# 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
December 31, 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
Jurisdiction      |  | (I.R.S. Employer    | 
| | of Incorporation or
Organization) |  | Identification 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

Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest
practicable date:

| | Class: Common Stock, $0.001 par valueShares outstanding as of February 14, 2005: 14,463,093
| | -------------------------------------------------------------------------------------------



# SYNTHETECH, INC

# INDEX

|Part I.  | Financial Information |                                                                                           | Page
|-------- | --------------------- | ----------------------------------------------------------------------------------------- | ----
|         |                       |                                                                                           |     
|         | Item 1.               | Condensed 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 | 13  
|         |                       |                                                                                           |     
|         | Item 3.               | Quantitative and Qualitative Disclosure about Market
    Risk                             | 22  
|         |                       |                                                                                           |     
|         | Item 4.               | Controls and Procedures                                                                   | 22  
|         |                       |                                                                                           |     
|Part II. | Other Information     |                                                                                           |     
|         |                       |                                                                                           |     
|         | Item 5.               | Other Information                                                                         | 23  
|         |                       |                                                                                           |     
|         | Item 6.               | Exhibits                                                                                  | 24  
|         |                       |                                                                                           |     
|         | Signatures            |                                                                                           | 25  

2



# PART I. FINANCIAL
INFORMATION

# Item 1. Financial
Statements

# SYNTHETECH, INC.

Condensed Balance
Sheets (unaudited)

|                                     | December 31,2004 |  | March 31,2004 |           
|------------------------------------ | ---------------- |  | ------------- | ----------
|Assets                               |                  |  |               |           
|                                     |                  |  |               |           
|Current Assets:                      |                  |  |               |           
|Cash and cash equivalents            |                  |  | $             | 3,507,000 
|Accounts receivable, less allowance  |                  | 
|for doubtful accounts of $15,000 for |                  | 
|both periods                         |                  |  |               | 812,000   
|Inventories                          |                  |  |               | 4,223,000 
|Prepaid expenses                     |                  |  |               | 514,000   
|                                     |                  |  |               |           
|Total Current Assets                 |                  |  |               | 9,056,000 
|                                     |                  |  |               |           
|                                     |                  |  |               |           
|Property, Plant and Equipment, net   |                  |  |               | 11,053,000
|                                     |                  |  |               |           
|                                     |                  |  |               |           
|                                     |                  |  |               |           
|Total Assets                         |                  |  | $             | 20,109,000
|                                     |                  |  |               |           

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

3



# SYNTHETECH, INC.

Condensed Balance
Sheets (continued)(unaudited)

|                                            | December 31,2004 |  | March 31,2004 |           
|------------------------------------------- | ---------------- |  | ------------- | ----------
|                                            |                  |  |               |           
|Liabilities and Shareholders' Equity        |                  |  |               |           
|                                            |                  |  |               |           
|Current Liabilities:                        |                  | 
|Current portion of long term debt           |                  |  | $             | 25,000    
|Accounts payable                            |                  |  |               | 476,000   
|Accrued compensation                        |                  |  |               | 150,000   
|Income taxes payable                        |                  |  |               | 180,000   
|Other accrued liabilities                   |                  |  |               | 22,000    
|                                            |                  |  |               |           
|Total Current Liabilities                   |                  |  |               | 853,000   
|                                            |                  |  |               |           
|Long Term Debt, net of current portion      |                  |  |               | 33,000    
|Other Long Term Liabilities                 |                  |  |               | 78,000    
|                                            |                  |  |               |           
|Total Liabilities                           |                  |  |               | 964,000   
|                                            |                  |  |               |           
|                                            |                  |  |               |           
|Shareholders' Equity:                       |                  | 
|Common stock, $.001 par value; authorized   |                  | 
|100,000,000 shares; issued and outstanding, |                  | 
|14,463,000 and 14,452,000 shares            |                  |  |               | 14,000    
|Paid-in capital                             |                  |  |               | 9,110,000 
|Deferred  compensation                      |                  |  |               | (14,000)  
|Retained earnings                           |                  |  |               | 10,035,000
|                                            |                  |  |               |           
|Total Shareholders' Equity                  |                  |  |               | 19,145,000
|                                            |                  |  |               |           
|Total Liabilities and Shareholders' Equity  |                  |  | $             | 20,109,000
|                                            |                  |  |               |           

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

4



# SYNTHETECH, INC.

Condensed Statements
of Operations (unaudited)

|                                     | For the Three Months EndedDecember 31, |  | For the Nine Months EndedDecember 31, |           
|------------------------------------ | -------------------------------------- |  | ------------------------------------- | ----------
|
|                                    
|Revenue                              |                                        |  | $                                     | 1,181,000 
|Cost of revenue                      |                                        |  |                                       | 1,675,000 
|                                     |                                        |  |                                       |           
|Gross income (loss)                  |                                        |  |                                       | (494,000  
|                                    
|Research and development             |                                        |  |                                       | 190,000   
|Selling, general and administrative  |                                        |  |                                       | 599,000   
|                                     |                                        |  |                                       |           
|Total operating expenses             |                                        |  |                                       | 789,000   
|                                     |                                        |  |                                       |           
|Operating loss                       |                                        |  |                                       | (1,283,000
|                                    
|Interest income                      |                                        |  |                                       | 17,000    
|Interest expense                     |                                        |  |                                       | (1,000    
|                                     |                                        |  |                                       |           
|Loss before income taxes             |                                        |  |                                       | (1,267,000
|                                    
|Benefit for income taxes             |                                        |  |                                       | --        
|                                     |                                        |  |                                       |           
|Net loss                             |                                        |  | $                                     | (1,267,000
|                                     |                                        |  |                                       |           
|                                    
|Net loss per common share:           |                                        | 
|Basic and diluted loss per share     |                                        |  | $                                     | (0.09     
|                                     |                                        |  |                                       |           
|                                    
|Weighted average shares outstanding: |                                        | 
|Basic and diluted                    |                                        |  |                                       | 14,463,093
|                                     |                                        |  |                                       |           

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

5



# SYNTHETECH, INC.

Condensed Statements
of Cash Flows (unaudited)

|For The Nine Month Period Ended December 31,        |  |  | 2004 |            | 2003 |  
|--------------------------------------------------- |  |  | ---- | ---------- | ---- | -
|                                                   
|CASH FLOWS FROM OPERATING ACTIVITIES:               |  |  |      |            |      |  
|Net loss                                            |  |  | $    | (1,782,000 | )    | $
|Adjustments to reconcile net loss to                |  | 
|net cash used in operating activities:              |  | 
|Depreciation expense                                |  |  |      | 806,000    |      |  
|Loss on retirement of equipment                     |  |  |      | --         |      |  
|Amortization of deferred compensation               |  |  |      | 12,000     |      |  
|                                                   
|(Increase) decrease in assets:                      |  | 
|Accounts receivable, net                            |  |  |      | 470,000    |      |  
|Inventories                                         |  |  |      | (51,000    | )    |  
|Prepaid expenses                                    |  |  |      | (93,000    | )    |  
|Increase (decrease) in liabilities:                 |  | 
|Accounts payable                                    |  |  |      | (83,000    | )    |  
|Accrued compensation                                |  |  |      | (28,000    | )    |  
|Other accrued liabilities                           |  |  |      | (13,000    | )    |  
|Other long term liabilities                         |  |  |      | 26,000     |      |  
|                                                    |  |  |      |           
|Cash used in Operating Activities                   |  |  |      | (736,000   | )    |  
|                                                    |  |  |      |           
|                                                   
|CASH FLOWS FROM INVESTING ACTIVITIES:               |  | 
|Property, plant and equipment purchases             |  |  |      | (65,000    | )    |  
|                                                    |  |  |      |           
|Cash Used In Investing Activities                   |  |  |      | (65,000    | )    |  
|                                                    |  |  |      |           
|                                                   
|CASH FLOWS FROM FINANCING ACTIVITIES:               |  | 
|Principal payments under long-term debt obligations |  |  |      | (18,000    | )    |  
|Repurchase of common stock                          |  |  |      | (2,000     | )    |  
|Proceeds from stock option purchases                |  |  |      | --         |      |  
|Proceeds from stock purchases                       |  |  |      | 10,000     |      |  
|                                                    |  |  |      |           
|Cash Provided By (Used In) Financing Activities     |  |  |      | (10,000    | )    |  
|                                                    |  |  |      |           
|                                                   
|Decrease in Cash and Cash Equivalents               |  |  |      | (811,000   | )    |  
|                                                   
|Cash and Cash Equivalents at Beginning of Period    |  |  |      | 4,318,000  |      |  
|                                                    |  |  |      |           
|                                                   
|Cash and Cash Equivalents at End of Period          |  |  | $    | 3,507,000  |      | $
|                                                    |  |  |      |           
|                                                   
|Non-Cash Financing Activities:                      |  | 
|Forfeiture of stock options issued below fair value |  |  | $    | 1,000      |      | $
|Deferred compensation on stock options granted      |  | 
|below fair value                                    |  |  |      | --         |      | $

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

6



# SYNTHETECH, INC.

NOTES TO UNAUDITED
CONDENSED FINANCIAL STATEMENTS (Information as of December 31, 2004 and for the
three and nine-month  periods
ended December 31, 2004 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 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, and are used as ingredients in drugs for the treatment of AIDS,
cancer, cardiovascular and other diseases, and in cosmeceuticals. A cosmeceutical is a
product that makes no therapeutic claims, but is intended for topical use by humans.

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s management 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.

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. |  | SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|------- |  | ------------------------------------------

Use
of Estimates:The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual results could
differ from those estimates. Significant items subject to such estimates and assumptions
include the valuation of inventory, accounts receivable, deferred tax assets and the
carrying amount of property, plant and equipment.

7



Cash
and Cash Equivalents: Cash and cash equivalents include demand cash and highly liquid
debt instruments with maturities of three months or less when purchased.

Cash and cash equivalents consist of
the following:

|                 | December 31,2004 |  | March 31,2004 |          
|---------------- | ---------------- |  | ------------- | ---------
|                 |                  |  |               |          
|Cash             |                  |  | $             | 129,000  
|Cash equivalents |                  |  |               | 3,378,000
|                 |                  |  |               |          
|                 |                  |  | $             | 3,507,000
|                 |                  |  |               |          

Accounts
receivable:Accounts receivable are recorded at the invoiced amount and do not bear
interest. Synthetech does not finance its trade receivables by factoring the balances to a
third party. 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 December 31, 2004 and March 31, 2004 was $15,000.

Inventories:
Inventories are stated at the lower of cost or market, determined on the first-in,
first-out 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. It is Synthetechs 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. Write-downs of inventory are reported as a component of cost of revenue in the
relevant period.

Property,
Plant and Equipment: Property, plant and equipment are recorded at cost. Expenditures
for maintenance and repairs are expensed as incurred. Expenditures that materially
increase values, change capacities or extend useful lives are capitalized. When assets are
retired, sold, or otherwise disposed of, the applicable costs and accumulated depreciation
are removed from the accounts and the resulting gain or loss is recognized. Depreciation
and amortization are provided on the straight-line method over the estimated useful lives
of the individual assets which range from three to 40 years. Assets to be disposed of by
sale are stated at the lower of their fair values or carrying amounts and depreciation is
no longer recognized.

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 value and the assets carrying value exceeds its fair value.

Revenue
Recognition: Synthetech recognizes revenue, including shipping and handling charges
billed to customers, upon shipment of product when title and risk of loss pass to
customers. Shipping and handling costs are classified as part of cost of revenue.

8



Stock-Based Compensation:In
accordance with Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure  an Amendment of Financial
Accounting Standards Board (FASB) Statement No. 123 (SFAS 148) and Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), Synthetechs pro forma option expense is computed
using the Black-Scholes option pricing model.

As permitted by SFAS No. 123, as
amended by SFAS No. 148, Synthetech has elected to continue to apply the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations in accounting for its employee
stock option plan and employee stock purchase plan (ESPP). Synthetech is generally not
required under APB Opinion No. 25 and related interpretations to recognize compensation
expense in connection with its stock-based employee compensation plans. Synthetech is
required by SFAS No. 123 to present, in the Notes to Financial Statements, the pro forma
effects on reported net income and earnings per share as if compensation expense had been
recognized based on the fair value method of accounting prescribed by SFAS No. 123.
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.

The following table illustrates the
effect on the net loss and net loss per share if Synthetech had applied the fair value
recognition provisions of SFAS 123, as amended, to options granted under the stock-based
employee compensation plans. For purposes of this pro forma disclosure, the estimated
value of the options is recognized over the options vesting periods.

|                                   | Three Months Ended December 31, |  | Nine Months Ended December 31, |           
|---------------------------------- | ------------------------------- |  | ------------------------------ | ----------
|
|Net loss, as reported              |                                 |  | $                              | (1,267,000
|Add: Stock-based employee          |                                 | 
|compensation expense included in   |                                 | 
|reported net loss, net of related  |                                 | 
|tax effects                        |                                 |  |                                | 4,000     
|                                  
|Deduct: Total stock-based employee |                                 | 
|compensation expense determined    |                                 | 
|under fair value based method for  |                                 | 
|all awards, net of related tax     |                                 | 
|effects                            |                                 |  |                                | (50,000   
|                                   |                                 |  |                                |           
|Pro forma net loss                 |                                 |  | $                              | (1,313,000
|                                   |                                 |  |                                |           
|Net loss per share:                |                                 | 
|Basic and Diluted - as reported    |                                 |  | $                              | (0.09     
|                                   |                                 |  |                                |           
|Basic and Diluted - pro forma      |                                 |  | $                              | (0.09     
|                                   |                                 |  |                                |           

9



In calculating pro forma
compensation, the fair value of each stock option grant and stock purchase right is
estimated on the date of grant using the Black-Scholes option pricing model and the
following weighted average assumptions. No stock options were granted during the three
months ended December 31, 2003. No ESPP shares were granted during the three months ended
December 31, 2004, or 2003.

|                                     | Three Months Ended December 31, |  | Nine Months Ended December 31, |     
|------------------------------------ | ------------------------------- |  | ------------------------------ | ----
|
|Stock Options:                       |                                 |  |                                |     
|Dividend yield                       |                                 |  |                                | -   
|Expected volatility                  |                                 |  |                                | 61  
|Risk-free interest rate              |                                 |  |                                | 3.91
|Expected life (in years)             |                                 |  |                                | 7.00
|Weighted-Average fair value of stock |                                 | 
|options granted                      |                                 | 
|At market value                      |                                 |  | $                              | 0.53
|Below market value                   |                                 |  |                                | -   
|All options granted                  |                                 |  | $                              | 0.53
|                                    
|ESPP:                                |                                 | 
|Dividend yield                       |                                 |  |                                | -   
|Expected volatility                  |                                 |  |                                | -   
|Risk-free interest rate              |                                 |  |                                | -   
|Expected life (in years)             |                                 |  |                                | -   
|Weighted-Average fair value of       |                                 | 
|purchase rights granted              |                                 |  |                                | -   

|NOTE C. |  | STATEMENTS
OF CASH FLOWS
|------- |  | ------------------------

| | Supplemental
cash flow disclosures:
| | -----------------------------------

|Cash Paid |  | Three Months Ended December 31, |   | Nine Months Ended December 31, | 
|--------- |  | ------------------------------- | - | ------------------------------ | 
|
|Interest  |  |                                 | $ | 1,000                          | 

10



|NOTE D. |  | COMPREHENSIVE
INCOME OR LOSS
|------- |  | ----------------------------

Synthetech has no material components
of comprehensive income or loss other than net income or loss. Accordingly, comprehensive
net income or loss was equal to net income or loss for all periods presented.

|NOTE E. |  | EARNINGS
(LOSS) PER SHARE
|------- |  | -------------------------

Basic loss per share (EPS) is
computed by dividing net loss by the weighted average number of shares of common stock
outstanding during the period. Diluted loss per share is computed by dividing net 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. For the three month and nine month periods ended December 31, 2004 and 2003,
the weighted average shares used to compute diluted loss per share did not differ from the
weighted average shares used to compute basic loss per share.

The following common stock
equivalents were excluded from the earnings per share computation because their effect
would have been anti-dilutive:

|                                 |      | For the Three MonthsEnded December 31, |      | For the Nine MonthsEnded December 31, |     
|-------------------------------- | ---- | -------------------------------------- | ---- | ------------------------------------- | ----
|                                 | 2004 |                                        | 2003 |                                       | 2004
|Common stock options outstanding |      |                                        |      | 1,245,000                             |     
|                                 |      |                                        |      |                                       |     

|NOTE F. |  | INVENTORIES
|------- |  | -----------

| | The
major components of inventories, net of reserves, are as follows:
| | ---------------------------------------------------------------------

|                  | December 31,2004 |  | March 31,2004 |          
|----------------- | ---------------- |  | ------------- | ---------
|                  |                  |  |               |          
|Finished products |                  |  | $             | 2,221,000
|Work in process   |                  |  |               | 922,000  
|Raw materials     |                  |  |               | 1,080,000
|                  |                  |  |               |          
|                  |                  |  | $             | 4,223,000
|                  |                  |  |               |          

11



|NOTE G. |  | PROPERTY,
PLANT AND EQUIPMENT
|------- |  | -----------------------------

| | Property,
plant and equipment consist of the following:
| | -------------------------------------------------------

|                         | December 31,2004 |  | March 31,2004 |           
|------------------------ | ---------------- |  | ------------- | ----------
|                         |                  |  |               |           
|Land                     |                  |  | $             | 241,000   
|Buildings                |                  |  |               | 6,846,000 
|Machinery and equipment  |                  |  |               | 14,652,000
|Laboratory equipment     |                  |  |               | 1,011,000 
|Furniture and fixtures   |                  |  |               | 400,000   
|Vehicles                 |                  |  |               | 151,000   
|Construction in Progress |                  |  |               | -         
|                         |                  |  |               |           
|                         |                  |  |               | 23,301,000
|Less:                    |                  | 
|Accumulated depreciation |                  |  |               | 12,248,000
|                         |                  |  |               |           
|                         |                  |  | $             | 11,053,000
|                         |                  |  |               |           

|NOTE H. |  | LINE
OF CREDIT
|------- |  | --------------

Synthetechs bank line of credit
provides for borrowings of up to $1 million. Interest is payable at prime with an annual
facility fee of 0.5 percent. The agreement is collateralized by cash and cash equivalents,
accounts receivable, inventory and equipment. The agreement requires Synthetech to
maintain various financial and other covenants. The line of credit has a one-year term and
expires in December 2005. As of December 31, 2004, Synthetech had no borrowings
outstanding under the credit agreement and was in compliance with all covenants.

|NOTE I. |  | RELATED
PARTY TRANSACTIONS
|------- |  | --------------------------

Synthetech has engaged Mr. Paul
Ahrens, Chairman of the Board, and Mr. David Clarke, Director, to assist with
Synthetechs marketing and strategic development efforts. Fees incurred by Synthetech
under these arrangements during the first nine months of fiscal 2005 were $40,000.

12



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 our large-scale
project revenue for the fourth quarter of fiscal 2005; customer completion of a New Drug
Application; obtaining regulatory approval for new drugs and other matters relating to
drug development progress; expected shipping dates; financing our current and future
capital expenditures; 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; the adequacy of our cash and cash equivalents,
borrowing capacity including our ability to draw on our credit facility and internally
generated funds to operate our business for the next twelve months; and our inability 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 that may cause
actual results to vary materially from any forward-looking statements 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 inability 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
urged to read our filings with the Securities and Exchange Commission, including our
Annual Report on Form 10-K for the fiscal year ended March 31, 2004, as amended, 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 does not intend to 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.

13



# 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 continues to face
difficult market conditions. 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 that are resulting in downward pressure on
pricing.

Revenue in the third quarter of
fiscal 2005 was $1.2 million. Our quarterly results fluctuate significantly, primarily as
a result of the progress on and timing of customer orders relating to large-scale
projects. The level of revenue for the current quarter is near the lower end of our range
of quarterly revenues since fiscal year 2001.

Management expects that, compared to
the third quarter of fiscal 2005, revenue will improve significantly in the fourth quarter
of fiscal 2005. As of February 10, 2005, our revenues relating to large-scale project
shipments already made during the fourth quarter of fiscal 2005 and our backlog relating
to large-scale projects scheduled for shipment during the fourth quarter, totaled
approximately $2.3 million. In addition, we continue to be active in supplying smaller
orders of key intermediates for several early stage drug development projects. Management
is currently unable to forecast with reasonable certainty Synthetechs revenues relating to
large-scale projects beyond the fourth quarter of fiscal 2005.

During the second quarter of fiscal
2005, Synthetech entered into a manufacturing agreement to prepare three validation
batches and submit a Drug Master File to the Food and Drug Administration for an advanced
cGMP intermediate. This agreement will support a customers New Drug Application
expected to be filed in calendar 2005. We shipped the first validation batch during the
third quarter of fiscal 2005. Synthetech has also received orders for validation batches
to supply a key starting material for another customers drug under development,
which is expected to be filed for regulatory approval in calendar 2005. Synthetech has
supported both of these projects for numerous years as they have progressed through the
pharmaceutical development cycle.

Management anticipates that
Synthetechs revenue will continue to be volatile from period to period, primarily
due to the level of revenue from, and the timing of shipments relating to, large-scale
projects. Synthetech operates in a challenging business environment, characterized by the
unpredictable dynamics and life cycle of pharmaceutical projects, which can lead to rapid
fluctuations in the mix of projects and revenues. As the uncertainties inherent in drug
development projects remain outside of Synthetechs control, it is difficult to
predict the progress, timing and revenue potential of these projects.

14



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. The progress and timing of development
projects and continued success of marketed products remain outside our control.

# 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.

|Percentage of Revenue
|---------------------

|                                    | For the Three MonthsEnded December 31, |          | For the Nine MonthsEnded December 31, | 
|----------------------------------- | -------------------------------------- | -------- | ------------------------------------- | 
|                                    | 2004                                   |          | 2003                                  | 
|Revenue                             |                                        | 100.0%   |                                       | 
|Cost of revenue                     |                                        | 141.8    |                                       | 
|                                    |                                        |          |                                       | 
|Gross income (loss)                 |                                        | (41.8)   |                                       | 
|                                    |                                        |          |                                       | 
|Research and development            |                                        | 16.1     |                                       | 
|Selling, general and administrative |                                        | 50.7     |                                       | 
|                                    |                                        |          |                                       | 
|Total operating expenses            |                                        | 66.8     |                                       | 
|                                    |                                        |          |                                       | 
|                                    |                                        |          |                                       | 
|Operating loss                      |                                        | (108.6)  |                                       | 
|                                    |                                        |          |                                       | 
|Interest income                     |                                        | 1.4      |                                       | 
|Interest expense                    |                                        | (0.1)    |                                       | 
|                                    |                                        |          |                                       | 
|Loss before income taxes            |                                        | (107.3)  |                                       | 
|                                    |                                        |          |                                       | 
|Benefit for income taxes            |                                        | -        |                                       | 
|                                    |                                        |          |                                       | 
|Net loss                            |                                        | (107.3)% |                                       | 
|                                    |                                        |          |                                       | 

# Revenue

Revenue of $1.2 million in the third
quarter of fiscal 2005 decreased by $1.7 million, or 59%, from revenue of $2.9 million in
the third quarter of fiscal 2004. Revenue for the first nine months of fiscal 2005 and
2004 was $6.5 million.

The size and timing of large-scale
customer projects can cause significant fluctuations in quarter to quarter revenue.
Revenue from large-scale customer projects was $563,000 and $3.7 million in the third
quarter and first nine months of fiscal 2005, respectively, compared to $2.1 million and
$4.2 million in the same periods of fiscal 2004. Revenue in the third quarter of fiscal
2005 was comprised of two large-scale projects and numerous smaller projects. Large-scale
project revenue during the first nine months of fiscal 2005 included revenue from five
customer projects compared to three large-scale projects in the comparable period of
fiscal 2004. Revenue in the first nine months of fiscal 2005 and 2004 and the third
quarter of fiscal 2004 included a large-scale customer project in support of an
established product in the cosmeceutical sector. A cosmeceutical is a product that makes
no

15



therapeutic claims but is intended
for topical use by humans. Synthetech is uncertain if future sales in support of this
particular cosmeceutical will continue.

In addition to large-scale projects,
a significant number of other customer projects contributed to revenue during the third
quarter and first nine months 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.
Synthetechs large-scale projects typically originate from the companys
portfolio of successful small-scale early stage drug development projects.

International sales, mainly to
Europe, were $520,000 and $1.3 million in the third quarter and first nine months of
fiscal 2005, respectively, compared to $399,000 and $1.4 million in the third quarter and
first nine months of fiscal 2004, respectively. International sales, like all of our
revenues, 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)

The gross loss in the third quarter
of fiscal 2005 was $494,000, or 42% of revenue, compared to gross income of $302,000, or
10% of revenue, in the third quarter of fiscal 2004. Gross income for the first nine
months of fiscal 2005 was $351,000, or 5% of revenue, compared to a gross loss of
$779,000, or 12% of revenue, in the first nine months of fiscal 2004.

Manufacturing department costs
incurred during the third quarter of fiscal 2005 were comparable to costs incurred during
the third quarter of fiscal 2004. The low amount of revenue in the third quarter of fiscal
2005 was inadequate to generate sufficient margins to offset manufacturing costs directly
charged to cost of revenue. The gross loss in the third quarter of fiscal 2005 reflects
charges for impaired inventory of $393,000 compared to charges for impaired inventory of
$224,000 in the third quarter of fiscal 2004.

The first nine months of fiscal 2005
benefited from both a favorable mix of projects and reduced manufacturing costs, compared
to the first nine months of fiscal 2004. In the first nine months of fiscal 2005, costs
incurred by Synthetechs manufacturing departments decreased by approximately
$480,000, compared to the first nine months of fiscal 2004, largely due to a decrease in
labor and maintenance costs. In response to difficult business conditions, Synthetech
reduced its workforce during the second quarter of fiscal 2004.

Gross income for the first nine
months of fiscal 2005 reflects charges for impaired inventory of $790,000, compared to
charges for impaired inventory of $807,000 in the first nine months of fiscal 2004.
Synthetech routinely develops manufacturing processes to produce new products or to
refine procedures for existing products. It is not unusual for manufacturing costs
associated with new processes to exceed the selling price for the initial batches of
product, which results in an inventory

16



write-off. The international fine
chemicals industry has been marked by overcapacity and a resulting downward pressure on
pricing. It remains difficult to rework certain materials on a cost effective basis.

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 third quarter of fiscal 2005 was
$190,000, or 16% of revenue, compared to $167,000, or 6% of revenue, in the third quarter
of fiscal 2004. R&D expense in the first nine months of fiscal 2005 was $474,000, or
7% of revenue, compared to $539,000, or 8% of revenue, in the first nine months of fiscal
2004.

The increase in R&D expense in
the third quarter of fiscal 2005, compared to the third quarter of fiscal 2004 is
primarily due to an increase in expenditures for laboratory supplies. The decrease in
R&D expense for the first nine months of fiscal 2005, compared to the first nine
months of fiscal 2004 is primarily due to a decrease in labor costs. The decrease in labor
costs is due to salary reductions that were implemented late in the second quarter of
fiscal 2004 and changes in staffing levels that reduced both labor and related expenses
partially offset by $30,000 of employee relocation costs.

Synthetechs R&D department
primarily develops processes to manufacture 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
third quarter of fiscal 2005 was $599,000, or 51% of revenue, compared to $489,000, or 17%
of revenue, in the third quarter of fiscal 2004. SG&A expense in the first nine months
of fiscal 2005 was $1.7 million or 26% of revenue, compared to $1.4 million, or 21% of
revenue, in the first nine months of fiscal 2004.

The increase in SG&A expense in
the third quarter and first nine months of fiscal 2005, compared to the same periods in
fiscal 2004 is primarily due to an increase in Synthetechs marketing activities
including the additions of a Director of Business Development in August 2003 and a
Director of Business Development for Europe in February 2004. In addition, in response to
the more demanding corporate governance environment our Board of Director fees and related
costs, and fees for legal services have increased approximately $80,000 in the first nine
month of fiscal 2005, compared to the first nine months of fiscal 2004.

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 third quarter
and first nine months of fiscal 2005 was $17,000 and $36,000, respectively, compared to
$6,000 and $26,000, respectively, in the same periods in 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 equivalents during the first nine months of fiscal 2005 was 1.16%,
compared to 0.87% during the first nine months of fiscal 2004.

17



# Interest expense

Interest expense in the third quarter
and first nine months of fiscal 2005 was $1,000 and $5,000, respectively, compared to
$2,000 and $6,000, respectively, in the same periods in fiscal 2004.

# Benefit for 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 in the third quarter of
fiscal 2005 was $1.3 million, or 107% of revenue, compared to a net loss of $350,000, or
12% of revenue, in the third quarter of fiscal 2004. Net loss for the first nine months of
fiscal 2005 was $1.8 million, or 28% of revenue, compared to a net loss of $2.7 million,
or 41% of revenue, in the first nine months 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 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

18



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.

# LIQUIDITY AND CAPITAL
RESOURCES

Synthetechs cash and cash
equivalents totaled $3.5 million at December 31, 2004, compared to $4.3 million at March
31, 2004. At December 31, 2004 and March 31, 2004, Synthetech had working capital of $8.2
million and $9.2 million, respectively. 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, inventory
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 $18 million. The terms of
the credit agreement call for the required amount of tangible net worth to increase by 50%
of positive quarterly net income and 50% of all equity or capital contributed. Synthetech
had no borrowings outstanding under the credit facility and was in compliance with all
covenants as of December 31, 2004. The credit facility expires in December 2005.

Synthetech used cash in operating
activities of $736,000 during the first nine months of fiscal 2005, compared to cash used
in operating activities of $1.7 million in the first nine months of fiscal 2004. In the
first nine months of fiscal 2005, the primary use of cash from operating activities was
the net loss of $1.8 million, which was partially offset by non-cash charges for
depreciation of $806,000 and amortization of deferred compensation of $12,000. A
reduction in accounts receivable was the primary source of cash flow derived from
operating activities. Accounts receivable decreased $470,000 to $812,000 at December 31,
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 and amount

19



of shipments. Inventory remained
substantially unchanged between March 31, 2004 and December 31, 2004. Prepaid expenses
increased $93,000 to $514,000 at December 31, 2004 from $421,000 at March 31, 2004. The
change in prepaid expenses between the two periods is primarily due to the renewal of
Synthetechs various insurance policies during the third quarter less amortization
of prepaid expenses over the periods which they benefit. Accounts payable decreased
$83,000 to $476,000 at December 31, 2004 from $559,000 at March 31, 2004.

Synthetech used $65,000 of cash for
capital expenditures during the first nine months of fiscal 2005, compared to $356,000 in
the first nine months of fiscal 2004. Synthetech has completed its existing long-term
capital plan for its sole facility in Albany, Oregon. Synthetechs revised capital
plan for fiscal 2005 includes various projects totaling approximately $100,000. 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 nine months of fiscal 2005 totaled $10,000 compared to cash provided by
financing activities of $1,000 in the first nine months of fiscal 2004.

Synthetech incurred significant
negative cash flow in the first nine months of fiscal 2005 and all of fiscal 2004.
Although we are unable to predict with certainty future revenue (as discussed above),
based on the existing state of the fine chemicals industry, our operating results for the
first nine months of fiscal 2005 and our existing order base, we expect to incur negative
cash flow for fiscal 2005, which adversely affects our cash position.

Synthetech believes that its existing
cash and cash equivalents, any available funds under 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 any 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 its line of credit. If sources of liquidity are
insufficient, Synthetech may have to seek 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 or
increase its leverage and interest expense.

# NEW ACCOUNTING
PRONOUNCEMENTS

In December 2004, the FASB issued
SFAS No. 123R, Share-Based Payment. SFAS No. 123R is a revision of SFAS No.
123, Accounting for Stock Based Compensation, and supersedes APB 25. Among
other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of
accounting, and requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments, based on the grant date fair value of those
awards, in the financial statements. The effective date of SFAS 123R is the first
reporting period beginning after June 15, 2005, although early adoption is allowed. SFAS
123R permits companies to adopt its requirements using either a modified prospective method,
or a modified retrospective method. Under the modified prospective method,
compensation cost is recognized in the financial statements beginning with the effective
date, based on the requirements of SFAS 123R for all share-based payments granted after
that date, and based on the requirements of SFAS 123 for all unvested awards granted
prior to the effective date of SFAS 123R. Under the modified retrospective method,
the requirements are the

20



same as under the modified
prospective method, but also permits entities to restate financial statements of
previous periods based on proforma disclosures made in accordance with SFAS 123.

Synthetech currently utilizes a
standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock
options granted to employees. While SFAS 123R permits entities to continue to use such a
model, the standard also permits the use of a lattice model. Synthetech has
not yet determined which model it will use to measure the fair value of employee stock
options upon the adoption of SFAS 123R.

Synthetech expects to adopt SFAS 123R
effective July 1, 2005. Synthetech is currently in the process of evaluating the impact of
adoption on our results of operations.

# 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 December 31, 2004 and March 31, 2004 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

21



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 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.

# 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 December
31, 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 by this report.

22



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 December 31,
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.

# PART II. OTHER
INFORMATION

# Item 5. Other Information

On March 1, 2004, Synthetech entered into
an oral compensation agreement with Paul C. Ahrens, Synthetechs Chairman. Pursuant
to this agreement, Mr. Ahrens has provided certain marketing services to Synthetech during the
first nine months of fiscal 2005. Synthetech paid Mr. Ahrens $10,000 for these services.

On September 15, 2004, David R.
Clarke, a member of Synthetechs Board of Directors, began providing certain
strategic planning services to Synthetech in his capacity as a director. Synthetech paid
Mr. Clarke $6,000 for these services. On November 8, 2004, Synthetech entered into an oral
compensation agreement with Mr. Clarke under which Mr. Clarke agreed to provide full-time
strategic planning services to Synthetech. Synthetech paid $45,500 to Mr. Clarke for these
services through January 31, 2005. On February 1, 2005, Synthetech and Mr. Clark entered
into a written agreement pursuant to which Mr. Clarke will provide full-time strategic
planning services to Synthetech from February 1, 2005 through May 31, 2005. Synthetech
will pay Mr. Clarke a total of $13,000 per month for these services and his temporary living
expenses. In addition, Synthetech has agreed to grant to Mr. Clarke at the next meeting of
the Compensation Committee an option to purchase 30,000 shares of Synthetechs common
stock under Synthetechs 2000 Stock Incentive Plan at an exercise price equal to the
closing price reported by Nasdaq on the date the option is granted.

23



# Item 6. Exhibits

|(a) |  | Exhibits.
|--- |  | ---------

| |  | Exhibit 3.1 |  | Articles
of Incorporation of Synthetech, as amended (incorporated by reference to the exhibits
filed with Synthetechs Annual Report on Form 10-K for the fiscal year ended March
31, 1991).
| |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Exhibit 3.2 |  | Bylaws
of Synthetech, as amended (incorporated by reference to the exhibits filed with Synthetechs
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2001).
| |  | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Exhibit 10.1 |  | Terms of oral compensation agreement entered into on March 1, 2004 between Paul C. Ahrens
and Synthetech (incorporated by reference to Part II, Item 5 of this Quarterly Report on
Form 10-Q).
| |  | ------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Exhibit 10.2 |  | Terms of oral compensation agreement entered into on September 15, 2004 between David R.
Clarke and Synthetech (incorporated by reference to Part II, Item 5 of this Quarterly
Report on Form 10-Q).
| |  | ------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Exhibit 10.3 |  | Independent
 Contractor  Agreement  entered  into  as of  February  1,  2005  between
                                   Synthetech and David R. Clarke.
| |  | ------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Exhibit 10.4 |  | Stock
Option Grant Notice and Agreement
| |  | ------------ |  | ---------------------------------------

| |  | 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
| |  | ------------ |  | -----------------------------------------------------

24



# 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.                                                             
|                           | (Registrant)                                                                 
|                           |                                                                              
|                           |                                                                              
|Date:    February 14, 2005 | /s/ M. SreenivasanM. SreenivasanPresident & C.E.O.                           
|                           |                                                                              
|                           |                                                                              
|                           |                                                                              
|Date:    February 14, 2005 | /s/ Gary A. WeberGary A. WeberVice President Finance &Chief Financial Officer
|                           |                                                                              

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