**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM10-Q**
| **x**                                                                                                                                                                                                                    | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                               | ** ** | ** **                                                                                               |
| **For the  Quarterly Period Ended March 31, 2007**                                                                                                                                                                       |
| ** **                                                                                                                                                                                                               | ** ** | ** **                                                                                               |
| **o**                                                                                                                                                                                                                    | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                               | ** ** | ** **                                                                                               |
| **For the transition period from               to               ** |

 

**Commissionfile number:  0-25323**

**ALBANY MOLECULAR RESEARCH,INC.**

(Exact name of registrant as specified in its charter)

| **DELAWARE**                     |   | **14-1742717**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

**21 Corporate Circle**

**PO Box 15098**

**Albany, New York 12212-5098**

(Address of principal executive offices)

**(518) 464-0279**

(Registrant’s telephone number, includingarea code)

**N/A**

(Former name, former address and formerfiscal year, if changed since last report)

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.
| Yes |   | x |   | No |   | o |
|-----|--------|---|--------|----|--------|---|

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):
| Large accelerated filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |
|---------------------------|--------|----------------------|--------|--------------------------|

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).
| Yes |   | o |   | No |   | x |
|-----|--------|---|--------|----|--------|---|

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate.

| **Class**                     |   | **Outstanding at April  30, 2007** |
|-------------------------------|--------|----------------------------------------------|
| Common Stock,  $.01 par value |   | 34,929,492                                   |

 

 

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ALBANY MOLECULARRESEARCH, INC.

INDEX
| Part I.  |   | Financial Information |
|---------------|--------|-----------------------|
|          |   |                  |   |   |   |   |
|          |   | Item 1.               |   | Condensed  Consolidated Financial Statements (Unaudited) |   |   |
|          |   |                  |   |   |   |   |
|          |   |                  |   | Condensed  Consolidated Statements of Operations |   |   |
|          |   |                  |   | Condensed  Consolidated Balance Sheets |   |   |
|          |   |                  |   | Condensed  Consolidated Statements of Cash Flows |   |   |
|          |   |                  |   | Notes to Condensed Consolidated Financial Statements |   |   |
|          |   |                  |   |   |   |   |
|          |   | Item 2.               |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |   |
|          |   |                  |   |   |   |   |
|          |   | Item 3.               |   | Quantitative  and Qualitative Disclosures About Market Risk |   |   |
|          |   |                  |   |   |   |   |
|          |   | Item 4.               |   | Controls and  Procedures |   |   |
|          |   |                  |   |   |   |   |
| Part II. |   | Other Information     |   |   |
|          |   |                  |   |   |   |   |
|          |   | Item 1.               |   | Legal Proceedings |   |   |
|          |   |                  |   |   |   |   |
|          |   | Item  1A.             |   | Risk  Factors |   |   |
|          |   |                  |   |   |   |   |
|          |   | Item  6.              |   | Exhibits |   |   |
|          |   |                  |   |   |   |   |
| Signatures    |   |                  |

 

2

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**PART I — FINANCIALINFORMATION**

**Item 1.**    Condensed Consolidated Financial Statements(Unaudited)

**AlbanyMolecular Research, Inc.**

**Condensed Consolidated Statements of Operations**

**(unaudited)**
| ** **                                                                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(Dollars in thousands, except for per share data)** | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006** | ** ** |
|                                                                                     |       |                             |       |   |   |
| Contract revenue                                                                         |       | $                                | 41,231     |   | $ | 36,188 |   |
| Recurring royalties                                                                      |       | 7,146                            |       | 7,178 |   |
| Total revenue                                                                            |       | 48,377                           |       | 43,366 |   |
|                                                                                     |       |                             |       |   |   |
| Cost of contract  revenue                                                                |       | 32,687                           |       | 31,143 |   |
| Technology incentive  award                                                              |       | 713                              |       | 798 |   |
| Research and development                                                                 |       | 2,381                            |       | 2,711 |   |
| Selling, general and  administrative                                                     |       | 8,416                            |       | 6,761 |   |
| Restructuring                                                                            |       | 243                              |       | — |   |
| Total costs and  expenses                                                                |       | 44,440                           |       | 41,413 |   |
|                                                                                     |       |                             |       |   |   |
| Income from operations                                                                   |       | 3,937                            |       | 1,953 |   |
|                                                                                     |       |                             |       |   |   |
| Interest income, net                                                                     |       | 737                              |       | 721 |   |
| Other income, net                                                                        |       | 30                               |       | 32 |   |
|                                                                                     |       |                             |       |   |   |
| Income before income  tax expense                                                        |       | 4,704                            |       | 2,706 |   |
|                                                                                     |       |                             |       |   |   |
| Income tax expense                                                                       |       | 1,480                            |       | 812 |   |
|                                                                                     |       |                             |       |   |   |
| Net income                                                                               |       | $                                | 3,224      |   | $ | 1,894 |   |
|                                                                                     |       |                             |       |   |   |
| Basic earnings per  share                                                                |       | $                                | 0.10       |   | $ | 0.06 |   |
|                                                                                     |       |                             |       |   |   |
| Diluted earnings per  share                                                              |       | $                                | 0.10       |   | $ | 0.06 |   |

 

*See notes to unaudited condensed consolidatedfinancial statements.*

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**Albany MolecularResearch, Inc.**

**Condensed Consolidated Balance Sheets**

**(unaudited)**
| **(Dollars in thousands, except for per share data)**                                                              | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                            |       |                     |       |                        |       |
| Current assets:                                                                                                                                       |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                            |       | $                        | 26,322     |                        | $          | 26,124 |   |
| Investment securities,  available-for-sale                                                                                                            |       | 83,155                   |       | 81,040                      |       |
| Accounts receivable,  net                                                                                                                             |       | 32,372                   |       | 34,747                      |       |
| Royalty income  receivable                                                                                                                            |       | 7,281                    |       | 6,225                       |       |
| Inventory                                                                                                                                             |       | 22,918                   |       | 22,644                      |       |
| Prepaid expenses and  other current assets                                                                                                            |       | 6,805                    |       | 5,615                       |       |
| Deferred income taxes                                                                                                                                 |       | 4,279                    |       | 4,725                       |       |
| Property and equipment  held for sale                                                                                                                 |       | —                   |       | 1,500                       |       |
| Total current  assets                                                                                                                                 |       | 183,132                  |       | 182,620                     |       |
|                                                                                                                                                  |       |                     |       |                        |       |
| Property and equipment,  net                                                                                                                          |       | 152,735                  |       | 153,202                     |       |
|                                                                                                                                                  |       |                     |       |                        |       |
| Goodwill                                                                                                                                              |       | 35,040                   |       | 35,811                      |       |
| Intangible assets and  patents, net                                                                                                                   |       | 2,402                    |       | 2,101                       |       |
| Equity investment in  unconsolidated affiliates                                                                                                       |       | 956                      |       | 956                         |       |
| Other assets                                                                                                                                          |       | 926                      |       | 803                         |       |
| Total assets                                                                                                                                          |       | $                        | 375,191    |                        | $          | 375,493 |   |
| ** **                                                                                                                                            |       |                     |       |                        |       |
| **Liabilities and Stockholders’  Equity**                                                                                                        |       |                     |       |                        |       |
| Current liabilities:                                                                                                                                  |       |                     |       |                        |       |
| Accounts payable and accrued  expenses                                                                                                                |       | $                        | 12,969     |                        | $          | 17,790 |   |
| Deferred revenue                                                                                                                                      |       | 7,927                    |       | 8,285                       |       |
| Accrued pension  benefits                                                                                                                             |       | 639                      |       | 639                         |       |
| Income taxes payable                                                                                                                                  |       | 3,333                    |       | 1,433                       |       |
| Current installments of  long-term debt                                                                                                               |       | 4,541                    |       | 4,541                       |       |
| Total current  liabilities                                                                                                                            |       | 29,409                   |       | 32,688                      |       |
|                                                                                                                                                  |       |                     |       |                        |       |
| Long-term liabilities:                                                                                                                                |       |                     |       |                        |       |
| Long-term debt,  excluding current installments                                                                                                       |       | 12,919                   |       | 13,993                      |       |
| Deferred income taxes                                                                                                                                 |       | 10,262                   |       | 9,646                       |       |
| Pension and  postretirement benefits                                                                                                                  |       | 63                       |       | 475                         |       |
| Environmental  liabilities                                                                                                                            |       | 191                      |       | 236                         |       |
| Total  liabilities                                                                                                                                    |       | 52,844                   |       | 57,038                      |       |
|                                                                                                                                                  |       |                     |       |                        |       |
| Commitments and  contingencies                                                                                                                        |       |                     |       |                        |       |
|                                                                                                                                                  |       |                     |       |                        |       |
| Stockholders’ equity:                                                                                                                            |       |                     |       |                        |       |
| Common stock, $0.01 par  value, 100,000 shares authorized, 34,922 shares issued at March 31, 2007  and 34,749 shares issued at December 31, 2006 |       | 349                      |       | 347                         |       |
| Additional paid-in  capital                                                                                                                           |       | 193,629                  |       | 193,127                     |       |
| Retained earnings                                                                                                                                     |       | 164,544                  |       | 161,320                     |       |
| Accumulated other  comprehensive income, net                                                                                                          |       | 996                      |       | 832                         |       |
|                                                                                                                                                  |       | 359,518                  |       | 355,626                     |       |
| Less, treasury shares  at cost, 2,077 shares                                                                                                     |       | (37,171                  | )          | (37,171                     | )          |
| Total  stockholders’ equity                                                                                                                      |       | 322,347                  |       | 318,455                     |       |
| Total liabilities  and stockholders’ equity                                                                                                      |       | $                        | 375,191    |                        | $          | 375,493 |   |

 

*See notes to unaudited condensed consolidatedfinancial statements.*

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**AlbanyMolecular Research, Inc.**

**Condensed Consolidated Statements of Cash Flows**

**(unaudited)**
| ** **                                                                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                   | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006** | ** ** |
| ** **                                                                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Operating activities**                                                                     |       |                             |       |   |   |
| Net income                                                                                   |       | $                                | 3,224      |   | $ | 1,894 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                             |       |   |   |
| Depreciation and  amortization                                                               |       | 4,134                            |       | 3,676 |   |
| Allowance for  bad debts                                                                     |       | —                           |       | 32 |   |
| Provision for  obsolete inventories                                                          |       | 607                              |       | 692 |   |
| Stock-based  compensation expense                                                            |       | 314                              |       | 213 |   |
| Gain on disposal  of property, plant and equipment                                           |       | (32                              | )          | — |   |
| Deferred income  tax expense                                                                 |       | 1,063                            |       | 265 |   |
|                                                                                         |       |                             |       |   |   |
| (Increase) decrease in  operating assets, net of business combination:                       |       |                             |       |   |   |
| Accounts  receivable                                                                         |       | 2,375                            |       | 331 |   |
| Royalty income  receivable                                                                   |       | (1,056                           | )          | (675 | ) |
| Inventory,  prepaid expenses and other assets                                                |       | (2,449                           | )          | (44 | ) |
| (Decrease) increase in  operating liabilities, net of effects of acquisition:                |       |                             |       |   |   |
| Accounts payable  and accrued expenses                                                       |       | (4,439                           | )          | (2,820 | ) |
| Deferred revenue                                                                             |       | (358                             | )          | (2,096 | ) |
| Income tax  payable                                                                          |       | 1,900                            |       | (4,194 | ) |
| Other long-term  liabilities                                                                 |       | (45                              | )          | — |   |
| Pension and  postretirement benefits                                                         |       | (401                             | )          | (476 | ) |
| Net cash provided by  (used in) operating activities                                         |       | 4,837                            |       | (3,202 | ) |
|                                                                                         |       |                             |       |   |   |
| **Investing activities**                                                                     |       |                             |       |   |   |
| Net purchases of  investment securities                                                      |       | (21,747                          | )          | (41,880 | ) |
| Proceeds from  maturities of investment securities                                           |       | 19,623                           |       | 51,130 |   |
| Purchase of  business, net of cash acquired                                                  |       | —                           |       | (11,219 | ) |
| Purchases of  property and equipment                                                         |       | (3,217                           | )          | (4,793 | ) |
| Proceeds from  disposal of property, plant and equipment                                     |       | 1,515                            |       | — |   |
| Payments for  patent applications and other costs                                            |       | (83                              | )          | (23 | ) |
| Net cash used in  investing activities                                                       |       | (3,909                           | )          | (6,785 | ) |
|                                                                                         |       |                             |       |   |   |
| **Financing activities**                                                                     |       |                             |       |   |   |
| Principal  payments on long-term debt                                                        |       | (1,074                           | )          | (1,071 | ) |
| Proceeds from  sale of common stock                                                          |       | 188                              |       | 200 |   |
| Net cash used in  financing activities                                                       |       | (886                             | )          | (871 | ) |
|                                                                                         |       |                             |       |   |   |
| Effect of exchange rate  changes on cash flows                                               |       | 156                              |       | 14 |   |
|                                                                                         |       |                             |       |   |   |
| Increase (decrease) in  cash and cash equivalents                                            |       | 198                              |       | (10,844 | ) |
|                                                                                         |       |                             |       |   |   |
| Cash and cash  equivalents at beginning of period                                            |       | 26,124                           |       | 27,606 |   |
|                                                                                         |       |                             |       |   |   |
| Cash and cash  equivalents at end of period                                                  |       | $                                | 26,322     |   | $ | 16,762 |   |

 

*See notesto unaudited condensed consolidated financial statements.*

5

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**Note 1 — Summary of Operations and SignificantAccounting Policies**

(Allamounts in thousands, except per share amounts, unless otherwise noted)

**Nature of Business and Operations**

AlbanyMolecular Research, Inc. (the “Company”) provides scientific services, productsand technologies that improve quality of life. The Company’s core businessconsists of a fee-for service contract services platform encompassing drugdiscovery, development and manufacturing and a separate, stand-alone researchand development division comprising proprietary technologies, internal drugdiscovery and bundled capabilities designed for more collaborativerelationships. With locations in the U.S., Europe, and Asia, the Companyprovides customers with a range of services and cost models.

**Basis ofPresentation**

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with U.S. generally accepted accounting principles forinterim financial information and with the instructions to Form 10-Q and Rule10-01 of Regulation S-X. In accordance with Rule 10-01, the unaudited condensedconsolidated financial statements do not include all of the information andfootnotes required by U.S. generally accepted accounting principles forcomplete consolidated financial statements. The year-end condensed consolidatedbalance sheet data was derived from audited financial statements but does notinclude all disclosures required by U.S. generally accepted accountingprinciples. In the opinion of management, all adjustments (consisting of normalrecurring accruals and adjustments) considered necessary for a fair statementof the results for the interim period have been included. Operating results forthe three months ended March 31, 2007 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2007. Theaccompanying unaudited condensed consolidated financial statements should beread in conjunction with the audited consolidated financial statements andnotes thereto included in our Annual Report on Form 10-K for the year endedDecember 31, 2006.

Theaccompanying unaudited condensed consolidated financial statements include theaccounts of Albany Molecular Research, Inc. and its wholly-owned subsidiaries.All intercompany balances and transactions have been eliminated duringconsolidation. Assets and liabilities of non-U.S. operations are translated atperiod-end rates of exchange, and the statements of operations are translatedat the average rates of exchange for the period. Gains or losses resulting fromtranslating non-U.S. currency financial statements are recorded in accumulatedother comprehensive income in the accompanying unaudited condensed consolidatedbalance sheets.

**Use ofManagement Estimates**

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, and disclosures of contingentassets and liabilities, at the date of the financial statements, and thereported amounts of revenues and expenses during the reporting period. Actualresults can vary from these estimates.

**ContractRevenue Recognition**

TheCompany’s contract revenue consists primarily of fees earned under contractswith third-party customers and reimbursed expenses under such contracts. TheCompany also seeks to include provisions in certain contracts which contain acombination of up-front licensing fees, milestone and royalty payments shouldthe Company’s proprietary technology and expertise lead to the discovery of newproducts that reach the market. Reimbursed expenses consist of chemicals andother project specific costs. Generally, the Company’s contracts may be terminatedby the customer upon 30 days’ to one year’s prior notice, depending on thesize of the contract. The Company analyzes its agreements to determine whetherthe elements can be separated and accounted for individually or as a singleunit of accounting in accordance with EITF No. 00-21, “Revenue Arrangements with MultipleDeliverables,” and SAB 104, “RevenueRecognition”. Allocation of revenue to individual elements which qualifyfor separate accounting is based on the estimated fair value of the respectiveelements.

TheCompany generates contract revenue on the following basis:

*Full-time Equivalent (FTE).*An FTE agreementestablishes the number of Company employees contracted for a project or aseries of projects, the duration of the contract period, the price per FTE,plus an allowance for chemicals and other project specific costs, which may ormay not be incorporated in the FTE rate. FTE contracts can run in one monthincrements, but typically have terms of six months or longer. FTE contracts typicallyprovide for annual adjustments in billing rates for the scientists assigned tothe contract.

6

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Thesecontracts involve the Company’s scientists providing services on a “bestefforts” basis on a project which may involve a research component with a timeframeor outcome that has some level of unpredictability. There are no fixeddeliverables that must be met for payment as part of these services. As such,the Company recognizes revenue under FTE contracts on a monthly basis asservices are performed according to the terms of the contract.

*Time and Materials*. Under a time and materials contract the Company chargescustomers an hourly rate plus reimbursement for chemicals and other projectspecific costs. The Company recognizes revenue for time and material contractsbased on the number of hours devoted to the project multiplied by the customer’sbilling rate plus other project specific costs incurred.

*Fixed-Fee*. Undera fixed-fee contract the Company charges a fixed agreed upon amount for adeliverable. Fixed-fee contracts have fixed deliverables upon completion of theproject. Typically, the Company recognizes revenue for fixed-fee contractsafter projects are completed, delivery is made and title transfers to thecustomer and collection is reasonably assured. In certain instances, theCompany’s customers request that the Company retain materials produced uponcompletion of the project due to the fact that the customer does not have aqualified facility to store those materials. In these instances, the revenuerecognition process is considered complete when project documents (batchrecords, Certificates of Analysis, etc.) have been delivered to the customerand payment has been collected.

*Up-Front License Fees, Milestone and Royalty Revenue***.**The Company recognizes revenue fromup-front non-refundable licensing fees on a straight-line basis over the periodof the underlying project. The Company will recognize revenue arising from asubstantive milestone payment upon the successful achievement of the event, andthe resolution of any uncertainties or contingencies regarding potentialcollection of the related payment, or if appropriate over the remaining term ofthe agreement.

*Recurring Royalty Revenue Recognition***.** Recurring royalties consist of royalties under a license agreement withSanofi-Aventis based on the worldwide sales of fexofenadine HCl, marketed asAllegra in the Americas and Telfast elsewhere, as well as on sales ofSanofi-Aventis’ authorized generics. The Company records royalty revenue in theperiod in which the sales of Allegra/Telfast occur, because we can reasonablyestimate such royalties. Royalty payments from Sanofi-Aventis are due within45 days after each calendar quarter and are determined based on sales ofAllegra/Telfast in that quarter.

**Long-livedAssets**

In accordance with the provisions of SFAS No. 144,**“**Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), the Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors the Company considers important which could trigger an impairment review include, among others, the following:

·                  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 theCompany determines that the carrying value of long-lived assets may not berecoverable, based upon the existence of one or more of the above indicators ofimpairment, the Company compares the carrying value of the asset group to theundiscounted cash flows expected to be generated by the asset group. If thecarrying value exceeds the undiscounted cash flows an impairment charge isrecorded. An impairment charge is recognized to the extent that the carryingamount of the asset group exceeds their fair value and will reduce only thecarrying amounts of the long-lived assets. The Company utilizes the assistanceof an independent valuation firm in determining the fair values.

**Goodwill**

In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), the Company performs an annual****assessment of the carrying value of goodwill for potential impairment (or on an interim basis if certain triggering events occur). A determination of impairment is made based upon the estimated discounted future cash flows of the operations associated with the related reporting unit. If goodwill is determined to be impaired in the future the Company would be required to record a charge to its results of operations. Factors the Company considers important which could result in an impairment include the following:

7

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·              significant underperformance relative to historical or projected future operating results;

·              significant changes in the mannerof our use of the acquired assets or the strategy for overall business;

·              significant negative industry oreconomic trends; and

·              market capitalization relative tonet book value.

TheCompany performed the annual goodwill assessment for its reporting units duringthe third quarter of 2006. Based on the results of these assessments, nogoodwill impairment was identified.  Ifmanagement’s expectations of future operating results change, or if there arechanges to other assumptions, the estimate of the fair value of the Company’sreporting units could change significantly. Such a change could result ingoodwill impairment charges in future periods, which could have a significantimpact on the Company’s consolidated financial statements. Total goodwillrecorded on the Company’s unaudited condensed consolidated balance sheet atMarch 31, 2007 was $35,040 including $23,060 of goodwill associated with theCompany’s acquisition of AMRI Rensselaer (formerly known as Organichem, Inc.)and $9,293 of goodwill associated with the Company’s acquisition of ComGenexKutato-Fejleszto Rt.

**Stock Compensation**

Effective January 1, 2006, the Company adopted SFASNo. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123 (R)”), whichamends SFAS No. 123 and supersedes APB No. 25**inestablishing standards for the accounting for transactions in which an entityexchanges its equity instruments for goods or services, as well as transactionsin which an entity incurs liabilities in exchange for goods or services thatare based on the fair value of the entity’s equity instruments or that may besettled by the issuance of those equity instruments. This Statement requiresthat the cost resulting from all share-based payment transactions be recognizedin the financial statements based on the fair value of the share-based payment.This Statement establishes fair value as the measurement objective inaccounting for share-based payment transactions with employees, except forequity instruments held by employee share ownership plans. As allowed underSFAS No. 123 (R), the Company elected the modified prospective method ofadoption, under which compensation cost is recognized in the financialstatements beginning with the effective date of SFAS No. 123 (R) for allshare-based payments granted after that date, and for all unvested awardsgranted prior to the effective date of SFAS No. 123 (R). Accordingly, priorperiod amounts have not been restated.

**Note 2 —Business Combination**

On February 28, 2006, theCompany, through a wholly-owned subsidiary, acquired all of the outstandingshares of ComGenex Kutato-Fejleszto Rt. (“ComGenex”), a privately held drugdiscovery service company located in Budapest, Hungary.

Theaggregate purchase price of $11,930 included cash payments totaling $11,160 andcapitalized costs related to the acquisition, primarily professional fees, of$770. The purchase price may be adjusted based upon the final release of purchasefunds currently held in escrow in accordance with the provisions of thepurchase agreement. The results of ComGenex’s operations were included in theunaudited condensed consolidated statement of income for the three months endedMarch 31, 2006 from the date of acquisition.

The followingtable summarizes the final allocation of the purchase price to the estimatedfair value of the net assets acquired.  Based on final determination of the purchase price and the completion ofthe Company’s valuation of the acquired assets and liabilities of ComGenex,there have been certain reclasses from the purchase price allocation disclosedin the Company’s Form 10-K for the period ended December 31, 2006.

8

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|                                            | ** ** | **February 28,  2006** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|
| **Assets Acquired**                        | ** ** | ** **                  | ** ** |
| Cash and cash  equivalents                 |       | $                           | 323        |   |
| Accounts  receivable, net                  |       | 1,002                       |       |
| Inventory                                  |       | 121                         |       |
| Prepaid expenses  and other current assets |       | 1,141                       |       |
| Property and  equipment, net               |       | 1,729                       |       |
| Goodwill                                   |       | 9,293                       |       |
| Intangible  assets and patents, net        |       | 1,104                       |       |
| Other assets                               |       | 21                          |       |
| Total assets acquired                      |       | $                           | 14,734     |   |
|                                       |       |                        |       |
| **Liabilities Assumed**                    | ** ** | ** **                  | ** ** |
| Accounts payable  and accrued expenses     |       | $                           | 1,545      |   |
| Deferred revenue                           |       | 1,119                       |       |
| Deferred income  taxes                     |       | 78                          |       |
| Other long term  liabilities               |       | 62                          |       |
| Total liabilities assumed                  |       | $                           | 2,804      |   |
|                                       |       |                        |       |
| Net assets  acquired                       |       | $                           | 11,930     |   |

 

Pro forma financialinformation for the three month period ended March 31, 2006 as if the ComGenexacquisition had been completed as of January 1, 2006 has been excluded due tothe immateriality of the operating results of ComGenex in relation to theCompany’s consolidated operating results as a whole.

**Note 3 — Earnings Per Share**

Theshares used in the computation of the Company’s basic and diluted earnings pershare are as follows:
|                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                     | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Weighted average  common shares outstanding |       | 32,271                                           |       | 32,142 |   |
| Dilutive effect  of stock options           |       | 106                                              |       | 182 |   |
| Dilutive effect  of restricted stock        |       | 95                                               |       | 68 |   |
| Weighted average common  shares outstanding |       | 32,472                                           |       | 32,392 |   |

 

The Company has excludedcertain outstanding stock options from the calculation of diluted earnings pershare for the three months ended March 31, 2007 and 2006 because the exerciseprice was greater than the average market price of the Company’s common sharesduring that period, and as such, these options would be anti-dilutive. Theweighted average number of anti-dilutive options and restricted sharesoutstanding (before the effects of the treasury stock method) was 2,005 and1,936 for the three months ended March 31, 2007 and 2006, respectively.  These amounts are not included in thecalculation of weighted average common shares outstanding.

**Note4 — Inventory**

Inventoryconsisted of the following at March 31, 2007 and December 31, 2006:
|                                             | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials                               |       | $                        | 7,838      |                        | $          | 7,525 |   |
| Work in process                             |       | 2,818                    |       | 1,914                       |       |
| Finished goods                              |       | 11,936                   |       | 12,858                      |       |
| Libraries, net  of accumulated amortization |       | 326                      |       | 347                         |       |
| Total                                       |       | $                        | 22,918     |                        | $          | 22,644 |   |

 

9

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**Note 5 — Restructuring**

***LargeScale Manufacturing Facility***

OnNovember 9, 2006, the Company announced plans to initiate a restructuring ofthe Company’s LSM business segment. Consistent with the Company’s continued strategy of realigning its LSMsegment toward a greater focus on manufacturing clinical trial materials withstrong commercial potential, the goals of the restructuring plan are tostrengthen the Company’s competitiveness in this area and reduce operatingcosts by eliminating overlap in business processes, organization and projectprocess flow, as well as leveraging existing resources and assets.  The restructuring plan includes a reductionof workforce in this segment by approximately 40 employees orapproximately 15%, as well as reductions of non-essential operating expenses,raw material costs and future capital expenditure activities.  The Company has estimated that total largescale costs will be reduced by $5,000 annually as a result of thisrestructuring.  The Company recorded arestructuring charge of approximately $2,400 in the fourth quarter of 2006,including a non-cash asset disposal charge of approximately $1,600, and othercharges of approximately $800 consisting primarily of terminationbenefits.  The Company recorded additionalrestructuring charges of $249 in the first quarter of 2007, consisting ofadditional termination benefits.

The large scalerestructuring costs are included under the caption restructuring charge in theconsolidated statement of income during 2007 and 2006 and the restructuringliabilities are included in accounts payable and accrued expenses on theconsolidated balance sheet at March 31, 2007 and December 31, 2006.

Thefollowing table displays the restructuring activity and liability balances:
|                       | ** ** | **Balance at  January 1,  2007** | ** ** | **Charges** | ** ** | **Incurred  Amounts** | ** ** | **Balance at  March 31,  2007** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|-------------|------------|-----------------------|------------|-------------------------------------------|------------|
| ** **            | ** ** | **(in 000’s)**                   | ** ** |
| Termination  benefits |       | $                                          | 682        |        | 249        |                  | (345       | )                                         | $          | 586 |   |
| Asset disposal  costs |       | 382                                        |       | —      |       | (382                  | )          | —                                    |       |
| Total                 |       | $                                          | 1,064      |        | 249        |                  | $          | (727                                      | )          | $ | 586 |   |
|                       |            |                                            |            |             |            |                       |            |                                           |            |  |  |  |

 

Termination benefitsrelate to severance packages, outplacement services and career counseling foremployees affected by the restructuring. Asset disposal costs relate primarilyto the carrying value of underutilized assets that were identified for disposalin conjunction with the restructuring plan.

The large scalemanufacturing restructuring activity was recorded in the LSM operating segment.The net cash outflow related to the large scale manufacturing restructuring forthe three months ended March 31, 2007 was $345. Anticipated cash outflows related to the large scale manufacturingrestructuring for the remainder of 2007 are $586, which primarily consists ofthe payment of termination benefits.

***Mt.Prospect Research Center***

On May 4, 2004 theCompany announced its plan to consolidate operations by relocating its Mt.Prospect facility operations to its facilities in New York. The Company’sproprietary biocatalysis technology platform, drug metabolism screening,research fermentation and chemical development technologies in Mt. Prospecthave been relocated to New York and continue to be fully integrated with theCompany’s drug discovery and development technologies. The restructuringresulted in the closure of the Mt. Prospect Research Center in the fourthquarter of 2004. The consolidation was initiated as a result of a lack ofanticipated growth in the Company’s chemical development services at thefacility.

During the fourth quarterof 2006, the Company secured a letter of intent related to the potential saleof the Mt. Prospect facility for approximately $1,500.  As a result, the Company recorded anadditional impairment charge of approximately $500 million in the fourthquarter of 2006 to reduce the carrying amount of these assets to reflect thesales price per the letter of intent less estimated selling costs.  The Company completed the sale of thefacility in March 2007 for $1,500.

At December 31, 2006, theCompany had recorded restructuring liabilities totaling $190 related to assetdisposal costs, including brokerage commissions, legal fees, and marketingexpenses associated with the planned sale of the Mt. Prospect Research Centerfacility. The following table displays the restructuring activity and liabilitybalances:

10

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|                       | ** ** | ** **                    | ** ** | ** **      | ** ** | ** **   | ** ** | **Balance at** | ** ** |
|-----------------------|------------|-------------------------------|------------|-----------------|------------|--------------|------------|---------------------|------------|
| ** **            | ** ** | **Balance at**           | ** ** | ** **      | ** ** | ** **   | ** ** | **March 31,**  | ** ** |
| ** **            | ** ** | **January 1, 2007** | ** ** | **Adjustments** | ** ** | **Payments** | ** ** | **2007**            | ** ** |
| Asset disposal  costs |       | $                             | 190        |            | (6         | )            | (184       | )                   | —     |   |
|                       |            |                               |            |                 |            |              |            |                     |            |  |

 

**Note 6 —Goodwill and Intangible Assets**

The carrying amounts ofgoodwill, by the Company’s Discovery/Development/Small Scale Manufacturing (“DDS”)and Large Scale Manufacturing (“LSM”) operating segments, as of March 31, 2007and December 31, 2006 are as follows:
|                            | ** ** | **DDS**    | ** ** | **LSM**    | ** ** | **Total**  | ** ** |
|----------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **March  31, 2007**        |       | $          | 11,980     |       | $          | 23,060     |       | $ | 35,040 |   |
|                       |       |       |       |       |       |       |       |
| **December 31, 2006** |       | $          | 12,751     |       | $          | 23,060     |       | $ | 35,811 |   |

 

The decrease ingoodwill within the DDS segment from December 31, 2006 to March 31, 2007 isrelated to the final valuation adjustments for the Company’s acquisition ofComGenex described in Note 2.

The components ofintangible assets are as follows:
|                               | ** ** | **Cost**   | ** ** | **Accumulated  Amortization** | ** ** | **Net**    | ** ** | **Amortization  Period** | ** ** |
|-------------------------------|------------|------------|------------|-------------------------------|------------|------------|------------|--------------------------|------------|
| **March  31, 2007**           | ** ** | ** ** | ** ** | ** **                    | ** ** | ** ** | ** ** | ** **               | ** ** |
| Patents and  Licensing Rights |       | $          | 2,583      |                          | $          | (763       | )          | $                        | 1,820      |   | 2-16 years |   |
| Other                         |       | 941        |       | (359                          | )          | 582        |       | 18-24 months             |       |
| Total                         |       | $          | 3,524      |                          | $          | (1,122     | )          | $                        | 2,402      |   |   |   |
|                          |       |       |       |                          |       |       |       |                     |       |
| **December 31,  2006**   |       |       |       |                          |       |       |       |                     |       |
| Patents and  Licensing Rights |       | $          | 2,492      |                          | $          | (727       | )          | $                        | 1,765      |   | 2-16 years |   |
| Other                         |       | 629        |       | (293                          | )          | 336        |       | 18-24 months             |       |
| Total                         |       | $          | 3,121      |                          | $          | (1,020     | )          | $                        | 2,101      |   |   |   |

 

Amortizationexpense related to intangible assets was $102 and $28 for the three monthsended March 31, 2007 and 2006, respectively.

Thefollowing chart represents estimated future annual amortization expense relatedto intangible assets:
| Year ending December 31, | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|
| 2007 (remaining)                        |       | $          | 551        |   |
| 2008                                    |       | 430        |       |
| 2009                                    |       | 186        |       |
| 2010                                    |       | 139        |       |
| 2011                                    |       | 139        |       |
| Thereafter                              |       | 957        |       |
|                                         |            |            |            |  |

 

**Note7 -****Defined Benefit andPostretirement Welfare Plan**

AMRIRensselaer (formerly known as Organichem Corporation) previously providedretirement benefits under two non-contributory defined benefit plans and anon-contributory, unfunded post-retirement welfare plan. Future benefits underthe defined benefit plans and for salaried participants in the post-retirementwelfare plan have been frozen.

11

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***Componentsof Net Periodic Benefit Cost***
|                                     | ** ** | **Pension   Benefits**                            | ** ** | **Postretirement   Benefits**                     | ** ** |
|-------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                          | ** ** | **Three Months   Ended March 31,** | ** ** | **Three Months   Ended March 31,** | ** ** |
| ** **                          | ** ** | **2007**                                               | ** ** | **2006**                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                |       |                                                   |       |                                                   |       |   |   |   |   |
| Service cost                        |       | $                                                      | —     |                                                   | $          | — |   | $ | 19 |   | $ | 17 |   |
| Interest cost                       |       | 301                                                    |       | 294                                                    |       | 9 |   | 7 |   |
| Expected return  on plan assets     |       | (366                                                   | )          | (334                                                   | )          | — |   | — |   |
| Recognized net  loss                |       | 9                                                      |       | 3                                                      |       | 2 |   | 2 |   |
| Net periodic  benefit (income) cost |       | $                                                      | (56        | )                                                      | $          | (12 | ) | $ | 30 |   | $ | 42 |   |
| **Recognized  in AOCI**             |       |                                                   |       |                                                   |       |   |   |   |   |
| Prior service  cost                 |       | —                                                 |       |                                                   |       | — |   |   |   |
| Net actuarial  (gain) loss          |       | 9                                                      |       |                                                   |       | 2 |   |   |   |
| Total recognized in  AOCI           |       | 9                                                      |       |                                                   |       | 2 |   |   |   |

 

***EmployerContributions***

TheCompany previously disclosed in its consolidated financial statements for theyear ended December 31, 2006 that it expected to contribute $639 to itspension plan in 2007.  As of March 31, 2007, $375 in contributions havebeen made.  The Company plans on making additional contributions of $264during 2007.

**Note8 — Share-Based Payments**

During the three monthsended March 31, 2007 and 2006, the Company recognized total share based compensationcost, net of tax, of $235 and $149, respectively.

The Company grants share-based payments, includingrestricted shares, under its 1998 Stock Option and Incentive Plan, as well asits 1998 Employee Stock Purchase Plan.

***1998 Stock Option and IncentivePlan***

**Restricted Stock**

A summary of unvested restricted stock activity as ofMarch 31, 2007 and changes during the three months then ended is presentedbelow:
|                                 | ** ** | **Number of  Shares** | ** ** | **Weighted  Average Grant Date  Fair Value** | ** ** |
|---------------------------------|------------|----------------------------|------------|-------------------------------------------------------------|------------|
| Outstanding,  December 31, 2006 |       | 419                        |       | $                                                           | 9.40       |   |
| Granted                         |       | 164                        |       | $                                                           | 9.42       |   |
| Vested                          |       | —                     |       | $                                                           | —     |   |
| Forfeited                       |       | (16                        | )          | $                                                           | 9.09       |   |
| Outstanding, March 31,  2007    |       | 567                        |       | $                                                           | 9.42       |   |

 

The weighted average fair value of restricted sharesgranted during the three months ended March 31, 2007 and 2006 were $9.42 and$8.45, respectively.  As of March 31,2007, there was $4,229 of total unrecognized compensation cost related tonon-vested restricted shares. That cost is expected to be recognized over aweighted-average period of 3.94 years. No restricted shares vested during the three months ended March 31,2007.

**Stock Options**

The fair value of each stock option award is estimatedat the date of grant using the Black-Scholes valuation model based on thefollowing assumptions: 

12

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|                         | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------|------------|----------------------------------------------------|------------|
| ** **              | ** ** | **March 31, 2007**                       | ** ** |
| Expected life in  years |       | 5                                                  |       |
| Interest rate           |       | 4.65                                               | %          |
| Volatility              |       | 38                                                 | %          |
| Dividend yield          |       | —                                             |       |

 

A summary of stock optionactivity under the Company’s stock option plan as of March 31, 2007 and changesduring the three month period then ended is presented below:
| ** **                           | ** ** | **Number of  Shares** | ** ** | **Weighted  Exercise  Price** | ** ** | **Weighted Average  Remaining  Contractual Term  (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|--------------------------------------|------------|----------------------------|------------|-------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding,  January 1, 2007        |       | 2,171                      |       | $                             | 20.12      |                                                                 |       |                            |       |   |
| Granted                              |       | 61                         |       | $                             | 9.34       |                                                                 |       |                            |       |   |
| Exercised                            |       | (9                         | )          | $                             | 1.67       |                                                                 |       |                            |       |   |
| Forfeited                            |       | (50                        | )          | $                             | 21.18      |                                                                 |       |                            |       |   |
| Expired                              |       | (1                         | )          | $                             | 1.53       |                                                                 |       |                            |       |   |
| Outstanding, March 31, 2007          |       | 2,172                      |       | $                             | 19.91      |                                                                 | 5.1        |                            | $          | 1,062 |   |
| Options  exercisable, March 31, 2007 |       | 1,917                      |       | $                             | 21.12      |                                                                 | 4.6        |                            | $          | 1,032 |   |

 

As of March 31, 2007 there was $1,006 of totalunrecognized compensation cost related to non-vested stock options. That costis expected to be recognized over a weighted-average period of 2.47 years.

There were no stock options granted during the quarterended March 31, 2006.

***Employee Stock Purchase Plan***

During the three months ended March 31, 2007 and 2006,19 and 18 shares, respectively, were issued under the Purchase Plan.  During the three months ended March 31, 2007and 2006, cash received from stock option exercises and employee stock purchaseplan purchases was $188 and $200, respectively. The actual tax benefit realized for the tax deductions from stock optionexercises was $0 during the three months ended March 31, 2007 and 2006.

**Note 9 —Operating Segment Data**

The Company has organized its sales, marketing and productionactivities into the Discovery/Development/Small Scale Manufacturing (DDS) andLarge Scale Manufacturing (LSM) segments based on the criteria set forth inSFAS No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation”. The Company’s management relies on an internal managementaccounting system to report results of the segments. The system includesrevenue and cost information by segment. The Company’s management makesfinancial decisions and allocates resources based on the information itreceives from this internal system.

DDS includes activities such as drug lead discovery, optimization, drugdevelopment and small scale commercial manufacturing. LSM includes pilot tocommercial scale manufacturing of active pharmaceutical ingredients andintermediates and high potency and controlled substance manufacturing all ofwhich are in compliance with the Food and Drug Administration’s (FDA) currentGood Manufacturing Practices. Corporate activities include business developmentand administrative functions, as well as research and development costs thathave not been allocated to the operating segments.

13

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The following tablecontains earnings data by operating segment, reconciled to totals included inthe unaudited condensed consolidated financial statements:
| ** **                                    | ** ** | **Contract  Revenue** | ** ** | **Recurring  Royalty  Revenue** | ** ** | **Operating  (loss) income** | ** ** | **Depreciation  and  Amortization** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|---------------------------------|------------|-----------------------------------|------------|-------------------------------------|------------|
| **For the three months ended March 31, 2007** | ** ** | ** **            | ** ** | ** **                      | ** ** | ** **                        | ** ** | ** **                          | ** ** |
| DDS                                           |       | $                     | 20,210     |                            | $          | 7,146                             |       | $                                   | 11,946     |   | $ | 2,516 |   |
| LSM                                           |       | 21,021                |       | —                          |       | 2,782                             |       | 1,618                               |       |
| Corporate                                     |       | —                |       | —                          |       | (10,791                           | )          | —                              |       |
| Total                                         |       | $                     | 41,231     |                            | $          | 7,146                             |       | $                                   | 3,937      |   | $ | 4,134 |   |
|                                          |       |                  |       |                            |       |                              |       |                                |       |
| **For the three months ended March 31, 2006** | ** ** | ** **            | ** ** | ** **                      | ** ** | ** **                        | ** ** | ** **                          | ** ** |
| DDS                                           |       | $                     | 16,943     |                            | $          | 7,178                             |       | $                                   | 10,678     |   | $ | 2,168 |   |
| LSM                                           |       | 19,245                |       | —                          |       | 747                               |       | 1,508                               |       |
| Corporate                                     |       | —                |       | —                          |       | (9,472                            | )          | —                              |       |
| Total                                         |       | $                     | 36,188     |                            | $          | 7,178                             |       | $                                   | 1,953      |   | $ | 3,676 |   |

 

The followingtable summarizes other information by segment as of March 31, 2007:
| ** **                               | ** ** | **As of March 31, 2007** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|
| **(in thousands)**                  | ** ** | **DDS**                                      | ** ** | **LSM** | ** ** | **Total** | ** ** |
|                                     |       |                                         |       |   |   |   |   |
| Total assets                             |       | $                                            | 242,245    |   | $ | 132,946 |   | $ | 375,191 |   |
| Goodwill included in total assets        |       | 11,980                                       |       | 23,060 |   | 35,040 |   |
| Investments in unconsolidated affiliates |       | 956                                          |       | — |   | 956 |   |
| Capital  expenditures                    |       | 2,190                                        |       | 1,027 |   | 3,217 |   |
|                                          |            |                                              |            |  |  |  |  |  |  |  |

 

The followingtable summarizes other information by segment as of March 31, 2006:
| ** **                               | ** ** | **As of March 31, 2006** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|
| **(in thousands)**                  | ** ** | **DDS**                                      | ** ** | **LSM** | ** ** | **Total** | ** ** |
|                                     |       |                                         |       |   |   |   |   |
| Total assets                             |       | $                                            | 239,182    |   | $ | 134,376 |   | $ | 373,558 |   |
| Goodwill included in total assets        |       | 12,469                                       |       | 23,060 |   | 35,529 |   |
| Investments in unconsolidated affiliates |       | 956                                          |       | — |   | 956 |   |
| Capital  expenditures                    |       | 3,085                                        |       | 1,708 |   | 4,793 |   |
|                                          |            |                                              |            |  |  |  |  |  |  |  |

 

**Note10 — Financial Information by Customer Concentration and Geographic Area**

Totalcontract revenue from DDS’ three largest customers represented approximately8%, 5% and 5% of AMR’s total contract revenue for the three months ended March31, 2007, and 12%, 10% and 6% of total contract revenue for the three monthsended March 31, 2006.  Total contractrevenue from LSM’s largest customer, GE Healthcare (GE), represented 37% and56% of LSM’s total contract revenue for the three months ended March 31, 2007and 2006, respectively.  GE accounted forapproximately 19% and 30% of the Company’s total contract revenue for the threemonths ended March 31, 2007 and 2006, respectively

The Company’s total contract revenue for the three months ended March31, 2007 and 2006 was recognized from customers in the following geographicregions:
|               | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------|------------|--------------------------------------------------|------------|
| ** **    | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| United States |       | 68                                               | %          | 64 | % |
| Europe        |       | 26                                               |       | 34 |   |
| Other         |       | 6                                                |       | 2 |   |
|          |       |                                             |       |   |   |
| Total         |       | 100                                              | %          | 100 | % |

 

14

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**Note11 — Comprehensive Income**

Thefollowing table presents the components of the Company’s comprehensive incomefor the three months ended March 31, 2007 and 2006:
|                                                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| **(in thousands)**                                                   | ** ** | **2007**                                                   | ** ** | **2006** | ** ** |
| Net income                                                                |       | $                                                          | 3,224      |   | $ | 1,894 |   |
| Other comprehensive income (loss):                                        |       |                                                       |       |   |   |
| Change in unrealized  gain on available-for-sale securities, net of taxes |       | 23                                                         |       | 14 |   |
| Change in unrealized  (loss) gain on interest rate swap, net of taxes     |       | (26                                                        | )          | 17 |   |
| Foreign currency  translation gain                                        |       | 156                                                        |       | 14 |   |
| Net actuarial loss of  pension and postretirement benefits                |       | 11                                                         |       | — |   |
| Total comprehensive income                                                |       | $                                                          | 3,388      |   | $ | 1,939 |   |

 

**Note12 — Legal Proceedings**

The Company, from time totime, may be involved in various claims and legal proceedings arising in theordinary course of business. Except as noted below in regards to litigationrelating to Allegra, the Company is not currently a party to any such claims orproceedings which, if decided adversely to the Company, would eitherindividually or in the aggregate have a material adverse effect on the Company’sbusiness, financial condition, results of operations or cash flows.

AMR Technology, asubsidiary of the Company, along with Aventis Pharmaceuticals Inc., the U.S.pharmaceutical business of Sanofi-Aventis S.A., are involved in legalproceedings with several companies seeking to market or currently marketinggeneric versions of Allegra. Beginning in 2001, Barr Laboratories, Inc., ImpaxLaboratories, Inc., Mylan Pharmaceuticals, Inc., Teva Pharmaceuticals USA, Dr.Reddy’s Laboratories, Ltd./Dr. Reddy’s Laboratories, Inc., Ranbaxy LaboratoriesLtd./Ranbaxy Pharmaceuticals Inc., and Sandoz Inc. filed Abbreviated New DrugApplications (ANDAs) with the U.S. Food and Drug Administration, or FDA, toproduce and market generic versions of Allegra products.

In response to thefilings described above, beginning in 2001, Aventis Pharmaceuticals filedpatent infringement lawsuits against Barr Laboratories, Impax Laboratories,Mylan Pharmaceuticals, Teva Pharmaceuticals, Dr. Reddy’s Laboratories, RanbaxyLaboratories Ltd./Ranbaxy Pharmaceuticals Inc., and Sandoz. Each of thelawsuits was filed in the U.S. District Court in New Jersey and allegesinfringement of one or more patents owned by Aventis Pharmaceuticals. Inaddition, on November 14, 2006, Aventis filed a patent infringement suitagainst Teva Pharmaceuticals USA, Barr Laboratories, Inc. and BarrPharmaceuticals, Inc. in the Eastern District of Texas based on patents ownedby Aventis.  Further, beginning in March5, 2004, AMR Technology, along with Aventis Pharmaceuticals, filed suit in theU.S. District Court in New Jersey against Barr Laboratories, ImpaxLaboratories, Mylan Pharmaceuticals, Teva Pharmaceuticals, Dr. Reddy’sLaboratories, Amino Chemicals, Ltd., Ranbaxy Laboratories Ltd./RanbaxyPharmaceuticals Inc., DiPharma S.P.A., DiPharma Francis s.r.l., and Sandoz,asserting infringement of two of our U.S. patents that are exclusively licensedto Aventis Pharmaceuticals relating to Allegra and Allegra-D products.  On December 11, 2006, AMR Technology andSanofi-Aventis U.S. LLC, an affiliate of Aventis Pharmaceuticals, also filed apatent infringement lawsuit in the Republic of Italy against DiPharma Franciss.r.l. and DiPharma S.P.A. based on European Patent No. 703,902 which is ownedby AMR Technology and licensed to Sanofi-Aventis U.S. LLC.  In addition, on December 22, 2006, AMRTechnology filed a patent infringement lawsuit in Canada against NovopharmLtd., Teva Pharmaceutical Industries Ltd., Teva Pharmaceuticals USA, Inc.,DiPharma S.P.A. and DiPharma s.r.l. based on Canadian Patent No. 2,181,089. OnMarch 20, 2007, AMR Technology filed a patent infringement lawsuit in Australiaagainst Alphapharm Pty Ltd based on Australian Patent No. 699,799.

Aventis Pharmaceuticalsand AMR Technology have entered into covenants not to sue the defendants otherthan Novopharm, DiPharma S.P.A. and DiPharma Francis s.r.l., under U.S. PatentNo. 5,578,610, which patent has not been asserted in the litigation but which AventisPharmaceuticals exclusively licenses from us. However, we and AventisPharmaceuticals have agreed that Aventis Pharmaceuticals will continue to payroyalties to us based on that patent under our original license agreement withAventis Pharmaceuticals. Under our arrangements with Aventis Pharmaceuticals,we will receive royalties until expiration of the underlying patents (2013 forU.S. Patent No. 5,578,610 and 2015 for U.S. Patent No. 5,750,703) unless thepatents are earlier determined to be invalid.

Under applicable federallaw, marketing of an FDA-approved generic version of Allegra may not commenceuntil the earlier of a decision favorable to the generic challenger in thepatent litigation or 30 months after the date the patent infringement lawsuitwas filed. In general, the first generic filer is entitled to a 180-daymarketing exclusivity period upon FDA approval.

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On September 6, 2005,Barr Pharmaceuticals, Inc. and Teva Pharmaceuticals Industries Ltd. announcedthat they have entered into an agreement for the launch of FexofenadineHydrochloride 30 mg, 60 mg and 180 mg tablets, the generic version of Allegratablets in the United States. The launch of the generic product is consideredan “at-risk” launch due to the on-going litigation. This generic launch has hada material adverse impact on U.S. sales of Allegra by Sanofi-Aventis since thefourth quarter of 2005 and in turn, the royalties earned by the Company onthose sales. The launch has not had a material impact on non-U.S. sales ofAllegra to date.

On September 20, 2005,AMR Technology, along with Aventis Pharmaceuticals, filed a Motion forPreliminary Injunction in the U.S. District Court in New Jersey seeking toenjoin Barr Pharmaceuticals, Inc., Teva Pharmaceuticals Ltd., Ranbaxy Laboratories,Ltd. and Amino Chemicals, Ltd. from the sale of generic versions of Allegra inthe United States. On January 30, 2006, the U.S. District Court denied therequest by AMR Technology and Aventis Pharmaceuticals for a preliminaryinjunction. An appeal of that decision was taken to the U.S. Court of Appealsfor the Federal Circuit and, on November 8, 2006, the appellate courtaffirmed the District Court’s denial of a preliminary injunction. The FederalCircuit’s decisions on the preliminary injunction application is notdispositive of the merits of the claims being asserted as described above.

Subsequent to thepreliminary injunction proceeding in the District Court, Dr. Reddy’sLaboratories has engaged in an at-risk launch of generic fexofenadine products.

Should the Company beunsuccessful in defending these patents, the Company would continue toexperience a material decrease in operating cash flows and a material adverseeffect on our results of operations and financial condition.

**Note13 — Income Taxes**

EffectiveJanuary 1, 2007, the Company adopted Financial Accounting Standards BoardInterpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN48”). FIN 48 provides guidance on the accounting for uncertainty in income taxreporting, and prescribes a methodology for recognizing, reversing, andmeasuring the tax benefits of a tax position taken, or expected to be taken, ina tax return. The adoption of this new standard did not have a material impacton the Company’s financial statements. The Company had unrecognized taxbenefits (reserves) of $3,731 at January 1, 2007, of which $754related to accrued interest and penalties. In 2007, the majority of theseunrecognized tax benefits are classified as income taxes payable in thecondensed consolidated balance sheet.  Ifrecognized, the portion of liabilities for unrecognized tax benefits that woulddecrease the Company’s provision for income taxes and increase net income is $2,425.The impact on net income reflects the liabilities for unrecognized tax benefitsnet of certain deferred tax assets and the federal tax benefit of state incometax items.

In the firstquarter of 2007, the Company accrued an additional $38 of interest relatedto its uncertain tax positions, which is recorded as a component of the Company’sprovision for income taxes in the condensed consolidated statement ofoperations. At March 31, 2007, the Company had unrecognized tax benefitsof $3,769.

The Company filesFederal income tax returns, as well as multiple state and foreign jurisdictiontax returns. The Company’s federal income tax returns have been examined by theInternal Revenue Service through the year ended December 31, 2004.  All significant state and foreign mattershave been concluded for years through 1999. The Company does not believe it isreasonably possible to estimate the potential change in its unrecognized taxbenefit due to tax examinations that are currently underway.

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Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

**Forward-LookingStatements**

The following discussion of our results of operationsand financial condition should be read in conjunction with the accompanyingCondensed Consolidated Financial Statements and the Notes thereto includedwithin this report. This quarterly report on Form 10-Q contains “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. These statements may be identified by forward-looking words such as“may,” “could,” “should,” “would,” “will,” “intend,” “expect,” “anticipate,” “believe,”and “continue” or similar words and include, but are not limited to, statementsconcerning the Mount Prospect Research Center, pension and postretirementbenefit costs, GE Healthcare, the Company’s collaboration with BMS, theacquisition of ComGenex, future acquisitions, earnings, contract revenues,costs and margins, royalty revenues, patent protection and the ongoing Allegrapatent infringement litigation, Allegra royalty revenue, government regulation,retention and recruitment of employees, customer spending and business trends,foreign operations (including Singapore, India and Hungary), clinical supplymanufacturing, management’s strategic plans, the Company’s targeted workforcereduction and the timing of the forecasted savings from the implementation oflarge scale manufacturing restructuring, the expectation of improvedprofitability of large scale manufacturing, the goal of submitting anInvestigational New Drug Application to the FDA in 2007, drug discovery,product commercialization, license arrangements, research and developmentprojects and expenses, selling, general and administrative expenses, goodwillimpairment, competition and tax rates. The Company’s actual results may differmaterially from such forward-looking statements as a result of numerousfactors, some of which the Company may not be able to predict and may not be withinthe Company’s control. Factors that could cause such differences include, butare not limited to, those discussed in Part I, Item 1A, “Risk Factors”, of theCompany’s Annual Report on Form 10-K for the year ended December 31, 2006as filed with the Securities and Exchange Commission on March 15, 2007 andin Part II Item 1A, “RiskFactors,” in this Form 10-Q. All forward-looking statements are made asof the date of this report, and we do not undertake to update any suchforward-looking statements in the future. References to “we,” “us,” and “our,”refer to Albany Molecular Research, Inc. and its subsidiaries, taken as awhole.

**Strategyand Overview**

We provide scientific services, products and technologiesthat improve quality of life while delivering excellence, value and maximumreturn. Our core business consists of contract drug discovery, chemistry, andmanufacturing services.   We continue toexecute our long-term strategy to develop and grow a fully integrated globalplatform from which we can provide these services.   In addition to allowing for increased accessto key markets,  the integration of our research facilities in Asia andEurope with our  research andmanufacturing facilities in the United States enables us to provide ourcustomers with a flexible combination of high quality services and competitivecost structures to meet their individual outsourcing needs.

We seek comprehensive research and/or supplyagreements with our customers, incorporating several of our service offeringsand spanning across the entire pharmaceutical research and developmentprocess.  Our research facilities provide discovery, chemical development,analytical, and small-scale cGMP manufacturing services.  Compoundsdiscovered and developed in our research facilities can then be seamlesslytransitioned to production at our large-scale manufacturing facility for use inclinical trials and, ultimately, commercial sales if the product meetsregulatory approval.  We believe that the ability to partner with a singleprovider of pharmaceutical research and development services from discoverythrough commercial production is of significant benefit to our customers. Through our comprehensive service offerings, we are able to provide customerswith a more efficient transition of experimental compounds through the researchand development process, ultimately reducing the time and cost involved inbringing these compounds from concept to market.

In addition to our contract services, we also have aseparate, standalone research and development division comprising proprietarytechnologies, internal drug discovery and bundled capabilities designed formore collaborative relationships.  Weconduct proprietary research and development to discover new therapeuticallyactive lead compounds with commercial potential. We anticipate that we wouldthen license these compounds to third parties in return for up-front andservice fees, and milestone payments as well as recurring royalty payments ifthese compounds are developed into new commercial drugs. Our proprietaryresearch and development activities previously led to the development,patenting and 1995 licensing of a substantially pure form of, and amanufacturing process for, the active ingredient in the non-sedating antihistaminefexofenadine HCl marketed by Sanofi-Aventis S.A. as Allegra in the Americas andas Telfast elsewhere.  Further, inOctober 2005, we licensed the worldwide rights to develop andcommercialize potential products from our amine neurotransmitter reuptakeinhibitors identified in one of our proprietary research programs toBristol-Myers Squibb Company (“BMS”). In October 2006, we announced theselection of a compound from our proprietary oncology research program foradvanced preclinical testing, with the goal of submitting an InvestigationalNew Drug Application (“IND”) with the U.S. Food and Drug Administration (“FDA”)in late 2007 or early 2008. We also continue to utilize our proprietarytechnologies to further advance other early to middle stage internal researchprograms in the fields of oncology, immunosuppresion, 

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bacterial infection andother diseases, with a view to seeking a licensing partner for these programsat an appropriate research or developmental stage.

Our total revenue for the quarter ended March 31, 2007was $48.4 million, as compared to $43.4 million for the quarter ended March 31,2006.

Contract services revenue for the first quarter of2007 was $41.2 million, compared to $36.2 million in the first quarter of 2006.Discovery, development, and small scale manufacturing (DDS) revenues increased$3.3 million from the quarter ended March 31, 2006 due to increased worldwidedemand for these services and incremental revenues resulting from the February28, 2006 acquisition of ComGenex (now known as AMRI Hungary).  Additionally, large scale manufacturingrevenue increased by $1.8 million, due to increased commercial sales of $5.0million, which were primarily derived from the transition of our customers’products from clinical trials to commercial sale.    Partially offsetting this increase was adecrease in revenue from the production of clinical supply materials for use inadvance stage human trials of $1.0 million, as well as a $2.2 million decreasein sales of commercial products to GE Healthcare (“GE”) due to the timing ofcustomer requirements. We currently expect total sales to GE for 2007 toapproximate sales made in 2006, and we expect the overall trend of increaseddemand for clinical supply materials to continue in 2007.

Recurring royalty revenues, which are based on theworldwide sales of fexofenadine HCl, marketed as Allegra in the Americas andTelfast elsewhere, as well as on sales of Sanofi-Aventis’ authorized generics,were consistent with the quarter ended March 31, 2006.

Consolidated gross margin was 20.7% for the quarterended March 31, 2007 compared to 13.9% for the quarter ended March 31, 2006.Gross margin at the DDS operating segment increased to 27.3% in the firstquarter of 2007 compared to 25.4% for the same period in 2006, primarilyresulting from increased contract revenues in relation to the fixed costcomponents of the DDS segment. Gross margin at the LSM operating segment was14.4% in the first quarter of 2007, compared with a gross margin of 3.9% in thefirst quarter of 2006. The increase in gross margin from the first quarter of2006 is due to the recognition of operating cost savings and processefficiencies resulting from the November 2006 restructuring of this segment, aswell as increased revenues in relation to the fixed cost components of the LSMsegment.

During the quarter ended March 31, 2007, cash flowfrom operations was $4.8 million.  Theincrease of $8.0 million in cash flow from operations from the quarter endedMarch 31, 2006 resulted primarily from higher revenues in the first quarter of2007, along with a decrease in accounts receivable due to timing of cashcollections and an increase in income taxes payable due to timing of taxpayments, including a $2.8 million income tax payment in the first quarter of2006 related to the receipt of the $8.0 million licensing fee fromBristol-Myers Squibb Company (“BMS”). We spent $3.2 million in capital onour facilities and equipment, primarily on the construction on a new researchcenter in India and the modernization of our large-scale manufacturingsuites.  In addition, we spent $1.1million in principal payments on our outstanding debt balances.  As of March 31, 2007, we had $109.5 millionin cash, cash equivalents and investments and $17.5 million in bank andother related debt.

**Resultsof Operations – Three Months ended March 31, 2007 Compared to Three Monthsended March 31, 2006**

***Revenues***

*Totalcontract revenue*

Contract revenueconsists primarily of fees earned under contracts with our third party customers.  Our contract revenues for each of our DDS andLSM segments were as follows:
|                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------|------------|------------------------------------------------------------|------------|
| **(in thousands)** | ** ** | **2007**                                                   | ** ** | **2006** | ** ** |
|                    |       |                                                       |       |   |   |
| DDS                     |       | $                                                          | 20,210     |   | $ | 16,943 |   |
| LSM                     |       | 21,021                                                     |       | 19,245 |   |
| Total                   |       | $                                                          | 41,231     |   | $ | 36,188 |   |

 

DDS contract revenues for the quarter ended March 31,2007, increased $3.3 million to $20.2 million as compared to $16.9 million forthe same quarter in the prior year.  Theincrease is due primarily to an increase in contract revenue from chemicaldevelopment and analytical services of $1.5 million as customers continue tofocus on development-stage projects.  Inaddition, discovery services revenue increased $1.7 million due to incrementalrevenue from AMRI Hungary of $1.1 million, as well as increased demand forthese services, as our ability to offer various combinations of services andcost structures at our U.S. and

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internationallocations continues to gain acceptance in the worldwide marketplace.  We currently expect the overall growth trendsin DDS contract revenues noted above to continue through the remainder of 2007.

Large scale manufacturing revenue increased by $1.8million, due primarily to increased commercial sales of $5.0 million, whichwere primarily derived from the transition of our customers’ products fromclinical trials to commercial sale. Partially offsetting this increase was a decrease in revenue from theproduction of clinical supply materials for use in advance stage human trialsof $1.0 million, as well as a $2.2 million decrease in sales of commercialproducts to GE Healthcare (“GE”) due to the timing of customer requirements. Wecurrently expect total revenue to GE by our LSM segment for 2007 to approximaterevenue from GE in 2006, and we currently expect the overall trend of increaseddemand for clinical supply materials to continue in 2007.

*Recurringroyalty revenue*

We earn royaltiesunder our licensing agreement with Sanofi-Aventis S.A. for the activeingredient in Allegra.  Royalties were asfollows:
| Three Months Ended March 31, | ** ** |
|--------------------------------------------------|------------|
| **2007**                                         | ** ** | **2006** | ** ** |
|                                             |       |   |   |
| $                                                | 7,146      |   | $ | 7,178 |   |
|                                                  |            |  |  |  |  |  |

 

Recurring royalties,which are based on the worldwide sales of fexofenadine HCl, marketed as Allegrain the Americas and Telfast elsewhere, as well as on sales of Sanofi-Aventis’authorized generics, remained consistent for the quarter ended March 31, 2007from the quarter ended March 31, 2006.

The recurring royaltieswe receive on the sales of Allegra/Telfast have historically provided amaterial portion of our revenues, earnings, and operating cash flows.  During 2006, we experienced a decrease inrevenues, earnings, and operating cash flows from historical levels due to theimpact of the at-risk launch of generic fexofenadine by Barr Pharmaceuticals, Inc.and Teva Pharmaceuticals Industries Ltd. on U.S. sales of Allegra bySanofi-Aventis.   We currently expect2007 royalty revenues to remain flat or decrease slightly from amountsrecognized in 2006.  We continue todevelop our business in an effort to supplement the revenues, earnings andoperating cash flows that have historically been provided by Allegra/Telfastroyalties.  We continue to forcefully andvigorously defend our intellectual property related to Allegra, and we continueto pursue our intellectual property rights as patent infringement litigationprogresses. However, should we or Aventis be unsuccessful in defending thesepatents we would continue to experience a material decrease from historicroyalty revenues.  Furthermore, anat-risk launch of a generic version of Allegra-D by a generic competitor couldresult in further material decreases in royalty revenues.

***Costs and Expenses***

*Costof contract revenue*

Ourcost of contract revenue consists primarily of compensation and associatedfringe benefits for employees, chemicals, depreciation and other indirectproject related costs.  Cost of contractrevenue for our DDS and LSM segments were as follows:
| Segment                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)** | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                    |       |                                             |       |   |   |
| DDS                     |       | $                                                | 14,697     |   | $ | 12,645 |   |
| LSM                     |       | 17,990                                           |       | 18,498 |   |
| Total                   |       | $                                                | 32,687     |   | $ | 31,143 |   |
|                    |       |                                             |       |   |   |
| DDS Gross Margin        |       | 27.3                                             | %          | 25.4 | % |
| LSM Gross Margin        |       | 14.4                                             | %          | 3.9 | % |
| Total Gross Margin      |       | 20.7                                             | %          | 13.9 | % |

 

DDS had a contract revenue gross margin of 27.3% forthe three months ended March 31, 2007 compared to contract revenue gross marginof 25.4% for the same period in 2006. The increase in gross margin largely resulted from the increase incontract revenues in relation to the fixed cost components of the DDScontract business.  We currently expectDDS contract margins over the balance of the year to remain consistent with themargins earned for the first three months of 2007.

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LSM’s contract revenue gross margin increased to 14.4%for the three months ended March 31, 2007 compared to 3.9% for the same periodsin 2006.  The increase in gross marginfrom the first quarter of 2006 is due to the recognition of operating costsavings and process efficiencies resulting from the November 2006 restructuringof this segment, as well as increased revenues in relation to the fixed costcomponents of the LSM segment.  Wecurrently expect LSM contract margins over the balance of the year to fluctuatefrom quarter to quarter, based on product sales mix by quarter.  Overall for the year, we expect contractmargins to be in the low double digits.

*Technology incentive award*

We maintain a Technology Development Incentive Plan,the purpose of which is to stimulate and encourage novel innovative technologydevelopment by our employees.  This planallows eligible participants to share in a percentage of the net revenue earnedby us relating to patented technology with respect to which the eligibleparticipant is named as an inventor.  Theaward is currently payable primarily to Dr. Thomas D’Ambra, the ChiefExecutive Officer and President of the Company. The incentive award was as follows:
| Three Months Ended March 31, | ** ** |
|------------------------------|------------|
| **2007**                     | ** ** | **2006** | ** ** |
| **(in thousands)**           | ** ** |
|                         |       |   |   |
| $                            | 713        |   | $ | 798 |   |
|                              |            |  |  |  |  |  |

 

The decrease in technology incentive award expense forthe quarter ended March 31, 2007 from the quarter ended March 31, 2006 is dueto technology incentive awards in the first quarter of 2006 paid to employeesinvolved in the development our proprietary amine neurotransmitter reuptakeinhibitors resulting from the licensing of this technology to BMS.

*Researchand development*

Research and development expense consists of compensation and benefits forscientific personnel for work performed on proprietary technology development,research projects, costs of chemicals and other out of pocket costs, andoverhead costs. We utilize our expertise in small molecule chemistry,biocatalysis and natural product technologies to perform our internal researchand development projects. The goal of these programs is to discover newcompounds with commercial potential. We would then seek to license thesecompounds to a third party in return for a combination of up-front licensefees, milestone payments and recurring royalty payments if these compounds aresuccessfully developed into new drugs and reach the market. In addition,research and development is performed at our large-scale manufacturing facilityrelated to the potential manufacture of new products and the development of alternativemanufacturing processes.

Researchand development expenses were as follows:
| Three Months Ended March 31, | ** ** |
|------------------------------|------------|
| **2007**                     | ** ** | **2006** | ** ** |
| **(in thousands)**           | ** ** |
|                         |       |   |   |
| $                            | 2,381      |   | $ | 2,711 |   |
|                              |            |  |  |  |  |  |

 

The decrease in R&Dexpense during the three months ended March 31, 2007 is due primarily to adecrease in salaries and benefits caused by the increased utilization of staffon external customer projects.  OnOctober 30, 2006, the Company announced the selection of a compound from itsproprietary oncology research program for advanced preclinical testing, withthe goal of submitting an Investigational New Drug Application (“IND”) with theU.S. Food and Drug Administration (“FDA”) in late 2007 or early 2008.  We currently expect research and developmentexpenses for the remainder of 2007 to increase from those incurred in the firstquarter of 2007 as we advance our oncology compound towards an IND submissionwith the FDA.

Projecting expected project completiondates and anticipated revenue from our internal research programs is notpractical at this time due to the early stages of the projects and the inherentrisks related to the development of new drugs. Our internal central nervoussystem program, which was our most advanced project to date, was licensed toBMS in exchange for up-front license fees, contracted research services, andthe rights to future milestone and royalty payments.  We also continue to utilize ourproprietary technologies to further advance other early to middle-stageinternal research programs in the fields of oncology, irritable bowelsyndrome/emesis, obesity, immunosuppresion and inflammation, with a view toseeking a licensing partner for these programs at an appropriate research ordevelopmental stage.

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We budget and monitor ourresearch and development costs by type or category, rather than by project on acomprehensive or fully allocated basis. In addition, a significant portion ofour research and development expenses is not tracked by project as it benefitsmultiple projects or our technology platform. Consequently, fully loadedresearch and development cost summaries by project are not available.

*Selling,general and administrative*

Selling,general and administrative expenses consist of compensation and related fringebenefits for marketing and administrative employees, professional service fees,marketing costs and all costs related to facilities and informationservices.  Selling, general andadministrative expenses were as follows:
| Three Months Ended March 31, | ** ** |
|------------------------------|------------|
| **2007**                     | ** ** | **2006** | ** ** |
| **(in thousands)**           | ** ** |
|                         |       |   |   |
| $                            | 8,416      |   | $ | 6,761 |   |
|                              |            |  |  |  |  |  |

 

The increase in selling, general, and administrativeexpenses for the three months ended March 31, 2007 is primarily attributable to$0.7 million in incremental administrative costs incurred at AMRI Hungary,which was acquired in February 2006.  Inaddition, professional and consulting fees increased $0.3 million, compensationand benefit costs increased approximately $0.3 million and property taxesincreased approximately $0.2 million due to a refund in the prior year for ourMt. Prospect facility.

*Impairment and restructuring charges*

***LargeScale Manufacturing Facility***

On November 9, 2006, the Company announced plans to initiatea restructuring of the Company’s LSM business segment.  Consistent with the Company’s continuedstrategy of realigning its LSM segment toward a greater focus on manufacturingclinical trial materials with strong commercial potential, the goals of therestructuring plan are to strengthen the Company’s competitiveness in this areaand reduce operating costs by eliminating overlap in business processes,organization and project process flow, as well as leveraging existing resourcesand assets.  The restructuring planincludes a reduction of workforce in this segment by approximately40 employees or approximately 15%, as well as reductions of non-essentialoperating expenses, raw material costs and future capital expenditureactivities.  The Company has estimatedthat total large scale costs will be reduced by $5.0 million annually as aresult of this restructuring.  TheCompany recorded a restructuring charge of approximately $2.4 million in thefourth quarter of 2006, including a non-cash asset disposal charge ofapproximately $1.6 million, and other charges of approximately $0.8million consisting primarily of termination benefits.  The Company recorded additional restructuringcharges of $0.2 million in the first quarter of 2007, consisting of additionaltermination benefits.

Thelarge scale restructuring costs are included under the caption restructuring inthe consolidated statement of operations during 2007 and 2006 and therestructuring liabilities are included in accounts payable and accrued expenseson the consolidated balance sheet at March 31, 2007 and December 31, 2006.

Thefollowing table displays the restructuring activity and liability balances:
|                       | ** ** | **Balance at  January 1,  2007** | ** ** | **Charges** | ** ** | **Incurred  Amounts** | ** ** | **Balance at  March 31, 2007** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|-------------|------------|-----------------------|------------|-----------------------------------------------|------------|
| ** **            | ** ** | **(in 000’s)**                   | ** ** |
| Termination  benefits |       | $                                          | 682        |        | 249        |                  | (345       | )                                             | $          | 586 |   |
| Asset disposal  costs |       | 382                                        |       | —      |       | (382                  | )          | —                                        |       |
| Total                 |       | $                                          | 1,064      |        | 249        |                  | $          | (727                                          | )          | $ | 586 |   |
|                       |            |                                            |            |             |            |                       |            |                                               |            |  |  |  |

 

Termination benefits relate to severance packages,outplacement services and career counseling for employees affected by therestructuring. Asset disposal costs relate primarily to the carrying value ofunderutilized assets that were identified for disposal in conjunction with therestructuring plan.

The large scale manufacturing restructuring activitywas recorded in the LSM operating segment. The net cash outflow related to thelarge scale manufacturing restructuring for the three months ended March 31,2007 was $0.3 million.  Anticipated cashoutflows related to the large scale manufacturing restructuring for theremainder of 2007 are $0.6 million, which primarily consists of the payment oftermination benefits.

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***Mt.Prospect Research Center***

On May 4, 2004 we announced our plan toconsolidate operations by relocating our Mt. Prospect facility operations toour facilities in New York.  Ourproprietary biocatalysis technology platform, drug metabolism screening,research fermentation and chemical development technologies in Mt. Prospecthave been relocated to New York and continue to be fully integrated with ourdrug discovery and development technologies. The restructuring resulted in theclosure of the Mt. Prospect Research Center in the fourth quarter of 2004. Theconsolidation was initiated as a result of a lack of anticipated growth in ourchemical development services at the facility.

During the fourth quarter of 2006, we secured a letterof intent related to the potential sale of the Mt. Prospect facility forapproximately $1.5 million.  As a result,we recorded an additional impairment charge of approximately $0.5 million inthe fourth quarter of 2006 to reduce the carrying amount of these assets toreflect the sales price per the letter of intent less estimated sellingcosts.  We completed the sale of thefacility in March 2007 for $1.5 million.

At December 31, 2006, we had recorded restructuringliabilities totaling $0.2 million related to asset disposal costs, includingbrokerage commissions, legal fees, and marketing expenses associated with theplanned sale of the Mt. Prospect Research Center facility. The following tabledisplays the restructuring activity and liability balances:
|                      | ** ** | ** **                    | ** ** | ** **      | ** ** | ** **   | ** ** | **Balance at** | ** ** |
|----------------------|------------|-------------------------------|------------|-----------------|------------|--------------|------------|---------------------|------------|
| ** **           | ** ** | **Balance at**           | ** ** | ** **      | ** ** | ** **   | ** ** | **March 31,**  | ** ** |
| ** **           | ** ** | **January 1, 2007** | ** ** | **Adjustments** | ** ** | **Payments** | ** ** | **2007**            | ** ** |
| Asset disposal costs |       | $                             | 190        |            | (6         | )            | (184       | )                   | —     |   |
|                      |            |                               |            |                 |            |              |            |                     |            |  |

 

*Interestincome (expense), net*
|                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| **(in thousands)**         | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                            |       |                                                 |       |   |   |
| Interest expense                |       | $                                                    | (255       | ) | $ | (263 | ) |
| Interest income                 |       | 992                                                  |       | 984 |   |
| Interest income  (expense), net |       | $                                                    | 737        |   | $ | 721 |   |

 

Net interest income (expense) remained fairlyconsistent for the quarter ended March 31, 2007 from the same period in 2006due to steady interest rates on outstanding debt during the quarters andconsistent interest bearing investment securities and cash and cash equivalentsbalances during the periods.

*Incometax expense*
| Three Months Ended March 31, | ** ** |
|------------------------------|------------|
| **2007**                     | ** ** | **2006** | ** ** |
|                         |       |   |   |
| $                            | 1,480      |   | $ | 812 |   |
|                              |            |  |  |  |  |  |

 

The increase in taxexpense for the three months ended March 31, 2007 is due primarily to anincrease in pre-tax income compared to the three months ended March 31,2006.  In addition, the Company’seffective tax rate increased from 30.0% of pre-tax income for the three monthsended March 31, 2006 to 31.5% of pre-tax income for the three months endedMarch 31, 2007. The increase in the 2007 effective tax rate is due to theincrease in pre-tax income in relation to the Company’s deductible items andnon-taxable earnings.

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Liquidityand Capital Resources

Wehave historically funded our business through operating cash flows, proceedsfrom borrowings and the issuance of equity securities. During the first quarterof 2007, we generated cash of $4.8 million from operating activities. Theprimary sources of operating cash flows resulted primarily from higher revenuesin the first quarter of 2007, along with a decrease in accounts receivable dueto timing of cash collections and an increase in income taxes payable due totiming of tax payments, including a $2.8 million income tax payment in thefirst quarter of 2006 related to the receipt of the $8.0 million licensing feefrom Bristol-Myers Squibb Company (“BMS”).

During the first threemonths of 2007, we used $3.9 million in investing activities, resulting fromthe use of $2.1 million related to net purchases of securities and $3.2 millionfor the acquisition of property and equipment, partially offset by net proceedsfrom disposal of property and equipment of $1.5 million.  During the first three months of 2007, weused $0.9 million for financing activities, consisting of $1.1 million inlong-term debt repayments, offset by $0.2 million of proceeds from our stockpurchase plan and stock option exercises.

Working capital was$153.7 million at March 31, 2007 as compared to $149.9 million as ofDecember 31, 2006. The primary source of this increase is the increase inoperating cash flow.  We currentlyanticipate making $0.6 million in defined benefit pension plan contributions,of which $0.4 was paid in the first three months of the year.  There have been no significant changes infuture maturities on our long-term debt since December 31, 2006.

We entered into a credit facility consisting of a$30.0 million term loan and a $35.0 million line of credit during 2003. Theterm loan matures in February, 2008. As of March 31, 2007, the interest rate on$9.3 million of the outstanding term loan balance was 4.36% and the interestrate on the remaining $4.6 million was 6.37%. The line of credit matures in June, 2010. The line of credit bearsinterest at a variable rate based on the Company’s leverage ratio. As of March31, 2007, the outstanding balance of the line of credit was $0. The creditfacility contains certain financial covenants, including a maximum leverageratio, a minimum required operating cash flow coverage ratio, a minimumearnings before interest and taxes to interest ratio and a minimum currentratio. Other covenants include limits on asset disposals and the payment ofdividends. As of March 31, 2007 we were in compliance with all covenants underthe credit facility.

The disclosure ofpayments we have committed to make under our contractual obligations is setforth under the heading “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Liquidity and Capital Resources” under Item7 of our 2006 Form 10-K. Excluding the repayment of $1.1 million ofoutstanding debt, and $0.4 million in defined benefit pension plancontributions, as described above, there have been no material changes to ourcontractual obligations since December 31, 2006.

We continue to pursue theexpansion of our operations through internal growth and strategic acquisitions.We expect that such activities will be funded from existing cash and cashequivalents, cash flow from operations, the issuance of debt or equitysecurities and borrowings. Future acquisitions, if any, could be funded withcash on hand, cash from operations, borrowings under our credit facility and/orthe issuance of equity or debt securities. There can be no assurance that attractiveacquisition opportunities will be available to us or will be available atprices and upon such other terms that are attractive to us. We regularlyevaluate potential acquisitions of other businesses, products and product linesand may hold discussions regarding such potential acquisitions. As a generalrule, we will publicly announce such acquisitions only after a definitiveagreement has been signed. In addition, in order to meet our long-termliquidity needs or consummate future acquisitions, we may incur additionalindebtedness or issue additional equity or debt securities, subject to marketand other conditions. There can be no assurance that such additional financingwill be available on terms acceptable to us or at all. The failure to raise thefunds necessary to finance our future cash requirements or consummate futureacquisitions could adversely affect our ability to pursue our strategy andcould negatively affect our operations in future periods. Furthermore, acontinued significant decrease in royalties from Allegra would negativelyaffect our cash flow from operations and financial condition in future periods.

The recurring royaltieswe receive on the sales of Allegra/Telfast have historically provided amaterial portion of our operating cash flows. As discussed in Part II, Item 1of this Form 10-Q, several generic manufacturers have filed ANDAapplications with the FDA seeking authorization to produce and market a genericversion of Allegra. We and Aventis Pharmaceuticals have filed several patentinfringement suits against these generic companies alleging infringement ofcertain U.S. patents. On September 6, 2005, BarrPharmaceuticals, Inc. and Teva Pharmaceuticals Industries Ltd. announcedthat they had entered into an agreement for the launch of FexofenadineHydrochloride 30 mg, 60 mg and 180 mg tablets, the generic version of Allegratablets in the United States. The launch of the generic product is consideredan “at-risk” launch due to the on-going litigation. The at-risk launch of genericfexofenadine has had a material adverse impact on U.S. sales of Allegra bySanofi-Aventis and in turn, the royalties earned by us on those sales. OnSeptember 20, 2005, we and Aventis Pharmaceuticals filed a Motion forPreliminary Injunction in the U.S. District Court in New Jersey seeking toenjoin Barr Pharmaceuticals,  Inc., TevaPharmaceuticals Ltd., Ranbaxy Laboratories, Ltd. and Amino

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Chemicals,Ltd. from the sale of generic versions of Allegra in the United States. Ourmotion was denied on January 30, 2006. We continue to forcefully andvigorously defend our intellectual property related to Allegra. We have filedan appeal of the ruling on the preliminary injunction matter, and we continueto pursue our intellectual property rights as the patent infringementlitigation progresses. However, should we or Aventis be unsuccessful indefending these patents we would continue to experience a material decrease inroyalty revenues and operating cash flows. Furthermore, an at-risk launch of a generic version of Allegra-D by ageneric competitor could result in further material decreases in royaltyrevenues and operating cash flows.

**Critical Accounting Policies and Estimates**

Our discussion andanalysis of our financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith U.S. generally accepted accounting principles. The preparation of theseconsolidated financial statements requires us to make estimates and judgmentsthat affect the reported amounts of assets, liabilities, revenues and expenses,and related disclosure of contingent assets and liabilities. On an on-goingbasis, we evaluate our estimates, including those related to bad debts,inventories, intangible assets, equity investments, unbilled revenue, incometaxes, pension and postretirement benefit plans, and contingencies. We base ourestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.

We refer to the policiesand estimates set forth in the section “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Critical Accounting Estimates”of our Annual Report on Form 10-K for the fiscal year ended December 31,2006. There have been no material changes or modifications to the policiessince December 31, 2006, other than the adoption of FIN 48.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

Therehave been no material changes with respect to the information on Quantitativeand Qualitative Disclosures about Market Risk appearing in Part II,Item 7A to the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006.

Item 4. Controls and Procedures

*Disclosure Controls andProcedures*

As required by rule 13a-15(b) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), as of the end of theCompany’s last fiscal quarter our management conducted an evaluation with theparticipation of our Chief Executive Officer and Chief Financial Officerregarding the effectiveness of our disclosure controls and procedures. Indesigning and evaluating our disclosure controls and procedures, we recognizethat any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and our management necessarily was required to apply its judgment in evaluatingand implementing possible controls and procedures. Based upon that evaluation,our Chief Executive Officer and Chief Financial Officer have concluded that, asof the end of the Company’s last fiscal quarter, our disclosure controls andprocedures were effective in that they provide reasonable assurance thatinformation required to be disclosed by us in the reports we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms, including ensuring that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer as appropriate to allow timely decisions regarding requireddisclosure. We intend to review and document our disclosure controls andprocedures, including our internal controls and procedures for financialreporting, on an ongoing basis, and may from time to time make changes aimed atenhancing their effectiveness and to ensure that our systems evolve with ourbusiness.

*Internal Control Over FinancialReporting*

There were nochanges in the Company’s internal control over financial reporting identifiedin connection with the evaluation of such internal control that occurred duringthe Company’s last fiscal quarter that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

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PART II -OTHER INFORMATION

Item 1.  Legal Proceedings

The Company, from time totime, may be involved in various claims and legal proceedings arising in theordinary course of business. Except as noted below in regards to litigationrelating to Allegra, the Company is not currently a party to any such claims orproceedings which, if decided adversely to the Company, would eitherindividually or in the aggregate have a material adverse effect on the Company’sbusiness, financial condition, results of operations or cash flows.

AMR Technology, asubsidiary of the Company, along with Aventis Pharmaceuticals Inc., the U.S.pharmaceutical business of Sanofi-Aventis S.A., are involved in legalproceedings with several companies seeking to market or currently marketinggeneric versions of Allegra. Beginning in 2001, Barr Laboratories, Inc., ImpaxLaboratories, Inc., Mylan Pharmaceuticals, Inc., Teva Pharmaceuticals USA, Dr.Reddy’s Laboratories, Ltd./Dr. Reddy’s Laboratories, Inc., Ranbaxy LaboratoriesLtd./Ranbaxy Pharmaceuticals Inc., and Sandoz Inc. filed Abbreviated New DrugApplications (ANDAs) with the U.S. Food and Drug Administration, or FDA, toproduce and market generic versions of Allegra products.

In response to thefilings described above, beginning in 2001, Aventis Pharmaceuticals filedpatent infringement lawsuits against Barr Laboratories, Impax Laboratories,Mylan Pharmaceuticals, Teva Pharmaceuticals, Dr. Reddy’s Laboratories, RanbaxyLaboratories Ltd./Ranbaxy Pharmaceuticals Inc., and Sandoz. Each of thelawsuits was filed in the U.S. District Court in New Jersey and allegesinfringement of one or more patents owned by Aventis Pharmaceuticals. Inaddition, on November 14, 2006, Aventis filed a patent infringement suitagainst Teva Pharmaceuticals USA, Barr Laboratories, Inc. and BarrPharmaceuticals, Inc. in the Eastern District of Texas based on patents ownedby Aventis.  Further, beginning in March5, 2004, AMR Technology, along with Aventis Pharmaceuticals, filed suit in theU.S. District Court in New Jersey against Barr Laboratories, ImpaxLaboratories, Mylan Pharmaceuticals, Teva Pharmaceuticals, Dr. Reddy’sLaboratories, Amino Chemicals, Ltd., Ranbaxy Laboratories Ltd./RanbaxyPharmaceuticals Inc., DiPharma S.P.A., DiPharma Francis s.r.l., and Sandoz,asserting infringement of two of our U.S. patents that are exclusively licensedto Aventis Pharmaceuticals relating to Allegra and Allegra-D products.  On December 11, 2006, AMR Technology andSanofi-Aventis U.S. LLC, an affiliate of Aventis Pharmaceuticals, also filed apatent infringement lawsuit in the Republic of Italy against DiPharma Franciss.r.l. and DiPharma S.P.A. based on European Patent No. 703,902 which is ownedby AMR Technology and licensed to Sanofi-Aventis U.S. LLC.  In addition, on December 22, 2006, AMRTechnology filed a patent infringement lawsuit in Canada against NovopharmLtd., Teva Pharmaceutical Industries Ltd., Teva Pharmaceuticals USA, Inc.,DiPharma S.P.A. and DiPharma s.r.l. based on Canadian Patent No. 2,181,089. OnMarch 20, 2007, AMR Technology filed a patent infringement lawsuit in Australiaagainst Alphapharm Pty Ltd based on Australian Patent No. 699,799.

Aventis Pharmaceuticalsand AMR Technology have entered into covenants not to sue the defendants otherthan Novopharm, DiPharma S.P.A. and DiPharma Francis s.r.l., under U.S. PatentNo. 5,578,610, which patent has not been asserted in the litigation but whichAventis Pharmaceuticals exclusively licenses from us. However, we and AventisPharmaceuticals have agreed that Aventis Pharmaceuticals will continue to payroyalties to us based on that patent under our original license agreement withAventis Pharmaceuticals. Under our arrangements with Aventis Pharmaceuticals,we will receive royalties until expiration of the underlying patents (2013 forU.S. Patent No. 5,578,610 and 2015 for U.S. Patent No. 5,750,703) unless thepatents are earlier determined to be invalid.

Under applicable federallaw, marketing of an FDA-approved generic version of Allegra may not commenceuntil the earlier of a decision favorable to the generic challenger in thepatent litigation or 30 months after the date the patent infringement lawsuitwas filed. In general, the first generic filer is entitled to a 180-daymarketing exclusivity period upon FDA approval.

On September 6, 2005,Barr Pharmaceuticals, Inc. and Teva Pharmaceuticals Industries Ltd. announcedthat they have entered into an agreement for the launch of FexofenadineHydrochloride 30 mg, 60 mg and 180 mg tablets, the generic version of Allegratablets in the United States. The launch of the generic product is consideredan “at-risk” launch due to the on-going litigation. This generic launch has hada material adverse impact on U.S. sales of Allegra by Sanofi-Aventis since thefourth quarter of 2005 and in turn, the royalties earned by the Company onthose sales. The launch has not had a material impact on non-U.S. sales ofAllegra to date.

On September 20, 2005,AMR Technology, along with Aventis Pharmaceuticals, filed a Motion forPreliminary Injunction in the U.S. District Court in New Jersey seeking toenjoin Barr Pharmaceuticals, Inc., Teva Pharmaceuticals Ltd., RanbaxyLaboratories, Ltd. and Amino Chemicals, Ltd. from the sale of generic versionsof Allegra in the United States. On January 30, 2006, the U.S. District Courtdenied the request by AMR Technology and Aventis Pharmaceuticals for apreliminary injunction. An appeal of that decision was taken to the U.S. Courtof Appeals for the Federal Circuit and, on November 8, 2006, the appellatecourt affirmed the District Court’s denial of a preliminary injunction. TheFederal Circuit’s decisions on the preliminary injunction application is notdispositive of the merits of the claims being asserted as described above.

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Subsequent to thepreliminary injunction proceeding in the District Court, Dr. Reddy’sLaboratories has engaged in an at-risk launch of generic fexofenadine products.

Should the Company beunsuccessful in defending these patents, the Company would continue toexperience a material decrease in operating cash flows and a material adverseeffect on our results of operations and financial condition.

Item 1A. RiskFactors

In addition to the other information set forth in thisreport, you should carefully consider the factors discussed in Part I, Item 1A.Risk Factors in our Annual Report on Form 10-K for the year ended December 31,2006, which could materially affect our business, financial condition or futureresults. The risks described in our Annual Report on Form 10-K are not the onlyrisks facing our Company.  Additionalrisks and uncertainties not currently known to us or that we currently deem tobe immaterial also may materially adversely affect our business, financialcondition and/or operating results.

Item 6.   Exhibits

(a)       Exhibits.

31.1         Certificationof the Chief Executive Officer pursuant toRule 13a-14(a)/15d-14(a) of the Security Exchange Act of 1934.

31.2         Certificationof the Chief Financial Officer pursuant toRule 13a-14(a)/15d-14(a) of the Security Exchange Act of 1934.

32.1         Certificationof the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2         Certificationof the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.
|                    | ALBANY MOLECULAR RESEARCH, INC. |
|--------------------|---------------------------------|
|               |                            |   |
|               |                            |   |
| Date: May 10, 2007 | By:                             | /s/ Mark T. Frost |   |
|               |                            | Mark T. Frost |
|               |                            | Chief Financial Officer and Treasurer  (Authorized Officer and Principal Financial Officer) |

 

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