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 under the heading "Risk Factors."

Overview

Synovis Life Technologies, Inc. is a diversified medical device company engaged in developing, manufacturing, marketing and selling implantable biomaterial products, devices for microsurgery and surgical tools, all designed to reduce risk and/or facilitate critical surgeries, improve patient outcomes and reduce health care costs. Our products serve a wide array of medical markets, including general surgery, bariatric, vascular, cardiac, thoracic, neurological and microsurgery.

As discussed in Note 2 to our consolidated financial statements, we completed the sale of substantially all of the assets of our interventional business on January 31, 2008. The pre-tax gain on the sale totaled $11,423,000. Income taxes recorded on the gain were $6,083,000 resulting in a net gain of $5,340,000. We also recorded a net loss related to the operation of discontinued operations in fiscal 2008 of $20,000.

Operating Results - 2008 ($ in thousands except per share data)

Net revenue increased 32% during fiscal 2008 to $49,800 from $37,691 in fiscal 2007. Our operating income was $7,194 in fiscal 2008, compared to $2,468 in the prior year. The increase in profitability was due to higher revenues and gross margins, partially offset by increased operating expenses. Net income from continuing operations for fiscal 2008 was $6,165, or 48 cents per diluted share, up from $3,292, or 26 cents per diluted share during fiscal 2007.

Net income in fiscal 2008, including the gain on sale of discontinued operations and operating results from discontinued operations, was $11,485 or 90 cents per diluted share, as compared to $3,810, or 30 cents per diluted share in fiscal 2007.

The following table summarizes our net revenue by product group and geography for fiscal 2008 and fiscal 2007:

                                                 2008         2007

                  Peri-Strips                  $ 17,653     $ 13,788
                  Biomaterial Patch Products     18,945       13,433
                  Devices for Microsurgery        7,749        5,439
                  Surgical Tools and Other        5,453        5,031

                  Total                        $ 49,800     $ 37,691

                  Domestic                     $ 42,190     $ 32,063
                  International                   7,610        5,628

                  Total                        $ 49,800     $ 37,691

The increase in net revenue in fiscal 2008 compared to the prior-year was primarily due to the following:

• Incremental worldwide units sold (inclusive of new product introductions) and product mix changes increased revenue approximately $10,100; and

• Higher average net selling prices primarily due to various worldwide hospital list price increases for certain of our products increased revenues by approximately $2,000.

We believe the increase in worldwide units sold was primarily attributable to increasing effectiveness of our expanded direct sales force growing domestic product sales, as well as improved international sales as a result of product realignment based upon distributor call points. In addition, revenues have grown due to the fiscal 2007 introduction of products into new markets, most notably Veritas into the hernia and general surgery markets and PSD Veritas into the European market.

Worldwide net revenue from Peri-Strips was $17,653 in fiscal 2008, an increase of 28% from $13,788 in fiscal 2007. The increase was driven by our direct sales force growing product sales and the increased international revenue resulting from the introduction of PSD Veritas into the European market, which began during the third quarter of fiscal 2007. Peri-Strips are used to reduce risks and improve patient outcomes in several procedures, with the predominant procedure being gastric bypass surgery. Included in the Peri-Strips product line was revenue from our two linear products: PSD Veritas, our remodelable buttress, and PSD Apex, our permanent buttress, as well as revenue from our PSD Veritas Circular buttress.

Revenue from biomaterial patch products increased $5,512 or 41% to $18,945 in fiscal 2008 from $13,433 in the last fiscal year. The introduction of Veritas into the hernia and chest wall repair markets drove approximately two-thirds of the increase. Additionally, a 12% increase in worldwide Tissue-Guard units sold

and various worldwide hospital list price increases for certain of our products in the current year also contributed to the increase.

Revenue from devices for microsurgery was $7,749 in fiscal 2008, an increase of $2,310 or 42% from $5,439 in the year-ago period. The increase was attributable to the expansion of the direct sales force focused on devices for microsurgery, which has driven incremental unit growth across all products. The revenue growth was led by worldwide Coupler unit sales, which increased 41% in fiscal 2008 compared to fiscal 2007, as well as revenue from the S&T instrument product line. The Coupler is a device used to connect extremely small arteries or veins, without sutures, quickly, easily and with consistently excellent results.

Our surgical tools and other product line increased $422 or 8% to $5,453 in fiscal 2008, due primarily to various worldwide increases to hospital list prices for certain products within the product line.

Our gross margin increased four percentage points to 69% in fiscal 2008 from 65% during fiscal 2007, due primarily to the following factors:

• Higher average list selling prices for certain of our products benefited the fiscal 2008 gross margin by approximately two percentage points.

• Favorable sales mix (both product and geographic) benefited the fiscal 2008 gross margin by approximately one percentage point.

• Improved utilization of production resources and increased production efficiencies improved the current year gross margin by approximately one percentage point.

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 2008 was $23,702, an increase of $4,420 or 23% from SG&A expense of $19,282 in fiscal 2007. As a percentage of net revenue, SG&A expense was 48% in fiscal 2008 as compared to 51% in the prior-year period. The SG&A increase was driven by $3,640 of incremental sales and marketing costs, primarily attributable to the expansion of our direct sales force (which began in the third quarter of fiscal 2007 and was completed in the first quarter of fiscal 2008), various product initiatives and increased sales meeting, convention and related activities in the current year. The remainder of the increase was driven by increased general and administrative investment in new business development and technology.

In fiscal 2009, we expect to continue to expand the size of our sales force from 43 sales representatives to as many as 58 sales representatives by the end of fiscal 2009. In addition, we expect significant investment in post market clinical study activity in fiscal 2009 to provide data in support of our product lines in several market indications. As a result, we expect SG&A expense to increase significantly in fiscal 2009 as compared to fiscal 2008.

Research and development ("R&D") expense totaled $3,248 during fiscal 2008, an increase of $628 or 24% from the prior-year period, driven by increased project activity during the current-year period. Fiscal 2008 R&D activities were primarily focused on expanding the indications for use of Veritas, improving the delivery system for our Peri-Strips products and advancing the technology of the Coupler.

In fiscal 2009, we expect R&D expense to increase compared to fiscal 2008 due to several activities, including research to support current indications for use of Veritas, explore potential opportunities for further expanding the indications for use of Veritas, improve the delivery system for our Peri-Strips products and advance the technology of the Coupler, among others. R&D expense fluctuates from period to period based on the timing and progress of internal and external project-related activities and the timing of such expense will continue to be influenced primarily by the number of projects and the related R&D personnel requirements, development and regulatory approval path, and expected timing and nature of costs for each project.

We recorded operating income from continuing operations of $7,194 in fiscal 2008, an improvement of $4,726 compared to operating income of $2,468 in fiscal 2007. Interest income was $2,077 in fiscal 2008, essentially flat compared with $2,092 in fiscal 2007. While we have a significantly higher investment balance

due to the fiscal 2008 sale of our interventional business, lower market interest rates in the current year have resulted in essentially flat interest income in the current-year period.

We recorded a provision for income taxes in fiscal 2008 of $3,106 at an effective tax rate of 33.5%. In fiscal 2007, we recorded income tax expense of $1,268 at an effective rate of 28%. Our effective tax rate for fiscal 2008 was closer to the statutory federal tax rate due to a lower proportion of permanent items relative to taxable income in fiscal 2008 as compared to fiscal 2007. As of October 31, 2008, we recorded $147 in net current deferred income tax liabilities and $330 in net long-term deferred income tax assets.

During fiscal 2008, we recorded a net gain on sale of our interventional business of $5,340, which reflected a pre-tax gain of $11,423 and a tax provision of $6,083. Approximately $4,100 of book basis goodwill had a tax basis of $0, thereby resulting in a higher gain for tax purposes. The gain is subject to finalization of actual costs associated with the divestiture. Additionally in fiscal 2008, we recorded a net loss related to the operation of our discontinued operations of $20. Included within the net loss from discontinued operations was an operating loss of $30 and a benefit from income taxes of $10. In fiscal 2007, we recorded net income from discontinued operations of $518, comprised of operating income of $815 less a provision for income taxes of $297.

Operating Results - 2007 ($ in thousands except per share data)

Net revenue increased 36% during fiscal 2007 to $37,691 from $27,743 in fiscal 2006. Our operating income was $2,468 in fiscal 2007, compared to an operating loss of $3,226 in the prior year. The increase in profitability was due to higher revenues and gross margins, partially offset by increased operating expenses. Net income from continuing operations for fiscal 2007 was $3,292, or 26 cents per diluted share, as compared to a net loss of $862, or 7 cents per share during fiscal 2006. Net income in fiscal 2007, including results from discontinued operations, was $3,810 or 30 cents per diluted share, up from a net loss of $1,481, or 12 cents per share in fiscal 2006.

The following table summarizes our net revenue by product group and geography for fiscal 2007 and fiscal 2006:

                                                 2007         2006

                  Peri-Strips                  $ 13,788     $  9,728
                  Biomaterial Patch Products     13,433       10,262
                  Devices for Microsurgery        5,439        3,845
                  Surgical Tools and Other        5,031        3,908

                  Total                        $ 37,691     $ 27,743

                  Domestic                     $ 32,063     $ 23,503
                  International                   5,628        4,240

                  Total                        $ 37,691     $ 27,743

The increase in net revenue in fiscal 2007 compared to the prior-year was primarily due to the following:

• Incremental worldwide units sold (inclusive of new product introductions) and product mix changes increased revenue approximately $6,450;

• Higher average net selling prices due to our transition to a direct sales force in the U.S. market (the "Transition"), which resulted in increased revenue of approximately $2,900; and

• Other pricing increases in various worldwide hospital list prices for certain of our products resulted in increased revenue of approximately $600.

The increase in worldwide unit sales occurred across all product lines, and was attributable to our direct sales force growing product sales, as well as the Transition's impact on the prior-year when several of our former distributors reduced their product purchases from us as they depleted their inventory levels of our

products. Furthermore, the Transition was completed in December 2006, which resulted in sales at hospital list prices instead of distributor prices, and yielded higher average net selling prices in fiscal 2007.

Worldwide net revenue from Peri-Strips was $13,788 in fiscal 2007, an increase of $4,060 or 42% from $9,728 in fiscal 2006. Approximately two-thirds of the revenue increase was driven by higher units sold and favorable product mix changes within the Peri-Strips product family, while approximately one-third was driven by increased net selling prices.

Revenue from other biomaterial products increased 31% to $13,433 in fiscal 2007 from $10,262 in the prior-year. A 17% increase in domestic Tissue-Guard units sold, higher net selling prices due to the Transition and the introduction of Veritas Collagen Matrix for the hernia market drove the increase.

Revenue from devices for microsurgery increased $1,594 or 41% to $5,439 in fiscal 2007, from $3,845 in fiscal 2006. Driving this increase were increased unit sales and pricing of the Coupler, as well as revenue from the S&T instrument product line.

Our gross margin increased six percentage points to 65% in fiscal 2007 from 59% during fiscal 2006, due to a number of factors:

• Higher average net selling prices resulting from our Transition benefited the fiscal 2007 gross margin by approximately three percentage points.

• Lower overhead rates due to higher production volumes and better utilization of manufacturing resources increased the current year margin by approximately two percentage points.

• Favorable sales mix (both product and geographic) benefited the fiscal 2007 gross margin by approximately one percentage point.

SG&A expense during fiscal 2007 increased $1,756 or 10% to $19,282 from $17,526 in fiscal 2006. We incurred $2,086 in incremental sales and marketing costs during fiscal 2007, primarily attributable to the full-year costs of our direct sales force, the subsequent expansion of our direct sales force as well as marketing and medical education activities to support our direct sales force and various product initiatives.

R&D expense increased 23% during fiscal 2007 to $2,620 from $2,135 during fiscal 2006. The increase was related to the timing and nature of various ongoing projects, which primarily focused on expanding the product offering for our Peri-Strips circular stapler buttress, improving the delivery system for our Peri-Strips products and advancing the technology of the Coupler.

We recorded operating income from continuing operations of $2,468 in fiscal 2007, an improvement of $5,694 from an operating loss of $3,226 in fiscal 2006. The increase was primarily due to realizing the benefits of the direct sales force and moving beyond the transitional costs of the conversion to a direct sales force. Interest income increased to $2,092 in fiscal 2007 compared with $1,337 in the prior-year period, due to higher investment yields, a higher average investment balance and the fiscal 2007 shift from tax-exempt to higher yielding taxable investments.

Our effective tax rate for fiscal 2007 was 28%, and we recorded a provision for income taxes of $1,268 in fiscal 2007. Included within our provision in the current year was tax expense of $1,368 at an effective tax rate of 30%, as well as a benefit of $100 related to R&D credits from fiscal 2006 as the laws governing such credits were reinstated during the first quarter of fiscal 2007. In fiscal 2006, we recorded a benefit from income taxes of $1,027 at an effective tax rate of 55%.

In fiscal 2007, we recorded net income from discontinued operations of $518, comprised of operating income of $815 less a provision for income taxes of $297. In fiscal 2006, we recorded a net loss from discontinued operations of $619, comprised of an operating loss of $953 less a benefit from income taxes of $334.

Liquidity and Capital Resources ($ in thousands)

Cash, cash equivalents, investments and restricted cash totaled $74,788 as of October 31, 2008, an increase of $21,110 from $53,678 as of October 31, 2007. Included in the above, we have $19,345 of

investments classified as non-current and $2,950 of restricted cash as of October 31, 2008. Working capital at October 31, 2008 and October 31, 2007 was $62,097 and $66,616, respectively. We have no long-term debt. We currently expect our cash on hand and cash from operations to be sufficient to cover both of 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, short- and long-term investments and restricted cash was driven by the sale of our interventional business. During fiscal 2008, we received cash proceeds of $30,440, of which $27,490 was recorded as cash and $2,950 as restricted cash, which has been placed in escrow subject to certain post-closing covenants and potential indemnification obligations. Partially offsetting the increase in cash in fiscal 2008 was the use of cash of $8,599 for income tax payments and $8,549 to repurchase stock under our announced share repurchase program.

Operating activities provided cash of $1,421 in fiscal 2008, as compared to providing cash of $8,519 during fiscal 2007. Cash flow from operating activities from continuing operations was approximately $5,700 in fiscal 2008, while operating cash flows from discontinued operations used cash of approximately $4,300. For fiscal 2008, net income of $11,485 was partially offset by income tax payments made of $8,599. Additionally, increased accounts receivables and inventories to support higher revenue levels also used cash of $627 and $634, respectively.

Investing activities provided cash of $42,720 during fiscal 2008 compared to using cash of $8,249 in the prior-year period. In fiscal 2008, we recorded net proceeds of $16,563 from the sale of investments, as compared to net purchases of $4,191 in the prior-year period, which were invested in our money market accounts and classified as cash equivalents on our balance sheet. We also recorded $30,440 in proceeds from the sale of the interventional business. As noted above, $2,950 of the sale proceeds were recorded as restricted cash. We also recorded $990 in purchases of property, plant and equipment in fiscal 2008, compared to purchases of $1,747 in fiscal 2007.

Financing activities used cash of $6,824 during fiscal 2008. $8,549 of cash was used to repurchase 504,167 shares of common stock, partially offset by $1,725 of proceeds from equity-based compensation plans. Financing activities provided cash of $2,255 in the prior-year period, primarily from proceeds from equity-based compensation plans.

At October 31, 2008, we held six auction rate securities ("ARS") with a par value of $9,000. Five of the six ARS we own are governed under the complex requirements of the Regulation Triple-X reinsurance trust and backed by the securitization of life insurance premiums. These five securities are further backed by monoline insurance. The other ARS we own is secured as a senior debt obligation of the issuer, which is a financial services company that offers credit risk protection on structured financial assets in the form of credit derivatives.

During fiscal 2008, the auctions for all of our ARS continued to fail, which occurs when there is not enough demand to sell all of the securities holders desired to sell at auction. The immediate effect of a failed auction means such holders cannot sell the securities at auction and the interest rate on the security resets to a contractual maximum rate. At October 31, 2008, these investments were not liquid and in the event we need to access these funds, we will not be able to do so without significant loss of principal, unless a future auction on these investments is successful, the broker dealer redeems the securities or the securities mature. Since August 2008, several issuing and distributing ARS dealers have announced settlement agreements with various government agencies whereby the dealers plan to repurchase their customers ARS at par over an extended time period. Our third-party broker dealer has not publicly stated their intentions, if any, to repurchase any of their clients' ARS, but has acknowledged they are currently working with various state government agencies regarding their customers' ARS as of October 31, 2008.

As of October 31, 2008, our third-party broker dealer had not provided an estimate of fair value for our ARS, and there was no observable ARS market information available to us. In the absence of such information, and taking into account the recent volatility in the overall investment markets, we performed a valuation assessment to provide a fair value estimate of our ARS as of October 31, 2008. Based on the

valuation assessment of fair value for our ARS, we recorded a temporary impairment of $2,429 related to our ARS investments of $9,000 (par value) as of October 31, 2008.

We have no reason to believe that any of the underlying issuers or the third-party insurers of our ARS are presently at risk of default. However, the fair value of our investment in ARS could change significantly and we may be required to record additional temporary ARS impairment, or any impairment could become "other than temporary" in the future based on market conditions and continued uncertainties in the credit markets as well as other facts and circumstances. Through December 31, 2008, we have continued to receive interest payments on the ARS in accordance with their terms. We currently believe we will ultimately be able to liquidate our investments without significant loss of principal primarily due to the collateral and third-party insurance securing most of the ARS, and any potential settlement plans by our broker to redeem its customers' ARS. However, it could take until final maturity of our ARS (with a current weighted average maturity of 27 years) to realize our investments' par value. Due to the ongoing uncertainties involving our ARS, we believe the recovery period for these investments is likely to be longer than 12 months and have classified these investments as long-term as of October 31, 2008.

Based on our ability to access our cash and cash equivalents, our expected operating cash flows, and our other sources of cash, we do not anticipate the current lack of liquidity on these investments will affect our ability to operate our business as usual.

The following table summarizes our contractual obligations and operating leases. For more information, see Note 8 to our Consolidated Financial Statements. Our commitments under these obligations are as follows for the year ending October 31:

Operating leases $ 791 $ 786 $ 766 $ 738 $ 844 $ 3,925

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.

Recent Accounting Standards

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. The Company does not believe the adoption of SFAS No. 157 will have a material impact on its consolidated operating results and financial condition.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS No. 159"). SFAS No. 159 permits entities to measure most financial instruments at fair value if desired. It may be applied on a case by case basis and is irrevocable once applied to that case. After election of this option, changes in fair value are reported in earnings. The items measured at fair value must be shown separately on the balance sheet. SFAS No. 159 is effective for fiscal years beginning after December 15, 2008. The Company has not yet determined if it will adopt SFAS No. 159, and if the Company does adopt SFAS No. 159, what impact, if any, it would have on our consolidated operating results and financial condition.

In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations ("SFAS No. 141R"). SFAS 141R changes how a reporting enterprise will account for the acquisition of a business in fiscal years beginning after December 15, 2008. When effective, SFAS No. 141R will replace SFAS No. 141 in its entirety. SFAS 141R will apply prospectively to business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning after December 15, 2008. Both early adoption and retrospective application are prohibited. The Company expects to adopt SFAS 141R on November 1, 2009, and has not yet determined if the adoption of SFAS 141R will have a material impact on its operating results and financial condition.

Critical Accounting Policies

Investments: Our investments consist of tax-exempt municipal bond investments and taxable and tax-exempt auction rate securities. Our investment policy seeks . . .