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 September 30, 2008





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 November 10, 2008:  14,648,614







SYNTHETECH,
INC.




INDEX










Part I.
                Financial
      Information
                PageItem 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
                16Item 3
                Quantitative and Qualitative Disclosure about MarketRisk
                28Item 4T
                Controls and Procedures
                28Part II.
                Other
    InformationItem 1
                Legal Proceedings
                30Item 1A
                Risk Factors
                30Item 4
                Submission of Matters to a Vote of Security
      Holders
                31Item 5
                Other Information
                31Item 6
                Exhibits
                34Signatures
                
                35




























PART I. FINANCIAL
      INFORMATIONItem 1. Financial
      StatementsSYNTHETECH, INC.Condensed
      Balance Sheets(unaudited)September
      30,
                              
                              
                              March
      31,2008
                              
                              
                              2008AssetsCurrent
      Assets:Cash
      and cash
      equivalents
                              
                              $
                              128,000
                              
                              
                              $
                              1,062,000Accounts
      receivable, less allowancefor
      doubtful accounts of $15,000 forboth
      periods
                              
                              
                              2,421,000
                              
                              
                              
                              2,460,000Inventories
                              
                              
                              4,870,000
                              
                              
                              
                              4,340,000Prepaid
      expenses
                              
                              
                              113,000
                              
                              
                              
                              338,000Total
      Current
      Assets
                              
                              
                              7,532,000
                              
                              
                              
                              8,200,000Property,
      Plant and Equipment,
      net
                              
                              
                              4,339,000
                              
                              
                              
                              3,911,000Total
      Assets
                              
                              $
                              11,871,000
                              
                              
                              $
                              12,111,000


















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




SYNTHETECH, INC.Condensed
      Balance Sheets(continued)(unaudited)
  September
      30,
                                                                                      
                                                                                      
                                                                                      March
      31,2008
                                                                                      
                                                                                      
                                                                                      2008Liabilities
      and Shareholders’ EquityCurrent
      Liabilities:Line
      of
      credit
                                                                                      
                                                                                      $
                                                                                      1,508,000
                                                                                      
                                                                                      
                                                                                      $
                                                                                      905,000Current
      portion of long-term
      debt
                                                                                      
                                                                                      
                                                                                      110,000
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Note
      Payable
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      135,000Accounts
      payable
                                                                                      
                                                                                      
                                                                                      1,135,000
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,349,000Accrued
      compensation
                                                                                      
                                                                                      
                                                                                      366,000
                                                                                      
                                                                                      
                                                                                      
                                                                                      324,000Deferred
      revenue
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,004,000Other
      accrued
      liabilities
                                                                                      
                                                                                      
                                                                                      23,000
                                                                                      
                                                                                      
                                                                                      
                                                                                      35,000Total
      Current
      Liabilities
                                                                                      
                                                                                      
                                                                                      3,142,000
                                                                                      
                                                                                      
                                                                                      
                                                                                      3,752,000Long-term
      debt
                                                                                      
                                                                                      
                                                                                      403,000
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Total
      Liabilities
                                                                                      
                                                                                      
                                                                                      3,545,000
                                                                                      
                                                                                      
                                                                                      
                                                                                      3,752,000Shareholders'
      Equity:Common
      stock, $.001 par value; authorized100,000,000
      shares; issued and outstanding,14,647,000
      and14,632,000
      shares
                                                                                      
                                                                                      
                                                                                      15,000
                                                                                      
                                                                                      
                                                                                      
                                                                                      15,000Paid-in
      capital
                                                                                      
                                                                                      
                                                                                      9,417,000
                                                                                      
                                                                                      
                                                                                      
                                                                                      9,378,000Retained
      deficit
                                                                                      
                                                                                      
                                                                                      (1,106,000
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (1,034,000
                                                                                      )Total
      Shareholders'
      Equity
                                                                                      
                                                                                      
                                                                                      8,326,000
                                                                                      
                                                                                      
                                                                                      
                                                                                      8,359,000Total
      Liabilities and Shareholders' Equity
                                                                                      
                                                                                      $
                                                                                      11,871,000
                                                                                      
                                                                                      
                                                                                      $
                                                                                      12,111,000





















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 Six Months EndedSeptember
      30,
                                        
                                        
                                        September
      30,2008
                                        
                                        
                                        2007
                                        
                                        
                                        2008
                                        
                                        
                                        2007Revenue
                                        
                                        $
                                        3,291,000
                                        
                                        
                                        $
                                        2,981,000
                                        
                                        
                                        $
                                        8,208,000
                                        
                                        
                                        $
                                        7,153,000Cost
      of revenue
                                        
                                        
                                        2,649,000
                                        
                                        
                                        
                                        2,838,000
                                        
                                        
                                        
                                        6,277,000
                                        
                                        
                                        
                                        5,821,000Gross
      income
                                        
                                        
                                        642,000
                                        
                                        
                                        
                                        143,000
                                        
                                        
                                        
                                        1,931,000
                                        
                                        
                                        
                                        1,332,000Research
      and development
                                        
                                        
                                        335,000
                                        
                                        
                                        
                                        346,000
                                        
                                        
                                        
                                        632,000
                                        
                                        
                                        
                                        674,000Selling,
      general and administrative
                                        
                                        
                                        640,000
                                        
                                        
                                        
                                        638,000
                                        
                                        
                                        
                                        1,318,000
                                        
                                        
                                        
                                        1,363,000Total
      operating expenses
                                        
                                        
                                        975,000
                                        
                                        
                                        
                                        984,000
                                        
                                        
                                        
                                        1,950,000
                                        
                                        
                                        
                                        2,037,000Operating
      loss
                                        
                                        
                                        (333,000
                                        )
                                        
                                        
                                        (841,000
                                        )
                                        
                                        
                                        (19,000
                                        )
                                        
                                        
                                        (705,000
                                        )Interest
      income
                                        
                                        
                                        -
                                        
                                        
                                        
                                        3,000
                                        
                                        
                                        
                                        5,000
                                        
                                        
                                        
                                        12,000Interest
      expense
                                        
                                        
                                        (34,000
                                        )
                                        
                                        
                                        (23,000
                                        )
                                        
                                        
                                        (58,000
                                        )
                                        
                                        
                                        (49,000
                                        )Loss
      before income taxes
                                        
                                        
                                        (367,000
                                        )
                                        
                                        
                                        (861,000
                                        )
                                        
                                        
                                        (72,000
                                        )
                                        
                                        
                                        (742,000
                                        )Income
      tax benefit
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Net
      loss
                                        
                                        $
                                        (367,000
                                        )
                                        
                                        $
                                        (861,000
                                        )
                                        
                                        $
                                        (72,000
                                        )
                                        
                                        $
                                        (742,000
                                        )Net
      loss per common share:Basic
      and diluted loss per share
                                        
                                        $
                                        (0.03
                                        )
                                        
                                        $
                                        (0.06
                                        )
                                        
                                        $
                                        (0.00
                                        )
                                        
                                        $
                                        (0.05
                                        )Weighted
      average shares outstanding:Basic
                                        
                                        
                                        14,635,201
                                        
                                        
                                        
                                        14,561,339
                                        
                                        
                                        
                                        14,633,417
                                        
                                        
                                        
                                        14,553,936Diluted
                                        
                                        
                                        14,635,201
                                        
                                        
                                        
                                        14,561,339
                                        
                                        
                                        
                                        14,633,417
                                        
                                        
                                        
                                        14,553,936




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




SYNTHETECH, INC.Condensed
      Statements of Cash Flows(unaudited)For The Six Months Ended September
      30,
                                            
                                            2008
                                            
                                            
                                            2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                                            
                                            $
                                            (72,000
                                            )
                                            
                                            $
                                            (742,000
                                            )Adjustments
      to reconcile net loss tonet
      cash provided by (used in) operating activities:Depreciation
      expense
                                            
                                            
                                            250,000
                                            
                                            
                                            
                                            236,000Loss
      on retirement of
      equipment
                                            
                                            
                                            -
                                            
                                            
                                            
                                            16,000Stock-based
      compensation
      expense
                                            
                                            
                                            35,000
                                            
                                            
                                            
                                            126,000(Increase)
      decrease in assets:Accounts
      receivable,
      net
                                            
                                            
                                            39,000
                                            
                                            
                                            
                                            974,000Inventories
                                            
                                            
                                            (530,000
                                            )
                                            
                                            
                                            627,000Prepaid
      expenses
                                            
                                            
                                            225,000
                                            
                                            
                                            
                                            253,000Increase
      (decrease) in liabilities:Accounts
      payable
                                            
                                            
                                            (214,000
                                            )
                                            
                                            
                                            378,000Accrued
      compensation
                                            
                                            
                                            42,000
                                            
                                            
                                            
                                            45,000Accrued
      termination
      benefits
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (107,000
                                            )Deferred
      revenue
                                            
                                            
                                            (1,004,000
                                            )
                                            
                                            
                                            (43,000
                                            )Other
      accrued
      liabilities
                                            
                                            
                                            (12,000
                                            )
                                            
                                            
                                            13,000Cash
      Provided By (Used In) Operating Activities
                                            
                                            
                                            (1,241,000
                                            )
                                            
                                            
                                            1,776,000CASH
      FLOWS FROM INVESTING ACTIVITIES:Property,
      plant and equipment
      purchases
                                            
                                            
                                            (678,000
                                            )
                                            
                                            
                                            (543,000
                                            )Cash
      Used In  Investing
      Activities
                                            
                                            
                                            (678,000
                                            )
                                            
                                            
                                            (543,000
                                            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from (repayments of) line of credit
                                            
                                            
                                            603,000
                                            
                                            
                                            
                                            (623,000
                                            )Borrowings
      under long-term debt obligations
                                            
                                            
                                            550,000Principal
      payments under long-term debt obligations
                                            
                                            
                                            (37,000
                                            )
                                            
                                            
                                            -Repayment
      of note
      payable
                                            
                                            
                                            (135,000
                                            )
                                            
                                            
                                            (132,000
                                            )Proceeds
      from exercise of stock options
                                            
                                            
                                            4,000
                                            
                                            
                                            
                                            7,000Cash
      Provided By (Used In) Financing Activities
                                            
                                            
                                            985,000
                                            
                                            
                                            
                                            (748,000
                                            )Increase
      (Decrease) in Cash and Cash Equivalents
                                            
                                            
                                            (934,000
                                            )
                                            
                                            
                                            485,000Cash
      and Cash Equivalents at Beginning of Period
                                            
                                            
                                            1,062,000
                                            
                                            
                                            
                                            259,000Cash
      and Cash Equivalents at End of
      Period
                                            
                                            $
                                            128,000
                                            
                                            
                                            $
                                            744,000






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


SYNTHETECH, INC.


NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


(Information
as of September 30, 2008 and for the three month


period
ended September 30, 2008 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 (peptide-like) 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’s products also support the production of
chemically based medical devices.





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, 2008.  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:





September
      30,
                      
                      
                      March
      31,2008
                      
                      
                      2008Cash
                      
                      $
                      7,000
                      
                      
                      $
                      920,000Cash
      equivalents
                      
                      
                      121,000
                      
                      
                      
                      142,000$
                      128,000
                      
                      
                      $
                      1,062,000





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 September 30, 2008 and March 31, 2008 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 September 30, 2008, four customers had
accounts receivable balances of 23%, 21%, 14% and 11% of total accounts
receivable.  At March 31, 2008, four customers had accounts receivable
balances of 25%, 15%, 14% and 10% of total accounts
receivable.  During the first half of fiscal 2009, sales to two
customers, each exceeding 10% of revenue for the six month period, accounted for
approximately 30% of Synthetech’s revenue.  During the first half of
fiscal 2008, sales to three customers, each exceeding 10% of revenue for the six
month period, accounted for approximately 38% of Synthetech’s
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. Revenue from emerging pharmaceutical or
biotechnology companies could be adversely impacted if these customers are
unable to obtain necessary additional funding from the financial
markets.





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.




6


When
assets are retired, sold or otherwise disposed of, the applicable costs and
accumulated depreciation are removed from the accounts and the resulting gain or
loss is recognized.  Depreciation and amortization are provided on the
straight-line 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 (SFAS) No. 144, “Accounting for Impairment or
Disposal of Long-Lived Assets”, 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, Synthetech compares the carrying values of its 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 an impairment charge may be recorded.  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:Stock-based compensation expense for all
stock-based compensation awards is based on the grant-date fair value estimated
in accordance with the provisions of SFAS No. 123(R), “Share-Based
Payment”.  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


NOTE C.NET LOSS PER
SHARE





Basic and
diluted loss per share are computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the period.  The
weighted average shares used to compute diluted loss per share did not differ
from the weighted average shares used to compute basic loss per share. The
following common stock equivalents were excluded from the dilutive loss per
share computation because their effect would have been
anti-dilutive:




For
      the Three Months
                      
                      
                      For
      the Six MonthsEnded
      September 30,
                      
                      
                      Ended
      September 30,2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007Common
      stock options outstanding
                      
                      
                      1,926,567
                      
                      
                      
                      2,299,100
                      
                      
                      
                      1,926,567
                      
                      
                      
                      2,299,100Less
      common stock options used incalculating
      diluted loss per share
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Common
      stock options not used incalculating
      diluted loss per share
                      
                      
                      1,926,567
                      
                      
                      
                      2,299,100
                      
                      
                      
                      1,926,567
                      
                      
                      
                      2,299,100





The
shares used in the computation of Synthetech’s basic and diluted
loss  per share are as follows:





For
      the Three Months
                      
                      
                      For
      the Six MonthsEnded
      September 30,
                      
                      
                      Ended
      September 30,Weighted
      average shares outstanding:
                      
                      2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007Basic
                      
                      
                      14,635,201
                      
                      
                      
                      14,561,339
                      
                      
                      
                      14,633,417
                      
                      
                      
                      14,553,936Dilutive
      effect of stock options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      --Diluted
                      
                      
                      14,635,201
                      
                      
                      
                      14,561,339
                      
                      
                      
                      14,633,417
                      
                      
                      
                      14,553,936







NOTE
D. STATEMENTS OF CASH
FLOWS





Supplemental
cash flow disclosures:








Cash
      Paid
                        
                        Three
      Months Ended September 30,
                        
                        
                        Six
      Months Ended September 30,2008
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2007Interest
                        
                        $
                        34,000
                        
                        
                        $
                        23,000
                        
                        
                        $
                        58,000
                        
                        
                        $
                        49,000


























8


NOTE
E. INVENTORIES





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





September
      30,
                      
                      
                      March
      31,2008
                      
                      
                      2008Finished
      products
                      
                      $
                      2,015,000
                      
                      
                      $
                      1,678,000Work
      in process
                      
                      
                      1,173,000
                      
                      
                      
                      902,000Raw
      materials
                      
                      
                      1,682,000
                      
                      
                      
                      1,760,000$
                      4,870,000
                      
                      
                      $
                      4,340,000







NOTE
F. PROPERTY, PLANT AND
EQUIPMENT





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




Depreciable
      Life
                            
                            
                            September
      30,
                            
                            
                            March
      31,In
      Years
                            
                            
                            2008
                            
                            
                            2008Land
                            
                            
                            
                            
                            $
                            241,000
                            
                            
                            $
                            241,000Buildings
                            
                            
                            15
      – 40
                            
                            
                            
                            1,617,000
                            
                            
                            
                            1,617,000Machinery
      and equipment
                            
                            
                            5 –
      17
                            
                            
                            
                            2,964,000
                            
                            
                            
                            2,660,000Laboratory
      equipment
                            
                            
                            5 –
      17
                            
                            
                            
                            1,441,000
                            
                            
                            
                            1,323,000Furniture
      and fixtures
                            
                            
                            3 –
      5
                            
                            
                            
                            114,000
                            
                            
                            
                            99,000Construction
      in process
                            
                            
                            
                            
                            
                            
                            254,000
                            
                            
                            
                            13,0006,631,000
                            
                            
                            
                            5,953,000Less:Accumulated
      depreciation
                            
                            
                            
                            
                            
                            
                            (2,292,000
                            )
                            
                            
                            (2,042,000
                            )$
                            4,339,000
                            
                            
                            $
                            3,911,000






































9


NOTE
G. LINE
OF CREDIT





During
November 2008, Synthetech amended its line of credit facility with its current
lender.  Under the amended facility, the interest rate was increased
from the prime rate plus 3% to the prime rate plus 5%, or 9%, whichever is
higher, the maturity date of the credit facility was extended from June 15, 2009
to September 15, 2010, and the borrowing base formula was
changed.  For more information regarding the amended credit facility,
please refer to Note M to these condensed financial statements.





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 was payable at the prime rate plus
3%.  Effective November 1, 2008, interest is payable at the prime rate
plus 5%, or 9%, whichever is higher.  The annual fee for the credit
facility is $20,000. Additionally, the credit facility has a minimum monthly fee
of $2,500, which is reduced by interest charges.  The facility
contains no financial covenants and is collateralized by cash, cash equivalents,
accounts receivable, inventories and property, plant and
equipment.  The amount outstanding under the facility as of September
30, 2008 was $1,508,000.







NOTE
H. LONG-TERM
DEBT





During
November 2008, Synthetech entered into a term loan facility under which it
borrowed $500,000 from the same finance company that provided Synthetech's line
of credit facility.  Also during November 2008, Synthetech amended its
other outstanding term loan facility with the same lender.  Under the
amended term loan facility, the rate of interest was increased from the prime
rate plus 3% to the prime rate plus 4%, or 8%, whichever is higher; no other
terms of the agreement were changed.  For further information
regarding the terms of Synthetech’s new and modified term loan facilities,
please refer to Note M to these condensed financial statements.





On May 5,
2008, Synthetech entered into a term loan facility under which it borrowed
$550,000 from the same finance company that provided Synthetech's line of credit
facility.  The loan matures on May 5, 2011, and requires 36 monthly
principal payments equal to $9,167, plus interest, beginning on June 1, 2008,
with a balloon payment of $220,000 due on maturity.  As of September
30, 2008, the loan bore interest at the prime rate plus 3%.  As
discussed above, the rate has since been revised to the prime rate plus 4% or
8%, whichever is higher.  On May 6, 2009 and 2010, Synthetech
will pay an annual loan fee equal to 1% of the then outstanding principal
balance of the loan.  The loan contains no financial covenants and is
collateralized by cash, cash equivalents, accounts receivable, inventories, and
property, plant and equipment.





Scheduled
long-term debt principal repayments under the May 5, 2008 term loan facility are
as follows:





Fiscal
      2009 (second half)
                      
                      $
                      55,000Fiscal
      2010
                      
                      
                      110,000Fiscal
      2011
                      
                      
                      110,000Fiscal
      2012
                      
                      
                      238,000$
                      513,000














10


NOTE
I. SHAREHOLDERS'
EQUITY
  Amended
and Restated Shareholders Rights Agreement
  In July
1998, Synthetech adopted a Shareholder Rights Plan (the “Original Rights
Agreement”).  Under the Original Rights Agreement, Synthetech
declared a dividend of one common share purchase right (a "Right") for each share of
common stock outstanding at the close of business on August 4,
1998.  The Rights are attached to, and automatically trade with, the
outstanding shares of Synthetech’s common stock.  In July 2008,
Synthetech adopted an Amended and Restated Shareholder Rights Agreement (the
“Current Rights
Agreement”).  The Current Rights Agreement extends the Rights'
expiration date and adjusts the purchase price from $30.00 to $2.00 per share,
subject to adjustment.  If any person or group other than Synthetech,
a Synthetech subsidiary or a Synthetech employee benefit plan acquires 15% or
more of Synthetech's common stock, then that person or group's Rights will be
void and proper provision will be made so that every other Right holder will
have the right to receive upon exercise an amount of Synthetech common stock
with a market value twice that of the Right exercise price.  In
addition, if Synthetech is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are sold
after a person or group has acquired 15% or more of Synthetech's common stock,
then proper provision will be made so that each Right holder will have the right
to receive, upon the exercise of its rights at the then current Right exercise
price, an amount of common stock of the acquiring company that at the time of
such a transaction will have a market value twice that of the Right exercise
price.  Synthetech may redeem the Rights at a price of $0.0001 per
Right at any time prior to the earlier of (i) the expiration of the Rights in
August 2018 or (ii) a certain amount of time after a person or group has begun
to acquire or announced that it plans to acquire 15% or more of the outstanding
shares of Synthetech common stock..  Until a Rights holder exercises
its Rights, the Rights holder does not have rights as a shareholder of
Synthetech, including, without limitation, voting or distribution
rights.
   NOTE
J. EMPLOYEE STOCK
BENEFITS





Description
of the 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 Synthetech’s common stock on the date of
grant.  Employee options generally vest one-third on the date of grant
and in equal annual installments between the date of grant and the subsequent
two years. On occasion, individual options may have different vesting
terms.  Board of Director Options, vest ratably over the five
succeeding years from the date of grant.  All options expire no later
than ten years from the date of grant.  As of September 30, 2008,
740,850 shares were available for issuance under the 2005 Plan.




On
November 13, 2008, the Compensation Committee of the Board of Directors awarded
key employees options to purchase an aggregate of 450,000 shares of Synthetech
common stock. The options were awarded at $0.50 per share, the market price of
Synthetech common stock on the date of grant.  The incentive stock
options were issued as part of the 2005 Plan.  One-third of these
options vested on the first anniversary of the grant date; one-third will vest
on the second anniversary; the remaining one-third will vest on the third
anniversary of the date of grant.  On November 13, 2008, the
Compensation Committee awarded a key employee the option to purchase 45,000
shares of Synthetech common stock pursuant to the terms of an employment
agreement.
        11
 The
options were awarded at $0.50 per share, the market price of Synthetech common
stock on the date of grant.  The incentive stock options were issued
as part of the 2005 Plan.  One-third of these options vested on each
of the date of grant and the first anniversary of the grant date; the remaining
one-third will vest on the second anniversary of the date of grant.
 
 Additionally,
on November 13, 2008, the Compensation Committee revised the non-employee Board
of Director’s compensation policy as it relates to stock-based
compensation.  Pursuant to the prior policy, members of the Board of
Directors receive a grant of 15,000 shares once every five years, which vest
3,000 shares per year, over five years.  The Compensation Committee
has modified this policy to increase the standard five-year award to nonemployee
Directors from 15,000 options to 37,500 options.  The initial
adjustment to the compensation policy was designed to increase each non-employee
Director’s annual vesting to 7,500 shares from the present 3,000
shares.  Consequently, on November 13, 2008, the Compensation
Committee of the Board of Directors awarded nonemployee Directors 186,000
options to purchase Synthetech’s common stock.  The options were
awarded at $0.50 per share, the market price of Synthetech’s common stock on the
date of grant.  The nonqualified stock options were issued as part of
the 2005 Plan.
  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 Grants


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 market price of Synthetech common stock on
the date of grant.  The nonqualified stock options were not issued as
part of the 2005 Plan and Synthetech has registered the underlying shares under
the Securities Act of 1933.  One-third of these options vested on each
of the date of grant and the first anniversary of the grant date; the remaining
one-third will vest on the second anniversary of the date of
grant.  As of September 30, 2008, 95,833 of these options had been
forfeited due to the termination of the employee option holders and are not
available for reissuance.
























12


Stock
Option Activity





A summary
of the changes in stock options outstanding under Synthetech’s 2005 Plan and
otherwise during the quarter ended September 30, 2008 is presented
below:





Weighted
      AverageNumber
                
                
                Weighted
      Average
                
                
                Remaining
                
                
                AggregateOf
                
                
                Exercise
                
                
                Contractual
      Term
                
                
                IntrinsicOptions
                
                
                Price
                
                
                (years)
                
                
                ValueOptions
      outstanding, April 1, 2008
                
                
                2,004,067
                
                
                $
                1.07
                
                
                
                6.0Granted
                
                
                -
                
                
                
                -Exercised
                
                
                (15,000
                )
                
                $
                0.29Forfeited
                
                
                (62,500
                )
                
                $
                1.55Options
      outstanding, September 30, 2008
                
                
                1,926,567
                
                
                $
                1.06
                
                
                
                6.2
                
                
                $
                283,000Options
      exercisable, September 30, 2008
                
                
                1,754,074
                
                
                $
                1.09
                
                
                
                6.0
                
                
                $
                275,000





No
options were granted during the first half of fiscal 2009.  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 September 30, 2008 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 September
30, 2008.  This amount changes based upon changes in the fair market
value of Synthetech’s stock.





As of
September 30, 2008, $52,000 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 0.8
years.























13


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





For
      the Three Months
                        
                        
                        For
      the Six MonthsEnded
      September 30,
                        
                        
                        Ended
      September 30,2008
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2007Expected
      price volatility
                        
                        
                        -
                        
                        
                        
                        55%
                        
                        
                        
                        -
                        
                        
                        
                        50%Risk-free
      interest rate
                        
                        
                        -
                        
                        
                        
                        4.96%
                        
                        
                        
                        -
                        
                        
                        
                        4.96%Expected
      term in years
                        
                        
                        -
                        
                        
                        
                        10
                        
                        
                        
                        -
                        
                        
                        
                        6.1Dividend
      yield
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Weighted
      average grant date fair value
                        
                        
                        -
                        
                        
                        $
                        0.75
                        
                        
                        
                        -
                        
                        
                        $
                        0.48








Stock-based
compensation expense was allocated as follows:





For
      the Three Months
                        
                        
                        For
      the Six MonthsEnded
      September 30,
                        
                        
                        Ended
      September 30,2008
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2007Stock-based
      compensation expense:Cost
      of revenue
                        
                        $
                        2,000
                        
                        
                        $
                        4,000
                        
                        
                        $
                        5,000
                        
                        
                        $
                        28,000Operating
      expenses
                        
                        
                        15,000
                        
                        
                        
                        20,000
                        
                        
                        
                        30,000
                        
                        
                        
                        98,000Stock-based
      compensation expensebefore
      income taxes
                        
                        
                        17,000
                        
                        
                        
                        24,000
                        
                        
                        
                        35,000
                        
                        
                        
                        126,000Income
      tax benefit
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      stock-based compensationexpense
      after income taxes
                        
                        $
                        17,000
                        
                        
                        $
                        24,000
                        
                        
                        $
                        35,000
                        
                        
                        $
                        126,000







NOTE
K. RELATED PERSON
TRANSACTIONS





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 half of fiscal 2009 and 2008 approximated $-0-
and $1,000, respectively.







NOTE
L. LIQUIDITY





During
fiscal 2008, Synthetech incurred a net loss of $1.2 million, or $0.08 per share,
and working capital decreased $1.1 million to $4.4 million at March 31,
2008.  During the first half of fiscal 2009, Synthetech incurred a net
loss of $72,000, or $0.00 per share, and working capital decreased $58,000 to
$4.4 million at September 30, 2008.  As discussed in Note M
below, on November 5, 2008 Synthetech borrowed $500,000 pursuant to a promissory
note and extended the maturity of its line of credit from June 15, 2009 to
September 15, 2010.





14


Management
believes that Synthetech’s existing cash and cash equivalents, anticipated
availability under its credit facility, any funds generated from operations and
a customer commitment to make certain advances to fund a large order as
discussed in the attached Management Discussion and Analysis section of this
Report on Form 10-Q, will be sufficient to support operations for the next
twelve months.  Customer advances to assist with the funding of large
projects are customary in Synthetech’s industry. A customer’s unwillingness to
fund an advance for a large project would adversely impact Synthetech’s ability
to participate in the project.  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 from 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 to discontinue operations.  Any
financing Synthetech obtains may dilute the ownership interests of its
shareholders or increase leverage and interest expense.






NOTE  M. SUBSEQUENT
EVENT – FINANCING ARRANGEMENTS




On
November 5, 2008, Synthetech entered into the following financing arrangements
with the same finance company:




●
            Synthetech
      amended its credit facility to: extend the maturity of the facility from
      June 15, 2009 to September 15, 2010; increase the rate of interest on the
      facility from the prime rate plus 3% to prime plus 5%, or 9%, whichever is
      higher; and change the borrowing
base.




●
            Synthetech
      amended its outstanding term loan facility to increase the interest rate
      from the prime rate plus 3% to prime plus 4%, or 8%, whichever is
      higher.  No other changes were made to this promissory
      note.




●
            Synthetech
      entered into a term loan facility under which it borrowed
      $500,000.  The loan matures in December 2011, and requires 36
      monthly principal payments equal to $8,333, plus interest, beginning on
      December 1, 2008, with a balloon payment of $200,000 due on
      maturity.  The loan bears interest at the prime rate plus 5%, or
      9%, whichever is higher.  At the closing of the loan, Synthetech
      paid a $15,000 loan fee.  The term loan facility contains no
      financial covenants and is collateralized by cash, cash equivalents,
      accounts receivable, inventories, and property, plant and
      equipment.








































15


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; whether our
cash and cash equivalents, borrowing capacity, any internally-generated funds
and any customer advances will be adequate to operate our business; expected
revenue from and shipping dates for customer orders; recurrence of large-scale
projects; the conditions of the fine chemicals industry; obtaining regulatory
approval for new drugs and other matters relating to drug development progress;
financing our current and future capital expenditures and the timing and amount
of such expenditures; the effect any change in foreign currency exchange rates
would have on our operating results; 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; potential period-to-period revenue or expense fluctuations;
our limited financial and other resources, including cash and cash equivalents;
our potential failure to generate positive cash flow from operations, 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;
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,
2008, 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 to reflect events or circumstances that may occur or
arise after the date hereof or to reflect the occurrence of unanticipated
events.









































16


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 (peptide-like) small molecule drugs from
early stages of a customer’s clinical development through market launch and into
commercial production.  Synthetech’s products also support the
production of chemically-based medical devices.  Synthetech’s domestic
and international customer base includes major pharmaceutical, contract drug
synthesis, emerging biotechnology (virtual pharmaceutical) and medical device
companies.  We also supply catalog quantities of specialty amino acids
to research institutions, universities and drug discovery firms.





Financial
Results


Synthetech
reported revenue of $3.3 million for the second quarter of fiscal
2009.  Related gross income was $642,000, or 20% of revenue, and the
net loss was $367,000, or $0.03 per share.  Revenue for the first six
months of fiscal 2009 was $8.2 million, related gross income was $1.9 million,
or 24% of revenue, and net loss was $72,000, or $-0- per share.  Gross
loss for the first six months of fiscal 2009 was unfavorably impacted by a cost
structure designed to support a higher base of revenue and by: lower than normal
margins on certain products which encountered production difficulties in the
prior fiscal year; higher than average raw material costs on certain projects;
and an increase in the weighting of material purchased for direct resell which
average lower margins than internally produced products.





Market
Overview


Synthetech’s
revenue has benefited from the improvement in the fine chemicals
market.  Custom projects have increased significantly over the last
few years.  We believe that Synthetech has been able to capitalize on
new revenue 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 research and development
group.





We have
increasingly targeted rapidly expanding market opportunities at
biopharmaceutical and medical device companies. This growth opportunity is being
driven in large part by the need of large pharmaceutical companies to develop
new drugs. A number of block-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 efforts augmented by the in-licensing of promising new drug
candidates from emerging pharmaceutical companies. Most biopharmaceutical
companies have limited manufacturing expertise, which we believe provides a
company like Synthetech with additional market opportunities.















17


Business
Conditions


Synthetech’s
order backlog as of September 30, 2008 and 2007 was approximately $5.7 million
and $3.4 million, respectively.  We expect that a majority of the
September 30, 2008 backlog will ship during the third quarter of fiscal 2009 and
substantially all of the remainder is scheduled to ship during the fourth
quarter of fiscal 2009.  In October 2008, we received an order from
the domestic subsidiary of a major Western European pharmaceutical company for
$1.3 million.  This order is scheduled to ship during the second and
third quarters of fiscal 2010.  In November 2008, we also received an
order from a major Western European pharmaceutical company for $5.4 million, we
expect that this order will ship during the fourth quarter of fiscal 2009. The
customer intends to advance certain funds to support this large
order.  The domestic and Western European drug development market
currently is very active.  Synthetech has commercial relationships
with a variety of Western European pharmaceutical companies.  The
existing favorable exchange rate for Euros relative to US Dollars appears to
have generated further interest from Western European customers in Synthetech’s
capabilities and products.





Our
primary competition is from a variety of fine chemical companies headquartered
in Western Europe.  We also continue to encounter competition,
primarily for more basic products, from developing countries such as South
Korea, India and China that have substantially lower cost
structures.  This trend has resulted in pricing pressures in the
United States and is affecting our ability to maintain historical margins and to
retain and attract business for some of our products.





Customer
Project Pipeline


Our
portfolio of clinical pipeline projects remains active and consists of a variety
of projects with significant revenue generating potential.  Many of
these projects have the potential to grow into large-scale projects in the
future.





Synthetech
is involved in many active customer projects.  Large-scale customer
projects represent our main source of revenue.  We are unable to
determine with reasonable certainty our revenues relating to large-scale
projects beyond our current order base, in part due to unpredictable drug
approval processes and the short-term supply chain planning by many of our
customers.






























































18


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 Six Months EndedSeptember
      30,
                  
                  September
      30,2008
                  
                  2007
                  
                  2008
                  
                  2007Revenue
                  
                  100.0%
                  
                  100.0%
                  
                  100.0%
                  
                  100.0%Cost
      of revenue
                  
                  80.5
                  
                  95.2
                  
                  76.5
                  
                  81.4Gross
      income
                  
                  19.5
                  
                  4.8
                  
                  23.5
                  
                  18.6Research
      and development
                  
                  10.2
                  
                  11.6
                  
                  7.7
                  
                  9.4Selling,
      general and administrative
                  
                  19.4
                  
                  21.4
                  
                  16.0
                  
                  19.1Total
      operating expenses
                  
                  29.6
                  
                  33.0
                  
                  23.7
                  
                  28.5Operating
      loss
                  
                  (10.1)
                  
                  (28.2)
                  
                  (0.2)
                  
                  (9.9)Interest
      income
                  
                  0.0
                  
                  0.1
                  
                  0.0
                  
                  0.2Interest
      expense
                  
                  (1.0)
                  
                  (0.8)
                  
                  (0.7)
                  
                  (0.7)Loss
      before income taxes
                  
                  (11.1)
                  
                  (28.9)
                  
                  (0.9)
                  
                  (10.4)Income
      tax benefit
                  
                  -
                  
                  -
                  
                  -
                  
                  -Net
      loss
                  
                  (11.1)%
                  
                  (28.9)%
                  
                  (0.9)%
                  
                  (10.4)%








Revenue





Revenue
of $3.3 million for the second quarter of fiscal 2009 increased by $310,000, or
10%, from revenue of $3.0 million for the second quarter of fiscal
2008.  Revenue of $8.2 million for the first six months of fiscal 2009
increased by $1.1 million, or 15%, from $7.2 million for the first half of
fiscal 2008.





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 five
large-scale projects was $1.3 million during the second quarter of fiscal
2009.  Three large-scale projects contributed $1.1 million to revenue
during the second quarter of fiscal 2008.  During the first six months
of fiscal 2009, seven large-scale projects contributed $3.7 million to revenue,
compared to four large-scale projects contributing $3.4 million during the
comparable period of fiscal 2008.  Large-scale project revenue for the
first six months of fiscal 2009 includes $627,000 in revenue in support of two
medical device projects.





The
market environment for smaller customer projects continues to be
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.





19


International
sales, mainly to Europe, were $1.1 million and $4.0 million in the second
quarter and first six months of fiscal 2009, respectively, compared to $1.3
million and $3.3 million in the second quarter and first six months of fiscal
2008, 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 from period to period.








Gross
income





Gross
income for the second quarter of fiscal 2009 increased $499,000, to $642,000, or
20% of revenue, compared to gross income of $143,000, or 5% of revenue, for the
second quarter of fiscal 2008.  Gross income for the first six months
of fiscal 2009 increased $599,000, to $1.9 million, or 24% of revenue, compared
to gross income of $1.3 million, or 19% of revenue, for the first six months of
fiscal 2008.  The increase in gross income between the respective
periods was primarily the result of the increase in sales between the
corresponding periods of fiscal 2009 and 2008.  Additionally, compared
to their respective periods in fiscal 2008, fiscal 2009 charges for impaired
inventory decreased, partially offset by continued increases in manufacturing
costs, as each such factor is discussed in more detail below.  Gross
income for the first six months of fiscal 2009 was unfavorably impacted by a
cost structure designed to support a higher base of revenue and by: lower than
normal margins on certain products which encountered production difficulties in
the prior fiscal year; higher than average raw material costs on certain
projects; and an increase in the weighting of material purchased for direct
resell which average lower margins than internally produced
products.





Manufacturing
department costs incurred during the second quarter and first six months of
fiscal 2009 increased $175,000 and $355,000, respectively, compared to the
comparable periods of fiscal 2008.  Variable operating costs such as
labor and supplies increased between the respective periods as a result of both
cost increases and increased production activity.  In response to
production difficulties, in May 2008 Synthetech engaged a manufacturing
consultant with a background in amino acid and peptide
chemistries.  Related consulting fees and costs for the second quarter
and first six months of fiscal 2009 were $40,000 and $55,000, respectively.
Effective, October 1, 2008, Synthetech hired Dr. Frederick Farkas as its new
Director of Production.  Going forward, it is expected that costs for
manufacturing consulting will cease or reduce significantly, these savings will
be offset by costs associated with the hiring of Dr.
Farkas.  Maintenance costs for the second quarter of fiscal 2009 were
stable compared to the second quarter of fiscal 2008.  Maintenance
costs for the first half of fiscal 2009 increased $53,000 compared to the first
half of fiscal 2008.





20


Gross
income for the second quarter and first six months of fiscal 2009 reflect
charges for impaired inventory of $164,000 and $355,000,
respectively.  Gross income for the second quarter and first six
months of fiscal 2008 reflect charges for impaired inventory of $385,000 and
$514,000, respectively.  The above charges for impaired inventory for
the first six months of fiscal 2009 and 2008 include unfavorable inventory
adjustments of $40,000 and $197,000, respectfully, relating to inventory held in
support of specific customer drug development projects which have been
discontinued or curtailed for a significant period of time.





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 offs 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
second quarter of fiscal 2009 decreased $11,000 to $335,000, or 10% of revenue,
compared to $346,000, or 12% of revenue, for the second quarter of fiscal
2008.  R&D expense in the first six months of fiscal 2009
decreased $42,000 to $632,000, or 8% of revenue, compared to $674,000, or 9% of
revenue, in the first six months of fiscal 2009.  The decreases in
R&D expense between these periods included:




●
            decreases
      during the second quarter and first six months of fiscal 2009 of $37,000
      and $42,000, respectively, arising from increases in the amount of R&D
      department costs allocated to inventory for the manufacture of customer
      products, as described below, and




●
            aggregate
      decreases during the second quarter and first six months of fiscal 2009 in
      compensation and related costs of $25,000 and $40,000, respectively,
      primarily composed of the transfer of an R&D chemist to the Production
      Department and a vacancy in a senior position, partially offset by general
      increases in salaries and benefits;




partially
offset by:




●
            increases
      during the second quarter and first six months of fiscal 2009 in contract
      research services of $28,000 and $19,000,
  respectively;




●
            increases
      during the second quarter and first six months of fiscal 2009 in
      laboratory supplies of $14,000 and $21,000, respectively,
    and




●
            a
      net increase during the second quarter of fiscal 2009 in various expenses
      of $9,000.





21


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 six months of fiscal 2009 and 2008 were
$100,000 and $58,000, respectively.





SG&A
Expense.  Selling, general and administrative (SG&A)
expense in the second quarter of fiscal 2009 increased $2,000 to $640,000, or
19% of revenue, compared to $638,000, or 21% of revenue, in the second quarter
of fiscal 2008.





The
increase of $2,000 in SG&A expense between these two periods
includes:





●
            an
      increase in professional fees of $36,000,
and





●
            a
      net increase in various expenses of
$17,000;





partially
offset by:





●
            an
      aggregate $51,000 decrease in compensation expense, comprised of a
      reduction in bonus expense of $25,000 and various decreases in
      compensation and related benefit costs, including a reduction in the
      number and related expense of senior employees.  Effective July
      1, 2008, Dr. Daniel Fagan our former CEO, was replaced by Dr. Gregory
      Hahn, our President and new CEO.  Dr. Fagan retains his position
      as Chairman of the Board.





SG&A
expense in the first six months of fiscal 2009 decreased $45,000 to $1.3
million, or 16% of revenue, compared to $1.4 million, or 19% of revenue, in the
first six months of fiscal 2008.





The
decrease of $45,000 in SG&A expense between the two six-month periods
included:




●
            an
      aggregate $82,000 decrease in compensation expense for the first six
      months of fiscal 2009, comprised of $55,000 of lower stock-based
      compensation expense, a reduction of $15,000 in bonus expense and a
      favorable net employer payroll tax adjustment of
  $12,000;





partially
offset by:





●
            an
      increase in professional fees of $23,000,
and





●
            a
      net increase in various expenses of
$14,000.





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 second quarter and first six months of fiscal 2009 was $-0- and
$5,000, respectively, compared to $3,000 and $12,000, respectively, in the same
periods in fiscal 2008.  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.





22


Interest
Expense





Interest
expense in the second quarter and first six months of fiscal 2009 was $34,000
and $58,000 respectively, compared to $23,000 and $49,000, respectively, in the
comparable periods of fiscal 2008.  The increase in interest expense
between the periods primarily relates to borrowings on Synthetech’s line of
credit and long-term debt.





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 Loss





As a
result of the foregoing factors, net loss for the second quarter and first six
months of fiscal 2009 was $367,000 and $72,000, respectively, compared to
$861,000 and $742,000, respectively, for the comparable period of fiscal
2008.








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
September 30, 2008 and March 31, 2008 was $15,000.  For the quarters
and six month periods ended September 30, 2008 and 2007, 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.











23


Inventories


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


●
            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.








24


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. 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 has improved.  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 the required customer specifications.  These factors
could cause increased costs and delayed shipments, either of which could
negatively affect periodic operating results.











25


LIQUIDITY AND CAPITAL
RESOURCES





Synthetech’s
cash and cash equivalents totaled $128,000 at September 30, 2008, compared to
$1.1 million at March 31, 2008.





At
September 30, 2008, Synthetech reported working capital of $4.4 million, a
decrease of $58,000 from March 31, 2008.  The $58,000 decrease in
working capital was primarily the result of a net loss for the six-month period
of $72,000, non-cash charges for depreciation of $250,000 and for stock based
compensation of $35,000, net additions to long-term debt of $403,000 and
proceeds from the exercise of stock options of $4,000, partially offset by
capital expenditures of $678,000.





Synthetech
maintains a line of credit facility and two term loan facilities with a finance
company.  None of these facilities contains financial
covenants.  Liens and security interests on all of our assets
collateralize our obligations under these facilities.  These credit
and term loan facilities are summarized below.





Line of Credit
Facility.The line of credit facility, which was amended in
November 2008 and is now scheduled to expire in September 2010, provides for
borrowings of up to $2 million or the maximum available under the borrowing
base, whichever is less.  The borrowing base, which was amended in
November 2008, now equals the sum of (a) the lesser of $750,000 or 50% of the
value of our raw materials and finished goods inventory plus (b) the lesser of
$1.25 million or 85% of the value of our eligible accounts
receivable.  Interest is payable at a fluctuating rate equal to the
prime rate plus 5%, or 9%, whichever is higher.  The interest rate on
the facility was increased by 2% with a floor of 9%, in connection with the
extension of the facility through September 2010.  The annual fee for
the credit facility is $20,000. The credit facility has a minimum monthly fee of
$2,500, which is reduced by interest charges.  As of September 30,
2008, Synthetech had $1,508,000 in borrowings outstanding under the credit
facility.





Term Loan
Facilities.  On November 5, 2008, Synthetech entered into a
term loan facility under which it borrowed $500,000.  The term loan
matures in December 2011, and requires 36 monthly principal payments equal to
$8,333, plus interest, beginning on November 1, 2008, and a balloon payment of
$200,000 due on maturity.  The loan bears interest at the prime rate
plus 5%, or 9%, whichever is higher.  At the closing of the loan,
Synthetech paid a $15,000 loan fee.  The note contains no financial
covenants.  Synthetech expects to use the proceeds from the term loan
to increase its present level of working capital in anticipation of larger than
normal requirements for raw materials in conjunction with customer
orders.





On May 5,
2008, Synthetech entered into a term loan facility under which it borrowed
$550,000.  The note matures on May 5, 2011, and requires 36 monthly
principal payments equal to $9,167, plus interest, beginning on June 1, 2008,
with a balloon payment of $220,000 due on maturity.  The interest rate
on the note is the prime rate plus 4% or 8%, whichever is higher, which was
increased by 1% with a floor of 8%, in connection with the extension of the line
of credit facility described above.  On May 6, 2009 and 2010,
Synthetech will pay an annual loan fee equal to 1% of the then outstanding
principal balance of the loan.  Synthetech is using the proceeds of
this loan to expand its large-scale reactor capacity and to install a
distillation column and equipment intended to recycle spent
solvents.  The distillation column and solvent recycle projects are
complete; the additional large-scale reactor is expected to be fully completed
during the third quarter of fiscal 2009.  As of September 30, 2008,
$513,000 was outstanding under this term loan.




26


We
utilized cash in our operating activities of $1,241,000 in the first six months
of fiscal 2009, compared to cash generated in operating activities of $1,776,000
in the first six months of fiscal 2008.





In the
first six months of fiscal 2009, the net loss of $72,000, adjusted for non-cash
charges for depreciation and stock-based compensation expense of $250,000 and
$35,000, respectively, contributed a net $213,000 in cash provided by operating
activities.  Accounts receivable decreased $39,000 to $2.4 million at
September 30, 2008, from $2.5 million at March 31, 2008, primarily due to the
timing and level of shipments between the two quarters.  Primarily in
support of shipments scheduled to ship in October 2008, inventory increased
$530,000 to $4.9 million at September 30, 2008, from $4.3 million at March 31,
2008.  Primarily as a result of the amortization of prepaid insurance
premiums and property taxes, prepaid expenses decreased $225,000 to $113,000 at
September 30, 2008, from $338,000 at March 31, 2008.  Accounts payable
decreased $214,000 to $1.1 million at September 30, 2008, from $1.3 million at
March 31, 2008.  Accrued compensation, which is primarily composed of
accrued vacation pay and employee sales and marketing bonuses increased $42,000
to $366,000 at September 30, 2008, from $324,000 at March 31,
2008.  Deferred revenue decreased $1.0 million to $-0- at September
30, 2008, reflecting the application of advance payments on customer
shipments.  Other accrued liabilities decreased $12,000 to $23,000 at
September 30, 2008, from $35,000 at March 31, 2008.





Cash used
in investing activities for the first six months of fiscal 2009 was $678,000
compared to cash used in investing activities of $543,000 in the first six
months of fiscal 2008.  Synthetech utilized $678,000 for capital
expenditures during the first six months of fiscal 2009, compared to $543,000
during the first six months of fiscal 2008.  Synthetech plans to incur
a total of approximately $1.2 million of capital expenditures in fiscal
2009.  Some of these capital projects may be deferred until fiscal
2010 depending on the availability of sources of cash or financing to fund these
projects.  As discussed above, Synthetech borrowed $550,000 under a
term loan facility to finance a portion of its fiscal 2009 capital
expenditures.





Cash
provided by financing activities for the first six months of fiscal 2009 was
$985,000, compared to cash used in financing activities of $748,000 in the first
six months of fiscal 2008.  During the first six months of fiscal 2009
Synthetech had net proceeds of $603,000 under its line of credit compared to net
repayments of $623,000 in the first six months of fiscal 2008.  As
discussed above, in May 2008, Synthetech borrowed $550,000 pursuant to one of
its term loan facilities.  Principal payments under its long-term debt
obligations and notes payable totaled $172,000 during the first six months of
fiscal 2009, compared to $132,000 during the comparable period of fiscal
2008.  Proceeds from the exercise of stock options were $4,000 and
$7,000 during the first six months of fiscal 2009 and 2008,
respectively.





As a
result of the foregoing, Cash and cash equivalents decreased $934,000 during the
first six months of fiscal 2009, to $128,000 at September 30, 2008, from $1.1
million at March 31, 2008.





We
believe that our existing cash and cash equivalents, availability under our line
of credit facility, any funds generated from operations and customer commitment
to make certain advances to fund a large order will be sufficient to support our
operations for the next twelve months.  Should customers fail to
advance funds for large orders, Synthetech’s liquidity and revenue could be
adversely affected.  However, any projections of future cash needs and
cash flows are subject to substantial uncertainty.




27


There can
be no assurance that current cash and cash equivalent balances and any proceeds
that may be available under our line of credit facility or any funds generated
from operations will be sufficient to satisfy our liquidity
requirements.





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.  We anticipate
that we will require additional capital, which may be substantial, to implement
certain elements of our growth strategy, although we have not yet determined the
amount or timing of such additional funding.  We may not be able to
obtain required financing to implement our growth strategy.  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 three months ended September 30,
2008.  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 4T. 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 in ensuring that information required to
be disclosed in our Exchange Act reports is (1) recorded, processed, summarized
and reported in a timely manner, and (2) accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate to allow timely decisions regarding required
disclosure.





There has
been no change in our internal control over financial reporting during the
second quarter ended September 30, 2008 that has materially affected or is
reasonably likely to materially affect our internal control over financial
reporting.





28


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.  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.































































































29


PART II. OTHER
INFORMATION







Item 1. Legal
Proceedings





Maurice Walker v.
Synthetech, Inc., United States District Court for the District of Oregon, Case
No. 6:08-CV-6191-AA.  On June 26, 2008, Maurice Walker
filed suit against Synthetech alleging employment discrimination based on race
and retaliation, and wrongful termination.  The lawsuit seeks $500,000
in compensatory damages, $500,000 in punitive damages, back pay and pay in lieu
of reinstatement plus interest in an amount to be determined, and various fees
and costs.  Mr. Walker's employment with Synthetech was terminated on
September 26, 2007.  Synthetech disputes the allegations of Mr. Walker's
lawsuit and intends to defend vigorously against the complaint.  The case
is in the early stages of discovery.  Synthetech has notified its
insurance carrier of this claim and believes that any liability under this claim
will be covered by Synthetech's liability insurance, subject to a $25,000
deductible.  Synthetech does not believe that the outcome of this
lawsuit will have a material adverse effect on its financial position or results
of operations.








Item 1A. Risk
Factors.




The
following risk factors supplement Synthetech's risk factors set forth in Part I,
Item 1A of the Company’s Annual Report on Form 10-K for the year ended March 31,
2008, filed with the SEC on June 9, 2008:





The
current capital and credit market conditions may adversely affect the Company’s
access to capital and cost of capital.


Over the
past twelve months, the general economic and capital market conditions in the
United States and other parts of the world have deteriorated significantly and
have adversely affected access to capital and increased the cost of capital. If
these conditions continue or become worse, Synthetech's future cost of capital
and the Company’s future access to capital could be adversely affected.
Synthetech's current lender is a finance company that receives its liquidity and
lending capacity from bank borrowings.  If Synthetech's lender is
unable to borrow funds from its banks, then the Company's ability to continue to
borrow under its line of credit with the lender or refinance its term debt if
needed would be impaired.





The
current economic downturn may impair the financial soundness of our customers,
which could adversely affect Synthetech's business operations.


If
Synthetech's customers are unsuccessful in generating sufficient revenue or are
precluded from securing financing, they may not be able to pay, or may delay
payment of, accounts receivable that are owed to Synthetech.  Any
inability of current and/or future customers to pay Synthetech for its products
may adversely affect the Company’s earnings and cash flow.





























30


Item 4. Submission of Matters
to a Vote of Security Holders





The
Annual Meeting of Shareholders was held on July 24, 2008 in Portland,
Oregon.





1) Election
of Directors


All seven
director nominees, including six incumbent directors, were elected, all without
opposition, to serve one-year terms in office.  The results of this
election were as follows:




Name
      of Director
              
              For
              WithheldPaul C.
    Ahrens
              
              12,964,486
              239,958Daniel T. Fagan,
      Ph.D.
              
              13,098,686
              105,758Howard L.
      Farkas
              
              12,902,936
              301,508Gregory R. Hahn,
      Ph.D.
              
              13,098,886
              105,558Donald E. Kuhla,
      Ph.D.
              
              13,099,186
              105,258Hans C.
      Noetzli
              
              13,099,186
              105,258Charles B.
      Williams
              
              13,029,436
              175,008






2) Ratification
of Independent Auditors


The
appointment of Peterson Sullivan LLP as the independent auditors for fiscal year
2009 was ratified.  The results of the shareholder vote were as
follows:




For
                Against
                AbstainAppointment
      of Peterson Sullivan LLP
                  as
      independent auditor
                13,073,011
                103,359
                28,074






Item 5. Other
Information




Executive
Compensation





On July
24, 2008, the Compensation Committee of Synthetech, Inc.’s Board of Directors
approved bonus performance objectives for cash incentives for fiscal 2009 for
its senior management under its Key Employee Performance Plan (KEPP). Awards
under the KEPP are determined as a percentage of base salary, with payment based
on achievement of certain performance objectives based on (1) health,
safety and environmental, (2) business strategy, (3) customer service, (4)
purchasing, (5) Sarbanes Oxley Act Compliance, (6) financial reporting, (7)
meeting sales for resale projects, (8) cost improvement and controls and (9)
business performance goals. Payments are calculated based on Synthetech's
performance in meeting the respective objectives, and then multiplied by a
weighted percentage for each objective based on the relative importance of the
objective to the overall goals.  This calculation yields a bonus
percentage for the objective for the applicable participant in the
KEPP.  The sum of the bonus percentages for each objective is
multiplied by the individual's salary percentage and the product is multiplied
by the applicable fiscal 2009 salary, yielding the KEPP
payout.  Weightings vary for specific objectives among participants in
the KEPP, and not all business strategy objectives are applicable to each
participant.





Payouts
are based on the score for each individual and the applicable weighting
percentage.  If Earnings Before Interest and Taxes (EBIT) is less than
$450,000 then no bonuses will be awarded for the achievement of any objectives
under the KEPP. Bonus maximums may be increased at the sole discretion of the
Compensation Committee. Based on Synthetech's performance for the first half of
fiscal 2009, it has not accrued any amounts for potential payments under
the KEPP.




31




The
estimated fiscal 2009 base salaries, ranges of potential bonuses as a percentage
of base salary and the performance objectives for Synthetech's named executive
officers who participate in the KEPP are as follows:





Fiscal
      2009 Target Bonus AllocationName
      and Title
                                                          
                                                          Fiscal
                                                            2009
                                                            Salary
                                                          
                                                          
                                                          Fiscal
      2009 Range of
                                                            Cash
                                                            Incentive
      as a % of Base Salary
                                                          
                                                          
                                                          Health,
      Safety and Environ-mental Objectives
                                                          
                                                          
                                                          Business
      Strategy Objectives
                                                          
                                                          
                                                          Cost
      Improvement and controls
                                                          
                                                          
                                                          Customer
      ServiceDr.
      Gregory R. Hahn
                                                            President
      and Chief Executive Officer
                                                          
                                                          $
                                                          215,000
                                                          
                                                          
                                                          0
      to 77%
                                                          
                                                          
                                                          
                                                          10%
                                                          
                                                          
                                                          
                                                          5%
                                                          
                                                          
                                                          
                                                          N/A
                                                          
                                                          
                                                          
                                                          15%Dr.
      Daniel T. Fagan1
                                                            Chief
      Executive Officer
                                                          
                                                          $
                                                          37,500
                                                          
                                                          
                                                          
                                                          N/A
                                                          
                                                          
                                                          
                                                          N/A
                                                          
                                                          
                                                          
                                                          N/A
                                                          
                                                          
                                                          
                                                          N/A
                                                          
                                                          
                                                          
                                                          N/AGary
      A. Weber
                                                            Vice
      President of Finance and Administration and Chief Financial
      Officer
                                                          
                                                          $
                                                          145,000
                                                          
                                                          
                                                          0
      to 58%
                                                          
                                                          
                                                          
                                                          10%
                                                          
                                                          
                                                          
                                                          5%
                                                          
                                                          
                                                          
                                                          N/A
                                                          
                                                          
                                                          
                                                          N/ABrett
      Reynolds
                                                            Vice
      President of Sales and Marketing
                                                          
                                                          $
                                                          120,000
                                                          
                                                          
                                                          0
      to 53%
                                                          
                                                          
                                                          
                                                          5%
                                                          
                                                          
                                                          
                                                          5%
                                                          
                                                          
                                                          
                                                          N/A
                                                          
                                                          
                                                          
                                                          N/ADr.
      Frederic Farkas*
                                                            Director
      of Operations
                                                          
                                                          $
                                                          80,000
                                                          
                                                          
                                                          0
      to 23%
                                                          
                                                          
                                                          
                                                          15%
                                                          
                                                          
                                                          
                                                          5%
                                                          
                                                          
                                                          
                                                          45%
                                                          
                                                          
                                                          
                                                          N/A





Fiscal
      2009 Target Bonus AllocationName
      and Title
                                                                                  
                                                                                  Purchasing
                                                                                  
                                                                                  SOX
      Compliance
                                                                                  
                                                                                  Financial
      Reporting
                                                                                  
                                                                                  Meet
      Sales for Resale Projects
                                                                                  
                                                                                  Business
      PerformanceDr.
      Gregory R. Hahn
                                                                                    President
      and Chief Executive Officer
                                                                                  
                                                                                  N/A
                                                                                  
                                                                                  N/A
                                                                                  
                                                                                  N/A
                                                                                  
                                                                                  N/A
                                                                                  
                                                                                  70%Dr.
      Daniel T. Fagan
                                                                                    Chief
      Executive Officer
                                                                                  
                                                                                  N/A
                                                                                  
                                                                                  N/A
                                                                                  
                                                                                  N/A
                                                                                  
                                                                                  N/A
                                                                                  
                                                                                  N/AGary
      A. Weber
                                                                                    Vice
      President of Finance and Administration and Chief Financial
      Officer
                                                                                  
                                                                                  10%
                                                                                  
                                                                                  5%
                                                                                  
                                                                                  5%
                                                                                  
                                                                                  N/A
                                                                                  
                                                                                  65%Brett
      Reynolds
                                                                                    Vice
      President of Sales and Marketing
                                                                                  
                                                                                  N/A
                                                                                  
                                                                                  N/A
                                                                                  
                                                                                  N/A
                                                                                  
                                                                                  5%
                                                                                  
                                                                                  85%Frederic
      Farkas*
                                                                                    Director
      of Operations
                                                                                  
                                                                                  N/A
                                                                                  
                                                                                  N/A
                                                                                  
                                                                                  N/A
                                                                                  
                                                                                  N/A
                                                                                  
                                                                                  35%




1 Dr.
Fagan's term as Chief Executive Officer ended on July 1, 2008.  Dr.
Fagan declined to participate in the 2009 KEPP Bonus Plan.  Dr. Fagan
continues to serve as Chairman of the Board.


* Dr. Frederic Farkas joined the company
on October 1, 2008.  Any payment he may be entitled to under the KEPP
for fiscal 2009 performance as Director of Operations will be prorated based on
the period from October 1, 2008 until March 31, 2009.










32


For each
of the members of senior management listed above, payment of the bonus target is
based on achievement of objectives during the period from April 1, 2008 to March
31, 2009 in the three primary categories listed below and further allocated
based on the following subcategories and percentages, which may vary for each
individual for each category; however the total for each individual adds to
100%:




Health,
      Safety and Environmental Objectives:
                                        
                                        5-15%Recordable
      Injuries
                                        2-5%Lost-Time
      Accidents
                                        2-5%Process
      Safety and Reportable Environmental Incident
                                        1-5%Business
      Strategy Objectives:
                                        
                                        5-45%Business
      Strategy
                                        5%Customer
      Service
                                        15%Cost
      Controls and Improvements
                                        45%Financial
      Reporting
                                        5%Sarbanes-Oxley 404
      Compliance
                                        5%Purchasing
                                        10%Business
      Performance Objectives:
                                        
                                        35-85%Achieve
      Sales Target
                                        10-50%Achieve  EBIT
      (earnings before interest and taxes) Target
                                        25-55%




Dr.
Joseph Murphy, Synthetech's Director of Business Development, does not
participate in the KEPP but is subject to a separate sales incentive plan that
pays 1.5% of eligible sales over $0.5 million for the period from September
1, 2008 to August 31, 2009. Under this plan, Dr. Murphy received a bonus of
$63,986 in October 2008.



























































33


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
      4
              Amended
      and Restated Rights Agreement, (incorporated by reference to Synthetech’s
      Current Report on Form 8-K dated July 31,
2008).


Exhibit
      10.1
                Summary of Key Terms of Compensation
      Arrangements with Synthetech, Inc. Executive
  OfficersExhibit
      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




































































































34


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:
      November 13,
      2008
                By:
                /s/ Gregory
      R. HahnGregory
      R. HahnPresident
      and Chief Executive Officer


Date:
      November 13,
      2008
                By:
                /s/ Gary
      A. WeberGary
      A. WeberVice
      President Finance andChief
      Financial Officer



































35