##### 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 April 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
incorporation or organization)
    
    (I.R.S. Employer Identification No.)3845 Corporate Centre Drive
OFallon, Missouri
    
    63368(Address of principal executive offices)
    
    (Zip Code)
 
 þ o
  o o þ
 o þ




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##### 



PagePART I
    
    Financial InformationItem 1.
    
    Unaudited Condensed Consolidated Financial StatementsBalance Sheets  April 30, 2006 and July 31, 2005
    
    
    3Statements of Income for the three and nine months ended April 30, 2006 and April 29, 2005
    
    
    4Statements of Cash Flows for the nine months ended April 30, 2006 and April 29, 2005
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    25PART II
    
    Other Information
    
    
    26Item 1.
    
    Legal Proceedings
    
    
    26Item 1A.
    
    Risk Factors
    
    
    27Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 3.
    
    Defaults Upon Senior Securities
    
    
    27Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    27Item 5.
    
    Other Information
    
    
    27Item 6.
    
    Exhibits
    
    
    27SignaturesExhibit IndexAmended and Restated 2001 Stock PlanForm of Restricted Stock Award AgreementAmended and Restated Non-employee Directors' Stock PlanCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer
  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 April 30, 2006 and July 31, 2005
 April 30, 2006
    
    
    July 31, 2005AssetsCurrent AssetsCash and cash equivalents
    
    $
    501,678
    
    
    $
    1,816,823Investment in trading securities
    
    
    45,833
    
    
    
    29,333Accounts receivable, net of allowance for
doubtful accounts of approximately
$159,000 and $135,000, respectively
    
    
    6,086,797
    
    
    
    3,344,214Notes receivable, officer-stockholder
    
    
    22,182
    
    
    
    Inventories
    
    
    11,986,066
    
    
    
    7,188,636Prepaid expenses
    
    
    562,468
    
    
    
    220,903Deferred income taxes
    
    
    273,000
    
    
    
    157,000Other
    
    
    308,279
    
    
    
    Total current assets
    
    
    19,786,303
    
    
    
    12,756,909Property and equipment, net
    
    
    8,173,320
    
    
    
    6,483,307Goodwill
    
    
    10,767,278
    
    
    
    Other intangible assets, net
    
    
    10,455,291
    
    
    
    846,008Other assets, cash value of life insurance
    
    
    29,545
    
    
    
    29,545Total assets
    
    $
    49,211,737
    
    
    $
    20,115,769Liabilities and Stockholders EquityCurrent LiabilitiesLines-of-credit
    
    $
    1,890,497
    
    
    $
    235,000Current maturities of long-term debt
    
    
    959,951
    
    
    
    276,771Current maturities of revenue bonds payable
    
    
    248,750
    
    
    
    248,750Accounts payable
    
    
    1,735,687
    
    
    
    1,148,082Accrued expenses
    
    
    1,701,603
    
    
    
    1,748,686Income taxes payable
    
    
    494,617
    
    
    
    311,684Deferred revenue
    
    
    8,800
    
    
    
    Total current liabilities
    
    
    7,039,905
    
    
    
    3,968,973Long-Term LiabilitiesLong-term debt, less current maturities
    
    
    3,459,735
    
    
    
    1,250,939Revenue bonds payable, less current maturities
    
    
    4,201,979
    
    
    
    4,388,542Deferred income taxes
    
    
    2,956,000
    
    
    
    343,000Deferred compensation
    
    
    
    
    
    
    25,519Total long-term liabilities
    
    
    10,617,714
    
    
    
    6,008,000Total liabilities
    
    
    17,657,619
    
    
    
    9,976,973Stockholders EquityCommon stock at April 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; 24,123,822 and 3,542,111 shares
issued, respectively; 24,123,822 and 3,456,773
shares outstanding, respectively
    
    
    24,125
    
    
    
    59,047Additional paid-in capital
    
    
    23,615,904
    
    
    
    4,985,936Retained earnings
    
    
    7,914,089
    
    
    
    5,401,81631,554,118
    
    
    
    10,446,799Less: Treasury stock
    
    
    
    
    
    
    308,003Total stockholders equity
    
    
    31,554,118
    
    
    
    10,138,796Total liabilities and stockholders equity
    
    $
    49,211,737
    
    
    $
    20,115,769
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##### Table of Contents



Synergetics USA, Inc. and Subsidiaries
 Unaudited Condensed Consolidated Statements of Income
Three and Nine Months Ended April 30, 2006 and April 29, 2005
 Three Months Ended
    
    
    Three Months Ended
    
    
    Nine Months Ended
    
    
    Nine Months EndedApril 30, 2006
    
    
    April 29, 2005
    
    
    April 30, 2006
    
    
    April 29, 2005Sales
    
    $
    10,449,516
    
    
    $
    5,750,074
    
    
    $
    27,465,084
    
    
    $
    16,071,643Cost of sales
    
    
    3,611,652
    
    
    
    2,220,661
    
    
    
    9,653,770
    
    
    
    5,895,859Gross profit
    
    
    6,837,864
    
    
    
    3,529,413
    
    
    
    17,811,314
    
    
    
    10,175,784Operating expensesResearch and development
    
    
    444,206
    
    
    
    209,510
    
    
    
    1,138,353
    
    
    
    570,697Selling, general and administrative
    
    
    4,469,253
    
    
    
    2,609,001
    
    
    
    12,531,915
    
    
    
    7,545,7664,913,459
    
    
    
    2,818,511
    
    
    
    13,670,268
    
    
    
    8,116,463Operating income
    
    
    1,924,405
    
    
    
    710,902
    
    
    
    4,141,046
    
    
    
    2,059,321Other income (expense)Interest income
    
    
    331
    
    
    
    (4,004
    )
    
    
    17,881
    
    
    
    5,714Interest expense
    
    
    (156,837
    )
    
    
    (82,948
    )
    
    
    (354,165
    )
    
    
    (197,500
    )Miscellaneous
    
    
    (34,910
    )
    
    
    
    
    
    
    (35,344
    )
    
    
    (191,416
    )
    
    
    (86,952
    )
    
    
    (371,628
    )
    
    
    (191,786
    )Income before provision for income taxes
    
    
    1,732,989
    
    
    
    623,950
    
    
    
    3,769,418
    
    
    
    1,867,535Provision for income taxes
    
    
    611,873
    
    
    
    236,673
    
    
    
    1,304,259
    
    
    
    685,437Net income
    
    $
    1,121,116
    
    
    $
    387,277
    
    
    $
    2,465,159
    
    
    $
    1, 182,098Earnings per share:Basic
    
    $
    0.05
    
    
    $
    0.11
    
    
    $
    0.13
    
    
    $
    0.35Diluted
    
    $
    0.05
    
    
    $
    0.11
    
    
    $
    0.13
    
    
    $
    0.35Basic weighted average common shares outstanding
    
    
    24,090,511
    
    
    
    3,412,996
    
    
    
    19,469,352
    
    
    
    3,412,973Diluted weighted average common shares outstanding
    
    
    24,326,847
    
    
    
    3,425,677
    
    
    
    19,678,767
    
    
    
    3,425,654
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Synergetics USA, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
Nine Months Ended April 30, 2006 and April 29, 2005
 Nine Months Ended
    
    
    Nine Months EndedApril 30, 2006
    
    
    April 29, 2005Cash Flows from Operating ActivitiesNet income
    
    $
    2,465,159
    
    
    $
    1,182,098Adjustments to reconcile net income to net cash used in operating activitiesDepreciation and amortization
    
    
    912,391
    
    
    
    709,638Provision for doubtful accounts receivable
    
    
    (8,317
    )
    
    
    Stock-based compensation
    
    
    452,656
    
    
    
    181,632Tax benefit associated with the exercise of non-qualified options
    
    
    168,070
    
    
    
    Deferred income taxes
    
    
    90,183
    
    
    
    Change in assets and liabilities, net of fiscal year 2006 acquisition of Valley Forge:(Increase) decrease in:Receivables, net
    
    
    (2,031,147
    )
    
    
    (900,170
    )Inventories
    
    
    (3,876,851
    )
    
    
    (1,969,657
    )Prepaid expenses
    
    
    (290,372
    )
    
    
    109,923Other current assets
    
    
    (27,020
    )
    
    
    (Decrease) increase in:Accounts payable
    
    
    328,232
    
    
    
    1,671,032Accrued expenses
    
    
    308,172
    
    
    
    (1,268,876
    )Income taxes payable
    
    
    147,220
    
    
    
    (16,406
    )Net cash used in operating activities
    
    
    (1,361,624
    )
    
    
    (300,786
    )Cash Flows from Investing ActivitiesNet decrease in notes receivable, officer-stockholder
    
    
    10,575
    
    
    
    Purchase of property and equipment
    
    
    (2,527,538
    )
    
    
    (1,152,658
    )Acquisition of patents
    
    
    (133,555
    )
    
    
    (134,791
    )Cash paid for reverse merger costs
    
    
    (494,159
    )
    
    
    Cash acquired through reverse merger
    
    
    2,023,945
    
    
    
    Purchases of trading securities
    
    
    (16,500
    )
    
    
    Net cash used in investing activities
    
    
    (1,137,232
    )
    
    
    (1,287,449
    )Cash Flows from Financing ActivitiesNet borrowings on lines-of-credit
    
    
    1,067,005
    
    
    
    16,191Principal payments on revenue bonds payable
    
    
    (186,563
    )
    
    
    Proceeds from long-term debt
    
    
    1,426,952
    
    
    
    918,730Principal payments on long-term debt
    
    
    (1,037,567
    )
    
    
    (272,875
    )Payments on debt incurred for acquisition of trademark
    
    
    (381,971
    )
    
    
    Proceeds from the exercise of stock options
    
    
    295,855
    
    
    
    Net cash provided by financing activities
    
    
    1,183,711
    
    
    
    662,046Net decrease in cash and cash equivalents
    
    
    (1,315,145
    )
    
    
    (926,189
    )Cash and cash equivalentsBeginning
    
    
    1,816,823
    
    
    
    1,540,042Ending
    
    $
    501,678
    
    
    $
    613,853
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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:
  Net incomeAs reported
    
    $
    1,182,098Pro forma
    
    
    1,177,521Basic net income per share:As reported
    
    $
    0.35Pro forma
    
    $
    0.35Diluted net income per shareAs reported
    
    $
    0.35Pro forma
    
    $
    0.34
 Segment information: ®
 Note 3. Reverse Merger
  7




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##### Table of Contents



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
    
    
    10,767,278Liabilities assumed:Accounts payable and accrued expenses
    
    
    (479,852
    )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
    
    $
    18,896,137
   Nine Months
    
    Nine MonthsEnded
    
    EndedApril 30,
    
    April 29,2006
    
    2005 (1)Net sales
    
    $
    28,337,145
    
    
    $
    20,449,858Net income
    
    
    2,324,591
    
    
    
    1,005,194Basic earnings per share
    
    
    0.12
    
    
    
    0.04Diluted earnings per share
    
    
    0.12
    
    
    
    0.04
 
 (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 nine months ended April 29, 2005 was derived by adding the results of
the nine months ended April 29, 2005 for Synergetics, Inc. and the results of the nine months ended
March 31, 2005, 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
six months ended March 31, 2005).  Note 4. Distribution Agreements
  Codman and Shurtleff, Inc. (Codman)
  8




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##### Table of Contents



®
  Stryker Corporation (Stryker)
    Note 5. Stock-Based Compensation
 Stock Option Plans
   9




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##### Table of Contents



Nine Months Ended April 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 April 30, 2006:Granted
    
    
    20,000
    
    
    $
    5.00
    
    
    $
    4.15Forfeited
    
    
    (9,180
    )
    
    $
    1.09
    
    
    $
    0.91Exercised
    
    
    (134,500
    )
    
    $
    2.04
    
    
    $
    1.74Options outstanding, end of period
    
    
    492,240
    
    
    $
    1.91
    
    
    $
    1.59Options exercisable end of period
    
    
    388,965
    
    
    $
    2.20
    
    
    $
    1.81
  Weighted AverageShares
    
    Grant 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 April 30, 2006:Forfeited
    
    
    9,180
    
    
    $
    1.09Vested
    
    
    4,590
    
    
    $
    0.72Unvested options, period end
    
    
    103,275
    
    
    $
    0.91
  Three Months Ended AprilApril 30, 2006
    
    April 29, 2005Proceeds of options exercised
    
    $
    170,851
    
    
    $
    Related tax benefit recognized
    
    
    130,312
    
    
    
    Intrinsic value of options exercised
    
    
    159,660
    
    
    
    
 Nine Months Ended AprilApril 30, 2006
    
    April 29, 2005Proceeds of options exercised
    
    $
    273,743
    
    
    $
    Related tax benefit recognized
    
    
    168,070
    
    
    
    Intrinsic value of options exercised
    
    
    248,805
    
    
    
    
  ExercisableOptions Outstanding
    
    OptionsNumber
    
    
    492,240
    
    
    
    388,965Weighted average exercise price
    
    $
    1.91
    
    
    $
    2.20Aggregate intrinsic value
    
    $
    784,625
    
    
    $
    690,645Weighted average contractual term
    
    7 years
    
    6.4 years
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##### Table of Contents



Options Outstanding
    
    Exercisable OptionsWeighted Average
    
    
    
    
    
    Weighted AverageRemaining
    
    
    
    
    
    RemainingContractual Life
    
    
    
    
    
    Contractual LifeShares
    
    (in Years)
    
    Shares
    
    (in Years)< $1.00
    
    
    61,965
    
    
    4.1 years
    
    
    61,965
    
    
    4.1 years$1.00 - $2.00
    
    
    268,275
    
    
    7.7 years
    
    
    165,000
    
    
    6.8 years$2.00 - $5.00
    
    
    162,000
    
    
    7.0 years
    
    
    162,000
    
    
    7.0 yearsTotal
    
    
    492,240
    
    
    7.0 years
    
    
    388,965
    
    
    6.4 years
  Expected average risk-free interest rate
    
    
    4.0
    %Expected average life (in years)
    
    
    5Expected volatility
    
    
    79.7
    %Expected dividend yield
    
    
    0
    %
  Restricted Stock Plans
  Note 6: Supplemental Balance Sheets Information
 Inventories
 April 30,
    
    
    July 31,2006
    
    
    2005Raw material and component parts
    
    $
    5,235,498
    
    
    $
    2,398,238Work-in-progress
    
    
    2,542,929
    
    
    
    1,295,976Finished goods
    
    
    4,207,639
    
    
    
    3,494,422$
    11,986,066
    
    
    $
    7,188,636
 11




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##### Table of Contents



Property and equipment
 April 30,
    
    
    July 31,2006
    
    
    2005Land
    
    $
    729,753
    
    
    $
    729,753Building and improvements
    
    
    5,278,557
    
    
    
    2,568,612Machinery and equipment
    
    
    3,741,409
    
    
    
    2,888,687Furniture and fixtures
    
    
    507,660
    
    
    
    266,225Software
    
    
    97,993
    
    
    
    39,734Construction in process
    
    
    30,836
    
    
    
    1,688,35510,386,208
    
    
    
    8,181,366Less accumulated depreciation
    
    
    2,212,888
    
    
    
    1,698,059$
    8,173,320
    
    
    $
    6,483,307
 Other intangible assets
  GrossCarrying
    
    
    AccumulatedValue
    
    
    Amortization
    
    
    NetApril 30, 2006Patents
    
    $
    783,782
    
    
    $
    176,809
    
    
    $
    606,973Proprietary know-how
    
    
    4,057,115
    
    
    
    235,698
    
    
    
    3,821,417Licensing agreements
    
    
    140,000
    
    
    
    36,295
    
    
    
    103,705Trademark
    
    
    5,923,196
    
    
    
    
    
    
    
    5,923,196$
    10,904,093
    
    
    $
    448,802
    
    
    $
    10,455,291
 July 31, 2005Patents
    
    $
    588,005
    
    
    $
    136,449
    
    
    $
    451,556Acquisition costs
    
    
    394,452
    
    
    
    
    
    
    
    394,452$
    982,457
    
    
    $
    136,449
    
    
    $
    846,008
   Years Ending July 31:
    
    Amount2006
    
    $
    130,6082007
    
    
    475,2002008
    
    
    472,9002009
    
    
    470,1002010
    
    
    468,900
  Pledged assets; short and long-term debt (excluding revenue bonds payable)
  Revolving Credit Facilities:
 12




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##### Table of Contents



Equipment Line of Credit:
  April 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 April 30, 2006), remaining
balance due September 2007,
collateralized by a second deed
of trust
    
    $
    168,557
    
    
    $
    178,806Note payable, due in monthly
installments of $509 including
interest at 4.9%, remaining
balance due May 2008,
collateralized by a vehicle
    
    
    10,587
    
    
    
    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
    
    
    1,149,460
    
    
    
    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
$3,677,792, including
contractual interest payments,
due December 2011,
collateralized by the
Malis® trademark
    
    
    3,091,082
    
    
    
    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
    
    
    
    
    
    
    588,4924,419,686
    
    
    
    1,527,710Less current maturities
    
    
    959,951
    
    
    
    276,771Long-term portion
    
    $
    3,459,735
    
    
    $
    1,250,939
 Note 7. Related Party Transactions
  Note 8. Commitments and Contingencies
  13




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##### Table of Contents



et al inter alia
   Note 9. Segment Information
  Synergetics
    
    Valley Forge
    
    ConsolidatedThree Months Ended April 30, 2006Net sales
    
    $
    7,810,123
    
    
    $
    2,639,393
    
    
    $
    10,449,516Operating income
    
    
    940,112
    
    
    
    984,293
    
    
    
    1,924,405Identifiable assets
    
    
    25,149,035
    
    
    
    24,062,702
    
    
    
    49,211,737
 14




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##### Table of Contents



Three Months Ended April 29, 2005Net sales
    
    $
    5,750,074
    
    
    $
    
    
    
    $
    5,750,074Operating income
    
    
    710,902
    
    
    
    
    
    
    
    710,902Identifiable assets
    
    
    16,885,540
    
    
    
    
    
    
    
    16,885,540
 Synergetics
    
    Valley Forge
    
    ConsolidatedNine Months Ended April 30, 2006Net sales
    
    $
    21,864,958
    
    
    $
    5,600,126
    
    
    $
    27,465,084Operating income
    
    
    2,493,623
    
    
    
    1,647,423
    
    
    
    4,141,046Identifiable assets
    
    
    25,149,035
    
    
    
    24,062,702
    
    
    
    49,211,737
 Nine Months Ended April 29, 2005Net sales
    
    $
    16,071,643
    
    
    $
    
    
    
    $
    16,071,643Operating income
    
    
    2,059,321
    
    
    
    
    
    
    
    2,059,321Identifiable assets
    
    
    16,885,540
    
    
    
    
    
    
    
    16,885,540
 15




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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, with the historical
business of Valley Forge Scientific Corp.; the ability to realize the synergies and other perceived
advantages resulting from our recently completed merger; the ability to attract new strategic
partners for the distribution of our products and to maintain our relationships with existing
distribution strategic partners; the ability to identify new product offering opportunities, which
may include partnering with original equipment manufacturers (OEM) and to bring effectively such
products to the market and/or maintain our relationships with our existing OEM partners; 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
   16




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##### Table of Contents



® ® ® ® ® ® ® ®
 ® ® ®
  ® ® ®
  17




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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.
 18




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##### Table of Contents



Results of Operations
 ®
 Three Month Period Ended April 30, 2006 Compared to Three Month Period Ended April 29, 2005
 Net Sales
  Quarter Ended April2006
    
    
    2005
    
    
    % IncreaseSynergetics:Ophthalmic
    
    $
    5,959
    
    
    $
    4,663
    
    
    
    27.8
    %Neurosurgery
    
    
    1,851
    
    
    
    1,087
    
    
    
    70.3
    %Valley Forge
    
    
    2,640
    
    
    
    
    
    
    
    N/M$
    10,450
    
    
    $
    5,750
    
    
    
    81.7
    %
 
 For 2006, this information is for the quarter ended April 30, and for 2005, the quarter ended
April 29.N/M  Not meaningful. ®
  Quarter Ended April2006
    
    
    2005
    
    
    % IncreaseUnited States  Synergetics
    
    $
    5,604
    
    
    $
    4,224
    
    
    
    32.7
    %United States  Valley Forge
    
    
    2,640
    
    
    
    
    
    
    
    N/MInternational   Synergetics(including Canada)
    
    
    2,206
    
    
    
    1,526
    
    
    
    44.6
    %$
    10,450
    
    
    $
    5,750
    
    
    
    81.7
    %
 
 For 2006, this information is for the quarter ended April 30, and for 2005, the quarter ended
April 29.N/M  Not meaningful. ® ®
 19




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##### Table of Contents



Gross Profit
  Operating Expenses
   Other Expense
  Operating Income, Income Taxes and Net Income
    20




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##### Table of Contents



Nine Month Period Ended April 30, 2006 Compared to Nine Month Period Ended April 29, 2005
 Net Sales
  Nine Months Ended April2006
    
    
    2005
    
    
    % IncreaseSynergetics:Ophthalmic
    
    $
    17,170
    
    
    $
    12,946
    
    
    
    32.6
    %Neurosurgery
    
    
    4,695
    
    
    
    3,126
    
    
    
    50.2
    %Valley Forge
    
    
    5,600
    
    
    
    
    
    
    
    N/M$
    27,465
    
    
    $
    16,072
    
    
    
    70.9
    %
 
 For 2006, this information is for the nine months ended April 30, and for 2005, the nine
months ended April 29. This tabular information also reflects the net sales of Valley Forge
for the period September 22, 2005 through April 30, 2006.N/M  Not meaningful.   Nine Months Ended April2006
    
    
    2005
    
    
    % IncreaseUnited States  Synergetics
    
    $
    16,019
    
    
    $
    12,079
    
    
    
    32.6
    %United States  Valley Forge
    
    
    5,600
    
    
    
    
    
    
    
    N/MInternational  Synergetics(including Canada)
    
    
    5,846
    
    
    
    3,993
    
    
    
    46.4
    %$
    27,465
    
    
    $
    16,072
    
    
    
    70.9
    %
 
 For 2006, this information is for the nine months ended April 30, and for 2005 the nine months
ended April 29. This tabular information also reflects the net sales of Valley Forge for the
period September 22, 2005 through April 30, 2006.N/M  Not meaningful. 21




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##### Table of Contents



Gross Profit
  Operating Expenses
   Other Expense
  Operating Income, Income Taxes and Net Income
    22




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Liquidity and Capital Resources
      ®
  Revolving Credit Facility:
 Equipment Line of Credit:
 23




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##### Table of Contents



Critical Accounting Policies
  Principles of consolidation:
 Property and equipment:
 Goodwill and other intangibles:
 Revenue recognition:
  Stock-based compensation:
 Segment information: ®
 24




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Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
 Item 4  Controls and Procedures
     25




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Part II  Other Information
 
 Item 1  Legal Proceedings
    et al inter alia
  26




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##### Table of Contents



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.
    
    Description10.1
    
    Amended and Restated Synergetics USA, Inc. 2001 Stock Plan10.2
    
    Form of Employee Restricted Stock Agreement for the Amended and Restated Synergetics USA, Inc. 2001
Stock Plan10.3
    
    Amended and Restated Synergetics USA, Inc. 2005 Non-employee Directors Stock Option Plan31.1
    
    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
  27




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##### Table of Contents



SYNERGETICS USA, INC.
(Registrant)June 13, 2006
    /s/ Gregg D. SchellerGregg D. Scheller, President and ChiefExecutive Officer (Principal Executive
Officer)June 13, 2006
    /s/ Pamela G. BoonePamela G. Boone, Executive VicePresident, Chief Financial Officer, Secretary
and Treasurer (Principal Financial and
Principal Accounting Officer) 28