**Index**


**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, 2006**





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**
              (State
                or Other Jurisdiction
              of
                Incorporation or Organization)
            
            **84-0845771**
              (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 13, 2006: 14,521,614**




**1**
 **Index**


**SYNTHETECH,
      INC**




**INDEX**








**Part
                  I.**
              **Financial
                  Information**
              **Page**Item
                  1.
              Condensed
                  Financial StatementsBalance
                  Sheets
              3Statements
                  of Operations
              5Statements
                  of Cash Flows
              6Notes
                  to Unaudited Condensed Financial
                  Statements
              7Item
                  2.
              Management’s
                  Discussion and Analysis of
                  FinancialCondition
                  and Results of Operations
              20Item
                  3.
              Quantitative
                  and Qualitative Disclosure about
                  MarketRisk
              32Item
                  4.
              Controls
                  and Procedures
              32**Part
                  II.**
              **Other
                  Information**Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              34Item
                  6.
              Exhibits
              34Signatures
              35









**2**
 **Index**





**PART
                I. FINANCIAL INFORMATION****Item
                1. Financial Statements****SYNTHETECH,
                INC.****Condensed
                Balance Sheets**(unaudited)**September
                30,**
            
            March
                31,**2006**
            
            2006**Assets**Current
                Assets:Cash
                and cash equivalents
            
            **$**
            **1,023,000**
            
            $
            1,233,000Marketable
                securities
            
            
            **-**
            
            
            800,000Accounts
                receivable, less allowancefor doubtful accounts of $15,000 forboth periods
            
            
            **1,252,000**
            
            
            467,000Inventories
            
            
            **4,196,000**
            
            
            3,599,000Prepaid
                expenses
            
            
            **239,000**
            
            
            351,000Total Current Assets
            
            
            **6,710,000**
            
            
            6,450,000Property,
                Plant and Equipment, net
            
            
            **3,833,000**
            
            
            4,044,000Total Assets
            
            **$**
            **10,543,000**
            
            $
            10,494,000*The
                accompanying notes are an integral part of these condensed financial
                statements.*





**3**
 **Index**


**SYNTHETECH,
                INC.****Condensed
                Balance Sheets**(continued)(unaudited)**September
                30,**
            
            March
                31,**2006**
            
            2006Liabilities
                and Shareholders’ EquityCurrent
                Liabilities:Line
                of
                credit
            
            **$**
            **443,000**
            
            $
            -Current
                portion of long term debt
            
            
            **12,000**
            
            
            26,000Note
                payable
            
            
            **-**
            
            
            91,000Accounts
                payable
            
            
            **895,000**
            
            
            906,000Accrued
                compensation
            
            
            **173,000**
            
            
            160,000Accrued
                termination benefits
            
            
            **212,000**
            
            
            212,000Deferred
                revenue
            
            
            **272,000**
            
            
            -Other
                accrued liabilities
            
            
            **11,000**
            
            
            11,000Total
                Current Liabilities
            
            
            **2,018,000**
            
            
            1,406,000Shareholders'
                Equity:Common
                stock, $.001 par value; 100,000,000 sharesauthorized; 14,522,000 shares issued and outstandingat September 30, 2006 and March 31, 2006
            
            
            **15,000**
            
            
            15,000Paid-in
                capital
            
            
            **9,150,000**
            
            
            9,126,000Retained
                earnings
            
            
            **(640,000**
            **)**
            
            (53,000
            )Total
                Shareholders' Equity
            
            
            **8,525,000**
            
            
            9,088,000Total
                Liabilities and Shareholders' Equity
            
            **$**
            **10,543,000**
            
            $
            10,494,000*The
                accompanying notes are an integral part of these condensed financial
                statements.*




**4**
 **Index**




**SYNTHETECH,
                INC.****Condensed
                Statements of Operations**(unaudited)


For
                the Three Months Ended
            
            For
                the Six Months EndedSeptember
                30,
            
            September
                30,**2006**
            
            
            2005
            
            
            **2006**
            
            
            2005Revenue
            
            **$**
            **3,187,000**
            
            $
            1,054,000
            
            **$**
            **4,930,000**
            
            $
            2,248,000Cost
                of revenue
            
            
            **2,110,000**
            
            
            1,322,000
            
            
            **3,808,000**
            
            
            2,855,000Gross
                income (loss)
            
            
            **1,077,000**
            
            
            (268,000
            )
            
            **1,122,000**
            
            
            (607,000
            )Research
                and development
            
            
            **277,000**
            
            
            197,000
            
            
            **607,000**
            
            
            389,000Selling,
                general and administrative
            
            
            **597,000**
            
            
            670,000
            
            
            **1,107,000**
            
            
            1,241,000Total
                operating expenses
            
            
            **874,000**
            
            
            867,000
            
            
            **1,714,000**
            
            
            1,630,000Operating
                income (loss)
            
            
            **203,000**
            
            
            (1,135,000
            )
            
            **(592,000**
            **)**
            
            (2,237,000
            )Interest
                income
            
            
            **10,000**
            
            
            55,000
            
            
            **22,000**
            
            
            76,000Interest
                expense
            
            
            **(16,000**
            **)**
            
            (1,000
            )
            
            **(18,000**
            **)**
            
            (2,000
            )Income
                (loss) before income taxes
            
            
            **197,000**
            
            
            (1,081,000
            )
            
            **(588,000**
            **)**
            
            (2,163,000
            )Income
                tax benefit
            
            
            **(1,000**
            **)**
            
            -
            
            
            **(1,000**
            **)**
            
            -Net
                income (loss)
            
            **$**
            **198,000**
            
            $
            (1,081,000
            )
            **$**
            **(587,000**
            **)**
            $
            (2,163,000
            )Net
                income (loss) per common share:Basic
                and diluted income (loss) per share
            
            **$**
            **0.01**
            
            $
            (0.07
            )
            **$**
            **(0.04**
            **)**
            $
            (0.15
            )Weighted
                average shares outstanding:Basic
            
            
            **14,521,614**
            
            
            14,471,897
            
            
            **14,521,614**
            
            
            14,470,840Diluted
            
            
            **14,561,138**
            
            
            14,471,897
            
            
            **14,521,614**
            
            
            14,470,840*The
                accompanying notes are an integral part of these condensed financial
                statements.*




**5**
 **Index**




**SYNTHETECH,
                INC.****Condensed
                Statements of Cash Flows**(unaudited)For
                The Six Months Ended September 30,
            
            **2006**
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            **$**
            **(587,000**
            **)**
            $
            (2,163,000
            )Adjustments
                to reconcile net loss tonet cash used in operating activities:Depreciation
                expense
            
            
            **269,000**
            
            
            274,000Stock-based
                compensation expense
            
            
            **24,000**
            
            
            22,000(Increase)
                decrease in assets:Accounts
                receivable, net
            
            
            **(785,000**
            **)**
            
            1,444,000Inventories
            
            
            **(597,000**
            **)**
            
            (73,000
            )Prepaid
                expenses
            
            
            **112,000**
            
            
            228,000Increase
                (decrease) in liabilities:Accounts
                payable
            
            
            **(11,000**
            **)**
            
            2,000Accrued
                compensation
            
            
            **13,000**
            
            
            4,000Accrued
                termination benefits
            
            
            **-**
            
            
            9,000Deferred
                revenue
            
            
            **272,000**
            
            
            -Other
                accrued liabilities
            
            
            **-**
            
            
            102,000Cash
                Used In Operating Activities
            
            
            **(1,290,000**
            **)**
            
            (151,000
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Property,
                plant
                and equipment purchases
            
            
            **(58,000**
            **)**
            
            (40,000
            )Purchase
              of
              marketable securities, available for sale
            
            
            **-**
            
            
            (1,300,000
            )Sale
              of
              marketable securities, available for sale
            
            
            **800,000**
            
            
            1,300,000Cash
                Provided by (Used In) Investing Activities
            
            
            **742,000**
            
            
            (40,000
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from
                line of credit
            
            
            **443,000**Principal
                payments under long-term debt obligations
            
            
            **(14,000**
            **)**
            
            (13,000
            )Repayment
                of
                note payable
            
            
            **(91,000**
            **)**
            
            -Proceeds
                from
                stock purchase plan
            
            
            **-**
            
            
            3,000Cash
                Provided By (Used In) Financing Activities
            
            
            **338,000**
            
            
            (10,000
            )Decrease
                in
                Cash and Cash Equivalents
            
            
            **(210,000**
            **)**
            
            (201,000
            )Cash
                and Cash Equivalents at Beginning of Period
            
            
            **1,233,000**
            
            
            1,828,000Cash
                and Cash Equivalents at End of Period
            
            **$**
            **1,023,000**
            
            $
            1,627,000*The
                accompanying notes are an integral part of these condensed financial
                statements.*




**6**
 **Index**




**SYNTHETECH,
      INC.**


**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**


(Information
      as of September 30, 2006 and for the three- and six-month


periods
      ended September 30, 2006 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 and cosmeceutical industries. Synthetech’s products support the
      development and manufacture of therapeutic peptides and peptidomimetic small
      molecule drugs at every stage of a customer’s clinical development pipeline, and
      are used as ingredients in drugs for the treatment of AIDS, cancer,
      cardiovascular and other diseases, and in cosmeceuticals. A cosmeceutical is
      a
      product that makes no therapeutic claims, but is intended for topical use by
      humans.





The
      summary financial statements included herein have been prepared, without audit,
      pursuant to the rules and regulations of the Securities and Exchange Commission.
      Certain information and footnote disclosures normally included in financial
      statements prepared in accordance with accounting principles generally accepted
      in the United States 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,
      2006.





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.**  **LIQUIDITY**





The
      revenue Synthetech may generate in upcoming periods is uncertain. Without a
      stable source of adequate revenue or new debt or equity financing, Synthetech
      may be unable to continue operations. The accompanying financial statements
      do
      not include any adjustments that might result should Synthetech be unable to
      continue operations. Synthetech’s previous line of credit expired on March 31,
      2006 and was not renewed by the bank. In June 2006, Synthetech entered into
      a
      new credit facility which is described in Note H to these condensed financial
      statements. Synthetech has employment agreements in place with certain
      employees, which require severance payments to the employee if certain
      conditions surrounding termination are met.





Synthetech
      has reported significant operating losses during each of its last five fiscal
      years and the quarter ended June 30, 2006. Synthetech reported net income of
      $198,000 during the quarter ended September 30, 2006, and a net loss of $587,000
      for the six months ended September 30, 2006. Synthetech's working capital
      decreased $352,000, to $4.7 million as of September 30, 2006, compared to $5.0
      million as of March 31, 2006. As of September 30, 2006, quick assets
      ( *i.e.* cash and
      cash equivalents and accounts receivable) exceeded current liabilities by
      $257,000. With this level of net




**7**
 **Index**


quick
      assets, Synthetech is unable to absorb any significant future operating losses.
      Synthetech believes that the amount it could realize upon disposition of its
      inventory outside the normal course of its operations would be significantly
      below the carrying value of its inventory as reflected in our financial
      statements.





Synthetech
      reduced the carrying value of its property, plant and equipment by $6.3 million
      to an estimated fair value of $4.5 million as of March 31, 2005, based on a
      valuation performed in accordance with Statement of Financial Accounting
      Standards *(SFAS)* No. 144,
“Accounting for Impairment or Disposal of Long-Lived Assets.” Synthetech
      performed a similar analysis pursuant to *SFAS* No. 144
      during the fourth quarter of fiscal 2006 and determined that the carrying value
      of its property, plant and equipment was not in excess of fair value and no
      adjustment to carrying value was required.





Synthetech’s
      fiscal 2006 annual financial statements were audited by an Independent
      Registered Public Accounting Firm. The resulting audit report contains an
      explanatory paragraph regarding Synthetech’s ability to continue as a going
      concern.





Synthetech
      is pursuing various strategies to stabilize and expand its revenues. Please
      refer to Item 2 of this Quarterly Report on Form 10-Q, “Management Discussion
      and Analysis of Financial Condition and Results of Operations - Growth
      Strategy.”





Synthetech
      anticipates that it will require additional capital, which may be substantial,
      to implement certain elements of its growth strategy, although Synthetech has
      not yet determined the amount or timing of such additional funding. Synthetech
      may not be able to obtain required financing to implement its growth strategy
      or
      continue its operations.




**NOTE
      C.**  **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.




**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,**2006**
            
            2006Cash
            
            $
            **110,000**
            
            $
            291,000Cash
                equivalents
            
            
            **913,000**
            
            
            942,000$
            **1,023,000**
            
            $
            1,233,000





**8**
 **Index**


**Marketable
      Securities, Available-for-Sale:** In
      accordance with SFAS No. 115, “Accounting for Certain Debt and Equity
      Securities,” marketable securities are classified as available-for-sale.
      Available-for-sale securities are carried at fair value, with the unrealized
      gains and losses reported in comprehensive income. The amortized cost of debt
      securities in this category is adjusted for amortization of premiums and
      accretion of discounts to maturity. Such amortization is included in interest
      income. Any realized gains and losses and declines in value judged to be other
      than temporary, on available-for-sale securities would be included in other
      income or expense. The cost of securities sold is based on the specific
      identification method. Interest and dividends on securities classified as
      available-for-sale are included in interest income.





At
      March
      31, 2006, our investment in marketable securities, available-for-sale, included
      $800,000 of auction rate preferred shares. Our investments in these securities
      were recorded at cost, which approximated fair market value due to the
      investments’ variable interest rates, which typically reset every seven to 28
      days based upon the results of an auction. As a result of the periodic
      adjustment in rates, we had no cumulative gross unrealized holding gains or
      losses or gross realized gains or losses from these securities. All income
      from
      our available-for-sale securities was recorded in interest income. Synthetech
      liquidated its positions in these securities, at par, in May 2006.





**Accounts
      receivable:** Accounts
      receivable are recorded at the invoiced amount and do not bear interest.
      Synthetech does not finance its trade receivables by factoring the balances
      to a
      third party. The allowance for doubtful accounts is established by a review
      of
      aged accounts receivables and a review for collectibility of specific accounts.
      The allowance for doubtful accounts as of September 30, 2006 and March 31,
      2006
      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, contract
      drug synthesis and cosmeceutical companies. Synthetech’s customers are primarily
      located in the United States and Western Europe. Synthetech’s reliance on major
      customers and the absence of long term contracts could adversely affect
      operating results if a major customer were lost or failed to pay Synthetech.





**Inventories:** Inventories are stated at the lower of cost or market, determined on the
      first-in, first-out basis. Costs include direct material, direct labor,
      applicable manufacturing overhead, and other direct costs.





Management
      evaluates Synthetech’s inventory for impairment whenever it becomes aware that
      indicators of impairment exist. It is Synthetech’s policy to write-down
      inventories to reflect an estimate for impairment in an amount equal to the
      difference between the cost of inventory and the estimated market value of
      inventory 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,




**9**
 **Index**


change
      capacities or extend useful lives are capitalized. When assets are retired,
      sold
      or otherwise disposed of, the applicable costs and accumulated depreciation
      are
      removed from the accounts and the resulting gain or loss is recognized.
      Depreciation and amortization are provided on the straight-line basis over
      the
      estimated useful lives of the individual assets, which range from three to
      40
      years.




In
      accordance with SFAS No. 144, “Accounting for Impairment or Disposal of
      Long-Lived Assets” (SFAS 144), Synthetech, assesses the impairment of property,
      plant and equipment whenever events or changes in circumstances indicate that
      their carrying value may not be recoverable. If Synthetech determines that
      the
      carrying value of property, plant and equipment may not be recoverable, we
      compare the carrying values of our property, plant and equipment to the
      undiscounted cash flows expected to be generated by the asset group. If the
      carrying value exceeds the undiscounted cash flows, 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 that 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 or loss other than net income
      or loss. Accordingly, comprehensive income or loss was equal to net income
      or
      loss for all periods presented.





**Stock-Based
      Compensation:** Effective
      April 1, 2006, Synthetech adopted the fair value recognition provisions of
      SFAS
      No. 123 (revised 2004), “Share-Based Payments” (SFAS 123(R)) using the modified
      prospective transition method and therefore has not restated results for prior
      periods. Under this transition method, stock-based compensation expense for
      fiscal 2007 would include compensation expense for all stock-based compensation
      awards granted prior to, but not yet vested as of April 1, 2006, based on the
      grant date fair value estimated in accordance with the original provision of
      SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). Stock-based
      compensation expense for all stock-based compensation awards granted after
      April
      1, 2006 is based on the grant-date fair value estimated in accordance with
      the
      provisions of SFAS 123(R). Synthetech recognizes these compensation costs net
      of
      estimated forfeitures over the requisite service period of the award, which
      is
      generally the vesting term of three to five years for stock options.





Prior
      to
      the adoption of SFAS 123(R), Synthetech measured compensation expense for its
      employee and director stock-based compensation plans using the intrinsic value
      method prescribed by Accounting Principles Board Opinion No. 25, Accounting
      for
      Stock Issued to Employees, (APB No. 25). Synthetech applied the disclosure
      provisions of SFAS No. 123 as amended by SFAS No. 148, Accounting for
      Stock-Based Compensation-Transition and Disclosure, as if the fair-value based
      method had been applied in measuring compensation expense. Under APB No. 25,
      compensation




**10**
 **Index**


expense
      was recorded only if, on the date of grant, the current market price of the
      underlying stock exceeded the exercise price. Resulting compensation expense
      was
      recognized over the vesting period. Refer to Note K to these condensed financial
      statements for a further discussion of stock-based compensation.





**Recent
      Accounting Pronouncements:** In
      September 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 157, *Fair
      Value Measurements* (SFAS
      157). SFAS 157 defines fair value, establishes a framework for measuring fair
      value and expands disclosures about fair value measurements but does not require
      any new fair value measurements. SFAS 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. Synthetech has not yet determined the impact of
      applying SFAS 157.




**NOTE
      D.**  **NET
      INCOME (LOSS) PER SHARE**





Basic
      net
      income (loss) per share is computed by dividing net income (loss) by the
      weighted-average number of shares of common stock outstanding during the period.
      Diluted net income per share is computed by dividing net income by the
      weighted-average number of shares of common stock and common stock equivalents
      outstanding during the period, calculated using the treasury stock method as
      defined in SFAS No. 128. For the three months ended September 30, 2005 and
      six
      months ended September 30, 2006 and 2005 the weighted-average number of shares
      used to compute diluted loss per share did not differ from the weighted-average
      number of shares used to compute basic loss per share. For the three months
      ended September 30, 2006 the weighted-average number of shares used to compute
      diluted loss per share includes common stock equivalents.





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





For
                the Three Months
            
            For
                the Six MonthsEnded
                September 30,
            
            Ended
                September 30,**2006**
            
            2005
            
            **2006**
            
            2005Common
                stock options outstanding
            **1,816,276**
            
            1,305,000
            
            **1,855,800**
            
            1,305,000Award
                of restricted stock - unvested
            **-**
            
            43,000
            
            **-**
            
            43,000**1,816,276**
            
            1,348,000
            
            **1,855,800**
            
            1,348,000




**NOTE
      E.**  **STATEMENTS
      OF CASH FLOWS**





Supplemental
      cash flow disclosures:





Cash
                Paid
            
            Three
                Months Ended September 30,
            
            Six
                Months Ended September 30,**2006**
            
            2005
            
            **2006**
            
            2005Interest
            
            **$**
            **16,000**
            
            $
            1,000
            
            **$**
            **18,000**
            
            $
            2,000








**11**
 **Index**


**NOTE
      F.**  **INVENTORIES**





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





**September
                30,**
            
            March
                31,**2006**
            
            2006Finished
                products
            
            **$**
            **1,994,000**
            
            $
            1,862,000Work
                in process
            
            
            **944,000**
            
            
            572,000Raw
                materials
            
            
            **1,258,000**
            
            
            1,165,000**$**
            **4,196,000**
            
            $
            3,599,000




**NOTE
      G.**  **PROPERTY,
      PLANT AND EQUIPMENT**





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


Depreciable
                  Life
              
              **September
                  30,**
              
              March
                  31,In
                  Years
              
              **2006**
              
              2006Land
              
              
              **$**
              **241,000**
              
              $
              241,000Buildings
              15
                  - 40
              
              
              **1,611,000**
              
              
              1,611,000Machinery
                  and equipment
              5
                  -
                  17
              
              
              **2,319,000**
              
              
              2,276,000Laboratory
                  equipment
              5
                  -
                  17
              
              
              **1,015,000**
              
              
              1,012,000Furniture
                  and fixtures
              3
                  -
                  5
              
              
              **64,000**
              
              
              52,000**5,250,000**
              
              
              5,192,000Less:Accumulated
                  depreciation
              
              
              
              **(1,417,000)**
              
              
              (1,148,000)**$**
              **3,833,000**
              
              $
              4,044,000


Synthetech’s
      significant operating losses during fiscal 2006 triggered an assessment of
      the
      recoverability of our property, plant and equipment. During the fourth quarter
      of fiscal 2006, Synthetech performed an analysis in accordance with SFAS No.
      144
      of its property, plant and equipment for potential impairment. Synthetech’s
      analysis conducted in the fourth quarter of fiscal 2006 concluded that the
      carrying value of the operating facility did not exceed its fair value.





**12**
 **Index**


**NOTE
      H.**  **LINE
      OF CREDIT**





In
      June
      2006, Synthetech entered into a new credit facility with a finance company.
      The
      credit facility provides for borrowings of up to $2 million or the maximum
      available under the borrowing base, whichever is less. Interest is payable
      at
      prime plus 3%, plus a monthly collateral management fee of 0.25% of the
      outstanding loan balance. The annual fee for the credit facility is $20,000.
      Additionally, the credit facility has a minimum monthly fee of $5,000 which
      is
      reduced by interest charges and the collateral management fee. The facility
      is
      collateralized by cash, cash equivalents, marketable securities, accounts
      receivable, inventory and property, plant and equipment. The credit facility
      contains no financial covenants and is scheduled to terminate in June 2007.
      The
      amount outstanding under the facility as of September 30, 2006 was
      $443,000.




**NOTE
      I.**  **NOTE
      PAYABLE**





In
      November 2005, Synthetech financed $202,000 of annual premiums for certain
      of
      its insurance policies. Payments under the financing consisted of nine monthly
      installments of $23,000, including interest at an annual rate of 6.84%. The
      final payment was paid August 2006. The amounts outstanding under the finance
      agreement as of September 30, 2006 and March 31, 2006 were $0 and $91,000,
      respectively.




**NOTE
      J.**  **ACCRUED
      TERMINATION BENEFITS**





On
      October 31, 2006, M. "Sreeni" Sreenivasan retired as Synthetech's Chief
      Executive Officer. In accordance with an employment agreement between Synthetech
      and Mr. Sreenivasan, upon termination of his employment he is to receive one
      year of base salary and healthcare benefits, to be paid in twelve monthly
      installments. An estimate of the amount to be paid under this agreement,
      $212,000, is reported as a current liability on Synthetech’s September 30, 2006
      balance sheet.




**NOTE
      K.**  **EMPLOYEE
      STOCK BENEFIT PLANS**





**Description
      of the Plans**





*Employee
      Stock Purchase Plan*


In
      July
      2000, Synthetech established an employee stock purchase plan (or *ESPP)* for the
      benefit of its employees. The plan is qualified under Section 423 of the
      Internal Revenue Code. Under the ESPP, substantially all employees may purchase
      Synthetech’s common stock through payroll deductions at a price equal to 85
      percent of the lower of the fair market value at the beginning or end of each
      six-month offering period. Stock purchases under the ESPP are limited to 15
      percent of an employee’s eligible compensation, up to a maximum of $15,000, in
      any plan year. No shares were issued under the ESPP during the six months ended
      September 30, 2006, 5,013 shares were issued under the ESPP during the six
      months ended September 30, 2005. In February 2006, the Board of Directors
      suspended operations of the ESPP until further notice. At September 30, 2006,
      there were 82,727 shares reserved for future issuance under the ESPP.




**13**
 **Index**


*Stock
      Plan*


Synthetech
      grants equity-based compensation under its 2005 Equity Incentive Plan (the
      2005
      Plan). Stock options, restricted stock awards and stock appreciation rights
      are
      authorized for issuance to employees, consultants and non-employee directors
      under the 2005 Plan. Stock options are granted with an exercise price equal
      to
      the fair market value of our common stock on the date of grant. Options
      generally vest in equal annual installments over two to five years from the
      date
      of grant although individual options may have different vesting terms. All
      options expire no later than ten years from the date of grant. As of September
      30, 2006, 507,450 shares were available for issuance under the 2005 Plan.





Effective
      March 29, 2006, Synthetech’s Board of Directors approved the vesting
      acceleration of all unvested, out-of-the-money stock options outstanding under
      the 2005 Plan. Vesting was accelerated for stock options that had exercise
      prices equal to or greater than $0.43 per share, which was the lowest grant
      price of any unvested option on March 29, 2006. In connection with the
      modification of the terms of these options to accelerate their vesting,
      approximately $205,000 was recorded as stock compensation expense on a pro
      forma
      basis in accordance with SFAS 123. This action was taken to reduce the impact
      of
      further compensation expense that Synthetech would otherwise be required to
      recognize in future Statements of Operations pursuant to SFAS 123R, which became
      applicable for Synthetech on April 1, 2006. Synthetech’s Board of Director’s
      also believes that the acceleration may have a positive effect on employee
      morale, retention and the perception of option value.





*Stock
      Option Agreements -* The
      right
      to purchase shares pursuant to existing stock option agreements typically vest
      pro-rata at each option anniversary date over a two to five-year period. The
      options, which are generally 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
      stockholder, subject to certain restrictions on transferability and a risk
      of
      forfeiture. Synthetech’s most recently issued RSAs had an original vesting
      period of two years. Synthetech has not awarded restricted stock units or
      performance-based stock units. Compensation cost for RSAs is determined using
      the market value of Synthetech’s common stock on the date of grant and the
      resulting expense is recognized on a straight-line basis over the vesting term.





*Other
      Stock Grant*


Dr.
      Gregory Hahn commenced employment with Synthetech on September 11, 2006, as
      Synthetech’s President and Chief Operating Officer. In accordance with his
      employment agreement, Synthetech awarded Dr. Hahn 300,000 options to purchase
      Synthetech common stock. The options were awarded at the market price of
      Synthetech’s common stock on the date of grant. The nonqualified stock options
      were not issued as part of the 2005 Plan and Synthetech intends to register
      the
      underlying shares under the Securities Act of 1933.





**14**
 **Index**


**Stock
      Option Activity**





A
      summary
      of the changes in stock options outstanding under Synthetech’s 2005 Plan and
      otherwise during the six months ended September 30, 2006 is presented
      below:




Number
              
              Weighted
                  Average
              
              Weighted
                  Average
              
              AggregateOf
              
              Exercise
              
              Remaining
              
              IntrinsicOptions
              
              Price
              
              Contractual
                  Term (years)
              
              ValueOptions
                  outstanding, March 31, 2006
              
              1,526,451
              
              $
              1.34
              
              7.1Granted
              
              340,000
              
              $
              0.32
              
              -Exercised
              
              -
              
              
              -
              
              -Canceled
              
              10,651
              
              $
              1.17Options
                  outstanding, September 30, 2006
              
              1,855,800
              
              $
              1.16
              
              7.2
              
              $
              14,000Options
                  exercisable, September 30, 2006
              
              1,625,803
              
              $
              1.28
              
              6.9
              
              $
              10,000




The
      weighted-average grant date fair value of options granted during the three
      and
      six months ended September 30, 2006 was $0.21. There was no stock-based
      compensation issued during the quarter ended June 30, 2006. 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 its second quarter ended September 30, 2006 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, 2006. This amount changes based upon changes in the fair market value of
      Synthetech’s stock.





As
      of
      September 30, 2006, $46,000 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 2.4
      years.





**Valuation
      Information under SFAS 123(R)**





SFAS
      No.
      123(R) requires the use of a valuation model to calculate the fair value of
      stock option awards. Synthetech has elected to use the Black-Scholes option
      pricing model, which incorporates various assumptions as follows:





*Expected
      Price Volatility*





Expected
      price volatility is a measure of the amount by which the price of a security
      has
      fluctuated or is expected to fluctuate. Synthetech uses actual historical
      changes in the market value of its stock to calculate the volatility assumption.
      Synthetech calculates monthly market value changes from the date of grant over
      a
      past period representative of the expected life of the options to determine
      volatility. Synthetech determined that due to its small volume of stock trades
      and the spread between the bid price and ask, the use of monthly market values,
      as compared to daily or weekly values, provided the




**15**
 **Index**


most
      reasonable determination of expected volatility. An increase in the expected
      price volatility will increase compensation expense.




*Risk-Free
      Interest Rate*





For
      the
      risk-free interest rate, Synthetech uses the U.S. Treasury rate for the week
      of
      the grant having a term approximating the expected life of the option. An
      increase in the risk-free interest rate will increase compensation
      expense.





*Expected
      Term*





This
      is
      the period of time over which the options granted are expected to remain
      outstanding, and is based on an average of the vesting period combined with
      the
      term of the option. Options granted have a term of ten years. An increase in
      the
      expected life will increase compensation expense.





*Dividend
      Yield*





Synthetech
      has not made any dividend payments nor does it have plans to pay dividends
      in
      the foreseeable future. An increase in the dividend will decrease compensation
      expense.





*Recognition
      of Compensation Expense and Forfeitures*





The
      fair
      value of each option is amortized into compensation expense on a straight-line
      basis over the vesting period. Synthetech reduces the straight-line compensation
      expense by an estimated forfeiture rate to account for the estimated impact
      of
      options that are expected to be forfeited before becoming fully vested.
      Synthetech determined that due to the nature and small number of option
      recipients in the quarter ended September 30, 2006, that an assumption of zero
      forfeitures was appropriate. An increase in the forfeiture rate will decrease
      compensation expense.





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





**Three
                Months Ended**
            
            **Six
                Months Ended****September
                30, 2006**
            
            **September
                30, 2006**Expected
                price volatility
            
            72%
            
            72%Risk-free
                interest rate
            
            4.74%
            
            4.74%Expected
                term in years
            
            5.57
            
            5.57Dividend
                yield
            
            -
            
            -








**16**
 **Index**


**Expense
      Information under SFAS 123(R)**





Stock-based
      compensation expense was allocated as follows:





**Three
                Months Ended**
            
            **Six
                Months Ended****September
                30, 2006**
            
            **September
                30, 2006**Stock-based
                compensation expense:Cost
                of revenue
            
            -
            
            -Operating
                expenses
            
            $
            24,000
            
            $
            24,000Stock-based
                compensation expensebefore income taxes
            
            $
            24,000
            
            $
            24,000Income
                tax expense (benefit)
            
            
            -
            
            
            -Total
                stock-based compensationexpense after income taxes
            
            $
            24,000
            
            $
            24,000





**Pro
      Forma Information under SFAS 123 for Periods Prior to Fiscal
      2007**





Prior
      to
      fiscal 2007, Synthetech followed the disclosure-only provisions of SFAS No.
      123,
      as amended. The following table illustrates the effect on net loss and earnings
      per share for the three and six months ended September 30, 2005 if the fair
      value recognition provisions of SFAS 123, as amended, had been applied to
      options granted under Synthetech’s equity-based compensation plans. For purposes
      of this pro forma disclosure, the estimated value of the options is recognized
      over the options’ vesting periods. If Synthetech had recognized the expense of
      equity-based compensation programs in the Condensed Statements of Operations,
      additional paid-in capital would have increased by a corresponding amount,
      net
      of applicable taxes, if any.





**17**
 **Index**





Three
                Months Ended
            
            Six
                Months EndedSeptember
                30, 2005
            
            September
                30, 2005Net
                loss, as reported
            
            $
            (1,081,000
            )
            $
            (2,163,000
            )Add:
                Stock-based employee compensation expense included in reported net
                loss
            
            
            22,000
            
            
            22,000Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of related tax
                effects
            
            
            (62,000
            )
            
            (90,000
            )Pro
                forma net loss
            
            $
            (1,121,000
            )
            $
            (2,231,000
            )Net
                loss per share:Basic
                and Diluted - as reported
            
            $
            (0.07
            )
            $
            (
                0.15
            )Basic
                and Diluted - pro forma
            
            $
            (0.08
            )
            $
            (
                0.15
            )





The
      2005
      Plan authorizes the granting of RSAs, which are held by Synthetech until the
      terms and conditions of the specific award are satisfied. Except for the right
      of disposal, holders of RSAs have full shareholders’ rights during the period of
      restriction, including voting rights. There were 43,000 shares of restricted
      stock awarded to employees during the three months ended September 30, 2005,
      with a fair market value of $0.50 per share. Effective March 29, 2006, all
      restrictions have been removed and the RSAs are free trading
      shares.





For
      purposes of the weighted-average estimated fair value calculations, the fair
      value of each stock option and ESPP grant is estimated on the date of grant
      using the Black-Scholes option model and the following assumptions:





**18**
 **Index**




Three
                Months Ended
            
            Six
                Months EndedSeptember
                30, 2005
            
            September
                30, 2005**Stock
                Options:**Dividend
                yield
            
            -
            
            -Expected
                volatility
            
            62%
            
            62%Risk-free
                interest rate
            
            4.23%
            
            4.23%Expected
                life (in years)
            
            7.00
            
            7.00Weighted-average
                fair value of purchase rights granted
            
            $
                0.32
            
            $
                0.32**ESPP:**Dividend
                yield
            
            -
            
            -Expected
                volatility
            
            76%
            
            76%Risk-free
                interest rate
            
            3.06%
            
            3.06%Expected
                life (in years)
            
            0.50
            
            0.50Weighted-average
                fair value of purchase rights granted
            
            $
                0.35
            
            $
                0.35




**NOTE
      L.**  **SYNTHETECH
      COMMON STOCK DELISTED BY NASDAQ**




On
      October 13, 2005, Synthetech’s common stock was delisted from the Nasdaq
      SmallCap Market due to noncompliance with Nasdaq’s minimum bid price
      requirement. Synthetech’s common stock is currently traded on the Pink Sheets
      under the symbol NZYM.PK.




**NOTE
      M.**  **RELATED
      PARTY TRANSACTIONS**





In
      February 2006, the Board of Directors established a Strategic Development
      Committee and appointed Dr. Daniel Fagan, Chairman of the Board, as the sole
      committee member. Dr. Fagan received a monthly retainer of $10,000. Committee
      fees and expenses incurred by Synthetech under this arrangement during the
      first
      half of fiscal 2007 were $61,000. Effective November 1, 2006, the Strategic
      Development Committee of the Board of Directors was terminated when Dr. Fagan
      was appointed Synthetech’s Chief Executive Officer. Dr. Fagan will continue as
      Synthetech’s Board Chairman.





Synthetech
      had engaged Paul Ahrens, a Director, to assist with Synthetech’s new product
      development efforts, and, until May 31, 2005, had engaged David Clarke, a former
      Director, to assist with Synthetech’s marketing and strategic development
      efforts. Aggregate fees and expenses incurred by Synthetech under these
      arrangements during the first half of fiscal 2007 and 2006 were $1,000 and
      $73,000, respectively.





**19**
 **Index**


**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, including projected revenues and net income or loss for
      fiscal 2007 and portions thereof and our ability to continue as a going concern
      and to absorb any operating losses; expected revenue from and shipping dates
      for
      customer orders; improvement in revenue derived from large-scale customer
      projects; implementation of our growth strategy and our ability to finance
      our
      growth strategy; the conditions of the fine chemicals industry; obtaining
      regulatory approval for new drugs and other matters relating to drug development
      progress, including filings and filing dates related to the approval process;
      financing our current and future capital expenditures and the amount of such
      expenditures; the effect any change in foreign currency exchange rates would
      have on our operating results; whether our cash and cash equivalents, borrowing
      capacity and internally-generated funds will be adequate to operate our
      business; and our inability to recognize deferred tax assets. Forward-looking
      statements reflect management’s current expectations, plans or projections and
      are inherently uncertain. Actual results could differ materially from
      management's*  *expectations,
      plans or projections. Readers are cautioned not to place undue reliance on
      these
      forward-looking statements, which speak only as of the date of this report.
      The
      risks and uncertainties that may cause actual results to vary materially from
      any forward-looking statements include, but are not limited to, the following:
      the uncertainty regarding our ability to continue our operations; the uncertain
      market for our products; potential loss of a significant customer; customer
      concentration; potential termination or suspension by customers of significant
      projects or orders; potential production or shipping delays; our limited
      experience in entering new markets and market segments; potential
      period-to-period revenue or expense fluctuations; our limited financial and
      other resources; higher than expected cash use, or inability to borrow funds
      under our line of credit or to raise other debt or equity capital required
      to
      continue operations or to implement our growth strategy; production factors;
      industry cost factors; competition; government regulation; labor disputes;
      technological change; and international business risks. Investors are urged
      to
      read our filings with the Securities and Exchange Commission, including our
      Annual Report on Form 10-K for the fiscal year ended March 31, 2006, for a
      further description of risks and uncertainties related to forward-looking
      statements made by us as well as to other aspects of our business. Synthetech
      does not intend to release any revisions to these forward-looking statements
      that may be made to reflect events or circumstances after the date hereof or
      to
      reflect the occurrence of unanticipated events.*





**20**
 **Index**


**OVERVIEW**





Synthetech
      is a fine chemicals company specializing in organic synthesis, biocatalysis
      and
      chiral technologies. Synthetech develops and manufactures amino acid
      derivatives, specialty amino acids, peptide fragments, proprietary custom chiral
      intermediates and specialty resins primarily for the pharmaceutical and
      cosmeceutical industries. Synthetech’s products support the development and
      manufacture of therapeutic peptides and peptidomimetic small molecule drugs
      at
      every stage of a customer’s clinical development pipeline. Synthetech’s domestic
      and international customer base includes major pharmaceutical and emerging
      biopharmaceutical companies, as well as contract drug synthesis firms.
      Synthetech also supplies catalog quantities of specialty amino acids to research
      institutions, universities and drug discovery firms. Our integrated “grams to
      tons” production capabilities allow us to be involved with our customers from
      the early phases of pharmaceutical discovery and clinical development through
      approval, market launch and commercialization.





***Synthetech's
      Ability to Continue as a Going Concern***


The
      revenue Synthetech may generate in upcoming periods is uncertain. Without a
      stable source of adequate revenue or new debt or equity financing, Synthetech
      may be unable to continue operations. The accompanying financial statements
      do
      not include any adjustments that might result should Synthetech be unable to
      continue operations. Synthetech’s previous line of credit expired on March 31,
      2006 and was not renewed by the bank. In June 2006, Synthetech entered into
      a
      new credit facility which is described in Note H to the condensed financial
      statements that accompany this Report. Synthetech has employment agreements
      in
      place with certain employees, which require severance payments to the employee
      if certain conditions surrounding termination are met.





Synthetech
      has reported significant operating losses during each of its last five fiscal
      years and the quarter ended June 30, 2006. Synthetech reported net income of
      $198,000 during the quarter ended September 30, 2006, and a net loss of $587,000
      for the six months ended September 30, 2006. Synthetech's working capital
      decreased $352,000, to $4.7 million as of September 30, 2006, compared to $5.0
      million as of March 31, 2006. As of September 30, 2006, quick assets
      ( *i.e.* cash and
      cash equivalents and accounts receivable) exceeded current liabilities by
      $257,000. With this level of net quick assets, Synthetech is unable to absorb
      any significant future operating losses. Synthetech believes that the amount
      it
      could realize upon disposition of its inventory outside the normal course of
      its
      operations would be significantly below the carrying value of its inventory
      as
      reflected in our financial statements.





Synthetech’s
      fiscal 2006 annual financial statements were audited by an Independent
      Registered Public Accounting Firm. The resulting audit report contains an
      explanatory paragraph regarding Synthetech’s ability to continue as a going
      concern.





***Business
      Conditions***


With
      recent large-scale orders for repeat projects, Synthetech’s backlog as of
      September 30, 2006 exceeded $6 million, including approximately $3.6 million
      in
      support of a single customer project. We expect that a large portion of this
      order backlog will ship during the second half of fiscal 2007, with the majority
      of the backlog shipping during the quarter ending March 31, 2007. An
      increase in large order inquiries and resulting order activity is a meaningful
      improvement compared to the market environment Synthetech encountered during
      most of fiscal 2006.





**21**
 **Index**


Our
      industry remains generally affected by a low rate of new drug approvals, ongoing
      customer insourcing and available capacity, although there appear to be
      continuing signs of meaningful improvement. During periods where manufacturing
      capacity is generally available, Synthetech is at a competitive disadvantage
      compared to contract drug synthesis companies that can support further
      downstream production in accordance with the FDA’s current Good Manufacturing
      Practices (cGMP).





During
      fiscal 2006, our manufacturing activities and related financial performance
      were
      adversely affected by low utilization of our large reactors due to the lack
      of
      significant large-scale customer projects. For fiscal 2007, we expect
      improvement in revenue from large-scale customer projects compared to fiscal
      2006. Although 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.





We
      are
      encountering competition, primarily for more basic products, from developing
      countries such as India and China that have substantially lower cost structures,
      primarily because salaries and other costs are a fraction of what they are
      in
      industrialized countries. This trend has resulted in pricing pressures in the
      United States and is affecting our ability to maintain historical margins on
      some of our products and to retain and attract business.





***Customer
      Project Pipeline***


Our
      portfolio of clinical pipeline projects remains active and consists of a variety
      of projects with significant revenue generating potential.





**Growth
      Strategy**


Synthetech's
      primary business objective is to create and build upon a more stable base of
      revenue by implementing the following strategies:





·
            *Continue
                With Core Focus*.
                Synthetech is a leader in the development of amino acid derivatives,
                specialty amino acids, peptide fragments and proprietary custom chiral
                intermediates for the pharmaceutical industry. Synthetech intends
                to
                continue to focus on these core markets and to support and build
                upon the
                projects in its drug development
                pipeline.




·
            *Leverage
                Core Expertise to Expand into More Complicated and Value-added
                Projects*.
                With over 20 years' of experience, Synthetech has developed extensive
                experience and process technology in its core areas of expertise.
                In
                recent years, Synthetech has leveraged this expertise to enter
                "downstream" pharmaceutical intermediates that involve more complicated
                products and generally offer higher margins, and Synthetech intends
                to
                expand its involvement with these value-added projects. Synthetech's
                expansion into more sophisticated projects is also in response to
                the
                increasing competition for more basic product offerings from developing
                countries.




·
            *Expand
                Research and Development Capabilities and Small-scale
                manufacturing*.
                The new product development sector of the pharmaceutical industry
                remains
                active, and Synthetech is participating in a variety of early-stage
                projects, which traditionally have been the source for its future
                large-scale projects. Expansion of our R&D resources will enable us to
                continue to participate actively in early-stage projects and increase
                the
                potential business within our core area of
                expertise.




**22**
 **Index**


·
            *Stabilize
                Revenue Base Through Pharmaceutical and Limited Non-pharmaceutical
                Manufacturing Opportunities*.
                To help stabilize our revenue base, Synthetech is exploring custom
                synthesis opportunities that are both within and outside of the
                pharmaceutical industry. We believe that our existing manufacturing
                capabilities combined with our location on the West Coast of the
                United
                States provides a potential platform from which to develop a limited
                base
                of custom synthesis revenue that will not be subject to the same
                level of
                volatility we currently experience in the pharmaceutical marketplace.
                Currently we are not producing significant quantities of products
                for
                market sectors outside of the pharmaceutical industry.




·
            *Develop
                Proprietary Products Based on our Core Competencies.*Synthetech’s primary business model has been to manufacture products on
                behalf and to the specifications of our pharmaceutical customer base.
                In
                order to gain an increased level of control over our sources of revenue,
                we are exploring opportunities to develop proprietary products for
                potential emerging markets related to our existing expertise.





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.


























**23**
 **Index**


**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 Revenue**For
                the Three Months Ended
            
            For
                the Six Months EndedSeptember
                30,
            
            September
                30,**2006**
            
            **2005**
            
            **2006**
            
            **2005**Revenue
            
            **100.0%**
            
            **100.0%**
            
            **100.0%**
            
            **100.0%**Cost
                of revenue
            
            **66.2**
            
            **125.4**
            
            **77.2**
            
            **127.0**Gross
                income (loss)
            
            **33.8**
            
            **(25.4)**
            
            **22.8**
            
            **(27.0)**Research
                and development
            
            **8.7**
            
            **18.7**
            
            **12.3**
            
            **17.3**Selling,
                general and administrative
            
            **18.7**
            
            **63.6**
            
            **22.5**
            
            **55.2**Total
                operating expenses
            
            **27.4**
            
            **82.3**
            
            **34.8**
            
            **72.5**Operating
                income (loss)
            
            **6.4**
            
            **(107.7)**
            
            **(12.0)**
            
            **(99.5)**Interest
                income
            
            **0.3**
            
            **5.2**
            
            **0.4**
            
            **3.3**Interest
                expense
            
            **(0.5)**
            
            **-**
            
            **(0.3)**
            
            **-**Income
                (loss) before income taxes
            
            **6.2**
            
            **(102.5)**
            
            **(11.9)**
            
            **(96.2)**Income
                tax expense
            
            **-**
            
            **-**
            
            **-**
            
            **-**Net
                income (loss)
            
            **6.2%**
            
            **(102.5)%**
            
            **(11.9)%**
            
            **(96.2)%**





**Revenue**





Revenue
      of $3.2 million in the second quarter of fiscal 2007 increased by $2.1 million,
      or 202%, from revenue of $1.1 million in the second quarter of fiscal 2006.
      Revenue for the first six months of fiscal 2007 was
      $4.9 million, an increase of $2.7 million, or 119%, compared to revenue of
      $2.2
      million in the first six months of fiscal 2006.





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 from large-scale customer
      projects was $1.9 million during the second quarter and first six months of
      fiscal 2007 compared to $0 and $249,000 in the second quarter and first six
      months of fiscal 2006, respectively.





Large-scale
      project revenue during the first six months of fiscal 2006 included small
      shipments in support of drug development projects from two customers.





The
      market environment for smaller customer projects is very 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




**24**
 **Index**


large-scale
      projects typically originate from our portfolio of successful small-scale early
      stage drug development projects.





International
      sales, mainly to Europe, were $780,000 and $1.6 million in the second quarter
      and first six months of fiscal 2007, respectively, compared to $469,000 and
      $1.2
      million in the second quarter and first six months of fiscal 2006, respectively.
      International sales, like all of our revenues, are subject to significant
      quarterly fluctuations.




To
      the
      extent successful customer projects develop into larger volumes, either during
      late stage clinical trials, pre-launch or as a marketed product, our per unit
      pricing may decline. There is a risk that the impact on future sales and
      profitability from declines in pricing may not be offset by an increase in
      volume.




The
      level
      of Synthetech’s business from period to period is largely unpredictable.
      Although revenue associated with marketed products is more likely to provide
      a
      longer term, on-going revenue stream than revenue associated with drugs at
      the
      clinical or discovery stages, continuation of customer demand for our products
      from customers with marketed products remains subject to various market
      conditions, including potential use of alternative manufacturing methods,
      continued market demand for drugs or cosmeceuticals that we support, and
      competition from other suppliers. Accordingly, while significant orders related
      to marketed products provide increased and more predictable revenue, we expect
      revenue related to marketed products and other projects to continue to fluctuate
      significantly from period to period.





**Gross
      income (loss)**





Gross
      income for the second quarter of fiscal 2007 increased $1.3 million, to $1.1
      million, or 34% of revenue, compared to a gross loss of $268,000, or 25% of
      revenue, for the second quarter of fiscal 2006. Gross income for the first
      six
      months of fiscal 2007 increased $1.7 million to gross income of $1.1 million,
      or
      23% of revenue, compared to a gross loss of $607,000, or 27% of revenue, in
      the
      first six months of fiscal 2006. These increases were primarily the result
      of
      the increases in sales between the corresponding periods of fiscal 2007 and
      2006. Manufacturing costs increased and charges for impaired inventory decreased
      in the second quarter and first six months of fiscal 2007 compared to the
      comparable periods of 2006, as discussed below.





Manufacturing
      department costs incurred during the second quarter and first six months of
      fiscal 2007 increased $371,000 and $529,000, respectively, compared to the
      comparable periods of fiscal 2006. Variable operating costs such as labor,
      maintenance, utilities and supplies expenses were up significantly between
      the
      periods as a result of increased production levels. Manufacturing department
      costs for the first six months of fiscal 2007 and 2006 reflect refunds of
      previously paid property taxes of $57,000 and $201,000, respectively.





Gross
      income for the second quarter and first six months of fiscal 2007 reflect
      charges for impaired inventory of $297,000 and $389,000, respectively. Gross
      loss for the second quarter and first six months of fiscal 2006 reflect charges
      for impaired inventory of $362,000 and $563,000, respectively. Synthetech
      routinely develops manufacturing processes to produce new products or to refine
      procedures for existing products. It is not unusual for manufacturing costs
      associated with new processes or certain existing processes to exceed the
      selling price for batches of product, which results in an inventory write-off.
      It remains difficult to rework certain materials on a cost effective basis.
      Synthetech also writes-off inventory that is specific to any customer project
      that has been discontinued.





Cost
      of
      revenue includes raw materials, direct labor, manufacturing overhead, other
      direct costs, and adjustments to inventory.





**25**
 **Index**


**Operating
      Expenses**





***R&D
      Expense.*** Research
      and development (R&D) expense in the second quarter of fiscal 2007 increased
      $80,000 to $277,000, or 9% of revenue, compared to $197,000, or 19% of revenue,
      in the second quarter of fiscal 2006. The increase in R&D expense between
      these two periods includes:




·
            an
                increase in compensation costs of $38,000, reflecting an increase
                in the
                number of chemists employed by Synthetech in response to improving
                business conditions and the termination of an agreement to obtain
                contract
                research services from a facility in India, as discussed below; and




·
            increased
                costs of $34,000 in fees for contract research services provided
                by the
                facility in India, as discussed below;
                and




·
            an
                increase in laboratory supplies expense of $11,000; and




·
            an
                increase of $11,000 arising from a change in the amount of R&D
                department costs allocated to R&D expense rather than inventory for
                the manufacture of small-scale products, as described below;




partially
      offset by:




·
            a
                reduction in contract research fees and expenses of $16,000 paid
                to Paul
                Ahrens, a Synthetech director;





R&D
      expense in the first six months of fiscal 2007 increased $218,000 to $607,000,
      or 12% of revenue, compared to $389,000, or 17% of revenue, in the first six
      months of fiscal 2006. The increase in R&D expense between these two periods
      includes:




·
            increased
                costs of $104,000 in fees for contract research services provided
                by the
                facility in India;




·
            an
                increase in compensation costs of $91,000, principally arising from
                an
                increase in the number of chemists employed in R&D and also including
                a $15,000 nonrecurring employee placement fee;




·
            an
                increase in laboratory supplies expense of $34,000; and




·
            an
                increase of $12,000 arising from a change in the amount of R&D
                department costs allocated to R&D expense rather than inventory for
                the manufacture of small-scale
                products;




partially
      offset by:




·
            a
                reduction in contract research fees and expenses of $35,000 paid
                to Paul
                Ahrens.





In
      October 2005, Synthetech supplemented its domestic R&D capabilities by
      engaging a division of an Indian pharmaceutical company to provide contract
      research and manufacturing. In August 2006, Synthetech decided that it would
      be
      more efficient to access lab and small-scale manufacturing services from this
      partner on a project-by-project basis rather than engaging it on a monthly
      basis, and terminated the underlying agreement. Fees and expenses incurred
      for
      contract research services pursuant to the agreement for the second quarter
      and
      first six months of fiscal 2007 were $34,000 and $104,000, respectively.





**26**
 **Index**


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 2007 and 2006 were $33,000 and $45,000, respectively.





***SG&A
      Expense.*** Selling,
      general and administrative (SG&A) expense in the second quarter of fiscal
      2007 decreased $73,000 to $597,000, or 19% of revenue, compared to $670,000,
      or
      64% of revenue, in the second quarter of fiscal 2006. The decrease in SG&A
      expense between the two quarters includes:




·
            a
                decrease in compensation expense of $41,000 arising from a non-recurring
                $107,000 charge during the second quarter of fiscal 2007 for termination
                benefits related to an executive compensation agreement, partially
                offset
                by a $35,000 executive signing bonus, an $18,000 increase in stock-based
                compensation expense, and a $9,000 increase in sales bonuses between
                the
                two periods; and




·
            decreases
                in sales and marketing expenses of $26,000, in fees for professional
                services of $25,000, and in public company costs of
                $20,000;




partially
      offset by:




·
            fees
                and expenses of $30,000 paid to Dr. Daniel Fagan for his services
                on the
                Strategic Development Committee of the Board of Directors, which
                committee
                was established in February 2006 and terminated in October 2006,
                in
                connection with Dr. Fagan's appointment to the position of Chief
                Executive
                Officer.





SG&A
      expense in the first six months of fiscal 2007 decreased $134,000 to $1.1
      million, or 22% of revenue, compared to $1.2 million, or 55% of revenue, in
      the
      first six months of fiscal 2006. The decrease in SG&A expense between the
      two six month periods includes:




·
            a
                decrease in compensation expense of $64,000, primarily arising from
                charges in the first six months of fiscal 2006 for termination benefits
                related to an executive compensation agreement for $116,000 and
                compensation expenses of $36,000 related to a European based sale
                executive who left Synthetech in December
                2005;




·
            Decreases
                in fees for professional services of $87,000, sales and marketing
                expenses
                of $24,000 and public company costs of
                $14,000;




partially
      offset by:




·
            fees
                and expenses of $61,000 paid to Dr. Fagan for his services on the
                Strategic Development Committee of the Board of Directors;
                and




·
            charges
                for an executive signing bonus of $35,000, increases in general
                compensation and related costs of $26,000, an increase in stock-based
                compensation expense of $18,000, and an increase in sales bonuses
                between
                the two six month periods of
                $9,000.




SG&A
      expense consists of compensation and related fringe benefits for sales and
      administrative employees, cost of professional services, marketing costs, costs
      associated with being a public company and costs related to administrative
      facilities and information services.





**27**
 **Index**


**Interest
      Income**





Interest
      income in the second quarter and first six months of fiscal 2007 was $10,000
      and
      $22,000, respectively, compared to $55,000 and $76,000, respectively, in the
      same periods in fiscal 2006. Interest income arising from a partial refund
      of
      prior years’ property taxes added $4,000 and $31,000 to interest income during
      the second quarter and first six months of fiscal 2007 and 2006, respectively.
      Other than the interest income related to these tax refunds, Synthetech’s
      interest income is primarily derived from earnings on our cash equivalents
      and
      marketable securities, which earnings are affected by the amount of cash
      equivalents and the interest rates in effect during the periods.





**Income
      Taxes**





Based
      on
      Synthetech’s history of losses in the last five fiscal years and the first
      quarter of fiscal 2007, our near-term outlook and management’s evaluation
      of available tax planning strategies, we have concluded that it is more likely
      than not that Synthetech will be unable to recognize its net deferred tax assets
      as an income tax benefit, continuing for an uncertain period of
      time.





**Net
      Income (Loss)**





Net
      income in the second quarter of fiscal 2007 was $198,000, or 6% of revenue,
      compared to a net loss of $1.1 million, or 103% of revenue, in the second
      quarter of fiscal 2006. Net loss for the first six months of fiscal 2007 was
      $587,000, or 12% of revenue, compared to a net loss of $2.2 million, or 96%
      of
      revenue, in the first six months of fiscal 2006.





**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. Refer to Note C 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,
      2006
      and March 31, 2006 was $15,000. For the quarters and six month periods ended
      September 30, 2006 and 2005, 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.





**28**
 **Index**


**Inventories**


Inventories
      are valued at the lower of cost or market, determined on the first-in first-out
      (FIFO) basis. Costs include direct material, direct labor, applicable
      manufacturing overhead, and other direct costs.





Management
      evaluates Synthetech’s inventory for impairment whenever it becomes aware that
      indicators of impairment exist. Factors contributing to inventory impairment
      include, but are not limited to: decreases in selling price; changes in customer
      specifications; project terminations or holds; variations in material produced
      by Synthetech from customer specifications; and production costs materially
      in
      excess of current market price. It is our policy to write-down inventories
      to
      reflect an estimate for impairment in an amount equal to the excess, if any,
      of
      the cost of inventory compared to the estimated market value based upon
      assumptions about future demand and market conditions. If actual market
      conditions are less favorable than those projected by management, additional
      inventory write-downs may be required in the future. Write-downs of inventory
      are reported as a component of cost of revenue in the relevant period.





**Long-Lived
      Asset Impairment**


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




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


·
            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.





**29**
 **Index**


**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
      appears to be improving. To the extent we are able to enter into longer-term,
      significant or large-scale orders with customers, we expect increased
      competition to supply these products. Similar dynamics affect the cosmeceutical
      development process and market, except that the regulatory oversight and,
      consequently, the typical length of a product’s “time to market” are reduced.





Due
      to
      the foregoing industry factors, Synthetech cannot predict 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




**30**
 **Index**


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




**LIQUIDITY
      AND CAPITAL RESOURCES**





Synthetech’s
      cash, cash equivalents and marketable securities totaled $1.0 million at
      September 30, 2006, compared to $2.0 million at March 31, 2006.





At
      September 30, 2006, Synthetech reported working capital of $4.7 million,
      compared to $5.0 million at March 31, 2006. The $352,000 decrease in working
      capital between March 31, 2006 and September 30, 2006 was primarily the result
      of the net loss of $587,000 incurred during the first six months of fiscal
      2006.




Synthetech’s
      portfolio of AAA rated marketable securities at March 31, 2006 consisted of
      auction rate preferred shares from three issuers. The auction rate securities
      were subject to auction every seven to 28 days. At auction, a holder could
      choose to continue to hold its securities at a new market rate, sell its
      securities at par or purchase more securities. Synthetech liquidated its
      positions in auction rate securities, at par, in May 2006 for total proceeds
      of
      $800,000.





In
      June
      2006, Synthetech entered into a new credit facility with a finance company,
      which is secured by a lien on all of our assets and provides for borrowings
      of
      up to $2 million or the maximum available under the borrowing base, whichever
      is
      less. Interest is payable at a fluctuating rate equal to the prime rate plus
      3%,
      plus a monthly collateral management fee of 0.25% of the outstanding loan
      balance. The annual fee for the credit facility is $20,000. The credit facility
      has a minimum monthly fee of $5,000, which is reduced by interest charges and
      the collateral management fee. The credit facility contains no financial
      covenants and expires in June 2007. As of September 30, 2006, Synthetech had
      $443,000 in borrowings outstanding under the new credit facility.





We
      used
      cash in our operating activities of $1.3 million in the first six months of
      fiscal 2007, compared to cash used in operating activities of $151,000 in the
      first six months of fiscal 2006.





In
      the
      first six months of fiscal 2007, a substantial use of cash from operating
      activities was the net loss of $587,000, which was partially offset by non-cash
      charges for depreciation of $269,000 and stock-based compensation expense of
      24,000. Accounts receivable increased $785,000 to $1.3 million at September
      30,
      2006, from $467,000 at March 31, 2006, primarily due to the timing of shipments
      and an increase in the amount of sales in the second quarter of fiscal 2007
      compared to the fourth quarter of fiscal 2006. Inventory increased $597,000
      to
      $4.2 million at September 30, 2006, from $3.6 million at March 31, 2006,
      primarily in support of shipments made or expected to be made in the second
      half
      of fiscal 2007. Prepaid expenses decreased $112,000 to $239,000 at September
      30,
      2006, from $351,000 at March 31, 2006, primarily due to the amortization of
      prepaid expenses such as insurance premiums and property taxes over the periods
      that they benefit. Accounts payable decreased $11,000 to $895,000 at September
      30, 2006, from $906,000 at March 31, 2006. Accrued compensation, which is
      primarily composed of accrued vacation pay, increased $13,000 to $173,000 at
      September 30, 2006 from $160,000 at March 31, 2006. There was no change in
      accrued termination benefits during the first six months of fiscal 2007.
      Deferred revenue of $272,000 at September 30, 2006, reflects advance payments
      on
      customer orders.




Cash
        provided by investing activities for the first six months of fiscal 2007
        was
        $742,000 compared to cash used in investing activities of $40,000 in the
        first
        six months of fiscal 2006. As discussed above, during the first quarter of
        fiscal 2007, Synthetech sold $800,000 of marketable securities, at
        par.




**31**
 **Index**


Synthetech
      used $58,000 of cash for capital expenditures during the first six months of
      fiscal 2007 compared to $40,000 during the first six months of fiscal 2006.
      Synthetech’s capital plan for fiscal 2007 includes various projects totaling
      approximately $100,000. Synthetech expects to finance these remaining capital
      expenditures from cash on hand and any internal cash flow and does not
      anticipate the need for any new debt or equity financing to fund these
      projects.




Cash
      provided by financing activities for the first six months of fiscal 2007 was
      $338,000 compared to cash used in financing activities of $10,000 in the first
      six months of fiscal 2006. During the first six months of fiscal 2007 Synthetech
      borrowed $443,000 under its line of credit. Principal payments under its
      long-term debt obligations and notes payables totaled $105,000 during the first
      six months of fiscal 2007, compared to $13,000 during the comparable period
      of
      fiscal 2006.




Cash
      and
      cash equivalents decreased $210,000 during the first six months of fiscal 2007,
      to $1.0 million at September 30, 2006, from $1.2 million at March 31, 2006.





Synthetech
      is uncertain whether its existing cash and cash equivalents, any available
      funds
      under its credit facility and any funds generated from operations will be
      sufficient for Synthetech to continue its operations. Any projections of future
      cash needs and cash flows are subject to substantial uncertainty. If sources
      of
      liquidity are insufficient, we will need to seek additional 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,
      2006.  For existing company transactions denominated in a foreign currency,
      the effect of an immediate 10% change in relevant exchange rates would not
      have
      a material impact on Synthetech's operating results or cash flows.





**Item
      4. Controls and Procedures**




Synthetech
      maintains a system of disclosure controls and procedures designed to provide
      reasonable assurance as to the reliability of our published financial statements
      and other disclosures included in our reports under the Securities Exchange
      Act
      of 1934. In accordance with Rule 13a-15(b) of the Securities and Exchange Act
      of
      1934, our management evaluated, under the supervision and with the participation
      of our principal executive officer and principal financial officer, the
      effectiveness of the design and operation of Synthetech’s disclosure controls
      and procedures (as defined in Rule 13a-15(e)




**32**
 **Index**


under
      the
      Securities and Exchange Act of 1934) as of the end of the period covered by
      this
      report. Based upon that evaluation, our principal executive officer and the
      principal financial officer concluded that Synthetech’s disclosure controls and
      procedures are effective.




There
      has
      been no change in our internal control over financial reporting during the
      second quarter ended September 30, 2006 that has materially affected or is
      reasonably likely to materially affect our internal control over financial
      reporting.





Synthetech’s
      principal executive officer and principal financial officer do not expect that
      our disclosure controls and internal controls will prevent all error and all
      fraud. Although our disclosure controls and procedures were designed to provide
      reasonable assurance of achieving their objectives and our principal executive
      officer and principal financial officer have determined that they are effective
      in doing so, a control system, no matter how well conceived and operated, can
      provide only reasonable, not absolute, assurance that the objectives of the
      system are met. Further, the design of a control system must reflect the fact
      that there are resource constraints, and the benefits of controls must be
      considered relative to their costs. 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.





























**33**
 **Index**


**PART
      II. OTHER INFORMATION**





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





The
      Annual Meeting of Shareholders was held on July 20, 2006 in Portland, Oregon.





*1)*
            *Election
                of Directors*




All
      five
      incumbent directors were reelected, and Donald E. Kuhla, a director candidate
      was elected, all without opposition, to serve one-year terms in office. The
      results of this election were as follows:





Name
                of Director
              
              Paul
                C. Ahrens
              Daniel
                T. Fagan, Ph.D.
              Howard
                L. Farkas
              Donald
                E. Kuhla, Ph.D.
              Hans
                C. Noetzli
              Charles
                B. Williams
            For
              
              13,272,563
              13,380,803
              13,212,753
              13,286,763
              13,371,593
              13,199,943
            Withheld
              
              280,687
              172,447
              340,497
              266,487
              181,657
              353,307





*2)*
            *Ratification
                of Independent Auditors*




The
      appointment of KPMG LLP as the independent auditors for fiscal year 2007 was
      ratified. The results of the shareholder vote were as follows:





Appointment
                of KPMG LLP
              as
                independent auditor
            For
              
              12,854,053
            Against
              
              149,080
            Abstain
              
              550,118




**Item
      6. Exhibits**





(a)
            Exhibits.





Exhibit
                3.1
            Articles
                of Incorporation of Synthetech, as amended (incorporated by reference
                to
                the exhibits filed with Synthetech’s Annual Report on Form 10-K for the
                fiscal year ended March 31, 1991).Exhibit
                3.2
            Bylaws
                of Synthetech, as amended (incorporated by reference to the exhibits
                filed
                with Synthetech’s Annual Report on Form 10-K for the fiscal year ended
                March 31, 2005).Exhibit
                31.1
            Rule
                13a-14(a) Certification of Chief Executive
                Officer.Exhibit
                31.2
            Rule
                13a-14(a) Certification of Chief Financial
                Officer.Exhibit
                32.1
            Section
                1350 Certification of Chief Executive
                Officer.Exhibit
                32.2
            Section
                1350 Certification of Chief Financial
                Officer











**34**
 **Index**




**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, 2006
            By:
                /s/ Daniel T.
                Fagan
              Daniel
                T. Fagan
              Chairman
                & Chief Executive OfficerDate:November
                13, 2006
            By:
                /s/ Gary A.
                Weber
              Gary
                A. Weber
              Vice
                President Finance &
              Chief
                Financial Officer