UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 
 QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d)
 OF THE
SECURITIES EXCHANGE ACT OF 1934
 
 For
the quarterly period ended September 30, 2008
 Commission
file number 000-04217
 
 
 ACETO
CORPORATION
 (Exact
name of registrant as specified in its charter)
 
 
 New
      York
              11-1720520(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification Number)
 
 One Hollow Lane, Lake
      Success, NY 11042(Address
      of principal executive offices)
 
 (516)
627-6000
 (Registrant's
telephone number, including area code)
 
 www.aceto.com
 (Registrant’s
website address)
 
 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 is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
  Large
      accelerated filer o
              Accelerated
      filer xNon-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
 
 The
Registrant has 24,529,541 shares of common stock outstanding as of November 4,
2008.
  
  ACETO
CORPORATION AND SUBSIDIARIES
 QUARTERLY
REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2008
 
 TABLE
OF CONTENTS
  PART
      I.
              FINANCIAL
      INFORMATION
              3Item
      1.
              Financial
      Statements
              3Condensed
      Consolidated Balance Sheets – September 30, 2008 (unaudited) and June 30,
      2008
              3Condensed
      Consolidated Statements of Income – Three Months Ended September 30, 2008
      and 2007 (unaudited)
              4Condensed
      Consolidated Statements of Cash Flows – Three Months Ended September 30,
      2008 and 2007 (unaudited)
              5Notes
      to Condensed Consolidated Financial Statements (unaudited)
              6Report
      of Independent Registered Public Accounting Firm
              13Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              14Item
      3.
              Quantitative
      and Qualitative Disclosures about Market Risk
              21Item
      4.
              Controls
      and Procedures
              22PART
      II.
              OTHER
      INFORMATION
              22Item
      1A.
              Risk
      Factors
              22Item
      6.
              Exhibits
              23Signatures
              24Exhibits
 
 
 
 PART
I. FINANCIAL INFORMATION
 Item
1.  Financial Statements
 
 ACETO
      CORPORATION AND SUBSIDIARIES
                CONDENSED
      CONSOLIDATED BALANCE SHEETS
                (in
      thousands, except per-share amounts)September
      30,
                2008
              
              
              June
      30,
                2008(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              32,475
              
              
              $
              46,515Investments
              
              
              10,875
              
              
              
              548Trade
      receivables, less allowance for doubtfulaccounts
      (September, $759, June $477)
              
              
              62,551
              
              
              
              68,220Other
      receivables
              
              
              6,302
              
              
              
              4,819Inventory
              
              
              68,495
              
              
              
              71,109Prepaid
      expenses and other current assets
              
              
              965
              
              
              
              817Deferred
      income tax benefit, net
              
              
              1,636
              
              
              
              1,756Total
      current assets
              
              
              183,299
              
              
              
              193,784Long-term
      notes receivable
              
              
              -
              
              
              
              347Property
      and equipment, net
              
              
              4,559
              
              
              
              4,307Property
      held for sale
              
              
              6,978
              
              
              
              6,978Goodwill
              
              
              1,890
              
              
              
              1,987Intangible
      assets, net
              
              
              5,000
              
              
              
              5,421Deferred
      income tax benefit, net
              
              
              2,364
              
              
              
              4,098Other
      assets
              
              
              5,133
              
              
              
              5,321TOTAL
      ASSETS
              
              $
              209,223
              
              
              $
              222,243LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              30,572
              
              
              $
              43,480Short-term
      bank loans
              
              
              2,000
              
              
              
              -Note
      payable – related party
              
              
              -
              
              
              
              500Accrued
      expenses
              
              
              18,420
              
              
              
              19,948Deferred
      income tax liability
              
              
              1,078
              
              
              
              1,070Total
      current liabilities
              
              
              52,070
              
              
              
              64,998Long-term
      liabilities
              
              
              6,901
              
              
              
              7,034Environmental
      remediation liability
              
              
              7,578
              
              
              
              7,578Deferred
      income tax liability
              
              
              839
              
              
              
              1,751Minority
      interest
              
              
              472
              
              
              
              473Total
      liabilities
              
              
              67,860
              
              
              
              81,834Commitments
      and contingencies (Note 7)Shareholders’
      equity:Common
      stock, $.01 par value, 40,000 shares authorized; 25,644 shares
      issued;  24,530 and 24,446 shares outstanding at September 30,
      2008 and June 30, 2008, respectively
              
              
              256
              
              
              
              256Capital
      in excess of par value
              
              
              56,839
              
              
              
              56,832Retained
      earnings
              
              
              86,330
              
              
              
              81,778Treasury
      stock, at cost, 1,114 and 1,198 shares at September 30, 2008 and June 30,
      2008, respectively
              
              
              (10,767
              )
              
              
              (11,571
              )Accumulated
      other comprehensive income
              
              
              8,705
              
              
              
              13,114Total
      shareholders’ equity
              
              
              141,363
              
              
              
              140,409TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
              
              $
              209,223
              
              
              $
              222,243
 
 See
accompanying notes to condensed consolidated financial statements and
accountants’ review report.
 3
  ACETO
      CORPORATION AND SUBSIDIARIES
                CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME
                (unaudited
      and in thousands, except per-share amounts)Three
      Months Ended
                September
      30,2008
              
              
              2007Net
      sales
              
              $
              93,839
              
              
              $
              79,528Cost
      of sales
              
              
              74,902
              
              
              
              64,965Gross
      profit
              
              
              18,937
              
              
              
              14,563Selling,
      general and administrative expenses
              
              
              11,914
              
              
              
              10,786Research
      and development expenses
              
              
              271
              
              
              
              172Operating
      income
              
              
              6,752
              
              
              
              3,605Other
      income (expense):Interest
      expense
              
              
              (9
              )
              
              
              (15
              )Interest
      and other income, net
              
              
              369
              
              
              
              327360
              
              
              
              312Income
      before income taxes
              
              
              7,112
              
              
              
              3,917Provision
      for income taxes
              
              
              2,561
              
              
              
              2,623Net
      income
              
              $
              4,551
              
              
              $
              1,294Net
      income per common share
              
              $
              0.19
              
              
              $
              0.05Diluted
      net income per common share
              
              $
              0.18
              
              
              $
              0.05Weighted
      average shares outstanding:Basic
              
              
              24,369
              
              
              
              24,336Diluted
              
              
              24,864
              
              
              
              24,851
 
 See
accompanying notes to condensed consolidated financial statements and
accountants’ review report.
  4
  ACETO
      CORPORATION AND SUBSIDIARIES
                CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS
                (unaudited
      and in thousands)Three
      Months Ended
                September
      30,2008
              
              
              2007Operating
      activities:Net
      income
              
              $
              4,551
              
              
              $
              1,294Adjustments
      to reconcile net income to net cash (used in) provided by operating
      activities:Depreciation
      and amortization
              
              
              438
              
              
              
              639Provision
      for doubtful accounts
              
              
              296
              
              
              
              (30
              )Non-cash
      stock compensation
              
              
              267
              
              
              
              83Deferred
      income taxes
              
              
              950
              
              
              
              1,468Unrealized
      loss (gain) on trading securities
              
              
              148
              
              
              
              (41
              )Changes
      in assets and liabilities:Trade
      accounts receivable
              
              
              3,722
              
              
              
              3,048Other
      receivables
              
              
              (1,969
              )
              
              
              (1,725
              )Inventory
              
              
              1,128
              
              
              
              1,651Prepaid
      expenses and other current assets
              
              
              (163
              )
              
              
              (225
              )Other
      assets
              
              
              138
              
              
              
              (359
              )Accounts
      payable
              
              
              (12,091
              )
              
              
              (4,233
              )Accrued
      expenses and other liabilities
              
              
              (453
              )
              
              
              2,437Net
      cash (used in) provided by operating activities
              
              
              (3,038
              )
              
              
              4,007Investing
      activities:Purchases
      of investments
              
              
              (10,924
              )
              
              
              -Payments
      received on notes receivable
              
              
              366
              
              
              
              19Purchases
      of property and equipment, net
              
              
              (233
              )
              
              
              (98
              )Net
      cash used in investing activities
              
              
              (10,791
              )
              
              
              (79
              )Financing
      activities:Proceeds
      from exercise of stock options
              
              
              176
              
              
              
              70Excess
      tax benefit on exercise of stock options
              
              
              19
              
              
              
              13Payment
      of note payable-related party
              
              
              (500
              )
              
              
              -Borrowings
      (repayments) of short-term bank loans
              
              
              2,000
              
              
              
              (25
              )Net
      cash provided by financing activities
              
              
              1,695
              
              
              
              58Effect
      of exchange rate changes on cash
              
              
              (1,906
              )
              
              
              1,110Net
      (decrease) increase in cash
              
              
              (14,040
              )
              
              
              5,096Cash
      at beginning of period
              
              
              46,515
              
              
              
              32,320Cash
      at end of period
              
              $
              32,475
              
              
              $
              37,416
 
 See
accompanying notes to condensed consolidated financial statements and
accountants’ review report.
 5
  ACETO
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited
and in thousands, except per-share amounts)
 (1)  Basis of
Presentation
 
 The
condensed consolidated financial statements of Aceto Corporation and
subsidiaries (“Aceto” or the “Company”) included herein have been prepared by
the Company and reflect all adjustments (consisting solely of normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for all periods presented.  Interim results
are not necessarily indicative of results which may be achieved for the full
year.
 
 The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses
reported in those financial statements.  These judgments can be
subjective and complex, and consequently actual results could differ from those
estimates and assumptions.  The Company’s most critical accounting
policies relate to revenue recognition; allowance for doubtful accounts;
inventories; goodwill and other indefinite-lived intangible assets; long-lived
assets; environmental and other contingencies; income taxes; and stock-based
compensation.
 
 These
condensed consolidated financial statements do not include all disclosures
associated with consolidated financial statements prepared in accordance with
U.S. generally accepted accounting principles.  Accordingly, these
statements should be read in conjunction with the Company’s consolidated
financial statements and notes thereto contained in the Company’s Form 10-K for
the year ended June 30, 2008.
 
 (2)  Goodwill
and Other Intangible Assets
 
 Goodwill
of $1,890 and $1,987 as of September 30, 2008 and June 30, 2008, relates to the
Health Sciences Segment.
 
 Changes
in goodwill are attributable to changes in foreign currency exchange rates used
to translate the financial statements of foreign subsidiaries with respect to
the Health Sciences Segment.
 
 (3)  Stock-Based
Compensation
 
 The
Company accounts for share-based compensation cost in accordance with Statement
of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based
Payment.”
 
 In
accordance with SFAS No. 123(R), the Company granted 41 shares of restricted
common stock and 3 restricted stock units in September 2008, whereby the service
inception date, which occurred in fiscal 2008, preceded the grant date, which
was in fiscal 2009. Since these shares of restricted common stock and restricted
stock units were issued in fiscal 2009, the Company recorded a liability as of
June 30, 2008 for such awards.  In addition,
in accordance with SFAS No. 123(R), compensation expense is recognized on a
straight-line basis over the employee's vesting period or to the employee's
retirement eligibility date, if earlier, for restricted stock
awards.  For the three months ended September 30, 2008, the Company
recorded stock-based compensation expense of approximately $76 for shares of
restricted common stock and restricted stock units and approximately $174 of
compensation expense related to stock options. For the three months ended
September 30, 2007, stock-based compensation expense of $61 was recorded related
to stock options.
 
 The
Company’s policy is to satisfy stock-based compensation awards with treasury
shares, to the extent available.
 
 (4)  Net
Income Per Common Share
 
 Basic
income per common share is based on the weighted average number of common shares
outstanding during the period.  Diluted income per common share
includes the dilutive effect of potential common shares
outstanding.  The following table sets forth the reconciliation of
weighted average shares outstanding and diluted weighted average shares
outstanding:
 
 6
  ACETO
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited
and in thousands, except per-share amounts)
 
 Three
      months ended
                September
      30,2008
              
              
              2007Weighted
      average shares outstanding
              
              
              24,369
              
              
              
              24,336Dilutive
      effect of stock options and restricted stock awards and
    units
              
              
              495
              
              
              
              515Diluted
      weighted average shares outstanding
              
              
              24,864
              
              
              
              24,851
 
 There
were 1,562 and 1,204 common equivalent shares outstanding as of September 30,
2008 and 2007, respectively, that were not included in the calculation of
diluted income per common share for the three months ended September 30, 2008
and 2007, respectively, because their effect would have been
anti-dilutive.
 
 (5)  Comprehensive
Income
 
 Comprehensive
income consists of net income and other gains and losses affecting shareholders’
equity that, under generally accepted accounting principles, are excluded from
net income.  The components of comprehensive income were as
follows:
  Three
      months ended
                September
      30,2008
              
              
              2007Comprehensive
      income:Net
      income
              
              
              4,551
              
              
              
              1,294Foreign
      currency translation adjustment
              
              
              (4,409
              )
              
              
              2,391Unrealized
      gain on available for sale securities
              
              
              -
              
              
              
              21Change
      in fair value of cross currency interest rate swaps
              
              
              -
              
              
              
              1Total
              
              $
              142
              
              
              $
              3,707
 
 The
financial statements of the Company’s foreign subsidiaries are translated into
U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation."
Where the functional currency of a foreign subsidiary is its local currency,
balance sheet accounts are translated at the current exchange rate and income
statement items are translated at the average exchange rate for the
period.   Exchange gains or losses resulting from the translation
of financial statements of foreign operations are accumulated in other
comprehensive income.  Where the local currency of a foreign
subsidiary is not its functional currency, financial statements are translated
at either current or historical exchange rates, as
appropriate.   The foreign currency translation adjustment for
the three months ended September 30, 2008 primarily relates to the fluctuation
of the conversion rate of the Euro. The currency translation adjustments are not
adjusted for income taxes as they relate to indefinite investments in non-US
subsidiaries.
 
 (6)  Income
Taxes
 
 The
decrease in the net deferred income tax assets of $950 for the quarter ended
September 30, 2008 related to the reduction of taxes payable due to the
utilization of foreign net operating loss carryforwards.
 
 The
decrease in the net deferred income tax assets of $1,468 for the quarter ended
September 30, 2007 related primarily to German tax reform which was enacted in
August 2007 that reduced the German corporate headline tax rate for businesses
from 40% to 30%, as well as implementing a cap on interest deductions and
tightening the tax basis for trade tax income. This tax rate reduction became
effective for tax years ending after January 1, 2008. Due to the reduction in
the overall German tax rate, the deferred income tax asset was revalued during
the month of enactment of the tax reform, which was in the first quarter of
fiscal 2008, and therefore was reduced by approximately $1,429, which is
reflected in the condensed consolidated financial statements for the three
months ended September 30, 2007.
  7
  ACETO
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited
and in thousands, except per-share amounts)
 There are
no material unrecognized tax benefits included in the condensed consolidated
balance sheet at September 30, 2008, that would, if recognized, have a material
effect on the Company’s effective tax rate. The Company is continuing its
practice of recognizing interest and penalties related to income tax matters in
income tax expense. The total accrual for interest and penalties related to
uncertain tax positions was approximately $122 as of September 30, 2008. The
Company did not recognize interest or penalties during the three months
ended September 30, 2008 and 2007. The Company files U.S. federal, U.S. state,
and foreign tax returns, and is generally no longer subject to tax examinations
for fiscal years prior to 2005 (in the case of certain foreign tax returns,
fiscal year 2002).
 
 (7)  Commitments
and Contingencies
 
 The
Company and its subsidiaries are subject to various claims which have arisen in
the normal course of business.  The impact of the final resolution of
these matters on the Company’s results of operations in a particular reporting
period is not known.  Management is of the opinion, however, that the
ultimate outcome of such matters will not have a material adverse effect upon
the Company’s financial condition or liquidity.
 
 In fiscal
2008 and 2007, the Company received letters from the Pulvair Site Group, a group
of potentially responsible parties (PRP Group) who are working with the State of
Tennessee (the State) to remediate a contaminated property in Tennessee called
the Pulvair site. The PRP Group has alleged that Aceto shipped hazardous
substances to the site which were released into the
environment.   The State had begun administrative proceedings
against the members of the PRP group and Aceto with respect to the cleanup of
the Pulvair site and the group has begun to undertake cleanup. The PRP Group is
seeking a settlement of approximately $2,100 from the Company for its share to
remediate the site contamination. Although the Company acknowledges that it
shipped materials to the site for formulation over twenty years ago, the Company
believes that the evidence does not show that the hazardous materials sent by
Aceto to the site have significantly contributed to the contamination of the
environment. Accordingly, the Company believes that the settlement offer is
unreasonable. Alternatively, counsel to the PRP Group has proposed that Aceto
join it as a participating member and pay 3.16% of the PRP Group's
cost.  The Company believes that this percentage is high because it is
based on the total volume of materials that Aceto sent to the site, most of
which were non-hazardous substances and as such, believes that, at most, it is a
de minimus contributor to the site contamination. The impact of the resolution
of this matter on the Company's results of operations in a particular reporting
period is not known.  However, management believes that the ultimate
outcome of this matter will not have a material adverse effect on the Company's
financial condition or liquidity.
 
 The
Company has environmental remediation obligations in connection with Arsynco’s
former manufacturing facility located in Carlstadt, New Jersey, which was closed
in 1993 and is currently held for sale.  Estimates of how much it
would cost to remediate environmental contamination at this site have increased
since the facility was closed in 1993.  During fiscal 2008, based on
continued monitoring of the contamination at the site and the current proposed
plan of remediation, the Company received an estimate from an environmental
consultant stating that the costs of remediation could be between $7,846 and
$9,574.  As of September 30, 2008 and June 30, 2008, a liability of
$7,846 is included in the accompanying condensed consolidated balance
sheets.   The estimated cost of remediation is based upon a
current proposed remedial action work plan; however, if this work plan is
revised or not approved by either the State of New Jersey or the EPA, actual
costs could be significantly greater than the current estimate.  If
this matter is resolved in a manner different from those assumed in current
estimates, the resolution could have a material adverse effect on the Company’s
financial condition, operating results and cash flows.
 
 In
connection with the environmental remediation obligation for Arsynco, the
Company has filed a claim against BASF Corporation (BASF), the former owners of
the Arsynco property. The Company alleges that BASF is liable for a portion of
the cost to remediate.  However, since collection from BASF is
uncertain at this time, no asset has been recorded.
  8
  ACETO
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited
and in thousands, except per-share amounts)
 In March
2006, Arsynco received notice from the EPA of its status as a PRP under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
for a site described as the Berry’s Creek Study Area.   Arsynco
is one of over 150 PRPs which have potential liability for the required
investigation and remediation of the site.  The estimate of the
potential liability is not quantifiable for a number of reasons, including the
difficulty in determining the extent of contamination and the length of time
remediation may require.  In addition, any estimate of liability must
also consider the number of other PRPs and their financial
strength.  Based on prior practice in similar situations, it is
possible that the State may assert a claim for natural resource damages with
respect to the Arsynco site itself, and either the federal government or the
State (or both) may assert claims against Arsynco for natural resource damages
in connection with Berry's Creek; any such claim with respect to Berry's Creek
could also be asserted against the approximately 150 PRPs which the EPA has
identified in connection with that site.  Any claim for natural
resource damages with respect to the Arsynco site itself may also be asserted
against BASF, the former owners of the Arsynco property. Since an amount of the
liability can not be reasonably estimated at this time, no accrual is recorded
for these potential future costs.  The impact of the resolution of
this matter on the Company’s results of operations in a particular reporting
period is not known.  However, management believes that the ultimate
outcome of this matter will not have a material adverse effect on the Company’s
financial condition or liquidity.
 
 A
subsidiary of the Company markets certain agricultural chemicals which are
subject to the Federal Insecticide, Fungicide and Rodenticide Act
(FIFRA).  FIFRA requires that test data be provided to the EPA to
register, obtain and maintain approved labels for pesticide products. The EPA
requires that follow-on registrants of these products compensate the initial
registrant for the cost of producing the necessary test data on a basis
prescribed in the FIFRA regulations. Follow-on registrants do not themselves
generate or contract for the data. However, when FIFRA requirements mandate that
new test data be generated to enable all registrants to continue marketing a
pesticide product, often both the initial and follow-on registrants establish a
task force to jointly undertake the testing effort. The Company is presently a
member of three such task force groups and historically, our payments have been
in the range of $100 - $250 per year.  The Company may be required to
make additional payments in the future.
 
 In June
2006, the Company negotiated a lease termination with its landlord for the
facility previously occupied by CDC and Magnum.  In connection with
the lease termination, the landlord and a third party entered into a long-term
lease for which the Company guaranteed the rental payments by the third party
through September 30, 2009.  As of September 30, 2008 and June 30,
2008, the aggregate future rental payments of the third party that are
guaranteed by the Company are $306 and $382, respectively, and the fair value of
this guarantee is deemed to be insignificant.
 
 Commercial
letters of credit are issued by the Company in the ordinary course of business
through major domestic banks as requested by certain suppliers.  The
Company had open letters of credit of approximately $653 and $663 as of
September 30, 2008 and June 30, 2008, respectively.  The terms of
these letters of credit are all less than one year.  No material loss
is anticipated due to non-performance by the counterparties to these
agreements.
 
 (8)
Fair Value Measurements
 
 The
Company adopted SFAS No. 157, “Fair Value Measurements” (SFAS No. 157) on July
1, 2008. SFAS No. 157 defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly fashion between
market participants at the measurement date. The adoption of SFAS No. 157 did
not have any impact on the Company’s condensed consolidated financial
statements.  SFAS No. 157 establishes a fair value hierarchy for those
instruments measured at fair value that distinguishes between assumptions based
on market data (observable inputs) and the Company’s assumptions (unobservable
inputs).  The hierarchy consists of three levels:
 
 Level
      1 –   Quoted market prices in active markets for identical
      assets or liabilities;Level
      2 –   Inputs other than Level 1 inputs that are either
      directly or indirectly observable; andLevel
      3 –   Unobservable inputs that are not corroborated by
      market data.
  9
 ACETO
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited
and in thousands, except per-share amounts)
 On a
recurring basis, Aceto measures at fair value certain financial assets and
liabilities, which consist of cash equivalents, investments and foreign currency
contracts. The Company classifies cash equivalents and investments within Level
1 if quoted prices are available in active markets. Level 1 assets include
instruments valued based on quoted market prices in active markets which
generally include money market funds, corporate equity securities publicly
traded on major exchanges and U.S. Treasury notes with quoted prices on active
markets. Time deposits are very short-term in nature and are accordingly valued
at cost plus accrued interest, which approximates fair value, and are classified
within Level 2 of the valuation hierarchy. The Company uses foreign currency
forward contracts (futures) to minimize the risk caused by foreign currency
fluctuation on its foreign currency receivables and payables by purchasing
futures with one of its financial institutions.  Futures are traded on
regulated U.S. and international exchanges and represent commitments to purchase
or sell a particular foreign currency at a future date and at a specific
price.   Aceto’s foreign currency derivative contracts are
classified within Level 2 as the fair value of these hedges is primarily based
on observable forward foreign exchange rates.
 
 The
following table summarizes the valuation of the Company’s investments and the
financial instruments which were determined by using the following inputs at
September 30, 2008:
 
 Fair Value Measurements at September 30, 2008
      UsingQuoted
      Prices
                in
      Active
                Markets
                (Level
      1)
              
              
              Significant
                Other
                Observable
                Input
      (Level 2)
              
              
              Significant
                Unobservable
      inputs
                (Level
      3)
              
              
              TotalCash
      equivalents:Money
      market funds
              
              $
              30
              
              
              
              -
              
              
              
              -
              
              
              $
              30Time
      deposits
              
              
              -
              
              
              $
              10,821
              
              
              
              -
              
              
              
              10,821Treasury
      notes
              
              
              3,998
              
              
              
              -
              
              
              
              -
              
              
              
              3,998Investments:Trading
      securities
              
              
              400
              
              
              
              -
              
              
              
              -
              
              
              
              400Time
      deposits
              
              
              -
              
              
              
              10,475
              
              
              
              -
              
              
              
              10,475Foreign
      currency contracts
              
              
              -
              
              
              
              225
              
              
              
              -
              
              
              
              225
 
 The
Company did not hold financial assets and liabilities which were recorded at
fair value in the Level 3 category as of September 30, 2008.
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities — Including an Amendment of FASB
Statement No. 115” (SFAS No. 159). SFAS No. 159 allows companies the choice to
measure financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected will
be recognized in earnings at each subsequent reporting date. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. The Company did
not elect to adopt the fair value option under SFAS 159 for its existing
instruments.
 
 (9)  Recent
Accounting Pronouncements
 
 Emerging
Issues Task Force (EITF) Issue No. 06-11, “Accounting for Income Tax Benefits of
Dividends on Share-Based Payment Awards” (EITF No. 06-11) became effective in
the first quarter of 2008.  EITF No. 06-11 requires that the tax
benefit received on dividends associated with share-based awards that are
charged to retained earnings should be recorded in additional paid-in-capital
(APIC) and included in the APIC pool of excess tax benefits available to absorb
potential future tax deficiencies on share-based payment awards.  The
Company did not declare cash dividends in the first quarter of 2008; however,
management does not believe EITF No. 06-11 will have a material impact on the
Company’s consolidated financial statements.
  10
 ACETO
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited
and in thousands, except per-share amounts)
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No 51” (SFAS No. 160). SFAS No. 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, changes in a parent’s ownership of a noncontrolling interest,
calculation and disclosure of the consolidated net income attributable to the
parent and the noncontrolling interest, changes in a parent’s ownership interest
while the parent retains its controlling financial interest and fair value
measurement of any retained noncontrolling equity investment. SFAS No. 160 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption
is prohibited. The Company must adopt these new requirements in its first
quarter of fiscal 2010.  The adoption of this statement will impact
the manner in which the Company presents noncontrolling interests, but will not
impact its consolidated financial position or results of
operations.
 
 In
December 2007, the FASB approved the issuance of SFAS No. 141 (revised 2007)
“Business Combinations” (SFAS No. 141R). SFAS No. 141R establishes principles
and requirements for how the acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase;
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination.  The provisions for SFAS No. 141R are effective for
fiscal years beginning after December 15, 2008 and are applied prospectively to
business combinations completed on or after that date.  Early adoption
is not permitted. SFAS No. 141R is effective for the Company beginning in the
first quarter of fiscal 2010.  The Company is evaluating the impact of
SFAS No. 141R on its results of operations and financial condition.
 
 In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective
Date of FASB Statement No. 157” (FSP 157-2). FSP 157-2 delays the effective date
of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for
certain items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The Company is currently
assessing the impact of SFAS No. 157 on its condensed consolidated financial
statements for items within the scope of FSP 157-2, which will become effective
beginning with our first quarter of fiscal 2010.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities— An Amendment of FASB Statement No. 133” (SFAS No. 161).
SFAS No. 161 requires enhanced qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about fair value
amounts of and gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative agreements. SFAS No. 161
is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The Company is currently evaluating
the impact of SFAS No. 161 on its consolidated financial
statements.
 
 (10)  Segment
Information
 
 The
Company's business is organized along product lines into three principal
segments: Health Sciences, Chemicals & Colorants and Crop
Protection.
  Health Sciences - includes the
active ingredients for generic pharmaceuticals, vitamins, and nutritional
supplements, as well as products used in preparing pharmaceuticals, primarily by
major innovative drug companies, and biopharmaceuticals.
  Chemicals & Colorants -
includes a variety of specialty chemicals used in plastics, resins, adhesives,
coatings, food, flavor additives, fragrances, cosmetics, metal finishing,
electronics, air-conditioning systems and many other areas. Dye and pigment
intermediates are used in the color-producing industries such as textiles, inks,
paper, and coatings. Organic intermediates are used in the production of
agrochemicals.
  11
  ACETO
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited
and in thousands, except per-share amounts)
 Crop Protection - includes
herbicides, fungicides and insecticides that control weed growth as well as
control the spread of insects and other microorganisms that can severely damage
plant growth. The Crop Protection segment also includes a sprout inhibitor for
potatoes and an herbicide for sugar cane.
  The
Company's chief operating decision maker evaluates performance of the segments
based on net sales and gross profit. The Company does not allocate assets by
segment because the chief operating decision maker does not review the assets by
segment to assess the segments' performance, as the assets are managed on an
entity-wide basis.
 
 Three
Months Ended September 30, 2008 and 2007:
  Health
                Sciences
              
              
              Chemicals
      & Colorants
              
              
              Crop
                Protection
              
              
              Consolidated
                Totals2008Net
      sales
              
              $
              56,609
              
              
              $
              33,742
              
              
              $
              3,488
              
              
              $
              93,839Gross
      profit
              
              
              13,378
              
              
              
              4,810
              
              
              
              749
              
              
              
              18,9372007Net
      sales
              
              $
              46,680
              
              
              $
              28,307
              
              
              $
              4,541
              
              
              $
              79,528Gross
      profit
              
              
              10,102
              
              
              
              3,594
              
              
              
              867
              
              
              
              14,563
  12
 
 Report
of Independent Registered Public Accounting Firm
 
  Board of
Directors and Shareholders
 Aceto
Corporation
 
 We have
reviewed the condensed consolidated balance sheet of Aceto Corporation and
subsidiaries as of September 30, 2008 and the related condensed consolidated
statements of income for the three-month periods ended September 30, 2008 and
2007, and the related condensed consolidated statements of cash flows for the
three-month periods ended September 30, 2008 and 2007 included in the
accompanying Securities and Exchange Commission Form 10-Q for the period ended
September 30, 2008.  These interim financial statements are the
responsibility of the Company’s management.
 
 We
conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States).  A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting
matters.  It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole.  Accordingly, we do not express such an
opinion.
 
 Based on
our review, we are not aware of any material modifications that should be made
to the condensed consolidated financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States of America.
 
 We have
previously audited, in accordance with standards of the Public Company
Accounting Oversight Board, the consolidated balance sheet of Aceto Corporation
and subsidiaries as of June 30, 2008, and the related consolidated statements of
income, shareholders’ equity and comprehensive income and cash flows for the
year then ended (not presented herein); and in our report dated September 4,
2008, we expressed an unqualified opinion on those consolidated financial
statements.  In our opinion, the information set forth in the
accompanying consolidated balance sheet as of June 30, 2008, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
 
 
 /s/ BDO
SEIDMAN, LLP
 
 Melville,
New York
 November
5, 2008
  13
  Item
2.  Management's Discussion and Analysis of Financial Condition and
Results of Operations
 
 CAUTIONARY
STATEMENT RELATING TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
 
 This
Quarterly Report on Form 10-Q and the information incorporated by reference
includes “forward-looking statements” within the meaning of section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934.  We intend those forward looking-statements to be covered by the
safe harbor provisions for forward-looking statements.  All statements
regarding our expected financial position and operating results, our business
strategy, our financing plans and the outcome of any contingencies are
forward-looking statements.  Any such forward-looking statements are
based on current expectations, estimates and projections about our industry and
our business.  Words such as “anticipates,” “expects,” “intends,”
“plans,” “believes,” “seeks,” “estimates,” or variations of those words and
similar expressions are intended to identify such forward-looking
statements.  Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
set forth or implied by any forward-looking statements.  Factors that
could cause actual results to differ materially from forward-looking statements
include, but are not limited to, unforeseen environmental liabilities,
international military conflicts, the mix of products sold and their profit
margins, order cancellation or a reduction in orders from customers, competitive
product offerings and pricing actions, the availability and pricing of key raw
materials, dependence on key members of management, risks of entering into new
European markets, and economic and political conditions in the United States and
abroad.  We undertake no obligation to update any such forward-looking
statements, other than as required by law.
 
 NOTE
REGARDING DOLLAR AMOUNTS
 
 In this
quarterly report, all dollar amounts are expressed in thousands, except for
share prices and per-share amounts.
 
 The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) is intended to provide the readers of our
financial statements with a narrative discussion about our business. The
MD&A is provided as a supplement to and should be read in conjunction with
our financial statements and the accompanying notes.
 
 
 Executive
Summary
 
 We are
reporting net sales of $93,839 for the three months ended September 30, 2008,
which represents an 18.0% increase from the $79,528 reported in the comparable
prior period.  Gross profit for the three months ended September 30,
2008 was $18,937 and our gross margin was 20.2% as compared to gross profit of
$14,563 and gross margin of 18.3% in the comparable prior period.  Our
selling, general and administrative costs for the three months ended September
30, 2008 increased to $11,914, an increase of 10.5% over the $10,786 we reported
in the prior period.  Our net income increased to $4,551, or $0.18 per
diluted share, compared to $1,294, or $0.05 per diluted share in the prior
period.
 
 Our
financial position as of September 30, 2008 remains strong, as we had cash and
cash equivalents and short-term investments of $43,350, working capital of
$131,229, no long-term debt and shareholders’ equity of $141,363.
 
 Our
ongoing business is separated into three segments:  Health Sciences,
Chemicals & Colorants and Crop Protection.
  The
Health Sciences segment is our largest segment in terms of both sales and gross
profits. Products that fall within this segment include active pharmaceutical
ingredients (APIs), pharmaceutical intermediates, nutritionals and
biopharmaceuticals.
  We
typically partner with both customers and suppliers years in advance of a drug
coming off patent to provide the generic equivalent.  We believe we
have a pipeline of new APIs poised to reach commercial levels over the coming
years as the patents on existing drugs expire, both in the United States and
Europe. In addition, we continue to explore opportunities to provide a
second-source option for existing generic drugs with approved abbreviated new
drug applications (ANDAs). The opportunities that we are looking for are to
supply the APIs for the more mature generic drugs where pricing has stabilized
following the dramatic decreases in price that these drugs experienced after
coming off patent.  As is the case in the generic industry, the
entrance into the market of other generic competition generally has a negative
impact on the pricing of the affected products.  By leveraging our
worldwide sourcing, quality assurance and regulatory capabilities, we believe we
can be an alternative lower cost, second-source provider of existing APIs to
generic drug companies.
  14
  The
Chemicals & Colorants segment is a major supplier to the many different
industries that require outstanding performance from chemical raw materials and
additives.  Products that fall within this segment include
intermediates for dyes, pigments and agrochemicals.  We provide
chemicals used to make plastics, surface coatings, textiles, lubricants, flavors
and fragrances. Many of our raw materials are also used in high-tech products
like high-end electronic parts (circuit boards and computer chips) and binders
for specialized rocket fuels. We are currently responding to the changing needs
of our customers in the color producing industry by taking our resources and
knowledge downstream as a supplier of select organic pigments. We expect that
continued global Gross Domestic Product growth will drive higher demand for the
chemical industry, especially in China and other emerging regions of the world.
With supply growth limited, we expect that industry supply/demand balances will
remain favorable. However, continued volatility in energy costs will add
uncertainty to our profit outlook.
  The Crop
Protection segment sells herbicides, fungicides, insecticides, and other
agricultural chemicals to customers, primarily located in the United States and
Western Europe. In fiscal 2007, we entered into a multi-year contract with a
major agricultural chemical distributor and launched generic Asulam, a herbicide
for sugar cane and the first generic registration that we have
received.  Our plan is to continue to develop our pipeline and bring
to market additional products in a similar manner. In May 2008, we sold an
insecticide product to its patent owner in conjunction with litigation
settlement involving an expired license.
  Our main
business strengths are sourcing, quality assurance, regulatory support,
marketing and distribution. With a physical presence in ten countries, we
distribute over 1000 pharmaceuticals and chemicals used principally as raw
materials in the pharmaceutical, agricultural, color, surface coating/ink and
general chemical consuming industries. We believe that we are currently the
largest buyer of pharmaceutical and specialty chemicals for export from China,
purchasing from over 500 different manufacturers.
 
 In this
MD&A section, we explain our general financial condition and results of
operations, including the following:
 
 ●
              factors
      that affect our business●
              our
      earnings and costs in the periods presented●
              changes
      in earnings and costs between periods●
              sources
      of earnings●
              the
      impact of these factors on our overall financial
  condition
 
 As you
read this MD&A section, refer to the accompanying condensed consolidated
statements of income, which present the results of our operations for the three
months ended September 30, 2008 and 2007.  We analyze and explain the
differences between periods in the specific line items of the condensed
consolidated statements of income.
 
 Critical
Accounting Estimates and Policies
 
 As
disclosed in our Form 10-K for the year ended June 30, 2008, the discussion and
analysis of our financial condition and results of operations is based on our
consolidated financial statements, which have been prepared in accordance with
U.S. generally accepted accounting principles.  In preparing these
financial statements, we were required to make estimates and assumptions
relating to critical accounting estimates and policies that affect the amounts
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities.  We regularly evaluate our
estimates including those related to allowances for bad debts, inventories,
goodwill and other indefinite-lived intangible assets, long-lived assets,
environmental and other contingencies, income taxes and stock-based
compensation.  We base our estimates on various factors, including
historical experience, advice from outside subject-matter experts, and various
assumptions that we believe to be reasonable under the circumstances, which
together form the basis for our making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources.  Actual results may differ from these estimates.
  15
 Since
June 30, 2008, there have been no significant changes to the assumptions and
estimates related to those critical accounting estimates and
policies.
 
 RESULTS
OF OPERATIONS
 
 Three
Months Ended September 30, 2008 Compared to Three Months Ended September 30,
2007
 
 Net
      Sales by Segment
                Three
      months ended September 30,Comparison
      20082008
              
              
              2007
              
              
              Over/(Under) 2007%
      of
              
              
              
              
              
              %
      of
              
              
              $
              
              
              %Segment
              
              Net sales
              
              
              total
              
              
              Net sales
              
              
              total
              
              
              change
              
              
              ChangeHealth
      Sciences
              
              $
              56,609
              
              
              
              60.3
              %
              
              $
              46,680
              
              
              
              58.7
              %
              
              $
              9,929
              
              
              
              21.3
              %Chemicals
      & Colorants
              
              
              33,742
              
              
              
              36.0
              %
              
              
              28,307
              
              
              
              35.6
              %
              
              
              5,435
              
              
              
              19.2
              %Crop
      Protection
              
              
              3,488
              
              
              
              3.7
              %
              
              
              4,541
              
              
              
              5.7
              %
              
              
              (1,053
              )
              
              
              (23.2
              %)Net
      sales
              
              $
              93,839
              
              
              
              100.0
              %
              
              $
              79,528
              
              
              
              100.0
              %
              
              $
              14,311
              
              
              
              18.0
              %Gross
      Profit by Segment
                Three
      months ended September 30,Comparison
      20082008
              
              
              2007
              
              
              Over/(Under) 2007Gross
              
              
              %
      of
              
              
              Gross
              
              
              %
      of
              
              
              $
              
              
              %Segment
              
              profit
              
              
              Sales
              
              
              Profit
              
              
              sales
              
              
              change
              
              
              ChangeHealth
      Sciences
              
              $
              13,378
              
              
              
              23.6
              %
              
              $
              10,102
              
              
              
              21.6
              %
              
              $
              3,276
              
              
              
              32.4
              %Chemicals
      & Colorants
              
              
              4,810
              
              
              
              14.3
              %
              
              
              3,594
              
              
              
              12.7
              %
              
              
              1,216
              
              
              
              33.8
              %Crop
      Protection
              
              
              749
              
              
              
              21.5
              %
              
              
              867
              
              
              
              19.1
              
              
              
              (118
              )
              
              
              (13.6
              %)Gross
      Profit
              
              $
              18,937
              
              
              
              20.2
              %
              
              $
              14,563
              
              
              
              18.3
              %
              
              $
              4,374
              
              
              
              30.0
              %
 
 Net
Sales
 
 Net sales
increased $14,311, or 18.0%, to $93,839 for the three months ended September 30,
2008, compared with $79,528 for the prior period.  We reported sales
increases in our Health Sciences and Chemicals & Colorants segments which
were partially offset by a sales decline in our Crop Protection segment, as
explained below.
 
 Health
Sciences
 
 Net sales
for the Health Sciences segment increased by $9,929 for the three months ended
September 30, 2008, to $56,609, which represents a 21.3% increase from net sales
of $46,680 for the prior period.  This increase is due to various
factors including increased sales from our foreign operations of $4,817,
specifically our European operations and a $2,393 rise in sales of our
nutraceutical products, which represent raw materials used in the production of
nutritional supplements. In addition, our domestic generics product group
experienced an increase in sales of $2,930 due to the higher volume of re-orders
for existing products.
 
 16
 
 Chemicals
& Colorants
 
 Net sales
for the Chemicals & Colorants segment increased by $5,435 for the three
months ended September 30, 2008, to $33,742, which represents a 19.2% increase
from net sales of $28,307 for the prior period.  Our chemical business
is diverse in terms of products, customers and consuming markets. The increase
in sales from this segment is partially attributable to an increase of $2,477 in
domestic sales of pigment, dye and miscellaneous intermediates, as well as
increased sales of $872 from our foreign operations. These increases are due to
a rise in prices in the chemical industry related to increased demand for
chemical products in China, as well as a direct result of the supplier
interruption in China due to the summer Olympics in August 2008. Aceto was able
to carry more stock in anticipation of the closing of certain factories in China
due to the Olympics.  The increase in sales in this segment is also
due to an $899 rise in sales of chemicals used to make surface coatings, $893
increase in sales of chemicals utilized in the food, beverage and cosmetic
industries and a $667 increase in sales of polymer additives. The increase in
the Chemicals & Colorants segment sales is offset, in part, by a drop of
$1,550 in sales of agricultural intermediates due to the timing of existing
products we supply.
 
 Crop
Protection
 
 Net sales
for the Crop Protection segment decreased to $3,488 for the three months ended
September 30, 2008, a decrease of $1,053, or 23.2%, from net sales of $4,541 for
the prior period.  The decrease over the prior period is primarily
attributed to decreased sales of our sprout inhibitor products, which are
utilized on potato crops.
 
 Gross
Profit
 
 Gross
profit increased $4,374 to $18,937 (20.2% of net sales) for the three months
ended September 30, 2008, as compared to $14,563 (18.3% of net sales) for the
prior period.
 
 Health
Sciences
 
 Health
Sciences’ gross profit of $13,378 for the three months ended September 30, 2008
was $3,276 or 32.4% higher than the prior period.  This increase in
gross profit was attributable to $2,471 increase in gross profit from our
foreign operations, primarily Germany, as well as the overall increase in sales
volume. Gross profit as a percentage of sales for the three months ended
September 30, 2008 increased to 23.6% from 21.6% for the prior period due
primarily to products sold by our European operations, which were more
profitable than other products.
 
 Chemicals
& Colorants
 
 Gross
profit for the three months ended September 30, 2008 increased by $1,216, or
33.8%, over the prior period. The gross margin was 14.3% for the three months
ended September 30, 2008 compared to 12.7% for the prior period.  The
increase in the gross profit and gross margin primarily relates to increase in
sales volume for pigment, dye and miscellaneous intermediates and favorable
product mix on aroma chemicals and surface coatings. Additionally, the Company
benefited from its decision to secure inventory positions on certain products
whose suppliers’ production was disrupted due to the Olympics held in China in
August 2008.
 
 Crop
Protection
 
 Gross
profit for the Crop Protection segment decreased to $749 for the three months
ended September 30, 2008, versus $867 for the prior period, a decrease of $118
or 13.6%.  Despite a decrease in sales, gross margin for the quarter
was 21.5% compared to the prior period gross margin of 19.5%. The increase in
the gross margin primarily relates to higher gross profit on certain sprout
inhibitor products.
 
 17
 
 Selling,
General and Administrative Expenses
  Selling,
general and administrative expenses (SG&A) increased $1,128, or 10.5%, to
$11,914 for the three months ended September 30, 2008 compared to $10,786 for
the prior period.  As a percentage of sales, SG&A decreased to
12.7% for the three months ended September 30, 2008 versus 13.6% for the prior
period.  The increase in SG&A relates primarily to a $1,343 rise
in personnel related costs, of which $600 relates to our foreign operations and
$743 relates to various factors including annual salary increases, stock-based
compensation and increased accrued bonus expense as a result of increased
profitability. SG&A also increased due to a $280 increase in sales and
marketing expenses, which is directly related to the increase in sales, as well
as higher bad debt expense of $326 as a result of additional reserves. The
increase in SG&A is partially offset by a decline of $970 in legal costs
from the prior period for which there is no comparable amount in the current
period. These legal costs in the prior period related to an antitrust case that
we previously commenced against the owner of certain licensed technology used
with one of our crop protection products, which was settled in May
2008.
 
 Research
and Development Expenses
 
 Research
and development expenses (R&D) increased $99 over the prior period to $271
for the three months ended September 30, 2008. R&D relates to the
development of two finished dosage form generic pharmaceutical products to be
distributed in Europe.
  Operating
Income
  For the
three months ended September 30, 2008, operating income was $6,752 compared to
$3,605 in the prior period, an increase of $3,147 or 87.3%.  This
increase was due to the overall increase in gross profit of $4,374 offset by the
$1,128 increase in SG&A and $99 increase in R&D expenses.
  Interest
and Other Income, Net
  Interest
and other income, net was $369 for the three months ended September 30, 2008,
which represents an increase of $42 over the prior period mainly due to an
increase in interest income on cash held at our foreign subsidiaries, as well as
an increase in foreign exchange gains offset by unrealized losses on trading
securities.
  Provision
for Income Taxes
  The
effective tax rate for the three months ended September 30, 2008 decreased to
36.0% from 67.0% for the prior period.  The decrease in the effective
tax rate was primarily due to German tax reform, which was enacted in August
2007, that reduced the German corporate headline tax rate for businesses from
40% to 30%, as well as implementing a cap on interest deductions and tightening
the tax basis for trade tax income. This tax rate reduction became effective for
tax years ending after January 1, 2008. Due to the future reduction in the
overall German tax rate, the deferred income tax asset was revalued during the
month of enactment of the tax reform, which was in the first quarter of fiscal
2008, and therefore was reduced by approximately $1,429. The decrease in the
effective tax rate from the prior period is partially offset by an approximate
$250 tax charge related to the anticipated repatriation of earnings from certain
foreign subsidiaries.  Without this charge, we expect the fiscal 2009
effective tax rate to be 32.5%. At this time, we do not expect any further
repatriation of earnings from our foreign subsidiaries.
 
 Liquidity
and Capital Resources
 
 Cash
Flows
 
 At
September 30, 2008, we had $32,475 in cash and cash equivalents, of which
$24,634 was outside the United States, $10,875 in short-term investments and
$2,000 in short-term bank loans.  Working capital was $131,229 at
September 30, 2008 versus $128,786 at June 30, 2008.  A portion of
cash is held in operating accounts that are with third party financial
institutions. These balances exceed the Federal Deposit Insurance Corporation
(FDIC) insurance limits. While we monitor daily the cash balances in our
operating accounts and adjust the cash balances as appropriate, these cash
balances could be impacted if the underlying financial institutions fail or are
subject to other adverse conditions in the financial markets. To date, we have
experienced no loss or lack of access to cash in our operating
accounts.
  18
  Our cash
position at September 30, 2008 decreased $14,040 from the amount at June 30,
2008.  Operating activities for the three months ended September 30,
2008 used cash of $3,038, for this period, as compared to cash provided by
operations of $4,007 for the comparable 2007 period. The $3,038 was comprised of
$4,551 in net income and $2,099 derived from adjustments for non-cash items less
a net $9,688 decrease from changes in operating assets and liabilities. The
non-cash items included $438 in depreciation and amortization expense and $950
for the deferred income taxes provision. Accounts receivable decreased $3,722
during the three months ended September 30, 2008, due to decreased sales during
the first quarter of 2009 as compared to the fourth quarter of 2008, as well as
an improvement in days sales outstanding. Inventories decreased by approximately
$1,128 and accounts payable decreased by $12,091as a result of orders for the
Health Sciences segment for inventory on-hand related to our European operations
that we took in the fourth quarter of 2008, of which some did not ship until the
first quarter of 2009 and the remainder is expected to ship in the second
quarter of 2009.  In addition, the Company carried more stock as of
June 30, 2008 for certain products of both the Chemicals and Colorants and
Health Sciences segments that were purchased from China, due to a supplier
interruption related to the Olympics that were held in China in August of 2008.
Some of this additional stock is not anticipated to be shipped until the second
quarter of fiscal 2009.  Accrued expenses and other liabilities
decreased $453 during the three months ended September 30, 2008, due primarily
to a decrease in accrued compensation as performance payments were made in
September 2008, partially offset by an increase in accrued expenses related to a
joint venture and an increase in Value Added Tax (VAT) for our foreign
subsidiaries related to increased sales. Other receivables increased $1,969 due
to an increase in VAT taxes receivables in our European subsidiaries and
increased royalty receivables on certain Crop Protection
products.  Our cash position at September 30, 2007 increased $5,096
from the amount at June 30, 2007.  Operating activities for the three
months ended September 30, 2007 provided cash of $4,007, for this period, as
compared to cash provided by operations of $4,581 for the comparable 2006
period. The $4,007 was comprised of $1,294 in net income and $2,119 derived from
adjustments for non-cash items plus a net $594 increase from changes in
operating assets and liabilities.
  Investing
activities for the three months ended September 30, 2008 used cash of $10,791
primarily related to purchases of investments.  Investing activities
for the three months ended September 30, 2007 used cash of $79 primarily related
to purchases of property and equipment.
  Financing
activities for the three months ended September 30, 2008 provided cash of $1,695
primarily due to $2,000 in borrowings from short-term bank loans and proceeds
from the exercise of stock options of $176, offset in part, by a $500 payment of
a note payable.  Financing activities for the three months ended
September 30, 2007 provided cash of $58 primarily as a result of proceeds from
the exercise of stock options of $70.
 
 Credit
Facilities
 
 We have
available credit facilities with certain foreign financial
institutions.  These facilities provide us with a line of credit of
$20,906, as of September 30, 2008.  We are not subject to any
financial covenants under these arrangements.
 
 In June
2007, we amended our revolving credit agreement with a financial institution
that expires June 30, 2010, and provides for available credit of
$10,000.  At September 30, 2008, we had utilized $653 in letters of
credit and $2,000 in line of credit drawdowns, leaving $7,347 of this facility
unused.  Under the credit agreement, we may obtain credit through
direct borrowings and letters of credit.  Our obligations under the
credit agreement are guaranteed by certain of our subsidiaries and are secured
by 65% of the capital of certain of our non-domestic
subsidiaries.  There is no borrowing base on the credit
agreement.  Interest under the credit agreement is at LIBOR plus
1.50%.  The credit agreement contains several covenants requiring,
among other things, minimum levels of debt service and tangible net
worth.  We are also subject to certain restrictive debt covenants,
including covenants governing liens, limitations on indebtedness, guarantees,
sale of assets, sales of receivables, and loans and investments.  We
were in compliance with all covenants at September 30, 2008.
 
 19
 
 Working
Capital Outlook
  Working
capital was $131,229 at September 30, 2008 versus $128,786 at June 30,
2008.  The increase in working capital was primarily attributable to
an increase in cash derived from increased net income, reduction of trade
receivables and inventory during the quarter.  We continually evaluate
possible acquisitions of or investments in businesses that are complementary to
our own, and such transactions may require the use of cash.   In
connection with our crop protection business, we plan to acquire product
registrations and related data filed with the United States Environmental
Protection Agency as well as payments to various task force groups, which could
approximate $11,000 in fiscal 2009.  In fiscal 2009, we plan to
repatriate approximately $13,000 of earnings from certain foreign subsidiaries
to help finance these crop protection products. We believe that our cash, other
liquid assets, operating cash flows, borrowing capacity and access to the equity
capital markets, taken together, provide adequate resources to fund ongoing
operating expenditures and the anticipated continuation of semi-annual cash
dividends for the next twelve months.  We may obtain additional credit
facilities to enhance our liquidity.
 
 Impact
of New Accounting Pronouncements
  The
Company adopted SFAS No. 157, “Fair Value Measurements” (SFAS No. 157) on July
1, 2008. SFAS No. 157 defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly fashion between
market participants at the measurement date. The adoption of SFAS No. 157 did
not have any impact on the Company’s condensed consolidated financial
statements.
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities — Including an Amendment of FASB
Statement No. 115” (SFAS No. 159). SFAS No. 159 allows companies the choice to
measure financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected will
be recognized in earnings at each subsequent reporting date. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. The Company did
not elect to adopt the fair value option under SFAS 159 for its existing
instruments.
 
 Emerging
Issues Task Force (EITF) Issue No. 06-11, “Accounting for Income Tax Benefits of
Dividends on Share-Based Payment Awards” (EITF No. 06-11) became effective in
the first quarter of 2008.  EITF No. 06-11 requires that the tax
benefit received on dividends associated with share-based awards that are
charged to retained earnings should be recorded in additional paid-in-capital
(APIC) and included in the APIC pool of excess tax benefits available to absorb
potential future tax deficiencies on share-based payment awards.  The
Company did not declare cash dividends in the first quarter of 2008; however,
management does not believe EITF No. 06-11 will have a material impact on the
Company’s consolidated financial statements.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No 51” (SFAS No. 160). SFAS No. 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, changes in a parent’s ownership of a noncontrolling interest,
calculation and disclosure of the consolidated net income attributable to the
parent and the noncontrolling interest, changes in a parent’s ownership interest
while the parent retains its controlling financial interest and fair value
measurement of any retained noncontrolling equity investment. SFAS No. 160 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption
is prohibited. The Company must adopt these new requirements in its first
quarter of fiscal 2010.  The adoption of this statement will impact
the manner in which the Company presents noncontrolling interests, but will not
impact its consolidated financial position or results of
operations.
 
 In
December 2007, the FASB approved the issuance of SFAS No. 141 (revised 2007)
“Business Combinations” (SFAS No. 141R). SFAS No. 141R establishes principles
and requirements for how the acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase;
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination.  The provisions for SFAS No. 141R are effective for
fiscal years beginning after December 15, 2008 and are applied prospectively to
business combinations completed on or after that date.  Early adoption
is not permitted. SFAS No. 141R is effective for the Company beginning in the
first quarter of fiscal 2010.  The Company is evaluating the impact of
SFAS No. 141R on its results of operations and financial condition.
  20
  In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective
Date of FASB Statement No. 157” (FSP 157-2). FSP 157-2 delays the effective date
of SFAS No.157 for nonfinancial assets and nonfinancial liabilities, except for
certain items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The Company is currently
assessing the impact of SFAS No. 157 on its condensed consolidated financial
statements for items within the scope of FSP 157-2, which will become effective
beginning with our first quarter of fiscal 2010.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities— An Amendment of FASB Statement No. 133” (SFAS No. 161).
SFAS No. 161 requires enhanced qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about fair value
amounts of and gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative agreements. SFAS No. 161
is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The Company is currently evaluating
the impact of SFAS No. 161 on its consolidated financial
statements.
 
 Item
3.  Quantitative and Qualitative Disclosures About Market
Risk
 
 Market
Risk Sensitive Instruments
 
 The
market risk inherent in our market-risk-sensitive instruments and positions is
the potential loss arising from adverse changes in investment market prices,
foreign currency exchange-rates and interest rates.
 
 Investment
Market Price Risk
 
 We had
short-term investments of $10,875 at September 30, 2008.  Those
short-term investments consisted of time deposits, treasury notes and corporate
equity securities. Time deposits are short-term in nature and are accordingly
valued at cost plus accrued interest, which approximates fair value. Corporate
equity securities and treasury notes are recorded at fair value and have
exposure to price risk.  If this risk is estimated as the potential
loss in fair value resulting from a hypothetical 10% adverse change in prices
quoted by stock exchanges, the effect of that risk would be $440 as of September
30, 2008.  Actual results, however, may differ.
  Foreign
Currency Exchange Risk
 
 In order
to reduce the risk of foreign currency exchange rate fluctuations, we hedge some
of our transactions denominated in a currency other than the functional
currencies applicable to each of our various entities.  The
instruments used for hedging are short-term foreign currency contracts
(futures).  The changes in market value of such contracts have a high
correlation to price changes in the currency of the related hedged
transactions.  At September 30, 2008, we had foreign currency
contracts outstanding that had a notional amount of $22,741.  The
difference between the fair market value of the foreign currency contracts and
the related commitments at inception and the fair market value of the contracts
and the related commitments at September 30, 2008, was not
material.
 
 We are
subject to risk from changes in foreign exchange rates for our subsidiaries that
use a foreign currency as their functional currency and are translated into U.S.
dollars.  These changes result in cumulative translation adjustments,
which are included in accumulated other comprehensive income.  On
September 30, 2008, we had translation exposure to various foreign currencies,
with the most significant being the Euro and the Chinese
Renminbi.  The potential loss as of September 30, 2008, resulting from
a hypothetical 10% adverse change in quoted foreign currency exchange rates
amounted to $7,585.  Actual results, however, may differ.
 
 21
 
 Interest
rate risk
 
 Due to
our financing, investing and cash-management activities, we are subject to
market risk from exposure to changes in interest rates.  We utilize a
balanced mix of debt maturities along with both fixed-rate and variable-rate
debt to manage our exposure to changes in interest rates.  Our
financial instrument holdings were analyzed to determine their sensitivity to
interest rate changes.  In this sensitivity analysis, we used the same
change in interest rate for all maturities.  All other factors were
held constant.  If there were an adverse change in interest rates of
10%, the expected effect on net income related to our financial instruments
would be immaterial.  However, there can be no assurances that
interest rates will not significantly affect our results of
operations.
  Item
4.  Controls and Procedures
 
 Evaluation
of Disclosure Controls and Procedures
  Our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are
designed to provide reasonable assurance that information required to be
disclosed in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission. Our disclosure
controls and procedures are also designed to ensure that information required to
be disclosed in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our principal
executive and principal financial officer, to allow timely decisions regarding
required disclosure. Our chief executive officer and chief financial officer,
with assistance from other members of our management, have reviewed the
effectiveness of our disclosure controls and procedures as of September 30, 2008
and, based on their evaluation, have concluded that the disclosure controls and
procedures were effective as of such date.
  Changes
in Internal Control over Financial Reporting
  There has
been no change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our
fiscal quarter ended September 30, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
  PART
II.  OTHER INFORMATION
 
 Item
1A.  Risk Factors
 
 In
addition to the other information set forth in this report, you should carefully
consider the risk factors disclosed under Part I – “Item 1A. Risk Factors” in
our Form 10-K for the year ended June 30, 2008 which could materially adversely
affect our business, financial condition, operating results and cash
flows.  The risks and uncertainties described in our Form 10-K for the
year ended June 30, 2008 are not the only ones we face.  Additionally,
risks and uncertainties not currently known to us or that we currently deem
immaterial also may materially adversely affect our business, financial
condition, operating results or cash flows.
 
 22
 
 Item
6.  Exhibits
 
 The
exhibits filed as part of this report are listed below.
 
 15.1
              Awareness
      letter from independent registered public accounting
  firm31.1
              Certification
      pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities and
      Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
              Certification
      pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities and
      Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
              Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 200232.2
              Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002
  23
  SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
   ACETO
      CORPORATIONDATE
      November
      7, 2008
              BY
              /s/ Douglas
      RothDouglas
      Roth, Chief Financial Officer(Principal
      Financial Officer)DATE
      November
      7, 2008
              BY
              /s/ Leonard S.
      SchwartzLeonard
      S. Schwartz, Chairman,President
      and Chief Executive Officer(Principal
      Executive Officer)








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