**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**
| **x**                                             | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                        | ** ** | ** **                                                                                              |
| **For the  Quarterly Period Ended June 30, 2007** |
| ** **                                        | ** ** | ** **                                                                                              |
| ** **                                        | ** ** | ** **                                                                                              |
| **o**                                             | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from              to**

**Commissionfile number:  0-25323**

**ALBANYMOLECULAR RESEARCH, INC.**

(Exact name of registrantas 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 markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange 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 July 31, 2007** | ** ** |
|-------------------------------|------------|------------------------------------------------------|------------|
| Common Stock,  $.01 par value |       | 34,979,925                                           |       |

 

 

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ALBANY MOLECULARRESEARCH, INC.

INDEX
| Part I.       |   | Financial Information |   | 3                                                                                           |
|--------------------|--------|-----------------------|--------|---------------------------------------------------------------------------------------------|
|               |   |                  |   |                                                                                        |   |   |
|               |   | Item 1.               |   | Condensed  Consolidated Financial Statements (Unaudited)                                    |   | 3 |
|               |   |                  |   |                                                                                        |   |   |
|               |   |                  |   | Condensed  Consolidated Statements of Operations                                            |   | 3 |
|               |   |                  |   | Condensed  Consolidated Balance Sheets                                                      |   | 4 |
|               |   |                  |   | Condensed  Consolidated Statements of Cash Flows                                            |   | 5 |
|               |   |                  |   | Notes to Condensed Consolidated Financial Statements                                        |   | 6 |
|               |   |                  |   |                                                                                        |   |   |
|               |   | Item 2.               |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 18 |
|               |   |                  |   |                                                                                        |   |   |
|               |   | Item 3.               |   | Quantitative  and Qualitative Disclosures About Market Risk                                 |   | 26 |
|               |   |                  |   |                                                                                        |   |   |
|               |   | Item 4.               |   | Controls and  Procedures                                                                    |   | 26 |
|               |   |                  |   |                                                                                        |   |   |
| Part II.      |   | Other Information     |   | 27                                                                                          |
|               |   |                  |   |                                                                                        |   |   |
|               |   | Item 1.               |   | Legal Proceedings                                                                           |   | 27 |
|               |   |                  |   |                                                                                        |   |   |
|               |   | Item  1A.             |   | Risk  Factors                                                                               |   | 28 |
|               |   |                  |   |                                                                                        |   |   |
|               |   | Item 4.               |   | Submission of  Matters to a Vote of Security Holders                                        |   | 28 |
|               |   |                  |   |                                                                                        |   |   |
|               |   | Item  6.              |   | Exhibits                                                                                    |   | 28 |
|               |   |                  |   |                                                                                        |   |   |
| Signatures         |   |                  |   | 29                                                                                          |
|               |   |                  |   |                                                                                        |   |   |
| Exhibit Index |   |                  |   |                                                                                        |

 

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**PART I— FINANCIAL INFORMATION**

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

**AlbanyMolecular Research, Inc.**

**Condensed Consolidated Statements of Operations**

**(unaudited)**
| ** **                                                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(Dollars in thousands, except for per share data)** | ** ** | **June 30, 2007**      | ** ** | **June 30, 2006**    | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** |
|                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Contract revenue                                                                         |       | $                                | 39,936     |                           | $          | 38,383 |   | $ | 81,167 |   | $ | 74,571 |   |
| Recurring royalties                                                                      |       | 7,838                            |       | 7,200                          |       | 14,984 |   | 14,378 |   |
| Milestone revenue                                                                        |       | 1,580                            |       | —                         |       | 1,580 |   | — |   |
| Total revenue                                                                            |       | 49,354                           |       | 45,583                         |       | 97,731 |   | 88,949 |   |
|                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Cost of contract  revenue                                                                |       | 30,003                           |       | 32,489                         |       | 62,690 |   | 63,632 |   |
| Technology incentive  award                                                              |       | 814                              |       | 720                            |       | 1,527 |   | 1,518 |   |
| Research and  development                                                                |       | 3,737                            |       | 2,631                          |       | 6,118 |   | 5,342 |   |
| Selling, general and  administrative                                                     |       | 8,231                            |       | 7,786                          |       | 16,647 |   | 14,547 |   |
| Restructuring                                                                            |       | 42                               |       | (292                           | )          | 285 |   | (292 | ) |
| Property and equipment  impairment                                                       |       | —                           |       | 3,376                          |       | — |   | 3,376 |   |
| Total costs and  expenses                                                                |       | 42,827                           |       | 46,710                         |       | 87,267 |   | 88,123 |   |
|                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Income (loss) from  operations                                                           |       | 6,527                            |       | (1,127                         | )          | 10,464 |   | 826 |   |
|                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Interest income, net                                                                     |       | 797                              |       | 666                            |       | 1,534 |   | 1,387 |   |
| Other (loss) income,  net                                                                |       | (10                              | )          | (120                           | )          | 20 |   | (88 | ) |
|                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Income (loss) before  income tax expense (benefit)                                       |       | 7,314                            |       | (581                           | )          | 12,018 |   | 2,125 |   |
|                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Income tax expense  (benefit)                                                            |       | 2,738                            |       | (228                           | )          | 4,218 |   | 584 |   |
|                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Net income (loss)                                                                        |       | $                                | 4,576      |                           | $          | (353 | ) | $ | 7,800 |   | $ | 1,541 |   |
|                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Basic earnings (loss)  per share                                                         |       | $                                | 0.14       |                           | $          | (0.01 | ) | $ | 0.24 |   | $ | 0.05 |   |
|                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Diluted earnings (loss) per share                                                        |       | $                                | 0.14       |                           | $          | (0.01 | ) | $ | 0.24 |   | $ | 0.05 |   |

 

*See notes to unaudited condensed consolidatedfinancial statements.*

3

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**Albany MolecularResearch, Inc.**

**Condensed Consolidated Balance Sheets**

**(unaudited)**
| **(Dollars in thousands, except for per share data)**                                                             | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                           |       |                    |       |                        |       |
| Current assets:                                                                                                                                      |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                           |       | $                       | 27,151     |                        | $          | 26,124 |   |
| Investment  securities, available-for-sale                                                                                                           |       | 83,759                  |       | 81,040                      |       |
| Accounts  receivable, net                                                                                                                            |       | 26,284                  |       | 34,747                      |       |
| Royalty income  receivable                                                                                                                           |       | 7,464                   |       | 6,225                       |       |
| Inventory                                                                                                                                            |       | 26,873                  |       | 22,644                      |       |
| Prepaid expenses  and other current assets                                                                                                           |       | 7,442                   |       | 5,615                       |       |
| Deferred income  taxes                                                                                                                               |       | 4,274                   |       | 4,725                       |       |
| Property and  equipment held for sale                                                                                                                |       | —                  |       | 1,500                       |       |
| Total current assets                                                                                                                                 |       | 183,247                 |       | 182,620                     |       |
|                                                                                                                                                 |       |                    |       |                        |       |
| Property and  equipment, net                                                                                                                         |       | 157,987                 |       | 153,202                     |       |
|                                                                                                                                                 |       |                    |       |                        |       |
| Goodwill                                                                                                                                             |       | 40,709                  |       | 35,811                      |       |
| Intangible  assets and patents, net                                                                                                                  |       | 2,336                   |       | 2,101                       |       |
| Equity  investment in unconsolidated affiliates                                                                                                      |       | 956                     |       | 956                         |       |
| Other assets                                                                                                                                         |       | 764                     |       | 803                         |       |
| Total assets                                                                                                                                         |       | $                       | 385,999    |                        | $          | 375,493 |   |
| ** **                                                                                                                                           |       |                    |       |                        |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                       |       |                    |       |                        |       |
| Current  liabilities:                                                                                                                                |       |                    |       |                        |       |
| Accounts payable  and accrued expenses                                                                                                               |       | $                       | 15,664     |                        | $          | 17,790 |   |
| Deferred revenue                                                                                                                                     |       | 8,732                   |       | 8,285                       |       |
| Accrued pension  benefits                                                                                                                            |       | 314                     |       | 639                         |       |
| Income taxes  payable                                                                                                                                |       | 6,469                   |       | 1,433                       |       |
| Current  installments of long-term debt                                                                                                              |       | 4,548                   |       | 4,541                       |       |
| Total current liabilities                                                                                                                            |       | 35,727                  |       | 32,688                      |       |
|                                                                                                                                                 |       |                    |       |                        |       |
| Long-term  liabilities:                                                                                                                              |       |                    |       |                        |       |
| Long-term  debt, excluding current installments                                                                                                      |       | 11,580                  |       | 13,993                      |       |
| Deferred income  taxes                                                                                                                               |       | 10,356                  |       | 9,646                       |       |
| Pension and  postretirement benefits                                                                                                                 |       | 334                     |       | 475                         |       |
| Environmental  liabilities                                                                                                                           |       | 191                     |       | 236                         |       |
| Total liabilities                                                                                                                                    |       | 58,188                  |       | 57,038                      |       |
|                                                                                                                                                 |       |                    |       |                        |       |
| Commitments and  contingencies                                                                                                                       |       |                    |       |                        |       |
|                                                                                                                                                 |       |                    |       |                        |       |
| Stockholders’  equity:                                                                                                                          |       |                    |       |                        |       |
| Common stock,  $0.01 par value, 100,000 shares authorized, 34,960 shares issued at June  30, 2007 and 34,749 shares issued at December 31, 2006 |       | 350                     |       | 347                         |       |
| Additional paid-in  capital                                                                                                                          |       | 194,115                 |       | 193,127                     |       |
| Retained  earnings                                                                                                                                   |       | 169,120                 |       | 161,320                     |       |
| Accumulated  other comprehensive income, net                                                                                                         |       | 1,397                   |       | 832                         |       |
|                                                                                                                                                 |       | 364,982                 |       | 355,626                     |       |
| Less, treasury  shares at cost, 2,077 shares                                                                                                    |       | (37,171                 | )          | (37,171                     | )          |
| Total stockholders’ equity                                                                                                                      |       | 327,811                 |       | 318,455                     |       |
| Total liabilities  and stockholders’ equity                                                                                                     |       | $                       | 385,999    |                        | $          | 375,493 |   |

 

*See notesto unaudited condensed consolidated financial statements.*

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**AlbanyMolecular Research, Inc.**

**Condensed Consolidated Statements of Cash Flows**

**(unaudited)**
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| **(Dollars in thousands)**                                               | ** ** | **June 30, 2007**    | ** ** | **June 30, 2006** | ** ** |
|                                                                               |       |                           |       |   |   |
| **Operating  activities**                                                          |       |                           |       |   |   |
| Net income                                                                         |       | $                              | 7,800      |   | $ | 1,541 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                      |       | 8,348                          |       | 7,472 |   |
| Foreign exchange loss                                                              |       | —                         |       | 1 |   |
| Provision for bad debts                                                            |       | 66                             |       | — |   |
| Deferred income tax expense (benefit)                                              |       | 1,172                          |       | (689 | ) |
| (Gain) loss on disposal of property, plant and  equipment                          |       | (33                            | )          | 35 |   |
| Stock-based compensation expense                                                   |       | 641                            |       | 522 |   |
| Impairment of property, plant and equipment                                        |       | —                         |       | 3,084 |   |
| Provision for obsolete inventories                                                 |       | 441                            |       | 1,062 |   |
| (Increase) decrease in:                                                            |       |                           |       |   |   |
| Accounts receivable                                                                |       | 8,410                          |       | 1,398 |   |
| Royalty income receivable                                                          |       | (1,239                         | )          | (901 | ) |
| Inventory, prepaid expenses and other assets                                       |       | (5,641                         | )          | 4,406 |   |
| (Decrease) increase in:                                                            |       |                           |       |   |   |
| Accounts payable and accrued expenses                                              |       | (2,190                         | )          | (5,774 | ) |
| Income tax payable                                                                 |       | 5,036                          |       | (3,938 | ) |
| Deferred revenue                                                                   |       | 447                            |       | (4,923 | ) |
| Pension and postretirement benefits                                                |       | (455                           | )          | (756 | ) |
| Other long-term liabilities                                                        |       | (45                            | )          | — |   |
| Net cash  provided by operating activities                                         |       | 22,758                         |       | 2,540 |   |
|                                                                               |       |                           |       |   |   |
| **Investing  activities**                                                          |       |                           |       |   |   |
| Net purchases of investment securities                                             |       | (50,473                        | )          | (78,040 | ) |
| Proceeds from sales of investment securities                                       |       | 47,704                         |       | 86,250 |   |
| Purchase of businesses, net of cash acquired                                       |       | (11,368                        | )          | (11,198 | ) |
| Purchase of property, plant and equipment                                          |       | (7,386                         | )          | (9,740 | ) |
| Proceeds from disposal of property, plant and  equipment                           |       | 1,517                          |       | 20 |   |
| Payments for patent applications and other costs                                   |       | (246                           | )          | (98 | ) |
| Net cash used in  investing activities                                             |       | (20,252                        | )          | (12,806 | ) |
|                                                                               |       |                           |       |   |   |
| **Financing  activities**                                                          |       |                           |       |   |   |
| Principal payments on long-term debt                                               |       | (2,406                         | )          | (2,443 | ) |
| Proceeds from sale of common stock                                                 |       | 348                            |       | 276 |   |
| Net cash used in  financing activities                                             |       | (2,058                         | )          | (2,167 | ) |
|                                                                               |       |                           |       |   |   |
| Effect of  exchange rate changes on cash flows                                     |       | 579                            |       | (131 | ) |
|                                                                               |       |                           |       |   |   |
| Increase  (decrease) in cash and cash equivalents                                  |       | 1,027                          |       | (12,564 | ) |
|                                                                               |       |                           |       |   |   |
| Cash and cash  equivalents at beginning of period                                  |       | 26,124                         |       | 27,606 |   |
|                                                                               |       |                           |       |   |   |
| Cash and cash  equivalents at end of period                                        |       | $                              | 27,151     |   | $ | 15,042 |   |

 

*See notesto unaudited condensed consolidated financial statements.*

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**Note 1 — Summary of Operations and Significant AccountingPolicies**(All amounts in thousands, except per share amounts, unless otherwise noted)

**Nature of Business and Operations**

AlbanyMolecular Research, Inc. (the “Company”) provides scientific services, technologiesand products that improve quality of life. The Company’s core business consistsof a fee-for-service contract services platform encompassing drug discovery,development and manufacturing and a separate, stand-alone research anddevelopment 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 and six months ended June 30, 2007 are not necessarily indicative ofthe results that may be expected for the year ending December 31, 2007.The accompanying unaudited condensed consolidated financial statements shouldbe read 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 should theCompany’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 beterminated by the customer upon 30 days’ to one year’s prior notice,depending on the size of the contract. The Company analyzes its agreements todetermine whether the elements can be separated and accounted for individuallyor as a single unit 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 contractstypically provide for annual adjustments in billing rates for the scientistsassigned to the contract.

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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 atimeframe or outcome that has some level of unpredictability. There are nofixed deliverables that must be met for payment as part of these services. Assuch, 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, the Company’scustomers request that the Company retain materials produced upon completion ofthe project due to the fact that the customer does not have a qualifiedfacility to store those materials. In these instances, the revenue recognitionprocess is considered complete when project documents (batch records,Certificates of Analysis, etc.) have been delivered to the customer and paymenthas 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:

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

·                                          significantchanges in the manner of our use of the acquired assets or the strategy foroverall business;

·                                          significantnegative industry or economic trends; and

·                                          marketcapitalization relative to net 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 atJune 30, 2007 was $40,709 including $23,060 of goodwill associated with theCompany’s acquisition of AMRI Rensselaer (formerly known as Organichem, Inc.),$9,293 of goodwill associated with the Company’s acquisition of ComGenexKutato-Fejleszto Rt, and $5,670 of goodwill associated with the Company’sacquisition of certain assets of Ariane Orgachem Pvt. Ltd. in Aurangabad,India, and Ferico Laboratories Ltd. located in Navi Mumbai, India (“AMRI India”).

**StockCompensation**

Effective January 1, 2006, the Company adopted SFASNo. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123 (R)”), whichamended SFAS No. 123 and superseded 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 were not restated.

**Note 2 —Business Combination**

OnJune 29, 2007, the Company, through a wholly-owned subsidiary, acquired certainassets of AMRI India.

Theaggregate purchase price of $11,573 included cash payments totaling $11,073 andestimated capitalized costs related to the acquisition, primarily professionalfees, of $500.

The followingtable summarizes the preliminary allocation of the purchase price to theestimated fair value of the net assets acquired.   The allocation will be adjusted upon thefinal determination of the purchase price and the completion of the Company’svaluation of the acquired assets and liabilities of AMRI India.
|                                            | ** ** | **June 29, 2007** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|
| **Assets Acquired**                        | ** ** | ** **                  | ** ** |
| Accounts  receivable, net                  |       | $                           | 13         |   |
| Inventory                                  |       | 961                         |       |
| Prepaid expenses  and other current assets |       | 241                         |       |
| Property and  equipment, net               |       | 4,929                       |       |
| Goodwill                                   |       | 5,670                       |       |
| Total assets acquired                      |       | $                           | 11,814     |   |
|                                       |       |                        |       |
| **Liabilities Assumed**                    | ** ** | ** **                  | ** ** |
| Accounts payable  and accrued expenses     |       | $                           | 241        |   |
| Total liabilities assumed                  |       | $                           | 241        |   |
|                                       |       |                        |       |
| Net assets  acquired                       |       | $                           | 11,573     |   |

 

8

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Pro formafinancial information for the six month period ended June 30, 2007 as if theAMRI India acquisition had been completed as of January 1, 2007 has beenexcluded due to the immateriality of the operating results of AMRI India inrelation to the Company’s consolidated operating results as a whole.

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 results of ComGenex’s operations were included in the unauditedcondensed consolidated statement of operations for the three and six monthsended June 30, 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. 
|                                            | ** ** | **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 formafinancial information for the six month period ended June 30, 2006 as if theComGenex acquisition had been completed as of January 1, 2006 has been excludeddue to the immateriality of the operating results of ComGenex in relation tothe Company’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 June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands)**                     | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted average  common shares outstanding |       | 32,279                                              |       | 32,154                                            |       | 32,273 |   | 32,148 |   |
| Dilutive effect  of stock options           |       | 90                                                  |       | —                                            |       | 99 |   | 177 |   |
| Dilutive effect  of restricted stock        |       | 189                                                 |       | —                                            |       | 143 |   | 66 |   |
| Weighted average common  shares outstanding |       | 32,558                                              |       | 32,154                                            |       | 32,515 |   | 32,391 |   |

 

The Company has excludedcertain outstanding stock options from the calculation of diluted earnings pershare for the three and six months ended June 30, 2007 and the six months endedJune 30, 2006 because the exercise price was greater than the average marketprice of the Company’s common shares during that period, and as such, theseoptions would be anti-dilutive. The Company has excluded the effects ofoutstanding stock options and restricted stock from the calculation of dilutedloss per share for the three

9

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months ended June 30,2006 because such securities would be anti-dilutive.  The weighted average number of anti-dilutiveoptions and restricted shares outstanding (before the effects of the treasurystock method) was 1,934 and 2,602 for the three months ended June 30, 2007 and2006, respectively and 1,934 and 1,951 for the six months ended June 30, 2007and 2006, respectively.  These amountsare not included in the calculation of weighted average common sharesoutstanding.

**Note4 — Inventory**

Inventoryconsisted of the following at June 30, 2007 and December 31, 2006:
|                                             | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials                               |       | $                       | 6,394      |                        | $          | 7,525 |   |
| Work in process                             |       | 2,886                   |       | 1,914                       |       |
| Finished goods                              |       | 17,303                  |       | 12,858                      |       |
| Libraries, net  of accumulated amortization |       | 290                     |       | 347                         |       |
| Total                                       |       | $                       | 26,873     |                        | $          | 22,644 |   |

 

**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 included 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 LSMcosts 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 recordedadditional restructuring charges of $285 in the first six months of 2007,consisting of termination benefits.

The large scalerestructuring costs are included under the caption restructuring charge in theconsolidated statements of operations during 2007 and 2006 and therestructuring liabilities are included in accounts payable and accrued expenseson the consolidated balance sheets at June 30, 2007 and December 31, 2006.

The following table displays the restructuringactivity and liability balances:
|                       | ** ** | **Balance at  January 1,  2007** | ** ** | **Charges** | ** ** | **Incurred Amounts** | ** ** | **Balance at  June 30,  2007** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|-------------|------------|---------------------------|------------|------------------------------------------|------------|
| ** **            | ** ** | **(in 000’s)**                   | ** ** |
| Termination  benefits |       | $                                          | 682        |        | 285        |                      | (532       | )                                        | $          | 435 |   |
| Asset disposal  costs |       | 382                                        |       | —      |       | (382                      | )          | —                                   |       |
| Total                 |       | $                                          | 1,064      |        | $          | 285                       |       | $                                        | (914       | ) | $ | 435 |   |
|                       |            |                                            |            |             |            |                           |            |                                          |            |  |  |  |  |

 

*Termination benefits relate toseverance packages, outplacement services and career counseling for employeesaffected by the restructuring. Asset disposal costs relate primarily to thecarrying value of underutilized assets that were identified for disposal inconjunction with the restructuring plan.*

Thelarge scale manufacturing restructuring activity was recorded in the LSMoperating segment. The net cash outflow related to the large scalemanufacturing restructuring for the six months ended June 30, 2007 was$529.  Anticipated cash outflows relatedto the large scale manufacturing restructuring for the remainder of 2007 are$435, which primarily consists of the payment of termination benefits.

10

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***Mt.Prospect Research Center***

On May 4,2004 the Company announced its plan to consolidate operations by relocating itsMt. 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 fourthquarter of 2006, the Company secured a letter of intent related to thepotential sale of the Mt. Prospect facility for approximately $1.5million.  As a result, the Companyrecorded an additional impairment charge of approximately $0.5 million in thefourth quarter of 2006 to reduce the carrying amount of these assets to reflectthe sales price per the letter of intent less estimated selling costs.  The Company completed the sale of the facilityin March 2007 for $1.5 million.

At December 31, 2006, the Company had recordedrestructuring liabilities totaling $190 related to asset disposal costs,including brokerage commissions, legal fees, and marketing expenses associatedwith the planned sale of the Mt. Prospect Research Center facility. Thefollowing table displays the restructuring activity and liability balances:
|                       | ** ** | ** **                    | ** ** | ** **      | ** ** | ** **   | ** ** | **Balance at** | ** ** |
|-----------------------|------------|-------------------------------|------------|-----------------|------------|--------------|------------|---------------------|------------|
| ** **            | ** ** | **Balance at**           | ** ** | ** **      | ** ** | ** **   | ** ** | **June 30,**   | ** ** |
| ** **            | ** ** | **January 1, 2007** | ** ** | **Adjustments** | ** ** | **Payments** | ** ** | **2007**            | ** ** |
| Asset disposal  costs |       | $                             | 190        |            | (6         | )            | (184       | )                   | —     |   |
|                       |            |                               |            |                 |            |              |            |                     |            |  |

 

**Note 6 —Goodwill and Intangible Assets**

Thecarrying amounts of goodwill, by the Company’s Discovery/Development/SmallScale Manufacturing (“DDS”) and Large Scale Manufacturing (“LSM”) operatingsegments, as of June 30, 2007 and December 31, 2006 are as follows:
| ** **                 | ** ** | **DDS**    | ** ** | **LSM**    | ** ** | **Total**  | ** ** |
|----------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **June  30, 2007**         |       | $          | 11,979     |       | $          | 28,730     |       | $ | 40,709 |   |
|                       |       |       |       |       |       |       |       |
| **December 31, 2006** |       | $          | 12,751     |       | $          | 23,060     |       | $ | 35,811 |   |

 

The increase ingoodwill within the LSM segment from December 31, 2006 to June 30, 2007 isrelated to the acquisition of AMRI  Indiadescribed in Note 2.  The decrease ingoodwill within the DDS segment from December 31, 2006 to June 30, 2007 is relatedto the final valuation adjustments for the Company’s acquisition of ComGenexdescribed in Note 2.

The components ofintangible assets are as follows:
| ** **                    | ** ** | **Cost**   | ** ** | **Accumulated  Amortization** | ** ** | **Net**    | ** ** | **Amortization  Period** | ** ** |
|-------------------------------|------------|------------|------------|-------------------------------|------------|------------|------------|--------------------------|------------|
| **June  30, 2007**            | ** ** | ** ** | ** ** | ** **                    | ** ** | ** ** | ** ** | ** **               | ** ** |
| Patents and  Licensing Rights |       | $          | 2,715      |                          | $          | (890       | )          | $                        | 1,825      |   | 2-16 years |   |
| Other                         |       | 964        |       | (453                          | )          | 511        |       | 18-24 months             |       |
| Total                         |       | $          | 3,679      |                          | $          | (1,343     | )          | $                        | 2,336      |   |   |   |
|                          |       |       |       |                          |       |       |       |                     |       |
| **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 $221 and $136 for the three monthsended June 30, 2007 and 2006, respectively and $323 and $164 for the six monthsended June 30, 2007 and 2006, respectively.

11

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The following chartrepresents estimated future annual amortization expense related to intangibleassets:

 
| **Year ending December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| 2007 (remaining)                  |       | $          | 340        |   |
| 2008                              |       | 492        |       |
| 2009                              |       | 199        |       |
| 2010                              |       | 144        |       |
| 2011                              |       | 144        |       |
| Thereafter                        |       | 1,017      |       |
|                                   |            |            |            |  |

 

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

AMRIRensselaer previously provided retirement benefits under two non-contributorydefined benefit plans and a non-contributory, unfunded post-retirement welfareplan. Future benefits under the defined benefit plans and for salariedparticipants in the post-retirement welfare plan have been frozen.

***Componentsof Net Periodic Benefit Cost***
| ** **                                                                    | ** ** | **Pension   Benefits**                           | ** ** | **Postretirement   Benefits**              | ** ** | **Pension   Benefits**                         | ** ** | **Postretirement   Benefits**                  | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                    | ** ** | **Three Months   Ended June 30,** | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months   Ended June 30,** | ** ** | **Six Months   Ended June 30,** | ** ** |
| ** **                                                                    | ** ** | **2007**                                              | ** ** | **2006**                                        | ** ** | **2007**                                            | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                          |       |                                                  |       |                                            |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Service cost                                                                  |       | $                                                     | —     |                                            | $          | —                                              |       | $                                                   | 4          |   | $ | 19 |   | $ | — |   | $ | — |   | $ | 23 |   | $ | 36 |   |
| Interest cost                                                                 |       | 309                                                   |       | 303                                             |       | 9                                                   |       | 8                                                   |       | 610 |   | 597 |   | 18 |   | 15 |   |
| Expected return  on plan assets                                               |       | (377                                                  | )          | (341                                            | )          | —                                              |       | —                                              |       | (743 | ) | (675 | ) | — |   | — |   |
| Amortization of  prior service cost                                           |       | —                                                |       | —                                          |       | 1                                                   |       | —                                              |       | — |   | — |   | 1 |   | — |   |
| Recognized net  loss                                                          |       | (9                                                    | )          | 23                                              |       | 1                                                   |       | 3                                                   |       | — |   | 26 |   | 3 |   | 5 |   |
| Net periodic  benefit (income) cost                                           |       | $                                                     | (77        | )                                               | $          | (15                                                 | )          | $                                                   | 15         |   | $ | 30 |   | $ | (133 | ) | $ | (52 | ) | $ | 45 |   | $ | 56 |   |
| **Recognized  in Accumulated Other Comprehensive Income (“AOCI”):** |       |                                                  |       |                                            |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Prior service  cost                                                           |       | —                                                |       |                                            |       | —                                              |       |                                                |       | — |   |   |   | — |   |   |   |
| Net actuarial  (gain) loss                                                    |       | (9                                                    | )          |                                            |       | 1                                                   |       |                                                |       | — |   |   |   | 3 |   |   |   |
| Total recognized in  AOCI, pre-tax                                            |       | $                                                     | (9         | )                                               |       |                                                | $          | 1                                                   |       |   |   | $ | — |   |   |   | $ | 3 |   |   |   |

 

***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.  Based on revised actuarial assumptions, the Companyexpects total contributions for 2007 to be $549.  As of June 30, 2007, $375 in contributionshave been made.  The Company anticipates making an additional $174 ofcontributions during 2007.

**Note 8 — Share-Based Payments**

During the three monthsended June 30, 2007 and 2006, the Company recognized total share based compensationcost, net of tax, of $244 and $212 respectively.  During the six months ended June 30, 2007 and2006, the Company recognized total share based compensation cost, net of tax,of $479 and $397, 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***

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**Restricted Stock**

A summary ofunvested restricted stock activity as of June 30, 2007 and changes during thesix months then ended is presented below:
|                                 | ** ** | **Number of  Shares** | ** ** | **Weighted  Average Grant Date  Fair Value** | ** ** |
|---------------------------------|------------|----------------------------|------------|-------------------------------------------------------------|------------|
| Outstanding, December  31, 2006 |       | 419                        |       | $                                                           | 9.40       |   |
| Granted                         |       | 169                        |       | $                                                           | 9.58       |   |
| Vested                          |       | —                     |       | $                                                           | —     |   |
| Forfeited                       |       | (45                        | )          | $                                                           | 9.02       |   |
| Outstanding, June 30,  2007     |       | 543                        |       | $                                                           | 9.49       |   |

 

The weighted average fairvalue of restricted shares granted during the three months ended June 30, 2007and 2006 were $9.58 and $10.15, respectively. As of June 30, 2007, there was $3,856 of total unrecognized compensationcost related to non-vested restricted shares. That cost is expected to berecognized over a weighted-average period of 3.66 years.  No restricted shares vested during the threemonths ended June 30, 2007.

**Stock Options**

The fair value of eachstock option award is estimated at the date of grant using the Black-Scholesvaluation model based on the following assumptions: 
|                        | ** ** | **For the Six Months Ended** | ** ** |
|------------------------|------------|--------------------------------------------------|------------|
| ** **             | ** ** | **June 30, 2007**                      | ** ** | **June 30, 2006** | ** ** |
| Expected life in years |       | 5                                                |       | 5 |   |
| Interest rate          |       | 4.69                                             | %          | 4.99 | % |
| Volatility             |       | 38                                               | %          | 42 | % |
| Dividend yield         |       | —                                           |       | — |   |

 

A summary of stock option activity under the Company’sstock option plan as of June 30, 2007 and changes during the six month periodthen 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                            |       | 98                         |       | 11.26                         |       |                                                                 |       |                            |       |
| Exercised                          |       | (63                        | )          | 1.62                          |       |                                                                 |       |                            |       |
| Forfeited                          |       | (109                       | )          | 19.07                         |       |                                                                 |       |                            |       |
| Expired                            |       | (2                         | )          | 1.53                          |       |                                                                 |       |                            |       |
| Outstanding, June 30, 2007         |       | 2,095                      |       | 20.36                         |       | 5.0                                                                  |       | $                               | 2,654      |   |
| Options exercisable, June 30, 2007 |       | 1,862                      |       | $                             | 21.52      |                                                                 | 4.1        |                            | $          | 1,782 |   |

 

As of June 30, 2007 therewas $1,024 of total unrecognized compensation cost related to non-vested stockoptions. That cost is expected to be recognized over a weighted-average periodof 2.44 years.

***EmployeeStock Purchase Plan***

During the six monthsended June 30, 2007 and 2006, 19 and 18 shares, respectively, were issued underthe Employee Stock Purchase Plan.  Duringthe six months ended June 30, 2007 and 2006, cash received from stock optionexercises and employee stock purchase plan purchases was $348 and $276,respectively.  The actual tax benefitrealized for the tax deductions from stock option exercises was $0 during thesix months ended June 30, 2007 and 2006.

**Note 9 — Operating Segment Data**

The Company hasorganized its sales, marketing and production activities into the Discovery/Development/SmallScale Manufacturing (DDS) and Large Scale Manufacturing (LSM) segments based onthe criteria set forth in SFAS No. 131, “Disclosures about Segments of anEnterprise and Related Information”. The Company’s management relies on aninternal management accounting system to report results of the segments. Thesystem includes revenue and cost information by segment. The Company’smanagement makes financial decisions and allocates resources based on theinformation it receives from this internal system.

13

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DDS includesactivities such as drug lead discovery, optimization, drug development andsmall scale commercial manufacturing. LSM includes pilot to commercial scalemanufacturing of active pharmaceutical ingredients and intermediates and highpotency and controlled substance manufacturing, all of which are in compliancewith the Food and Drug Administration’s (FDA) current Good ManufacturingPractices. Corporate activities include business development and administrativefunctions, as well as research and development costs that have not beenallocated to the operating segments.

Thefollowing table contains earnings data by operating segment, reconciled tototals included in the unaudited condensed consolidated financial statements:
|                                                    | ** ** | **Contract  Revenue** | ** ** | **Milestone &  Recurring  Royalty  Revenue** | ** ** | **Operating  (loss) income** | ** ** | **Depreciation  and  Amortization** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|-------------------------------------------------------|------------|-----------------------------------|------------|-------------------------------------|------------|
| **For the  three months ended June 30, 2007** | ** ** | ** **            | ** ** | ** **                                            | ** ** | ** **                        | ** ** | ** **                          | ** ** |
| DDS                                                |       | $                     | 20,295     |                                                  | $          | 9,338                             |       | $                                   | 13,741     |   | $ | 2,597 |   |
| LSM                                                |       | 19,641                |       | 80                                                    |       | 4,754                             |       | 1,617                               |       |
| Corporate                                          |       | —                |       | —                                                |       | (11,968                           | )          | —                              |       |
| Total                                              |       | $                     | 39,936     |                                                  | $          | 9,418                             |       | $                                   | 6,527      |   | $ | 4,214 |   |
|                                               |       |                  |       |                                                  |       |                              |       |                                |       |
| **For the  three months ended June 30, 2006** | ** ** | ** **            | ** ** | ** **                                            | ** ** | ** **                        | ** ** | ** **                          | ** ** |
| DDS                                                |       | $                     | 17,614     |                                                  | $          | 7,200                             |       | $                                   | 8,067      |   | $ | 2,314 |   |
| LSM                                                |       | 20,769                |       | —                                                |       | 1,223                             |       | 1,482                               |       |
| Corporate                                          |       | —                |       | —                                                |       | (10,417                           | )          | —                              |       |
| Total                                              |       | $                     | 38,383     |                                                  | $          | 7,200                             |       | $                                   | (1,127     | ) | $ | 3,796 |   |
|                                               |       |                  |       |                                                  |       |                              |       |                                |       |
| **For the  six months ended June 30, 2007**   | ** ** | ** **            | ** ** | ** **                                            | ** ** | ** **                        | ** ** | ** **                          | ** ** |
| DDS                                                |       | $                     | 40,505     |                                                  | $          | 16,484                            |       | $                                   | 25,687     |   | $ | 5,113 |   |
| LSM                                                |       | 40,662                |       | 80                                                    |       | 7,536                             |       | 3,235                               |       |
| Corporate                                          |       | —                |       | —                                                |       | (22,759                           | )          | —                              |       |
| Total                                              |       | $                     | 81,167     |                                                  | $          | 16,564                            |       | $                                   | 10,464     |   | $ | 8,348 |   |
|                                               |       |                  |       |                                                  |       |                              |       |                                |       |
| **For the  six months ended June 30, 2006**   | ** ** | ** **            | ** ** | ** **                                            | ** ** | ** **                        | ** ** | ** **                          | ** ** |
| DDS                                                |       | $                     | 34,557     |                                                  | $          | 14,378                            |       | $                                   | 18,745     |   | $ | 4,482 |   |
| LSM                                                |       | 40,014                |       | —                                                |       | 1,970                             |       | 2,990                               |       |
| Corporate                                          |       | —                |       | —                                                |       | (19,889                           | )          | —                              |       |
| Total                                              |       | $                     | 74,571     |                                                  | $          | 14,378                            |       | $                                   | 826        |   | $ | 7,472 |   |

 

14

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The following tablesummarizes other information by segment as of or for the six months ended June30, 2007:
|                                          | ** ** | **As of June 30, 2007** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands)**                  | ** ** | **DDS**                                     | ** ** | **LSM** | ** ** | **Total** | ** ** |
|                                     |       |                                        |       |   |   |   |   |
| Total assets                             |       | $                                           | 234,877    |   | $ | 151,122 |   | $ | 385,999 |   |
| Goodwill included in total assets        |       | 11,979                                      |       | 28,730 |   | 40,709 |   |
| Investments in unconsolidated affiliates |       | 956                                         |       | — |   | 956 |   |
| Capital  expenditures                    |       | 5,613                                       |       | 1,773 |   | 7,386 |   |
|                                          |            |                                             |            |  |  |  |  |  |  |  |

 

The following tablesummarizes other information by segment as of or for the six months endedJune 30, 2006:
|                                           | ** ** | **As of June 30, 2006** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands)**                   | ** ** | **DDS**                                     | ** ** | **LSM** | ** ** | **Total** | ** ** |
|                                      |       |                                        |       |   |   |   |   |
| Total assets                              |       | $                                           | 236,212    |   | $ | 128,798 |   | $ | 365,010 |   |
| Goodwill  included in total assets        |       | 12,451                                      |       | 23,060 |   | 35,511 |   |
| Investments in  unconsolidated affiliates |       | 956                                         |       | — |   | 956 |   |
| Capital expenditures                      |       | 6,610                                       |       | 3,130 |   | 9,740 |   |
|                                           |            |                                             |            |  |  |  |  |  |  |  |

 

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

Totalcontract revenue from DDS’ three largest customers represented approximately10%, 10% and 5% of DDS’ total contract revenue for the three months ended June30, 2007, and 13%, 9% and 7% of DDS’ total contract revenue for the threemonths ended June 30, 2006.  Totalcontract revenue from DDS’ three largest customers represented approximately10%, 8% and 5% of DDS’ total contract revenue for the six months ended June 30,2007 and 13%, 9% and 6% for the six months ended June 30, 2006.  Total contract revenue from LSM’s largestcustomer, GE Healthcare (GE), represented 47% of LSM’s total contract revenuefor the three months ended June 30, 2007 and 2006.  Total contract revenue from GE represented42% and 52% of LSM’s total contract revenue for the six months ended June 30,2007 and 2006, respectively. GE accounted for approximately 21% and 28% of theCompany’s total contract revenue for the six months ended June 30, 2007 and2006, respectively.

TheCompany’s total contract revenue for the three and six months ended June 30,2007 and 2006 was recognized from customers in the following geographicregions:
|               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **    | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|          |       |                                                |       |                                              |       |   |   |   |   |
| United States |       | 69                                                  | %          | 64                                                | %          | 69 | % | 64 | % |
| Europe        |       | 27                                                  |       | 33                                                |       | 27 |   | 34 |   |
| Other         |       | 4                                                   |       | 3                                                 |       | 4 |   | 2 |   |
|          |       |                                                |       |                                              |       |   |   |   |   |
| Total         |       | 100                                                 | %          | 100                                               | %          | 100 | % | 100 | % |

 

**Note 11 — Comprehensive Income**

Thefollowing table presents the components of the Company’s comprehensive incomefor the three and six months ended June 30, 2007 and 2006:
| ** **                                                                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands)**                                                   | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income (loss)                                                         |       | $                                                   | 4,576      |                                              | $          | (353 | ) | $ | 7,800 |   | $ | 1,541 |   |
|                                                                      |       |                                                |       |                                              |       |   |   |   |   |
| Other comprehensive  loss:                                                |       |                                                |       |                                              |       |   |   |   |   |
| Change in  unrealized gain on available-for-sale securities, net of taxes |       | 6                                                   |       | 20                                                |       | 29 |   | 34 |   |
| Change in  unrealized (loss) gain on interest rate swap, net of taxes     |       | (19                                                 | )          | —                                            |       | (45 | ) | 17 |   |
| Foreign currency  translation gain (loss)                                 |       | 422                                                 |       | (145                                              | )          | 578 |   | (131 | ) |
| Net actuarial  (gain) loss of pension and postretirement benefits         |       | (8                                                  | )          | —                                            |       | 3 |   | — |   |
| Total comprehensive  income (loss)                                        |       | $                                                   | 4,977      |                                              | $          | (478 | ) | $ | 8,365 |   | $ | 1,461 |   |

 

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**Note 12— 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 on 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 the patentsare 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.

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

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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.

**Note 13— 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 $3.7 million at January 1, 2007, of which$0.8 million related to accrued interest and penalties. In 2007, themajority of these unrecognized tax benefits are classified as income taxespayable in the condensed consolidated balance sheet.  If recognized, the portion of liabilities forunrecognized tax benefits that would decrease the Company’s provision forincome taxes and increase net income is $2.4 million. The impact on netincome reflects the liabilities for unrecognized tax benefits net of certaindeferred tax assets and the federal tax benefit of state income tax items.

As ofJune 30, 2007, the Company accrued an additional $0.2 million of reserves basedon current year tax positions and an additional $0.1 million of interestrelated to its uncertain tax positions, which is recorded as a component of theCompany’s provision for income taxes in the condensed consolidated statement ofoperations.  The Company also had asettlement through payment of a previously unrecognized benefit of $0.5 millionin the second quarter.  At June 30, 2007,the Company had unrecognized tax benefits of $3.5 million.

TheCompany files Federal income tax returns, as well as multiple state and foreignjurisdiction tax returns. The Company’s federal income tax returns have beenexamined by the Internal Revenue Service through the year ended December 31,2004.  All significant state and foreignmatters have been concluded for years through 1999. The Company does notbelieve it is reasonably possible to estimate the potential change in itsunrecognized tax benefit due to tax examinations that are currently underway.

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Item2.  Management’s Discussion and Analysisof Financial 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 included withinthis 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), the effect of thepurchase of assets from Ariane Orgachem Private Limited and Ferico LaboratoriesLimited, including increasing options and solutions for customers, businessgrowth and the expansion of the Company’s global market, 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 late 2007 or early 2008,drug discovery, product commercialization, license arrangements, research anddevelopment projects and expenses, selling, general and administrativeexpenses, goodwill impairment, competition and tax rates. The Company’s actualresults may differ materially from such forward-looking statements as a resultof numerous factors, some of which the Company may not be able to predict andmay not be within the Company’s control. Factors that could cause suchdifferences include, but are not limited to, those discussed in Part I, Item1A, “Risk Factors”, of the Company’s Annual Report on Form 10-K for the yearended December 31, 2006 as filed with the Securities and ExchangeCommission on March 15, 2007 and in PartII Item 1A, “Risk Factors,” in this Form 10-Q. All forward-lookingstatements are made as of the date of this report, and we do not undertake toupdate any such forward-looking statements in the future. References to “we,” “us,”and “our,” refer to Albany Molecular Research, Inc. and its subsidiaries, takenas a whole.

**Strategyand Overview**

Weprovide scientific services, technologies and products that improve quality oflife while delivering excellence, value and maximum return. Our core businessconsists of contract drug discovery, chemistry, and manufacturingservices.   We continue to execute ourlong-term strategy to develop and grow a fully integrated global platform fromwhich we can provide these services, including our most recent purchase oflarge-scale manufacturing sites in India in June 2007.  With this newest acquisition, we have beenable to globalize our manufacturing operations, which offers us the flexibilityto produce raw materials and process intermediates to support our domesticlarge scale manufacturing facility.  Inaddition, we believe that this will allow us to provide our customers withincreasing options and solutions, provide our business opportunities for growthand expand our global market.

Wecontinue to integrate our research and manufacturing facilities worldwide,increasing our access to key global markets and enabling us to provide ourcustomers with a flexible combination of high quality services and competitivecost structures to meet their individual outsourcing needs.  We seekcomprehensive research and/or supply agreements with our customers,incorporating several of our service offerings and spanning across the entirepharmaceutical research and development process.  Our research facilities providediscovery, chemical development, analytical, and small-scale cGMP manufacturingservices.  Compounds discovered and developed in our research facilitiescan then be seamlessly transitioned to production at our large-scalemanufacturing facilities for use in clinical trials and, ultimately, commercialsales if the product meets regulatory approval.  We believe that theability to partner with a single provider of pharmaceutical research anddevelopment services from discovery through commercial production is ofsignificant benefit to our customers.  Through our comprehensive serviceofferings, we are able to provide customers with a more efficient transition ofexperimental compounds through the research and development process, ultimatelyreducing the time and cost involved in bringing these compounds from concept tomarket.

Inaddition to our contract services, we also have a separate, stand-aloneresearch and development division comprising proprietary technologies, internaldrug discovery and bundled capabilities designed for more collaborativerelationships.  We conduct proprietaryresearch and development to discover new therapeutically active lead compoundswith commercial potential. We anticipate that we would then license thesecompounds to third parties in return for up-front and service fees, andmilestone payments as well as recurring royalty payments if these compounds aredeveloped into new commercial drugs. Our proprietary research and developmentactivities previously led to the development, patenting and 1995 licensing of asubstantially pure form of, and a manufacturing process for, the activeingredient in the non-sedating antihistamine fexofenadine HCl marketed bySanofi-Aventis S.A. as Allegra in the Americas and as Telfast elsewhere.  Further, in October 2005, we licensedthe worldwide rights to develop and commercialize potential products from ouramine neurotransmitter reuptake inhibitors identified in one of our proprietaryresearch programs to Bristol-Myers Squibb Company (“BMS”). In October 2006, weannounced the selection of a compound from our proprietary 

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oncologyresearch program for advanced preclinical testing, with the goal of submittingan Investigational New Drug Application (“IND”) with the U.S. Food and DrugAdministration (“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, 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 June 30, 2007was $49.4 million, as compared to $45.6 million for the quarter ended June 30,2006.

Contract services revenue for the second quarter of2007 was $39.9 million, compared to $38.4 million in the second quarter of2006. Discovery, development, and small scale manufacturing (“DDS”) revenuesincreased $2.7 million from the quarter ended June 30, 2006 due to increaseddemand for these services in the U.S. and Singapore.  Large scale manufacturing revenue decreasedby $1.1 million primarily due to a decrease in revenue from the production ofclinical supply materials for use in advance stage human trials of $1.7million, offset by increased commercial sales of $0.8 million, which wereprimarily derived from the transition of our customers’ products from clinicaltrials to commercial sale.  We currentlyexpect the overall trend of increased demand for clinical supply materials tocontinue 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, wereslightly higher than in the quarter ended June 30, 2006.  Additionally, we received milestone revenueof $1.5 million for achieving a target from a licensing and research agreementwith Bristol-Myers Squibb Company (“BMS”) during the second quarter of 2007.

Consolidated gross margin was 24.9% for the quarterended June 30, 2007 compared to 15.4% for the quarter ended June 30, 2006.Gross margin at the DDS operating segment decreased to 25.7% in the secondquarter of 2007 compared to 26.5% for the same period in 2006, primarilyresulting from underutilized capacity at some of our international locations,offset in part by an improvement in domestic gross margin due to an increase inhigh margin fixed fee revenue during the quarter ended June 30, 2007.  Gross margin at the LSM operating segment was24.0% in the second quarter of 2007, compared with a gross margin of 5.9% inthe second quarter of 2006. The increase in gross margin from the secondquarter of 2006 is due primarily to an increase in commercial sales, whichgenerally yield a higher margin, process efficiencies, as well as operatingcost savings resulting from the November 2006 restructuring of this segment.

Duringthe six months ended June 30, 2007, cash flow from operations was $22.8million.  The increase of $20.2 millionin cash flow from operations from the six months ended June 30, 2006 resultedprimarily from higher revenues in the first half of 2007, along with a decreasein accounts receivable due to timing of cash collections and an increase inincome taxes payable due to timing of tax payments, including a $2.8 millionincome tax payment in the first quarter of 2006 related to the receipt of the$8.0 million licensing fee from BMS. We spent $11.4 million on our acquisitionof AMRI India and $7.4 million in capital on our facilities and equipment,primarily on the construction on a new research center in India and themodernization of our large-scale manufacturing suites.  In addition, we spent $2.4 million inprincipal payments on our outstanding debt balances.  As of June 30, 2007, we had $110.9 million incash, cash equivalents and investments and $16.1 million in bank and otherrelated debt.

**Resultsof Operations – Three Months and Six Months Ended June 30, 2007 Compared toThree Months and Six Months Ended June 30, 2006**

***Revenues***

*Totalcontract revenue*

Contract revenueconsists primarily of fees earned under contracts with our third partycustomers.  Our contract revenues foreach of our DDS and LSM segments were as follows:
|                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands)** | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|                    |       |                                                |       |                                              |       |   |   |   |   |
| DDS                     |       | $                                                   | 20,295     |                                              | $          | 17,614 |   | $ | 40,505 |   | $ | 34,557 |   |
| LSM                     |       | 19,641                                              |       | 20,769                                            |       | 40,662 |   | 40,014 |   |
| Total                   |       | $                                                   | 39,936     |                                              | $          | 38,383 |   | $ | 81,167 |   | $ | 74,571 |   |

 

DDScontract revenues for the quarter ended June 30, 2007, increased $2.7 millionto $20.3 million as compared to $17.6 million for the same quarter in the prioryear.  The increase is due primarily toan increase in contract revenue from development and small-scale 

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manufacturingservices of $2.1 million as customers continue to focus on development-stageprojects.  In addition, discoveryservices revenue increased $0.6 million due to increased demand for theseservices, as our ability to offer various combinations of services and coststructures at our U.S. and Singapore locations continues to gain acceptance inthe worldwide marketplace.  We currentlyexpect the overall growth trends in DDS contract revenues noted above tocontinue through the remainder of 2007.

Large scale manufacturing revenue for the quarterended June 30, 2007 decreased by $1.1 million, due primarily to a decreasein  revenue from the production ofclinical supply materials for use in advance stage human trials of $1.7million, offset by increased commercial sales of $0.8 million, which wereprimarily derived from the transition of our customers’ products from clinicaltrials to commercial sale.

For the six months ended June 30, 2007, DDScontract revenue has increased $5.9 million from the six months endedJune 30, 2006.  The increase is dueprimarily to an increase in contract revenue from development and small-scalemanufacturing services of $3.6 million as customers continue to focus on development-stageprojects.  In addition, discoveryservices revenue increased $2.3 million due to increased demand for theseservices, as our ability to offer various combinations of services and coststructures at our U.S. and international locations continues to gain acceptancein the worldwide marketplace.

LSM contract revenues for the six months endedJune 30, 2007 increased $0.6 million from the six months endedJune 30, 2006.  This increase isprimarily due to increased commercial sales of $5.7 million, partially offsetby a decrease in revenue from the production of clinical supply materials foruse in advance stage human trials of $2.7 million, as well as a $2.4 milliondecrease in sales of commercial products to GE due to the timing of customerrequirements.  We currently expect totalrevenue from GE for our LSM segment for 2007 to slightly decrease from revenuefrom GE in 2006, and we currently expect an overall annual increase in demandfor clinical supply materials from 2006.

*Recurringroyalty revenue*

We earn royaltiesunder our licensing agreement with Sanofi-Aventis S.A. for the activeingredient in Allegra.  Royalties were asfollows:
| Three Months Ended June 30, | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------|------------|
| **2007**                                        | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                      | ** ** | **(in thousands)**                           | ** ** | ** ** | ** ** |
| $                                          | 7,838      |                                              | $          | 7,200 |   | $ | 14,984 |   | $ | 14,378 |   |
|                                                 |            |                                                   |            |  |  |  |  |  |  |  |  |

 

Recurring royalties, which are based on the worldwidesales of fexofenadine HCl, marketed as Allegra in the Americas and Telfastelsewhere, as well as on sales of Sanofi-Aventis’ authorized generics, slightlyincreased for the quarter ended June 30, 2007 from the quarter ended June 30,2006.

The recurring royalties we receive on the sales ofAllegra/Telfast have historically provided a material portion of our revenues,earnings, and operating cash flows. During 2006, we experienced a decrease in revenues, earnings, andoperating cash flows from historical levels due to the impact of the at-risklaunch of generic fexofenadine by Barr Pharmaceuticals, Inc. and TevaPharmaceuticals Industries Ltd. on U.S. sales of Allegra by Sanofi-Aventis.   We currently expect 2007 royalty revenues toremain flat from amounts recognized in 2006. We continue to develop our business in an effort to supplement therevenues, earnings and operating cash flows that have historically beenprovided by Allegra/Telfast royalties. We continue to forcefully and vigorously defend our intellectualproperty related to Allegra, and we continue to pursue our intellectualproperty rights as patent infringement litigation progresses.  However, should we or Aventis be unsuccessfulin defending these patents we would continue to experience a material decreasefrom historic royalty revenues. Furthermore, an at-risk launch of a generic version of Allegra-D by ageneric competitor could result in further material decreases in royalty revenues.

*Milestone revenue*

Milestone revenue is earned for achieving certainmilestones included in licensing and research agreements with certaincustomers.  Milestone revenues were asfollows:
| Three Months Ended June 30, | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------|------------|
| **2007**                                        | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                      | ** ** | **(in thousands)**                           | ** ** | ** ** | ** ** |
| $                                          | 1,580      |                                              | $          | — |   | $ | 1,580 |   | $ | — |   |
|                                                 |            |                                                   |            |  |  |  |  |  |  |  |  |

 

 

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Milestonerevenue increased $1.6 million for both the three and six months ended June 30,2007 as compared with the three and six months ended June 30, 2006,respectively.  This increase is primarilydue to a milestone payment of $1.5 million in conjunction with the Company’slicense and research agreement with BMS. This milestone payment was triggered by a compound, which is beingdeveloped under the agreement, proceeding into pre-clinical development.

***Costs and Expenses***

*Costof contract revenue*

Ourcost of contract revenue consists primarily of compensation and associatedfringe benefits for employees, as well as chemicals, depreciation and otherindirect project related costs.  Cost ofcontract revenue for our DDS and LSM segments were as follows:
|                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **Segment**             | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| **(in thousands)** |       |                                                |       |                                              |       |   |   |   |   |
|                    |       |                                                |       |                                              |       |   |   |   |   |
| DDS                     |       | $                                                   | 15,078     |                                              | $          | 12,943 |   | $ | 29,775 |   | $ | 25,588 |   |
| LSM                     |       | 14,925                                              |       | 19,546                                            |       | 32,915 |   | 38,044 |   |
| Total                   |       | $                                                   | 30,003     |                                              | $          | 32,489 |   | $ | 62,690 |   | $ | 63,632 |   |
|                    |       |                                                |       |                                              |       |   |   |   |   |
| DDS Gross Margin        |       | 25.7                                                | %          | 26.5                                              | %          | 26.5 | % | 26.0 | % |
| LSM Gross Margin        |       | 24.0                                                | %          | 5.9                                               | %          | 19.1 | % | 4.9 | % |
| Total Gross  Margin     |       | 24.9                                                | %          | 15.4                                              | %          | 22.8 | % | 14.7 | % |

DDS had a contractrevenue gross margin of 25.7% for the three months ended June 30, 2007 comparedto contract revenue gross margin of 26.5% for the same period in 2006.  The decrease in gross margin resulted fromunderutilized capacity at some of our international  locations, offset in part by an improvementin domestic gross margin due to an increase in high margin fixed fee revenueduring the quarter ended June 30, 2007. DDS’ contract revenue gross margin slightly increased to 26.5% for thesix months ended June 30, 2007 to 26.0% for the same period in 2006.  This increase was primarily due to anincrease in contract revenues in relation to the fixed cost components of theDDS contract business, offset by a decrease in margin from internationallocations.  We currently expect DDScontract margins over the balance of the year to remain consistent with themargins earned for the first six months of 2007.

LSM’s contract revenuegross margin increased to 24.0% for the three months ended June 30, 2007compared to 5.9% for the same period in 2006 and to 19.1% for the six monthsended June 30, 2007 as compared to 4.9% for the same period in 2006.  This increase in gross margin from 2006 isdue primarily to product sales mix. Commercial sales, which generally yield a higher margin, increased inthe second quarter of 2007 from the same period in 2006.  Additionally, there was an increase in grossmargin due to process efficiencies as well as the recognition of operating costsavings resulting from the November 2006 restructuring of this segment.  We currently expect LSM contract margins overthe balance of the year to fluctuate from quarter to quarter, based on productsales mix, as well as the impact of annually scheduled plant maintenance andthe seasonality of customer demand by quarter. Overall for the year, we expect contract margins to approximate marginsrecognized during the first quarter of 2007.

*Technology incentive award*

Wemaintain a Technology Development Incentive Plan, the purpose of which is tostimulate and encourage novel innovative technology development by ouremployees.  This plan allows eligibleparticipants to share in a percentage of the net revenue earned by us relatingto patented technology with respect to which the eligible participant is namedas an inventor or made a significant intellectual contribution.  The award is currently payable primarily toDr. Thomas D’Ambra, the Chief Executive Officer and President of theCompany.  The incentive award was asfollows:
| Three Months Ended June 30, | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------|------------|
| **2007**                                        | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| **(in thousands)**                         | ** ** |
|                                            |       |                                              |       |   |   |   |   |
| $                                               | 814        |                                              | $          | 720 |   | $ | 1,527 |   | $ | 1,518 |   |
|                                                 |            |                                                   |            |  |  |  |  |  |  |  |  |

 

The increase intechnology incentive award expense for the quarter ended June 30, 2007 from thequarter ended June 30, 2006 is primarily due to the increase in Allegra royaltyrevenue.  The remainder of the increaseis due to awards granted to certain employees resulting from the milestonepayment of $1.5 million received from BMS.

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Theincrease in technology incentive award expense for the six months ended June30, 2007 from the same period in 2006 is primarily due to awards granted inrelation to the milestone payment from BMS, offset by awards in the firstquarter of 2006 paid to employees involved in the development our proprietaryamine neurotransmitter reuptake inhibitors resulting from the licensing of thistechnology to BMS.

*Researchand development*

Research anddevelopment expense consists of compensation and benefits for scientificpersonnel for work performed on proprietary technology development, researchprojects, costs of chemicals and other out of pocket costs, and overhead costs.We utilize our expertise in small molecule chemistry, biocatalysis and naturalproduct technologies to perform our internal research and development projects.The goal of these programs is to discover new compounds with commercialpotential. We would then seek to license these compounds to a third party inreturn for a combination of up-front license fees, milestone payments andrecurring royalty payments if these compounds are successfully developed intonew drugs and reach the market. In addition, research and development isperformed at our large-scale manufacturing facility related to the potentialmanufacture of new products, the development of processes for the manufactureof generic products with commercial potential, and the development ofalternative manufacturing processes.  Research anddevelopment expenses were as follows:
| Three Months Ended June 30, | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------|------------|
| **2007**                                        | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| **(in thousands)**                         | ** ** |
|                                            |       |                                              |       |   |   |   |   |
| $                                               | 3,737      |                                              | $          | 2,631 |   | $ | 6,118 |   | $ | 5,342 |   |
|                                                 |            |                                                   |            |  |  |  |  |  |  |  |  |

 

The increase in R&D expense of $1.1 million from the quarter endedJune 30, 2006 to $3.7 million in the quarter ended June 30, 2007 is dueprimarily to expenses related to the progression of one of our compounds from ourproprietary oncology research program to the advanced preclinical testingphase.  On October 30, 2006, we announcedthe selection 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.  In addition,R&D expense increased due to incremental costs related to the developmentof active pharmaceutical ingredients to be used in the manufacturing ofspecialty authorized generic drugs.  Wecurrently expect research and development expenses for the remainder of 2007 toincrease from those incurred in the first and second quarter of 2007 as weadvance our oncology compound towards an IND submission with the FDA.  Additionally, we expect increased costsassociated with the continued development of specialty authorized generics, aswell as researching and developing processes to manufacture intermediates atour AMRI India facility which have historically been purchased from thirdparties to be used at our domestic locations.

The increase in R&D expense during the six months ended June 30,2007 is due primarily to advanced preclinical testing phase expenses from ouroncology research program and R&D on specialty authorized generics,partially offset by a decrease in salaries and benefits as a result of areallocation of resources.

Projectingexpected project completion dates and anticipated revenue from our internalresearch programs is not practical at this time due to the early stages of theprojects and the inherent risks related to the development of new drugs. Ourinternal central nervous system program, which was our most advanced project todate, was licensed to BMS in exchange for up-front license fees, contractedresearch services, and the rights to future milestone and royaltypayments.  We also continue toutilize our proprietary technologies to further advance other early tomiddle-stage internal research programs in the fields of oncology, irritablebowel syndrome/emesis, obesity, immunosuppresion and inflammation, with a viewto seeking a licensing partner for these programs at an appropriate research ordevelopmental stage.

Webudget and monitor our research and development costs by type or category,rather than by project on a comprehensive or fully allocated basis. Inaddition, a significant portion of our research and development expenses is nottracked by project as it benefits multiple projects or our technology platform.Consequently, fully loaded research and development cost summaries by projectare not available.

*Selling,general and administrative*

Selling, generaland administrative expenses consist of compensation and related fringe benefitsfor marketing and administrative employees, professional service fees,marketing costs and all costs related to facilities and information services.

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Selling, generaland administrative expenses were as follows:

 
| Three Months Ended June 30, | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------|------------|
| **2007**                                        | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| **(in thousands)**                         | ** ** |
|                                            |       |                                              |       |   |   |   |   |
| $                                               | 8,231      |                                              | $          | 7,786 |   | $ | 16,647 |   | $ | 14,547 |   |
|                                                 |            |                                                   |            |  |  |  |  |  |  |  |  |

The increase in selling,general and administrative expenses for the three months ended June 30, 2007 isprimarily attributable to an increase in compensation and benefit costs ofapproximately $0.4 million due to the addition of business developmentpersonnel worldwide and the addition of administrative support staff at ourSingapore and Hyderabad, India locations as well as general increases inadministrative costs reflecting our global expansion.

The increase in selling,general, and administrative expenses for the six months ended June 30, 2007 isprimarily attributable to an increase of $0.7 million in compensation andbenefits due to the addition of business development personnel worldwide andthe addition of administrative support staff at our Singapore and Hyderabad,India locations. Additionally, we incurred $0.6 million in incrementaladministrative costs at AMRI Hungary, which was acquired in February 2006, anda $0.4 million increase in professional and consulting fees.  These increases were partially offset by adecrease in data processing costs associated with the implementation of our ERPsystem of $0.3 million.

We currently expect selling,general and administrative expenses to increase from amounts recognized in thefirst half of 2007 due to the administrative costs of the AMRI Indiaacquisition in June 2007.

*Impairmentand restructuring charges*

***LargeScale Manufacturing Facility***

OnNovember 9, 2006, we announced plans to initiate a restructuring of our LSMbusiness segment.  Consistent with ourcontinued strategy of realigning the LSM segment toward a greater focus onmanufacturing clinical trial materials with strong commercial potential, thegoals of the restructuring plan are to strengthen our competitiveness in thisarea and reduce operating costs by eliminating overlap in business processes,organization and project process flow, as well as leveraging existing resourcesand assets.  The restructuring planincluded 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.  We have  estimated that total large scale costs willbe reduced by $5.0 million annually as a result of this restructuring.  We recorded a restructuring charge ofapproximately $2.4 million in the fourth quarter of 2006, including a non-cashasset disposal charge of approximately $1.6 million, and other charges ofapproximately $0.8 million consisting primarily of terminationbenefits.  We recorded additionalrestructuring charges of $0.3 million in the first six months of 2007,consisting of additional termination benefits.

***Mt.Prospect Research Center***

On May 4,2004, we announced our plan to consolidate operations by relocating our Mt.Prospect facility operations to our facilities in New York.  Our proprietary biocatalysis technologyplatform, drug metabolism screening, research fermentation and chemicaldevelopment technologies in Mt. Prospect have been relocated to New York andcontinue to be fully integrated with our drug discovery and developmenttechnologies. The restructuring resulted in the closure of the Mt. ProspectResearch Center in the fourth quarter of 2004. The consolidation was initiatedas a result of a lack of anticipated growth in our chemical developmentservices at the facility.

During the second quarterof 2006, the Company recorded non-cash pre-tax charges related to the Mr.Prospect facility of $3.4 million related to property and equipment impairmentcharges.  The Company also adjusted itsaccrued restructuring costs by $0.3 million to reflect a reduction in theestimated sales commissions to be paid upon completion of the sale of thefacility.

During the fourthquarter of 2006, we secured a letter of intent related to the potential sale ofthe Mt. Prospect facility for approximately $1.5 million.  As a result, we recorded an additional impairmentcharge of approximately $0.5 million in the fourth quarter of 2006 to reducethe carrying amount of these assets to reflect the sales price per the letterof intent less estimated selling costs. We completed the sale of the facility in March 2007 for $1.5 million.

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*Interest income, net*
|                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands)** | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|                    |       |                                                |       |                                              |       |   |   |   |   |
| Interest expense        |       | $                                                   | (171       | )                                                 | $          | (264 | ) | $ | (426 | ) | $ | (527 | ) |
| Interest income         |       | 968                                                 |       | 930                                               |       | 1,960 |   | $ | 1,914 |   |
| Interest income,  net   |       | $                                                   | 797        |                                              | $          | 666 |   | $ | 1,534 |   | $ | 1,387 |   |

 

Netinterest income (expense) increased for the three and six months ended June 30,2007 from the same period in 2006 due to reduced interest expense onoutstanding debt as well as an increase in capitalized interest on long termconstruction projects.

*Incometax expense (benefit)*
| Three Months Ended June 30, | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------|------------|
| **2007**                                        | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| **(in thousands)**                         | ** ** |
|                                            |       |                                              |       |   |   |   |   |
| $                                               | 2,738      |                                              | $          | (228 | ) | $ | 4,218 |   | $ | 584 |   |
|                                                 |            |                                                   |            |  |  |  |  |  |  |  |  |

 

The increase in tax expense for the quarter ended June30, 2007 is due primarily to an increase in pre-tax income compared to the  pre-tax loss for the quarter ended June 30,2006.

The increase in tax expense for the six months endedJune 30, 2007 is due primarily to an increase in pre-tax income from the sixmonths ended June 30, 2006. Additionally, the effective tax rate increased from 27.5% for the sixmonths ended June 30, 2006 to 35.1% for the same period in 2007.  The increase in the 2007 effective tax rateis due to the increase in pre-tax income in relation to the Company’sdeductible items and non-taxable earnings.

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**Liquidityand Capital Resources**

We havehistorically funded our business through operating cash flows, proceeds fromborrowings and the issuance of equity securities. During the first six monthsof 2007, we generated cash of $22.8 million from operating activities. Theprimary sources of operating cash flows resulted primarily from higher revenuesin the first six months of 2007, along with a decrease in accounts receivabledue to timing of cash collections and an increase in income taxes payable dueto timing 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 six months of 2007, we used $20.3million in investing activities, resulting from the use of $11.4 millionrelated to the acquisition of AMRI India, $2.8 million related to net purchasesof securities and $7.4 million for the acquisition of property and equipment,partially offset by net proceeds from disposal of property and equipment of$1.5 million.  During the first six monthsof 2007, we used $2.1 million for financing activities, consisting of $2.4million in long-term debt repayments, offset by $0.3 million of proceeds fromour stock purchase plan and stock option exercises.

Working capital was $147.5 million at June 30, 2007 ascompared to $149.9 million as of December 31, 2006.  The primary source of this decrease is thepurchase of AMRI India, offset by an increase in operating cash flow.  We currently anticipate making $0.6 millionin defined benefit pension plan contributions, of which $0.4 was paid in the firstsix months of the year.  There have beenno significant changes in future maturities on our long-term debt sinceDecember 31, 2006.

Weentered into a credit facility consisting of a $30.0 million term loan and a$35.0 million line of credit during 2003. The term loan matures in February,2008. As of June 30, 2007, the interest rate on $8.6 million of the outstandingterm loan balance was 4.36% and the interest rate on the remaining $4.3 millionwas 6.35%.  The line of credit matures inJune, 2010. The line of credit bears interest at a variable rate based onthe Company’s leverage ratio. As of June 30, 2007, the outstanding balance ofthe line of credit was $0. The credit facility contains certain financialcovenants, including a maximum leverage ratio, a minimum required operatingcash flow coverage ratio, a minimum earnings before interest and taxes tointerest ratio and a minimum current ratio. Other covenants include limits onasset disposals and the payment of dividends. As of June 30, 2007 we were in compliance with all covenants under thecredit facility.

The disclosure of payments we have committed to makeunder our contractual obligations is set forth under the heading “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Liquidityand Capital Resources” under Item 7 of our 2006 Form 10-K. Excluding therepayment of $2.4 million of outstanding debt, and $0.4 million in definedbenefit pension plan contributions, as described above, there have been nomaterial changes to our contractual obligations since December 31,2006.  As of June 30, 2007, we had no off-balance sheet arrangements as definedin Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K.

Wecontinue to pursue the expansion of our operations through internal growth andstrategic acquisitions. Specifically, on June 29, 2007, we completed theacquisition of certain assets from Ariane Orgachem Pvt. Ltd. in Aurangabad,India, and Ferico Laboratories Ltd. located in Navi Mumbai, India. Inconjunction with that acquisition, we plan to invest approximately $15 millionto expand and upgrade manufacturing capabilities at these locations over thenext three years. We expect that such activities will be funded from existingcash and cash equivalents, cash flow from operations, the issuance of debt orequity securities and borrowings. Future acquisitions, if any, could be fundedwith cash on hand, cash from operations, borrowings under our credit facilityand/or the issuance of equity or debt securities. There can be no assurancethat attractive acquisition opportunities will be available to us or will beavailable at prices and upon such other terms that are attractive to us. Weregularly evaluate potential acquisitions of other businesses, products andproduct lines and may hold discussions regarding such potential acquisitions.As a general rule, we will publicly announce such acquisitions only after adefinitive agreement has been signed. In addition, in order to meet ourlong-term liquidity needs or consummate future acquisitions, we may incuradditional indebtedness or issue additional equity or debt securities, subjectto market and other conditions. There can be no assurance that such additionalfinancing will be available on terms acceptable to us or at all. The failure toraise the funds necessary to finance our future cash requirements or consummatefuture acquisitions could adversely affect our ability to pursue our strategyand could 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.

Therecurring royalties we receive on the sales of Allegra/Telfast havehistorically provided a material portion of our operating cash flows. Asdiscussed in Part II, Item 1 of this Form 10-Q, several genericmanufacturers have filed ANDA applications with the FDA seeking authorizationto produce and market a generic version of Allegra. We and AventisPharmaceuticals have filed several patent infringement suits against thesegeneric companies alleging infringement of certain U.S. patents. OnSeptember 6, 2005, Barr Pharmaceuticals, Inc. and TevaPharmaceuticals Industries Ltd. announced that they had entered into anagreement for the launch of Fexofenadine Hydrochloride 30 mg, 60 mg and 180 mgtablets, the generic version of Allegra tablets in the United States. Thelaunch of the generic product is considered an “at-risk” launch due to theon-going litigation. The at-risk launch of generic fexofenadine has had amaterial adverse impact on U.S. sales of Allegra by Sanofi-Aventis and in turn,the royalties earned by us on those sales. On September 20, 2005, we andAventis Pharmaceuticals filed a Motion for Preliminary Injunction in the U.S.District Court in New 

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Jerseyseeking to enjoin Barr Pharmaceuticals, Inc., Teva Pharmaceuticals Ltd.,Ranbaxy Laboratories, Ltd. and Amino Chemicals, Ltd. from the sale of genericversions of Allegra in the United States. Our motion was denied onJanuary 30, 2006. 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. Wecontinue to forcefully and vigorously defend our intellectual property relatedto Allegra. We have filed an appeal of the ruling on the preliminary injunctionmatter, and we continue to pursue our intellectual property rights as thepatent infringement litigation progresses. However, should we or Aventis beunsuccessful in defending these patents we would continue to experience amaterial decrease in royalty revenues and operating cash flows.  Furthermore, an at-risk launch of a genericversion of Allegra-D by a generic competitor could result in further materialdecreases in royalty revenues and operating cash flows.

**Critical Accounting Policies and Estimates**

Ourdiscussion and analysis of our financial condition and results of operationsare based upon our consolidated financial statements, which have been preparedin accordance with U.S. generally accepted accounting principles. Thepreparation of these consolidated financial statements requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On an on-going basis, we evaluate our estimates, includingthose related to bad debts, inventories, intangible assets, equity investments,unbilled revenue, income taxes, pension and postretirement benefit plans, andcontingencies. We base our estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates under differentassumptions or conditions.

We refer to the policies and estimates set forth inthe section “Management’s Discussion and Analysis of Financial Condition andResults of Operations — Critical Accounting Estimates” of our Annual Report onForm 10-K for the fiscal year ended December 31, 2006. There have been nomaterial changes or modifications to the policies since December 31, 2006,other than the adoption of FIN 48, as discussed in Note 13 to the unauditedcondensed consolidated financial statements. The adoption of FIN 48 did not have a material impact on our financialstatements.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

There have been nomaterial changes with respect to the information on Quantitative andQualitative 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 byrule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), as of the end of the Company’s last fiscal quarter our managementconducted an evaluation with the participation of our Chief Executive Officerand Chief Financial Officer regarding the effectiveness of our disclosurecontrols and procedures. In designing and evaluating our disclosure controlsand procedures, we recognize that any controls and procedures, no matter howwell designed and operated, can provide only reasonable assurance of achievingthe desired control objectives, and our management necessarily was required toapply its judgment in evaluating and implementing possible controls andprocedures. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that, as of the end of the Company’s lastfiscal quarter, our disclosure controls and procedures were effective in thatthey provide reasonable assurance that information required to be disclosed byus in the reports we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms, including ensuring thatsuch information is accumulated and communicated to our management, includingour Chief Executive Officer and Chief Financial Officer as appropriate to allowtimely decisions regarding required disclosure. We intend to review anddocument our disclosure controls and procedures, including our internalcontrols and procedures for financial reporting, on an ongoing basis, and mayfrom time to time make changes aimed at enhancing their effectiveness and toensure that our systems evolve with our business.

*Internal Control Over FinancialReporting*

There were no changes inthe Company’s internal control over financial reporting identified inconnection 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 to time, may be involved invarious claims and legal proceedings arising in the ordinary course ofbusiness. Except as noted below in regards to litigation relating to Allegra,the Company is not currently a party to any such claims or proceedings which,if decided adversely to the Company, would either individually or in theaggregate have a material adverse effect on the Company’s business, financialcondition, results of operations or cash flows.

AMR Technology, a subsidiary of the Company, alongwith Aventis Pharmaceuticals Inc., the U.S. pharmaceutical business ofSanofi-Aventis S.A., are involved in legal proceedings with several companiesseeking to market or currently marketing generic versions of Allegra. Beginningin 2001, Barr Laboratories, Inc., Impax Laboratories, Inc., MylanPharmaceuticals, Inc., Teva Pharmaceuticals USA, Dr. Reddy’s Laboratories,Ltd./Dr. Reddy’s Laboratories, Inc., Ranbaxy Laboratories Ltd./RanbaxyPharmaceuticals Inc., and Sandoz Inc. filed Abbreviated New Drug Applications(ANDAs) with the U.S. Food and Drug Administration, or FDA, to produce andmarket generic versions of Allegra products.

In response to the filings described above, beginningin 2001, Aventis Pharmaceuticals filed patent infringement lawsuits againstBarr Laboratories, Impax Laboratories, Mylan Pharmaceuticals, TevaPharmaceuticals, Dr. Reddy’s Laboratories, Ranbaxy Laboratories Ltd./RanbaxyPharmaceuticals Inc., and Sandoz. Each of the lawsuits was filed in the U.S.District Court in New Jersey and alleges infringement of one or more patentsowned by Aventis Pharmaceuticals. In addition, on November 14, 2006, Aventisfiled a patent infringement suit against Teva Pharmaceuticals USA, BarrLaboratories, Inc. and Barr Pharmaceuticals, Inc. in the Eastern District ofTexas based on patents owned by Aventis. Further, beginning on March 5, 2004, AMR Technology, along with AventisPharmaceuticals, filed suit in the U.S. District Court in New Jersey againstBarr Laboratories, Impax Laboratories, Mylan Pharmaceuticals, TevaPharmaceuticals, Dr. Reddy’s Laboratories, Amino Chemicals, Ltd., RanbaxyLaboratories Ltd./Ranbaxy Pharmaceuticals Inc., DiPharma S.P.A., DiPharmaFrancis s.r.l., and Sandoz, asserting infringement of two of our U.S. patentsthat are exclusively licensed to Aventis Pharmaceuticals relating to Allegraand Allegra-D products.  On December 11,2006, AMR Technology and Sanofi-Aventis U.S. LLC, an affiliate of AventisPharmaceuticals, also filed a patent infringement lawsuit in the Republic ofItaly against DiPharma Francis s.r.l. and DiPharma S.P.A. based on EuropeanPatent No. 703,902 which is owned by AMR Technology and licensed toSanofi-Aventis U.S. LLC.  In addition, onDecember 22, 2006, AMR Technology filed a patent infringement lawsuit in Canadaagainst Novopharm Ltd., Teva Pharmaceutical Industries Ltd., TevaPharmaceuticals USA, Inc., DiPharma S.P.A. and DiPharma s.r.l. based onCanadian Patent No. 2,181,089. On March 20, 2007, AMR Technology filed a patentinfringement lawsuit in Australia against Alphapharm Pty Ltd based onAustralian Patent No. 699,799.

Aventis Pharmaceuticals and AMR Technology haveentered into covenants not to sue the defendants other than Novopharm, DiPharmaS.P.A. and DiPharma Francis s.r.l., under U.S. Patent No. 5,578,610, whichpatent 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 federal law, marketing of anFDA-approved generic version of Allegra may not commence until the earlier of adecision favorable to the generic challenger in the patent litigation or 30months after the date the patent infringement lawsuit was filed. In general,the first generic filer is entitled to a 180-day marketing exclusivity periodupon FDA approval.

On September 6, 2005, Barr Pharmaceuticals, Inc. andTeva Pharmaceuticals Industries Ltd. announced that they have entered into anagreement for the launch of Fexofenadine Hydrochloride 30 mg, 60 mg and 180 mgtablets, the generic version of Allegra tablets in the United States. Thelaunch of the generic product is considered an “at-risk” launch due to theon-going litigation. This generic launch has had a material adverse impact onU.S. sales of Allegra by Sanofi-Aventis since the fourth quarter of 2005 and inturn, the royalties earned by the Company on those sales. The launch has nothad a material impact on non-U.S. sales of Allegra to date.

On September 20, 2005, AMR Technology, along withAventis Pharmaceuticals, filed a Motion for Preliminary Injunction in the U.S.District Court in New Jersey seeking to enjoin Barr Pharmaceuticals, Inc., TevaPharmaceuticals Ltd., Ranbaxy Laboratories, Ltd. and Amino Chemicals, Ltd. fromthe sale of generic versions of Allegra in the United States. On January 30,2006, the U.S. District Court denied the request by AMR Technology and AventisPharmaceuticals for a preliminary injunction. An appeal of that decision wastaken to the U.S. Court of Appeals for the Federal Circuit and, onNovember 8, 2006, the appellate court affirmed the District Court’s denialof a preliminary injunction. The Federal Circuit’s decisions on the preliminaryinjunction application is not dispositive of the merits of the claims beingasserted as described above.

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Subsequent to the preliminary injunction proceeding inthe District Court, Dr. Reddy’s Laboratories has engaged in an at-risk launchof generic fexofenadine products.

Should the Company be unsuccessful in defending thesepatents, the Company would continue to experience a material decrease inoperating cash flows and a material adverse effect on our results of operationsand financial condition.

Item 1A. RiskFactors

Inaddition to the other information set forth in this report, you shouldcarefully consider the factors discussed in Part I, Item 1A. Risk Factors inour Annual Report on Form 10-K for the year ended December 31, 2006, whichcould materially affect our business, financial condition or future results.The risks described in our Annual Report on Form 10-K are not the only risksfacing our Company.  Additional risks anduncertainties not currently known to us or that we currently deem to beimmaterial also may materially adversely affect our business, financialcondition and/or operating results.

Item 4.  Submission of Matters to a Vote of SecurityHolders

TheCompany held its Annual Meeting of Stockholders (the “Annual Meeting”) on June4, 2007.  At the Annual Meeting,stockholders of the Company voted to elect Thomas E. D’Ambra, Ph.D., Anthony P.Tartaglia, M.D. and Veronica G. H. Jordan, Ph.D. to serve as Class II Directorsof the Company for three-year terms, such terms will continue until the AnnualMeeting of Stockholders in 2010 and until their respective successors are dulyelected and qualified.  The votes castfor, and withheld from, the election of the aforementioned Directors are listedbelow:
|                               | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|-------------------------------|------------|------------|------------|--------------|------------|
| Thomas E. D’Ambra, Ph.D. |       | 28,340,838 |       | 901,252      |       |
|                          |       |       |       |         |       |
| Anthony P. Tartaglia, M.D.    |       | 28,977,584 |       | 264,506      |       |
|                          |       |       |       |         |       |
| Veronica G. H.  Jordan, Ph.D. |       | 27,700,796 |       | 1,541,294    |       |

 

The followingindividuals continued as directors following the Annual Meeting:  Paul S. Anderson, Ph.D., Donald E. Kuhla,Ph.D., Kevin O’Connor, Una S. Ryan, Ph.D., O.B.E., and Arthur J. Roth.

Item 6.             Exhibits

(a)                      Exhibits.

2.1                             BusinessTransfer Agreement, dated May 16, 2007, between Albany Molecular Research, Inc.and Ariane Orgachem Private Limited

2.2                            BusinessTransfer Agreement, dated May 16, 2007, between Albany Molecular Research, Inc.and Ferico Laboratories Limited

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: August 8, 2007 | By:                             | /s/ Mark T. Frost |   |
|                 |                            | Mark T. Frost |
|                 |                            | Chief Financial Officer and Treasurer   (Authorized Officer and Principal Financial Officer) |

 

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