer
Address: 1601 West River Road North
Minneapolis, MN 55411

MENTOR ORC, INC., a Delaware corporation
By: /s/ GARY E. MISTLIN
Its: Treasurer
Address: 1300 Optical Drive
Azusa, CA 91702

MENTOR CARIBE, a Delaware corporation
By: /s/ GARY E. MISTLIN
Its: Treasurer
Address: 5425 Hollister Ave.
Santa Barbara, CA 93111

<PAGE>

Exhibit F
To Credit Agreement

LITIGATION DISCLOSURE

NONE

<PAGE>

Exhibit G
To Credit Agreement

LIST OF
SUBSIDIARIES OF MENTOR CORPORATION

1. Mentor H/S, Inc.

2. Mentor Urology, Inc.

3. Mentor O&O, Inc.

4. Mentor Caribe, Inc.

5. Mentor ORC, Inc.

6. Mentor Polymer Technologies Company

7. Teknar Corporation

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, Pty. Ltd (Australia)

14. Mentor Medical Systems, UK, Ltd.

15. Mentor Medical Systems, B.V.

16. Mentor Deutschland GmbH
<PAGE>

Exhibit H
To Credit Agreement

PERMITTED LIENS

Financing Agreement 3 Year Term Loan with Norwest Bank
(Automated Dipping Line) Balance at 3/31/95: $692,000

Exhibit K
To Credit Agreement

INTER-COMPANY NOTE

For value received, each the undersigned agrees to pay to the order of
Mentor Corporation, a Minnesota corporation (the "Parent") on demand the amount
from time to time advanced to the undersigned by Creditor.

This Inter-Company Note shall be governed by and construed in accordance
with the laws of the State of California without giving effect to choice of law
rules.

Dated as of the 22 day of May, 1995.

MENTOR H/S, INC., a Delaware corporation

By: /s/ GARY E. MISTLIN
Its: Treasurer

MENTOR O&O, INC., a Massachusetts corporation

By: /s/ GARY E. MISTLIN
Its: Treasurer

MENTOR UROLOGY, INC., a Delaware corporation

By: /s/ GARY E. MISTLIN
Its: Treasurer

MENTOR ORC, INC., a Delaware corporation

By: /s/ GARY E. MISTLIN
Its: Treasurer
<PAGE>

MENTOR CARIBE, a Delaware corporation

By: /s/ GARY E. MISTLIN
Its: Treasurer

Exhibit C
To Credit Agreement

CONTINUING GUARANTY

For value received and in consideration of the extension of credit by SANWA
BANK CALIFORNIA (the "Bank") to Mentor Corporation, a Minnesota corporation (the
"Debtor") or the benefits to the undersigned derived therefrom, the undersigned
(individually, a "Guarantor" and, collectively, the "Guarantors"), guarantees
and promises to pay to the Bank any and all Indebtedness (as defined below) and
agree as follows:

1. Indebtedness. The term "Indebtedness" is used herein in its most
comprehensive sense and includes any and all advances, debts, obligations,
guaranties and liabilities of the Debtor heretofore, now, or hereafter made,
incurred or created, whether voluntary or involuntary and however arising,
whether direct or acquired by the Bank by assignment or succession, whether due
or not due, absolute or contingent, liquidated or unliquidated, determined or
undetermined, and whether the Debtor may be liable individually or jointly with
others.

2. Guaranty. Each Guarantor unconditionally agrees to pay to the Bank or
its order, on demand, an amount equal to the amount of the Indebtedness or
otherwise perform any obligation of the Debtor undertaken pursuant to any
Indebtedness. In addition to any maximum principal liability hereunder, each
Guarantor agrees to (i) bear the expenses enumerated hereunder in the paragraph
herein entitled "Attorneys' Fees" and (ii) pay interest on the Indebtedness at
the rate(s) applicable thereto. Notwithstanding the foregoing, the Bank may
allow the Indebtedness to exceed the Guarantors' liability hereunder. Any
payment by any Guarantor shall not reduce the maximum principal obligation of
such Guarantor hereunder unless written notice to that effect is actually
received by the Bank at or prior to the time of such payment. Any payment by the
Debtor or any other person shall not reduce any Guarantor's maximum principal
liability hereunder.

3. Right to Amend or Modify Indebtedness. Each Guarantor authorizes the
Bank, at its sole discretion, with or without notice and without affecting any
Guarantor's liability hereunder, from time to time to: (i) change the time or
manner of payment of any Indebtedness by renewal, extension, modification,
acceleration or otherwise; (ii) alter or change any provision of any
Indebtedness including, but not limited to, the rate of interest thereon, and
any document, instrument or agreement (other than this Guaranty) evidencing,
guaranteeing, securing or related to any Indebtedness; (iii) release, discharge,
exonerate, substitute or add one or more parties liable on any Indebtedness or
one or more endorsers, cosignors or guarantors for any Indebtedness; (iv) obtain
collateral for the payment of any Indebtedness or any guaranty thereof; (v)
release existing or after acquired collateral on such terms as the Bank, in its
sole discretion, shall determine; (vi) apply any sums received from the Debtor,
<PAGE>

any endorser, cosignor, other guarantor or other person liable on any
Indebtedness or from the sale or collection of collateral or its proceeds to any
indebtedness whatsoever owed or to be owed to the Bank by the Debtor in any
order or amount and regardless of whether or not such indebtedness is guaranteed
hereby, is secured by collateral or is due and payable; and (vii) apply to any
Indebtedness, in any order or amount, regardless of whether such Indebtedness is
secured by collateral or is due and payable, any sums received from any
Guarantor or from the sale of collateral in which any Guarantor has granted the
Bank a security interest.

4. Waivers. Each Guarantor hereby unconditionally and irrevocable
acknowledges and agrees to the matters set forth below:
A. Deficiency. In the event that any Indebtedness is now or hereafter
secured by a deed of trust, such Guarantor waives any defense and all rights and
benefits of those laws purporting to state that no deficiency judgment may be
recovered on certain real property purchase money obligations (as presently
contained in Section 580(b) of the California Code of Civil Procedures and as it
may be amended or superseded in the future) and those laws purporting to state
that no deficiency judgment may be recovered after a trustee's sale under a deed
of trust (as presently contained in Section 580(d) of the California Code of
Civil Procedure and as it may be amended or superseded in the future). SUCH
GUARANTOR ACKNOWLEDGES THAT A FORECLOSURE BY A TRUSTEE'S SALE UNDER A DEED OF
TRUST MAY RESULT IN THE DESTRUCTION OF SUCH GUARANTOR'S SUBROGATION RIGHTS THAT
MAY OTHERWISE EXIST AND THAT A DESTRUCTION OF THOSE RIGHTS MAY CREATE A DEFENSE
TO A DEFICIENCY JUDGMENT. THE GUARANTOR HEREBY SPECIFICALLY WAIVES ANY SUCH
DEFENSE.

B. Election of Remedies. Such Guarantor waives any defense based upon
such Guarantor's loss of a right against the Debtor arising from the Bank's
election of a remedy on any Indebtedness under bankruptcy or other debtor relief
laws or under any other laws, including, but not limited to, those purporting to
reduce the Bank's right against such Guarantor in proportion to the principal
obligation of any Indebtedness (as presently contained in Section 2809 of the
California Civil Code and as it may be amended or superseded in the future).

Without limiting the generality of the foregoing, such Guarantor
waives all rights and defenses arising out of an election of remedies by the
Bank, even though that election of remedies, such as a nonjudicial foreclosure
with respect to security for a guaranteed obligation, has destroyed such
Guarantor's rights of subrogation and reimbursement against the Debtor by
operation of Section 580d of the California Code of Civil Procedure or
otherwise.

C. Action Against the Debtor and Collateral (and Other Remedies). Such
Guarantor waives all right to require the Bank to: (i) proceed against the
Debtor, any endorser, cosignor, other guarantor or other person liable on any
Indebtedness; (ii) join the Debtor or any endorser, cosignor, other guarantor or
other person liable on any Indebtedness in any action or actions that may be
brought and prosecuted by the Bank solely and separately against such Guarantor
on any Indebtedness; (iii) proceed against any item or items of collateral
<PAGE>

securing any Indebtedness or any guaranty thereof; or (iv) pursue or refrain
from pursuing any other remedy whatsoever in the Bank's power.

D. Debtor's Defenses. Such Guarantor waives any defense arising by
reason of any disability or other defense of the Debtor, the Debtor's successor
or any endorser, cosignor, other guarantor or other person liable on any
Indebtedness. Until all Indebtedness has been paid in full, even though it may
be in excess of the liability incurred hereby, such Guarantor shall not have any
right of subrogation and such Guarantor waives any benefit of and right to
participate in any collateral now or hereafter held by the Bank.

E. Debtor's Financial Condition. Such Guarantor hereby recognizes,
acknowledges and agrees that advances may be made in the future from time to
time with respect to any Indebtedness without authorization from or notice to
such Guarantor even though the financial condition of the Debtor, any endorser,
cosignor, other guarantor or other person liable on any Indebtedness may have
deteriorated since the date of this Guaranty. Such Guarantor waives all right to
require the Bank to disclose any information with respect to: (i) any
Indebtedness now existing or hereafter incurred; (ii) the present or future
financial condition, credit or character of the Debtor, any endorser, cosignor,
other guarantor or other person liable on any Indebtedness; (iii) any present or
future collateral securing any Indebtedness or any guaranty thereof; or (iv) any
present or future action or inaction on the part of the Bank, the Debtor or any
endorser, cosignor, other guarantor or other person liable on any Indebtedness.
Such Guarantor hereby assumes the responsibility for being informed of the
financial condition, credit and character of the Debtor and of all circumstances
bearing upon the risk of non-payment of any Indebtedness which diligent inquiry
would reveal.

5. Right of Set-off; Grant of Security Interest. In addition to all liens
upon and rights of set-off against any monies, securities or other property of
any Guarantor given to the Bank by law, the Bank shall have a security interest
in and a right to set off against all monies, securities and other property of
such Guarantor now or hereafter in the possession of or deposit with the Bank,
the Bank's agents or any one or more of them, whether held in general or special
account or deposit or for safekeeping or otherwise. No action or inaction by the
Bank with respect to any security interest or right of set-off shall be deemed a
waiver thereof and every right of set-off and security interest shall continue
in full force and effect until specifically released by the Bank in writing. The
security interest created hereby shall secure all of the Guarantors' obligations
under this Guaranty.

6. Right of Foreclosure. The Bank may foreclose, either by judicial
foreclosure or by exercise of power of sale, any deed of trust securing any
Indebtedness even though such foreclosure may destroy or diminish any
Guarantor's rights against the Debtor. Each Guarantor shall be liable to the
Bank for any part of any Indebtedness remaining unpaid after any such
foreclosure whether or not such foreclosure was for fair market value.

7. Subordination. Any indebtedness of the Debtor or any endorser, cosignor,
other guarantor or other person liable on any Indebtedness now or hereafter owed
to any Guarantor is hereby subordinated to the Indebtedness. Such indebtedness
<PAGE>

owed to such Guarantor shall, if the Bank so requests, be collected, enforced
and received by such Guarantor as trustee for the Bank and be paid over to the
Bank on account of the Indebtedness but without reducing or affecting in any
manner the liability of such Guarantor set forth herein. Should any Guarantor
fail to collect the proceeds of any such indebtedness owed to it and pay the
proceeds to the Bank, the Bank, as such Guarantor's attorney-in-fact, may do
such acts and sign such documents in such Guarantor's name as the Bank considers
necessary to effect such collection.

8. Invalid, Fraudulent or Preferential Payments. Each Guarantor agrees
that, to the extent the Debtor or any endorser, cosignor, other guarantor or
other person liable on any Indebtedness makes a payment or payments to, or is
credited for any payment or payments made for or on behalf of the Debtor to the
Bank, which payment or payments, or any part thereof, is subsequently
invalidated, determined to be fraudulent or preferential, set aside or required
to be repaid to any trustee, receiver, assignee or any other party whether under
any bankruptcy, state or federal law or under any common law or equitable cause
or otherwise, then, to the extent therof, the obligation or part thereof
intended to be satisfied thereby shall be revived, reinstated and continued in
full force and effect as if such payment or payments had not originally been
made or credited.

9. Joint and Several Obligations; Independent Obligations. If more than one
Guarantor signs this Guaranty, the obligations hereunder are joint and several.
Each Guarantor's obligations hereunder are independent of the obligations of the
Debtor or any endorser, cosignor, other guarantor or other person liable on any
Indebtedness and a separate action or actions may be brought and prosecuted
against any Guarantor on any Indebtedness.

10. Financial Information. Each Guarantor hereby agrees to deliver or cause
to be delivered to the Bank:

A. Other Information. (i) Annual Statements. Not later than July 31st of
each year, a copy of the personal financial statement of such Guarantor for such
year, which report is prepared by such Guarantor; and (ii) Tax Returns, Not
later than 30 days after filing, a copy of such Guarantor's federal income tax
returns filed for such year.

11. Acknowledgment of Receipt. Receipt of a true copy of this Guaranty is
hereby acknowledged by each Guarantor. Each Guarantor understands and agrees
that this Guaranty shall not constitute a commitment of any nature whatsoever by
the Bank to renew or hereafter extend credit to the Debtor. Each Guarantor
agrees that this Guaranty shall be effective with or without notice from the
Bank of that Bank's acceptance hereof.

12. Continuing Guaranty. This Guaranty is a continuing guaranty. Revocation
shall be effective only upon written notice personally received by an officer of
the Bank at the originating office indicated below or actually received at the
originating office by United States mail postage prepaid. Notice shall be
effective at any office of the Bank should the originating office no longer be
in existence. Revocation shall be effective at the close of the Bank's business
day when such notice is actually received. Any revocation shall be effective
only as to the revoking party and shall not affect that party's obligation with
respect to any Indebtedness existing before such revocation is effective.
<PAGE>

13. Non-Reliance. In executing this Guaranty, the undersigned is not
relying, and has not relied, upon any statement or representation made by the
Bank, or any employee, agent or representative of the Bank, with respect to the
status, financial condition or other matters related to the Debtor or the
relationship between the Debtor and the Bank.

14. Multiple Guaranties. If any Guarantor has executed or does execute more
than one guaranty of any indebtedness of the Debtor to the Bank, the limits of
liability thereunder and hereunder shall be cumulative.

15. Severability. Should any one or more provisions of this Guaranty be
determined to be illegal or unenforceable, all other provisions shall remain
effective.

16. Corporate or Partnership Authority. If the Debtor is a corporation or
partnership, the Bank need not inquire into the power of the Debtor or the
authority of its officers, directors, partners or agents acting or purporting to
act in its behalf and any credit granted in reliance upon the purported exercise
of such power or authority is guarantied hereunder.

17. Assignment. The Bank may, with notice, assign this Guaranty in whole or
in part. This Guaranty shall inure to the benefit of the Bank, its successors
and assigns, and shall bind each Guarantor and such Guarantor's heirs,
executors, administrators, successors and assigns.

18. Attorneys' Fees. Whether or not any suit, action, arbitration or other
dispute resolution proceeding is instituted by Bank or any Guarantor to enforce
any provisions of this Guaranty, in collection of any Indebtedness, or in
protection or preservation of, or realization on, any collateral securing such
Indebtedness, the non-prevailing party shall pay to the prevailing party all
reasonable attorneys' fees and other costs and expenses which may be incurred
therewith by the prevailing party.

19. Governing Law, Consent to Jurisdiction and Service of Process. This
Guaranty shall be governed by and construed according to the laws of the State
of California and each Guarantor hereby submits to the jurisdiction of the
courts of the State of California. Each Guarantor with respect to which personal
jurisdiction is not present hereby appoints Teresa Caldwell and such other
persons as may hereafter be selected by such Guarantor which irrevocably agree
in writing to so serve as its agent to receive on its behalf service of all
process in any proceedings in any such court, such service being hereby
acknowledged by such Guarantor to be effective and binding service in every
respect.

20. Entire Agreement. This Guaranty and all documents, instruments and
agreement mentioned herein constitute the entire and complete understanding of
the parties with respect to the transactions contemplated hereunder. All
previous conversations, memoranda and writings between the parties pertaining to
the transactions contemplated hereunder not incorporated or referenced in this
Guaranty or in such documents, instruments and agreements are superseded hereby.

21. Headings. The headings used herein are solely for the purpose of
identification and have no legal significance.
<PAGE>

22. Address of the Bank. The Bank's originating office under this Guaranty
is: Sherman Oaks Office (CBC), 15165 Ventura Boulevard, Sherman Oaks, CA 91403.

23. Maximum Principal Liability. THE MAXIMUM PRINCIPAL LIABILITY UNDER THIS
GUARANTY IS the amount of $15,000,000.00, plus interest at the rate(s)
applicable to any Indebtedness as set forth in the paragraph herein entitled
"Guaranty" and the expenses enumerated in the paragraph herein entitled
"Attorneys' Fees".

This Guaranty is made as of May 22, 1995, which shall be the date of this
Guaranty.

Executed by the undersigned Guarantors as of the date set forth above.

MENTOR H/S, INC. a Delaware corporation
By: /s/ GARY E. MISTLIN
Its: Treasurer
Address: 3041 Skyway Circle North
Irving, Texas 75038

MENTOR O&O, INC., a Massachusetts corporation
By: /s/ GARY E. MISTLIN
Its: Treasurer
Address: 3000 Longwater Drive
Norwell, Mass 02061

MENTOR UROLOGY, INC., a Delaware corporation
By: /s/ GARY E. MISTLIN
Its: Treasurer
Address: 1601 West River Road North
Minneapolis, MN 55411

MENTOR ORC, INC., a Delaware corporation
By: /s/ GARY E. MISTLIN
Its: Treasurer
Address: 1300 Optical Drive
Azusa, CA 91702

MENTOR CARIBE, a Delaware corporation
By: /s/ GARY E. MISTLIN
Its: Treasurer
Address: 5425 Hollister Ave.
Santa Barbara, CA 93111

EMPLOYMENT AGREEMENT

This Employment Agreement, dated August 5, 1994, is between MENTOR O & O, INC.
("COMPANY"), a Massachusetts corporation with its executive offices at 5425
Hollister Avenue, Santa Barbara, California 93111, and WILLIAM M. FREEMAN
("EMPLOYEE") of 26091 Paseo Minero, San Juan Capistrano, California 92675.

RECITALS

COMPANY is in the business of manufacturing and selling medical devices and
products, including ophthalmology 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 general operations of the 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 President. 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 be
assigned to EMPLOYEE by COMPANY from time to time (hereinafter referred
to as "Services"). EMPLOYEE shall be responsible for COMPANY's
operations including, but not limited to, management, sales, marketing,
manufacturing, and research and development activities. EMPLOYEE shall
report directly to the Chairman of the Board of Directors of COMPANY
(or to such other person designated by the Chairman) and to the
President and Chief Operating Officer of Mentor Corporation, the
COMPANY's parent corporation ("PARENT"). EMPLOYEE shall serve at the
pleasure of COMPANY's Board of Directors.

1.1.2 As President of COMPANY, EMPLOYEE shall also be an officer of
PARENT. In such capacity, EMPLOYEE shall serve at the pleasure of
PARENT's Board of Directors. EMPLOYEE shall serve in this further
capacity without further compensation.

1.1.3 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 Board of Directors of COMPANY. 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.
<PAGE>

1.1.4 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 interests of COMPANY.

1.3 Corporate Authority. EMPLOYEE, as an executive officer, shall comply
with all laws and regulations applicable to EMPLOYEE as a result of this
Agreement including, but not limited to, the Securities Act of 1933 and
Securities Act of 1934. Prior to the execution of this Agreement, EMPLOYEE
has received and reviewed COMPANY's and PARENT's Policies and Procedures
and COMPANY's and PARENT's Employee Handbook. EMPLOYEE shall comply with
COMPANY's and PARENT's Policies and Procedures, and practices now in effect
or as later amended or adopted by COMPANY.

2. TERM

This Agreement shall commence upon the execution of this Agreement and continue
until terminated as provided in Section 4 of this Agreement. EMPLOYEE's
commencement date shall be on or before September 1, 1994.

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 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.

3.1.1 For the first year of this Agreement, COMPANY agrees to pay
EMPLOYEE a base salary of One Hundred Fifty Thousand Dollars
($150,000).

3.1.2 EMPLOYEE shall also be entitled to a bonus with potential of up
to forty percent (40%) of base salary calculated on a fiscal year basis
(Fiscal Year Ending March 31, 1995) provided mutually designated
objectives are attained and subject to approval by PARENT's
Compensation Committee and Board of Directors. Based on EMPLOYEE's
start date, the maximum bonus for which EMPLOYEE will be eligible for
FYE 1995 will be Thirty Five Thousand Dollars ($35,000). COMPANY
guarantees a minimum bonus for FYE 1995 in the amount of Twenty
Thousand Dollars ($20,000).
<PAGE>

3.1.3 At the next regularly scheduled meeting of the Board of Directors
of PARENT, EMPLOYEE shall be granted a option for Fifteen Thousand
(15,000) shares of PARENT's common stock subject to a four (4) year
vesting schedule one (1) year after grant and expiring ten (10) years
thereafter and otherwise in accordance with the Mentor Corporation 1991
Stock Option Plan ("Plan"), and 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.

3.1.4 Thereafter, EMPLOYEE's compensation shall be fixed annually by
the Compensation Committee of PARENT's Board of Directors.

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

3.3 Relocation Expenses. COMPANY shall reimburse EMPLOYEE for relocation
expenses, whether or not deductible pursuant to state of federal income tax
laws. Relocation expenses shall be limited to reasonable expenses for real
estate commissions incurred upon the sale of EMPLOYEE's primary residence,
house-hunting trips, physical moving expenses, closing costs and fees not
to exceed One and one-half (1.5) mortgage points, temporary living expenses
in the Santa Barbara area for up to three (3) months, and other reasonable
out of pocket expenses (other than home decorating expenses, differences in
mortgage rates, costs of comparable housing, etc.). COMPANY will reimburse
EMPLOYEE for state and federal income taxes EMPLOYEE would not otherwise
have incurred attributable to the receipt of Relocation Expenses as
provided in this Section 3.3 (generally referred to as reimbursement on a
"gross-up" basis).

3.4 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, and vision
benefits and eligibility to participate in the PARENT's 401(k) plan.

3.5 Vacation. EMPLOYEE will accrue vacation equal to fifteen (15) days per
year during the first five (5) years of service. Thereafter, vacation shall
accrue at twenty (20) days per year. The time or times for such vacation
shall be selected by EMPLOYEE and approved by the Chairman of the Board of
Directors of COMPANY.

3.6 Automobile Expense. COMPANY will permit EMPLOYEE to select a business
automobile (e.g., four-door sedan) for lease by the COMPANY or PARENT with
lease payments not to exceed Five Hundred Fifty Dollars ($550.00) per month
in addition to associated automobile and insurance payments.

4. TERMINATION

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

4.1.1 This Agreement shall terminate upon EMPLOYEE's death.
<PAGE>

4.1.2 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) consecutive 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 are consecutive).

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

4.1.4 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 and/or PARENT as an officer 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.

4.1.5 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,
nor 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.

4.2 EMPLOYEE's Rights Upon Termination

4.2.1 Upon death or Disability of EMPLOYEE, COMPANY shall have no
further obligation to EMPLOYEE under this 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.

4.2.2 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:

i. Any compensation and reimbursable expenses owed by COMPANY
through the termination date; and
<PAGE>

ii. Severance compensation totaling three (3) months base pay
plus one (1) month base pay for each complete year of EMPLOYEE's
service with COMPANY, determined at EMPLOYEE's then current rate
of base pay. No Severance compensation shall be owing pursuant to
this paragraph unless EMPLOYEE concurrently executes PARENT's
standard form release of all claims against COMPANY and PARENT.
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.

4.2.3 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 by COMPANY
through the termination date; and

ii. Severance compensation as provided for in the COMPANY's
Severance Policy, if any.

5. COVENANTS

5.1 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 and PARENT'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 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.

5.2 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
EMPLOYEE, or as a member of a partnership, or as an officer, director,
stockholder, employee, or representative of any company, engage, directly
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 knowledge,
contemplated by COMPANY at the time of termination of this Agreement.
<PAGE>

6. 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 of a major portion of its assets or its
business and goodwill, or any other corporate reorganization involving COMPANY
or PARENT.

7. RESOLUTION OF DISPUTES

7.1 Arbitration. Any dispute arising out of or in connection with this
Agreement or in any way relating to the employment of EMPLOYEE by COMPANY
shall be arbitrated according to the American Arbitration Association's
rules, excepting that (i) the arbitrator/s shall furnish the parties with a
written decision setting forth findings of fact, conclusions of law, and
order; and (ii) the arbitration panel shall be composed of persons who are
knowledgeable in such matters if the issue in dispute involves matters of
patents, licensing, or technology.

7.2 Specifically Enforceable. This agreement to arbitrate shall be
specifically enforceable, and any award or order rendered in any proceeding
under this section shall be final and specifically enforced by any court of
competent jurisdiction. In addition to any monetary award that may be
given, the arbitrators may order a party to perform any act required by
this Agreement or to refrain from performing any act contrary to this
Agreement.

7.3 Venue. The venue for any such proceeding shall be Santa Barbara County,
California.

7.4 Costs and Fees. Each party shall initially bear its own costs and
expenses in any arbitration proceeding; however, costs and reasonable
attorneys' fees shall be awarded to the prevailing party and paid by the
losing party.

8. GENERAL PROVISIONS

8.1 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.

8.2 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 August 4, 1994.

8.3 Agreement Controls. Unless otherwise provided for in this Agreement,
the COMPANY's policies, procedures and practices shall govern the
<PAGE>

relationship between EMPLOYEE and COMPANY. If any of COMPANY's policies,
procedures and practices conflict with this Agreement, this Agreement shall
control.

8.4 Binding Effect. This Agreement shall inure to the benefit of and be
binding upon the parties, and their respective legal representatives,
successors, and assigns.

8.5 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 provisions of this Agreement shall
not be construed as a waiver of that party's right to enforce such
provisions.

8.6 Governing Law. This Agreement shall be interpreted under the laws of
the State of Massachusetts.

8.7 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.

8.9 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.

8.10 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.

8.11 Severability. If any provision 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

8.12 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.
<PAGE>

8.13 Counterpart Copies. This Agreement shall be signed in counterpart
copies, each 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.

WILLIAM M. FREEMAN MENTOR O & O, INC.

By /s/ William M. Freeman By /s/ Anthony R. Gette
Anthony R. Gette
Chairman of the Board

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