UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended October 31, 2011

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: 0-13907

SYNOVIS LIFE TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

Minnesota		41-1526554
(State of Incorporation)		(I.R.S. Employer Identification No.)

2575 UNIVERSITY AVENUE W., ST. PAUL, MINNESOTA 55114-1024

(Address of principal executive offices)

TELEPHONE NUMBER: (651) 796-7300

Securities Registered Pursuant to Section 12(b) of the Act:

		Name on each exchange on
Title of each class:		which registered;
Common Stock, $.01 par value		The NASDAQ Stock Market
Common Stock Purchase Rights

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of April 30, 2011, the last business day of the registrant’s second quarter of fiscal 2011, 11,460,644 shares of Common Stock of the registrant were outstanding, and the aggregate market value of the registrant’s outstanding Common Stock (based upon the closing price of the Common Stock on that date as reported by the NASDAQ Global Market), excluding outstanding shares owned beneficially by executive officers, directors and affiliates, was approximately $223,540,000.

As of December 1, 2011, 11,167,690 shares of the registrant’s Common Stock were outstanding.

Except where the context otherwise requires, references in this Annual Report on Form 10-K to “Synovis”, “Company”, “we”, and “our” are to Synovis Life Technologies, Inc. and its subsidiaries collectively.

Registered Trademarks

APEX processing®, Dura-Guard®, Flo-Rester®, Flo-Thru Flo-Rester®, Flo-thru Intraluminal Shunt®, Flow Coupler®, Neurotube®, OrthAdapt®, Peri-Guard®, Peri-Strips®, Peri-Strips Dry®, Supple Peri-Guard®, Synovis®, Ultifix®, Ultister®, Unite®, Vascu-Guard® and Veritas® are registered trademarks of the Company.

Synovis Website

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available through our website (www.synovislife.com under the “Investor Information” caption and “SEC Filings” subcaption) free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”).

Information relating to corporate governance at Synovis, including our Principles of Corporate Governance, Code of Business Conduct & Ethics, Whistleblower Policy, and information concerning our executive officers, directors, and Board committees is available on or through our website at www.synovislife.com under the “Investor Information” caption and the “Corporate Governance” subcaption.

Available Information

The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. The Company files annual reports, quarterly reports, proxy statements, and other documents with the SEC under the Exchange Act. The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

Forward-Looking Statements

Certain statements contained in this Annual Report on Form 10-K are “forward–looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in this Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as “may”, “should”, “will”, “expect”, “believe”, “anticipate”, “estimate,” “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. All forward-looking statements in this document are based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any forward-looking statements. You are advised, however, to consult any future disclosures we make on related subjects in future filings with the Securities and Exchange Commission. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors may include, among others, those factors set forth under the heading “Risk Factors” beginning in Part I, Item 1A on this Form 10-K.

PART I

ITEM 1 – Business

Significant Recent Development

On the terms and subject to the conditions set forth in the Merger Agreement, which has been unanimously approved by the Board of Directors of the Company, at the effective time of the Merger (the “Effective Time”), and as a result thereof, each share of common stock, par value $0.01 per share, of Synovis (“Synovis Common Stock”) that is issued and outstanding immediately prior to the Effective Time (other than Synovis Common Stock owned directly or indirectly by Baxter or any subsidiary of Synovis, which will be canceled without payment of any consideration, and Synovis Common Stock for which dissenters’ rights have been validly exercised and not withdrawn) will be converted at the Effective Time into the right to receive $28.00 in cash, without interest (the “Merger Consideration”), subject to adjustment under certain conditions as described in the Merger Agreement. Each option to purchase Synovis Common Stock that is outstanding as of the Effective Time will become fully vested and will be canceled in exchange for the right to receive in cash the amount by which the Merger Consideration exceeds the exercise price, multiplied by the number of shares of Synovis Common Stock subject to such option.

Baxter and the Company have made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants that: (i) the Company will conduct its business in the ordinary course consistent with past practice during the interim period between the execution of the Merger Agreement and the Effective Time, (ii) the Company will not engage in certain kinds of transactions during such period without the consent of Baxter, (iii) the Company will cause a meeting of the Synovis shareholders to be held to consider approval of the Merger Agreement, (iv) subject to certain customary exceptions, the Board of Directors of Synovis will recommend approval by its shareholders of the Merger Agreement, and (v) Baxter and the Company will use their commercially reasonable efforts to obtain prompt termination of any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (the “HSR Act”) and other applicable antitrust laws. The Company has also made certain additional customary covenants, including, among others, covenants not to: (i) solicit proposals relating to alternative business combination transactions or (ii) subject to certain exceptions designed to allow the Board of Directors to fulfill its fiduciary duties to shareholders of the Company, enter into discussions concerning or provide confidential information in connection with any proposals for alternative business combination transactions. Consummation of the Merger is subject to customary conditions, including (i) approval of the holders of a majority of the outstanding shares of Synovis Common Stock, (ii) the absence of any law or order prohibiting the consummation of the Merger, (iii) the expiration or termination of any applicable waiting period under the HSR Act and the receipt of approvals under any applicable foreign antitrust laws, and (iv) the absence of a material adverse effect with respect to the Company.

The Merger Agreement contains certain termination rights for both Baxter and Synovis, and further provides that, upon termination of the Merger Agreement under certain specified circumstances, Synovis would be required to pay Baxter a termination fee of $9,750,000. The Merger is expected to be completed in the first calendar quarter of 2012, subject to the affirmative vote of the holders of the majority of shares of Synovis Common Stock as well as satisfaction or waiver of all other conditions to closing specified in the Merger Agreement.

In connection with the parties’ entry into the Merger Agreement, the directors and executive officers of Synovis (the “Voting Parties”), have entered into voting agreements (the “Voting Agreements”) covering a total of 1,034,927 shares of Synovis Common Stock (including 407,500 shares which may be acquired within 60 days upon the exercise of options) legally or beneficially owned by the Voting Parties (the “Voting Party Shares”), which represent approximately 8.9% of Synovis’s outstanding shares (assuming the exercise of such options). Under the Voting Agreements, each Voting Party has agreed to vote his or her Voting Party Shares in favor of the Merger and has also agreed to certain restrictions on the disposition of such Voting Party Shares, subject to the terms and conditions set forth in the Voting Agreements. The Voting Agreements provide that they will terminate concurrently with any termination of the Merger Agreement.

Additionally on December 12, 2011, Synovis entered into a First Amendment (the “Rights Amendment”) to its Rights Agreement dated as of June 1, 2006, by and between Synovis and American Stock Transfer & Trust Company, LLC, a New York limited liability trust company (the “Rights Agreement”). The Rights Amendment amends the Rights Agreement to (i) render it inapplicable to the Merger Agreement, the Voting Agreements and the transactions contemplated thereby, and (ii) render the Rights (as defined in the Rights Agreement) issued pursuant to the Rights Agreement inapplicable to the Merger, the execution and delivery of the Merger Agreement and the Voting Agreements and consummation of the transactions contemplated thereby and ensure that none of the execution and delivery of the Merger Agreement and the Voting Agreements or the consummation of the transactions contemplated thereby will (A) result in the Rights becoming exercisable, (B) cause Baxter or any of its Affiliates or Associates (each as defined in the Rights Agreement) to become an Acquiring Person (as defined in the Rights Agreement), or (C) give rise to a Distribution Date (as defined in the Rights Agreement) or a Stock Acquisition Date (as defined in the Rights Agreement).

(a)	General Development of Business

Overview

Synovis Life Technologies, Inc., a diversified medical device company, develops, manufactures, and markets biological and mechanical products used by several surgical specialties to facilitate the repair and reconstruction of soft tissue damaged or destroyed by disease or injury. Our products include implantable biomaterials for soft tissue repair, devices for microsurgery, and surgical tools – all designed to reduce risks and/or facilitate critical surgeries, improve patient outcomes, and reduce healthcare costs.

Our surgical business develops, manufactures, markets, and sells implantable biomaterial products and surgical tools. Our surgical business products include Peri-Strips, Tissue Guard, Veritas, and Surgical Tools. These products serve several surgical markets including plastic reconstructive, general, bariatric, vascular, and cardiac.

Our microsurgical business develops, manufactures, markets, and sells devices serving the niche market of microsurgery. Our microsurgical products include the Coupler and the Flow Coupler, as well as several other products serving the microsurgery market.

Our Ortho & Wound business develops, manufactures, markets, and sells advanced biological solutions for soft tissue repair, serving primarily the orthopedic and wound care markets. Our Ortho & Wound products include the OrthADAPT Bioimplant which is used in numerous orthopedic applications, and the Unite Biomatrix, which serves the wound care market.

Operations that are not included in any of the operating segments are reported in the category “corporate and other.” The corporate and other segment captures costs that are not directly assignable to one of the operating business segments, primarily the costs of operating a public company and the time of management personnel in support of administrative activities.

History

Synovis Life Technologies, Inc. was incorporated in the state of Minnesota in July of 1985. In 1985, the Company was spun-off to the shareholders of its then parent company, thereafter operating as a separate public company.

In 2001, we acquired Micro Companies Alliance, Inc., a Birmingham, Alabama company that provides products to the microsurgery market, which has since changed its name to Synovis Micro Companies Alliance, Inc. (“MCA”).

On July 17, 2009, the Company, through its wholly-owned subsidiary Synovis Orthopedic and Woundcare, Inc. (“Ortho & Wound”) completed the acquisition of substantially all of the assets of Pegasus Biologics, Inc., a Delaware corporation. Our Ortho & Wound business is focused on developing advanced biological solutions for soft tissue repair, primarily within the orthopedic and wound care markets.

Our principal executive offices are located at 2575 University Avenue W., St. Paul, Minnesota 55114-1024. We can be contacted by telephone at (651) 796-7300, by facsimile at (651) 642-9018, or by electronic mail at info@synovislife.com.

(b)	Financial Information about Industry Segments

The Company’s operations, which are presently based in Minnesota, Alabama, and California, are comprised of three operating segments, the surgical business, the microsurgical business, and the Ortho & Wound business, with segmentation based upon the similarities of the underlying business operations, products, and markets. The Company evaluates the performance of its business segments and allocates resources based upon their respective current or future earnings contribution to the consolidated earnings of the Company as well as upon each segment’s organizational initiatives and activities in process at that time.

Operations that are not included in any of the operating segments are included in the category “corporate and other.” The corporate and other segment captures costs that are not directly assignable to one of the operating business segments, primarily the costs of operating a public company and the estimated time of management personnel in support of corporate activities.

(c)	Narrative Description of Business

The table below summarizes the revenue contributed by our significant products or product lines for the periods indicated.

	Years Ended October 31,
Net Revenue:	2011				2010				2009
($ in thousands)		$	%			$	%			$	%
Peri-Strips	$	23,675	29	%	$	19,414	28	%	$	19,384	33	%
Tissue-Guard		18,407	22	%		16,550	24	%		15,806	27	%
Veritas		15,829	19	%		14,368	21	%		8,757	15	%
Microsurgery		15,190	19	%		11,020	16	%		8,668	15	%
Surgical Tools and other		5,748	7	%		5,335	8	%		5,531	10	%
Orthopedic & Wound		3,514	4	%		1,878	3	%		65	0	%
Total Net Revenue	$	82,363	100	%	$	68,565	100	%	$	58,211	100	%

Domestic	$	70,130	85	%	$	57,700	84	%	$	49,290	85	%
International		12,233	15	%		10,865	16	%		8,921	15	%
Worldwide	$	82,363	100	%	$	68,565	100	%	$	58,211	100	%

Products, Markets and Competition

Business Description

We are a diversified medical device company which develops, manufactures, and markets biological and mechanical products used by several surgical specialties to facilitate the repair and reconstruction of soft tissue damaged or destroyed by disease or injury. Our products include implantable biomaterials for soft tissue repair, devices for microsurgery, and surgical tools all designed to reduce risks and/or facilitate critical surgeries, improve patient outcomes, and reduce healthcare costs.

Biomaterial Products

A core competency of our business is the development and manufacture of implantable biomaterial products for use by surgeons in various procedures where reinforcing, reconstructing, and repairing tissue or preventing leaks of air, blood, or other bodily fluids is desirable to achieve a favorable outcome. The historical choice when tissue repair is necessary has been to use autologous tissues, requiring the surgeon to excise tissue from another part of the patient’s body. Harvesting tissue from a second surgical site may increase procedure cost, procedure time, and the risk of complications, leading to additional pain and recovery time for the patient. Use of an available, off-the-shelf, implantable medical product, whether tissue-based or synthetic, is an alternative to harvesting autologous tissue from the patient and is a means to reduce surgical costs and improve patient outcomes.

Our biomaterial products are produced from bovine and equine pericardium. Many of our products’ characteristics and competitive advantages are derived from the pericardium’s collagen composition. Collagen, a fibrous protein, makes the pericardium durable and provides performance characteristics superior to synthetics and similar to autologous tissue.

We process pericardium using proprietary and patented technologies to create three distinct product platforms:

Our Veritas tissue processing results in an extremely strong and conformable biomaterial. Once implanted, Veritas acts as a scaffold that is rapidly revascularized and repopulated by the patient’s surrounding tissue. Animal studies have demonstrated the formation of new blood vessels (angiogenesis) and cell in-growth with Veritas as early as 28 days post-implant. The Veritas tissue process is used to manufacture our Veritas Collagen Matrix and our Peri-Strips Veritas products.

Our Apex tissue processing creates a permanent patch or buttress that provides enduring strength and reinforcement to a repair site or staple line. Apex processing is used to manufacture our Tissue-Guard and Peri-Strips Apex products.

Our flexible cross-linking technologies are based on proprietary stabilization and sterilization processes, resulting in a safe, sterile, structurally sound, biologic scaffold of highly organized collagen for soft tissue repair. We have exclusive worldwide licenses for these processes for use in orthopedic, oral/dental, spinal and neurological, abdominal and thoracic, breast and wound applications and such licenses are used to manufacture our Ortho & Wound OrthADAPT Bioimplant and Unite Biomatrix products.

Peri-Strips. Peri-Strips is a biomaterial stapling buttress used as reinforcement at a surgical staple line to reduce the risk of potentially fatal leaks, most significantly in bariatric surgery, a treatment for morbid obesity, as well as in certain thoracic procedures. Peri-Strips accounted for 29% of our revenue in fiscal 2011, compared to 28% in fiscal 2010.

In bariatric surgery, Peri-Strips are proven to reduce the incidence of gastric leaks and to reduce bleeding at the staple line. Because of the clean visual field provided by the improved hemostasis and the atraumatic tissue manipulation provided by Peri-Strips, it can also facilitate a quicker and safer surgical procedure. Peri-Strips are typically applied during the formation of the gastric pouch in a Roux-en-Y gastric bypass procedure. Peri-Strips may also be applied to other gastric stapling sites such as the J-J anastomosis of the Roux-en-Y procedure and the gastric sleeve staple line of the sleeve gastrectomy procedure. Peri-Strips are also utilized in certain thoracic surgeries (blebectomies, bullectomies, wedge resections, segmentectomies, and lobectomies) and are proven to reduce bleeding and air leaks at the staple line during lung resection procedures.

Tissue-Guard. Our Tissue-Guard family of products is used to repair and replace damaged tissue in an array of surgical procedures, including cardiac, vascular, thoracic, and neurologic procedures. Tissue-Guard products accounted for 22% of our revenue in fiscal 2011, compared to 24% in fiscal 2010. Apex Processing, used to manufacture our Tissue-Guard products, is designed to retain the intrinsic nature of bovine pericardial collagen with improved biocompatibility, performance and safety. Tissue-Guard products offer exceptional strength and durability, resistance to leakage, autologous-like handling characteristics and proven clinical performance. Since their introduction, Tissue-Guard products have been used in over 1,075,000 procedures, including use for pericardial closure, intracardiac defect repair, peripheral vascular repair and reconstruction, dural closure, and other soft tissue repairs.

Veritas. Veritas is used in surgery to repair soft tissue. Veritas accounted for 19% of our revenue in fiscal 2011, compared with 21% in fiscal 2010. We launched Veritas into the complex ventral hernia repair market in the U.S. during fiscal 2007, following our 510(k) market clearance which indicated Veritas as having minimal tissue attachment. Veritas has been used by surgeons in a broad range of procedures since launch for small tissue repair and reconstruction. Overall surgical results and experience with Veritas in these applications have been favorable.

Ortho & Wound. Our Ortho & Wound products accounted for 4% of our revenue and include the OrthADAPT Bioimplant and Unite Biomatrix products. OrthADAPT Bioimplant received FDA marketing clearance in fiscal 2005 and is used in numerous orthopedic applications, including rotator cuff and Achilles tendon repair, where there is a clinical need to reinforce the repair. Unite Biomatrix received FDA marketing clearance in fiscal 2006 and offers treatment for chronic wounds, such as diabetic foot ulcers and pressure ulcers. Unite Biomatrix provides a durable, collagen structure that can be applied to the wound easily and maintains its integrity while promoting wound healing.

Microsurgery

In addition to our biomaterial products, our business offers medical devices for microsurgery. Microsurgery products accounted for 19% of our revenue in fiscal 2011, compared to 16% in fiscal 2010. The primary device within this product group is the Microvascular Anastomotic Coupler (the “Coupler”), a mechanical anastomotic product comprised of a pair of implantable, single-use rings. A variation of the Coupler incorporates a miniature Doppler sensor to confirm blood flow through the anastomosis.

The Coupler is available in seven sizes, ranging from 1.0mm to 4.0mm in diameter, in half millimeter increments. The Coupler enables microsurgeons in numerous surgical specialties, including plastic and reconstructive, head and neck, orthopedic and hand, to perform highly effective anastomotic microsurgical procedures (the connecting of small veins or arteries) faster, easier and as or more dependably than traditional suture anastomosis. The Flow Coupler enhances our Microsurgery product offerings by combining our existing Coupler with Doppler technology, enabling physicians to verify and monitor blood flow.

In addition to the Coupler and Flow Coupler, we sell several other products to the microsurgery market. These include the GEM Microclip, a hemostatic clip designed to securely ligate vessels and provide for atraumatic occlusion, as well as the Neurotube, a device designed to assist in the reconnection of severed nerves. We also distribute product lines for other companies in the microsurgery market, including the S&T microsurgery instrument product line.

Competition

Our products compete primarily on the basis of product performance, quality, and service. The surgical markets in which we compete globally are characterized by intense competition. These markets are typically dominated by very large, established manufacturers that have broader product lines, greater distribution capabilities, substantially greater capital resources, and larger marketing, research, and development staffs and facilities than Synovis. Many of these competitors offer broader product lines within our specific product market, particularly in our surgical tool markets, and/or in the general field of medical devices and supplies. Broad product lines give many of our competitors the ability to negotiate exclusive, long-term medical device supply contracts and, consequently, the ability to offer comprehensive pricing for their products, including those that compete with our products. By offering a broader product line in the general field of medical devices and supplies, competitors may also have an advantage in marketing competing products to group purchasing organizations, health maintenance organizations, and other managed care organizations that increasingly seek to reduce costs by centralizing and consolidating their purchasing functions.

Competition for our biomaterial products is primarily from products comprised of synthetic materials, other xenograft tissues, and human cadaveric tissue. The ability of these products to compete with our biomaterial products varies based on each such product’s indications for use, relative features, benefits, and surgeon preference. We believe that the collagen characteristics exclusive to pericardial tissue, the strength of the multi-directional fibers of the pericardial substrate, the proprietary tissue-treatment process, and the purification process we employ offer significant benefits in product performance over competitive cadaveric tissue and synthetic materials.

We believe the major competitors to Peri-Strips include W.L. Gore & Associates, Inc., Cook Group, Inc., and Covidien PLC. Peri-Strips also face indirect forms of competition, which include alternate surgical techniques such as oversewing the staple line and alternative bariatric procedures which do not use surgical staplers or buttresses such as gastric banding. Synthetic materials may be less expensive to produce and to the extent that comparable synthetic materials are available and effective in surgical procedures, we face significant price competition for our biomaterial products. There are other multi-purpose patches made from bovine and other types of animal tissue that compete with our products. Cadaveric tissue from tissue banks or from commercial distributors is utilized in breast reconstruction, hernia repair, neurological surgery, and urologic procedures. There can be no assurance that competing products or indirect forms of competition will not achieve greater acceptance or that future products or alternative treatments for morbid obesity will not offer similar or enhanced performance advantages.

We believe the major competitors to our Tissue-Guard products include Cook Group, Inc., LeMaitre, Integra LifeSciences Corporation, and Getinge AB. We believe the major competitors to Veritas include KCI Corporation, Covidien PLC, Ethicon, Inc., C.R. Bard, Inc., and Cook Group, Inc. Within our microsurgical products, our Coupler faces indirect forms of competition, primarily hand suturing as an alternative surgical technique. Competition to our Flow Coupler includes blood flow monitoring products from Cook Group, Inc. and ViOptix Inc. We believe the major competitors to our Ortho & Wound products include Wright Medical Group, Inc., Integra LifeSciences Corporation, Shire PLC (formerly Advanced BioHealing, Inc.), and Organogenesis.

Intellectual Property

We believe that in order to maintain a competitive advantage in the marketplace, we must develop and maintain protection of the proprietary aspects of our technology. We rely on a combination of patent, trademark, confidentiality, trade secret, and other intellectual property rights and measures to aggressively protect intellectual property we deem important to our business.

We have developed a patent portfolio internally, as well as through acquisitions, that cover many aspects of our product offerings. As of October 31, 2011, we owned or licensed approximately 98 U.S. and foreign patents and 56 U.S. and foreign pending patent applications. The expiration dates of our material patents range from fiscal 2014 to fiscal 2024.

Synovis holds key patents related to Veritas Collagen Matrix in both wet and dry forms, patents related to the Peri-Strip Dry in both linear and circular formats, as well as the microanastomotic Flow Coupler. Synovis has exclusive rights to technology used in the cross-linking and sterilization of our Ortho & Wound products.

We own trademarks on Synovis as well as trade names used in conjunction with the sale of most of our products, including Peri-Strips and Veritas.

We manufacture, market, and sell our products both under our own patents as well as license agreements. While we believe that our patents are valuable, our knowledge, experience, product development team, and marketing staff, as well as our confidential information regarding our manufacturing processes, materials, and product design have been equally important in providing for and maintaining our proprietary product offering. To protect our patents, we have established policies and procedures, as well as requiring as a condition of employment for all employees to execute a confidentiality agreement with respect to proprietary information and the assignment of intellectual property to us.

We also rely on unpatented proprietary technology and know-how. We seek to protect our trade secrets and proprietary know-how with confidentiality agreements with our employees, consultants, and vendors.

There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. We have strongly defended, and will continue to defend, our intellectual property. Despite our measures to protect our intellectual property, we cannot be certain that the measures we take to protect our intellectual property will be successful. These risks are discussed in more detail in this Form 10-K in Part I, Item 1A, Risk Factors under the heading “We may not be able to adequately enforce or protect our intellectual property rights or to protect ourselves against the infringement claims of others.”

Marketing and Customers

Our marketing and sales strategies include supporting our products with sales and marketing programs. These programs include advertising and direct mail campaigns, participation in trade shows, support of key surgeons’ gatherings, publication and presentation of clinical data and new product information, and collaboration with key surgeons on educational activities and internet-based programs. An important strategy of our marketing programs is to identify and assess customer needs. This is accomplished by developing and maintaining a close working relationship with the hospitals and surgeons who purchase and use our products and through observations and interactions with our customers.

In the U.S., we utilize a direct sales model for all products except for our Ortho & Wound products. As of October 31, 2011, we have 60 direct sales representatives selling our Peri-Strips, Veritas, Tissue-Guard, and Surgical tools and other products. Additionally, we have 12 direct sales representatives selling our microsurgery products. Internationally, we utilize an independent distributor sales network to sell these products.

Our Ortho & Wound business sells its products through independent sale representative groups in the U.S. Our marketing and sales group works closely with these representatives to implement marketing strategies and to provide product training and support. Written agreements with these independent sales representatives impose limited geographic exclusivity and minimum purchase requirements which approximate the representative’s estimates of growth that can be accomplished. These agreements may be terminated upon breach of the agreement by the representative, including breach of the minimum sales obligations imposed by the agreement. As of October 31, 2011, we have 32 domestic independent representative groups under contract providing sales coverage to more than 75% of the U.S. population. Internationally, we have two independent distributors serving Italy and Spain and are presently seeking to expand our European coverage through the appointment of additional independent distributors.

Additional Information Regarding Our Business

Backlog

Based on our experience, we believe that backlog is not a meaningful predictor of future revenue levels of our business.

Raw Materials

We acquire bovine pericardium for use in our biomaterial products from United States Department of Agriculture (“USDA”) inspected abattoirs as well as a USDA approved source in New Zealand. We acquire equine pericardium for use in our biomaterial products from USDA approved abattoirs located in Mexico and Canada. The supply of bovine and equine pericardium, as well as other raw materials, is currently adequate. We have not experienced any product shortages arising from interruptions in the supply of any raw materials or components, and have identified alternative sources of supply for significant raw materials and components.

Research and Development

As a component of our business strategy, we continue to make a significant investment in research and development (“R&D”) as well as new product design and engineering. R&D expense for fiscal 2011, 2010, and 2009 was $4,709,000, $4,393,000, and $3,798,000, respectively.

The R&D activities we expect to advance in fiscal 2012 include expanding the size offerings and indications for use of our Veritas product into new markets, providing research and clinical data to support the use of Veritas in various surgical procedures, exploring other process improvements and product enhancements for our proprietary biomaterial products, advancing the size offerings and technology of the Flow Coupler and providing research and clinical data to support the launch of the ProCuff product, an arthroscopically delivered augmentation device for rotator cuff repair.

Regulatory Requirements

General

Our business operates in a medical device marketplace subject to extensive and rigorous regulation by the Food and Drug Administration (“FDA”) and by comparable agencies in foreign countries. In the United States, the FDA regulates the design control, development, manufacturing, labeling, record keeping, and surveillance procedures for medical devices.

United States Regulation

FDA regulations classify medical devices based on perceived risk to public health as Class I, II or III devices. Class I devices are subject to general controls, Class II devices are subject to special controls, and Class III devices are subject to pre-market approval (“PMA”) requirements. While most Class I devices are exempt from pre-market submission, it is necessary for most Class II devices to be cleared by a 510(k) pre-market notification prior to marketing. 510(k) establishes that the device is ''substantially equivalent'' to a device that was legally marketed prior to May 28, 1976, the date on which the Medical Device Amendments of 1976 became effective. The 510(k) pre-market notification must be supported by data establishing the claim of substantial equivalence to the satisfaction of the FDA. The process of obtaining a 510(k) clearance typically can take several months to a year or longer. If the product is notably new or different and substantial equivalence cannot be established, the FDA will require the manufacturer to submit a PMA application for a Class III device that must be reviewed and approved by the FDA prior to sale and marketing of the device in the United States. The process of obtaining PMA approval can be expensive, uncertain, lengthy and frequently requires anywhere from one to several years from the date of FDA submission, if approval is obtained at all. The FDA controls the indicated uses for which a product may be marketed and strictly prohibits the marketing of medical devices for unapproved uses. The FDA can withdraw products from the market for failure to comply with laws or the occurrence of safety risks.

Our microsurgery instruments and the Lap Assist Fascia Closure System are Class I medical devices. The rest of our products are classified as Class II medical devices and have received 510(k) marketing clearance from the FDA. Our manufacturing operations are subject to periodic inspections by the FDA, whose primary purpose is to audit the Company's compliance with the Quality System Regulations published by the FDA and other applicable government standards. Strict regulatory action may be initiated in response to audit deficiencies or to product performance problems. We believe that our manufacturing and quality control procedures are in compliance with the requirements of the FDA regulations.

The FDA is considering a change in the medical device 510(k) clearance process, including its revocation and replacement with a more stringent approval process. Such a change could dramatically increase time and costs to market a medical device in the United States. The FDA is assessing comments from the public based on predominantly negative reactions to a report by the Center for Devices and Radiological Health (“CDRH”) in 2010 and a second report by the Institute of Medicine (“IOM”) in 2011. The CDRH report contains elements that it believes will create a more effective 510(k) process. It also includes a new device classification (Class IIb) with clinical data requirements. The IOM report concludes that the 510(k) process should be abandoned and be replaced with an entirely new regulatory framework in which the current standard for clearance, substantial equivalence, is replaced with new pre- and post- market requirements.

International Regulation

International regulatory bodies have established varying regulations governing product standards, packaging and labeling requirements, import restrictions, tariff regulations, duties and tax. Many of these regulations are similar to those of the FDA. With the exception of the European Union (“EU”), Canada, and Australia, we typically rely on our independent distributors covering a given country to comply with the foreign regulatory requirements, including registration of our devices with the appropriate governmental authorities. We believe we are in compliance with the regulatory requirements in the foreign countries in which our medical devices are marketed. We do, however, face certain regulatory risks in international markets related to our bovine tissue products, which are discussed in Part I, Item 1A of this report.

In the EU, medical devices are regulated through the Medical Device Directive (“MDD”) and are classified based on risk, considering such factors as duration of contact with the body (e.g., long term implant), body part contacted (e.g., central nervous system) and whether animal derived. Most of our products are Class III (high risk) and require design examination certificates. The registration system in the EU for our medical devices also requires that our quality system conform to international quality standards and that our medical devices conform to “essential requirements” set forth by the MDD. Manufacturing facilities and processes under which our Ortho & Wound medical devices are produced are inspected and audited by the National Standards Authority of Ireland (“NSAI”). Manufacturing facilities and processes under which all of our other medical devices are produced are inspected and audited by the British Standards Institute (“BSI”). These audits verify our compliance with the essential requirements of the MDD, as well as supplementary requirements for “medical devices incorporating animal tissue.” These certifying bodies verify that our quality system conforms to the international quality standard ISO 13485:2003 and that our products conform to the “essential requirements” and “supplementary requirements” set forth by the MDD for the class of medical devices we produce. These certifying bodies also certify our conformity with both the quality standards and the MDD requirements, entitling us to place the “CE” mark on all of our current medical devices.

The European Commission intends to “recast” the MDD in the first quarter of 2012 because the EU’s regulatory regime consists of a complex legal framework which lacks uniformity across countries and has difficulties addressing emerging technologies. The recast remains open with a list of potential options which include the replacement of the MDD and the Active Implantable MDD with one comprehensive directive to the more radical establishment of a centralized EU medical devices agency. Anyone of these options could impact the speed and cost of product approval.

Third Party Reimbursement

The availability and level of reimbursement from third-party payers for procedures utilizing our products is significant to our business. Our products are purchased primarily by hospitals and other end-users, who in turn bill various third party payers for the services provided to the patients. These payers, which include Medicare, Medicaid, private health insurance plans, and managed care organizations, reimburse all or part of the costs and fees associated with the procedures utilizing our products.

In response to the focus of national attention on rising health care costs, a number of changes to reduce costs have been proposed or have begun to emerge. There have been, and may continue to be, proposals by legislators, regulators, and third party payers to curb these costs. The development or increased use of more cost effective treatments for diseases could cause such payers to decrease or deny reimbursement for surgeries or devices to favor alternatives that do not utilize our products. A significant number of Americans enroll in some form of managed care plan. Higher managed care utilization typically drives down the payments for health care procedures, which in turn places pressure on medical supply prices. This in turn causes hospitals to implement tighter vendor selection and certification processes, by reducing the number of vendors used, purchasing more products from fewer vendors, and trading discounts on price for guaranteed higher volumes to vendors. Hospitals have also sought to control and reduce costs over the last decade by joining group purchasing organizations or purchasing alliances. We cannot predict the impact these practices, existing or proposed legislation, or such third-party payer measures will have on our future business, financial condition, or results of operations within a constantly changing healthcare landscape.

Employees

On October 31, 2011, we employed approximately 330 full-time and part-time individuals. Our employees are not represented by a union, and we consider our relationship with our employees to be good.

(d)	Financial Information About Geographic Areas

For information regarding net revenue by geographic area, please refer to Note 5 to our consolidated financial statements under Part II, Item 8 of this report.

ITEM 1A - Risk Factors

The following factors are important and should be considered carefully in connection with any evaluation of our business, financial condition, results of operations, prospects, or an investment in our common stock. Additionally, the following factors could cause our actual results to materially differ from those reflected in any forward-looking statements.

Risks Related to Our Proposed Merger with Baxter International Inc.

We will be subject to various uncertainties and contractual restrictions while the Merger is pending that could adversely affect our financial results.

Uncertainty about the effect of the Merger on our employees and certain of our business operations may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel. Employee retention and recruitment may be particularly challenging, as employees and prospective employees may experience uncertainty about their future roles with the combined company.

The pursuit of the Merger and the preparation for the integration may place a significant burden on management and internal resources. Any significant diversion of management attention away from ongoing business and any difficulties encountered in the transition and integration process could affect our financial results.

In addition, the Merger Agreement restricts us, without Baxter’s consent, from, among other things, (i) making any material change in the conduct of our business or entering into any transactions other than in the ordinary course during the interim period between the execution of the Merger Agreement and consummation of the Merger, (ii) making changes in our organizational documents or issuing stock or instruments convertible into our stock, (iii) entering into certain transactions, (iv) subjecting any of our material assets or properties to any liens, (v) redeeming, repurchasing or otherwise acquiring our stock, (vi) increasing compensation or benefits of any of our personnel (with certain exceptions), (vii) settling, releasing or forgiving any material claims, litigation or regulatory action, or (viii) making any other material changes or entering into any material transactions, in each case without the prior consent of Baxter.

We may be unable to obtain satisfaction of all conditions to complete the Merger, including the approval of our shareholders in the anticipated timeframe, or at all.

Completion of the Merger is contingent upon customary closing conditions, including approval of the Merger by our shareholders. We may be unable to satisfy all the conditions to the Merger. If the shareholders of the Company do not approve the Merger at the special shareholder meeting to be held after the related Merger proxy statement is effective, the Merger will not be consummated.

In addition, satisfying the conditions to, and completion of, the Merger may take longer than, and could cost more than, we expect. These closing conditions include, among others, the receipt of required approvals of our shareholders and the expiration or termination of all waiting periods under applicable antitrust laws, including the applicable waiting periods under the Hart–Scott–Rodino Antitrust Improvements Act of 1976 (“HSR Act”). The Merger Agreement provides a termination right to each party if the Merger is not consummated by June 12, 2012. However, if the waiting period under the HSR Act has not terminated by June 12, 2012, then either party by written notice to the other party may extend the termination date to December 12, 2012.

If the Merger is not completed, our financial results may be adversely affected and we will be subject to several risks, including but not limited to:

●

Payment to Baxter of a termination fee of $9.75 million or reimbursement of Baxter’s expenses of up to $2.0 million, as specified in the Merger Agreement, depending on the nature of the termination;

●

Being subject to litigation related to any failure to complete the Merger.

Any delay or inability to satisfy all conditions to complete the Merger, or failure to complete the Merger could negatively affect our future business, financial condition or results of operation.

No assurance can be given that the required shareholder approval will be obtained or that the required closing conditions will be satisfied, and, if all required consents and approvals are obtained and the closing conditions are satisfied, no assurance can be given as to the terms, conditions and timing of the approvals.

Whether or not the Merger is completed, the announcement and pendency of the Merger could cause disruptions in our business, which could have an adverse effect on our business and financial results.

Pending shareholder litigation could prevent or delay the closing of the Merger or otherwise negatively impact our business and operations.

On December 14, 2011, a putative class action complaint challenging the transaction was filed by a shareholder named Colleen Witmer in Ramsey County District Court, Second Judicial District, State of Minnesota, against Baxter, Merger Sub, Synovis and individual members of our board of directors. The complaint generally alleges, among other things, that the members of our board of directors breached their fiduciary duties owed to the shareholders of Synovis by entering into the Merger Agreement, approving the proposed Merger and failing to take steps to maximize the value of Synovis to its shareholders, and that Synovis, Baxter and Merger Sub aided and abetted such breaches of fiduciary duties. See “Item 3 – Legal Proceedings” for more detailed information concerning this lawsuit. The complaint seeks, among other things, declaratory and injunctive relief concerning the alleged fiduciary breaches, injunctive relief prohibiting the defendants from consummating the Merger and other forms of equitable relief. No assurances can be given that this litigation will not result in such an injunction being issued, which could prevent or delay the closing of the Merger. It is possible that additional lawsuits may be filed against us asserting similar or different claims. There can be no assurance that we or any of the other defendants will be successful in the outcome of the pending or any potential future lawsuits.

Risks Related to Our Business

We may not be able to sustain or manage our growth.

We have achieved notable revenue growth over the past several years. Our business has increased revenue 20% in fiscal 2011, 18% in fiscal 2010, and 17% in fiscal 2009. There can be no assurance that we can manage the significant challenges that accompany such growth, including management of an increasingly diverse product portfolio and provision of necessary infrastructure. In addition, there can be no assurance that we will be able to identify and successfully consummate and integrate acquisitions or develop new products to sustain rates of revenue growth and profitability in future periods comparable to those experienced over the past several years.

Sales growth of our Ortho & Wound products in the marketplace is uncertain and we expect to incur significant operating losses from this business unit in the future.

While we achieved revenues of $3,514,000 from our Ortho & Wound products during fiscal 2011, we incurred an operating loss of $5,471,000 in this business unit during the year. We plan to invest significantly in this business unit in the future to drive revenue growth, and we expect to incur significant operating losses until a return on these investments is achieved. There can be no assurance that our investments will result in our desired sales levels or that our Ortho & Wound business unit will be able to achieve such break-even operating performance. If long-term profitable operating results are not achieved, we may be required to record an impairment of Ortho & Wound’s identifiable intangible assets that could be material to our results of operations.

We face significant competition from established competitors in the medical device industry.

We face intense competition. The medical device industry is highly competitive and characterized by rapid innovation and technological change. We expect technology to continue to develop rapidly, and our success will depend on our ability to maintain a competitive position with our technology. There can be no assurance that we will be able to compete effectively in the marketplace or that products developed by our competitors will not render our products obsolete or non-competitive. Similarly, there can be no assurance that our competitors will not succeed in developing or marketing products that are viewed by surgeons as providing superior clinical performance and/or are less expensive relative to the products we currently market or may develop.

Reputable companies manufacture and sell products that compete with each of our products or capabilities. Some of the companies with whom we compete have greater sales and/or distribution capabilities, substantially greater capital resources, larger marketing, research and development staffs, and larger facilities. In addition, many of our competitors offer broader product lines within our specific product markets. Broad product lines may give our competitors the ability to negotiate exclusive, long-term medical product supply contracts and the ability to offer comprehensive pricing for their products. There can be no assurance that we will be able to compete effectively with such manufacturers.

We continue to evaluate new market opportunities for our existing products. This process involves numerous steps, including, but not limited to, identifying meaningful new markets for our products, performing in-depth research and analysis to forecast the market potential for our products in these new markets, obtaining the required regulatory market clearances, developing an attractive value proposition for potential customers, and translating this value proposition into meaningful revenue. Due to the inherent complexity of this process, there can be no assurance that we will be able to effectively enter new markets with our existing or newly developed products.

We may not be able to adequately enforce or protect our intellectual property rights or to protect ourselves against the infringement claims of others.

We protect our technology through patents, trade secrets, and proprietary know-how. We also seek to protect our technology through confidentiality agreements with employees, consultants, and other parties.

There can be no assurance that our trade secrets or confidentiality agreements will adequately protect our proprietary information or, in the event of a breach of any confidentiality agreement, that we will have adequate remedies. Additionally, there can be no assurance that any pending or future patent applications will result in issued patents, or that any current or future patent, regardless of whether we are an owner or licensee of such patent, will not be challenged, invalidated, or circumvented or that the rights granted thereunder or under our licensing agreements will provide a competitive advantage to us. Furthermore, there can be no assurance that others will not independently develop similar technologies or duplicate any technology developed by us, or that our technology does not or will not infringe patents or other rights owned by others.

The medical device industry is characterized by frequent and substantial intellectual property litigation, and competitors may resort to intellectual property litigation as a means of competition. Intellectual property litigation is complex and expensive, and the outcome of such litigation is difficult to predict.

From time to time, we may become involved in litigation which is an ordinary and routine incidental to a business. Further, product liability claims may be asserted in the future relative to events not known to management at the present time. Management believes that our risk management practices, including our insurance coverage, are reasonably adequate to protect against potential material liability losses.

Oversight of the medical device industry might affect the manner in which we may sell medical devices.

There are laws and regulations that govern the means by which companies in the healthcare industry may market its products to healthcare professionals and may compete by discounting the prices of its products, including for example, the federal Anti-Kickback Statute, the federal False Claims Act, the federal Health Insurance Portability and Accountability Act of 1996, and state law equivalents to these federal laws that are meant to protect against fraud and abuse. Violations of these laws are punishable by criminal and civil sanctions, including, but not limited to, in some instances civil and criminal penalties, damages, fines, and exclusion from participation in federal and state healthcare programs, including Medicare and Medicaid. Although we exercise care in structuring our sales, marketing practices, and customer discount arrangements to comply with those laws and regulations, we cannot assure you that:

●

Government officials charged with the responsibility for enforcing those laws will not assert that our sales and marketing practices or customer discount arrangements are in violation of those laws or regulations;

●

Government regulators or courts will interpret those laws or regulations in a manner consistent with our interpretation.

ADVAMED, the principal U.S. trade association for the medical device industry, has put in place a model “Code of Conduct” that sets forth standards by which its members should abide in the promotion of their products. We have policies and procedures in place for compliance that we believe are consistent with those set forth in the ADVAMED Code, and we provide routine training to our sales and marketing personnel on our policies regarding sales and marketing practices. Nevertheless, the sales and marketing practices of our industry have been the subject of increased scrutiny from federal and state government agencies, and we believe that this trend will continue. For example, recent federal and state legislation require detailed disclosure of gifts and other remuneration made to health care professionals. In addition, prosecutorial scrutiny and governmental oversight, on the federal and state levels, over some major device companies regarding the retention of healthcare professionals as consultants has limited the manner in which medical device companies may retain healthcare professionals as consultants. We have in place policies to govern how we may retain healthcare professionals as consultants that reflect the current climate on this issue and provide training on these policies. Finally, various hospital organizations, medical societies, and trade associations are establishing their own practices that may require detailed disclosures of relationships between healthcare professionals and medical device companies or that ban or restrict certain marketing and sales practices such as gifts and business meals.

Quality issues with our processes, goods, and services could harm our reputation for producing high quality products and erode our competitive advantage.

Quality is extremely important to us and our customers due to the serious and costly consequences of product failure. Our quality certifications are critical to the marketing success of our products. If our products fail to meet these standards or fail to adapt to evolving standards, our reputation as a manufacturer of high quality products could be harmed, our competitive advantage could be damaged, we could lose customers and market share, and our revenues and results of operations could decline.

Our failure to obtain regulatory clearance/approval and maintain regulatory compliance for any of our products would impact our ability to generate revenue from those products.

We must comply with FDA regulations to market our products in the United States. The medical device industry in which our business operates is subject to extensive and rigorous regulation by the FDA and by comparable agencies in foreign countries. In the United States, the FDA regulates the design control, development, manufacturing, labeling, record keeping, and surveillance procedures for our medical devices.

The process of obtaining marketing clearance or approvals from the FDA for new products and new applications for existing products can be time-consuming and expensive, and there is no assurance that such clearance or approvals will be granted, or that the FDA review will not involve delays that would adversely affect our ability to commercialize additional products or additional applications for existing products. Some of our products that are in the research and development stage may be subject to a lengthy and expensive pre-market approval process with the FDA. The FDA has the authority to control the indicated uses of a medical device. Products can also be withdrawn from the market due to failure to comply with regulatory standards or the occurrence of unforeseen problems. The FDA regulations depend heavily on administrative interpretation, and there can be no assurance that future interpretations made by the FDA or other regulatory bodies, with possible retroactive effect, will not adversely affect us.

Our facilities and processes are subject to regulation. The FDA, various state agencies, and foreign regulatory agencies inspect our facilities to determine whether we are in compliance with various regulations relating to quality systems, such as manufacturing practices, validation, testing, quality control, product labeling, and product surveillance. A determination that we are in violation of such regulations could lead to imposition of civil penalties, including fines, product recalls, or product seizures and, in extreme cases, criminal sanctions, depending on the nature of the violation.

We must obtain regulatory approvals to market our products internationally. The registration scheme in the majority of international markets (e.g. Europe, Canada) for our products require that our quality system conforms to international quality standards. We must remain compliant with these requirements, as well as product standards in order to sell our products in these countries. There can be no assurance that we will be able to maintain compliance with these regulations. In addition, there can be no assurance that we will be successful in obtaining registration for new product introductions.

Further, international regulatory bodies have established varying additional regulations governing product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties, and tax requirements. We rely, in part, on our independent distributors to comply with such foreign regulatory requirements. As a result, our communication with foreign regulatory agencies may be indirect as it occurs through the foreign distributor. The inability or failure of independent distributors to comply with the varying regulations or the imposition of new regulations could restrict such distributors’ ability to sell our medical products internationally and thereby adversely affect our business, financial condition, and results of operations.

Because many of our biomaterial products are manufactured from bovine pericardium, perceptions about Bovine Spongiform Encephalopathy may impact our sales.

Under the direction of the United States Department of Agriculture (“USDA”), the U.S. government has had an active program of surveillance and import controls since the late 1980s designed to prevent the introduction of Bovine Spongiform Encephalopathy (“BSE”) into U.S. cattle. The USDA program includes certain feed restrictions which began in 1997. The World Health Organization continues to evaluate the levels of BSE infectivity of tissue. This characterization places pericardium (which primarily consists of collagen) as having low infectivity. The European authorities have specifically reviewed our biomaterial sourcing and manufacturing processes and have certified our bovine pericardium products. The European Medicines Agency (“EMA”) has approved our bovine pericardium as a base material in pharmaceuticals.

We obtain our raw bovine pericardium for our biomaterial products from USDA-inspected abattoirs as well as from a USDA approved source in New Zealand. The bovine pericardium is collected under strict conditions; inspectors examine each heart for disease and anomalies prior to harvesting the pericardium. Additional measures are also taken to ensure brain and spinal cord matter does not come into contact with the bovine pericardium. Our bovine-based tissue products are manufactured with sodium hydroxide, a processing technique recommended by international experts to remove or inactivate the prion, the agent believed to cause BSE, should it exist in the tissue. The bovine pericardium used in our products is sourced from animals who are 30 months of age or younger. Sourcing from these younger animals markedly decreases the likelihood of BSE transmission. Notwithstanding these safeguards, if the perception of risk associated with BSE increases, it could have a material adverse effect on our business, financial condition and results of operations.

In 2004, the EU enacted medical device regulations that require product specific evaluation of bovine-based products for potential BSE patient health risks. All bovine-based medical products currently sold in the EU are subject to this evaluation. Our bovine-based products have been evaluated and have obtained approval, although our Dura-Guard product has not been approved for sale in France. Currently, none of our bovine-based products are approved for sale in Japan or Taiwan. In August 2006, the government of China began prohibiting the sale of U.S. bovine-based products. We understand that regulatory approvals will not be granted in the present environment within those countries for products derived from bovine pericardium, unless we source bovine pericardium from countries which they consider at no risk for BSE (e.g. New Zealand and Australia). Total international sales of our bovine-based products accounted for 10.7% and 11.3% of our consolidated net sales for the fiscal years ended October 31, 2011 and 2010, respectively, and increased 14% in fiscal 2011. Any prohibition by certain other countries of U.S. bovine pericardium products as a result of concerns related to BSE could have an adverse effect on our ability to maintain or grow international sales of these products.

We may face the risk of product liability claims and product recalls that could result in costly and time consuming litigation and significant liability.

The medical device industry historically has been litigious, and the manufacture and sale of our products entails an inherent risk of product liability claims. In particular, our principal medical devices are designed to be permanently placed in the human body, and production or other errors could result in an unsafe product and injury to the patient. Although we maintain product liability insurance in amounts believed to be adequate, based upon the nature and risks of our business in general and our actual experience to date, there can be no assurance that one or more liability claims will not exceed the coverage limits of such policies or that such insurance will continue to be available on commercially reasonable terms, if at all. Furthermore, we do not have, nor do we expect to obtain insurance covering our costs and losses as the result of any recall of our products due to alleged defects, whether such a recall is instituted by us or required by a regulatory agency. A product liability claim, recall, or other claim with respect to uninsured liabilities or in excess of our insured liabilities could have a material adverse effect on our business, financial condition and results of operations.

Due to the unpredictability of the health care industry, our customers may not be able to receive third-party reimbursement for the medical procedures utilizing our products.

Our products are purchased primarily by hospitals and other end-users. Hospitals and end-users of our products bill various third-party payers, including government health programs, private health insurance plans, managed care organizations and other similar programs, for the health care goods and services provided to their patients. Third-party payers may deny reimbursement if they determine that a procedure was not in accordance with established third-party payer protocol regarding treatment methods. Our products are covered by procedure costs as a component of the overall medical procedure reimbursement obtained from the third-party payer.

Third-party payers are also increasingly challenging the prices charged for medical products and services and, in some instances, have put pressure on medical device suppliers to lower their prices. While we believe our pricing is appropriate for the niche markets and technology of our products, we are unable to predict what changes will occur in the reimbursement methods used by third-party payers. There can be no assurance that medical procedures in which our products are used will continue to be considered cost-effective by third-party payers, that reimbursement for such procedures will be available or, if available, will continue, or that third-party payers’ reimbursement levels will not adversely affect our ability to sell our products on a profitable basis. The cost of health care has risen significantly over the past decade, and there have been and may continue to be proposals by legislators, regulators, and third-party payers to curb these costs.

Failure by hospitals and other users of our products to obtain reimbursement from third-party payers for procedures in which our products are used, changes in third-party payers’ policies towards reimbursement for procedures using our products or legislative action could have a material adverse effect on our business, financial condition, and results of operations.

Our business, financial condition, results of operations and cash flows could be significantly and adversely affected by the recently adopted legislation reforming the United States healthcare system and if other administration and legislative proposals are enacted into law.

On March 30, 2010, the Health Care and Education Reconciliation Act of 2010 (the “Reconciliation Bill”) was signed into law by President Obama. The Reconciliation Bill amended the Patient Protection and Affordable Care Act, which was signed into law on March 23, 2010. Among other initiatives, these bills impose a 2.3% excise tax on domestic sales of medical devices following December 31, 2012. This enacted excise tax on medical devices could materially and adversely affect our operating results.

Other elements in the Reconciliation Bill, such as comparative effectiveness research, an independent payment advisory board and other provisions could meaningfully change the way healthcare is developed and delivered, and may materially impact our business.

Various healthcare reform proposals also have emerged at the state level. We cannot predict what healthcare initiatives, if any, will be implemented at the state level or the exact effect newly enacted laws or any future legislation or regulation will have on us. However, an expansion in government’s role in the U.S. healthcare industry may lower reimbursements for our products, reduce medical procedure volumes and adversely affect our business and results of operations, possibly materially.

The current global economic downturn could continue to adversely impact our business.

Significant portions of our product sales are used in medical procedures are covered by patient health insurance. Additionally, a notable percentage of medical procedures utilizing our products may be considered elective by the patient. The current global economic downturn may have a meaningful impact on availability to or affordability of health insurance, or may impact patient decisions to have an elective medical procedure performed. This may in turn also impact the financial condition of our customers. Accordingly, a pronounced and sustained economic downturn could have a material, adverse effect on our business, financial condition, and results of operations.

We depend on highly specialized equipment to manufacture our products and loss of or damage to one of our manufacturing facilities could result in reduced revenues and significant losses.

We presently have two manufacturing facilities: our Irvine, California facility which manufactures our Ortho & Wound products, and our St. Paul, Minnesota facility which manufactures substantially all of our other products, except for microsurgery which relies on third-party manufacturers. The loss of or damage to either of our manufacturing facilities due to natural disaster, equipment failure or other difficulty could result in significant delays in production. In the event of such disaster, re-starting manufacturing activity at our other location, or locating third-party manufacturers to manufacture our products in any such event would likely be difficult given the specialized equipment and processes necessary to produce those products. Although we maintain business interruption insurance to mitigate the financial impact on our business, any sustained period of suspended production would likely have a material adverse effect on our business, financial condition and results of operations.

We cannot predict the outcome of our clinical studies.

In fiscal 2012, we expect to continue as well as initiate several post-clearance marketing clinical studies for certain of our products, which are designed to document the comparative strengths of our products versus competitive products, and also to more fully understand how implant techniques and other factors may affect clinical outcomes. We expect these clinical studies will require significant investment and may span several years. We cannot predict the outcome of our clinical studies, nor what impact, if any, they may have in the marketplace.

Our strategy to acquire complementary businesses and technologies involves risk and may result in disruptions to our business by, among other things, distracting management time and diverting financial resources.

One of our growth strategies is the acquisition of complementary businesses and technologies. We may not be able to identify suitable acquisition candidates, or if we do, we may not be able to make such acquisitions on commercially acceptable terms. If we make acquisitions, a significant amount of management time and financial resources may be required to evaluate or complete the acquisition and integrate the acquired business into our existing operations. Even with this investment of management time and financial resources, an acquisition may not produce the desired revenue, earnings or business synergies. Acquisitions involve numerous other potential risks including: assumption of unanticipated operating problems or legal liabilities, problems integrating the purchased operations, technologies or products, diversion of management’s attention from our core businesses, adverse effects on existing business relationships with suppliers and customers, inaccurate estimates of fair value made in the accounting for acquisitions and amortization of acquired intangible assets which would reduce future reported earnings, and potential loss of customers or key employees of acquired businesses, among others.

We may not be able to hire or retain key personnel.

We depend on key management, sales and technical personnel. Moreover, because of the highly technical nature of our business, our ability to continue our technological developments and to market and sell our products depends in large part on our ability to attract and retain qualified, technical sales and management personnel.

Competition for qualified personnel is intense, and we cannot ensure that we will be able to attract and retain the individuals we need. The loss of key personnel, or our inability to hire or retain qualified personnel, could have a materially adverse effect on our business, financial condition, and results of operations.

ITEM 1B – Unresolved Staff Comments

None.

ITEM 2 - Properties

We have a lease for our corporate headquarters and manufacturing facility, totaling 65,000 square feet, located at 2575 University Ave. W., St. Paul, Minnesota. The lease expires on December 31, 2013, and the base rent is approximately $724,000 annually.

We lease approximately 14,830 square feet for our Ortho & Wound facility at 4 and 6 Jenner Drive, Irvine, CA. The lease expires August 31, 2012, and the base rent is approximately $200,000 annually.

We lease approximately 6,000 square feet for our MCA facility at 439 Industrial Lane, Birmingham, Alabama. The lease expires February 28, 2014, and the base rent is approximately $55,000 annually.

We pay apportioned real estate taxes and common costs on our St. Paul, MN and Irvine, CA leased facilities.

ITEM 3 - Legal Proceedings

From time to time, we may become involved in routine litigation incidental to our business. Further, product liability claims may be asserted in the future relative to events not known to management at the present time. Management believes that our risk management practices, including our insurance coverage, are reasonably adequate to protect against potential material product liability losses.

Beginning December 14, 2011, two putative shareholder class action complaints challenging the proposed Merger were filed in Ramsey County District Court, Second Judicial District, State of Minnesota, against Baxter, Merger Sub, Synovis and individual members of our board of directors. The complaints generally allege, among other things, that the members of our board of directors breached their fiduciary duties owed to the shareholders of Synovis by entering into the Merger Agreement, approving the proposed Merger, failing to take steps to maximize the value of Synovis to its shareholders, making materially inadequate disclosures regarding the proposed merger, and that Synovis, Baxter and Merger Sub aided and abetted such breaches of fiduciary duties. In addition, the complaints allege that the transaction improperly favors Baxter and that certain provisions of the Merger Agreement unduly restrict Synovis’ ability to receive a topping bid or negotiate with rival bidders. The complaints seek, among other things, declaratory and injunctive relief concerning the alleged fiduciary breaches, injunctive relief prohibiting the defendants from consummating the Merger and other forms of equitable relief.

We believe that the claims asserted against us in these proceedings are without merit; however, there can be no assurance as to the outcome or timing of the resolution of these proceedings. We therefore are unable to estimate the amount or potential range of any loss that may arise out of these proceedings. The possible resolutions could include a delay or prohibition of consummation of the Merger, a determination and judgment against us or a settlement that requires a substantial payment by us that could have a material adverse effect on our financial condition, results of operations and cash flows.

ITEM 4 – [Removed and Reserved]

PART II

ITEM 5 - Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range

Our common stock is currently traded on the NASDAQ Global Market under the symbol “SYNO.” The following table sets forth, for each of the fiscal periods indicated, the range of high and low closing sale prices per share as reported by the NASDAQ Global Market.

	2011				2010
Fiscal Quarter Ended:	High		Low		High		Low
January 31	$	16.98	$	14.99	$	13.30	$	11.54
April 30		21.19		15.31		15.78		12.47
July 31		20.59		16.46		16.28		13.61
October 31		19.20		13.33		16.26		13.80

Dividends

We have not declared or paid any cash dividends on our common stock since inception, and our Board of Directors presently intends to retain all earnings for use in the business for the foreseeable future.

Shareholders

As of December 1, 2011, there were approximately 5,700 beneficial owners and 532 registered shareholders of our common stock.

Sales of Unregistered Securities

None.

Purchases of Equity Securities

On September 29, 2009, we announced that our Board of Directors had authorized the repurchase of up to 500,000 shares of our common stock. On March 4, 2010, the Board of Directors increased the number of shares we are authorized to repurchase by an incremental 1,000,000 shares of our common stock, for a total of 1,500,000 shares to be repurchased. The share repurchases are to be funded using our existing cash balances and may occur either in the open market or through private transactions from time to time, in accordance with SEC regulations. The timing and extent to which we may buy back shares depends upon market conditions and other corporate considerations. The repurchase plan does not have an expiration date.

From inception of the program on September 29, 2009 through October 31, 2011, we used approximately $15,574,000 to repurchase 1,056,362 shares at an average price of $14.74 per share. The following table presents the total number of shares repurchased during each of the months of the fourth quarter fiscal 2011, the average price paid per share, the number of shares that were purchased, and the maximum number of shares that may yet be purchased at October 31, 2011, pursuant to our stock repurchase program. All shares repurchased by the Company were purchased under a Securities and Exchange Commission Rule 10b5-1 plan. See note 10 to our consolidated financial statements in Part II, Item 8 “Financial Statements and Supplementary Data” of this Form 10-K for further detail on repurchases of equity securities.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total number of Shares Purchased as Part of Publicly Announced Plan or Program		Maximum Number of Shares that May Yet be Purchased Under the Plan or Program
August 1, 2011 – August 31, 2011		62,100	$	16.98		62,100		823,239
September 1, 2011 – September 30, 2011		307,636		16.81		307,636		515,603
October 1, 2011 – October 31, 2011		71,965		17.05		71,965		443,638
Total		441,701	$	16.87		441,701		443,638

Performance Graph

In accordance with the rules of the SEC, the following performance graph compares the performance of our common stock on the NASDAQ Global Market to the NASDAQ Global Market and to NASDAQ’s “Surgical and Medical Instruments and Supplies” Index. The following performance graph compares the cumulative total shareholder return as of the end of each of our last five fiscal years on $100 invested at the beginning of the period and assumes reinvestment of all dividends.

Date	Company Index	NASDAQ Market Index	NASDAQ Surgical and Medical Instruments and Supplies Index
10/31/06	100.0	100.0	100.0
10/31/07	323.6	118.9	115.5
10/31/08	237.0	73.7	89.9
10/31/09	163.4	69.0	91.5
10/31/10	203.3	85.5	97.6
10/31/11	243.4	93.6	101.8

ITEM 6 - Selected Financial Data

SUMMARY STATEMENT OF OPERATIONS DATA (in thousands except per share data)

For the year ended October 31,	2011		2010		2009		2008			2007

Net revenue	$	82,363	$	68,565	$	58,211	$	49,800		$	37,691
Gross margin		60,020		49,540		41,767		34,144			24,370
Operating income		12,362		7,335		4,002		7,194			2,468

Net income from continuing operations		8,461		4,876		2,706		6,165			3,292
Gain on sale of discontinued operations		-		-		-		5,340			-
Income (loss) from discontinued operations		-		-		-		(20	)		518
Net income	$	8,461	$	4,876	$	2,706	$	11,485		$	3,810

Basic earnings per share
Continuing operations	$	0.74	$	0.43	$	0.23	$	0.50		$	0.27
Discontinued operations		0.00		0.00		0.00		0.43			0.04
Net income	$	0.74	$	0.43	$	0.23	$	0.93		$	0.31
Diluted earnings per share
Continuing operations	$	0.73	$	0.43	$	0.23	$	0.48		$	0.26
Discontinued operations		0.00		0.00		0.00		0.42			0.04
Net income	$	0.73	$	0.43	$	0.23	$	0.90		$	0.30
Weighted average shares outstanding

Basic		11,381		11,262		11,588		12,395			12,225
Diluted		11,571		11,441		11,827		12,721			12,528

SUMMARY BALANCE SHEET DATA (in thousands)

At October 31,	2011		2010		2009		2008		2007

Working capital	$	72,881	$	66,271	$	63,885	$	62,097	$	66,616
Total assets		105,935		97,482		93,720		97,401		94,677
Shareholders’ equity		95,920		89,467		86,011		89,861		86,953

ITEM 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with the selected consolidated financial data and our financial statements and the related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth in Part 1, Items 1A, “Risk Factors,” of this report.

OVERVIEW

Synovis Life Technologies, Inc., a diversified medical device company, develops, manufactures and markets biological and mechanical products used by several surgical specialties to facilitate the repair and reconstruction of soft tissue damaged or destroyed by disease or injury. Our products include implantable biomaterials for soft tissue repair, devices for microsurgery, and surgical tools – all designed to reduce risks and/or facilitate critical surgeries, improve patient outcomes and reduce healthcare costs.

SIGNIFICANT RECENT DEVELOPMENT

On December 12, 2011, Synovis, Baxter International Inc., a Delaware corporation (“Baxter”), and Twins Merger Sub, Inc., a Minnesota corporation and wholly owned subsidiary of Baxter (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Baxter will acquire all of the outstanding shares of Synovis for $28.00 per share in cash, without interest, and pursuant to which Merger Sub will be merged with and into the Company with the Company continuing as the surviving corporation and a wholly owned subsidiary of Baxter (the “Merger”). The Merger is expected to be completed in the first calendar quarter of 2012, subject to the affirmative vote of the holders of the majority of shares of Synovis Common Stock as well as satisfaction or waiver of all other conditions to closing specified in the Merger Agreement.

OPERATING RESULTS – FISCAL 2011 ($ in thousands except per share data)

Net revenue increased 20% during fiscal 2011 to $82,363 from $68,565 in fiscal 2010. Our operating income was $12,362 in fiscal 2011, compared to $7,335 in the prior year. Net income for fiscal 2011 was $8,461, or 73 cents per diluted share, compared to $4,876, or 43 cents per diluted share during fiscal 2010.

The following table summarizes our net revenue by product group and geography for fiscal 2011 and fiscal 2010:

Net Revenue:	2011				2010
($ in thousands)
	$		%		$		%
Peri-Strips	$	23,675	29	%	$	19,414	28	%
Tissue-Guard		18,407	22	%		16,550	24	%
Veritas		15,829	19	%		14,368	21	%
Microsurgery		15,190	19	%		11,020	16	%
Surgical Tools and other		5,748	7	%		5,335	8	%
Orthopedic and Wound		3,514	4	%		1,878	3	%
Total Net Revenue	$	82,363	100	%	$	68,565	100	%

Domestic	$	70,130	85	%	$	57,700	84	%
International		12,233	15	%		10,865	16	%
Worldwide	$	82,363	100	%	$	68,565	100	%

The increase in net revenue in fiscal 2011 compared to that of fiscal 2010 was primarily due to the following:

●	Incremental worldwide units sold, inclusive of new product introductions, increased revenue approximately $8,500; and

●	Higher average net selling prices primarily due to various worldwide hospital list price increases for certain of our products increased revenue by approximately $5,300.

In the United States, each of our business units has its own distinct sales channel. As of October 31, 2011, we have 60 direct sales representatives selling our surgical business products, having just completed an expansion of four territories in the fourth quarter of fiscal 2011, and we presently expect to add four additional direct sales representatives in fiscal 2012. We have 12 direct sales representatives selling our microsurgery products, and presently expect to add several direct sales representatives in fiscal 2012. For our Ortho & Wound products, we have an independent sales force consisting of 32 independent representative groups (each with multiple sales representatives) as of October 31, 2011 and we intend to appoint additional independent sales groups during fiscal 2012. Internationally, all of our products are sold through independent third-party stocking distributors.

The increase in worldwide units sold in fiscal 2011 was primarily attributable to higher Peri-Strips revenue believed to be primarily due to increased procedure volumes of sleeve gastrectomies, increased volumes of Tissue-Guard units sold worldwide, increased market penetration of our microsurgery products and increased Ortho & Wound volumes due primarily to the establishment and development of our independent sales force.

We cannot fully assess the impact economic conditions may have had on our results of operations during fiscal 2011. We believe, however, that the volume of certain surgical procedures in which our products are used, particularly those which may be considered elective, has been impacted by economic conditions. In addition, we believe that the financial condition of various hospital customers has been impacted by the economic conditions. These notable items, as well as other factors, may have had an impact on our results of operations.

Worldwide net revenue from Peri-Strips was $23,675 in fiscal 2011, an increase of $4,261 or 22% as compared to revenue of $19,414 in fiscal 2010. Increased volume of units sold during fiscal 2011 drove the revenue increase, which we believe was primarily driven by an increased number of sleeve gastrectomy procedures, which are more likely to use a buttress compared to other bariatric surgeries and typically use more buttresses per procedure. Higher average net selling prices in fiscal 2011 as compared to fiscal 2010 also contributed to the increase. Peri-Strips are used to reduce risks and improve patient outcomes in bariatric and thoracic procedures using surgical staples.

Revenue from Peri-Strips used with Ethicon surgical staplers increased 37% in fiscal 2011 as compared to fiscal 2010, while revenue from Peri-Strips used with Covidien staplers decreased 5%. Covidien launched a competitive buttress product in mid-fiscal 2009 supplied integral with their stapler cartridges, which has adversely impacted Peri-Strips revenue. In fiscal 2011, approximately 80% of our worldwide Peri-Strips revenue was derived from buttresses used with Ethicon staplers, as compared to 73% in fiscal 2010.

Revenue from Tissue-Guard patch products was $18,407 in fiscal 2011, an increase of $1,857 or 11% from $16,550 in fiscal 2010. The fiscal 2011 increase was driven by a 6% increase in units sold worldwide, in addition to higher average selling prices in the current year. Our Tissue-Guard family of products is used to repair and replace damaged tissue in an array of surgical procedures, including cardiac, vascular, thoracic, and neurologic procedures.

Revenue from Veritas patch products was $15,829 in fiscal 2011, an increase of $1,461 or 10% from $14,368 in fiscal 2010. The increase in Veritas revenue was driven by higher average net selling prices in fiscal 2011 as compared to fiscal 2010. Veritas is an extremely strong and conformable biomaterial which acts as a “scaffold” that enables rapid repopulation and revascularization by the surrounding host tissue.

Revenue from Microsurgery was $15,190 in fiscal 2011, an increase of $4,170 or 38% from $11,020 in fiscal 2010. The revenue growth in fiscal 2011 was primarily driven by increased market acceptance of the Coupler and the Flow Coupler, and higher average net selling prices for our Coupler products, which cumulatively resulted in a 44% growth in Coupler products during fiscal 2011. The Coupler is a device used to connect extremely small arteries or veins, without sutures, quickly, easily and with consistently excellent results. The Flow Coupler enhances our Microsurgery product offerings by combining our existing Coupler with Doppler technology, enabling physicians to verify and monitor blood flow.

Revenue from Ortho & Wound products was $3,514 in fiscal 2011, an increase of $1,636 or 87% as compared to $1,878 in fiscal 2010. During fiscal 2011, we transitioned from a hybrid sales force to a fully independent sales force. As they have gained experience with our Ortho & Wound products, our independent representatives have become increasingly effective at communicating the clinical benefits of our products to physicians. The OrthADAPT Bioimplant is used in numerous orthopedic applications, including rotator cuff and Achilles tendon repair, where there is a clinical need to reinforce the repair. Unite Biomatrix provides a durable, collagen structure that need be applied only once to a wound and maintains its integrity while promoting wound healing.

Our gross margin increased by six-tenths of a percentage point to 72.9% in fiscal 2011 from 72.3% during fiscal 2010. On a consolidated basis, higher average net selling prices in fiscal 2011 positively impacted gross margin partially offset by product mix. Our Ortho & Wound gross margin increased 13 percentage points to 54% in fiscal 2011 primarily due to a higher percentage of sales in the current year representing lower cost manufactured inventory as compared to higher cost acquired units in the prior year. Our surgical business gross margin increased one percentage point to 77% in fiscal 2011, primarily due to higher average net selling prices for our products. Our microsurgical business gross margin increased one percentage point to 60% in fiscal 2011 due to higher average net selling prices for certain of our products.

Factors which may affect the gross margin include product and geographic mix of products sold, volume, product acquisitions and disposals, and other production activities. Accordingly, our gross margin may fluctuate from period to period based on variations in these factors.

Selling, general, and administrative (“SG&A”) expense during fiscal 2011 was $42,949, an increase of $5,137 or 14% from SG&A expense of $37,812 in fiscal 2010. As a percentage of net revenue, SG&A expense was 52% in fiscal 2011 as compared to 55% in the prior year. The fiscal 2011 SG&A increase was primarily due to approximately $4,072 in higher sales and marketing costs across each of our businesses driven by increased personnel, increased compensation associated with higher revenue levels, and increased marketing activities to drive current and long-term revenue growth.

In fiscal 2012, we expect to incur higher SG&A expense as compared to fiscal 2011 due to incremental investments we believe are necessary to drive near and long-term revenue growth. Such investments include increased sales staff at both our surgical and microsurgical businesses, increased sales and marketing costs to promote our products and increased clinical study activities.

Research and development (“R&D”) expense totaled $4,709 during fiscal 2011, an increase of $316 or 7% from $4,393 in fiscal 2010, driven by increased project activity and related increased personnel costs in support of higher project activities near and long-term. Fiscal 2011 R&D activity focused on several activities, including research to expand the size offerings and indications for use of our Veritas product into new and existing markets, providing research and clinical data to support the use of Veritas in various surgical procedures, exploring additional process improvements and product enhancements for our proprietary biomaterial products, advancing the size offerings and technology of the Flow Coupler and providing research and clinical data to support the launch of the ProCuff product, an arthroscopically delivered augmentation device for tendon repair, including rotator cuff repair.

In fiscal 2012, we expect R&D expense to increase compared to fiscal 2011 due to several activities, including research to expand the size offerings and indications for use of our Veritas product into new and existing markets, providing research and clinical data to support the use of Veritas in various surgical procedures, exploring additional process improvements and product enhancements for our proprietary biomaterial products, advancing the size offerings and technology of the Flow Coupler and providing research and clinical data to support the launch of the ProCuff product, an arthroscopically delivered augmentation device for tendon repair, including rotator cuff repair.

We recorded operating income of $12,362 in fiscal 2011, an increase of $5,027 as compared to operating income of $7,335 in fiscal 2010. The increase in operating income in fiscal 2011 as compared to the prior year was primarily due to higher revenue levels in the current year. Interest income was $311 in fiscal 2011 compared with $284 in fiscal 2010.

We recorded a provision for income taxes in fiscal 2011 of $4,212, at an effective tax rate of 33.2%. This was less than our fiscal 2010 effective tax rate of 36.0%, primarily due to recording $350 of discrete income tax benefit in fiscal 2011, related to reinstatement of the Federal R&D credit from fiscal 2010, as well as from exercises of employee incentive stock options. In fiscal 2010, we recorded income tax expense of $2,743 at an effective rate of 36.0%. As of October 31, 2011, we recorded $447 in net current deferred income tax assets and $2,166 in net long-term deferred income tax assets.

OPERATING RESULTS – FISCAL 2010 ($ in thousands except per share data)

Net revenue increased 18% during fiscal 2010 to $68,565 from $58,211 in fiscal 2009. Our operating income was $7,335 in fiscal 2010, compared to $4,002 in the prior fiscal year. Net income from continuing operations for fiscal 2010 was $4,876, or 43 cents per diluted share, compared to $2,706, or 23 cents per diluted share during fiscal 2009.

The following table summarizes our net revenue by product group and geography for fiscal 2010 and fiscal 2009:

Net Revenue:	2010				2009
($ in thousands)
	$		%		$		%
Peri-Strips	$	19,414	28	%	$	19,384	33	%
Tissue-Guard		16,550	24	%		15,806	27	%
Veritas		14,368	21	%		8,757	15	%
Microsurgery		11,020	16	%		8,668	15	%
Surgical Tools and other		5,335	8	%		5,531	10	%
Orthopedic and Wound		1,878	3	%		65	0	%
Total Net Revenue	$	68,565	100	%	$	58,211	100	%

Domestic	$	57,700	84	%	$	49,290	85	%
International		10,865	16	%		8,921	15	%
Worldwide	$	68,565	100	%	$	58,211	100	%

The increase in net revenue in fiscal 2010 compared to fiscal 2009 was primarily due to the following:

●	Incremental worldwide units sold increased revenue approximately $6,300;

●	Ortho & Wound products increased revenue approximately $1,800; and

●	Higher average net selling prices primarily due to various worldwide hospital list price increases for certain of our products increased revenue by approximately $2,250.

The increase in worldwide units sold was primarily attributable to the expansion of our direct sales force in the second half of fiscal 2009, increased market acceptance of Veritas into the worldwide hernia and general surgery markets and increased market penetration of our microsurgery products.

We believe the expansion of our domestic direct sales force is a key element of our long-term strategy to increase revenues. In fiscal 2009, we expanded our sales force by 22 sales representatives for a total of 65 sales representatives at the end of fiscal 2009. As of October 31, 2010, we had a total of 73 sales representatives in the U.S: 56 sales representatives sell our Veritas, Peri-Strips, Tissue-Guard and Surgical tools and other products, nine sales representatives sell our Microsurgery products and eight sales representatives sell our Ortho & Wound products.

We cannot fully assess the impact the economic downturn may have had on our results of operations during fiscal 2010. We believe, however, that the volume of certain surgical procedures in which our products are used, particularly those which may be considered elective, has been impacted by the current economic downturn. In addition, we believe that the financial condition of various hospital customers has been negatively impacted by the economic downturn. These notable items, as well as other factors, may have had an impact on our results of operations.

Worldwide net revenue from Peri-Strips was $19,414 in fiscal 2010, essentially flat as compared to revenue of $19,384 in fiscal 2009. Increased average net selling prices were offset by slightly lower units sold in fiscal 2010 as compared to fiscal 2009. Fiscal 2010 Peri-Strips revenue was also affected by the impact of increased competition within the buttressing market. Covidien, one of the two primary companies which offer surgical staplers on which our Peri-Strips products are used, launched a buttress product in mid-fiscal 2009 supplied integral with their stapler cartridges. During fiscal 2010, worldwide revenue from Peri-Strips products which are used with Covidien staplers decreased 30% from fiscal 2009. This was offset by fiscal 2010 revenue for Peri-Strips products used with Ethicon staplers increasing 20% from fiscal 2009.

Revenue from Tissue-Guard patch products was $16,550 in fiscal 2010, an increase of $744 or 5% from $15,806 in fiscal 2009. The fiscal 2010 increase was driven by a 3% increase in units sold worldwide, in addition to slightly higher average selling prices in the current year.

Revenue from Veritas patch products was $14,368 in fiscal 2010, an increase of $5,611 or 64% from $8,757 in fiscal 2009. Veritas revenue growth in fiscal 2010 was primarily driven by incremental worldwide sales into the plastic and reconstructive and general surgery markets. Additionally, late in the fourth quarter of fiscal 2009, we received CE Mark approval for the use of Veritas in soft tissue repair and commenced selling Veritas to our European distributors. Higher average net selling prices also contributed to the revenue increase in fiscal 2010.

Revenue from Microsurgery was $11,020 in fiscal 2010, an increase of $2,352 or 27% from $8,668 in fiscal 2009. The revenue growth was primarily driven by the fiscal 2009 expansion of our sales force, increased market acceptance of the Coupler, as well as the domestic market launch of the Flow Coupler in the third quarter of fiscal 2010, resulting in a 24% increase in Coupler unit sales in fiscal 2010.

Revenue from Ortho & Wound products was $1,878 in fiscal 2010 as compared to $65 from July to October 2009. Our U.S. sales coverage has increased from approximately 10% at the beginning of fiscal 2010 to approximately 75% at the end of fiscal 2010, and our Ortho & Wound sales force continues to develop their sales territories and customer base by establishing relationships with pre-acquisition customers as well as prospecting for new customers.

Our gross margin increased by one-half of a percentage point to 72.3% in fiscal 2010 from 71.8% during fiscal 2009. On a consolidated basis, higher average list selling prices for certain of our products in fiscal 2010 were partially offset by product mix and lower manufacturing utilization in the current year. Our surgical business gross margin increased two percentage points to 76% in fiscal 2010, primarily due to higher average net selling prices for our products and higher sales of Veritas, which has a higher gross margin relative to other surgical business products. These were offset by lower manufacturing efficiencies in fiscal 2010 as compared to fiscal 2009. Our microsurgical business gross margin decreased one percentage point to 59% in fiscal 2010 due to product mix and higher inventory costs. Our Ortho & Wound gross margin was 41% in fiscal 2010, as substantially all of our sales were of inventory acquired in our July 2009 acquisition, which had higher ‘stepped up’ cost basis due to purchase accounting rules.

SG&A expense during fiscal 2010 was $37,812, an increase of $7,945 or 27% from SG&A expense of $29,867 in fiscal 2009. As a percentage of net revenue, SG&A expense was 55% in fiscal 2010 as compared to 51% in the prior year. The SG&A expense increase was due to $3,766 of incremental costs related to our Ortho & Wound business, which we acquired in July 2009, as well as approximately $3,500 of incremental expense related to the expansion of our direct sales force in the second half of fiscal 2009. Additionally, stock-based compensation expense was $1,455 (9 cents per diluted share) in fiscal 2010, up from $937 (7 cents per diluted share) in fiscal 2009.

R&D expense totaled $4,393 during fiscal 2010, an increase of $595 or 16% from $3,798 in fiscal 2009. Fiscal 2010 activity focused on several activities, including research to potentially expand the indications of our Veritas product into new markets, providing research and clinical data to support the use of Veritas in various surgical procedures, exploring process improvements and product enhancements for our proprietary tissue products, comparative studies involving Peri-Strips and its competition, advancing the technology of the Coupler and further development of an orthopedic product and related instrumentation.

In fiscal 2009, we recorded other operating expenses of $4,100. We expensed acquired in-process R&D costs of $3,500 related to our acquisition of the assets of Pegasus, as it was determined the related projects had no alternative future use. We also recorded an impairment charge of $600 related to identifiable intangible assets related to our fiscal 2007 acquisition of the 4Closure™ Surgical Fascia Closure System (“4Closure”) following an impairment analysis. This analysis was performed as a result of a delay in the fiscal 2009 re-launch and re-brand of the product, combined with actual revenues since acquisition not meeting projected expectations. No other operating expenses were recorded in fiscal 2010.

We recorded operating income of $7,335 in fiscal 2010, an increase of $3,333 as compared to operating income of $4,002 in fiscal 2009. The increase in operating income in fiscal 2010 as compared to the prior year was primarily driven by a reduction of other operating costs of $4,100 (zero of these costs were incurred in fiscal 2010 while $4,100 were incurred in fiscal 2009). In addition, the operating loss related to our Ortho & Wound business was approximately $4,100 higher in fiscal 2010 compared to fiscal 2009 given a full year of operations in fiscal 2010, with this higher operating loss largely offset by higher operating profitability in our other operations. Interest income was $284 in fiscal 2010 compared with $920 in fiscal 2009, primarily due to significantly lower investment yields and lower investment balances in the current year. Additionally in fiscal 2009, we sold our auction rate securities (“ARS”), which had a par value of $9,000, for $7,650, realizing a loss on sale of $1,350.

We recorded a provision for income taxes in fiscal 2010 of $2,743 at an effective tax rate of 36.0%. We recorded income tax expense of $866 in fiscal 2009 at an effective rate of 24.2% of pretax income. Our fiscal 2009 effective tax rate was comprised of a tax rate of 27.3% on operations and interest income and a 35.3% tax benefit on the capital loss of $1,350 incurred upon the sale of our ARS. Our fiscal 2009 effective tax rate on operations and interest income was lower than fiscal 2010 due to lower pretax income in fiscal 2009 as compared to fiscal 2010, higher permanent differences that reduce taxes and a lower overall rate for state taxes. As of October 31, 2010, we recorded $367 in net current deferred income tax assets and $2,139 in net long-term deferred income tax assets.

LIQUIDITY AND CAPITAL RESOURCES ($ in thousands)

Cash, cash equivalents, and investments totaled $66,551 as of October 31, 2011, an increase of $4,627 as compared to cash, cash equivalents, and investments of $61,924 as of October 31, 2010. Included in the balance above, we have $7,335 of investments classified as non-current as of October 31, 2011. Working capital at October 31, 2011 and 2010 was $72,881 and $66,271, respectively. We have no long-term debt. We currently expect our cash on hand and cash from operations to be sufficient to cover both our short- and long-term operating requirements, subject however, to numerous variables, including acquisition opportunities, research and development priorities, and the growth and profitability of the business.

The increase in cash, cash equivalents, and investments in fiscal 2011 was primarily due to cash provided by operating activities of $11,377 in fiscal 2011. This was partially offset by the use of $7,580 to repurchase 450,122 shares of our common stock in fiscal 2011.

Operating activities provided cash of $11,377 in fiscal 2011, as compared to providing cash of $6,903 during fiscal 2010. The fiscal 2011 cash provided by operating activities was driven by net income of $8,461 and $4,028 in non-cash expenses. Working capital changes used cash of $1,112 in fiscal 2011, driven by $2,811 of cash used for increased accounts receivable and $565 of cash used for increased inventories to support higher revenue levels, which were offset by $2,522 of cash provided by increases in accrued expenses and accounts payable. The fiscal 2010 cash provided by operating activities was driven by net income of $4,876 and $5,074 in non-cash expenses. Working capital changes used cash of $3,047 in fiscal 2010, driven by $1,980 of cash used for increased accounts receivable and $1,709 of cash used for increased inventories to support higher revenue levels.

Investing activities used cash of $3,136 during fiscal 2011. We used cash of $888 towards the net purchase of short- and long-term investments during the year. We also used $1,932 for purchases of property, plant and equipment in fiscal 2011. Investing activities used cash of $7,006 during fiscal 2010, as we used $5,779 towards the net purchase of short- and long-term investments, and $1,102 for the purchase of property, plant and equipment.

Financing activities used cash of $3,179 during fiscal 2011, as compared to $2,809 in fiscal 2010. In fiscal 2011, $7,580 of cash was used to repurchase 450,122 shares of common stock, partially offset by $3,879 of proceeds from equity-based compensation plans. During fiscal 2010, $5,101 of cash was used to repurchase 385,836 shares of common stock, partially offset by $1,996 of proceeds from equity-based compensation plans.

The following table summarizes our contractual obligations and operating leases. For more information, see Note 9 to our Consolidated Financial Statements. Our commitments under these obligations are as follows as of October 31, 2011:

		< 1 year				1-3 years				3-5 years				5 < years				Total
Operating leases		$	1,027			$	1,007			$	23			$	-			$	2,057

INFLATION

We believe inflation has not had a material effect on our operations or financial condition.

FOREIGN CURRENCY TRANSACTIONS

Substantially all of our foreign transactions are negotiated, invoiced, and paid in U.S. dollars. Fluctuations in currency exchange rates in other countries may therefore influence the demand for our products by changing the price of our products as denominated in the currency of the countries in which the products are sold.

CRITICAL ACCOUNTING POLICIES

Investments: Our investments consist of taxable and tax-exempt commercial paper, corporate notes/bonds, and municipal bond investments. Our investment policy seeks to manage these assets to achieve our goal of preserving principal, maintaining adequate liquidity at all times, and maximizing returns subject to our investment guidelines. We account for all of our investments as “available-for-sale” and report these investments at fair value, with unrealized gains and losses excluded from earnings and reported in “Accumulated Other Comprehensive Income,” a component of shareholders’ equity.

We review our investments for impairment to determine the classification of the impairment as “temporary” or “other-than-temporary.” A temporary impairment charge results in an unrealized loss being recorded in the other comprehensive income component of shareholders’ equity. Such unrealized loss does not reduce net income for the applicable accounting period because the loss is not viewed as other-than-temporary.

Accounts Receivable: Credit is extended based on evaluation of a customer’s financial condition, historical sales, and payment history. Generally, collateral is not required. Accounts receivable are generally due within 30-90 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts receivable outstanding longer than the contractual payment terms are considered past due. We determine our allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, the customer’s current ability to pay its obligation to us, and the condition of the general economy and the industry as a whole. We write-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

Indefinite-lived Intangible Assets: Our indefinite-lived intangible assets consist of goodwill, which is carried at cost. Indefinite-lived intangible assets are not amortized, but are required to be reviewed annually for impairment, and between annual test dates in certain circumstances. We perform an annual impairment test for goodwill in the fourth quarter of each fiscal year, or more often as circumstances require. In assessing the recoverability of goodwill, estimates of market capitalization and other factors are made to determine the fair value of the respective assets. If these estimates change in the future, we may be required to record impairment charges for these assets. Recoverability is assessed by comparison of the fair value of the Company to its carrying amount to determine if there is potential impairment. If the fair value of the Company is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the Company is less than its carrying value. If the carrying amount of the goodwill exceeds the fair value, an impairment loss is recognized.

Definite-lived Intangible Assets: Definite-lived intangible assets consist of patents, trademarks, developed technology, non-competes, and licenses, which are carried at amortized cost. We review our definite-lived intangible assets whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. We assess recoverability by reference to future cash flows from the products underlying these intangible assets. If these estimates change in the future, we may be required to record impairment charges for these assets.

Revenue Recognition: We recognize revenue when the product has been shipped to the customer if there is evidence that the customer has agreed to purchase the products, delivery, and performance have occurred, the price and terms of sale are fixed and collection of the receivable is expected. Less than five percent of our revenue is derived from consigned inventory, for which we recognize revenue upon customer use and receipt of proper purchase order and/or purchase requisition documentation.All amounts billed to customers in a sales transaction related to shipping and handling are classified as revenue. Our sales policy does not allow sales returns.

Inventories: Inventories, which are comprised of raw materials, work in process, and finished goods, are valued at the lower of cost, first-in, first-out (“FIFO”) or market. Overhead costs are applied to work in process and finished goods based on annual estimates of production volumes and overhead spending. These estimates are reviewed and assessed for reasonableness on a quarterly basis and adjusted as needed. The estimated value of excess, slow-moving, and obsolete inventory, as well as inventory with a carrying value in excess of its net realizable value, is established on a quarterly basis through review of inventory on hand and assessment of future product demand, anticipated release of new products into the market, historical experience, and product expiration.

Stock-Based Compensation: We recognize stock-based compensation based on certain assumptions within the Black-Scholes Model. These assumptions are used to determine an estimated fair value of stock based payment awards on the date of grant and require subjective judgment. Because employee stock options have characteristics significantly different from those of traded options, and because changes in the assumptions can materially affect the fair value estimate, the existing models may not provide a reliable single measure of the fair value of the employee stock options. We assess the assumptions and methodologies used to calculate the estimated fair value of stock-based compensation on a regular basis. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies and thereby materially impact our fair value determination.

Income Taxes: We account for income taxes using the asset and liability method. The asset and liability method provides that deferred tax assets and liabilities are recorded based on the differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes (“temporary differences”). Deferred tax assets are reduced by a valuation allowance, when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

ITEM 7A – Quantitative and Qualitative Disclosures about Market Risk

We maintain financial instruments in cash and cash equivalents, investments, and accounts receivable. We believe that the interest rate, credit, and market risk related to these accounts is not significant. We manage the risk associated with these accounts through periodic reviews of the carrying value for non-collectability of assets and establishment of appropriate allowances in connection with our internal controls and policies. We may enter into derivative instruments or perform hedging activities. However, our policy is to only enter into contracts that can be designated as normal purchases or sales.

ITEM 8 – Financial Statements and Supplementary Data

MANAGEMENT REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING

The management of Synovis Life Technologies, Inc. and its subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting. Synovis’s internal control system was designed to provide reasonable assurance to the company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Synovis management assessed the effectiveness of the company’s internal control over financial reporting as of October 31, 2011. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment, we believe that, as of October 31, 2011, the company’s internal control over financial reporting is effective based on those criteria.

Our consolidated financial statements as of and for the year ended October 31, 2011, have been audited by Grant Thornton LLP, our independent registered public accounting firm, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Grant Thornton LLP has also audited our internal control over financial reporting as of October 31, 2011, as stated in its report included in this Annual Report on Form 10-K.

/s/ Richard W. Kramp	/s/ Brett A. Reynolds

Richard W. Kramp	Brett A. Reynolds

President, Chief Executive	Vice President of Finance, Chief Financial
Officer and Director	Officer and Corporate Secretary
January 6, 2012	January 6, 2012

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Synovis Life Technologies, Inc.

We have audited the accompanying consolidated balance sheets of Synovis Life Technologies, Inc. and Subsidiaries (the “Company”) as of October 31, 2011 and 2010, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended October 31, 2011. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Synovis Life Technologies, Inc. and Subsidiaries as of October 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Synovis Life Technologies Inc. and Subsidiaries’ internal control over financial reporting as of October 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated January 6, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ Grant Thornton

Minneapolis, Minnesota

January 6, 2012

Board of Directors and Shareholders

Synovis Life Technologies, Inc.

We have audited Synovis Life Technologies, Inc. and Subsidiaries’ (the “Company”) internal control over financial reporting as of October 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Synovis Life Technologies, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of October 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Synovis Life Technologies, Inc. and Subsidiaries as of October 31, 2011 and 2010, and the related consolidated statements of operations, shareholders’ equity, and cash flows and financial statement schedule for each of the three years in the period ended October 31, 2011, and our report dated January 6, 2012 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.

/s/ Grant Thornton

Minneapolis, Minnesota

January 6, 2012

SYNOVIS LIFE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

For the fiscal years ended October 31,	2011		2010		2009

Net revenue	$	82,363	$	68,565	$	58,211
Cost of revenue		22,343		19,025		16,444
Gross margin		60,020		49,540		41,767

Operating expenses:
Selling, general and administrative		42,949		37,812		29,867
Research and development		4,709		4,393		3,798
Other		-		-		4,100
Operating expenses		47,658		42,205		37,765

Operating income		12,362		7,335		4,002

Interest income		311		284		920
Loss on sale of investments		-		-		(1,350	)

Income before provision for income taxes		12,673		7,619		3,572
Provision for income taxes		4,212		2,743		866

Net income	$	8,461	$	4,876	$	2,706

Basic earnings per share	$	0.74	$	0.43	$	0.23

Diluted earnings per share	$	0.73	$	0.43	$	0.23

Weighted average common shares outstanding:
- Basic		11,381		11,262		11,588
- Diluted		11,571		11,441		11,827

The accompanying notes are an integral part of these consolidated financial statements

SYNOVIS LIFE TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

As of October 31,	2011			2010

ASSETS
Current assets:
Cash and cash equivalents	$	18,013		$	12,951
Short-term investments		41,203			41,119
Accounts receivable, net		11,262			8,701
Inventories		9,998			9,433
Deferred income tax asset, net		447			367
Other current assets		1,973			1,715
Total current assets		82,896			74,286

Investments, net		7,335			7,854
Property, plant and equipment, net		4,154			3,401
Goodwill		3,620			3,620
Other intangible assets, net		5,764			6,182
Deferred income tax asset, net		2,166			2,139
Total assets	$	105,935		$	97,482

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	2,235		$	1,644
Accrued expenses		7,780			6,371
Total current liabilities		10,015			8,015

Total liabilities		10,015			8,015

Commitments and contingencies (Note 9)

Shareholders' equity:
Preferred stock: authorized 5,000,000 shares of $0.01 par value; none issued or outstanding as of October 31, 2011 and 2010		-			-
Common stock: authorized 20,000,000 shares of $0.01 par value; issued and outstanding, 11,167,690 and 11,228,654 as of October 31, 2011 and 2010, respectively		112			112
Additional paid-in capital		59,832			61,780
Accumulated other comprehensive (loss) income		(34	)		26
Retained earnings		36,010			27,549
Total shareholders' equity		95,920			89,467
Total liabilities and shareholders' equity	$	105,935		$	97,482

The accompanying notes are an integral part of these consolidated financial statements

SYNOVIS LIFE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(in thousands, except share data)

	Common Stock						Additional Paid-In			Accumulated Other Comprehensive			Retained
		Shares			Par Value			Capital			Income (Loss)			Earnings		Total
Balance as of October 31, 2008		12,018,670		$	120		$	72,181		$	(2,407	)	$	19,967	$	89,861
Stock option exercises, including tax benefit		89,376			1			927			-			-		928
Employee Stock Purchase Plan activity		7,065			-			98			-			-		98
Repurchase of the Company's common stock		(716,237	)		(7	)		(11,011	)		-			-		(11,018	)
Stock-based compensation expense		-			-			937			-			-		937
Comprehensive income:
Net unrealized gain on investments		-			-			-			2,499			-		2,499
Net income		-			-			-			-			2,706		2,706
Comprehensive income		-			-			-			-			-		5,205
Balance as of October 31, 2009		11,398,874			114			63,132			92			22,673		86,011
Stock option exercises, including tax benefit		204,807			2			2,140			-			-		2,142
Employee Stock Purchase Plan activity		10,809			-			150			-			-		150
Repurchase of the Company's common stock		(385,836	)		(4	)		(5,097	)		-			-		(5,101	)
Stock-based compensation expense		-			-			1,455			-			-		1,455
Comprehensive income:
Net unrealized loss on investments		-			-			-			(66	)		-		(66	)
Net income		-			-			-			-			4,876		4,876
Comprehensive income		-			-			-			-			-		4,810
Balance as of October 31, 2010		11,228,654			112			61,780			26			27,549		89,467
Stock option exercises, including tax benefit		378,468			4			4,223			-			-		4,227
Employee Stock Purchase Plan activity		10,690			-			174			-			-		174
Repurchase of the Company's common stock		(450,122	)		(4	)		(7,576	)		-			-		(7,580	)
Stock-based compensation expense		-			-			1,231			-			-		1,231
Comprehensive income:
Net unrealized loss on investments		-			-			-			(60	)		-		(60	)
Net income		-			-			-			-			8,461		8,461
Comprehensive income		-			-			-			-			-		8,401
Balance as of October 31, 2011		11,167,690		$	112		$	59,832		$	(34	)	$	36,010	$	95,920

The accompanying notes are an integral part of these consolidated financial statements

SYNOVIS LIFE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

For the fiscal years ended October 31,	2011			2010			2009

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	8,461		$	4,876		$	2,706

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, plant and equipment		1,154			1,228			1,017
Amortization of intangible assets		734			782			539
Amortization of investment premium, net		1,263			1,626			1,027
Provision for uncollectible accounts		250			204			149
Stock-based compensation		1,231			1,455			937
Tax benefit from stock option exercises		(522	)		(296	)		(203	)
Acquired in-process research and development expense		-			-			3,500
Loss on sale of investments		-			-			1,350
Impairment of intangible assets		-			-			600
Loss on sale or disposal of property, plant and equipment		25			192			25
Change in deferred income taxes		(107	)		(117	)		(2,206	)

Changes in operating assets and liabilities:
Accounts receivable		(2,811	)		(1,980	)		(953	)
Inventories		(565	)		(1,709	)		62
Other current assets		(258	)		40			677
Accounts payable		591			(318	)		637
Accrued expenses		1,931			920			(118	)
Net cash provided by operating activities		11,377			6,903			9,746

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment		(1,932	)		(1,102	)		(1,156	)
Investments in identifiable intangible assets		(316	)		(123	)		(105	)
Purchase of assets of Pegasus Biologics, Inc.		-			-			(12,319	)
Purchases of investments		(51,116	)		(79,397	)		(43,226	)
Redemptions of investments		50,228			73,618			23,405
Decrease in restricted cash		-			-			2,950
Other		-			(2	)		(335	)
Net cash used in investing activities		(3,136	)		(7,006	)		(30,786	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds related to stock-based compensation plans		3,879			1,996			823
Repurchase of the Company's common stock		(7,580	)		(5,101	)		(11,018	)
Excess tax benefit of stock option exercises		522			296			203
Net cash used in financing activities		(3,179	)		(2,809	)		(9,992	)

Net change in cash and cash equivalents		5,062			(2,912	)		(31,032	)
Cash and cash equivalents at beginning of year		12,951			15,863			46,895
Cash and cash equivalents at end of year	$	18,013		$	12,951		$	15,863

The accompanying notes are an integral part of these consolidated financial statements

SYNOVIS LIFE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.	Business Description and Summary of Significant Accounting Policies (in thousands):

Synovis Life Technologies, Inc. develops, manufactures, and markets biological and mechanical products used by several surgical specialties for the repair of soft tissue damaged or destroyed by disease or injury. Our products are designed to reduce risks and/or facilitate critical surgeries, improve patient outcomes, and reduce healthcare costs. Our products serve a wide array of medical markets, including general surgery, bariatric, vascular, cardiac, thoracic, neurological, microsurgery, orthopedic, and woundcare.

Basis of Consolidation: The consolidated financial statements include the accounts of Synovis Life Technologies, Inc. and its wholly owned subsidiaries, after elimination of intercompany accounts and transactions.

Use of Estimates: The preparation of consolidated financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Cash and Cash Equivalents: Cash and cash equivalents consist of cash and highly liquid investments purchased with an original maturity of three months or less when purchased. These investments are carried at cost, which approximates fair value. Cash amounts typically are in excess of federally insured limits.

Investments: Our investments consist of taxable and tax-exempt commercial paper, corporate notes/ bonds, and municipal bond investments. Our investment policy seeks to manage these assets to achieve our goal of preserving principal, maintaining adequate liquidity at all times, and maximizing returns subject to our investment guidelines. We account for all of our investments as “available-for-sale” and report these investments at fair value, with unrealized gains and losses excluded from earnings and reported in “Accumulated Other Comprehensive Income,” a component of shareholders’ equity.

Accounts Receivable: Credit is extended based on evaluation of a customer’s financial condition, historical sales and payment history. Generally, collateral is not required. Accounts receivable are generally due within 30 to 90 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts receivable outstanding longer than the contractual payment terms are considered past due. We determine our allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, the customer’s current ability to pay its obligation to us, and the condition of the general economy and the industry as a whole. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

Inventories: Inventories, which are comprised of raw materials, work in process, and finished goods, are valued at the lower of cost, first-in, first-out (“FIFO”) or market. Overhead costs are applied to work in process and finished goods based on annual estimates of production volume and overhead spending. These estimates are reviewed and assessed for reasonableness on a quarterly basis and adjusted if so needed. The estimated value of excess, slow-moving, and obsolete inventory as well as inventory with a carrying value in excess of its net realizable value is established on a quarterly basis through review of inventory on hand and assessment of future product demand, anticipated release of new products into the market, historical experience, and product expiration.

Property, Plant, and Equipment: Property, plant, and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the related assets. Furniture, fixtures, and computer equipment are depreciated over a 3 to 7 year life, and manufacturing equipment is depreciated over a 5 to 10 year life. Amortization of leasehold improvements is recorded on a straight-line basis over the life of the related facility leases or the estimated useful life of the assets, whichever is shorter. Major replacements and improvements are capitalized and maintenance and repairs, which do not improve or extend the useful lives of the respective assets, are charged to operations. The asset and related accumulated depreciation or amortization accounts are adjusted for asset retirements and disposals with the resulting gain or loss, if any, recorded in the Consolidated Statements of Income at the time of disposal. Our long-lived depreciable assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset in question may not be recoverable. Impairment losses are recorded whenever the fair value of the asset is determined to be lower than its carrying amount.

Indefinite-lived Intangible Assets: Our indefinite-lived intangible assets consist of goodwill, which is carried at cost. Indefinite-lived intangible assets are not amortized, but are required to be reviewed annually for impairment, and between annual test dates in certain circumstances. We perform an annual impairment test for goodwill in the fourth quarter of each fiscal year, or more often as circumstances require. In assessing the recoverability of goodwill, estimates of market capitalization and other factors are made to determine the fair value of the respective assets. If these estimates change in the future, we may be required to record impairment charges for these assets.Recoverability is assessed by comparison of the fair value of the Company to its carrying amount to determine if there is potential impairment. If the fair value of the Company is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the Company is less than its carrying value. If the carrying amount of the goodwill exceeds the fair value, an impairment loss is recognized.

Shipping and Handling: We record all amounts billed to customers in a sales transaction related to shipping and handling as net revenue. We record costs related to shipping and handling in cost of revenue.

Research and Development: Research and development costs are expensed as incurred.

Net Earnings Per Share: Basic earnings per share (“EPS”) is computed based on the weighted average number of common shares outstanding, while diluted EPS is computed based on the weighted average number of common shares outstanding, adjusted by the weighted average number of additional shares that would have been outstanding had the potential dilutive common shares been issued. Potential dilutive shares of common stock include stock options and other stock-based awards granted under the Company’s stock-based compensation plans, when their impact is not anti-dilutive. See Note 11 for additional earnings per share information.

Reclassifications: Certain reclassifications have been made to the fiscal 2009 and fiscal 2010 consolidated financial statements to conform to the fiscal 2011 presentation. These reclassifications had no effect on net income or earnings per share.

Subsequent Events: Management has evaluated the impact of events occurring after October 31, 2011 up to the date of issuance of these consolidated financial statements. These statements contain all necessary adjustments and disclosures resulting from that evaluation. See Note 15 to our consolidated financial statements for subsequent events disclosure.

2.	Acquisition of Business (in thousands):

On July 17, 2009, we, through our wholly-owned subsidiary Ortho & Wound, completed the acquisition of substantially all of the assets of Pegasus Biologics, Inc. (“Pegasus”) from Comerica Bank (“Comerica”) pursuant to a Foreclosure Sale Agreement with Comerica dated as of July 2, 2009 (the “Foreclosure Sale Agreement”). The acquisition resulted from a sealed bid auction process after Pegasus effectively ceased operations when attempts to raise additional operating capital were unsuccessful. Pegasus, a privately held medical device company based in Irvine, California, focused on the development of advanced biological solutions for soft tissue repair.

We paid $12,100 in cash to Comerica for the assets transferred. We purchased the assets on an “as is,” “where is” basis and without recourse, subject to the representations and warranties provided for in the Foreclosure Sale Agreement.

Operating results for Ortho & Wound from July 17, 2009 to October 31, 2009 are included in the Consolidated Statement of Income for the fiscal year ended October 31, 2009.

We accounted for the acquisition of the assets of Pegasus under the purchase method of accounting. Accordingly, the purchase price was allocated to the tangible and intangible assets acquired based on our determination of fair value at the acquisition date, and are consolidated with those of the Company. The purchase price allocation was based upon estimates of the fair value of the assets acquired. Determination of fair value required the use of significant assumptions and estimates, including but not limited to, expected utilization of acquired inventory, future expected cash flows and applicable discount rates. We used the income approach to determine the fair value of the acquired intangible assets.

The following provides further information on the purchase price allocations:

Purchase Price

Cash payment	$	12,100
Acquisition related costs		219
Total consideration	$	12,319

Purchase Price Allocation

Accounts receivable	$	50
Inventory		2,053
Other current assets		42
Property and equipment		674
Identifiable intangible assets
- Developed technology		6,000
- Acquired in-process research and development		3,500
Assets acquired	$	12,319

In accordance with GAAP, we expensed the acquired in-process research and development costs of $3,500 in fiscal 2009. This expense was recorded as “other” operating expense in the Consolidated Statement of Income for fiscal 2009. We assigned an eleven year weighted average amortization period to the identifiable developed technology assets. As we assigned the entire purchase price to tangible and identifiable intangible assets, none of the preliminary purchase price was allocated to goodwill.

Pro Forma Results of Operations:

The following unaudited pro forma financial information presents a summary of our consolidated results of operations as if the acquisition of the assets of Pegasus had occurred at the beginning of the earliest period presented. The unaudited pro forma results presented below assume the in-process research and development expense of $3,500 occurred as of November 1, 2008. Annual amortization expense of $545 related to acquired developed technology is reflected on a pro rata basis in fiscal 2009. The historical consolidated financial information has been adjusted to give effect to pro forma events that are directly attributable to the acquisition and are factually supportable. The unaudited pro forma condensed consolidated financial information is presented for informational purposes only. The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the acquisition been completed at the dates indicated. In addition, the unaudited pro forma condensed consolidated financial information does not purport to project our future financial position or operating results after completion of the acquisition.

The following provides unaudited pro forma financial information for the fiscal year ended October 31, 2009, assuming we consummated the purchase of the assets from Pegasus as of November 1, 2008:

	Fiscal Year Ended October 31, 2009
	(unaudited)

Net revenue	$	61,853

Net income (loss)	$	(2,266	)

Net income (loss) per share – basic	$	(0.20	)

Net income (loss) per share – diluted	$	(0.19	)

3.	Segment Information (in thousands):

The Company’s operations, which are presently based in Minnesota, Alabama and California, are comprised of three operating segments, the surgical business, the microsurgical business and the Ortho & Wound business, with segmentation based upon the similarities of the underlying business operations, products and markets. The Company evaluates the performance of its operating segments and allocates resources based upon their respective current or future earnings contribution to the consolidated earnings of the Company as well as upon each segment’s organizational initiatives and activities in process at that time. The accounting policies of the reportable segments are the same as those described in the summary of accounting policies.

The following table presents certain financial information by operating segment as of and for the fiscal year ended October 31:

	2011			2010			2009
Net revenue:
Surgical business	$	63,659		$	55,667		$	49,478
Microsurgical business		15,190			11,020			8,668
Ortho & Wound business		3,514			1,878			65
Consolidated	$	82,363		$	68,565		$	58,211

Operating income (loss):
Surgical business	$	17,807		$	13,848		$	11,129
Microsurgical business		3,514			2,242			1,145
Ortho & Wound business		(5,471	)		(5,851	)		(5,291	)
Corporate and other		(3,488	)		(2,904	)		(2,981	)
Consolidated	$	12,362		$	7,335		$	4,002

Depreciation and amortization:
Surgical business	$	989		$	1,017		$	1,017
Microsurgical business		149			186			288
Ortho & Wound business		750			807			251
Consolidated	$	1,888		$	2,010		$	1,556

Capital expenditures:
Surgical business	$	1,811		$	929		$	1,111
Microsurgical business		22			158			45
Ortho & Wound business		99			15			-
Consolidated	$	1,932		$	1,102		$	1,156

Total assets:
Surgical business	$	20,964		$	17,852		$	16,504
Microsurgical business		5,741			5,087			4,635
Ortho & Wound business		9,394			9,495			8,732
Corporate and other		69,836			65,048			63,849
Consolidated	$	105,935		$	97,482		$	93,720

4.	Supplemental Financial Statement Information (in thousands):

The following table summarizes selected balance sheet data as of October 31:

	2011			2010
Accounts receivable, net:
Trade receivables	$	11,885		$	9,104
Allowance for doubtful accounts		(623	)		(403	)
	$	11,262		$	8,701

Inventories:
Raw materials	$	1,198		$	1,376
Work in process		5,309			3,533
Finished goods		3,491			4,524
	$	9,998		$	9,433

Property, plant and equipment, net:
Furniture, fixtures, and computer equipment	$	3,254		$	3,035
Manufacturing equipment		6,159			5,701
Leasehold improvements		3,271			3,162
Equipment in process		1,489			534
Accumulated depreciation and amortization		(10,019	)		(9,031	)
	$	4,154		$	3,401

Accrued expenses:
Payroll, employee benefits and related taxes	$	3,986		$	4,191
Accrued income taxes		2,198			628
Other accrued expenses		1,596			1,552
	$	7,780		$	6,371

Supplemental Cash Flow Information: Our income tax payments totaled $3,287, $3,054, and $850 for the years ended October 31, 2011, 2010, and 2009, respectively. Our income tax refunds received totaled $1,109, $4, and $118 for the years ended October 31, 2011, 2010, and 2009, respectively.

The following table summarizes our amortizable intangible assets for the fiscal years ended October 31:

	2011

	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value		Weighted Average Amortization Period
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value		Weighted Average Amortization Period

Patents and trademarks	$	1,626	$	691	$	935	14.6 years
Developed technology		7,418		2,670		4,748	10.8 years
Non-competes and other		634		634		-	5.7 years
Licenses		100		19		81	11.0 years
Total	$	9,778	$	4,014	$	5,764

	2010

	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value		Weighted Average Amortization Period
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value		Weighted Average Amortization Period

Patents and trademarks	$	1,310	$	649	$	661	14.0 years
Developed technology		7,418		1,993		5,425	10.8 years
Non-competes and other		634		628		6	5.7 years
Licenses		100		10		90	11.0 years
Total	$	9,462	$	3,280	$	6,182

Amortization expense for the intangible assets listed above was $734, $782, and $539 in fiscal 2011, 2010, and 2009, respectively. Our estimated amortization expense for each of the next five years is expected to be approximately $675 per year based on the current amortizable intangible assets owned by the Company.

5.	Supplemental Net Revenue Information (in thousands):

The following table summarizes net revenues by product line for the fiscal years ended October 31:

Net Revenues by Product Line:	2011		2010		2009
Peri-Strips	$	23,675	$	19,414	$	19,384
Tissue-Guard		18,407		16,550		15,806
Veritas		15,829		14,368		8,757
Microsurgery		15,190		11,020		8,668
Surgical Tools and Other		5,748		5,335		5,531
Orthopedic and Wound		3,514		1,878		65
Total	$	82,363	$	68,565	$	58,211

Substantially all of our international net revenues are negotiated, invoiced, and paid in U.S. dollars. The following table summarizes net revenues by geographic area for the years ended October 31:

Net Revenues by Geographic Area:	2011		2010		2009
United States	$	70,130	$	57,700	$	49,290
Europe		8,106		7,652		6,094
Asia and Pacific region		1,491		1,325		963
Canada		1,167		874		817
Other		1,469		1,014		1,047
Total	$	82,363	$	68,565	$	58,211

6.	Investments (in thousands):

The following table summarizes our cash, cash equivalents and investments at October 31, 2011 and 2010:

	October 31, 2011
	Amortized Cost		Unrealized Gain (Loss)			Estimated Fair Value

Cash	$	11,854	$	-		$	11,854
Money Market Funds		6,159		-			6,159
Municipal Bonds		24,911		7			24,918
Commercial Paper		5,984		(7	)		5,977
Corporate Notes/Bonds		17,677		(34	)		17,643
Total	$	66,585	$	(34	)	$	66,551

Cash and cash equivalents	$	18,013	$	-		$	18,013
Short-term investments		41,214		(11	)		41,203
Long-term investments		7,358		(23	)		7,335
Total	$	66,585	$	(34	)	$	66,551

	October 31, 2010
	Amortized Cost		Unrealized Gain (Loss)			Estimated Fair Value

Cash	$	7,416	$	-		$	7,416
Money Market Funds		5,535		-			5,535
Municipal Bonds		30,864		(8	)		30,856
Commercial Paper		1,994		3			1,997
Corporate Bonds		15,089		30			15,119
Treasuries and Agencies		1,000		1			1,001
Total	$	61,898	$	26		$	61,924

Cash and cash equivalents	$	12,951	$	-		$	12,951
Short-term investments		41,079		40			41,119
Long-term investments		7,868		(14	)		7,854
Total	$	61,898	$	26		$	61,924

At October 31, 2011, our long-term investments mature in fiscal 2013.

7.	Fair Value Measurments (in thousands):

The accounting guidance for fair value measurements and disclosures provides a single definition of fair value and requires enhanced disclosures about assets and liabilities measured at fair value. A hierarchal framework for disclosing the observability of the inputs utilized in measuring assets and liabilities at fair value is established by this guidance. The three levels in the hierarchy are as follows:

Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices.

Level 2 — Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reporting date. The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, or priced with discounted cash flow or option pricing models using highly observable inputs.

Level 3 — Significant inputs to pricing have little or no observability as of the reporting date. The types of assets and liabilities included in Level 3 are those valued with models requiring significant management judgment or estimation.

The following table presents for each of the hierarchy levels, the Company’s assets that are carried at fair value and measured on a recurring basis at October 31, 2011 and 2010:

			Fair Value Measurements at October 31, 2011 Using
	Total Carrying Value at October 31, 2011		Quoted Price in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Investments:
Municipal Bonds	$	24,918	$	—	$	24,918	$	—
Commercial Paper		5,977		—		5,977		—
Corporate Notes/Bonds		17,643		—		17,643		—
Total investments	$	48,538	$	—	$	48,538	$	—

			Fair Value Measurements at October 31, 2010 Using
	Total Carrying Value at October 31, 2010		Quoted Price in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Investments:
Municipal Bonds	$	30,856	$	—	$	30,856	$	—
Commercial Paper		1,997		—		1,997		—
Corporate Bonds		15,119		—		15,119		—
Treasuries and Agencies		1,001		—		1,001		—
Total investments	$	48,973	$	—	$	48,973	$	—

We utilize a pricing service to estimate fair value measurements for our short- and long-term investments. The pricing service utilizes market quotations for fixed maturity securities that have quoted prices in active markets. Since fixed maturities other than U.S. Treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing.

The fair value estimates provided by the pricing service for our investments are based on observable market information rather than market quotes. Accordingly, the estimates of fair value for our investments were determined based on Level 2 inputs at October 31, 2011 and 2010.

8.	Income Taxes (in thousands):

The components of our provision for (benefit from) income taxes are as follows:

For the fiscal years ended October 31,	2011			2010			2009
Current:
Federal	$	3,359		$	2,218		$	2,752
State		960			642			320
		4,319			2,860			3,072
Deferred:
Federal		(96	)		(108	)		(2,016	)
State		(11	)		(9	)		(190	)
		(107	)		(117	)		(2,206	)
Total income tax expense	$	4,212		$	2,743		$	866

A reconciliation of our effective income tax rate and the federal statutory rate is as follows:

For the fiscal years ended October 31,	2011			2010			2009
Income before income taxes	$	12,673		$	7,619		$	3,572
Statutory federal rate		4,336			2,591			1,215
State taxes, net of federal benefit		628			410			112
Tax exempt interest		(35	)		(54	)		(169	)
Other permanent differences		(308	)		(109	)		(117	)
Change in deferred tax rate		(92	)		-			-
Research and development credits		(317	)		(95	)		(175	)

Provision for income taxes	$	4,212		$	2,743		$	866

Components of deferred income tax assets and liabilities are as follows:

As of October 31,	2011			2010
Inventory	$	360		$	316
Other, net		87			51
Net current deferred income tax assets		447			367
Depreciation		(126	)		(26	)
Stock-based compensation expense		931			768
Intangible asset amortization		1,361			1,397
Net long-term deferred income tax assets		2,166			2,139

Net deferred income tax assets	$	2,613		$	2,506

A net income tax payable of $2,198 was recorded at October 31, 2011, as compared to $628 at October 31, 2010. A tax benefit of $522, $296, and $203 related to the exercise of stock options was recorded to additional paid-in capital in fiscal 2011, 2010, and 2009, respectively.

The Company files a consolidated federal income tax return. The statute of limitations applicable to the Company’s 2007 federal income tax return expired in July 2011. The statute of limitations applicable to the Company’s 2008 federal income tax return expires in July 2012. The IRS commenced an examination of our Federal income tax return for tax year 2009 in the fourth quarter of 2011.

Uncertain tax positions:Significant judgment is required in evaluating our uncertain tax positions. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes may be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of a tax audit or changes in the tax law. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate. At October 31, 2011, we had unrecognized tax benefits of $430.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

For the fiscal years ended October 31,	2011			2010			2009

Beginning balance	$	393		$	435		$	387
Additions for current period tax positions		134			185			48
Lapse of applicable statutes of limitations		(97	)		(227	)		0
Ending balance	$	430		$	393		$	435

Our policy is to include interest and penalties related to our tax contingencies in income tax expense.

The Company does not have any net operating loss or tax credit carryforward amounts as of October 31, 2011.

9.	Commitments and Contingencies (in thousands):

Operating Leases: We are committed under non-cancelable operating leases for our office and production facilities. At October 31, 2011, the remaining terms on the leases range from one to four years. In addition to base rent charges, we also pay apportioned real estate taxes and common costs on our St. Paul, MN and Irvine, CA leased facilities. We have an option to renew our St. Paul, MN lease prior to December 31, 2013 for an additional three or five year period at fair market value. Total facilities rent expense, including real estate taxes and common costs, was $1,502, $1,464, and $1,200 for the fiscal years ended October 31, 2011, 2010, and 2009, respectively.

As of October 31, 2011, future minimum lease payments, excluding real estate taxes and common costs, due under existing non-cancelable operating leases are as follows:

Fiscal years ended October 31,
2012	$	1,027
2013		827
2014		180
2015		23
	$	2,057

Royalties: We incurred royalty expense, primarily related to revenue from Peri-Strips and our Ortho & Wound products, of approximately $984, $827, and $753 for the years ended October 31, 2011, 2010, and 2009, respectively, which is included in cost of revenue. Royalty expense included minimum royalties we are obligated to pay on sales of our Ortho & Wound products, which totals $135 per year.

10.	Shareholders’ Equity (in thousands except share and per share data):

Authorized Shares: Our authorized capital stock consists of 20,000,000 shares of common stock and 5,000,000 shares of undesignated preferred stock.

Shareholder Rights Agreement: On June 1, 2006, our board of directors declared a dividend distribution of one common stock purchase right for each outstanding share of our common stock, payable to shareholders of record at the close of business on June 11, 2006. The description and terms of the rights are set forth in a Rights Agreement (the “Rights Agreement”), dated as of June 1, 2006, between us and American Stock Transfer & Trust Company, as Rights Agent. The Rights Agreement was approved by the shareholders at our 2007 Annual Meeting of Shareholders.

Upon certain acquisition events set forth in the Rights Agreement, each holder of a right other than certain “acquiring persons,” will have the right to receive upon exercise for a purchase price equal to ten times the purchase price of the right, shares of our common stock (or in certain circumstances, cash, property or other securities) having a market value equal to 20 times the purchase price.

Subsequent to October 31, 2011, the Rights Agreement was amended. See Note 15 to the consolidated financial statements for additional information.

Stock-Based Compensation: Our current stock-based compensation plans consist of our 2006 Stock Incentive Plan, as amended (the “2006 Plan”), and an Employee Stock Purchase Plan (“ESPP”). Under the 2006 Plan, we are authorized to issue up to 1,500,000 shares of our common stock, plus 125,645 shares becoming available under our prior 1995 Stock Incentive Plan or issued or assumed by us in certain merger or acquisition transactions, pursuant to incentive awards granted under the plan. At October 31, 2011, 341,962 shares remained available for grant under the 2006 Plan. Under the ESPP, we are authorized to sell and issue up to 400,000 shares of our common stock to our employees. At October 31, 2011, a total of 90,831 shares remained available for issuance under the ESPP.

The 2006 Plan was approved by our shareholders in February 2006, and amended in 2009 as approved by our shareholders in March 2009. The 2006 Plan permits us to grant incentive stock options, non-qualified stock options, and other share-based awards to eligible recipients for up to 1,500,000 shares of our common stock, plus 125,645 shares or awards outstanding under our prior 1995 Stock Incentive Plan as of its expiration which were subsequently cancelled or forfeited. The grant price of an option under the 2006 Plan may not be less than the fair market value of the common stock subject to the option as of the grant date. The term of any options granted under the 2006 Plan may not exceed seven years from the date of grant. As of October 31, 2011, 1,504,144 stock options have been granted under the 2006 Plan; 220,461 of the stock options granted under the 2006 Plan have subsequently been forfeited and are again available for grant under the 2006 plan.

We recognized compensation expense for stock-based compensation awards on a straight-line basis over the requisite service period of all stock-based compensation awards granted to, but not yet vested. Total stock-based compensation expense included in our Statements of Income for the years ended October 31, 2011, 2010, and 2009 was $1,231 ($775, net of tax), $1,455 ($1,013, net of tax), and $937 ($804, net of tax), respectively.

We estimated the fair values of our stock options using the Black-Scholes option-pricing model. The Black-Scholes option valuation weighted average assumptions used in the valuation of stock options for the fiscal years ended October 31, 2011, 2010, and 2009 were as follows:

	2011			2010			2009
Risk-free rate (1)		0.70	%		1.90	%		1.10	%
Expected dividend yield	None			None			None
Expected stock volatility (2)		55	%		54	%		50	%
Expected life of stock options (3)	3.5 years			4.0 years			3.0 years
Fair value per option		$6.09 - $7.88			$5.11 - $6.93			$4.30 - $7.41
Forfeiture rate		14	%		10	%		8	%

(1)

Based on U.S Treasury Strip interest rates which have a term that is consistent with the expected life of the stock options.

(2)

Expected stock price volatility is based on our historical volatility over a period generally consistent with the expected term of our stock options.

(3)

Expected life of stock options is estimated based on historical experience.

As of October 31, 2011, there was $1,608 of unrecognized compensation expense related to unvested stock options that is expected to be recognized over a weighted average period of approximately one year.

Stock Options: The exercise price of each stock option equals 100% of the market price of our common stock on the date of grant and has a maximum term of 7 years. Stock options granted to non-employee directors and employees generally vest ratably over two or three years. A summary of the status of our stock options for the years ended October 31 is as follows:

	2011					2010					2009
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding at beginning of year		1,186,978		$	11.67		736,376		$	10.48		689,761		$	9.32
Granted		51,206			18.06		728,116			12.24		161,880			15.24
Exercised		(378,246	)		9.80		(204,807	)		9.01		(89,376	)		8.12
Cancelled		(46,382	)		13.37		(72,707	)		12.91		(25,889	)		17.39
Outstanding at end of year		813,556		$	12.84		1,186,978		$	11.67		736,376		$	10.48
Options exercisable at end of year		564,192		$	12.70		722,211		$	11.23		661,201		$	9.95

The total intrinsic value of options exercised during the fiscal year ended October 31, 2011, 2010, and 2009 was $2,997, $1,210, and $737, respectively. The aggregate intrinsic value of options outstanding and exercisable as of October 31, 2011 was $2,977. The weighted-average remaining contractual term of options outstanding and exercisable as of October 31 was 3.18 years.

The following table summarizes information about stock options outstanding at October 31, 2011:

Range of Exercise Prices		Number of Options Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)		Number of Options Exercisable		Weighted Average Exercise Price of Exercisable Options
	$9.50 – $10.92		63,000	$	10.31		2.86		63,000	$	10.31
	12.00 – $12.00		526,100		12.00		4.07		339,166		12.00
	12.16 – $19.69		224,456		15.53		3.24		162,026		15.11
	$9.50 – $19.69		813,556	$	12.84		3.73		564,192	$	12.70

Employee Stock Purchase Plan: We sponsor an ESPP under which 400,000 shares of common stock were reserved for future issuance. The ESPP was established to enable our employees to invest in our common stock through payroll deductions. Shares are available to employees to purchase shares of stock at a price equal to 95% of the fair market value of the stock on the last day of each offering period. There were 10,690, 10,809, and 7,065 shares purchased through the ESPP in fiscal 2011, 2010, and 2009, respectively.

Repurchase of Common Shares: On September 29, 2009, we announced that our Board of Directors had authorized the repurchase of up to 500,000 shares of our common stock. On March 4, 2010, the Board of Directors increased the number of shares we are authorized to repurchase by an incremental 1,000,000 shares of our common stock, for a total of 1,500,000 shares to be repurchased. The share repurchase is funded using our existing cash balances and may occur either in the open market or through private transactions from time to time, in accordance with SEC regulations. The timing and extent to which we may buy back shares depends upon market conditions and other corporate considerations. The repurchase plan does not have an expiration date.

From inception of the program on September 29, 2009 through October 31, 2011, we used $15,574 to repurchase 1,056,362 shares at an average price of $14.74 per share. All shares repurchased by the Company were purchased under a Securities and Exchange Commission Rule 10b5-1 plan. The following table presents the total number of shares repurchased from September 29, 2009 through October 31, 2011, the average price paid per share and the number of shares that were purchased and the maximum number of shares that may yet be purchased at October 31, 2011, pursuant to our stock repurchase program:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total number of Shares Purchased as Part of Publicly Announced Plan or Program		Maximum Number of Shares that May Yet be Purchased Under the Plan or Program
September 29, 2009 – September 30, 2009		43,968	$	13.75		43,968		456,032
October 1, 2009 – October 31, 2009		176,436		12.97		176,436		279,596
November 1, 2009 – November 30, 2009		213,377		11.96		213,377		66,219
December 1, 2009 – December 31, 2009		-		-		-		66,219
January 1, 2010 – January 31, 2010		-		-		-		66,219
February 1, 2010 – February 28, 2010		-		-		-		66,219
March 1, 2010 – March 31, 2010		-		-		-		1,066,219
April 1, 2010 – April 30, 2010		-		-		-		1,066,219
May 1, 2010 – May 31, 2010		-		-		-		1,066,219
June 1, 2010 – June 30, 2010		-		-		-		1,066,219
July 1, 2010 – July 31, 2010		-		-		-		1,066,219
August 1, 2010 – August 31, 2010		-		-		-		1,066,219
September 1, 2010 – September 30, 2010		99,559		14.61		99,559		966,660
October 1, 2010 – October 31, 2010		72,900		15.02		72,900		893,760
November 1, 2010 – November 30, 2010		4,121		14.97		4,121		889,639
December 1, 2010 – December 31, 2010		-		-		-		889,639
January 1, 2011 – January 31, 2011		4,300		15.04		4,300		885,339
February 1, 2011 – February 28, 2011		-		-		-		885,339
March 1, 2011 – March 31, 2011		-		-		-		885,339
April 1, 2011 – April 30, 2011		-		-		-		885,339
May 1, 2011 – May 31, 2011		-		-		-		885,339
June 1, 2011 – June 30, 2011		-		-		-		885,339
July 1, 2011 – July 31, 2011		-		-		-		885,339
August 1, 2011 – August 31, 2011

SYNOVIS LIFE TECHNOLOGIES INC 10-K