• Our Business Strategy - a description of the strategic initiatives on which we focus and the goals we seek to achieve.

• Results of Operations - an analysis of the Company's results of operations for the three years presented in our financial statements.

• Liquidity and Capital Resources - an analysis of cash flows, sources and uses of cash, currency exchange and an overview of our financial position.

• Contractual Obligations - an analysis of contracts entered into in the normal course of business that will require future payments.

• Use of Estimates and Critical Accounting Policies - a description of critical accounting policies including those that affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Our Business
The Company is a leading medical device company. Through continuous improvement and development of our people, our mission is to design, manufacture and market innovative microsurgical instruments and consumables of the highest quality in order to assist and enable microsurgeons around the world to provide a better quality of life for their patients. The Company's primary focus is on the microsurgical disciplines of ophthalmology and neurosurgery. Our distribution channels include a combination of direct and independent sales organizations and important strategic alliances with market leaders. The Company's product lines focus upon precision engineered, microsurgical, hand-held instruments and the microscopic delivery of laser energy, ultrasound, electrosurgery, illumination and irrigation, often delivered in multiple combinations. Enterprise wide information is included in Note 16 to the consolidated audited financial statements. During fiscal 2008, the Company decided to redirect the efforts formally placed on the ENT market back into neurosurgery. New Product Sales
The Company's business strategy has been, and is expected to continue to be, the development, manufacture and marketing of new technologies for micro-surgery applications including the ophthalmic and neurosurgical markets. New products, which management defines as products first available for sale within the prior 24-month period, accounted for approximately 17 percent of total sales for the Company for fiscal 2008, or approximately $8.6 million. For fiscal 2007, new products accounted for approximately 9 percent of total sales for the Company, or approximately $4.3 million. This continued growth was primarily in our capital equipment products both in the ophthalmic and neurosurgery markets. Synergetics' past revenue growth has been closely aligned with the adoption by surgeons of new technologies introduced by Synergetics. Since August 1, 2007, Synergetics has introduced 90 new items to the ophthalmic and neurosurgery markets. We expect adoption rates for the Company's new products in the future to have a similar effect on its operating performance.

Growth in Minimally Invasive Surgery Procedures Minimally invasive surgery is surgery performed without making a major incision or opening. Minimally invasive surgery generally results in less patient trauma, decreased likelihood of complications related to the incision and a shorter recovery time. A growing number of surgical procedures are performed using minimally invasive techniques, creating a multi-billion dollar market for the specialized devices used in the procedures. Based on our micro-instrumentation capability, we believe we are ideally positioned to take advantage of this growing market. The Company has developed scissors having a single activating shaft as small as 30 gauge (0.012 inch, 0.3 millimeter in diameter). We also believe that we are the world leader in small-fiber illumination technology as our PhotonTM and PhotonTM II light sources can transmit more light through a fiber of 300 micron diameter or smaller than any other light source in the world. This product was developed for ophthalmology but has wide ranging minimally invasive surgical applications. The Company's Malis® line of electrosurgical bipolar generators is the market share leader in neurosurgical generators worldwide. These generators produce a unique and patented waveform that has been developed and refined over many decades and has proven to cause less collateral tissue damage as compared to other competing generators. The Omni® power ultrasound system technology provides a new method for the minimally invasive removal of soft and fibrotic tissue, as well as bone removal. This technology is in its infancy, and we anticipate that, once fully developed, it will become a standard of care in multiple minimally invasive surgical applications. The Company has benefited from the overall growth in this market and expects to continue to benefit as it continues to introduce new and improved technologies targeting this market.
Demand Trends
Increased procedure volume, product mix improvements and price contributed to the majority of sales growth for the Company during the fiscal years ended July 31, 2008, 2007 and 2006. Ophthalmic and neurosurgical procedures volume on a global basis continues to rise at an estimated 5.0 percent growth rate driven by an aging global population, new technologies, advances in surgical techniques and a growing global market resulting from ongoing improvements in healthcare delivery in third world countries, among other factors. In addition, the demand for high quality products and new technologies, such as the Company's innovative instruments and disposables, to support growth in procedures volume continues to positively impact growth. The Company believes innovative surgical approaches will continue to significantly impact the ophthalmic and neurosurgery market. Pricing Trends
Through its strategy of delivering new and higher quality technologies, the Company has generally been able to maintain the average selling prices for its products in the face of downward pressure in the healthcare industry. However, increased competition in the market for the AdvantageTM electrosurgical generator has negatively impacted the Company's selling prices on these devices. Further economic conditions may be negatively impacting the Company's selling prices for the Omni® ultrasonic aspirator.

Our Business Strategy
Our goal is to become a global leader through:
• continuous improvement and development of our people,

• continuous improvement and development of our manufacturing facilities,

• continuous improvement of our systems; and

• continuous improvement of our research and development initiatives.

During July 2008, the Company realigned its field sales operations. The realignment is designed to position the Company to attain increased revenues and market share. A comprehensive study of the Company's sales and marketing structure was undertaken, and as a result, a new and improved sales training system is being developed, higher recruitment standards are being implemented, individual and corporate objectives were linked with changes to the compensation structures and a defined sales process has been initiated.
During August 2008, the Company has begun to introduce lean manufacturing philosophies into the production environment. These philosophies were applied to our largest volume disposable product family where we were able to cut manufacturing times in half and reduce scrap by one-third. We plan to continue to apply the lean philosophy to one value stream at a time according to the financial importance to the Company. We will also be applying this philosophy to other departments in our organization, including purchasing, accounting and administration. In addition, the Company's most recent acquisition, Medimold, is producing components which were previously supplied by outside vendors. Over the next fiscal year, select high volume plastic components will be introduced to this lower cost process. Our annual savings from this process is now projected to be over $300,000.
During August 2008, the Company began to utilize MRP within its information system. The Company is beginning to utilize this capability to manage its inventory more efficiently and gain benefits from its master production plan. In addition, the Company is continuing to work on establishing a standard cost system during fiscal year 2009. These improvements to the information system will give the Company the tools to measure its manufacturing performance against standards, provide budgeting capabilities and build more effective monitoring controls over inventory.
In October 2008, the Company has completed a thorough review and prioritization of its research and development efforts. In addition, it has begun to develop a uniform policies and procedures manual for its research and development initiatives.

Results of Operations

Year Ended July 31, 2008 Compared to Year Ended July 31, 2007
Net Sales
The following table presents net sales by category (dollars in thousands):

                                           Year Ended July 31,         % Increase
                                            2008           2007        (Decrease)

      Ophthalmic                         $    28,019     $ 24,522             14.3 %
      Neurosurgery                            12,925       10,241             26.2 %
      OEM (Codman, Stryker and Iridex)         8,347       10,266            (18.7 %)
      Other                                      772          916            (15.7 %)

      Total                              $    50,063     $ 45,945              9.0 %

Ophthalmic sales growth was led by growth in sales of the products in our core technology areas including increased sales of vitreoretinal instruments, laser probes and sales of new disposable packs. When comparing neurosurgery, net sales during the fiscal year ended 2008 were 26.2 percent greater than 2007 sales, primarily attributable to the sales of disposables related to electrosurgical generators and power ultrasonic aspirators. OEM sales were down 18.7 percent to $8.3 million for the fiscal year ended July 31, 2008 compared to $10.3 million for the prior year primarily due to the fact that OEM sales to Stryker declined by 33.9 percent to $2.0 million for the fiscal year ended July 31, 2008 compared to $3.0 million for the prior year due to Stryker's model change completed during fiscal 2008 which resulted in lower sales. The Company expects that the VitraTM laser, the Malis® electrosurgical generator sales and the related disposables will continue to have a positive impact on net sales in fiscal 2009. Additionally, shipments of the SupraTM laser are expected to commence in the second quarter of fiscal 2009.
The following table presents domestic and international net sales (dollars in thousands):

                                                      Year Ended July 31,
                                               2008         2007       % Increase
       United States (including OEM sales)   $ 35,838     $ 35,214             0.2 %
       International (including Canada)        14,225       10,731            32.5 %

       Total                                 $ 50,063     $ 45,945             9.0 %

U.S. sales were primarily flat with the sales of the Company's core technology products offsetting weak OEM sales. International sales grew 32.5 percent in the Company's core technology areas including sales of ophthalmic products in direct sales markets, the ultrasonic aspirator, electrosurgical generator and their related disposables. The Malis®AdvantageTM received the CE mark during the fourth quarter of our 2006 fiscal year thus allowing the Company to begin selling these medical devices internationally. During fiscal 2008, the Company continued adding distributors to its international neurosurgery sales force due to the addition of the Omni® and the Malis® AdvantageTM. As of July 31, 2008, the Company had 30 international distributors covering 40 countries.

Gross Profit
Gross profit as a percentage of net sales was 59.8 percent in fiscal 2008, compared to 58.8 percent in fiscal 2007. The increase in gross profit as a percentage of net sales in fiscal 2008 from fiscal 2007 was attributable primarily to an increase in sales of 9.0 percent compared to a cost of goods sold increase of 6.1 percent. Gross profit as a percentage of net sales from fiscal 2007 to fiscal 2008 increased one percentage point, primarily due to the change in mix toward higher disposable product sales and as a result of the cost savings initiatives implemented by the Company. Beginning in June of 2007, the Company implemented a program to aggressively pursue cost savings and has subsequently had a reduction in force, implemented an incentive-based buyer's program for its purchasing department and gained additional control over its use of manufacturing supplies. The Company's incentive-based buyer's program is a bonus program for our purchasing employees, who are awarded a bonus based upon how much cost they can save from new or existing suppliers. Operating Expenses
Research and development ("R&D") costs as a percentage of net sales were 5.3 percent and 5.6 percent for the fiscal years ended July 31, 2008 and 2007, respectively. R&D costs remained relatively flat in 2008 compared to 2007. The Company's product development pipeline included over 36 active, major projects in various stages of completion at July 31, 2008. The Company has strategically targeted R&D spending as a percentage of net sales to be consistent with what management believes to be an average range for the industry. The Company expects over the next few years to invest in R&D at a rate of approximately 4 percent to 6 percent of net sales.
Selling expenses, which consist of salaries, commissions and direct expenses, the largest component of SG&A, increased approximately $1.5 million to $12.6 million, or 25.2 percent of sales, for the fiscal year ended July 31, 2008, compared to $11.1 million, or 24.2 percent of net sales for the fiscal year ended July 31, 2007. This increase was primarily due to the increase in head count as the Company has continued to increase its territory coverage of the United States and expand its international sales force. Additionally, as OEM sales did not increase as quickly as core product sales increased, this led to a significant increase in commissionable sales on a percentage basis.
Commissionable sales increased from 77.7 percent of sales during the fiscal year ended July 31, 2007 to 83.3 percent in the fiscal year ended July 31, 2008. General and administrative expenses ("G&A") decreased by $2.3 million during the fiscal year ended July 31, 2008 and as a percentage of net sales were 19.0 percent for the fiscal year ended July 31, 2008 as compared to 25.6 percent for the fiscal year ended July 31, 2007. The Company's legal expenses decreased by $2.3 million during the fiscal year ended July 31, 2008 compared to the fiscal year ended July 31, 2007 as the cost associated primarily with the Iridex lawsuit and subsequent settlement are no longer a significant factor. The Company also experienced a decrease of approximately $261,000 in outside consulting costs on the Company's Sarbanes-Oxley compliance efforts primarily due to the completion of documentation and testing of the former Valley Forge location in fiscal 2007 and the Company's efforts to internalize a portion of the documentation procedures. As mentioned above, the Company has instituted a cost savings initiative in June of 2007, which also targets SG&A costs. The additional SG&A costs savings were offset by head count increases and the increase in amortization expense associated with the Iridex settlement. Stock-based compensation cost is measured at the grant date, based on the fair value of the award calculated using the Black-Scholes option pricing model and is recognized over the directors' and employees' requisite service period. The Company will continue to grant options to its independent directors and officers but has begun to use restricted stock to provide incentive compensation for its non-officer employees. As of July 31, 2008, the future compensation cost expected to be recognized under SFAS 123(R) is approximately $40,000 in 2009 and $4,000 in 2010. However, the major portion of our compensation cost arises from our stock option grants to our directors, which is recognized pro-ratably over the year as the options vest.

Other Expense
Other expense for the 2008 fiscal year increased 17.6 percent to $1.1 million from $945,000 for the fiscal year ended July 31, 2007. The increase was due primarily to increased interest expense for the increased borrowings on the Company's working capital line due to working capital needs during the year and the additional expense associated with the Iridex settlement as the fiscal year ended July 31, 2008 included the expense for the full twelve months and the fiscal year ended July 31, 2007 only included the expense for three months on the remaining $2.7 million obligation to Iridex. Operating Income, Income Taxes and Net Income Operating income for fiscal 2008 was $5.2 million, as compared to an operating income of $1.5 million in fiscal 2007. The increase in operating income was primarily the result of a one percentage point increase in gross profit margin on 9.0 percent more net sales, research and development expenses remaining relatively flat, a decrease of $2.3 million in G&A expenses primarily related to reductions in legal costs partially offset by an additional $1.5 million in selling costs.
For the fiscal year ended July 31, 2008, the Company recorded a $1,439,000 provision on a pre-tax income of $4.1 million or 35.1 percent effective tax rate. For the fiscal year ended July 31, 2007, the Company recorded an $189,000 provision on pre-tax income of $573,000 or 33.0 percent effective tax rate, excluding a $461,000 research and experimentation credit for the 2007 fiscal year. The Company's effective tax rate increased for the fiscal year ended July 31, 2008 due to the substantial increase in pre-tax income, causing the relative portion of the provision that is made up by the research and experimentation credit and the manufacturing deduction to decrease. Net income increased by $1.8 million to $2.7 million for the fiscal year ended July 31, 2008, from $845,000 for the same period in fiscal 2007. Basic and diluted earnings per share for the fiscal year ended July 31, 2008 increased to $0.11 from $0.03 for the fiscal year ended July 31, 2007. Basic weighted-average shares outstanding increased from 24,220,507 at July 31, 2007 to 24,321,713 at July 31, 2008.
Year Ended July 31, 2007 Compared to Year Ended July 31, 2006 Net Sales
The following table presents net sales by category (dollars in thousands):

                                             Year Ended July 31,        % Increase
                                              2007          2006*       (Decrease)
      Ophthalmic                           $    24,522     $ 22,709             8.0 %
      Neurosurgery                              10,241        6,745            51.8 %
      OEM (including Codman and Stryker)        10,266        8,005            28.2 %
      Other                                        916          787            16.4 %

      Total                                $    45,945     $ 38,246            20.1 %

* This tabular information includes the net sales of the reverse merger with Valley Forge Scientific Corp. from September 22, 2005 through July 31, 2006.

Ophthalmic sales growth was led by growth in sales of the products in Synergetics' core technology areas including sales of the VitraTM laser. When comparing neurosurgery, net sales during the fiscal year ended 2007 were 51.8 percent greater than 2006 sales, primarily attributable to the sales in disposables related to power ultrasonic aspirators. OEM sales increased 28.2 percent primarily due to sales associated with the Stryker contract as well as Malis® cord tubing sets.
The following table presents domestic and international net sales (dollars in thousands):

                                                      Year Ended July 31,
                                               2007        2006*       % Increase
       United States (Including OEM sales)   $ 35,214     $ 30,090            17.0 %
       International (including Canada)        10,731        8,156            31.6 %

       Total                                 $ 45,945     $ 38,246            20.1 %

* This tabular information includes the net sales of the reverse merger with Valley Forge Scientific Corp. from September 22, 2005 through July 31, 2006.

United States and international sales growth was primarily attributable to the sales in core technology areas of illumination and power ultrasonic aspirators and related disposables. The Omni® power ultrasonic aspirator received the CE mark during the third quarter of fiscal year 2007 thus allowing the Company to begin selling these medical devices internationally. During fiscal 2007, the Company continued adding distributors to its international neurosurgery sales force due to the addition of the Omni® and the Malis® AdvantageTM. As of July 31, 2007, the Company had 30 international distributors covering 35 countries.
Gross Profit
Gross profit as a percentage of net sales was 58.8 percent in fiscal 2007, compared to 62.8 percent in fiscal 2006. The reduction in gross profit as a percentage of net sales from fiscal 2006 to fiscal 2007 was attributable primarily to cost of goods sold increasing at a rate of 33.0 percent compared to the increased sales rate of 20.1 percent. Gross profit as a percentage of net sales from fiscal 2006 to fiscal 2007 decreased more than four percentage points, primarily due to the change in mix toward higher neurosurgery and international sales, pricing pressure on both ophthalmic and neurosurgical capital equipment and additional costs experienced in manufacturing some of the Company's new and yet to be introduced products and product redesigns. Operating Expenses
R&D costs as a percentage of net sales were 5.6 percent and 4.3 percent for the fiscal years ended July 31, 2007 and 2006, respectively. R&D costs increased to $2.6 million in 2007 from $1.7 million in 2006, reflecting not only an increase in spending on active projects focused on areas of strategic significance such as the PhotonTM II, the Omni® ultrasonic aspirator and the Malis® AdvantageTMelectrosurgical generator, as well as increased spending on new product development. The Company's product development pipeline included over 14 active, major projects in various stages of completion at July 31, 2007. Selling expenses increased by approximately $2.1 million to $11.1 million, or 24.2 percent of net sales, for the fiscal year ended July 31, 2007, compared to $9.0 million, or 23.5 percent for the fiscal year ended July 31, 2006. The increase in selling expenses as a percentage of net sales was primarily due to an increase in sales headcount by 18.9 percent in fiscal 2007 and due to our investment in our non-U.S. ophthalmic direct distribution in fiscal 2007 of approximately $624,000.

G&A expenses increased by $3.4 million during the fiscal year ended July 31, 2007 and as a percentage of net sales were 25.6 percent for the fiscal year ended July 31, 2007 as compared to 21.8 percent for the fiscal year ended July 31, 2006. The Company's legal expenses increased by $1.3 million, as the costs associated with the Iridex lawsuit and subsequent settlement were significant during the 2007 fiscal year. In addition to the internal costs associated with the Company's Sarbanes-Oxley compliance efforts, the Company also experienced an increase of approximately $427,000 primarily due to the documentation and testing of the former Valley Forge location and the Company's continued efforts to strengthen its internal control environment. Amortization expense increased $196,000 primarily associated with the intangible assets acquired in the settlement with Iridex.
Other Expense
Other expense for the 2007 fiscal year increased 87.8 percent to $945,000 from $503,000 for the fiscal year ended July 31, 2006. The increase was due primarily to increased interest expense for the increased borrowings on the Company's working capital line due to the payment of $2.5 million to Iridex during the third quarter of fiscal 2007 and an additional $83,000 in interest on the remaining $3.2 million obligation to Iridex. Operating Income, Income Taxes and Net Income Operating income for fiscal 2007 was $1.5 million, as compared to an operating income of $5.0 million in fiscal 2006. The decrease in operating income was primarily the result of a four percentage point decrease in gross profit margin on 20.1 percent more net sales, an increase of $929,000 in R&D costs and an increase of $5.5 million in SG&A expenses primarily related to an additional $1.7 million in selling costs, $1.3 million in legal costs and $427,000 in Sarbanes-Oxley consulting and auditing costs.
The Company recorded a $272,000 credit provision on a pre-tax income of $573,000 in fiscal 2007. The Company's effective tax rate, excluding a $461,000 research and experimentation credit for fiscal 2007 and 2006 was 33.0 percent in fiscal 2007 as compared to 31.5 percent for the fiscal year ended July 31, 2006. The increase in the effective tax rate for the fiscal year ended July 31, 2007 was due primarily to the permanent differences between book and taxable income becoming a larger percentage of our taxable income as our pre-tax income fell this year. The Company recorded a $461,000 research and experimentation credit during the 2007 fiscal year, which included a $205,000 credit for the current fiscal year ended July 31, 2007 and the remaining was due to the re-enactment of the research and experimentation credit during the 2007 fiscal year as it had expired as of July 31, 2006.
Net income decreased to $845,000 for the fiscal year ended July 31, 2007 from $3.1 million, for the same 2006 period. The decrease in net income was primarily the result of a four percentage point decrease in gross profit margin on a 33.0 percent increase in cost of goods sold, offset by a 20.1 percent increase in sales, an increase of $929,000 in R&D costs and an increase of $5.5 million in SG&A expenses primarily related to an additional $1.7 million in selling costs, $1.3 million in legal costs and $427,000 in Sarbanes-Oxley consulting and . . .