Note 12.

Stock-Based Compensation Plans

Stock Option Plans

In addition to the historical options outstanding for Synergetics prior to the merger, the Company has options outstanding under two existing active option plans and two terminated plans of Valley Forge. The first active plan, the Amended and Restated Synergetics USA, Inc. (the "2001 Plan") was adopted by Valley Forge on January 16, 2001 pursuant to which 345,000 shares of common stock were reserved for issuance to employees, officers and consultants of the Company. The 2001 Plan was amended with the approval of the Valley Forge stockholders on September 19, 2005 to increase the number of share awards issuable under the 2001 Plan from 345,000 to 1,345,000. There were 209,440 options and restricted shares not yet awarded at July 31, 2012 under the 2001 Plan. On September 19, 2005, the stockholders of Valley Forge voted to adopt the Valley Forge Scientific Corp. 2005 Non-Employee Directors' Stock Option Plan (the "Non-Employee Directors' Plan") and voted to authorize up to 200,000 shares issuable upon exercise of options granted thereunder. On December 11, 2008, the stockholders of the Company voted to increase the number of shares authorized for issuance under the Non-Employee Directors' Plan from 200,000 to 400,000. There were 90,000 options available for future grants at July 31, 2012 under this plan. Generally, options were granted with an exercise price equal to fair market value at the date of grant and expire 10 years from the date of the grant. Generally, stock options granted under these plans vest over a three to five-year period, with the exception of the non-employee director options, which vest over a 12-month period.

A summary of the status of the fixed awards at July 31, 2012, 2011 and 2010 and changes during the years ended on those dates is as follows:

	Shares			Weighted Average Exercise Price		Weighted Average Fair Value
Options outstanding, July 31, 2009		527,735		$	2.10	$	1.74
For the period from August 1, 2009 through July 31, 2010:
Granted		127,500		$	1.37	$	1.10
Forfeited		(14,770	)	$	0.94	$	0.78
Exercised		(63,770	)	$	1.07	$	0.93
Options outstanding, July 31, 2010		576,695		$	2.08	$	1.71
For the period from August 1, 2010 through July 31, 2011:
Granted		108,751		$	4.43	$	3.56
Forfeited		(27,000	)	$	3.21	$	2.71
Exercised		(141,417	)	$	1.49	$	1.29
Options outstanding, July 31, 2011		517,029		$	2.68	$	2.16
For the period from August 1, 2011 through July 31, 2012
Granted		235,734		$	6.21	$	4.75
Forfeited		(56,133	)	$	4.11	$	3.22
Exercised		(16,885	)	$	2.07	$	1.99
Options outstanding, July 31, 2012		679,745		$	3.80	$	2.98

Options exercisable, July 31, 2012		449,099		$	3.06	$	2.43

A further summary about awards outstanding at July 31, 2012 is as follows:

	Shares			Weighted Average Grant Date Value
Unvested options, beginning of period		141,188		$	3.04
Granted		235,734		$	6.21
Vested		(104,612	)	$	4.74
Forfeited		(41,664	)	$	4.54
Unvested options, period end		230,646		$	5.24

Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised were as follows (dollars in thousands), except exercise price:

	Fiscal Year Ended
	July 31, 2012		July 31, 2011		July 31, 2010
Proceeds of options exercised	$	35	$	210	$	68
Related tax benefit recognized		24		125		31
Intrinsic value of options exercised		34		183		59

The following table provides information about options outstanding and exercisable options at July 31, 2012 (dollars in thousands):

	Options Outstanding		Exercisable Options
Number		679,745		449,099
Weighted average exercise price	$	3.80	$	3.06
Aggregate intrinsic value	$	2,023	$	1,091
Weighted average contractual term	7.0 years		6.0 years

The weighted average remaining life for options outstanding and weighted average exercise price per share for exercisable options at July 31, 2012 were as follows:

		Options Outstanding			Exercisable Options
		Shares		Weighted Average Remaining Contractual Life (in years)	Shares		Weighted Average Remaining Contractual Life (in years)
$	< 1.00		45,000	6.5 years		45,000	6.5 years
$	1.00 - $ 2.00		188,893	5.6 years		155,060	5.1 years
$	2.01 - $ 6.00		445,852	7.7 years		249,039	6.4 years
Total			679,745	7.0 years		449,099	6.0 years

During the second quarter of fiscal 2012, there were options to purchase 60,000 shares of common stock granted to the Company's independent directors, which vest pro-ratably on a quarterly basis over the next year of service. Each independent director receives an option to purchase 10,000 shares of the Company's common stock each year in which he or she is elected, appointed, or re-elected to serve as a director pursuant to the Amended and Restated 2005 Non-Employee Directors' Stock Option Plan. These options vest pro-ratably on a quarterly basis over the next year of service on the Board. The Company recorded $158,000 of compensation expense for the fiscal year ended July 31, 2012, with respect to these options. The Company recorded $59,000 of compensation expense for the fiscal year ended July 31, 2012 for previously granted options.

During the second quarter of fiscal 2012 there were options to purchase 175,734 shares of common stock granted to the officers of the Company. These options were granted in conjunction with the Company's annual review of compensation as of August 1, 2011 and vest on a quarterly basis over the next five years of service. The Company recorded $88,000 of compensation expense for the fiscal year ended July 31, 2012, related to these options. In addition, the Company recorded $66,000 of compensation expense for the fiscal year ended July 31, 2012 for previously granted options.

The Company expects to issue new shares as options are exercised. As of July 31, 2012, the future compensation cost expected to be recognized for currently outstanding stock options is approximately $305,000 in fiscal 2013, $192,000 in fiscal 2014, $183,000 in fiscal 2015, $156,000 in fiscal 2016 and $59,000 in fiscal 2017.

The following table provides the weighted average fair value of options granted and the assumptions used in the Black-Scholes model:

	Fiscal Year Ended July 31,
	2012			2011			2010
Expected average risk-free interest rate		1.92	%		3.30	%		2.35	%
Expected average life (in years)		10			10			10
Expected volatility		71.4	%		75.4	%		77.8	%
Expected dividend yield		0.0	%		0.0	%		0.0	%

The expected average risk-free rate is based on 10-year U.S. treasury yield curve in December of 2011. The expected average life represents the period of time that options granted are expected to be outstanding giving consideration to vesting schedules, historical exercise and forfeiture patterns. Expected volatility is based on historical volatilities of Synergetics USA, Inc.'s common stock. The expected dividend yield is based on historical information and management's plan. The Company expects to issue new shares as options are exercised.

Restricted Stock Plans

Under the Company's 2001 Plan, the Company's common stock may be granted at no cost to certain employees and consultants of the Company. Certain plan participants are entitled to cash dividends and voting rights for their respective shares. Restrictions limit the sale or transfer of these shares during a vesting period whereby the restrictions lapse either pro-ratably over a three-year or five-year vesting period or at the end of the third or fifth year. These shares also vest upon a change of control event. Upon issuance of stock under the 2001 Plan, unearned compensation equivalent to the market value at the date of the grant is charged to stockholders' equity and subsequently amortized to expense over the applicable restriction period. As of July 31, 2012, there was approximately $1.2 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company's 2001 Plan. The cost is expected to be recognized over a weighted average period of four years which is generally the vesting period.

In addition, during the fiscal year ended July 31, 2012, 5,593 shares were granted to advisory consultants under the 2001 Plan. Compensation expense related to these shares was $36,000 for the fiscal year ended July 31, 2012.

The following table provides information about restricted stock grants during the fiscal year ended July 31, 2012, 2011 and 2010:

	Number of Shares		Weighted Average Grant Date Fair Value
Balance as of July 31, 2009		112,076	$	2.95
Granted		176,885	$	1.36
Forfeited		2,000	$	3.04
Balance as of July 31, 2010		286,961	$	2.04
Granted		43,846	$	4.43
Balance as of July 31, 2011		330,807	$	2.36
Granted		202,072	$	6.37
Forfeited		35,365	$	5.93
Balance as of July 31, 2012		497,514	$	3.75

Compensation expense associated with stock-based compensation plans as of July 31, 2012, 2011 and 2010 was as follows (dollars in thousands):

	July 31, 2012		July 31, 2011		July 31, 2010
Stock Options:
Directors	$	217	$	100	$	34
Employees		154		60		28
Total	$	371	$	160	$	62
Restricted Stock
Employees	$	357	$	154	$	114
Advisors		36		44		111
Total		393		198		225
Total Compensation Expense	$	764	$	358	$	287
Income Tax benefits from Share-based Compensation	$	225	$	108	$	100