##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended January 30, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM TO
 Commission file number 000-51602
 SYNERGETICS USA, INC.
  Delaware
    
    23-2131580(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 3845 Corporate Centre DriveOFallon, Missouri
    
    63368(Address of principal executive offices)
    
    (Zip Code)
  (Registrants
Telephone Number, Including Area Code)
 þ o
  o o þ
 o þ




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##### 



PagePART I
    
    Financial InformationItem 1.
    
    Unaudited Condensed Consolidated Financial StatementsBalance Sheets  January 30, 2006 and July 31, 2005
    
    3Statements of Income for the three and six months ended January 30, 2006 and January 31, 2005
    
    4Statements of Cash Flows for the six months ended January 30, 2006 and January 31, 2005
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    24Item 4.
    
    Controls and Procedures
    
    24PART II
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    25Item 1A.
    
    Risk Factors
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    26Item 3.
    
    Defaults Upon Senior Securities
    
    26Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    26Item 5.
    
    Other Information
    
    26Item 6.
    
    Exhibits
    
    26SignaturesExhibit IndexCertification of CEOCertification of CFOCertification of CEOCertification of CFO
  2




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##### Table of Contents



Part I  Financial Information
 
 Item 1  Unaudited Condensed Consolidated Financial Statements
 Synergetics USA, Inc. and Subsidiaries
 
 Unaudited Condensed Consolidated Balance Sheets
As of January 30, 2006 and July 31, 2005
 January 30, 2006
    
    
    July 31, 2005AssetsCurrent AssetsCash and cash equivalents
    
    $
    549,584
    
    
    $
    1,816,823Investment in trading securities
    
    
    40,333
    
    
    
    29,333Accounts receivable, net of allowance for
doubtful accounts of approximately $87,000
and $135,000, respectively
    
    
    5,791,116
    
    
    
    3,344,214Notes receivable, officer-stockholder
    
    
    25,707
    
    
    
    Inventories
    
    
    10,319,822
    
    
    
    7,188,636Prepaid expenses
    
    
    423,074
    
    
    
    220,903Deferred income taxes
    
    
    244,317
    
    
    
    157,000Other
    
    
    301,204
    
    
    
    Total current assets
    
    
    17,695,157
    
    
    
    12,756,909Property and equipment, net
    
    
    8,044,494
    
    
    
    6,483,307Goodwill
    
    
    10,788,565
    
    
    
    Other intangible assets, net
    
    
    10,513,404
    
    
    
    846,008Other assets, cash value of life insurance
    
    
    29,545
    
    
    
    29,545Total assets
    
    $
    47,071,165
    
    
    $
    20,115,769Liabilities and Stockholders EquityCurrent LiabilitiesLines-of-credit
    
    $
    1,211,132
    
    
    $
    235,000Current maturities of long-term debt
    
    
    953,087
    
    
    
    276,771Current maturities of revenue bonds payable
    
    
    248,750
    
    
    
    248,750Accounts payable
    
    
    2,067,953
    
    
    
    1,148,082Accrued construction costs and expenses
    
    
    1,443,403
    
    
    
    1,748,686Income taxes payable
    
    
    299,113
    
    
    
    311,684Total current liabilities
    
    
    6,223,438
    
    
    
    3,968,973Long-Term LiabilitiesLong-term debt, less current maturities
    
    
    3,702,328
    
    
    
    1,250,939Revenue bonds payable, less current maturities
    
    
    4,264,167
    
    
    
    4,388,542Deferred income taxes
    
    
    2,836,811
    
    
    
    343,000Deferred compensation
    
    
    25,519
    
    
    
    25,519Total long-term liabilities
    
    
    10,828,825
    
    
    
    6,008,000Total liabilities
    
    
    17,052,263
    
    
    
    9,976,973Stockholders EquityCommon stock at January 30, 2006 and July 31, 2005,
$.001 par value, 50,000,000 shares authorized and
$0.01667 par value, 8,000,000 shares authorized,
respectively; 24,015,238 and 3,542,111 shares
issued, respectively; 23,913,863 and 3,456,773
shares outstanding, respectively
    
    
    24,016
    
    
    
    59,047Additional paid-in capital
    
    
    23,249,025
    
    
    
    4,985,936Retained earnings
    
    
    6,745,861
    
    
    
    5,401,81630,018,902
    
    
    
    10,446,799Less: Treasury stock
    
    
    
    
    
    
    308,003Total stockholders equity
    
    
    30,018,902
    
    
    
    10,138,796Total liabilities and stockholders equity
    
    $
    47,071,165
    
    
    $
    20,115,769
  3




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##### Table of Contents



Synergetics USA, Inc. and Subsidiaries
 
 Unaudited Condensed Consolidated Statements of Income
Three and Six Months Ended January 30, 2006 and January 31, 2005
 Three Months Ended
    
    
    Three Months Ended
    
    
    Six Months Ended
    
    
    Six Months EndedJanuary 30, 2006
    
    
    January 31, 2005
    
    
    January 30, 2006
    
    
    January 31, 2005Sales
    
    $
    9,868,449
    
    
    $
    5,346,962
    
    
    $
    17,015,568
    
    
    $
    10,321,569Cost of sales
    
    
    3,734,322
    
    
    
    1,980,007
    
    
    
    6,042,118
    
    
    
    3,675,198Gross profit
    
    
    6,134,127
    
    
    
    3,366,955
    
    
    
    10,973,450
    
    
    
    6,646,371Operating expensesResearch and development
    
    
    416,886
    
    
    
    185,578
    
    
    
    694,147
    
    
    
    361,187Selling, general and administrative
    
    
    4,260,883
    
    
    
    2,474,606
    
    
    
    8,062,662
    
    
    
    4,936,7654,677,769
    
    
    
    2,660,184
    
    
    
    8,756,809
    
    
    
    5,297,952Operating income
    
    
    1,456,358
    
    
    
    706,771
    
    
    
    2,216,641
    
    
    
    1,348,419Other income (expense)Interest income
    
    
    5,833
    
    
    
    
    
    
    
    17,550
    
    
    
    9,718Interest expense
    
    
    (161,980
    )
    
    
    (17,241
    )
    
    
    (197,328
    )
    
    
    (114,552
    )Miscellaneous
    
    
    (130
    )
    
    
    2,636
    
    
    
    (434
    )
    
    
    (156,277
    )
    
    
    (14,605
    )
    
    
    (180,212
    )
    
    
    (104,834
    )Income before provision for income taxes
    
    
    1,300,081
    
    
    
    692,166
    
    
    
    2,036,429
    
    
    
    1,243,585Provision for income taxes
    
    
    442,028
    
    
    
    268,569
    
    
    
    692,387
    
    
    
    448,765Net income
    
    $
    858,053
    
    
    $
    423,597
    
    
    $
    1,344,042
    
    
    $
    794,820Earnings per share:Basic
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    0.08
    
    
    $
    0.23Diluted
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    0.08
    
    
    $
    0.23Basic weighted average common shares outstanding
    
    
    23,934,251
    
    
    
    3,411,364
    
    
    
    17,196,651
    
    
    
    3,412,614Diluted weighted average common shares
outstanding
    
    
    24,148,395
    
    
    
    3,424,045
    
    
    
    17,413,406
    
    
    
    3,425,295
  4




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##### Table of Contents



Synergetics USA, Inc. and Subsidiaries
 
 Unaudited Condensed Consolidated Statements of Cash Flows
 Six Months Ended January 30, 2006 and January 31, 2005
 Six Months Ended
    
    
    Six Months EndedJanuary 30, 2006
    
    
    January 31, 2005Cash Flows from Operating ActivitiesNet income
    
    $
    1,344,042
    
    
    $
    794,820Adjustments to reconcile net income to net cash used in operating activitiesDepreciation and amortization
    
    
    612,830
    
    
    
    486,914Provision for doubtful accounts receivable
    
    
    (33,803
    )
    
    
    Stock-based compensation
    
    
    446,701
    
    
    
    Deferred income tax
    
    
    (323
    )
    
    
    Change in assets and liabilities:(Increase) decrease in:Receivables, net
    
    
    (1,721,668
    )
    
    
    (150,207
    )Inventories
    
    
    (2,205,697
    )
    
    
    (1,788,450
    )Prepaid expenses
    
    
    (144,719
    )
    
    
    116,524Other current assets
    
    
    (26,204
    )
    
    
    24,675(Decrease) increase in:Accounts payable
    
    
    672,185
    
    
    
    213,288Other accrued expenses
    
    
    66,691
    
    
    
    (540,477
    )Income taxes payable
    
    
    (48,284
    )
    
    
    473,912Net cash used in operating activities
    
    
    (1,038,249
    )
    
    
    (369,001
    )Cash Flows from Investing ActivitiesNet decrease in notes receivable, officer-stockholder
    
    
    7,050
    
    
    
    Purchase of property and equipment
    
    
    (2,281,779
    )
    
    
    (443,145
    )Acquisition of patents
    
    
    (61,060
    )
    
    
    (62,303
    )Cash paid for reverse merger costs
    
    
    (515,446
    )
    
    
    Cash acquired through reverse merger
    
    
    2,023,945
    
    
    
    Purchases of trading securities
    
    
    (11,000
    )
    
    
    Net cash used in investing activities
    
    
    (838,290
    )
    
    
    (505,448
    )Cash Flows from Financing ActivitiesNet borrowings on lines-of-credit
    
    
    387,640
    
    
    
    (220,589
    )Principal payments on revenue bonds payable
    
    
    (124,375
    )
    
    
    Proceeds from long-term debt
    
    
    1,426,952
    
    
    
    542,395Principal payments on long-term debt
    
    
    (913,698
    )
    
    
    (170,610
    )Payments on debt incurred for acquisition of trademark
    
    
    (270,111
    )
    
    
    Proceeds from the exercise of stock options
    
    
    102,892
    
    
    
    Net cash provided by financing activities
    
    
    609,300
    
    
    
    151,196Net decrease in cash and cash equivalents
    
    
    (1,267,239
    )
    
    
    (723,253
    )Cash and cash equivalentsBeginning
    
    
    1,816,823
    
    
    
    1,540,042Ending
    
    $
    549,584
    
    
    $
    816,789
  5




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##### Table of Contents



Synergetics USA, Inc. and Subsidiaries
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 Note 1. General
 Nature of business:
 Reporting period:
 Basis of presentation:
 Note 2. Summary of Significant Accounting Policies
  Principles of consolidation:
 Property and equipment:
 Goodwill and other intangibles:
 Revenue recognition:
 6




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##### Table of Contents



Stock-based compensation:
 Segment information: ®
 Note 3. Reverse Merger
  Assets:Cash
    
    $
    2,023,945Accounts receivable
    
    
    703,119Inventories
    
    
    925,489Prepaid expenses and other current assets
    
    
    454,451Property and equipment
    
    
    323,962Other intangibles
    
    
    10,182,533Goodwill
    
    
    10,788,565Liabilities assumed:Accounts payable and accrued expenses
    
    
    (500,869
    )Income taxes payable
    
    
    (35,713
    )Note payable issued in connection with Malis® trademark
    
    
    (3,473,053
    )Deferred income taxes
    
    
    (2,496,022
    )Net assets acquired
    
    $
    18,896,407
   7




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##### Table of Contents



Six Months
    
    Six MonthsEnded
    
    EndedJanuary 30,
    
    January 31,2006
    
    2005 (1)Net sales
    
    $
    17,887,629
    
    
    $
    12,883,755Net income
    
    
    1,178,807
    
    
    
    614,865Basic earnings per share
    
    
    0.05
    
    
    
    0.03Diluted earnings per share
    
    
    0.05
    
    
    
    0.03
 
 (1)
    
    Prior to the reverse merger, Valley Forge had a fiscal year end of September 30 with quarterly
results reported on calendar quarters. Accordingly, the unaudited pro forma condensed combined
statement of income for the six months ended January 31, 2005 was derived by adding the results of
the six months ended January 31, 2005 for Synergetics, Inc. and the results of the six months ended
December 31, 2004, for Valley Forge (which was derived by taking the results of the year ended
September 30, 2004 less the results of the nine months ended June 30, 2004 plus the results of the
three months ended December 31, 2004).  Note 4. Distribution Agreements
  Codman and Shurtleff, Inc. (Codman)
 ®
  Stryker Corporation (Stryker)
   8




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##### Table of Contents



Note 5. Stock-Based Compensation
   Six Months Ended January 30, 2006Weighted-Average
    
    
    Weighted-Exercise
    
    
    AverageShares
    
    
    Price
    
    
    Fair ValueOptions outstanding, beginning of period
    
    
    58,500
    
    
    $
    2.33
    
    
    $
    2.97Exercised prior to September 21, 2005
    
    
    (20,500
    )
    
    
    
    
    
    $
    3.92Options outstanding, September 21, 2005
    
    
    38,000
    
    
    $
    4.64
    
    
    $
    2.46Conversion ratio applied at September 21, 2005
    
    
    4.59
    
    
    
    4.59
    
    
    
    Converted options
    
    
    174,420
    
    
    $
    1.01
    
    
    $
    2.46Existing options assumed under the Valley Forge Stock option plan
    
    
    441,500
    
    
    $
    2.18
    
    
    $
    1.92For the period from September 22, 2005 through January 30, 2006:Granted
    
    
    20,000
    
    
    $
    5.00
    
    
    $
    4.15Forfeited
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (48,500
    )
    
    $
    2.12
    
    
    $
    1.86Options outstanding, end of period
    
    
    587,420
    
    
    $
    1.94
    
    
    $
    1.62Options exercisable end of period
    
    
    474,965
    
    
    $
    2.14
    
    
    $
    1.79
  Weighted Average GrantShares
    
    Date ValueUnvested options, beginning of period
    
    
    36,834
    
    
    $
    3.42Vested upon change of control
    
    
    11,334
    
    
    $
    4.00Unvested options outstanding September 21, 2005
    
    
    25,500
    
    
    $
    3.16Conversion ratio applied at September 21, 2005
    
    
    4.59Converted options
    
    
    117,045
    
    
    $
    0.90From September 22, 2005 through January 30, 2006:Vested
    
    
    4,590
    
    
    $
    0.72Unvested options, period end
    
    
    112,455
    
    
    $
    0.91
 9




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##### Table of Contents



Three Months Ended January2006
    
    2005Proceeds of options exercised
    
    $
    95,437
    
    
    $
    0Related tax benefit recognized
    
    $
    34,718
    
    
    $
    0Intrinsic value of options exercised
    
    $
    85,680
    
    
    $
    0
 Six Months Ended January2006
    
    2005Proceeds of options exercised
    
    $
    102,892
    
    
    $
    0Related tax benefit recognized
    
    $
    37,758
    
    
    $
    0Intrinsic value of options exercised
    
    $
    89,145
    
    
    $
    0
  ExercisableOptions Outstanding
    
    OptionsNumber
    
    
    587,420
    
    
    
    474,965Weighted average exercise price
    
    $
    1.94
    
    
    $
    2.14Aggregate intrinsic value
    
    $
    951,719
    
    
    $
    849,385Weighted average contractual term
    
    7 years
    
    6.5 years
  Options Outstanding
    
    Exercisable OptionsWeighted Average
    
    
    
    
    
    Weighted AverageRemaining Contractual
    
    
    
    
    
    Remaining ContractualShares
    
    Life (in Years)
    
    Shares
    
    Life (in Years)< $1.00
    
    
    61,965
    
    
    4.1 years
    
    
    61,965
    
    
    4.1 years$1.00  $2.00
    
    
    311,455
    
    
    7.7 years
    
    
    199,000
    
    
    6.9 years$2.00  $5.00
    
    
    214,000
    
    
    6.7 years
    
    
    214,000
    
    
    6.7 yearsTotal
    
    
    587,420
    
    
    7 years
    
    
    474,965
    
    
    6.5 years
  Expected average risk-free interest rate
    
    
    4.0
    %Expected average life (in years)
    
    
    5Expected volatility
    
    
    79.7
    %Expected dividend yield
    
    
    0
    %
  10




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##### Table of Contents



Note 6: Supplemental Balance Sheets Information
 Inventories
 January 30,
    
    
    July 31,2006
    
    
    2005Raw material and component parts
    
    $
    4,562,637
    
    
    $
    2,398,238Work-in-progress
    
    
    2,132,341
    
    
    
    1,295,976Finished goods
    
    
    3,624,844
    
    
    
    3,494,422$
    10,319,822
    
    
    $
    7,188,636
 Property and equipment
 January 30,
    
    
    July 31,2006
    
    
    2005Land
    
    $
    729,753
    
    
    $
    729,753Building and improvements
    
    
    5,143,716
    
    
    
    2,568,612Machinery and equipment
    
    
    3,025,801
    
    
    
    2,888,687Furniture and fixtures
    
    
    349,330
    
    
    
    266,225Software
    
    
    39,734
    
    
    
    39,734Construction in process
    
    
    885,304
    
    
    
    1,688,35510,173,638
    
    
    
    8,181,366Less accumulated depreciation
    
    
    2,129,144
    
    
    
    1,698,059$
    8,044,494
    
    
    $
    6,483,307
 Other intangible assets
  GrossCarrying
    
    
    AccumulatedValue
    
    
    Amortization
    
    
    NetJanuary 30, 2006Patents
    
    $
    711,287
    
    
    $
    162,769
    
    
    $
    548,518Proprietary know-how
    
    
    4,057,115
    
    
    
    134,685
    
    
    
    3,922,430Licensing agreements
    
    
    140,000
    
    
    
    20,740
    
    
    
    119,260Trademark
    
    
    5,923,196
    
    
    
    
    
    
    
    5,923,196$
    10,831,598
    
    
    $
    318,194
    
    
    $
    10,513,404July 31, 2005Patents
    
    $
    588,005
    
    
    $
    136,449
    
    
    $
    451,556Acquisition costs
    
    
    394,452
    
    
    
    
    
    
    
    394,452$
    982,457
    
    
    $
    136,449
    
    
    $
    846,008
   Years Ending July 31:
    
    Amount2006
    
    $
    268,0002007
    
    
    475,2002008
    
    
    472,9002009
    
    
    470,1002010
    
    
    468,900
 11




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##### Table of Contents



Pledged assets; short and long-term debt (excluding revenue bonds payable)
  Revolving Credit Facilities:
   Equipment Line of Credit:
  January 30,
    
    
    July 31,2006
    
    
    2005Note payable to bank, due in
monthly principal installments of
$1,139 plus interest at prime rate
plus 1% (an effective rate of 8.25%
as of January 30, 2006), remaining
balance due September 2007,
collateralized by a second deed of
trust
    
    
    171,972
    
    
    
    178,806Note payable, due in monthly
installments of $509 including
interest at 4.9%, remaining balance
due May 2008, collateralized by a
vehicle
    
    
    12,116
    
    
    
    15,170Note payable to bank, due in
monthly principal installments of
$39,642 beginning November 2005
plus interest at a rate of 6.75%
remaining balance due September 30,
2008, collateralized by
substantially all assets of the
Company
    
    
    1,268,385
    
    
    
    Note payable to the estate of the
late Dr. Leonard I. Malis, due in
quarterly installments of $159,904
which includes interest at an
imputed rate of 6.00%, remaining
balance of $3,837,696 due December
2011, collateralized by the
Malis® trademark
    
    
    3,202,942
    
    
    
    Note payable to bank, due in
monthly installments of $3,033 plus
interest at prime rate (an
effective rate of 6.25% as of July
31, 2005), remaining balance due
May 7, 2007, collateralized by
substantially all assets of the
Company, refinanced in October 2005
    
    $
    
    
    
    $
    63,713Note payable to bank, due in
monthly principal installments of
$7,083 plus interest at prime rate
(an effective rate of 6.25% as of
July 31, 2005), remaining balance
due June 2008, collateralized by
machinery and equipment, refinanced
in October 2005
    
    
    
    
    
    
    240,833Note payable to bank, due in
monthly principal installments of
$11,300 plus interest at prime rate
(an effective rate of 6.25% as of
July 31, 2005), remaining balance
due September 2008, collateralized
by machinery and equipment,
refinanced in October 2005
    
    
    
    
    
    
    440,696Equipment line of credit note
payable to bank, available
borrowings up to $1.0 million, with
interest at the banks prime
lending rate, collateralized by
applicable equipment financed, due
September 30, 2005, refinanced in
October 2005
    
    
    
    
    
    
    588,4924,655,415
    
    
    
    1,527,710Less current maturities
    
    
    953,087
    
    
    
    276,771Long-term portion
    
    $
    3,702,328
    
    
    $
    1,250,939
 12




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##### Table of Contents



Note 7. Related Party Transactions
  Note 8. Commitments and Contingencies
     inter alia
   13




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##### Table of Contents



Note 9. Segment Information
  Synergetics
    
    Valley Forge
    
    ConsolidatedThree Months Ended January 30, 2006Net sales
    
    $
    7,663,964
    
    
    $
    2,204,485
    
    
    $
    9,868,449Operating income
    
    
    897,779
    
    
    
    558,579
    
    
    
    1,456,358Identifiable assets
    
    
    23,257,493
    
    
    
    23,813,672
    
    
    
    47,071,165Three Months Ended January 31, 2005Net sales
    
    $
    5,346,962
    
    
    $
    
    
    
    $
    5,346,962Operating income
    
    
    706,771
    
    
    
    
    
    
    
    706,771Identifiable assets
    
    
    15,566,753
    
    
    
    
    
    
    
    15,566,753
 Synergetics
    
    Valley Forge
    
    ConsolidatedSix Months Ended January 30, 2006Net sales
    
    $
    14,054,835
    
    
    $
    2,960,733
    
    
    $
    17,015,568Operating income
    
    
    1,553,511
    
    
    
    663,130
    
    
    
    2,216,641Identifiable assets
    
    
    23,257,493
    
    
    
    23,813,672
    
    
    
    47,071,165Six Months Ended January 31, 2005Net sales
    
    $
    10,321,569
    
    
    $
    
    
    
    $
    10,321,569Operating income
    
    
    1,348,419
    
    
    
    
    
    
    
    1,348,419Identifiable assets
    
    
    15,566,753
    
    
    
    
    
    
    
    15,566,753
 14




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##### Table of Contents



Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
  The Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities
Exchange Act of 1934, as amended, provide a safe harbor for forward-looking statements made by or
on behalf of the Company. The Company and its representatives may from time to time make written or
oral statements that are forward-looking, including statements contained in this report and other
filings with the Securities and Exchange Commission (SEC) and in our reports to stockholders. In
some cases forward-looking statements can be identified by words such as believe, expect,
anticipate, plan, potential, continue or similar expressions. Because such forward-looking
statements include risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. For example, uncertainty exists with
respect to: the effects of local and national economic, credit and capital market conditions on the
economy in general, and on the medical device industry in particular, and the effects of foreign
exchange rates and interest rates; the ability to timely and cost-effectively integrate the
operations of Synergetics, Inc., now a wholly owned subsidiary of the Company, and Valley Forge
Scientific Corp.; the ability to realize the synergies and other perceived advantages resulting
from our recently completed merger; the ability to attract and retain key personnel; the ability to
meet all existing and new U.S. FDA requirements and comparable non-U.S. medical device regulations
in jurisdictions in which the Company conducts its business; the ability to successfully execute
our business strategies; the extent and timing of market acceptance of new products or product
indications; the ability to procure, maintain, enforce and defend our patent and proprietary know
how; changes in laws, including increased tax rates, regulations or accounting standards,
third-party relations and approvals, and decisions of courts, regulators and governmental bodies;
the ability to continue to increase customer loyalty; the ability to recoup costs of capital
investments through higher revenues; the effects of environmental and structural building
conditions relating to the Companys properties; acts of war and terrorism incidents and the
effects of operating and market competition.
 Although we believe the expectations reflected in our forward-looking statements are based
upon reasonable assumptions, it is not possible to foresee or identify all facts that could have a
material effect on the future financial performance of the Company. The forward-looking statements
in this report are made on the basis of managements assumptions and analyses, as of the time the
statements are made, in light of their experience and perception of historical conditions, expected
future developments and other factors believed to be appropriate under the circumstances. Further
information concerning important factors that could cause actual events or results to be materially
different from the forward-looking statements can be found in the Risk Factors section of the
Companys Form 10-K for the fiscal year ended July 31, 2005.
 In addition, certain market data and other statistical information used throughout this report
are based on independent industry publications. Although we believe these sources to be reliable,
we have not independently verified the information and cannot guarantee the accuracy and
completeness of such sources.
 Except as otherwise required by the federal securities laws, we disclaim any obligation or
undertaking to publicly release any updates or revisions to any forward-looking statement contained
in this quarterly report on Form 10-Q and the information incorporated by reference in this report
to reflect any change in our expectations with regard thereto or any change in events, conditions
or circumstances on which any statement is based.
 Overview
   ® ®
 15




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® ® ® ®
 ® ® TM ® TM
 TM
   16




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##### Table of Contents



Our Business Strategy
  
    
    Introducing new technology that can be easily differentiated from our competition by
capitalizing on our combined successes in delivering minimally invasive products that enable
concentrated application to a surgical area with decreased impact beyond the specific desired
surgical effects, resulting in improved recovery times and shorter hospital stays;
 
    
    Identifying microsurgical niches that may offer the prospect for substantial growth and
higher profit margins that allow us an opportunity to build upon our existing technologies,
such as expanding the use of our products in ENT (ear, nose and throat), plastic surgery and
other forms of microsurgery;
 
    
    Accelerating our international (including Canada) growth by continuing to build on our recent
successes supported by Valley Forges long-established relationships and reputation in global
markets;
 
    
    Combining the breadth and depth of knowledge, experience and resources in Valley Forges and
Synergetics existing research and development groups to form a new combined research and
development capability aligned to deliver precision engineered instruments based on our own
proprietary technologies and innovations;
 
    
    Branding and marketing a substantial portion of our neurosurgical products with the
Malis® trademark;
 
    
    Developing hybrid direct sales/independent sales agent distribution channels to assure that
our products and benefits are seen by those making or influencing the purchasing decisions;
 
    
    Marketing our new state-of-the-art multifunctional bipolar electrosurgical system, known as
the Malis® AdvantageTM, with our new proprietary single use
hand-switching bipolar instruments including enhanced features and functionality to expand the
array of procedures they are designed to perform;
 
    
    Growing our disposables revenue stream by focusing on the development of a full offering of
disposable adjuncts, such as instruments, adapters and fiber optics, to our capital equipment
offerings and emphasizing disposables designed to eliminate hospital repair costs and minimize
patient-to-patient disease transfer;
 
    
    Expanding the use of our new multifunctional bipolar electrosurgical generator, which will be
marketed as the Malis® AdvantageTM, into other surgical markets as its
increased power and functionality allows the surgeon to perform functions similar to
traditional monopolar systems, without the inherent safety limitations; and
 
    
    Exploring opportunities for growth through strategic partnering with other companies with
complimentary products and technologies to facilitate strategic growth in our defined niche
markets, such as our current relationship with Stryker Corporation.
 17




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##### Table of Contents



Results of Operations
 ®
 Three Month Period Ended January 30, 2006 Compared to Three Month Period Ended January 31, 2005
 Net Sales
  Quarter Ended January2006
    
    
    2005
    
    
    % IncreaseSynergetics:Ophthalmic
    
    $
    5,858
    
    
    $
    4,427
    
    
    
    32.3
    %Neurosurgery
    
    
    1,806
    
    
    
    920
    
    
    
    96.3
    %Valley Forge:
    
    
    2,204
    
    
    
    
    
    
    
    N/M$
    9,868
    
    
    $
    5,347
    
    
    
    84.6
    %
 
 For 2006, this information is for the quarter ended January 30, and for 2005, the quarter
ended January 31.N/M  Not meaningful. ® TM
  Quarter Ended January2006
    
    
    2005
    
    
    % IncreaseUnited States  Synergetics
    
    $
    5,564
    
    
    $
    3,895
    
    
    
    42.8
    %United States  Valley Forge
    
    
    2,204
    
    
    
    
    
    
    
    N/MInternational  Synergetics(including Canada)
    
    
    2,100
    
    
    
    1,452
    
    
    
    44.6
    %$
    9,868
    
    
    $
    5,347
    
    
    
    84.6
    %
 
 For 2006, this information is for the quarter ended January 30, and for 2005, the quarter
ended January 31.N/M  Not meaningful. 18




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Gross Profit
  Operating Expenses
   Other Expense
  Operating Income, Income Taxes and Net Income
    19




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##### Table of Contents



Six Month Period Ended January 30, 2006 Compared to Six Month Period Ended January 31, 2005
 Net Sales
  Six Months Ended January2006
    
    
    2005
    
    
    % IncreaseSynergetics:Ophthalmic
    
    $
    11,212
    
    
    $
    8,245
    
    
    
    36.0
    %Neurosurgery
    
    
    2,843
    
    
    
    2,077
    
    
    
    36.9
    %Valley Forge
    
    
    2,961
    
    
    
    
    
    
    
    N/M$
    17,016
    
    
    $
    10,322
    
    
    
    64.9
    %
 
 For 2006, this information is for the six months ended January 30, and for 2005, the six
months ended January 31. This tabular information also reflects the net sales of Valley Forge
for the period September 22, 2005 through January 30, 2006.N/M  Not meaningful. ® TM
  Six Months Ended January2005
    
    
    2004
    
    
    % IncreaseUnited States  Synergetics
    
    $
    10,415
    
    
    $
    7,902
    
    
    
    31.8
    %United States  Valley Forge
    
    
    2,961
    
    
    
    
    
    
    
    N/MInternational  Synergetics(including Canada)
    
    
    3,640
    
    
    
    2,420
    
    
    
    50.4
    %$
    17,016
    
    
    $
    10,322
    
    
    
    64.9
    %
 
 For 2006, this information is for the six months ended January 30, and for 2005 the six months
ended January 31. This tabular information also reflects the net sales of Valley Forge for
the period September 22, 2005 through January 30, 2006.N/M  Not meaningful. 20




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Gross Profit
  Operating Expenses
   Other Expense
  Operating Income, Income Taxes and Net Income
    21




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Liquidity and Capital Resources
      ®
  Revolving Credit Facilities:
  22




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Equipment Line of Credit:
  Critical Accounting Policies
  Principles of consolidation:
 Property and equipment:
 Goodwill and other intangibles:
 Revenue recognition:
  Stock-based compensation:
 Segment information: ®
 23




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Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
 Item 4  Controls and Procedures
     24




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Part II  Other Information
 
 Item 1  Legal Proceedings
    inter alia
 
 25




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Item 1A  Risk Factors
  
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3  Defaults upon Senior Securities
  
 Item 4  Submission of Matters to a Vote of Security Holders
  
 Item 5  Other Information
  
 Item 6  Exhibits
 Exhibit No.
    
    Description31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 Trademark Acknowledgements
  26




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SYNERGETICS USA, INC.(Registrant)March 15, 2006
    
    /s/ Gregg D. SchellerGregg D. Scheller, President and ChiefExecutive Officer (Principal ExecutiveOfficer)March 15, 2006
    
    /s/ Pamela G. BoonePamela G. Boone, Executive VicePresident, Chief Financial Officer, Secretaryand Treasurer (Principal Financial andPrincipal Accounting Officer)
 27