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 December 31, 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 24,763,818 shares of common stock outstanding as of February 3,
2009.
  
  ACETO
CORPORATION AND SUBSIDIARIES
 QUARTERLY
REPORT FOR THE PERIOD ENDED DECEMBER 31, 2008
 
 TABLE
OF CONTENTS
 PART
      I.FINANCIAL
      INFORMATION
                            3Item
      1.
                            Financial
      Statements
                            3Condensed
      Consolidated Balance Sheets – December 31, 2008 (unaudited) andJune
      30, 2008
                            3Condensed
      Consolidated Statements of Income – Six Months Ended December 31,2008
      and 2007 (unaudited)
                            4Condensed
      Consolidated Statements of Income – Three MonthsEnded
      December 31, 2008 and 2007 (unaudited)
                            5Condensed
      Consolidated Statements of Cash Flows – Six Months Ended December 31,2008
      and 2007 (unaudited)
                            6Notes
      to Condensed Consolidated Financial Statements (unaudited)
                            7Report
      of Independent Registered Public Accounting Firm
                            15Item
      2.
                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                            16Item
      3.
                            Quantitative
      and Qualitative Disclosures about Market Risk
                            26Item
      4.
                            Controls
      and Procedures
                            26PART
      II.OTHER
      INFORMATION
                            27Item
      1A.
                            Risk
      Factors
                            27Item
      4.
                            Submission
      of Matters to a Vote of Security Holders
                            27Item
      6.
                            Exhibits
                            28Signatures
                            29Exhibits
 
 
 
 PART
I. FINANCIAL INFORMATION
 Item
1.  Financial Statements
 
 ACETO
      CORPORATION AND SUBSIDIARIES
                    CONDENSED
      CONSOLIDATED BALANCE SHEETS
                    (in
      thousands, except per-share amounts)December
      31,
                    2008
                  
                  
                  June
      30,
                    2008(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  25,504
                  
                  
                  $
                  46,515Investments
                  
                  
                  10,728
                  
                  
                  
                  548Trade
      receivables, less allowance for doubtfulaccounts
      (December, $997; June, $477)
                  
                  
                  59,712
                  
                  
                  
                  68,220Other
      receivables
                  
                  
                  7,450
                  
                  
                  
                  4,819Inventory
                  
                  
                  77,442
                  
                  
                  
                  71,109Prepaid
      expenses and other current assets
                  
                  
                  1,173
                  
                  
                  
                  817Deferred
      income tax asset, net
                  
                  
                  1,679
                  
                  
                  
                  1,756Total
      current assets
                  
                  
                  183,688
                  
                  
                  
                  193,784Long-term
      notes receivable
                  
                  
                  -
                  
                  
                  
                  347Property
      and equipment, net
                  
                  
                  4,378
                  
                  
                  
                  4,307Property
      held for sale
                  
                  
                  6,978
                  
                  
                  
                  6,978Goodwill
                  
                  
                  1,865
                  
                  
                  
                  1,987Intangible
      assets, net
                  
                  
                  4,733
                  
                  
                  
                  5,421Deferred
      income tax asset, net
                  
                  
                  2,139
                  
                  
                  
                  4,098Other
      assets
                  
                  
                  5,340
                  
                  
                  
                  5,321TOTAL
      ASSETS
                  
                  $
                  209,121
                  
                  
                  $
                  222,243LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                  
                  $
                  32,069
                  
                  
                  $
                  43,480Note
      payable – related party
                  
                  
                  -
                  
                  
                  
                  500Accrued
      expenses
                  
                  
                  20,080
                  
                  
                  
                  19,948Deferred
      income tax liability
                  
                  
                  1,078
                  
                  
                  
                  1,070Total
      current liabilities
                  
                  
                  53,227
                  
                  
                  
                  64,998Long-term
      liabilities
                  
                  
                  6,996
                  
                  
                  
                  7,034Environmental
      remediation liability
                  
                  
                  7,578
                  
                  
                  
                  7,578Deferred
      income tax liability
                  
                  
                  672
                  
                  
                  
                  1,751Minority
      interest
                  
                  
                  476
                  
                  
                  
                  473Total
      liabilities
                  
                  
                  68,949
                  
                  
                  
                  81,834Commitments
      and contingencies (Note 8)Shareholders’
      equity:Common
      stock, $.01 par value, 40,000 shares authorized; 25,644 shares
      issued;
                    24,730
      and 24,446 shares outstanding at December 31, 2008 and June 30,
                    2008,
      respectively
                  
                  
                  256
                  
                  
                  
                  256Capital
      in excess of par value
                  
                  
                  56,145
                  
                  
                  
                  56,832Retained
      earnings
                  
                  
                  84,945
                  
                  
                  
                  81,778Treasury
      stock, at cost, 914 and 1,198 shares at December 31, 2008 and June 30,
                    2008,
      respectively
                  
                  
                  (8,829
                  )
                  
                  
                  (11,571
                  )Accumulated
      other comprehensive income
                  
                  
                  7,655
                  
                  
                  
                  13,114Total
      shareholders’ equity
                  
                  
                  140,172
                  
                  
                  
                  140,409TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                  
                  $
                  209,121
                  
                  
                  $
                  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)Six
      Months Ended
                    December
      31,2008
                  
                  
                  2007Net
      sales
                  
                  $
                  168,054
                  
                  
                  $
                  156,633Cost
      of sales
                  
                  
                  137,372
                  
                  
                  
                  129,591Gross
      profit
                  
                  
                  30,682
                  
                  
                  
                  27,042Selling,
      general and administrative expenses
                  
                  
                  22,463
                  
                  
                  
                  21,364Research
      and development expenses
                  
                  
                  153
                  
                  
                  
                  353Operating
      income
                  
                  
                  8,066
                  
                  
                  
                  5,325Other
      income (expense):Interest
      expense
                  
                  
                  (62
                  )
                  
                  
                  (31
                  )Interest
      and other income (expense), net
                  
                  
                  728
                  
                  
                  
                  (14
                  )666
                  
                  
                  
                  (45
                  )Income
      before income taxes
                  
                  
                  8,732
                  
                  
                  
                  5,280Provision
      for income taxes
                  
                  
                  3,089
                  
                  
                  
                  3,078Net
      income
                  
                  $
                  5,643
                  
                  
                  $
                  2,202Net
      income per common share
                  
                  $
                  0.23
                  
                  
                  $
                  0.09Diluted
      net income per common share
                  
                  $
                  0.23
                  
                  
                  $
                  0.09Weighted
      average shares outstanding:Basic
                  
                  
                  24,402
                  
                  
                  
                  24,341Diluted
                  
                  
                  24,940
                  
                  
                  
                  24,834
 
 See
accompanying notes to condensed consolidated financial statements and
accountants’ review report.
 
 4
 
 ACETO
      CORPORATION AND SUBSIDIARIES
                    CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME
                    (unaudited
      and in thousands, except per-share amounts)Three
      Months Ended
                    December
      31,2008
                  
                  
                  2007Net
      sales
                  
                  $
                  74,215
                  
                  
                  $
                  77,105Cost
      of sales
                  
                  
                  62,470
                  
                  
                  
                  64,626Gross
      profit
                  
                  
                  11,745
                  
                  
                  
                  12,479Selling,
      general and administrative expenses
                  
                  
                  10,549
                  
                  
                  
                  10,578Research
      and development expenses
                  
                  
                  (118
                  )
                  
                  
                  181Operating
      income
                  
                  
                  1,314
                  
                  
                  
                  1,720Other
      income (expense):Interest
      expense
                  
                  
                  (53
                  )
                  
                  
                  (16
                  )Interest
      and other income (expense), net
                  
                  
                  359
                  
                  
                  
                  (341
                  )306
                  
                  
                  
                  (357
                  )Income
      before income taxes
                  
                  
                  1,620
                  
                  
                  
                  1,363Provision
      for income taxes
                  
                  
                  528
                  
                  
                  
                  455Net
      income
                  
                  $
                  1,092
                  
                  
                  $
                  908Net
      income per common share
                  
                  $
                  0.04
                  
                  
                  $
                  0.04Diluted
      net income per common share
                  
                  $
                  0.04
                  
                  
                  $
                  0.04Weighted
      average shares outstanding:Basic
                  
                  
                  24,435
                  
                  
                  
                  24,346Diluted
                  
                  
                  25,015
                  
                  
                  
                  24,817
 
 See
accompanying notes to condensed consolidated financial statements and
accountants’ review report.
  5
  ACETO
      CORPORATION AND SUBSIDIARIES
                    CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS
                    (unaudited
      and in thousands)Six
      Months Ended
                    December
      31,2008
                  
                  
                  2007Operating
      activities:Net
      income
                  
                  $
                  5,643
                  
                  
                  $
                  2,202Adjustments
      to reconcile net income to net cash (used in) provided
                    by
      operating activities:Depreciation
      and amortization
                  
                  
                  849
                  
                  
                  
                  1,202Provision
      for doubtful accounts
                  
                  
                  520
                  
                  
                  
                  9Non-cash
      stock compensation
                  
                  
                  819
                  
                  
                  
                  415Deferred
      income taxes
                  
                  
                  965
                  
                  
                  
                  1,339Unrealized
      loss (gain) on trading securities
                  
                  
                  195
                  
                  
                  
                  (54
                  )Changes
      in assets and liabilities:Trade
      accounts receivable
                  
                  
                  5,867
                  
                  
                  
                  2,080Other
      receivables
                  
                  
                  (3,154
                  )
                  
                  
                  (921
                  )Inventory
                  
                  
                  (8,232
                  )
                  
                  
                  (3,504
                  )Prepaid
      expenses and other current assets
                  
                  
                  (454
                  )
                  
                  
                  (147
                  )Other
      assets
                  
                  
                  (81
                  )
                  
                  
                  (635
                  )Accounts
      payable
                  
                  
                  (10,406
                  )
                  
                  
                  893Other
      accrued expenses and liabilities
                  
                  
                  (1,027
                  )
                  
                  
                  2,590Net
      cash (used in) provided by operating activities
                  
                  
                  (8,496
                  )
                  
                  
                  5,469Investing
      activities:Payments
      received on notes receivable
                  
                  
                  404
                  
                  
                  
                  49Purchases
      of property and equipment, net
                  
                  
                  (292
                  )
                  
                  
                  (586
                  )Purchases
      of investments
                  
                  
                  (10,243
                  )
                  
                  -Net
      cash used in investing activities
                  
                  
                  (10,131
                  )
                  
                  
                  (537
                  )Financing
      activities:Proceeds
      from exercise of stock options
                  
                  
                  755
                  
                  
                  
                  70Excess
      tax benefit on stock option exercises and restricted stock
                  
                  
                  145
                  
                  
                  
                  13Payment
      of note payable-related party
                  
                  
                  (500
                  )
                  
                  
                  -Payments
      of short-term bank loans
                  
                  
                  -
                  
                  
                  
                  (25
                  )Net
      cash provided by financing activities
                  
                  
                  400
                  
                  
                  
                  58Effect
      of exchange rate changes on cash
                  
                  
                  (2,784
                  )
                  
                  
                  1,720Net
      (decrease) increase in cash
                  
                  
                  (21,011
                  )
                  
                  
                  6,710Cash
      at beginning of period
                  
                  
                  46,515
                  
                  
                  
                  32,320Cash
      at end of period
                  
                  $
                  25,504
                  
                  
                  $
                  39,030
  Non-Cash
Item
 
 The
Company had a non-cash item excluded from the Condensed Consolidated Statements
of Cash Flows during the six months ended December 31, 2008 and December 31,
2007 of $2,473 and $2,443, respectively, related to dividends declared but not
paid.
 
 See
accompanying notes to condensed consolidated financial statements and
accountants’ review report.
 
 6
 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 $1,865 and $1,987 as of December 31, 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
December 2008, the Company granted 222 options to employees at an exercise price
equal to the market value of the common stock on the date of
grant.  These options vest over one year and will expire ten years
from the date of grant.  Compensation expense of $724, as determined
using the Black-Scholes option pricing model, will be charged over the vesting
period for these options. In December 2007, the Company granted 239 options to
non-employee directors and employees at an exercise price equal to the market
value of the common stock on the date of grant.  These options vest
over one year and will expire ten years from the date of grant.  Total
compensation expense related to stock options for the six months ended December
31, 2008 and 2007 was $365 and $180, respectively and $191 and $119 for the
three months ended December 31, 2008 and 2007, respectively.  As of
December 31, 2008, the total unrecognized compensation cost related to option
awards is $664.
 
 In order
to determine the fair value of stock options on the date of grant, the Company
uses the Black-Scholes option-pricing model, including an estimate of forfeiture
rates.  Inherent in this model are assumptions related to expected
stock-price volatility, risk-free interest rate, expected life and dividend
yield.  Expected stock-price volatility is based on the historical daily
price changes of the underlying stock which are obtained from public data
sources. The risk-free interest rate is based on U.S. Treasury issues with
a term equal to the expected life of the option. The Company uses historical
data to estimate expected dividend yield, expected life and forfeiture rates.
The fair values of the options granted were estimated based on the following
weighted average assumptions:
 
 7
 ACETO
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited
and in thousands, except per-share amounts)
  Six
      months ended
                      December
      31,2008
                    
                    
                    2007Expected
      life
                    
                    5.6
      years
                    
                    
                    5.6
      yearsExpected
      volatility
                    
                    
                    48.0
                    %
                    
                    
                    46.0
                    %Risk-free
      interest rate
                    
                    
                    2.42
                    %
                    
                    
                    3.55
                    %Dividend
      yield
                    
                    
                    2.32
                    %
                    
                    
                    2.50
                    %
 
 In
December 2008, the Company granted 97 shares of restricted common stock and 23
restricted stock units. These shares of restricted common stock and restricted
stock units vest over three years.
 
 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 December 2007, the Company granted
86 shares of restricted common stock and 20 restricted stock units.
  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 and six months ended December 31, 2008,
the Company recorded stock-based compensation expense of approximately $345 and
$421, respectively, related to restricted common stock and restricted stock
units, of which $246 of compensation expense related to retiree eligibility for
the three months ended December 31, 2008.  Therefore, the compensation
expense for the quarter ended December 31, 2008 is not representative of the
compensation expense for the entire fiscal year.  As of December 31,
2008, the total unrecognized compensation cost related to restricted stock
awards is $1,169.  For the three and six months ended December 31,
2007, the Company recorded stock-based compensation expense of approximately
$199 for shares of restricted common stock and restricted stock
units.
 
 The
Company’s policy is to satisfy stock-based compensation awards with treasury
shares, to the extent available.
 
 (4)  Common Stock
 
 On
December 4, 2008, the Company’s board of directors declared a regular
semi-annual cash dividend of $0.10 per share which was paid on January 13, 2009
to shareholders of record on December 19, 2008.  The amount paid for
the cash dividend of $2,473 was included in accrued expenses at December 31,
2008.
  (5)  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:
 Six
      months ended
                      December
      31,
                    
                    
                    Three
      months ended
                      December
      31,2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007Weighted average shares
      outstanding
                    
                    
                    24,402
                    
                    
                    
                    24,341
                    
                    
                    
                    24,435
                    
                    
                    
                    24,346Dilutive effect of stock options
      and restricted
                      stock awards and
      units
                    
                    
                    538
                    
                    
                    
                    493
                    
                    
                    
                    580
                    
                    
                    
                    471Diluted weighted average
      sharesoutstanding
                    
                    
                    24,940
                    
                    
                    
                    24,834
                    
                    
                    
                    25,015
                    
                    
                    
                    24,817
  8
 ACETO
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited
and in thousands, except per-share amounts)
  There
were 1,471 and 1,316 common equivalent shares outstanding as of December 31,
2008 and 2007, respectively, that were not included in the calculation of
diluted income per common share for the six months ended December 31, 2008 and
2007, respectively, because their effect would have been
anti-dilutive.  There were 1,380 and 1,427 common shares outstanding
as of December 31, 2008 and 2007, respectively, that were not included in the
calculation of diluted income per common share for the three months ended
December 31, 2008 and 2007, respectively, because their effect would have been
anti-dilutive.
 
 (6)  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:
 
 Six
      months ended
                      December
      31,
                    
                    
                    Three
      months ended
                      December
      31,2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007Comprehensive
      income:Net
      income
                    
                    $
                    5,643
                    
                    
                    $
                    2,202
                    
                    
                    $
                    1,092
                    
                    
                    $
                    908Foreign
      currency translation
                      adjustment
                    
                    
                    (5,459
                    )
                    
                    
                    4,050
                    
                    
                    
                    (1,050
                    )
                    
                    
                    1,659Unrealized
      gain on available
                      for
      sale securities
                    
                    
                    -
                    
                    
                    
                    37
                    
                    
                    
                    -
                    
                    
                    
                    16Change
      in fair value of cross
                      currency
      interest rate swaps
                    
                    
                    -
                    
                    
                    
                    12
                    
                    
                    
                    -
                    
                    
                    
                    11Total
                    
                    $
                    184
                    
                    
                    $
                    6,301
                    
                    
                    $
                    42
                    
                    
                    $
                    2,594
 
 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 and six months ended December 31, 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.
 
 (7)  Income
Taxes
 
 The
decrease in the net deferred income tax assets of $965 for the six months ended
December 31, 2008, when compared to June 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 $1,339 for the six months
ended December 31, 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 six
months ended December 31, 2007.
 
 9
 ACETO
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited
and in thousands, except per-share amounts)
 
 (8)  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
years 2009, 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 $1,700 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 and thus believes that, at most, it is a de minimus contributor to
the site contamination.  Accordingly, the Company believes that the
settlement offer is unreasonable. 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 December 31, 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 asserted 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.  Settlement discussions with BASF are
on-going; however, since collection from BASF is uncertain at this time, no
asset has been recorded.
 
 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 cannot 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.
 
 10
 ACETO
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited
and in thousands, except per-share amounts)
  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 December 31, 2009.  As of December 31, 2008 and June 30, 2008,
the aggregate future rental payments of the third party that are guaranteed by
the Company are $231 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 $20 and $663 as of December
31, 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.
 
 (9)
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; and
  Level
3 –   Unobservable inputs that are not corroborated by market
data.
 
 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 corporate equity securities publicly traded on major
exchanges.  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
December 31, 2008:
  11
 ACETO
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited
and in thousands, except per-share amounts)
  Fair Value Measurements at December 31, 2008
      UsingQuoted
      Prices
                                              in
      Active
                                              Markets
                                              (Level
      1)
                                            
                                            
                                            Significant
                                              Other
                                              Observable
                                              Input
      (Level 2)
                                            
                                            
                                            Significant
                                              Unobservable
                                              inputs
                                              (Level
      3)
                                            
                                            
                                            TotalCash
      equivalents:Time
      deposits
                                            
                                            
                                            -
                                            
                                            
                                            $
                                            5,649
                                            
                                            
                                            
                                            -
                                            
                                            
                                            $
                                            5,649Investments:Trading
      securities
                                            
                                            $
                                            353
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            353Time
      deposits
                                            
                                            
                                            -
                                            
                                            
                                            
                                            10,375
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            10,375Foreign
      currency contracts
                                            
                                            
                                            -
                                            
                                            
                                            
                                            173
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            173
 
 The
Company did not hold financial assets and liabilities which were recorded at
fair value in the Level 3 category as of December 31, 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.
 
 (10)  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
adoption of EITF No. 06-11 did not 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.
  12
 ACETO
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited
and in thousands, except per-share amounts)
  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.
 
 In June
2008, the FASB issued Staff Position EITF No. 03-06-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities” (FSP EITF 03-06-1). FSP EITF 03-06-1 provides that unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings per share pursuant to the
two-class method in SFAS No. 128, “Earnings per Share”. The Company will adopt
FSP EITF 03-06-1 effective July 1, 2009. The Company is currently assessing the
impact of FSP EITF 03-06-1 on its consolidated financial
statements.
 
 (11)  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.
  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.
 
 13
 ACETO
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited
and in thousands, except per-share amounts)
  Six
Months Ended December 31, 2008 and 2007:
 Health
                      Sciences
                    
                    
                    Chemicals
      & Colorants
                    
                    
                    Crop
                      Protection
                    
                    
                    Consolidated
      Totals2008Net
      sales
                    
                    $
                    99,314
                    
                    
                    $
                    61,826
                    
                    
                    $
                    6,914
                    
                    
                    $
                    168,054Gross
      profit
                    
                    
                    20,543
                    
                    
                    
                    8,700
                    
                    
                    
                    1,439
                    
                    
                    
                    30,6822007Net
      sales
                    
                    $
                    90,323
                    
                    
                    $
                    58,165
                    
                    
                    $
                    8,145
                    
                    
                    $
                    156,633Gross
      profit
                    
                    
                    17,457
                    
                    
                    
                    7,987
                    
                    
                    
                    1,598
                    
                    
                    
                    27,042
 
 Three
Months Ended December 31, 2008 and 2007:
 Health
                    Sciences
                  
                  
                  Chemicals
      & Colorants
                  
                  
                  Crop
                    Protection
                  
                  
                  Consolidated
      Totals2008Net
      sales
                  
                  $
                  42,705
                  
                  
                  $
                  28,084
                  
                  
                  $
                  3,426
                  
                  
                  $
                  74,215Gross
      profit
                  
                  
                  7,165
                  
                  
                  
                  3,890
                  
                  
                  
                  690
                  
                  
                  
                  11,7452007Net
      sales
                  
                  $
                  43,643
                  
                  
                  $
                  29,858
                  
                  
                  $
                  3,604
                  
                  
                  $
                  77,105Gross
      profit
                  
                  
                  7,355
                  
                  
                  
                  4,393
                  
                  
                  
                  731
                  
                  
                  
                  12,479
  14
  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 December 31, 2008 and the related condensed consolidated
statements of income for the three-month and six-month periods ended December
31, 2008 and 2007, and the related condensed consolidated statements of cash
flows for the six-month periods ended December 31, 2008 and 2007 included in the
accompanying Securities and Exchange Commission Form 10-Q for the period ended
December 31, 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
 February
4, 2009
 
 15
 
 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 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, continued successful
integration of acquisitions, receipt of regulatory approvals, 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 $168,054 for the six months ended December 31, 2008,
which represents a 7.3% increase from the $156,633 reported in the comparable
prior period.  Gross profit for the six months ended December 31, 2008
was $30,682 and our gross margin was 18.3% as compared to gross profit of
$27,042 and gross margin of 17.3% in the comparable prior period.  Our
selling, general and administrative costs for the six months ended December 31,
2008 increased to $22,463, an increase of 5.1% over the $21,364 we reported in
the prior period.  Our net income increased to $5,643, or $0.23 per
diluted share, compared to $2,202, or $0.09 per diluted share in the prior
period.
 
 Our
financial position as of December 31, 2008 remains strong, as we had cash and
cash equivalents and short-term investments of $36,232, working capital of
$130,461, no long-term debt and shareholders’ equity of $140,172.
 
 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.
  16
 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. 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 the fiscal 2009 second quarter, we received our EPA
registration for Halosulfuron, a herbicide used to control sedge on rice,
vegetables and turf and ornamental grasses.  We believe we will begin
selling Halosulfuron in the 2009 growing season.  We have several
additional products in various stages of review and our plan is to continue to
develop this 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. In fiscal 2009, we are developing an industrial
brand for Aceto called “Enabling Quality Worldwide” and we expect to market this
brand globally. 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
and six months ended December 31, 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.
 
 17
 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
 
 Six
Months Ended December 31, 2008 Compared to Six Months Ended December 31,
2007
 
 Net
      Sales by Segment
                          Six
      months ended December 31,Comparison
      20082008
                        
                        
                        2007
                        
                        
                        Over/(Under) 2007%
      of
                        
                        
                        
                        
                        
                        %
      of
                        
                        
                        $
                        
                        
                        %Segment
                        
                        Net sales
                        
                        
                        total
                        
                        
                        Net sales
                        
                        
                        total
                        
                        
                        change
                        
                        
                        changeHealth
      Sciences
                        
                        $
                        99,314
                        
                        
                        
                        59.1
                        %
                        
                        $
                        90,323
                        
                        
                        
                        57.7
                        %
                        
                        $
                        8,991
                        
                        
                        
                        10.0
                        %Chemicals
      & Colorants
                        
                        
                        61,826
                        
                        
                        
                        36.8
                        
                        
                        
                        58,165
                        
                        
                        
                        37.1
                        
                        
                        
                        3,661
                        
                        
                        
                        6.3Crop
      Protection
                        
                        
                        6,914
                        
                        
                        
                        4.1
                        
                        
                        
                        8,145
                        
                        
                        
                        5.2
                        
                        
                        
                        (1,231
                        )
                        
                        
                        (15.1
                        )Net
      sales
                        
                        $
                        168,054
                        
                        
                        
                        100.0
                        %
                        
                        $
                        156,633
                        
                        
                        
                        100.0
                        %
                        
                        $
                        11,421
                        
                        
                        
                        7.3
                        %Gross
      Profit by Segment
                          Six
      months ended December 31,Comparison
      20082008
                        
                        
                        2007
                        
                        
                        Over/(Under) 2007Gross
                        
                        
                        %
      of
                        
                        
                        Gross
                        
                        
                        %
      of
                        
                        
                        $
                        
                        
                        %Segment
                        
                        profit
                        
                        
                        sales
                        
                        
                        Profit
                        
                        
                        sales
                        
                        
                        change
                        
                        
                        ChangeHealth
      Sciences
                        
                        $
                        20,543
                        
                        
                        
                        20.7
                        %
                        
                        $
                        17,457
                        
                        
                        
                        19.3
                        %
                        
                        $
                        3,086
                        
                        
                        
                        17.7
                        %Chemicals
      & Colorants
                        
                        
                        8,700
                        
                        
                        
                        14.1
                        
                        
                        
                        7,987
                        
                        
                        
                        13.7
                        
                        
                        
                        713
                        
                        
                        
                        8.9Crop
      Protection
                        
                        
                        1,439
                        
                        
                        
                        20.8
                        
                        
                        
                        1,598
                        
                        
                        
                        19.6
                        
                        
                        
                        (159
                        )
                        
                        
                        (10.0
                        )Gross
      Profit
                        
                        $
                        30,682
                        
                        
                        
                        18.3
                        %
                        
                        $
                        27,042
                        
                        
                        
                        17.3
                        %
                        
                        $
                        3,640
                        
                        
                        
                        13.5
                        %
 Net
Sales
 
 Net sales
increased $11,421, or 7.3%, to $168,054 for the six months ended December 31,
2008, compared with $156,633 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 $8,991 for the six months ended
December 31, 2008, to $99,314, which represents a 10.0% increase from net sales
of $90,323 for the prior period.  This increase is due to various
factors including increased sales from our foreign operations of $4,407,
specifically our Shanghai operations and a $2,648 rise in sales of our domestic
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 $3,249 due to the higher volume of re-orders
for existing products.  The overall increase in sales for the Health
Sciences segment is offset, in part, by a decline in sales of $1,338 of
pharmaceutical intermediates, which represent key components used in the
manufacture of certain drug products.
 
 18
 
 Chemicals
& Colorants
 
 Net sales
for the Chemicals & Colorants segment increased by $3,661 for the six months
ended December 31, 2008, to $61,826, which represents a 6.3% increase from net
sales of $58,165 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 attributable to an increase of $2,238 of sales of
chemicals used to produce surface coatings, $1,049 increase in sales of
chemicals utilized in the food, beverage and cosmetic industries and a $1,280
increase in sales of polymer additives. These increases are partially offset by
a decline in sales of color pigments of $642 and decreased sales of $971 in
chemicals used in aroma products, both of which have decreased as a direct
result of the economic recession.
 
 Crop
Protection
 
 Net sales
for the Crop Protection segment decreased to $6,914 for the six months ended
December 31, 2008, a decrease of $1,231, or 15.1%, from net sales of $8,145 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 $3,640 to $30,682 (18.3% of net sales) for the six months ended
December 31, 2008, as compared to $27,042 (17.3% of net sales) for the prior
period.
 
 Health
Sciences
 
 Health
Sciences’ gross profit of $20,543 for the six months ended December 31, 2008 was
$3,086 or 17.7% higher than the prior period.  This increase in gross
profit was attributable to $1,708 increase in gross profit from our foreign
operations, primarily Europe and Shanghai, as well as the overall increase in
sales volume. Gross profit as a percentage of sales for the six months ended
December 31, 2008 increased to 20.7% from 19.3% 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 six months ended December 31, 2008 increased by $713, or 8.9%,
over the prior period. The gross margin was up slightly at 14.1% for the six
months ended December 31, 2008 compared to 13.7% for the prior
period.  The increase in the gross profit and gross margin primarily
relates to increase in sales volume for food, beverage and cosmetic chemicals
and polymer additives and favorable product mix on surface
coatings.
 
 Crop
Protection
 
 Gross
profit for the Crop Protection segment decreased to $1,439 for the six months
ended December 31, 2008, versus $1,598 for the prior period, a decrease of $159
or 10.0%.  Despite a decrease in sales, gross margin increased
slightly for the six months to 20.8% compared to the prior period gross margin
of 19.6%.
  Selling,
General and Administrative Expenses
  Selling,
general and administrative expenses (SG&A) increased $1,099, or 5.1%, to
$22,463 for the six months ended December 31, 2008 compared to $21,364 for the
prior period.  As a percentage of sales, SG&A decreased to 13.4%
for the six months ended December 31, 2008 versus 13.6% for the prior
period.  The increase in SG&A relates primarily to a $1,715 rise
in personnel related costs, of which $651 relates to our foreign operations and
$1,064 relates to various factors including annual salary increases and
stock-based compensation and increased accrued bonus expense as a result of
increased profitability. SG&A also increased due to a $145 increase in sales
and marketing expenses, which is directly related to the increase in sales, as
well as higher bad debt expense of $507 as a result of additional reserves. The
increase in SG&A is partially offset by a decline of $1,383 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.
 
 19
 
 Research
and Development Expenses
 
 Research
and development expenses (R&D) decreased $200 over the prior period to $153
for the six months ended December 31, 2008 due to the abandonment of R&D
related to two finished dosage form generic pharmaceutical products that were to
be distributed in Europe.
  Operating
Income
  For the
six months ended December 31, 2008, operating income was $8,066 compared to
$5,325 in the prior period, an increase of $2,741 or 51.5%.  This
increase was due to the overall increase in gross profit of $3,640 and to a
lesser extent, a $200 decline in R&D expenses, offset by the $1,099 increase
in SG&A.
  Interest
and Other Income, Net
  Interest
and other income, net was $728 for the six months ended December 31, 2008, which
represents an increase of $742 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 six months ended December 31, 2008 decreased to 35.4%
from 58.3% 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.
 
 20
  Three
Months Ended December 31, 2008 Compared to Three Months Ended December 31,
2007
 
 Net
      Sales by Segment
                            Three
      months ended December 31,Comparison
      20082008
                          
                          
                          2007
                          
                          
                          Over/(Under) 2007%
      of
                          
                          
                          
                          
                          
                          %
      of
                          
                          
                          $
                          
                          
                          %Segment
                          
                          Net sales
                          
                          
                          total
                          
                          
                          Net sales
                          
                          
                          total
                          
                          
                          change
                          
                          
                          changeHealth
      Sciences
                          
                          $
                          42,705
                          
                          
                          
                          57.6
                          %
                          
                          $
                          43,643
                          
                          
                          
                          56.6
                          %
                          
                          $
                          (938
                          )
                          
                          
                          (2.1
                          %)Chemicals
      & Colorants
                          
                          
                          28,084
                          
                          
                          
                          37.8
                          
                          
                          
                          29,858
                          
                          
                          
                          38.7
                          
                          
                          
                          (1,774
                          )
                          
                          
                          (5.9
                          )Crop
      Protection
                          
                          
                          3,426
                          
                          
                          
                          4.6
                          
                          
                          
                          3,604
                          
                          
                          
                          4.7
                          
                          
                          
                          (178
                          )
                          
                          
                          (4.9
                          )Net
      sales
                          
                          $
                          74,215
                          
                          
                          
                          100.0
                          %
                          
                          $
                          77,105
                          
                          
                          
                          100.0
                          %
                          
                          $
                          (2,890
                          )
                          
                          
                          (3.7
                          %)Gross
      Profit by Segment
                            Three
      months ended December 31,Comparison
      20082008
                          
                          
                          2007
                          
                          
                          Over/(Under) 2007Gross
                          
                          
                          %
      of
                          
                          
                          Gross
                          
                          
                          %
      of
                          
                          
                          $
                          
                          
                          %Segment
                          
                          profit
                          
                          
                          sales
                          
                          
                          profit
                          
                          
                          sales
                          
                          
                          change
                          
                          
                          changeHealth
      Sciences
                          
                          $
                          7,165
                          
                          
                          
                          16.8
                          %
                          
                          $
                          7,355
                          
                          
                          
                          16.9
                          %
                          
                          $
                          (190
                          )
                          
                          
                          (2.6
                          %)Chemicals
      & Colorants
                          
                          
                          3,890
                          
                          
                          
                          13.9
                          
                          
                          
                          4,393
                          
                          
                          
                          14.7
                          
                          
                          
                          (503
                          )
                          
                          
                          (11.5
                          )Crop
      Protection
                          
                          
                          690
                          
                          
                          
                          20.1
                          
                          
                          
                          731
                          
                          
                          
                          20.3
                          
                          
                          
                          (41
                          )
                          
                          
                          (5.6
                          )Gross
      profit
                          
                          $
                          11,745
                          
                          
                          
                          15.8
                          %
                          
                          $
                          12,479
                          
                          
                          
                          16.2
                          %
                          
                          $
                          (734
                          )
                          
                          
                          (5.9
                          %)
 
 Net
Sales
 
 Net sales
decreased $2,890, or 3.7%, to $74,215 for the three months ended December 31,
2008, compared with $77,105 for the prior period.  We reported sales
declines in each of our three business segments-Health Sciences, Chemicals and
Colorants, and Crop Protection.
 
 Health
Sciences
 
 Net sales
for the Health Sciences segment decreased by $938 for the three months ended
December 31, 2008, to $42,705, which represents a 2.1% decrease from net sales
of $43,643 for the prior period.  This decrease is primarily the
result of a decline of $1,137 in sales of our pharmaceutical
intermediates.
 
 Chemicals
& Colorants
 
 Net sales
for the Chemicals & Colorants segment were $28,084 for the three months
ended December 31, 2008, a decrease of $1,774 from net sales of $29,858 for the
prior period.  Our chemical business consists of a variety of
products, customers and consuming markets, most of which were negatively
affected by the difficult economic conditions.  The decrease of 5.9%,
over the prior period is partially attributable to a drop in sales of pigment
intermediates of $1,017 due to the timing of new pharmaceutical manufacturing
projects. Sales of chemicals used in aroma products also decreased by $1,351 due
to reduced demand. Sales of products sold by our foreign operations also had a
decline of $940. These decreases are offset, in part, by an increase in sales
into the surface coatings industry of $1,339.
  21
  Crop
Protection
 
 Net sales
for the Crop Protection segment decreased to $3,426 for the three months ended
December 31, 2008, a decrease of $178, or 4.9%, from net sales of $3,604 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. This decrease related to the overall potato acreage
which is down in both the United States and Europe.
 
 Gross
Profit
 
 Gross
profit decreased to $11,745 (15.8% of net sales) for the three months ended
December 31, 2008, as compared to $12,479 (16.2% of net sales) for the prior
period.
 
 Health
Sciences
 
 Gross
profit for the three months ended December 31, 2008 decreased slightly by $190,
or 2.6%, over the prior period. The gross margin was relatively consistent to
the prior year at 16.8% for the three months ended December 31, 2008 compared to
16.9% for the prior period.  The decrease in gross profit was
attributable to the overall decline in sales volume.
 
 Chemicals
& Colorants
 
 Chemicals
and Colorants’ gross profit of $3,890 for the three months ended December 31,
2008 was $503 or 11.5% lower than the prior period.  The gross margin
was 13.9% for the three months ended December 31, 2008 compared to 14.7% for the
prior period.  The decrease in the gross profit and the gross margin
percentage is due to primarily sales volume decline in both our domestic and
foreign operations, as well as unfavorable price mix on aroma
chemicals.
 
 Crop
Protection
 
 Gross
profit for the Crop Protection segment decreased to $690 for the three months
ended December 31, 2008, versus $731 for the prior period, a decrease of $41 or
5.6%.  Gross margin for the quarter was relatively flat at 20.1%
compared to the prior period gross margin of 20.3%. The decrease in the gross
profit and gross margin percentage primarily relates to a decline in sales
volume of our sprout inhibitor products as described above.
 
 Selling,
General and Administrative Expenses
 
 SG&A
decreased $29 or 0.3%, to $10,549 for the three months ended December 31, 2008
compared to $10,578 for the prior period.  As a percentage of sales,
SG&A increased to 14.2% for the three months ended December 31, 2008 versus
13.7% for the prior period. The decrease in SG&A relates primarily to a
decline of $413 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. This decrease is offset by an increase in personnel
related costs of $372.
 
 Research
and Development Expenses
 
 R&D
decreased $299 over the prior period for the three months ended December 31,
2008 due to the abandonment of R&D related to two finished dosage form
generic pharmaceutical products that were to be distributed in Europe. The
remaining obligations on these projects will not be incurred due to the
discontinuance of the R&D resulting in a reversal of an accrual in the three
months ended December 31, 2008. This reversal is due to the renegotiation of
certain estimates related to these two R&D products.
 
 22
  Operating
Income
 
 For the
three months ended December 31, 2008, operating income was $1,314 compared to
$1,720 in the prior period, a decrease of $406 or 23.6%.  This
decrease was due to the overall decrease in gross profit of $734 offset by the
$29 decrease in SG&A and $299 decline in R&D expenses.
  Interest
and Other Income, Net
  Interest
and other income, net was $359 for the three months ended December 31, 2008,
which represents an increase of $700 over the prior period mainly due to $682 in
net foreign currency exchange gains.
 
 Provision
for Income Taxes
 
 The
effective tax rate for the three months ended December 31, 2008 was 32.6%, which
was relatively consistent to 33.4% for the prior period.
 
 Liquidity
and Capital Resources
 
 Cash
Flows
 
 At
December 31, 2008, we had $25,504 in cash and cash equivalents, of which $20,125
was outside the United States, $10,728 in short-term investments and no
outstanding bank loans.  Working capital was $130,461 at December 31,
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.
  Our cash
position at December 31, 2008 decreased $21,011 from the amount at June 30,
2008.  Operating activities for the six months ended December 31, 2008
used cash of $8,496, for this period, as compared to cash provided by operations
of $5,469 for the comparable 2007 period. The $8,496 was comprised of $5,643 in
net income and $3,348 derived from adjustments for non-cash items less a net
$17,487 decrease from changes in operating assets and liabilities. The non-cash
items included $849 in depreciation and amortization expense, $819 in non-cash
stock compensation expense and $965 for the deferred income taxes provision.
Accounts receivable decreased $5,867 during the six months ended December 31,
2008, due to decreased sales during the second quarter of 2009 as compared to
the fourth quarter of 2008, as well as an improvement in days sales outstanding.
Inventories increased by approximately $8,232 and accounts payable decreased by
$10,406 due primarily to purchases of inventories in our German operations, in
particular, our Health Ingredients business, as a result of a ramp-up in orders
for products to be shipped in the third and fourth quarters of 2009. In
addition, overall inventories have increased as a direct result of the current
economic environment, whereby certain customers are postponing
deliveries.  Accrued expenses and other liabilities decreased $1,027
during the six months ended December 31, 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 an increase in
Value Added Tax (VAT) for our foreign subsidiaries related to increased sales.
Other receivables increased $3,154 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 December 31, 2007
increased $6,710 from the amount at June 30, 2007.  Operating
activities for the six months ended December 31, 2007 provided cash of $5,469,
for this period, as compared to cash provided by operations of $3,006 for the
comparable 2006 period. The $5,469 was comprised of $2,202 in net income and
$2,911 derived from adjustments for non-cash items plus a net $356 increase from
changes in operating assets and liabilities.
 
 Investing
activities for the six months ended December 31, 2008 used cash of $10,131
primarily related to purchases of investments.  Investing activities
for the six months ended December 31, 2007 used cash of $537 primarily related
to purchases of property and equipment.
 
 23
  Financing
activities for the six months ended December 31, 2008 provided cash of $400
primarily due to proceeds from the exercise of stock options of $755 offset in
part, by a $500 payment of a note payable.  Financing activities for
the six months ended December 31, 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
$20,402, as of December 31, 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 December 31, 2008, we had utilized $20 in letters of
credit leaving $9,980 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 December 31, 2008.
 
 Working
Capital Outlook
 
 Working
capital was $130,461 at December 31, 2008 versus $128,786 at June 30,
2008.  The increase in working capital was primarily attributable to
increased net income and reduction of trade receivables during the six
months.  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 $11,800
in fiscal 2009.    In connection with our Health Sciences
business, we plan to advance a supplier $2,000 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.  In January 2009, the Company paid a cash dividend of $2,473
to the shareholders of record on December 19, 2008.   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
adoption of EITF No. 06-11 did not have a material impact on the Company’s
consolidated financial statements.
  24
  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.
 
 In June
2008, the FASB issued Staff Position EITF No. 03-06-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities” (FSP EITF 03-06-1). FSP EITF 03-06-1 provides that unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings per share pursuant to the
two-class method in SFAS No. 128, “Earnings per Share”. The Company will adopt
FSP EITF 03-06-1 effective July 1, 2009. The Company is currently assessing the
impact of FSP EITF 03-06-1 on its consolidated financial
statements.
  25
  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 $10,728 at December 31, 2008.  Those
short-term investments consisted of time deposits 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 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 $35 as of December 31,
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 December 31, 2008, we had foreign currency contracts
outstanding that had a notional amount of $29,934.  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 December 31, 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
December 31, 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 December 31, 2008, resulting from
a hypothetical 10% adverse change in quoted foreign currency exchange rates
amounted to $7,623.  Actual results, however, may differ.
  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
proceduresare
alsodesigned 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 ofDecember 31,2008and, based on their evaluation, have
concluded that the disclosure controls and procedures were effectiveas of such date.
  26
 
 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 December 31,
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.
 
 Item
4.    Submission of Matters to a Vote of Security
Holders.
 
 The
Company held an annual meeting of its shareholders on December 4,
2008.  Two matters were voted on at the annual meeting, as
follows:
 
 a.
                The
      election of nominees Leonard S. Schwartz, Robert A. Wiesen, Stanley H.
      Fischer, Albert L. Eilender, Hans C. Noetzli and William N. Britton as
      directors of the Company until the next annual meeting was voted on at the
      annual meeting.
 
 The votes
were cast for this matter as follows:
 
 FOR
                          WITHHELD/ABSTAINLeonard
      S. Schwartz
                          
                          15,226
                          6,507Robert
      A. Wiesen
                          
                          16,185
                          5,548Stanley
      H. Fischer
                          
                          15,254
                          6,479Albert
      L. Eilender
                          
                          20,672
                          1,061Hans
      C. Noetzli
                          
                          20,674
                          1,059William
      N. Britton
                          
                          20,663
                          1,070
 
 Each
nominee was elected a director of the Company.
  b.
                Ratification
      of the selection of BDO Seidman, LLP as the Company’s independent
      accountants for the current fiscal
year.
 
 The votes
were cast for this matter as follows:
  FOR
                        
                        AGAINST
                        
                        ABSTAIN21,593
                        
                        44
                        
                        96
 27
  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
 28
  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 February
      6, 2009
              BY
              /s/ Douglas
      RothDouglas
      Roth, Chief Financial Officer(Principal
      Financial Officer)DATE February
      6, 2009
              BY
              /s/ Leonard S.
      SchwartzLeonard
      S. Schwartz, Chairmanand
      Chief Executive Officer(Principal
      Executive Officer)








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