UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549








FORM
10-Q




(Mark
One)


[
      X]
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934





For
the Quarterly Period Ended December 31, 2007





OR





[    
      ]
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      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 of Incorporation or Organization)
            
            (I.R.S. Employer
      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 a large accelerated filer, an
accelerated filer or a non-accelerated filer.  See the definition of
“large accelerated filer and accelerated filer” in Rule 12b-2 of the Exchange
Act.  (Check one)




Large
      accelerated filer ____
            Accelerated
      filer ____
            Non-accelerated
      filer X




Indicate
by check mark whether the registrant is a shell company (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 value


Shares
outstanding as of February 11, 2008:  14,631,614







SYNTHETECH,
INC




INDEX





PagePart I. Financial
      InformationItem
      1.
                Condensed
      Financial StatementsBalance Sheets
                1Statements of Operations
                3Statements of Cash Flows
                4Notes to Unaudited Condensed Financial
      Statements
                5Item
      2.
                Management’s
      Discussion and Analysis of FinancialCondition
      and Results of Operations
                15Item
      3.
                Quantitative and Qualitative Disclosure about Market
      Risk
                27Item
      4.
                Controls and Procedures
                27Part II. Other
      InformationItem
      6.
                Exhibits
                28Signatures
                29


















ii




PART
I.  FINANCIAL INFORMATION




Item
1.  Financial Statements
  SYNTHETECH,
INC.
 Condensed Balance Sheets
 (unaudited)


December
      31,
            
            
            March
      31,2007
            
            
            2007AssetsCurrent
      Assets:Cash
      and cash equivalents
            
            $
            308,000
            
            
            $
            259,000Accounts
      receivable, less allowancefor
      doubtful accounts of $15,000 forboth
      periods
            
            
            2,256,000
            
            
            
            2,195,000Inventories
            
            
            4,291,000
            
            
            
            4,778,000Prepaid
      expenses
            
            
            405,000
            
            
            
            354,000Total
      Current
      Assets
            
            
            7,260,000
            
            
            
            7,586,000Property,
      Plant and Equipment,
      net
            
            
            3,945,000
            
            
            
            3,746,000Total
      Assets
            
            $
            11,205,000
            
            
            $
            11,332,000








The
accompanying notes are an integral part of these condensed financial
statements.
 1


SYNTHETECH,
INC.


Condensed
Balance Sheets


(continued)
 (unaudited)


December
      31,
            
            
            March
      31,2007
            
            
            2007Liabilities
      and Shareholders’ EquityCurrent
      Liabilities:Line
      of credit
            
            $
            629,000
            
            
            $
            644,000Note
      payable
            
            
            235,000
            
            
            
            132,000Accounts
      payable
            
            
            1,126,000
            
            
            
            782,000Accrued
      compensation
            
            
            260,000
            
            
            
            273,000Accrued
      termination benefits
            
            
            -
            
            
            
            124,000Deferred
      revenue
            
            
            750,000
            
            
            
            43,000Other
      accrued liabilities
            
            
            6,000
            
            
            
            3,000Total
      Current
      Liabilities
            
            
            3,006,000
            
            
            
            2,001,000Shareholders'
      Equity:Common
      stock, $.001 par value; authorized100,000,000
      shares; issued and outstanding,14,566,000
      and 14,547,000 shares
            
            
            15,000
            
            
            
            15,000Paid-in
      capital
            
            
            9,331,000
            
            
            
            9,176,000Retained
      earnings (deficit)
            
            
            (1,147,000
            )
            
            
            140,000Total
      Shareholders' Equity
            
            
            8,199,000
            
            
            
            9,331,000Total
      Liabilities and Shareholders' Equity
            
            $
            11,205,000
            
            
            $
            11,332,000























The
accompanying notes are an integral part of these condensed financial
statements.
 2


SYNTHETECH,
INC.


Condensed Statements of Operations


(unaudited)




For
      the Three Months Ended
            
            
            For
      the Nine Months EndedDecember
      31,
            
            
            December
      31,2007
            
            
            2006
            
            
            2007
            
            
            2006Revenue
            
            $
            2,851,000
            
            
            $
            3,724,000
            
            
            $
            10,004,000
            
            
            $
            8,654,000Cost
      of revenue
            
            
            2,449,000
            
            
            
            2,431,000
            
            
            
            8,270,000
            
            
            
            6,239,000Gross
      income
            
            
            402,000
            
            
            
            1,293,000
            
            
            
            1,734,000
            
            
            
            2,415,000Research
      and development
            
            
            308,000
            
            
            
            233,000
            
            
            
            982,000
            
            
            
            840,000Selling,
      general and administrative
            
            
            628,000
            
            
            
            540,000
            
            
            
            1,991,000
            
            
            
            1,647,000Total
      operating expenses
            
            
            936,000
            
            
            
            773,000
            
            
            
            2,973,000
            
            
            
            2,487,000Operating
      income (loss)
            
            
            (534,000
            )
            
            
            520,000
            
            
            
            (1,239,000
            )
            
            
            (72,000
            )Interest
      income
            
            
            4,000
            
            
            
            6,000
            
            
            
            16,000
            
            
            
            28,000Interest
      expense
            
            
            (15,000
            )
            
            
            (28,000
            )
            
            
            (64,000
            )
            
            
            (46,000
            )Income
      (loss) before income taxes
            
            
            (545,000
            )
            
            
            498,000
            
            
            
            (1,287,000
            )
            
            
            (90,000
            )Income
      tax benefit
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,000
            )Net
      income (loss)
            
            $
            (545,000
            )
            
            $
            498,000
            
            
            $
            (1,287,000
            )
            
            $
            (89,000
            )Net
      income (loss) per common share:Basic
      and diluted income (loss) per share
            
            $
            (0.04
            )
            
            $
            0.03
            
            
            $
            (0.09
            )
            
            $
            (0.01
            )Weighted
      average shares outstanding:Basic
            
            
            14,566,614
            
            
            
            14,527,109
            
            
            
            14,558,178
            
            
            
            14,523,432Diluted
            
            
            14,566,614
            
            
            
            14,668,682
            
            
            
            14,558,178
            
            
            
            14,523,432







The
accompanying notes are an integral part of these condensed financial
statements.
 3


SYNTHETECH,
INC.




Condensed Statements of Cash Flows


(unaudited)





For The Nine Months Ended December
      31,
            
            2007
            
            
            2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (1,287,000
            )
            
            $
            (89,000
            )Adjustments
      to reconcile net loss tonet
      cash provided by (used in) operating activities:Depreciation
      expense
            
            
            355,000
            
            
            
            381,000Loss
      on retirement of equipment
            
            
            80,000
            
            
            
            -Stock-based
      compensation expense
            
            
            148,000
            
            
            
            36,000(Increase)
      decrease in assets:Accounts
      receivable, net
            
            
            (61,000
            )
            
            
            (1,510,000
            )Inventories
            
            
            487,000
            
            
            
            (1,245,000
            )Prepaid
      expenses
            
            
            241,000
            
            
            
            190,000Increase
      (decrease) in liabilities:Accounts
      payable
            
            
            344,000
            
            
            
            135,000Accrued
      compensation
            
            
            (13,000
            )
            
            
            20,000Accrued
      termination benefits
            
            
            (124,000
            )
            
            
            (2,000
            )Deferred
      revenue
            
            
            707,000
            
            
            
            195,000Other
      accrued liabilities
            
            
            3,000
            
            
            
            7,000Cash
      Provided By (Used In) Operating Activities
            
            
            880,000
            
            
            
            (1,882,000
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Property,
      plant and equipment purchases
            
            
            (634,000
            )
            
            
            (86,000
            )Sale
      of marketable securities, available for sale
            
            
            -
            
            
            
            800,000Cash
      Provided by (Used In)  Investing Activities
            
            
            (634,000
            )
            
            
            714,000CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from (repayments of) line of credit
            
            
            (15,000
            )
            
            
            966,000Principal
      payments under long-term debt obligations
            
            
            -
            
            
            
            (21,000
            )Repayment
      of note payable
            
            
            (189,000
            )
            
            
            (169,000
            )Proceeds
      from exercise of stock options
            
            
            7,000
            
            
            
            8,000Cash
      Provided By (Used In) Financing Activities
            
            
            (197,000
            )
            
            
            784,000Increase
      (Decrease) in Cash and Cash Equivalents
            
            
            49,000
            
            
            
            (384,000
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            259,000
            
            
            
            1,233,000Cash
      and Cash Equivalents at End of Period
            
            $
            308,000
            
            
            $
            849,000Non-Cash
      Financing Activities:Insurance
      premiums financed with note payable
            
            $
            292,000
            
            
            $
            314,000








The
accompanying notes are an integral part of these condensed financial
statements.
 4


SYNTHETECH, INC.


NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


(Information
as of December 31, 2007 and for the three- and nine-month


periods
ended December 31, 2007 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, proprietary custom chiral intermediates and specialty resins,
primarily for the pharmaceutical industry.  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.  Synthetech also
manufactures products for use in cosmeceuticals, which are products that make no
therapeutic claims, but are 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 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, 2007. Synthetech's
fiscal year ends March 31 of each year.





The
interim period information included in this Quarterly Report on 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.

















5


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,
            
            
            March
      31,2007
            
            
            2007Cash
            
            $
            131,000
            
            
            $
            209,000Cash
      equivalents
            
            
            177,000
            
            
            
            50,000$
            308,000
            
            
            $
            259,000





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 receivable and a
review for collectibility of specific accounts.  The allowance for
doubtful accounts as of December 31, 2007 and March 31, 2007 was
$15,000.





Concentrations of Credit
Risk:  Financial instruments that potentially subject
Synthetech to significant concentrations of credit risk consist principally of
cash equivalents and trade accounts receivable. Cash equivalents primarily
consist of money market accounts with maturities at purchase of less than three
months.  Synthetech’s customers consist primarily of major
pharmaceutical, emerging biopharmaceutical and contract drug synthesis
companies.  Synthetech’s customers are primarily located in the United
States and Western Europe.  At December 31, 2007, three customers had
accounts receivable balances of 33%, 16%, and 16%, respectively, of total
accounts receivable.  At March 31, 2007, four customers had accounts
receivable balances of 30%, 27%, 13% and 11%, respectively, of total accounts
receivable.  During the first nine months of fiscal 2008, sales to two
customers, each exceeding 10% of revenue for the period, accounted for an
aggregate of approximately 29% of revenue.  During the first nine
months of fiscal 2007, sales to two customers, each exceeding 10% of revenue for
the period, accounted for an aggregate of approximately 52% of
revenue.  Synthetech’s reliance on major customers and the absence of
long term contracts could adversely affect operating results if a major customer
were lost or failed to pay Synthetech.





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.




6


Depreciation
and amortization are provided on the straight-line basis over the estimated
useful lives of the individual assets, which range from three to 40
years.





In
accordance with Statement of Financial Accounting Standards No. 144, “Accounting
for Impairment or Disposal of Long-Lived Assets” (SFAS No. 144), Synthetech
assesses the impairment of property, plant and equipment whenever events or
changes in circumstances indicate that their carrying value may not be
recoverable.  If Synthetech determines that the carrying value of
property, plant and equipment may not be recoverable, we compare the carrying
values of our property, plant and equipment to the undiscounted cash flows
expected to be generated by the asset group.  If the carrying value
exceeds the undiscounted cash flows, we may record an impairment
charge.  An impairment charge is recognized to the extent that the
carrying amount of property, plant and equipment is in excess of their
determined fair value.





Income
Taxes:Synthetech accounts for income taxes in accordance with
SFAS No. 109 “Accounting for Income Taxes.”  In accordance with SFAS
No. 109, deferred tax assets arise from the tax benefit of amounts expensed for
financial reporting purposes but not yet deducted for tax purposes and from
unutilized tax credits and net operating loss
carryforwards.  Synthetech evaluates its deferred tax assets on a
regular basis to determine if a valuation allowance is required.  To
the extent it is determined the recoverability of the deferred tax assets is
unlikely, Synthetech records a valuation allowance against deferred tax
assets.





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.





Research and Development
Costs:  Research and development costs are expensed as
incurred.





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





Stock-Based
Compensation:Effective April 1, 2006, Synthetech adopted SFAS
No. 123(R) “Share-Based Payment” using the modified prospective transition
method and, therefore, has not restated results for prior
periods.  Under this transition method, stock-based compensation
expense for fiscal 2007 includes compensation expense for all stock-based
compensation awards granted prior to, but not yet vested as of April 1, 2006,
based on the grant date fair value estimated in accordance with the original
provision of SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123).  Stock-based compensation expense for all stock-based
compensation awards granted after April 1, 2006 is based on the grant-date fair
value estimated in accordance with the provisions of SFAS No.
123(R).  Synthetech recognizes these compensation costs net of
estimated forfeitures over the requisite service period of the award, which is
generally the vesting term of one to five years for stock options.





Please
refer to Note J to these condensed financial statements for a further discussion
of stock-based compensation.














7


Recent
Accounting Pronouncements:




In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”(“SFAS 141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest in the acquiree and the goodwill acquired. The
Statement also establishes disclosure requirements which will enable users to
evaluate the nature and financial effects of the business combination. SFAS
141(R) is effective for fiscal years beginning after December 15, 2008. The
adoption of SFAS 141(R) will have an impact on accounting for business
combinations once adopted, but the effect is dependent upon acquisitions at that
time.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51”(“SFAS 160”), which establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15,
2008.  Synthetech does not believe that the implementation of SFAS 160
will have any effect on its consolidated financial statements.







NOTE C.
            NET INCOME (LOSS) PER
      SHARE





Basic net
income (loss) per share is computed by dividing net income (loss) by the
weighted-average number of shares of common stock outstanding during the
period.  Diluted net income per share is computed by dividing net
income 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 months ended
December 31, 2006, the weighted-average number of shares used to compute diluted
income per share includes common stock equivalents.  For the three
months ended December 31, 2007 and the nine month periods ended December 31,
2007 and 2006, the weighted-average number of shares used to compute diluted
loss per share did not differ from the weighted-average number of shares used to
compute basic loss per share.  The common stock equivalents were
excluded from these earnings per share computations because their effect would
have been anti-dilutive.




For
      the Three Months
            
            
            For
      the Nine MonthsEnded
      December 31,
            
            
            Ended
      December 31,2007
            
            
            2006
            
            
            2007
            
            
            2006Common
      stock options outstanding
            
            
            2,243,700
            
            
            
            1,793,800
            
            
            
            2,243,700
            
            
            
            1,793,800Less
      common stock options used incalculating
      diluted income (loss) per share
            
            
            -
            
            
            
            565,000
            
            
            
            -
            
            
            
            -Common
      stock options not used incalculating
      diluted income (loss) per share
            
            
            2,243,700
            
            
            
            1,228,800
            
            
            
            2,243,700
            
            
            
            1,793,800







8




NOTE
      D.
            STATEMENTS
      OF CASH FLOWS





Supplemental
cash flow disclosures:








Cash
      Paid
            
            Three
      Months Ended December 31,
            
            
            Nine
      Months Ended December 31,2007
            
            
            2006
            
            
            2007
            
            
            2006Interest
            
            $
            15,000
            
            
            $
            28,000
            
            
            $
            64,000
            
            
            $
            46,000






NOTE
      E.
            INVENTORIES





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





December
      31,
            
            
            March
      31,2007
            
            
            2007Finished
      products
            
            $
            2,050,000
            
            
            $
            2,051,000Work
      in process
            
            
            932,000
            
            
            
            1,106,000Raw
      materials
            
            
            1,309,000
            
            
            
            1,621,000$
            4,291,000
            
            
            $
            4,778,000








NOTE
      F.
            PROPERTY,
      PLANT AND EQUIPMENT





Property,
plant and equipment and depreciable lives are summarized as
follows:


Depreciable
      Life
            
            
            December
      31,
            
            
            March
      31,In
      Years
            
            
            2007
            
            
            2007Land
            
            
            
            
            $
            241,000
            
            
            $
            241,000Buildings
            
            15
      – 40
            
            
            
            1,617,000
            
            
            
            1,616,000Machinery
      and equipment
            
            5 –
      17
            
            
            
            2,658,000
            
            
            
            2,382,000Laboratory
      equipment
            
            5 –
      17
            
            
            
            1,258,000
            
            
            
            1,058,000Furniture
      and fixtures
            
            3 –
      5
            
            
            
            91,000
            
            
            
            82,000Construction
      in process
            
            
            
            
            
            
            7,000
            
            
            
            7,0005,872,000
            
            
            
            5,386,000Less:Accumulated
      depreciation
            
            
            
            
            
            
            (1,927,000
            )
            
            
            (1,640,000
            )$
            3,945,000
            
            
            $
            3,746,000





9




NOTE
      G.
            LINE
      OF CREDIT





Synthetech’s
credit facility, with a finance company, provides for borrowings of up to $2
million or the maximum available under the borrowing base, whichever is
less.  Interest is payable at prime plus a monthly collateral
management fee of 0.25% of the outstanding loan balance. The annual fee for the
credit facility is $15,000. Additionally, the credit facility has a minimum
monthly fee of $2,500, which is reduced by interest charges and the collateral
management fee.  The facility is collateralized by cash, cash
equivalents, accounts receivable, inventories and property, plant and
equipment.  The credit facility contains no financial covenants and is
scheduled to expire on June 15, 2008.  The amount outstanding under
the facility as of December 31, 2007 was $629,000.




NOTE
      H.
            NOTE
      PAYABLE





During
October and November 2007, Synthetech financed $292,000 of annual premiums for
certain of its insurance policies.  As of December 31, 2007, remaining
payments under the financings consisted of eight monthly installments of
$34,000, including interest at 7.5%.  The amount outstanding under the
finance agreements as of December 31, 2007 was $235,000.





During
October and November 2006, Synthetech financed $314,000 of annual premiums for
certain of its insurance policies.  As of March 31, 2007, remaining
payments under the financings consisted of four monthly installments of $36,000
and a final installment due in August 2007 of $26,000, including interest at
7.6%.  The amount outstanding under the finance agreements as of March
31, 2007 was $132,000.




NOTE
      I.
            ACCRUED
      TERMINATION BENEFITS





In
accordance with an employment agreement between Synthetech and Synthetech’s
former President and Chief Executive Officer, upon termination of employment,
the former executive was entitled to receive one year of base salary and
healthcare benefits, to be paid in twelve monthly installments ending in October
2007.  There are no remaining payments due under this agreement as of
December 31, 2007.




NOTE
      J.
            EMPLOYEE
      STOCK BENEFITS





Description
of the Stock Plans





Stock
Plan


Synthetech
grants equity-based compensation under its 2005 Equity Incentive Plan (the 2005 Plan).  Stock
options, restricted stock awards and stock appreciation rights are authorized
for issuance to employees, consultants and non-employee directors under the 2005
Plan.  Stock options are granted with an exercise price equal to the
fair market value of our common stock on the date of grant.  Options
generally vest in equal annual installments between the date of grant and one to
five years from the date of grant, although individual options may have
different vesting terms.  All options expire no later than ten years
from the date of grant.  As of December 31, 2007, 599,550 shares were
available for issuance under the 2005 Plan.




10


Stock Option Agreements –The
right to purchase shares pursuant to existing stock option agreements typically
vests pro-rata at each option anniversary date over a one to five-year
period.  The options, which are granted with option exercise prices
equal to the fair market value of Synthetech shares on the date of grant, expire
within ten years from the date of grant.  Synthetech has not issued
any options to consultants or advisors.  Stock options are a component
of director’s compensation.





Restricted stock awards (RSAs) –Awards of restricted stock may be either grants of restricted stock,
restricted stock units or performance-based stock units that are issued at no
cost to the recipient.  For RSAs, at the date of grant the recipient
has the rights of a shareholder, subject to certain restrictions on
transferability and a risk of forfeiture.  Synthetech’s most recently
issued RSAs had an original vesting period of two years.  Synthetech
has not awarded restricted stock units or performance-based stock
units.  Compensation cost for RSAs is determined using the market
value of Synthetech’s common stock on the date of grant and the resulting
expense is recognized on a straight-line basis over the vesting
term.





Other
Stock Grant


On April
17, 2007, the Compensation Committee of the Board of Directors awarded key
employees 525,000 options to purchase Synthetech’s common stock. The options
were awarded at $0.87 per share, the fair market value of Synthetech’s common
stock on the date of grant.  The nonqualified stock options were
issued outside of the 2005 Plan.  One-third of these options vested on
the date of grant, one-third vest on the first anniversary of the date of grant
and the remaining one-third vest on the second anniversary of the date of
grant.





Stock
Option Activity





A summary
of stock option activity under Synthetech’s 2005 Plan and otherwise as of
December 31, 2007 and changes during the nine-month period then ended is
presented below:





Weighted
      AverageNumber
            
            
            Weighted
      Average
            
            
            Remaining
            
            
            AggregateOf
            
            
            Exercise
            
            
            Contractual
      Term
            
            
            IntrinsicOptions
            
            
            Price
            
            
            (years)
            
            
            ValueOptions
      outstanding, March 31, 2007
            
            
            1,793,800
            
            
            $
            1.13Granted
            
            
            540,000
            
            
            $
            0.88Exercised
            
            
            (20,000
            )
            
            $
            0.33Forfeited
            
            
            (70,100
            )
            
            $
            1.07Options
      outstanding, December 31, 2007
            
            
            2,243,700
            
            
            $
            1.08
            
            
            6.9
            
            
            $
            90,000Options
      exercisable, December 31, 2007
            
            
            1,804,711
            
            
            $
            1.16
            
            
            6.3
            
            
            $
            71,000





The
aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value (the difference between Synthetech’s closing stock price on the
last trading day of the quarter ended December 31, 2007 and the exercise price,
multiplied by the number of in-the-money options) that would have been received
by the option holders had option holders exercised their options on December 31,
2007.  This amount changes based upon changes in the fair market value
of Synthetech’s stock.





11


As of
December 31, 2007, $128,000 of total unrecognized compensation cost, net of
estimated forfeitures, related to nonvested stock options is expected to be
recognized over a weighted-average period of approximately 1.8
years.





The
following table summarizes information with respect to options outstanding and
options exercisable at December 31, 2007:





Options
      Outstanding
            
            
            Options
      ExercisableWeighted
            
            
            Weighted
            
            
            
            
            
            WeightedAverage
            
            
            Average
            
            
            
            
            
            AverageExercise
            
            
            Remaining
            
            
            
            
            
            ExerciseExercise
      Price Range
            
            
            Shares
            
            
            Price
            
            
            Life
            
            
            Shares
            
            
            Price$0.16
      - $0.92...............
            
            
            
            1,286,000
            
            
            $
            0.57
            
            
            
            8.6
            
            
            
            862,011
            
            
            $
            0.49$1.07
      - $1.82...............
            
            
            
            717,800
            
            
            $
            1.53
            
            
            
            4.9
            
            
            
            702,800
            
            
            $
            1.54$2.07
      - $2.50..................
            
            
            
            178,100
            
            
            $
            2.09
            
            
            
            4.2
            
            
            
            178,100
            
            
            $
            2.09$3.13
      - $4.56...............
            
            
            
            61,800
            
            
            $
            3.63
            
            
            
            2.3
            
            
            
            61,800
            
            
            $
            3.632,243,700
            
            
            $
            1.08
            
            
            
            6.9
            
            
            
            1,804,711
            
            
            $
            1.16




Recognition
of Compensation Expense and Forfeitures





The fair
value of each option is amortized into compensation expense on a straight-line
basis over the requisite service period.  Synthetech reduces the
straight-line compensation expense by an estimated forfeiture rate to account
for the estimated impact of options that are expected to be forfeited before
becoming fully vested.  In determining compensation expense,
Synthetech assumed an expected forfeiture rate of 3%.  An increase or
decrease in the forfeiture rate would decrease or increase, respectively,
compensation expense.





The
weighted-average fair value of stock options was determined utilizing the
assumptions below:





For
      the Three Months
            
            
            For
      the Nine MonthsEnded
      December 31,
            
            
            Ended
      December 31,2007
            
            
            2006
            
            
            2007
            
            
            2006Expected
      price volatility
            
            
            -
            
            
            
            71%
            
            
            
            50%
            
            
            
            72%Risk-free
      interest rate
            
            
            -
            
            
            
            4.48%
            
            
            
            4.96%
            
            
            
            4.71%Expected
      term in years
            
            
            -
            
            
            
            5.5
            
            
            
            6.1
            
            
            
            5.6Dividend
      yield
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Weighted
      average grant date fair value
            
            
            -
            
            
            $
            0.21
            
            
            $
            0.48
            
            
            $
            0.21











12


Expense
Information under SFAS No. 123(R)





Stock-based
compensation expense was allocated as follows:





For
      the Three Months
            
            
            For
      the Nine MonthsEnded
      December 31,
            
            
            Ended
      December 31,2007
            
            
            2006
            
            
            2007
            
            
            2006Stock-based
      compensation expense:Cost
      of revenue
            
            $
            4,000
            
            
            $
            -
            
            
            $
            32,000
            
            
            $
            -Operating
      expenses
            
            
            18,000
            
            
            
            24,000
            
            
            
            116,000
            
            
            
            36,000Stock-based
      compensation expensebefore
      income taxes
            
            
            22,000
            
            
            
            24,000
            
            
            
            148,000
            
            
            
            36,000Income
      tax benefit
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      stock-based compensationexpense
      after income taxes
            
            $
            22,000
            
            
            $
            24,000
            
            
            $
            148,000
            
            
            $
            36,000








NOTE
      K.
            SYNTHETECH
      COMMON STOCK




Prices
for Synthetech’s common stock were reported on the over-the-counter (OTC) Pink
Sheets under the symbol NZYM.PK through May 22, 2007.  Since May 23,
2007, prices for Synthetech’s common stock have been reported on the OTC
Bulletin Board under the symbol NZYM.OB.




NOTE
      L.
            RELATED
      PERSON TRANSACTIONS





In
February 2006, the Board of Directors established a Strategic Development
Committee and appointed Dr. Daniel Fagan, Chairman of the Board, as the sole
committee member.  Effective November 1, 2006, the Strategic
Development Committee of the Board of Directors was terminated when Dr. Fagan
was appointed Synthetech’s Chief Executive Officer.  Dr. Fagan
continues to serve as Synthetech’s Board Chairman.   Dr. Fagan
received a monthly retainer of $10,000 for his service on the Strategic
Development Committee.  Committee fees and expenses incurred by
Synthetech under this arrangement during the first nine months of fiscal 2008
and fiscal 2007 were $-0- and $72,000, respectively.





Synthetech
has engaged Paul Ahrens, a Director, to assist with Synthetech’s new product
development efforts.  Aggregate expenses incurred by Synthetech under
this arrangement during the first nine months of fiscal 2008 and fiscal 2007
approximated $3,000 and $1,000, respectively.




NOTE
      M.
            LIQUIDITY





Synthetech
returned to profitability in fiscal 2007, recording net income for the year of
$193,000 and it recorded net income for the first quarter of fiscal 2008 of
$119,000.  For the first nine months of fiscal 2008, Synthetech
recorded a net loss of $1,287,000.  As of December 31, 2007, current
liabilities exceeded quick assets (i.e. cash and cash equivalents and
accounts receivable) by $442,000.




13


Management
believes that Synthetech’s existing cash and cash equivalents, credit facility
and any funds generated from operations will be sufficient to support 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 that may be available under the credit facility, or any funds generated
from operations will be sufficient to satisfy Synthetech’s liquidity
requirements.





If
sources of liquidity are insufficient, Synthetech will need to seek debt or
equity financing to satisfy liquidity requirements, which Synthetech may be
unable to obtain on favorable terms or at all, or to sell assets or further
reduce the size of its operations or discontinue operations.  Any
financing Synthetech obtains may dilute the ownership interests of its
shareholders or increase leverage and interest expense.















































































14




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 condensed
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.  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 performance and operating results; shipping
dates for customer orders; recurrence of large-scale projects; resolution of
manufacturing process difficulties; continued Section 404 implementation
expenses for the remainder of fiscal 2008; our ability to finance our growth
strategy; the conditions of the fine chemicals industry; the revenue-generating
potential of our current projects; obtaining regulatory approval for new drugs
and other matters relating to drug development progress; financing our current
and future capital expenditures and the amount of such expenditures; the effect
any change in foreign currency exchange rates would have on our operating
results; whether our cash and cash equivalents, borrowing capacity and
internally-generated funds will be adequate to operate our business; 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 or orders; potential production
or shipping delays; our limited experience in entering new markets and market
segments; potential period-to-period revenue or expense fluctuations; our
limited financial and other resources and operating losses in recent periods;
higher than expected cash use, or inability to borrow funds under our line of
credit or to raise other debt or equity capital required to continue operations
or to implement our growth strategy; production factors and timely access to raw
materials; industry cost factors; competition; government regulation; labor
disputes; technological change; future incentive stock awards; 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, 2007, 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.






































15


OVERVIEW





Synthetech,
Inc., based in Albany, Oregon, is a fine chemicals company specializing in
organic synthesis, biocatalysis and chiral technologies.  We develop
and manufacture amino acid derivatives, specialty amino acids, peptide
fragments, proprietary custom chiral intermediates and specialty resins,
primarily for the pharmaceutical industry.  Synthetech produces
advanced pharmaceutical intermediates in accordance with Current Good
Manufacturing Practices (cGMP) in compliance with U.S.
Food and Drug Administration (FDA) regulations.  Our products support
the development and manufacture of therapeutic peptides and peptidomimetic (or
peptide-like) small molecule drugs from early stages of a customer’s clinical
development, through market launch and into commercial
production.  Synthetech’s domestic and international customer base
includes major pharmaceutical and emerging biopharmaceutical companies, as well
as contract drug manufacturing firms.  We also supply catalog
quantities of specialty amino acids to research institutions, universities and
drug discovery firms.





Financial
Results


Financial
results for the third quarter and first nine months of fiscal 2008 were
disappointing.  On revenue of $2.9 million, Synthetech reported a net
loss for the quarter of $545,000.  For the first nine months of fiscal
2008, on revenue of $10.0 million, Synthetech reported a net loss of $1.3
million.  Production process difficulties reduced revenue and
increased per unit costs, significantly hindering our fiscal 2008 financial
results.  We estimate that manufacturing difficulties related to
certain customer projects reduced revenue for the first nine months of fiscal
2008 by approximately $900,000 and increased our charges for impaired inventory
by approximately $295,000. We are continuing to address weaknesses in our
manufacturing processes.





Based on
a typical product mix, third quarter revenue of $2.9 million is inadequate to
support Synthetech’s cost structure, which has been increasing over the past
year as we respond to generally improving market conditions.




For the
third quarter and first nine months of fiscal 2008, Synthetech incurred
consulting fees related to the implementation of Section 404 of the
Sarbanes-Oxley Act of $60,000 and $100,000,
respectively.  Implementation of Section 404 is expected to be ongoing
throughout the fourth quarter of fiscal 2008.




Market
Overview


Despite
Synthetech’s disappointing financial results for the third quarter and first
nine months of fiscal 2008, Synthetech has benefited from the recent improvement
in the fine chemicals market.  We believe that Synthetech has been
able to capitalize on new opportunities because of our proprietary technology
positions in both amino acid chemistry and multi-step chiral organic synthetic
chemistry. In addition, several large multi-national pharmaceutical companies
have made a strategic decision to outsource more of their manufacturing
requirements. We believe we are well positioned to compete for these new
opportunities because of our long association with the pharmaceutical industry,
large-scale domestic manufacturing facility, and experienced chemists and
R&D group.





We have
recently increased our marketing effort with additional personnel to target the
rapidly expanding opportunities at biopharmaceutical companies. This new growth
opportunity is being driven in large part by the need of large pharmaceutical
companies to develop new drugs. A number
of block-




16


buster
drugs will lose patent protection and become generic over the next five years
and large pharmaceutical companies are seeking to offset the impact of this
development with increased internal drug development, augmented by the
in-licensing of promising new drug candidates from emerging pharmaceutical
companies. We believe the limited manufacturing expertise of most
biopharmaceutical companies provides Synthetech with additional market
opportunities.





Business
Conditions


Synthetech’s
order backlog as of December 31, 2007 was approximately $6.5 million, compared
to $5.2 million at December 31, 2006.  Substantially all of these
customer orders are scheduled to ship during the fourth quarter of fiscal 2008
and the first quarter of fiscal 2009.  In addition to our traditional
pharmaceutical projects, we have seen some inquires and orders in support of
both industrial and medical device projects.  In spite of our
financial results for the last two fiscal quarters, management views the number
of large project inquiries and resulting order activity we have experienced
recently as a continuation of the overall favorable trend that Synthetech has
experienced since fiscal 2007.















































































17


RESULTS
OF OPERATIONS








The
following table sets forth, for the periods indicated, the percentage of
revenues represented by each item included in our condensed Statements of
Operations.








Percentage
      of RevenueFor
      the Three Months Ended
            
            For
      the Nine Months EndedDecember
      31,
            
            December
      31,2007
            
            2006
            
            2007
            
            2006Revenue
            
            100.0%
            
            100.0%
            
            100.0%
            
            100.0%Cost
      of revenue
            
            85.9
            
            65.3
            
            82.7
            
            72.1Gross
      income
            
            14.1
            
            34.7
            
            17.3
            
            27.9Research
      and development
            
            10.8
            
            6.2
            
            9.8
            
            9.7Selling,
      general and administrative
            
            22.0
            
            14.5
            
            19.9
            
            19.0Total
      operating expenses
            
            32.8
            
            20.7
            
            29.7
            
            28.7Operating  income
      (loss)
            
            (18.7)
            
            14.0
            
            (12.4)
            
            (0.8)Interest
      income
            
            0.1
            
            0.2
            
            0.1
            
            0.3Interest
      expense
            
            (0.5)
            
            (0.8)
            
            (0.6)
            
            (0.5)Income
      (loss) before income taxes
            
            (19.1)
            
            13.4
            
            (12.9)
            
            (1.0)Income
      tax expense
            
            -
            
            -
            
            -
            
            -Net
      income (loss)
            
            (19.1)%
            
            13.4%
            
            (12.9)%
            
            (1.0)%








Revenue





Revenue
of $2.9 million for the third quarter of fiscal 2008 decreased by $873,000, or
23%, from revenue of $3.7 million for the third quarter of fiscal
2007.  Revenue of $10.0 million for the first nine months of fiscal
2008 increased by $1.4 million, or 16%, from $8.7 million for the first nine
months of fiscal 2007.  As discussed above, management estimates that
manufacturing difficulties on certain customer projects reduced revenue for the
first nine months of fiscal 2008 by approximately $900,000.





Because
large-scale customer projects represent our primary source of revenue, the size
and timing of shipments related to these projects can cause significant
fluctuations in quarter-to-quarter revenue.  Revenue earned from four
large-scale projects was $1.3 million during the third quarter of fiscal
2008.  Two large-scale projects contributed $2.1 million of revenue
during the third quarter of fiscal 2007.  During the first nine months
of fiscal 2008, five large-scale projects contributed $4.7 million to revenue,
compared to two large-scale projects that contributed $4.0 million during the
comparable period of fiscal 2007.








18


The
market environment for smaller customer projects is active.  While
generally 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 our portfolio of successful small-scale early-stage
drug development projects.





International
sales, mainly to Europe, were $1.1 million and $4.4 million in the third quarter
and first nine months of fiscal 2008, respectively, compared to $1.5 million and
$2.3 million in the third quarter and first nine months of fiscal 2007,
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, Synthetech’s
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 that we support, and competition from other
suppliers.  Accordingly, while significant orders related to marketed
products provide substantial and more predictable revenue, we expect revenue to
continue to fluctuate significantly from period to period.








Gross
income





Gross
income for the third quarter of fiscal 2008 decreased $891,000, to $402,000, or
14% of revenue, compared to gross income of $1.3 million, or 35% of revenue, for
the third quarter of fiscal 2007.  The decrease in gross income
between the two periods is primarily the result of decreased sales of $873,000,
an increase in charges for impaired inventory, and an increase in manufacturing
department costs.





Gross
income for the first nine months of fiscal 2008 decreased $681,000, to $1.7
million, or 17% of revenue, compared to gross income of $2.4 million, or 28% or
revenue, for the first nine months of fiscal 2007.  On increased sales
of $1.4 million, gross income as a percentage of sales was lower for the first
nine months of fiscal 2008, compared to the comparable periods of fiscal 2007,
primarily due to:




●
            execution
      difficulties encountered on certain large customer projects, which
      resulted in higher than anticipated per unit raw material costs and lower
      than anticipated revenue;




●
            manufacturing
      cost increases; and




●
            increases
      in charges for impaired inventory.





Gross
income for the third quarter and first nine months of fiscal 2008 was
unfavorably impacted by a cost structure designed to support a higher base of
revenue, which current cost structure reflects in part Synthetech's response to
generally improving market conditions.





In
response to generally improving market conditions and to a lesser extent cost
increases, manufacturing department costs incurred during the third quarter and
first nine months of fiscal 2008 increased $188,000 and $815,000, respectively,
compared to the comparable periods of fiscal 2007.
  19
 Variable
operating costs such as labor, maintenance, utilities and supplies expenses have
increased between the periods.  Manufacturing department costs for the
first nine months of fiscal 2007 reflect a partial refund of previously paid
property taxes of $57,000.





Gross
income for the third quarter and first nine months of fiscal 2008 reflect
charges for impaired inventory of $405,000 and $919,000,
respectively.  The charges for impaired inventory for the first nine
months of fiscal 2008 include $295,000 related to production difficulties
discussed above.  Gross income for the third quarter and first nine
months of fiscal 2007 reflect charges for impaired inventory of $180,000 and
$569,000, respectively.  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 or certain existing processes to exceed the selling price for
batches of product, which results in an inventory write-off.  It
remains difficult to rework certain materials on a cost effective
basis.  Synthetech also writes-off inventory that is specific to any
customer project that has been discontinued.





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 for the
third quarter of fiscal 2008 increased $75,000 to $308,000, or 11% of revenue,
compared to $233,000, or 6% of revenue, for the third quarter of fiscal
2007.  The increase in R&D expense between these two periods
included:




●
            an
      aggregate increase during the third quarter of fiscal 2008 in compensation
      expense of $74,000, comprised of an increase from additional chemists
      employed by Synthetech in response to improving business conditions and
      the termination of our contract research services agreement with a
      facility in India in August 2006 (as described below), and general
      increases in salaries and benefits;
and




●
            an
      increase during the third quarter of fiscal 2008 in laboratory supplies,
      travel and depreciation expenses of $34,000;
and




●
            an
      increase during the third quarter of fiscal 2008 in on-line library
      services of $12,000;




partially
offset by:




●
            a
      decrease during the third quarter of fiscal 2008 of $49,000 arising from
      an increase in the amount of R&D department costs allocated to
      inventory for the manufacture of small-scale products, as described
      below.





R&D
expense in the first nine months of fiscal 2008 increased $142,000 to $982,000,
or 10% of revenue, compared to $840,000, or 10% of revenue, in the first nine
months of fiscal 2007.  The increase in R&D expense between these
two periods includes:




●
            an
      increase during the first nine months of fiscal 2008 of $243,000 in
      compensation and related costs relating to an increase in the number of
      chemists employed by Synthetech in response to improving business
      conditions and the termination of a contract research services agreement
      with an Indian pharmaceutical company in August 2006, and general
      increases in salaries and benefits;
and




20




●
            an
      increase during the first nine months of fiscal 2008 in travel expense,
      laboratory supplies  and professional fees of $48,000;
      and




●
            an
      increase during the first nine months of fiscal 2008 in research resources
      of $10,000;




partially
offset by:




●
            relative
      decreased costs during the first nine months of fiscal 2008 of $104,000
      primarily for fees for contract research services provided during the
      first nine months of fiscal 2007 by a facility in India,
    and




●
            a
      decrease during the first nine months of fiscal 2008 of $74,000 arising
      from an increase in the amount of R&D department costs allocated to
      inventory for the manufacture of small-scale
  products.





Commencing
in October 2005, Synthetech supplemented its domestic R&D capabilities by
engaging a division of an Indian pharmaceutical company to provide contract
research and manufacturing services.  In August 2006, Synthetech
decided that it would be more efficient to access lab and small-scale
manufacturing services from this partner on a project-by-project basis rather
than engaging it on a monthly basis, and terminated the underlying
agreement.  Fees and expenses incurred for contract research services
pursuant to the agreement for the first nine months of fiscal 2007 were
$104,000.





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.  Additionally, the R&D department will manufacture
small-scale products for sale.  The cost of producing these
small-scale products is captured in inventory and not reflected in R&D
expense.  The amount of R&D department costs charged to the
manufacture of small-scale products can cause fluctuations between reporting
periods in the amount of reported R&D expense.  R&D department
costs charged to inventory in the first nine months of fiscal 2008 and 2007 were
$118,000 and $44,000, respectively.








SG&A
Expense.  Selling, general and administrative (SG&A)
expense in the third quarter of fiscal 2008 increased $88,000 to $628,000, or
22% of revenue, compared to $540,000, or 15% of revenue, in the third quarter of
fiscal 2007.  The increase of $88,000 in SG&A expense between the
two periods included:





●
            an
      aggregate increase during the third quarter of fiscal 2008 in compensation
      expense of $40,000; and





●
            an
      increase in consulting fees of $60,000, related to the implementation of
      Section 404 of the Sarbanes-Oxley
Act;





partially
offset by:





●
            a
      decrease in marketing expense of approximately
  $20,000.





SG&A
expense in the first nine months of fiscal 2008 increased $344,000 to $2.0
million, or 20% of revenue, compared to $1.6 million, or 19% of revenue, in the
first nine months of fiscal 2007.





The
increase in SG&A expense between the two nine month periods
included:




21




●
            an
      aggregate $231,000 increase in compensation expense, composed of
      approximately $86,000 attributable to a new senior sales position created
      in April 2007, an increase of $64,000 in stock-based compensation expense,
      and approximately $81,000 of general increases in salaries, benefits and
      sales, signing and performance
bonuses;




●
            an
      increase in consulting fees of $100,000 related to the implementation of
      Section 404 of the Sarbanes-Oxley Act;
and




●
            a
      $28,000 increase in consulting services provided by M. Sreenivasan,
      Synthetech’s former Chief Executive Officer, since his retirement on
      October 31, 2006.





SG&A
expense consists of compensation and related fringe benefits for sales and
administrative employees, costs 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 2008 was $4,000 and
$16,000, respectively, compared to $6,000 and $28,000, respectively, in the same
periods in fiscal 2007.  Interest income arising from a partial refund
of prior years’ property taxes added $4,000 to interest income during the first
nine months of fiscal 2007.  Synthetech’s interest income is primarily
derived from earnings on our cash equivalents, which earnings are affected by
the amount of cash equivalents and the interest rates in effect during the
periods.








Interest
Expense





Interest
expense in the third quarter and first nine months of fiscal 2008 was $15,000
and $64,000 respectively, compared to $28,000 and $46,000, respectively, in the
same periods in fiscal 2007.  The increase in interest expense between
the periods primarily relates to borrowings on Synthetech’s line of
credit.








Income
Taxes





Based on
Synthetech’s history of losses in certain prior years and management’s
evaluation of available tax planning strategies, we have concluded that for the
foreseeable future Synthetech may be unable to recognize its net deferred tax
assets as an income tax benefit, continuing for an uncertain period of
time.








Net Income
(Loss)





Net loss
for the third quarter of fiscal 2008 was $545,000, compared to net income for
the comparable quarter of fiscal 2007 of $498,000.  The net loss for
the nine month periods ended December 31, 2007 and 2006 was $1.3 million and
$89,000, respectively.





22


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
conformity with generally accepted accounting principles 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.  Please refer to Note B to these Condensed Financial
Statements that accompany this Report.





Allowance for Doubtful
Accounts


We
analyze a customer’s creditworthiness by reviewing the customer’s payment
history and financial stability.  We establish the allowance for
doubtful accounts by reviewing aged accounts receivables and the collectibility
of specific accounts.  The allowance for doubtful accounts as of
December 31, 2007 and March 31, 2007 was $15,000.  For the quarters
and nine month periods ended December 31, 2007 and 2006, Synthetech’s provision
for credit losses was insignificant.  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 excess, if any, of the cost of inventory compared to 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, additional inventory write-downs 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


In
accordance with the provisions of SFAS No. 144, Synthetech assesses the
impairment of long-lived assets such as property, plant and equipment whenever
events or changes in circumstances indicate that their carrying value may not be
recoverable.  Factors that could trigger an impairment review include,
among others:




●
            a
      significant change in the extent or manner in which a long-lived asset is
      being used;




23




●
            a
      significant change in the business climate that could affect the value of
      a long-lived asset; and


●
            a
      significant decrease in the market value of
  assets.





If
Synthetech determines that the carrying value of long-lived assets may not be
recoverable, based upon the existence of one or more indicators of impairment,
we compare the carrying value of the asset group to the undiscounted cash flows
expected to be generated by the asset group.  If the carrying value
exceeds the undiscounted cash flows, we may record an impairment
charge.  We recognize an impairment charge to the extent that the
carrying amount of the asset group exceeds its fair value and will reduce only
the carrying amount of the long-lived assets.





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.








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.





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 rates faced by discovery and
clinical trial-stage drug development programs, the demand for approved drugs
remains subject to many uncertainties, including price, side effects and the
existence of competing drugs.




24


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. 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.  In recent years, the
international fine chemicals industry has been marked by overcapacity and a
resulting downward pressure on pricing.  While downward pressure on
pricing remains persistent, the demand side in the industry appears to be
improving.   To the extent we are able to enter into longer-term,
significant or large-scale orders with customers, we expect increased
competition to supply these products.





Due to
the foregoing industry factors, Synthetech cannot predict with reasonable
certainty 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 500
products. With over 20 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 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 $308,000 at December 31, 2007, compared to
$259,000 at March 31, 2007.





At
December 31, 2007, Synthetech reported working capital of $4.3 million, compared
to $5.6 million at March 31, 2007.  The $1.3 million decrease in
working capital between March 31, 2007 and December 31, 2007 was primarily the
result of the net loss for the nine month period of $1.3 million and capital
expenditures of $634,000, partially offset by non-cash charges for depreciation
of $355,000, stock-based compensation of $148,000, and loss on retirement of
equipment of $80,000.





In June
2007, Synthetech renewed its credit facility with a finance
company.  The credit facility is secured by a lien on all of our
assets and provides for borrowings of up to $2 million or the maximum available
under the borrowing base, whichever is less.  Interest is payable at a
fluctuating rate equal to the prime rate, plus a monthly collateral management
fee of 0.25% of the outstanding loan balance. The annual fee for the credit
facility is $15,000. The credit facility has a minimum monthly fee of $2,500,
which is reduced by interest charges and the collateral management
fee.  The credit facility contains no financial covenants and expires
in June 2008.  As of December 31, 2007, Synthetech had $629,000 in
borrowings outstanding under the credit facility.





We
generated cash in our operating activities of $880,000 in the first nine months
of fiscal 2008, compared to cash used in operating activities of $1.9 million in
the first nine months of fiscal 2007.





25


In the
first nine months of fiscal 2008, our cash provided by operating activities was
reduced by $704,000 as a result of our net loss of $1.3 million, partially
off-set by non-cash charges for depreciation of $355,000, stock-based
compensation expense of $148,000, and loss on retirement of equipment of
$80,000.  Accounts receivable increased $61,000 to $2.3 million at
December 31, 2007, from $2.2 million at March 31, 2007.  The increase
between the two periods reflects a December 2007 invoice for $750,000 relating
to a customer advance, partially offset by a decrease in sales between the two
quarters.  Inventory decreased $487,000 to $4.3 million at December
31, 2007, from $4.8 million at March 31, 2007.  Unfavorable inventory
adjustments for the nine month ended December 31, 2007 totaled
$919,000.  Including $292,000 of insurance premiums financed with a
note payable and reflecting the amortization of insurance premiums and property
taxes over the periods that they benefit, prepaid expenses increased $241,000 to
$405,000 at December 31, 2007, from $354,000 at March 31,
2007.  Accounts payable increased $344,000 to $1.1 million at December
31, 2007, from $782,000 at March 31, 2007, primarily as the result of the timing
of purchases and set-up costs associated with a customer project scheduled for
production in January 2008.  Accrued compensation, which is primarily
composed of accrued vacation pay, accrued wages and employee sales bonuses,
decreased $13,000 to $260,000 at December 31, 2007, from $273,000 at March 31,
2007. Accrued termination benefits decreased to $-0- at December 31, 2007, from
$124,000 at March 31, 2007.  Deferred revenue increased $707,000 to
$750,000 at December 31, 2007, from $43,000 at March 31, 2007, reflecting the
invoicing of an advance payment on a customer order.





Cash used
in investing activities for the first nine months of fiscal 2008 was $634,000
compared to cash provided by investing activities of $714,000 in the first nine
months of fiscal 2007.  Synthetech used $634,000 for capital
expenditures during the first nine months of fiscal 2008, compared to $86,000
during the first nine months of fiscal 2007.  Synthetech expects to
incur a total of approximately $700,000 of capital expenditures in fiscal
2008.  Synthetech may finance remaining or additional capital
expenditures from cash on hand or any internal cash flow or may seek debt or
lease financing or a combination thereof.  During the first quarter of
fiscal 2007, Synthetech liquidated $800,000 of marketable securities, at
par.





Cash used
in financing activities for the first nine months of fiscal 2008 was $197,000,
compared to cash provided by financing activities of $784,000 in the first nine
months of fiscal 2007.  During the first nine months of fiscal 2008,
Synthetech repaid $15,000 on its line of credit compared to net borrowings of
$966,000 in the first nine months of fiscal 2007.  Principal payments
under its long-term debt obligations and notes payable totaled $189,000 during
the first nine months of fiscal 2008, compared to $169,000 during the comparable
period of fiscal 2007.  Non-cash financing activities include proceeds
from a notes payable to finance insurance premiums in the amount of $292,000 and
$314,000 for the first nine months of fiscal 2008 and 2007,
respectively.  During the first nine months of fiscal 2008, Synthetech
received $7,000 in proceeds from the exercise of stock options.





Synthetech
returned to profitability in fiscal 2007, recording net income for the year of
$193,000 and it recorded net income for the first quarter of fiscal 2008 of
$119,000.  For the first nine months of fiscal 2008, Synthetech
recorded a net loss of $1,287,000.  As of December 31, 2007, current
liabilities exceeded quick assets (i.e. cash and cash equivalents and accounts
receivable) by $442,000. We believe that our existing cash and cash equivalents,
availability under our credit facility and any funds generated from operations
will be sufficient to support our 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 that may be available under the
credit facility or any funds generated from operations will be sufficient to
satisfy our liquidity requirements.





26


If
sources of liquidity are insufficient, we will need to seek debt or equity
financing to satisfy our liquidity requirements, which we may be unable to
obtain on favorable terms or at all, or to sell assets or further reduce the
size of our operations or discontinue our operations.  Any financing
Synthetech obtains may dilute the ownership interests of our shareholders or
increase our leverage and interest expense.








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 during the nine months ended December 31,
2007.  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 principal executive officer and principal 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.  Based upon that evaluation, our principal executive officer
and the principal financial officer concluded that Synthetech’s disclosure
controls and procedures are effective.





There has
been no change in our internal control over financial reporting during the
quarter ended December 31, 2007 that has materially affected or is reasonably
likely to materially affect our internal control over financial
reporting.





Synthetech’s
principal executive officer and principal financial officer do not expect that
our disclosure controls and internal controls will prevent all error and all
fraud.  Although our disclosure controls and procedures were designed
to provide reasonable assurance of achieving their objectives and our principal
executive officer and principal financial officer have determined that they are
effective in doing so, 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.




27


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 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 Annual Report on Form 10-K for the fiscal year ended
      March 31, 2005).


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.




































































28





SIGNATURES











Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.














SYNTHETECH,
      INC.(Registrant)Date: February 12,
      2008
              By:
              /s/ Daniel
      T. FaganDaniel
      T. FaganChairman
      & Chief Executive Officer


Date: February 12,
      2008
              By:
              /s/ Gary
      A. WeberGary
      A. WeberVice
      President Finance &Chief
      Financial Officer













































































29