# UNITED

STATES SECURITIES AND
EXCHANGE COMMISSIONWashington, D.C. 20549

---

# FORM

10-Q

(Mark One)

|[X] |  | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE           SECURITIES EXCHANGE

ACT OF 1934
|--- |  | --------------------------------------------------------------------------------------------------

# For the

quarterly
period ended June 30, 2004

OR

|[   ] |  | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE           SECURITIES EXCHANGE

ACT OF 1934
|----- |  | ---------------------------------------------------------------------------------------------------

For the

transition period
from______to_______

# Commission file number
0-12992

SYNTHETECH, INC.(Exact name of
registrant as specified in its charter)

|OREGON                                                        | 84-0845771                          
|------------------------------------------------------------- | ------------------------------------
|(State or Other
Jurisdictionof Incorporation or
Organization) | (I.R.S.

EmployerIdentification No.)

1290 Industrial Way PO Box 646 Albany, Oregon 97321

(Address of Principal
Executive Offices)

(541)

967-6575(Registrants
Telephone Number, Including Area Code)

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
|------ | --

# 

Indicate by check mark

whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the

Exchange Act).

|Yes | No

X
|--- | -----

Number of shares

outstanding of the
issuer's common stock as of August 2, 2004:  14,452,396



SYNTHETECH, INC

INDEX

|         |                       |                                                      | Page
|-------- | --------------------- | ---------------------------------------------------- | ----
|         |                       |                                                      |     
|Part I.  | Financial Information |                                                     
|         |                       |                                                      |     
|         | Item 1.               | Financial Statements                                 |     
|         |                       |                                                      |     
|         |                       | Balance Sheets                                       | 3   
|         |                       | Statements of Operations                             | 5   
|         |                       | Statements of Cash Flows                             | 6   
|         |                       | Notes to Unaudited Condensed Financial Statements    | 7   
|         |                       |                                                      |     
|         | Item 2.               | Management's Discussion and Analysis of Financial    |     
|         |                       | Condition and Results of Operations                  | 11  
|         |                       |                                                      |     
|         | Item 3.               | Quantitative and Qualitative Disclosure about Market |     
|         |                       | Risk                                                 | 19  
|         |                       |                                                      |     
|         | Item 4.               | Controls and Procedures                              | 19  
|         |                       |                                                      |     
|Part II. | Other Information     |                                                      |     
|         |                       |                                                      |     
|         | Item 4.               | Submission of Matters to Vote of Security Holders    | 21  
|         |                       |                                                      |     
|         | Item 6.               | Exhibits and Reports on Form 8-K                     | 21  
|         |                       |                                                      |     
|         | Signatures            |                                                      | 22  



# PART I. FINANCIAL
INFORMATION

# Item 1. Financial
Statements

# SYNTHETECH, INC.

Balance Sheets (unaudited)

|                                      | June 30,2004 |  | March 31,2004 |           
|------------------------------------- | ------------ |  | ------------- | ----------
|                                      |              |  |               |           
|Assets                                |              |  |               |           
|                                      |              |  |               |           
|Current Assets:                       |              |  |               |           
|Cash and

cash equivalents            |              |  | $             | 4,027,000 
|Accounts

receivable, less allowance  |              | 
|for doubtful accounts of

$15,000 for |              | 
|both periods                          |              |  |               | 1,769,000 
|Inventories                           |              |  |               | 3,942,000 
|Prepaid expenses                      |              |  |               | 257,000   
|                                      |              |  |               |           
|Total Current Assets                  |              |  |               | 9,995,000 
|Property, plant and equipment, net    |              |  |               | 11,571,000
|                                      |              |  |               |           
|Total

Assets                         |              |  | $             | 21,566,000
|                                      |              |  |               |           

The accompanying notes

are an
integral part of these financial statements.

3



# SYNTHETECH, INC.

Balance Sheets(continued) (unaudited)

|                                               | June

30,2004 |  | March 31,2004 |           
|---------------------------------------------- | ------------- |  | ------------- | ----------
|                                               |               |  |               |           
|Liabilities and Shareholders'

Equity          |               |  |               |           
|                                               |               |  |               |           
|Current Liabilities:                           |               | 
|Current

portion of long term obligations      |               |  | $             | 24,000    
|Accounts

payable                              |               |  |               | 584,000   
|Accrued

compensation                          |               |  |               | 148,000   
|Income taxes

payable                          |               |  |               | 180,000   
|Other

accrued liabilities                     |               |  |               | 25,000    
|                                               |               |  |               |           
|                                               |               |  |               |           
|Total Current Liabilities                      |               |  |               | 961,000   
|                                               |               |  |               |           
|Long term obligations, net of current

portion |               |  |               | 46,000    
|Other long term liabilities                    |               |  |               | 60,000    
|                                               |               |  |               |           
|                                               |               |  |               |           
|Total

Liabilities                             |               |  |               | 1,067,000 
|                                               |               |  |               |           
|Shareholders' Equity:                          |               | 
|Common stock, $.001 par value;

authorized     |               | 
|100,000,000 shares; issued and

outstanding,   |               | 
|14,452,000 and 14,339,000

shares              |               |  |               | 14,000    
|Paid-in

capital                               |               |  |               | 9,103,000 
|Deferred

compensation                         |               |  |               | (23,000)  
|Retained

earnings                             |               |  |               | 11,405,000
|                                               |               |  |               |           
|                                               |               |  |               |           
|Total

Shareholders' Equity                    |               |  |               | 20,499,000
|                                               |               |  |               |           
|                                               |               |  |               |           
|Total Liabilities and Shareholders' Equity     |               |  | $             | 21,566,000
|                                               |               |  |               |           

The accompanying notes

are an integral
part of these financial statements.

4



# SYNTHETECH, INC.

Statements of
Operations(unaudited)

|                                     |  | 
|------------------------------------ |  | 
|Three Months Ended June

30,         |  | 
|                                     |  | 
|                                     |  | 
|                                     |  | 
|Revenue                              |  | 
|Cost of revenue                      |  | 
|                                     |  | 
|                                     |  | 
|Gross income (loss)                  |  | 
|                                     |  | 
|Research and development             |  | 
|Selling, general and

administrative |  | 
|                                     |  | 
|Total operating expense              |  | 
|                                     |  | 
|                                     |  | 
|Operating loss                       |  | 
|                                     |  | 
|Interest income                      |  | 
|Interest expense                     |  | 
|                                     |  | 
|                                     |  | 
|Loss before income taxes             |  | 
|                                     |  | 
|Income taxes                         |  | 
|                                     |  | 
|                                     |  | 
|Net loss                             |  | 
|                                     |  | 
|                                     |  | 
|Net loss per common share:           |  | 
|Basic and diluted loss per share     |  | 
|                                     |  | 
|                                     |  | 
|Weighted average shares outstanding: |  | 
|Basic

and diluted                   |  | 
|                                     |  | 

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

5



# SYNTHETECH, INC.

Statements of Cash
Flows(unaudited)

|Three Months Ended June

30,                            |  |  |   | 2004      |  |   | 2003        | 
|------------------------------------------------------- |  |  | - | --------- |  | - | ----------- | 
|                                                        |  |  |   |           |  |  
|                                                        |  | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                   |  | 
|Net loss                                                |  |  | $ | (412,000) |  | $ | (1,095,000) | 
|Adjustments to reconcile net

loss to                   |  | 
|cash used in operating

activities:                     |  | 
|Depreciation

expense                                   |  |  |   | 268,000   |  |   | 266,000     | 
|Amortization of deferred compensation                   |  |  |   | 4,000     |  |   | 4,000       | 
|                                                        |  | 
|(Increase) decrease in assets:                          |  | 
|Accounts receivable, net                                |  |  |   | (487,000) |  |   | (342,000)   | 
|Inventories                                             |  |  |   | 230,000   |  |   | (153,000)   | 
|Prepaid expenses                                        |  |  |   | 164,000   |  |   | 188,000     | 
|                                                        |  | 
|Increase (decrease) in liabilities:                     |  | 
|Accounts payable                                        |  |  |   | 25,000    |  |   | (69,000)    | 
|Accrued compensation                                    |  |  |   | (30,000)  |  |   | 36,000      | 
|Other accrued liabilities                               |  |  |   | (10,000)  |  |   | (16,000)    | 
|Other long term liabilities                             |  |  |   | 8,000     |  |   | 7,000       | 
|                                                        |  |  |   |          
|Cash used in operating activities                       |  |  |   | (240,000) |  |   | (1,174,000) | 
|                                                        |  |  |   |          
|                                                        |  | 
|CASH FLOWS FROM INVESTING ACTIVITIES:                   |  | 
|Property, plant and

equipment purchases                |  |  |   | (45,000)  |  |   | (185,000)   | 
|                                                        |  |  |   |          
|Cash used in

investing activities                      |  |  |   | (45,000)  |  |   | (185,000)   | 
|                                                        |  |  |   |          
|                                                        |  | 
|CASH FLOWS FROM FINANCING ACTIVITIES:                   |  | 
|Principal payments under long term debt obligations     |  |  |   | (6,000)   |  |   | (5,000)     | 
|                                                        |  |  |   |          
|Cash used in

financing activities                      |  |  |   | (6,000)   |  |   | (5,000)     | 
|                                                        |  |  |   |          
|                                                        |  | 
|Decrease in Cash and Cash

Equivalents                  |  |  |   | (291,000) |  |   | (1,364,000) | 
|                                                        |  | 
|Cash and Cash Equivalents at Beginning of

Period       |  |  |   | 4,318,000 |  |   | 5,965,000   | 
|                                                        |  |  |   |          
|                                                        |  | 
|Cash and Cash Equivalents at End of

Period             |  |  | $ | 4,027,000 |  | $ | 4,601,000   | 
|                                                        |  |  |   |          
|                                                        |  | 
|Non-Cash financing

Activities:                         |  | 
|Forfeiture of stock options

issued at below fair value |  |  |   | --        |  | $ | 17,000      | 

The accompanying notes

are an
integral part of these financial statements.

6



SYNTHETECH, INC. 
NOTES TO UNAUDITED
CONDENSED FINANCIAL STATEMENTS(Information
as of June 30, 2004 and for the three-months ended
June 30, 2004 and June 30, 2003 is unaudited)

# NOTE A.

GENERAL AND
BUSINESS

Synthetech, Inc., an Oregon
corporation, is a fine chemicals company specializing in organic synthesis,

biocatalysis
and chiral technologies. Synthetechs products are used predominately

by
pharmaceutical companies to make a wide range of peptide-based drugs under

development or
on the market for the treatment of AIDS, cancer, and cardiovascular and

other diseases.

The

summary financial statements
included herein have been prepared, without audit, pursuant to the rules

and regulations
of the Securities and Exchange Commission. Certain information and footnote

disclosures
normally included in financial statements prepared in accordance with

accounting
principles generally accepted in the United States of America have been

condensed or
omitted pursuant to such rules and regulations, although Synthetech

management believes
that the disclosures are adequate to make the information presented not

misleading.
Synthetech suggests that these summary financial statements be read in

conjunction with
the financial statements and the notes thereto included in

Synthetechs Annual Report
on Form 10-K for the year ended March 31, 2004, as amended.

The

interim period information
included in this Form 10-Q reflects all adjustments, consisting of normal

recurring
adjustments, that are, in the opinion of Synthetechs management,

necessary for a
fair statement of the results of the respective interim periods. Results of

operations for
interim periods are not necessarily indicative of results to be expected

for an entire
year.

# NOTE B.

COMPREHENSIVE
INCOME OR LOSS

Synthetech has no material components
of comprehensive income or loss other than net income or loss. Accordingly,

comprehensive
loss was equal to net loss for all periods presented.

7



# NOTE C.

STOCK BASED
COMPENSATION

Synthetech applies the intrinsic
value-based method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to

Employees,
and related interpretations, in accounting for its fixed plan stock

options. As such,
compensation expense is recorded only if, on the date of grant, the current

market price
of the underlying stock exceeds the exercise price. Resulting compensation

expense is
recognized over the vesting period.

If

compensation expense had been
determined based on the grant date fair value as computed under the

Black-Scholes option
pricing model for awards outstanding in the first quarter of fiscal 2005

and 2004 in
accordance with the provisions of SFAS No. 123, the Companys net loss

and net loss
per share would have changed to the pro forma amounts indicated below:

|                                                                         | Three MonthsEnded June 30, | 
|------------------------------------------------------------------------ | -------------------------- | 
|                                                                         | 2004                       | 
|Net loss, as

reported                                                   |                            | 
|Add: Stock-based employee compensation

expense included in reported net |                            | 
|loss                                                                     |                            | 
|                                                                         |                            | 
|Deduct:  Total stock-based

employee  compensation expense determined    |                            | 
|under fair value based method for all awards                             |                            | 
|                                                                         |                            | 
|                                                                         |                            | 
|Pro forma net loss                                                       |                            | 
|                                                                         |                            | 
|Net loss per

share:                                                     |                            | 
|Basic and Diluted - as reported                                          |                            | 
|                                                                         |                            | 
|Basic and Diluted - pro forma                                            |                            | 
|                                                                         |                            | 

Using

the Black-Scholes methodology,
the total value of options granted during the first quarter of fiscal 2005

and 2004 was
$238,000 and $116,000, respectively, which would be amortized to expense on

a pro forma
basis over the vesting period of the options.

In

calculating pro forma
compensation, the fair value of each stock option grant is estimated on the

date of grant
using the Black-Scholes option pricing model with the following weighted

average
assumptions used for grants during the first quarter of fiscal 2005 and

2004:

|                         | Three MonthsEnded June 30, |      
|------------------------ | -------------------------- | -----
|
|Expected dividend

yield |                            | None 
|Risk-free interest rate  |                            | 3.91%
|Expected volatility      |                            | 58%  
|Expected life (in years) |                            | 7.0  

8



# NOTE D.

EARNINGS (LOSS)
PER SHARE

Basic

earnings (loss) per share (EPS)
are computed by dividing net income (loss) by the weighted average number

of shares of
common stock outstanding during the period. Diluted earnings per share are

computed by
dividing net income (loss) by the weighted average number of shares of

common stock and
common stock equivalents outstanding during the period, calculated using

the treasury
stock method as defined in SFAS No. 128. The following is a reconciliation

of the shares
used to calculate basic and diluted loss per share:

|                                                      | Three MonthsEnded June 30, |           
|----------------------------------------------------- | -------------------------- | ----------
|
|Weighted average shares                               |                            |           
|outstanding for Basic EPS                             | 14,452,396                 |           
|                                                      |                            |           
|Dilutive effect of common

stock                      |                           
|options

issuable under treasury                      |                           
|stock

method                                         |                            | --        
|                                                      |                            |           
|                                                      |                            |           
|Weighted average common

and                          |                           
|common equivalent shares

outstanding for Diluted EPS |                            | 14,452,396
|                                                      |                            |           

For

purposes of computing diluted
earnings per share, weighted average common share equivalents do not

include stock options
with an exercise price that exceeded the average fair market value of

Synthetechs
common stock for the period, as the effect would be anti-dilutive. The

number of
anti-dilutive stock options outstanding were 1,240,650 and 1,211,600 as of

June 30, 2004
and 2003, respectively.

# NOTE E.

STATEMENTS OF
CASH FLOWS

Supplemental cash flow disclosures:

|Cash Paid    |      | Three MonthsEnded June 30, | 
|------------ | ---- | -------------------------- | 
|2004         | 2003
|Income taxes |      | $     1,000                | 
|Interest     |      | $     2,000                | 

9



# NOTE F.

INVENTORIES

Inventories are stated at the lower
of cost or market, determined on the first-in, first-out (FIFO) basis. The

major
components of inventories are as follows:

|                  | June 30,2004 |  |  
|----------------- | ------------ |  | -
|Finished products |              |  | $
|Work in process   |              |  |  
|Raw materials     |              |  |  
|                  |              |  |  
|                  |              |  | $
|                  |              |  |  

# NOTE G.

PROPERTY, PLANT
AND EQUIPMENT

Property, plant and equipment
consist of the following:

|                         | June 30,2004 |  |  
|------------------------ | ------------ |  | -
|Land                     |              |  | $
|Buildings                |              |  |  
|Machinery and equipment  |              |  |  
|Laboratory equipment     |              |  |  
|Furniture and fixtures   |              |  |  
|Vehicles                 |              |  |  
|Construction in progress |              |  |  
|                         |              |  |  
|                         |              |  |  
|Less:                    |              | 
|Accumulated depreciation |              |  |  
|                         |              |  |  
|                         |              |  | $
|                         |              |  |  

10



Item 2.

Managements
Discussion and Analysis of Financial Condition and Results of Operations

The

following discussion of the
results of Synthetechs operations and financial condition should be

read in
conjunction with the accompanying financial statements and the notes

thereto included
within this report.

# FORWARD

LOOKING
STATEMENTS

This Quarterly Report on Form 10-Q
contains forward-looking statements within the meaning of the Private

Securities
Litigation Reform Act of 1995. This Act provides a safe harbor

for
forward-looking statements to encourage companies to provide prospective

information about
themselves so long as they identify these statements as forward-looking and

provide
meaningful cautionary statements identifying important factors that could

cause actual
results to differ from the projected results. All statements, other than

statements of
historical fact, including statements regarding industry prospects and

future results of
operations or financial position, made in this Quarterly Report are forward

looking. Words
such as anticipates, believes, expects,
future and intends and similar expressions may

identify
forward-looking statements. In particular, forward-looking statements in

this report
include statements regarding: our future operating results, including

anticipated revenue;
increasing competition from developing countries; financing our current and

future capital
expenditures; management statements regarding market conditions; the

financial effect on
us of successful commercialization of customer drug development projects;

the effect any
change in foreign currency exchange rates would have on our operating

results; adequacy of
our cash and cash equivalents, borrowing capacity and internally generated

funds to
operate our business for the next twelve months; and our ability to

recognize deferred tax
assets. Forward-looking statements reflect managements current

expectations, plans
or projections and are inherently uncertain. Actual results could differ

materially from
managements expectations, plans or projections. Readers are

cautioned not to
place undue reliance on these forward-looking statements, which speak only

as of the date
of this report. The risks and uncertainties include, but are not limited

to, the
following: the uncertain market for our products, potential loss of a

significant
customer, customer concentration, potential termination or suspension by

customers of
significant projects, potential period-to-period revenue or expense

fluctuations, higher
than expected cash use, or ability to borrow funds under our line of

credit, production
factors, industry cost factors, competition, government regulation, labor

disputes,
technological change, and international business risks. Investors are

directed to our
filings with the Securities and Exchange Commission, including our Annual

Report on Form
10-K for the fiscal year ended March 31, 2004, for a further description of

risks and
uncertainties related to forward-looking statements made by us as well as

to other aspects
of our business. Synthetech undertakes no obligation to publicly release

any revisions to
these forward-looking statements that may be made to reflect events or

circumstances after
the date hereof or to reflect the occurrence of unanticipated events.

Readers are urged,
however, to review the factors set forth in reports that Synthetech files

from time to
time with the Securities and Exchange Commission.

11



# OVERVIEW

Synthetech is a fine chemicals
company specializing in organic synthesis, biocatalysis and chiral

technologies.
Synthetech develops and manufactures amino acid derivatives, specialty

amino acids,
peptide fragments, and proprietary custom chiral intermediates primarily

for the
pharmaceutical and cosmeceutical industries. Synthetechs products

support the
development and manufacture of therapeutic peptides and peptidomimetic

small molecule
drugs at every stage of a customers clinical development pipeline.

Synthetechs
domestic and international customer base includes major pharmaceutical and

emerging
biopharmaceutical companies, as well as contract drug synthesis firms.

Synthetech also
supplies catalog quantities of specialty amino acids to research

institutions,
universities and drug discovery firms. Our integrated grams to

tons production
capabilities allow us to be involved with our customers from the early

phases of
pharmaceutical discovery and clinical development through approval, market

launch and
commercialization.

Synthetech continued to face
difficult market conditions in the first quarter of fiscal 2005. The

pharmaceutical
industry remains subject to significant overcapacity at a time when low

cost suppliers
from emerging economies are developing positions in the pharmaceutical

supply chain.

Management believes that the new
product development sector of the pharmaceutical industry remains active.

Synthetech is
participating in a variety of early-stage projects, which have

traditionally been the
source for our future large-scale projects. In addition, we continue to

supply products
for marketed pharmaceuticals and a marketed cosmeceutical. Our products are

key building
blocks in a number of drugs currently in mid- to advanced phases of

clinical trials. If
some of the drugs eventually receive regulatory approvals and achieve

successful
commercialization this would assist Synthetech in establishing a more

stable revenue base.
However, the progress and timing of development projects and continued

success of marketed
products remain outside our control.

12



# RESULTS OF
OPERATIONS

The

following table sets forth, for
the periods indicated, the percentage of revenues represented by each item

included in the
Statements of Operations.

|                                     |  | Three MonthsEnded June 30, | 
|------------------------------------ |  | -------------------------- | 
|
|Revenue                              |  | 100.0%                     | 
|Cost of revenue                      |  | 90.1                       | 
|                                     |  |                            | 
|Gross income (loss)                  |  | 9.9                        | 
|Research and development             |  | 4.6                        | 
|Selling, general and

administrative |  | 20.5                       | 
|                                     |  |                            | 
|Total operating expenses             |  | 25.1                       | 
|Operating loss                       |  | (15.2)                     | 
|Interest income                      |  | 0.3                        | 
|Interest expense                     |  | (0.1)                      | 
|                                     |  |                            | 
|Loss before income taxes             |  | (15.0)                     | 
|Income taxes                         |  | --                         | 
|                                     |  |                            | 
|Net loss                             |  | (15.0)%                    | 
|                                     |  |                            | 

# Revenue

Revenue of $2.7 million in the first
quarter of fiscal 2005 increased by $968,000, or 55%, compared to $1.8

million in the
first quarter of fiscal 2004. Changes in revenue between the two periods

primarily relate
to revenue arising from large-scale customer projects.

Revenue from large-scale customer
projects was $2.0 million and $1.1 million for the first quarter of fiscal

2005 and 2004,
respectively. Large-scale project revenue during the first quarter of

fiscal 2005
primarily arose from two ongoing customer projects, both in support of

marketed products,
which also contributed to revenue from large-scale customer projects in the

first quarter
of fiscal 2004.

In

addition to large-scale projects,
a significant number of other customer projects contributed to our revenue

during the
first quarter of fiscal 2005 and 2004. While individually smaller in dollar

value, these
projects support a wide variety of programs for our major pharmaceutical,

emerging
biopharmaceutical and contract drug synthesis customers.

13



International sales, mainly to
Europe, were $198,000 for the first quarter of fiscal 2005, compared to

$386,000 for the
first quarter of fiscal 2004. International sales, like all of our revenue,

are subject to
significant quarterly fluctuations.

To the

extent successful customer
projects develop into larger volumes, either during late stage clinical

trials, pre-launch
or as a marketed product, our per unit pricing may decline. There is a risk

that the
impact on future sales and profitability from declines in pricing may not

be offset by an
increase in volume.

The

level of Synthetechs
business from period to period is largely unpredictable. Although revenue

associated with
marketed products is more likely to provide a longer term, on-going revenue

stream than
revenue associated with drugs at the clinical or discovery stages,

continuation of
customer demand for our products from customers with marketed products

remains subject to
various market conditions, including potential use of alternative

manufacturing methods,
continued market demand for drugs or cosmeceuticals that we support, and

competition from
other suppliers. Accordingly, while significant orders related to marketed

products
provide increased and more predictable revenue, we expect revenue related

to marketed
products and other projects to continue to fluctuate significantly from

period to period.

# Gross

income (loss)

Gross

income for the first quarter of
fiscal 2005 was $270,000, or 10% of revenue, compared to a gross loss of

$428,000, or 24%
of revenue, for the first quarter of fiscal 2004. The favorable change in

gross income
(loss) in the first quarter of fiscal 2005, compared to the first quarter

of fiscal 2004,
was primarily the result of a 55% increase in revenue. Overall

manufacturing costs
decreased 3% between the two quarters, primarily as a result of cost

control measures
implemented during the second quarter of fiscal 2004.

Cost

of revenue includes raw
materials, direct labor, manufacturing overhead, other direct costs, and

adjustments to
inventory.

# Operating expenses

R&D Expense. Research and
development (R&D) expense in the first quarter of fiscal 2005 was

$126,000, or 5% of
revenue, compared to $196,000, or 11% of revenue, in the first quarter of

fiscal 2004.
R&D expense during the first quarter of fiscal 2004 includes

approximately $30,000 of
employee relocation costs. In addition, the decrease in R&D expense for

the first
quarter of fiscal 2005, compared to the comparable period of fiscal 2004,

reflects an
increase in R&D department costs allocated to the manufacture of small

scale products,
which are reported as a component of cost of revenue when the product is

sold.

Synthetechs R&D department
primarily develops processes to produce and optimize the production of our

products and
their related scale-up to manufacturing quantities.

SG&A Expense. Selling,
general and administrative (SG&A) expense in the first quarter of

fiscal 2005 was
$563,000, or 21% of revenue, compared to $481,000, or 27% of revenue, in

the first quarter
of fiscal 2004. The increase in SG&A expense for the first quarter of

fiscal 2005
compared to the comparable period of fiscal 2004 primarily reflects an

increase in costs
associated with the hiring of a Director of Business Development for Europe

in February
2004 and increased legal and board of director fees.

14



SG&A expense consists of
compensation and related fringe benefits for sales and administrative

employees, cost of
professional services, marketing costs, costs associated with being a

public company and
costs related to administrative facilities and information services.

# Interest income

Interest income in the first quarter
of fiscal 2005 was $9,000, compared to $12,000 in the first quarter of

fiscal 2004.
Synthetechs interest income is primarily derived from earnings on our

cash
equivalents. The changes in interest income for the periods presented were

due to the
amount of cash equivalents and the interest rates in effect during the

periods. The
average rate of interest earned on Synthetechs cash and cash

equivalents during the
first quarter of fiscal 2005 and 2004 was 0.94%.

# Income

taxes

Based

on Synthetechs recent
history of losses, our near-term outlook and managements evaluation

of available tax
planning strategies, we have concluded that it is more likely than not that

Synthetech
will be unable to recognize its net deferred tax assets as a benefit for

income taxes,
continuing for an uncertain period of time.

# Net

loss

Net

loss for the first quarter of
fiscal 2005 was $412,000, or 15% of revenue, compared to a net loss of $1.1

million, or
62% of revenue, for the first quarter of fiscal 2004.

# INDUSTRY

FACTORS

# Market

Factors

The

market for Synthetechs
products is driven by the market for the drugs into which they are

incorporated. The drug
development process is dictated by the marketplace, drug companies and the

regulatory
environment. Synthetech has no control over the pace of these drug

development efforts,
which drugs get selected for clinical trials, which drugs are approved by

the FDA or, even
if approved, the ultimate market potential of the drugs. Synthetech also

manufactures
products for use in a cosmeceutical, and faces similar factors in that

market.

The

three stages of the drug
development process include: R&D or discovery stage, clinical trial

stage and marketed
drug stage. Synthetechs customers can spend years researching and

developing new
drugs, and take only a small percentage to clinical trials and fewer yet to

commercial
market. A substantial amount of activity continues to occur at the earlier

stages of
R&D and clinical trials. The market for peptide and peptidomimetic

small molecule
drugs is still developing.

Recurring sales of our products for
development programs are sporadic. Because of the high cancellation rate

for drug
development programs, there is a significant likelihood that there will be

no subsequent
or follow-on sales for any particular drug development program.

Accordingly,
the level

15



and

timing of customer orders
relating to specific drug development programs vary substantially from

period to period
and we cannot rely on any one customer as a constant source of revenue.

The

size of customer orders for
marketed drugs can be substantially larger than those for the discovery or

clinical trial
stages. Sales of Synthetechs products for marketed drugs may provide

an opportunity
for continuing, longer-term sales. While not subject to the same high

cancellation rate
faced by discovery and clinical trial-stage drug development programs, the

demand for
approved drugs remains subject to many uncertainties, including price, side

effects, the
existence of competing drugs and other factors affecting market acceptance.

These factors,
which are outside of Synthetechs control, affect the level of demand

for the drug
itself and, therefore, the demand for Synthetechs products. With

longer-term,
significant or large-scale orders, we expect increased competition to

supply these
products, which may result in canceled orders or downward price pressure.

Also, industry
cost pressures can cause pharmaceutical companies to explore and ultimately

adopt
alternative manufacturing processes that may not include Synthetechs

products as an
intermediate. The international fine chemicals industry, where Synthetech

is a niche
participant, has been marked by significant overcapacity and a resulting

downward pressure
on pricing.

Similar dynamics affect the
cosmeceutical development process and market, except that the regulatory

oversight and,
consequently, the typical length of a products time to

market are
reduced.

Due to

the foregoing industry factors
Synthetech cannot predict future demand beyond its current order base, and

existing orders
may be subject to cancellation or delay by customers. Until there is stable

demand for our
products, we are likely to continue to experience significant fluctuations

in our periodic
results.

# Production Factors

Synthetech has a full cycle
grams to tons production capability and has made over 400

products. With over
15 years of experience, Synthetech has developed extensive process

technology and is
recognized as one of the leaders in our area of expertise. Nevertheless,

initial batches
of new products and scaling up production processes for existing products

may result in
significantly lower than expected yields and extended processing time, and

may require
substantial rework to meet the required customer specifications. These

factors could cause
increased costs and delayed shipments, either of which could negatively

affect periodic
operating results.

16



# LIQUIDITY

AND CAPITAL
RESOURCES

Synthetechs cash and cash
equivalents totaled $4.0 million at June 30, 2004, compared to $4.3 million

at March 31,
2004. At June 30, 2004, Synthetech had working capital of $9.0 million,

compared to $9.2
million at March 31, 2004. Synthetech has a $1 million bank line of credit.

Interest is
payable at the prime rate with an annual facility fee of 0.5 percent. The

facility is
collateralized by cash and cash equivalents, accounts receivable,

inventories and
equipment. Financial covenants contained in the agreement require

Synthetech to maintain a
quick ratio of 1.5 to 1 and a tangible net worth of $19 million. Synthetech

had no
borrowings outstanding under the credit facility as of June 30, 2004. The

credit facility
expires in December 2004.

Synthetech used cash in operating
activities of $240,000 during the first quarter of fiscal 2005, compared to

cash used in
operating activities of $1.2 million in the first quarter of fiscal 2004.

In the first
quarter of fiscal 2005, the primary use of cash from operating activities

was the net loss
adjusted to exclude the effect of non-cash charges, followed by changes in

working capital
levels, including accounts receivable, inventories and accounts payable.

Accounts
receivable increased $487,000 to $1.8 million at June 30, 2004 from $1.3

million at March
31, 2004. The change in accounts receivable between the two periods is

primarily due to
differences in the timing of shipments. Inventory decreased $230,000 to

$3.9 million at
June 30, 2004 from $4.2 million at March 31, 2004. The change in inventory

between the two
periods is consistent with normal levels of inventory fluctuations based on

the timing of
raw material purchases and customer shipments. Accounts payable of $584,000

at June 30,
2004 was substantially unchanged from the March 31, 2004 balance of

$559,000.

Synthetech used $45,000 of cash for
capital expenditures during the first quarter of fiscal 2005, compared to

$185,000 in the
first quarter of fiscal 2004. Synthetech has completed its existing long-term capital
plan for its sole facility in Albany, Oregon. Synthetechs capital

plan for fiscal
2005 includes various projects totaling approximately $500,000. Based upon
Synthetechs future financial results management may defer some of

these projects to
conserve cash. Synthetech expects to finance all capital expenditures from

cash on hand
and any internal cash flow and does not anticipate the need for any new

debt or equity
financing to fund these projects.

Cash

used in financing activities for
the first quarter of fiscal 2005 and 2004 totaled $6,000 and $5,000,

respectively, for
principal payments under long term debt obligations.

Synthetech incurred significant
negative cash flow in fiscal 2004. Although we are unable to predict with

certainty future
demand (as discussed above), based on the existing state of the fine

chemicals industry,
our first quarter operating results and our existing order base, we may

incur negative
cash flow for fiscal 2005, which would adversely affect our cash position.

Notwithstanding the foregoing,
Synthetech believes that its existing cash and cash equivalents, its bank

line of credit
and any funds generated from operations will be sufficient to support its

operations for
the next twelve months. However, any projections of future cash needs and

cash flows are
subject to substantial uncertainty. There can be no assurance that current

cash and cash
equivalent balances and proceeds from the bank line of credit, together

with cash
anticipated to be generated from operations, will be sufficient to satisfy

our liquidity
requirements. Synthetech may not be able to draw under or renew its line of

credit or
obtain a replacement line of credit on acceptable terms. If sources of

liquidity are
insufficient, Synthetech may have to seek additional debt or equity

financing to satisfy
its liquidity requirements, may not be able to obtain adequate or favorable

financing and
any financing Synthetech obtains may dilute the ownership interests of its

shareholders
prior to the financing.

The

disclosure of payments we have
committed to make under our contractual obligations is set forth under the

heading
Managements Discussion and Analysis of Financial Condition and

Results of

17



Operations - Contractual  Obligations"  under Item 7 of our fiscal 2004

Form 10-K. Excluding scheduled
maturities, there have been no changes to our debt and operating lease

obligations since
March 31, 2004. Purchase obligations outstanding as of June 30, 2004 were

approximately
$120,000.

# CRITICAL

ACCOUNTING
POLICIES AND ESTIMATES

The

discussion and analysis of
Synthetechs financial condition and results of operations are based

upon its
financial statements, which have been prepared in accordance with

accounting principles
generally accepted in the United States. The preparation of these financial

statements
requires Synthetech to make estimates and judgments that affect the

reported amounts of
assets, liabilities, revenue and expenses and related disclosure of

contingent assets and
liabilities. On an on-going basis, Synthetech evaluates its estimates,

including those
related to deferred tax asset realization, inventory realization, allowance

for doubtful
accounts and long-lived asset impairments. Synthetech bases its estimates

on historical
experience and on various other assumptions. Actual results may differ from

these
estimates under different assumptions or conditions. Synthetech believes

the following are
among the critical accounting policies and the related judgments and

estimates that affect
the preparation of its financial statements.

# Allowance for Doubtful
Accounts

A

customers creditworthiness is
analyzed by a review of a customers payment history and financial

stability. The
allowance for doubtful accounts is established by a review of aged accounts

receivables
and a review for collectibility of specific accounts. The allowance for

doubtful accounts
as of June 30, 2004 and 2003 was $15,000. If circumstances related to a

specific customer
change, Synthetechs estimate of the recoverability of receivables

could materially
change.

# Inventories

Inventories are valued at the lower
of cost or market, determined on the first-in first-out (FIFO) basis. Costs

include direct
material, direct labor, applicable manufacturing overhead, and other direct

costs.

Management evaluates
Synthetechs inventory for impairment whenever it becomes aware that

indicators of
impairment exist. Factors contributing to inventory impairment include, but

are not
limited to: decreases in selling price; changes in customer specifications;

project
terminations or holds; variations in material produced by Synthetech from

customer
specifications; and production costs materially in excess of current market

price. It is
our policy to write-down inventories to reflect an estimate for impairment

in an amount
equal to the difference between the cost of inventory and the estimated

market value based
upon assumptions about future demand and market conditions. If actual

market conditions
are less favorable than those projected by management, an additional

inventory write-down
may be required in the future. Write-downs of inventory are reported as a

component of
cost of revenue in the relevant period.

# Long-Lived Asset
Impairment

Synthetech monitors the
recoverability of the carrying value of its long-lived assets such as

property, plant and
equipment. An impairment charge is recognized when the expected net

undiscounted cash
flows from an assets use (including any proceeds from disposition)

are less than the
assets carrying

18



value and the asset's carrying value exceeds its fair value.  Changes in

the expected use of a long-lived asset, and the
financial performance of the long-lived asset, are evaluated as indicators

of possible
impairment. Future cash flow value may be based upon appraisals for

property, plant and
equipment, future cash flow estimates from operating the long-lived assets

and other
operating considerations. Based on this analysis, Synthetech did not

recognize an
impairment to long-lived assets during the current period.

# Revenue

Recognition

Synthetech recognizes revenue,
including shipping and handling charges billed to customers, when the

following criteria
are met:

| |  |  | Persuasive
evidence of an arrangement exists,
| | - |  | ---------------------------------------------

| |  |  | Delivery
has occurred or services have been rendered,
| | - |  | -----------------------------------------------------

| |  |  | Synthetechs
price to our customer is fixed or determinable, and
| | - |  | ----------------------------------------------------------------

| |  |  | Collectibility
is reasonably assured.
| | - |  | -------------------------------------

Shipping and handling

costs are
classified as part of cost of revenue. .

# Item 3.

Quantitative and
Qualitative Disclosures about Market Risk

Synthetechs primary market risk
exposure is the impact of interest rate fluctuations on interest income

earned on our cash
equivalents. The risks associated with market, liquidity and principal are

mitigated by
investing in high-credit quality securities and limiting concentrations of

issuers and
maturity dates. Synthetech does not invest in derivative financial

instruments.

Substantially all
of Synthetechs purchases and sales are denominated in U.S.

dollars and, as a
result, it has relatively little exposure to foreign currency exchange risk

with respect
to any of its purchases and sales. Should Synthetech enter into a

significant transaction
denominated in a foreign currency, we may enter into a forward exchange

contract at that
time.  Synthetech was not a party to any forward exchange contracts as

of June 30,
2004.  For existing company transactions denominated in a foreign

currency, the
effect of an immediate 10% change in relevant exchange rates would not have

a material
impact on Synthetechs operating results or cash flows.

# Item 4.

Controls and
Procedures

Synthetech maintains a system of
disclosure controls and procedures designed to provide reasonable assurance

as to the
reliability of our published financial statements and other disclosures

included in our
reports under the Securities Exchange Act of 1934. In accordance with Rule

13a-15(b) of
the Securities and Exchange Act of 1934, our management evaluated, under

the supervision
and with the participation of our Chief Executive Officer and Chief

Financial Officer, the
effectiveness of the design and operation of Synthetechs disclosure

controls and
procedures (as defined in Rule 13a-15(e) under the Securities and Exchange

Act of 1934) as
of the end of the period covered

19



by this  report.  Based upon that  evaluation,  our Chief  Executive

Officer  and the Chief  Financial Officer concluded that
Synthetechs disclosure controls and procedures were effective as of

the end of the
period covered by this report to ensure that material information relating

to Synthetech
was made known to them by others within Synthetech, particularly during the

period in
which this Quarterly Report on Form 10-Q was being prepared.

There

has been no change in our
internal control over financial reporting during the fiscal quarter ended

June 30, 2004
that has materially affected or is reasonably likely to materially affect

our internal
control over financial reporting.

Synthetechs Chief Executive
Officer and Chief Financial Officer do not expect that our disclosure

controls and
internal controls will prevent all error and all fraud. A control system,

no matter how
well conceived and operated, can provide only reasonable, not absolute,

assurance that the
objectives of the system are met. Further, the design of a control system

must reflect the
fact that there are resource constraints, and the benefits of controls must

be considered
relative to their costs. Because of the inherent limitations in all control

systems, no
evaluation of controls can provide absolute assurance that all control

issues and
instances of fraud, if any, within Synthetech have been detected. These

inherent
limitations include the realities that judgments in decision-making can be

faulty, and
that breakdowns can occur because of simple mistake or error. Additionally,

controls can
be circumvented by the individual acts of some persons, by collusion of two

or more
people, or by management override of the control. The design of any system

of controls
also is based partly on certain assumptions about the likelihood of future

events, and
there can be no assurance that any design will succeed in achieving its

stated goals under
all potential future conditions.

---

20



# PART II.

OTHER
INFORMATION

# Item 4.

Submission of
Matters to a Vote of Security Holders

The Annual Meeting of

Shareholders
was held on July 15, 2004 in Portland, Oregon.

1) Election of

DirectorsAll six incumbent directors were
reelected without opposition to serve one-year terms in office. The results

of this
election were as follows:

|Name of

Director       | For        | Withheld
|----------------------- | ---------- | --------
|                        |            |         
|Paul C. Ahrens          | 13,036,935 | 584,188 
|David R. Clarke         | 13,152,086 | 469,037 
|Daniel T. Fagan         | 13,151,386 | 469,737 
|Howard L. Farkas        | 13,140,336 | 480,787 
|M. "Sreeni" Sreenivasan | 12,949,536 | 671,587 
|Charles B. Williams     | 13,059,886 | 561,237 

2) Ratification of
Independent Auditors The appointment of KPMG LLP as the
independent auditors for fiscal year 2005 was ratified. The results of the

shareholder
vote were as follows:

|                        | For        | Against | Abstain
|----------------------- | ---------- | ------- | -------
|Appointment of KPMG LLP
|as independent

auditor | 13,474,010 | 119,713 | 27,400 

3) Approval of
Synthetechs 2004 Equity Incentive PlanThe Synthetech 2004

Equity Incentive
Plan was not approved by the shareholders. The results of the shareholder

vote were as
follows:

|                               | For       | Against | Abstain | Not

Voted
|------------------------------ | --------- | ------- | ------- | ----------
|Approval of Synthetech's

2004
|Equity Incentive

Plan         | 5,470,882 | 989,760 | 123,436 | 7,037,045 

# Item 6.

Exhibits and
Reports on Form 8-K

Exhibits.

| | Exhibit

3.1 |  | Articles
of Incorporation of the Company, as amended, incorporated by reference to

the exhibits
filed with the Companys Annual Report on Form 10-K for the fiscal

year ended March
31, 1991.
| | ------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Exhibit

3.2 |  | Bylaws
of the Company, as amended, incorporated by reference to the exhibits filed

with the
Companys Quarterly Report on Form 10-Q for the fiscal quarter ended

September 30,
2001.
| | ------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Exhibit 31.1 |  | Rule
13a-14(a) Certification of Chief Executive Officer
| | ------------ |  | -------------------------------------------------------

| | Exhibit 31.2 |  | Rule
13a-14(a) Certification of Chief Financial Officer
| | ------------ |  | -------------------------------------------------------

| | Exhibit 32.1 |  | Section
1350 Certification of Chief Executive Officer
| | ------------ |  | -----------------------------------------------------

| | Exhibit 32.2 |  | Section
1350 Certification of Chief Financial Officer
| | ------------ |  | -----------------------------------------------------

|(b) | Reports
on Form 8-K.
|--- | --------------------

| | On
June 8, 2004, Synthetech, Inc. furnished a report on Form 8-K under Item 12

announcing
its fiscal 2004 financial results.
| | -----------------------------------------------------------------------------------------------------------------------------

21



# 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.

SYNTHETECH, INC.

|Date:  August 3, 2004 | /s/ M. SreenivasanM. SreenivasanPresident & C.E.O.                           
|--------------------- | -----------------------------------------------------------------------------
|                      |                                                                              
|Date:  August 3, 2004 | /s/ Gary A. WeberGary A. WeberVice President Finance &Chief Financial Officer

22