PART I

ITEM 1. BUSINESS.

Overview

Albany Molecular Research, Inc. (“the Company”), a Delaware corporation incorporated on June 20, 1991, is a global chemistry-based drug discovery and development company focused on identifying and developing novel biologically active small molecules with applications in the drug market. Our core business consists of a fee-for service contract services platform encompassing drug discovery, optimization, and manufacturing; and a separate, standalone research and development division comprising proprietary technologies, internal drug discovery and bundled capabilities designed for more collaborative relationships. We provide contract services to customers across the entire product development cycle from lead discovery to commercial manufacturing. We conduct research and development projects and collaborate with many leading pharmaceutical and biotechnology companies, and are developing proprietary new technology for potential pharmaceutical products. With locations in the U.S., Europe and Asia, we provide customers with a range of services and cost models.

Business Strategy

Contract Services—Since our inception, we have provided contract chemistry services to many of the world’s leading pharmaceutical and biotechnology companies. Contract service companies typically derive their contract revenue from research and development expenditures of the pharmaceutical and biotechnology industry. We believe the industry continues to be under pressure to contain costs and to develop new drugs faster. We also believe that the industry is undergoing a globalization transformation and we are seeking to expand the scope of our service alternatives in order to meet this demand. In 2005, we established operations in Singapore and India, enabling us to provide our research and development services in lower-cost environments. In February 2006, we completed the acquisition of ComGenex, a privately held drug discovery service company in Budapest, Hungary. The addition of ComGenex (now known as AMRI Hungary) provides the Company with a European base in a European Union member state and we expect significantly increased access to the European market, as well as another lower-cost environment from which we can provide our services. We have designed our operating structure and our services to provide our customers with opportunities to reduce overall drug development time and cost and to simultaneously pursue a greater number of drug discovery and development opportunities across a wide range of technologies, geographic locations, and cost structures.

We seek comprehensive chemistry research and supply agreements with our customers, incorporating several of our service offerings in a variety of locations and cost structures worldwide, and spanning across the entire pharmaceutical research and development process, including access to our chemical compound and natural product libraries, performance of screening and other lead discovery activities, performance of lead optimization and pre-clinical testing, and large-scale manufacturing for clinical trials and commercial sale if the product meets regulatory approval. We believe that the ability to partner with a single provider of pharmaceutical research and development services from discovery through commercial production is of

significant benefit to our customers. Through our comprehensive service offerings, we are able to provide customers with a more efficient transition of experimental compounds through the research and development process, ultimately reducing the time and cost involved in bringing these compounds from concept to market.

Biotech/Drug Discovery—We also conduct proprietary research and development to discover new lead compounds with commercial potential. We anticipate that we would then license these preclinical and clinical compounds to third parties in return for up-front service fees and milestone payments as well as recurring royalty payments if these compounds are developed into new commercial drugs. We have successfully licensed compounds we have developed. In October 2005, we licensed the worldwide rights to develop and commercialize potential products from our amine neurotransmitter reuptake inhibitors identified in one of our proprietary research programs to Bristol-Myers Squibb Company (“BMS”). We believe that this technology provides the opportunity to yield multiple drug candidates. Under our contract with BMS, the successful advancement of two such candidates could result in the receipt of in excess of $150 million in up-front license, contract service, and milestone revenue. In 1995, our proprietary research and development activities led to the development, patenting and licensing of a substantially pure form of, and a manufacturing process for, the active ingredient in the non-sedating antihistamine fexofenadine HCl marketed by Sanofi-Aventis as Allegra in the Americas and as Telfast elsewhere. Under our license agreement with Sanofi-Aventis we have earned a total of $340.2 million in milestones and royalty revenue from 1995 through December 31, 2006 and are entitled to receive ongoing royalties from Sanofi-Aventis based upon a percentage of worldwide sales of Allegra and its authorized generic alternative. We presently have multiple other programs in pre-licensing research and development.

Industry Overview

Opportunities to develop therapeutics for previously unmet or undermet medical needs are being fueled by advances in disciplines such as molecular biology, high throughput synthesis and screening and human genomics research. In addition, pharmaceutical and biotechnology companies are under pressure to deliver new drugs to market and reduce the time required for drug development. This pressure has come about, in part, as a result of the significant number of current drug products on the market for which patent protection has or will soon expire.

In order to take advantage of these opportunities and to respond to these pressures, many pharmaceutical and biotechnology companies have augmented their internal research and development capacity through outsourcing.

Drug Discovery, Development and Manufacturing Process

Although many scientific disciplines are required for new drug discovery and development, chemistry and biology are core technologies. Chemists and biologists typically work together to develop laboratory models of disease, screen small molecule compounds to identify those that demonstrate the desired activity and finally create a marketable drug. The drug discovery and development process includes the following steps:

· lead discovery—the identification of a compound that may be developed into a new drug;

· lead optimization—an iterative process of modifying the structure of a lead compound to optimize its therapeutic properties;

· preclinical testing—the testing of the compound in increasingly complex animal models;

· clinical trials—the multi-phase testing of the compound for safety and efficacy in humans; and

· product commercialization—the manufacture, marketing and sale of commercial quantities of the approved drug.

The Importance of Chemistry in the Drug Discovery and Development Process

Lead Discovery. The first major hurdle in drug discovery is the identification of one or more lead compounds that interact with a biological target, such as an enzyme, receptor or other protein that may be associated with a disease. A biological test, or assay, based on the target is developed and used to test or “screen” chemical compounds. Medicinal chemistry and combinational chemistry working interactively with computational science are used to synthesize these compounds rapidly and study the interaction between the three-dimensional molecular structures of the compounds and biological targets. The objective of lead discovery is to identify a lead compound for further research and development.

Lead Optimization. Once a lead compound has been identified, medicinal chemistry is used to optimize that lead compound by modifying and synthesizing analogs of active lead candidates with improved potency, selectivity and/or pharmacokinetics (improved absorption, solubility, half-life and metabolism) in order to identify a more promising drug candidate. This iterative process involves the synthesis of compounds for biological testing, the analysis of the screening results and the further design and synthesis of additional compounds based upon the analysis of structure-activity relationships. During lead optimization, specialists in chemical development optimize the synthesis process and perform the scale-up synthesis of a lead compound as that compound is advanced through the drug discovery and development process. These scientists are experts in the preparation of chemicals on a larger scale and focus on the efficiency, economics, simplicity and safety of the preparation of such chemicals. Chemical development is also an iterative process which may require progressive improvements in chemical synthesis as subsequent repeat batches are prepared. In addition to providing repeat synthesis, significant process research may be required to refine existing or develop new synthesis processes. Also, during the lead optimization stage, analytical chemistry services are incorporated to assure the identity and purity of the lead candidate.

Preclinical Testing. Following the development of a lead compound during the lead optimization stage, advanced preclinical testing is conducted in order to evaluate the efficacy and safety of the lead compound prior to initiating human clinical trials. The lead compound must demonstrate a scientifically proven benefit in controlled and well-defined biological tests in animal models, and must exhibit this benefit at doses much lower than those at which side effects would occur. During the lead optimization and preclinical testing phases, scientists continue the synthesis of additional analogs of the lead compound using medicinal chemistry. Often a second compound, referred to as a backup compound or second generation analog, is synthesized and enters the drug development cycle. In addition, continued synthesis is desirable in order to prepare compounds of significant diversity to broaden potential patent coverage. As a result, the advancement of a lead compound into preclinical testing is often a catalyst which increases, rather than decreases, the need for additional medicinal chemical synthesis and other chemical services. During this phase, specialists in chemical development continue to conduct significant process research to optimize the production of a compound.

Clinical Trials. During clinical trials, several phases of studies are conducted to test the safety and efficacy of a drug candidate. As study populations increase and trial durations lengthen, larger quantities of the active ingredient are required. The active pharmaceutical ingredient (“API”), and the formulated drug product, must be prepared under current good manufacturing practices, commonly referred to as cGMP, guidelines. Analytical chemistry services are critical to cGMP manufacturing. Additional preparations provide an opportunity to further refine the manufacturing process, with the ultimate goal of maximizing the cost effectiveness and safety of the synthesis prior to commercialization.

Product Commercialization. Before approving a drug, the Food and Drug Administration (FDA) requires that manufacturing procedures and operations conform to cGMP regulations, International Conference on Harmonization (ICH) guidance and manufacturing guidelines and guidance published by the FDA. Manufacturing procedures and operations must be in compliance with all regulatory and quality regulations at all times during the manufacture of commercial products and APIs. Once a drug has received all necessary approvals, the manufacture, marketing and sale of commercial quantities of the approved drug may commence.

Trends in Contracting for Drug Discovery and Development Services

Contract services have traditionally been limited to the later stages of drug development, such as clinical trial management and manufacturing. In recent years, many pharmaceutical and biotechnology companies have utilized contract service providers to complement, or in some cases supplement, internal expertise. During this time, only a few companies provided services for drug discovery, development and manufacturing, and these companies typically focused only on certain stages of the drug development process. The following trends led to an increase in demand for contract services in drug discovery, development and manufacturing:

· a larger number of drugs marketed today were not discovered in-house;

· development of new technologies that continued to increase the number of targets and accelerate the identification of active compounds;

· pressure to develop new lead compounds due to the near-term loss of patent protection for many drug products;

· increased pressure to reduce the time spent in drug discovery and development to bring drugs to market sooner and maximize patent life;

· increased focus on converting fixed costs to variable costs and streamlining operations by contracting for research and development services;

· heightened regulatory environment and increased complexity that made the internal management of complicated discovery, development and manufacturing projects more difficult and costly; and

· biotechnology and emerging pharmaceutical companies, in many cases, lacking the required in-house drug discovery and development expertise.

In 2003 and 2004, the domestic market for contract services began to tighten. This timeframe marked a period of financial decline for the pharmaceutical and biotechnology industry due to factors such as patent expirations and successful patent challenges on “blockbuster” drugs, product recalls, and failure in clinical trials of developmental compounds expected to replace expiring patents. These factors, as well as consolidation within the industry, led to an overall decrease in spending on contract services, as well as a shift in spending away from the discovery phase of the pharmaceutical research and development process in an effort to bring previously identified compounds to market. In addition, the number of entrants in the market began to increase, including a number of foreign companies operating under substantially lower cost structures, resulting in increased competition for services and pricing pressures.

2005 marked a year of continued transition in the market for the discovery and development component of contracted pharmaceutical research and development services. We experienced increased demand in the areas of developmental and small-scale cGMP manufacturing services, reflecting a reduction in budgetary constraints and increased efforts to bring identified compounds into clinical trials on the part of our pharmaceutical and biotechnology customers. During the year, we continued to advance our strategic initiatives to successfully position ourselves in the current marketplace, establishing lower-cost international operations in Singapore and India. The trend of sourcing contracted services to lower-

cost providers accelerated in 2005, particularly in China and India, resulting in several of our western competitors exiting or significantly reducing their presence in the marketplace during the year.

The trends that began to emerge in drug discovery and development outsourcing during 2005 continued in 2006. We continued to experience strong demand for our developmental and small-scale cGMP manufacturing services, further extending the growth trend that began in the second half of 2004. Pricing for our services remained extremely competitive, and the trend of sourcing contracted services to lower-cost providers continued. Our ability to provide services under a variety of business models and cost structures by incorporating our lower cost international facilities that were established in India and Singapore in 2005, as well as AMRI Hungary, which was acquired in February 2006, continued to be well-received by our customers. Our global platform helped to drive an increase in worldwide demand for our discovery services. This trend, which began in the latter portion of 2004 and ended a two-year period of declining demand for these services, continued through 2006. We currently expect the trend of increased worldwide demand for our services to continue in 2007, and we expect to continue to expand our global service platform to meet the needs of our customers. In addition to continuing to integrate our existing facilities in India, Singapore, and Hungary into our global service offerings, we initiated construction on a new 50,000 square foot R&D centre at the Shapoorji Pallonji Biotech Park in Hyderabad, India in 2006. The facility will conduct contract projects in early stage drug discovery research and house a development laboratory, and is expected to be completed in late 2007.

Our Capabilities

We have a broad range of high-quality drug discovery and development, chemistry research and manufacturing capabilities. The problem-solving abilities of our scientists provide added value throughout the drug discovery, development and manufacturing process. We offer proprietary discovery technologies as well as services on a contract basis that have traditionally required significant time and capital investment to create internally. Our comprehensive suite of services allows our customers to contract with a single partner, eliminating the time and cost of transitioning projects among multiple vendors.

Service Offerings

Drug Lead Discovery and Technologies

We provide services and proprietary drug discovery technologies used to identify new lead compounds. We have developed biocatalysis technology that assists in the creation of novel compounds. Biocatalysis technology uses enzymes and microbial cell systems to synthesize new compounds which are unattainable by traditional means in one or two chemical steps. Additional discovery technologies that we provide include isolation, purification, structure elucidation and the supply of sample collection libraries from microbial and botanical sources, computational chemistry, virtual screening, microbiology, fermentation, asymmetric synthesis, metabolic profiling, high throughput biological screening and in vitro biology. We may seek to bundle our drug discovery technologies and screening collections in a strategic alliance to cost effectively identify new drug candidates with selected partners. In return, we would expect to receive a combination of fee for service, milestone and royalty payments based on the success of the drug candidate.

Our drug discovery technologies compliment our medicinal chemistry services as additional methods of developing and screening large numbers of compounds against drug targets to generate new drug leads. These drug discovery technologies give us the capability to:

· identify hit and lead compounds for further optimization;

· improve the pharmacology, toxicology and efficacy or selectivity of chemical compounds for currently marketed drugs;

· develop lead extensions from unsuccessful Phase II or Phase III clinical trials;

· improve solubility and/or bioavailability of drug compounds;

· create analogs of potential lead compounds;

· identify active metabolites;

· widen patent coverage; and

· perform process research, consisting of the improvement or modification of existing processes.

Medicinal Chemistry

The chemistry functions associated with the identification and optimization of a lead compound are handled by chemists specializing in medicinal chemistry. The role of the medicinal chemist is to synthesize small quantities of new and potentially patentable compounds for biological testing. Our medicinal chemistry group assists our customers in the pursuit of new drug leads as well as in lead development and optimization using modern structure-based drug design, as well as many other cutting edge techniques. Our medicinal chemistry group uses tools such as computational and combinatorial chemistry in conjunction with the traditional techniques of medicinal drug development. Medicinal chemistry services that we provide include:

· design and synthesis of potential lead compounds;

· design, modify and synthesis of compounds to improve receptor binding and selectivity, enzyme inhibition and selectivity affording drug candidates with improved potency and pharmacokinetics;

· development and synthesis of analogs of lead compounds to broaden patent protection; and

· resynthesis and expansion of customers’ chemistry libraries by employing combinatorial and computational chemistry.

Chemical Development

Chemical development involves the scale-up synthesis of a lead compound and intermediates. Processes developed for small scale production of a compound may not be suitable for larger scale production because they may be too expensive or environmentally unacceptable or they may present safety concerns. Our chemical development scientists design novel, creative or improved methods and processes suitable for medium to large scale production. Our chemical development scientists possess expertise in a broad range of structural classes of molecules and are able to address a wide variety of chemical synthesis and production problems. Chemical development services that we provide include:

· process research, consisting of the improvement or modification of existing processes;

· discovery and development of new synthetic methodologies to prepare products;

· process development and production of single-isomer molecules; and

· development of practical purification techniques.

Analytical Chemistry Services

Our analytical chemistry services develop assays for studying the purity of the various substances we synthesize, examining and detecting impurities, conduct physical testing, validate methods against established protocols and conduct stability testing. We also provide regulatory consulting services, including the preparation of regulatory filings, chemistry manufacturing and control documentation and

testing, and scientific and technical writing. The cGMP guidelines mandated by the FDA necessitate employing analytical support for drugs under development, as well as for drugs already on the market. Our analytical services are designed to support our customers’ compliance with these guidelines. We typically provide these services at several stages throughout the drug discovery, development and manufacturing process starting with lead optimization. Analytical services that we provide include:

· test method development and validation;

· quality control and release testing;

· high performance liquid and/or gas chromatography for purity assessment, separation of enantiomers and identification of impurities;

· evaluation of polymorphic forms, crystallization properties, and salt selection for new drug candidates;

· stability studies for bulk active ingredients and formulated drug products; and

· preparation of regulatory documentation, including chemistry manufacturing and control sections of investigational new drug applications, new drug applications and drug master files.

cGMP Manufacturing Services

Small Scale Manufacturing

We provide chemical synthesis and manufacturing services for our customers in accordance with cGMP guidelines. All facilities and manufacturing techniques used in the manufacture of products for clinical use or for sale in the United States must be operated in conformity with cGMP guidelines as established by the FDA. Our Albany, NY location has production facilities and quarantine and restricted access storage necessary to manufacture quantities of drug substances under cGMP conditions sufficient for conducting clinical trials from Phase I through Phase II, and later stages for selected products, based on volume and other parameters. In the third quarter of 2006, our focus on quality was reinforced after a successful FDA inspection of our small scale cGMP facilities resulted in no issuances of Form FDA 483 Observations of Objectionable Conditions and Practices.

Large Scale Manufacturing

Our large scale manufacturing facility in Rensselaer, NY is equipped to provide a wide range of custom chemical development and manufacturing capabilities. We conduct commercial cGMP manufacturing of active pharmaceutical ingredients and advanced intermediates. Our large-scale cGMP manufacturing facilities provide synergies with our small-scale development laboratories, offering our customers excellence at every scale, from bench to production. We have a number of highly specialized production capabilities, including manufacturing of highly potent and cytotoxic agents, purification using critical fluid technology, production of controlled substances, and cryogenic reaction capabilities. In the third quarter of 2006, our focus on quality was reinforced after a successful FDA inspection of our Rensselaer facility resulted in no issuances of Form FDA 483 Observations of Objectionable Conditions and Practices.

Consulting Services

We provide to our customers, in particular our biotechnology customers, consulting services across all chemistry phases of drug discovery, development and manufacturing.

Proprietary Research and Development

Leveraging our wide array of chemistry disciplines and discovery technologies, we seek to discover and develop promising drug candidates and license these candidates in return for upfront fees, milestones and downstream royalty payments for commercialized drug products. Utilizing our medicinal chemistry expertise, high throughput biological screening capabilities, our combinatorial biocatalysis technology, natural products sample collections and other chemically and structurally diverse chemical collections generated through the application of combinatorial chemistry integrated with our computer assisted drug design capabilities, we pursue drug discovery opportunities and generate novel biologically active chemical substances. Our broad array of scientific disciplines also include capabilities in microbial fermentation, molecular biology, cell culture technologies, gene expression and cloning, in vitro drug metabolism testing and scale up synthesis of human metabolites. We have spent $11.4 million, $14.5 million and $23.9 million on proprietary research and development activities in 2006, 2005 and 2004, respectively. Research and development expenditures in 2004 included a $3.1 million non-cash charge related to the issuance of warrants to Bristol-Myers Squibb (“BMS”) in exchange for one of BMS’ pre-clinical drug candidates. These warrants were cancelled in October 2005 in conjunction with our entry into a Licensing and Research Agreement with BMS in an effort to further develop and commercialize products from this technology.

Licensing Agreements

In October 2005, we licensed the worldwide rights to develop and commercialize potential products from our amine neurotransmitter reuptake inhibitors identified in one of our proprietary research programs to BMS. In conjunction with the licensing agreement, we received a non-refundable, non-creditable up-front payment of $8 million. In addition, the agreement provides for the establishment of a research program, under which BMS will purchase approximately $10.0 million in research and development services over the initial three year term of the program. The agreement also sets forth milestone events that, if achieved by these products, would entitle the Company to non-refundable, non-creditable milestone payments of up to $66.0 million for each of the first and second products to achieve these events, and up to $22.0 million for each subsequent product to achieve these events. The agreement also provides for the Company to receive royalty payments on worldwide sales of any such product that is commercialized.

Our proprietary research and development efforts to date have contributed to the discovery and development of one product that has reached the market. We discovered a new process to prepare a metabolite known as terfenadine carboxylic acid, or TAM, in a purer form. The purer form of TAM is the active ingredient in the non-sedating antihistamine known as fexofenadine HCl, which is sold by Sanofi-Aventis under the name Allegra in the Americas and as Telfast elsewhere. We have been issued several United States and foreign patents relating to TAM and the process chemistry by which TAM is produced. Subject to payment of government annuities and maintenance fees, our issued patents relating to TAM expire between 2013 and 2015.

In March 1995, we entered into a license agreement with Sanofi-Aventis. Under the terms of the license agreement, we granted Sanofi-Aventis an exclusive, worldwide license to any patents issued to us related to our original TAM patent applications. Since the beginning of the agreement through December 31, 2006, we have earned $7.4 million in milestone payments and $332.8 million in royalties under this license agreement. Sanofi-Aventis is obligated under the license agreement to pay ongoing royalties to us based upon its sales of Allegra/Telfast and generic fexofenadine. We are not entitled, however, to receive any additional milestone payments under the license agreement. Sales of Allegra/Telfast and generic fexofenadine by Sanofi-Aventis worldwide were approximately $0.9 billion for the year ended December 31, 2006, $1.76 billion for the year ended December 31, 2005, and $1.85 billion for the year ended December 31, 2004. Allergic reactions to plants, pollens and other airborne allergens

generally occur during the spring and summer seasons. Therefore, we expect the demand for Allegra to be lower during other times of the year. Because Allegra sales change seasonally based on the demand for allergy medicines, our revenues are typically lower during the first and fourth calendar quarters. See “Item 3—Legal Proceedings” for discussion of current legal proceedings related to Allegra/Telfast.

Business Segments

Our large scale cGMP manufacturing activities represent a distinct business segment as defined by Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information”. The Company’s remaining activities, including drug lead discovery, optimization, drug development, and small scale commercial manufacturing represent a separate distinct business segment as defined by SFAS No. 131. See the notes to the consolidated financial statements for financial information on the Company’s business segments.

Customers

Our customers include pharmaceutical companies and biotechnology companies and, to a limited extent, agricultural companies, fine chemical companies and contract chemical manufacturers. For the year ended December 31, 2006, contract revenue from our three largest customers represented 21%, 7% and 6%, respectively, of our contract revenue. For the year ended December 31, 2005, contract revenue from our three largest customers represented 37%, 6% and 4%, respectively, of our contract revenue. For the year ended December 31, 2004, contract revenue from our three largest customers respectively represented approximately 38%, 6% and 4% of our contract revenue. Our largest customer, GE Healthcare (“GE”), represented 21% of total contract revenue for the year ended December 31, 2006. See Note 16 to the consolidated financial statements for information on geographic and other customer concentrations.

Marketing

Our services are marketed primarily by our dedicated business development personnel and senior management Because our customers are typically highly skilled scientists, our use of technical experts in marketing has allowed us to establish strong customer relationships. In addition to our internal marketing efforts, we also rely on the marketing efforts of consultants, both in the United States and abroad. We market our services directly to customers through targeted mailings, meetings with senior management of pharmaceutical and biotechnology companies, maintenance of an extensive Internet web site, participation in trade conferences and shows, and advertisements in scientific and trade journals. We also receive a significant amount of business from customer referrals and through expansion of existing contracts.

Employees

As of February 1, 2007, we had 1,015 employees. Our large-scale manufacturing hourly work force of 98 employees is covered by a collective bargaining agreement with the International Chemical Workers Union. A new 4-year collective bargaining agreement was signed in January 2007 with the union and expires on January 10, 2011. None of our other employees are covered by collective bargaining agreements. We consider our relations with our employees and the union to be good.

Competition

We face competition based on a number of factors, including size, relative expertise and sophistication, speed and costs of identifying and optimizing potential lead compounds and of developing and optimizing chemical processes. In certain aspects of our business we also face foreign competition from companies in regions with lower cost structures. We compete with the research departments of

pharmaceutical companies, biotechnology companies, combinatorial chemistry companies, contract research companies, contract drug manufacturing companies and research and academic institutions. Many of these competitors have greater financial and other resources and more experience in research and development than we do. Smaller companies may also prove to be significant competitors, particularly through arrangements with large corporate collaborators.

Historically, pharmaceutical companies have maintained close control over their research and development activities, including the synthesis, screening and optimization of chemical compounds and the development of chemical processes. Many of these companies, which represent a significant potential market for our products and services, are developing or already possess in-house technologies and services offered by us. Academic institutions, governmental agencies and other research organizations are also conducting research in areas in which we provide services either on their own or through collaborative efforts.

We anticipate that we will continue to face increased competition in the future as new companies enter the market, including increased foreign competition from Asia, Eastern Europe and other lower-cost environments. Our services and expertise may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors. The existing approaches of our competitors or new approaches or technologies developed by our competitors may be more effective than those developed by us. We cannot give assurance that our competitors will not develop more effective or more affordable technologies or services, thus rendering our technologies and/or services obsolete, uncompetitive or uneconomical.

Patents and Proprietary Rights

Our success will depend, in part, on our ability to obtain and enforce patents, protect trade secrets, obtain licenses to technology owned by third parties when necessary, and conduct our business without infringing the proprietary rights of others. The patent positions of pharmaceutical, medical products and biotechnology firms can be uncertain and involve complex legal and factual questions. We cannot assure you that any patent applications will result in the issuance of patents or, if any patents are issued, whether they will provide significant proprietary protection or commercial advantage, or will not be circumvented by others. In the event a third party has also filed one or more patent applications for inventions which conflict with one of ours, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in the loss of any opportunity to secure patent protection for the inventions and the loss of any right to use the inventions. Even if the eventual outcome is favorable to us, these proceedings could result in substantial cost to us. The filing and prosecution of patent applications, litigation to establish the validity and scope of patents, assertion of patent infringement claims against others and the defense of patent infringement claims by others can be expensive and time consuming. We cannot assure you that in the event that any claims with respect to any of our patents, if issued, are challenged by one or more third parties, that any court or patent authority ruling on such challenge will determine that such patent claims are valid and enforceable. An adverse outcome in such litigation could cause us to lose exclusivity afforded by the disputed rights. If a third party is found to have rights covering products or processes used by us, we could be forced to cease using the technologies covered by such rights, could be subject to significant liability to the third party, and could be required to license technologies from the third party. Furthermore, even if our patents are determined to be valid, enforceable, and broad in scope, we cannot assure you that competitors will not be able to design around such patents and compete with us and our licensees using the resulting alternative technology.

We have a policy of seeking patent protection for patentable aspects of our proprietary technology. We have been issued various United States and international patents covering fexofenadine HC1 and certain related manufacturing processes. Our United States patents begin to expire in 2013, and our

international patents begin to expire in 2014. Additionally, our United States patents related to substituted biaryl purines as potent anticancer agents and a series of aryl and heteroaryl tetrahydroisoquinolines related to central nervous system indications begin to expire in 2020.

We seek patent protection with respect to products and processes developed in the course of our activities when we believe such protection is in our best interest and when the cost of seeking such protection is not inordinate. However, we cannot assure you that any patent application will be filed, that any filed applications will result in issued patents, or that any issued patents will provide us with a competitive advantage or will not be successfully challenged by third parties. The protections afforded by patents will depend upon their scope and validity, and others may be able to design around our patents.

Many of our other current contracts with our customers provide that ownership of proprietary technology developed by us in the course of work performed under the contract is vested in the customer, and we retain little or no ownership interest.

We also rely upon trade secrets and proprietary know-how for certain unpatented aspects of our technology. To protect such information, we require all employees, consultants and licensees to enter into confidentiality agreements limiting the disclosure and use of such information. We cannot assure you that these agreements provide meaningful protection or that they will not be breached, that we would have adequate remedies for any such breach, or that our trade secrets, proprietary know-how, and technological advances will not otherwise become known to others. In addition, we cannot assure you that, despite precautions taken by us, others have not and will not obtain access to our proprietary technology. Further, we cannot assure you that third parties will not independently develop substantially equivalent or better technology.

Government Regulation

The manufacture, transportation and storage of our products are subject to certain international, Federal, state and local laws and regulations. Our future profitability is indirectly dependent on the sales of pharmaceuticals and other products developed by our customers. Regulation by governmental entities in the United States and other countries will be a significant factor in the production and marketing of any pharmaceutical products that may be developed by our customers. The nature and the extent to which such regulation may apply to our customers will vary depending on the nature of any such pharmaceutical products. Virtually all pharmaceutical products developed by our customers will require regulatory approval by governmental agencies prior to commercialization. Human pharmaceutical products are subject to rigorous preclinical and clinical testing and other approval procedures by the FDA and by foreign regulatory authorities. Various federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of such pharmaceutical products. The process of obtaining these approvals and the subsequent compliance with appropriate federal and foreign statutes and regulations are time consuming and require the expenditure of substantial resources.

Generally, in order to gain FDA approval, a company first must conduct preclinical studies in the laboratory and in animal models to gain preliminary information on a compound’s efficacy and to identify any safety problems. The results of these studies are submitted as a part of an investigational new drug application, or IND, that the FDA must review before human clinical trials of an investigational drug can start. In order to commercialize any products, we or our customer will be required to sponsor and file an IND and will be responsible for initiating and overseeing the clinical studies to demonstrate the safety and efficacy that are necessary to obtain FDA approval of any such products. Clinical trials are normally done in three phases and generally take two to seven years, but may take longer, to complete. After completion of clinical trials of a new product, FDA and foreign regulatory authority marketing approval must be obtained. If the product is classified as a new drug, we or our customer will be required to file a new drug

application, or NDA, and receive approval before commercial marketing of the drug. The testing and approval processes require substantial time, effort and expense, and we cannot assure you that any approval will be granted on a timely basis, if at all. NDAs submitted to the FDA can take several years to obtain approval. Even if FDA regulatory clearances are obtained, a marketed product is subject to continual review. Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. For marketing outside the United States, we will also be subject to foreign regulatory requirements governing human clinical trials and marketing approval for pharmaceutical products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country.

All facilities and manufacturing techniques used in the manufacture of products for clinical use or for sale in the United States must be operated in conformity with cGMP guidelines as established by the FDA. Our facilities are subject to unscheduled periodic regulatory inspections to ensure compliance with cGMP requirements. Failure on our part to comply with applicable requirements could result in the termination of ongoing research or the disqualification of data for submission to regulatory authorities. A finding that we had materially violated cGMP requirements could result in additional regulatory sanctions and, in severe cases, could result in a mandated closing of our facilities or significant fines, which would materially and adversely affect our business, financial condition and results of operations. FDA inspections of our Rensselaer manufacturing facilities were completed in the third quarter of 2006, resulting in no issuances of Form FDA 483. Also, FDA inspections at our cGMP manufacturing facility at 21 Corporate Circle in Albany were completed in 2006, resulting in no issuances of Form FDA 483.

Our manufacturing and research and development processes involve the controlled use of hazardous materials. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although we believe that our activities currently comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed our resources. In addition, we cannot assure you that we will not be required to incur significant costs to comply with environmental laws and regulations in the future.

Internet Website

We maintain a website on the World Wide Web at www.albmolecular.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. We make available on our website, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Our reports filed with, or furnished to, the SEC are also available at the SEC’s website at www.sec.gov.

ITEM 1A. RISK FACTORS

The following factors should be considered carefully in addition to the other information in this Form 10-K. Except as mentioned under “Quantitative and Qualitative Disclosure About Market Risk” and except for the historical information contained herein, the discussion contained in this Form 10-K contains “forward-looking statements,” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, that involve risks and uncertainties. Our actual results could differ materially from those discussed in this Form 10-K. Important factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere herein.

The royalties we earn on Allegra may continue to decrease.

Royalties from sales of Allegra currently constitute a significant portion of our total revenues and operating income. During the year ended December 31, 2006, our royalties from Allegra were $27.0 million, which represented approximately 15% of our total revenues. For the year ended December 31, 2005, our royalties from Allegra were $46.9 million, which represented approximately 26% of our total revenues. The decrease is primarily attributable to the at-risk launch of generic fexofenadine announced by Barr Pharmaceuticals, Inc. and Teva Pharmaceuticals Industries Ltd. on September 6, 2005, which has had a material adverse impact on U.S. sales of Allegra beginning in the fourth quarter of 2005. The launch of the generic product is considered an “at-risk” launch due to the on-going litigation. Continued generic Allegra competition, including the entrance of additional generic competitors upon the expiration of Barr’s 180-day exclusivity period for marketing generic fexofenadine or an at-risk launch of a generic version of Allegra-D by a generic competitor, may further adversely affect U.S. sales of Allegra. If the dollar amount of Allegra sales subject to our license agreement decreases, due to these or any other factors, our revenues from our license agreement with Sanofi-Aventis will also decrease. Because we have very few costs associated with the Allegra license, a decrease in revenues from our license agreement for Allegra would have a material adverse effect on our revenue, operating income, and financial condition. For example, a $5.0 million decrease in our Allegra royalty revenue would decrease our operating income by $4.5 million.

The recurring royalties we receive on the sales of Allegra/Telfast have historically provided a material portion of our revenues, earnings, and operating cash flows. The at-risk launch of generic fexofenadine announced by Barr Pharmaceuticals, Inc. and Teva Pharmaceuticals Industries Ltd. on September 6, 2005 had a material adverse impact on U.S. sales of Allegra in 2006, resulting in a 42% year-over-year decrease in our royalty revenues. We currently expect that the at-risk launch of generic fexofenadine will have a similar impact on our royalty revenues in future periods. We expect to experience a decrease in earnings, and operating cash flows in the short term as we continue to develop our business in an effort to supplement the revenues, earnings and operating cash flows that have historically been provided by Allegra/Telfast royalties.

We have been issued several patents on a pure form of, and a manufacturing process for, fexofenadine HCl. The patent positions of pharmaceutical, medical and biotechnology firms can be uncertain and can involve complex legal and factual questions. Litigation, in particular patent litigation, can be complex and time-consuming and the outcome is inherently uncertain. We cannot assure our stockholders that we and/or Sanofi-Aventis will ultimately succeed in its current or any future litigation against generic drug manufacturers involving patents with respect to Allegra. In the event that one or more of the patents owned by us or Sanofi-Aventis are ultimately determined to be invalid or unenforceable, Sanofi-Aventis and we would lose exclusivity with respect to the claims covered by those patents. Any such loss of exclusivity or the introduction of generic forms of fexofenadine HCl may cause a reduction in Allegra sales. In addition, under our current arrangements with Sanofi-Aventis, Sanofi-Aventis, with consultation from us, has the right to lead with respect to preparing and executing a strategy to defend and enforce certain of the patents relating to Allegra, and is executing that role in the current litigation. As a result, we may not be able to control the conduct of such litigation and the strategic decisions that are made during the course of such litigation. See “Item 3—Legal Proceedings.”

Pharmaceutical and biotechnology companies may discontinue or decrease their usage of our services.

We depend on pharmaceutical and biotechnology companies that use our services for a large portion of our revenues. Although there has been a trend among pharmaceutical and biotechnology companies to outsource drug research and development functions, this trend may not continue. We have experienced increasing pressure on the part of our customers to reduce expenses, including the use of our services as a result of negative economic trends generally and in the pharmaceutical industry. Although our contract

revenues increased in 2006, we may be adversely effected in future periods as a result of general economic or pharmaceutical industry downturns. If pharmaceutical and biotechnology companies discontinue or decrease their usage of our services, including as a result of a slowdown in the overall United States economy, our revenues and earnings could be lower than we currently expect and our revenues may decrease or not grow at historical rates.

We may lose one or more of our major customers.

During the year-ended December 31, 2006, revenues from sales of a raw material to GE for use in one of its diagnostic imaging agents GE totaled $32.5 million and represented approximately 21% of our contract revenue, or 18% of our total revenue. Our subsidiary, Organichem, entered into a long-term agreement to supply this material to GE in 1999 that was renewed in 2005, extending the expiration date of the original agreement from 2007 to 2010. GE’s purchases have historically exceeded the contractual minimum purchases, however, this may not continue. If GE materially reduces its purchase levels, there may be a material decrease in our revenues and operating income. In addition, during the year ended December 31, 2006, our DDS segment provided services to three major customers representing approximately 12% of our contract revenues or 10% of our total revenue. These customers typically may cancel their contracts with 30 days’ to one-year’s prior notice depending on the size of the contract, for a variety of reasons, many of which are beyond our control. If any one of our major customers cancels its contract with us, our contract revenues may decrease.

We face increased competition.

We compete directly with the in-house research departments of pharmaceutical companies and biotechnology companies, as well as combinatorial chemistry companies, contract research companies, and research and academic institutions. We are also experiencing increased competition from foreign companies operating under lower cost structures. Many of our competitors have greater financial and other resources than we have. As new companies enter the market and as more advanced technologies become available, we currently expect to face increased competition. In the future, any one of our competitors may develop technological advances that render the services that we provide obsolete. While we plan to develop technologies, which will give us competitive advantages, our competitors plan to do the same. We may not be able to develop the technologies we need to successfully compete in the future, and our competitors may be able to develop such technologies before we do or provide those services at a lower cost. Consequently, we may not be able to successfully compete in the future.

We may be unsuccessful in producing and licensing proprietary technology developed from our internal research and development efforts or acquired from a third party.

We have expended and continue to expend significant time and money on internal research and development with the intention of producing proprietary technologies in order to patent and then license them to other companies. For example, in October 2005 we licensed our proprietary amine neurotransmitter reuptake inhibitor technology to BMS. However, we may not be successful in producing any additional valuable technology or successfully licensing it to a third party in the future. To the extent we are unable to produce technology that we can license, we may not receive any revenues related to our internal research and development efforts.

We may be unsuccessful in our collaboration with BMS.

Our objective is to patent and license our proprietary technologies to other companies for the purpose of advancing compounds associated with these technologies through human clinical trials, and ultimately, obtaining regulatory approval for the commercial sale of products containing these compounds. We seek to enter into licensing arrangements with selected partners that provide for a combination of up-front

license fees, milestone payments upon the achievement of specified research and development objectives, and royalty payments based on sales of related commercial products. In October 2005, we licensed the worldwide rights to develop and commercialize potential products from our amine neurotransmitter reuptake inhibitors identified in one of our proprietary research programs to BMS. In conjunction with the licensing agreement, we received a non-refundable, non-creditable up-front fee of $8 million. In addition, BMS will purchase approximately $10 million in research and development services over the initial three year term of our agreement. The license agreement also sets forth development related milestone events that, if achieved by our products, would entitle us to non-refundable, non-creditable milestone payments of up to $66.0 million for each of the first and second products to achieve these events, and up to $22.0 million for each subsequent product to achieve these events. The license agreement also provides for us to receive royalty payments on worldwide sales of any such product that is commercialized.

Our arrangement with BMS is a significant component of our proprietary research and development business. If there is a delay or failure in BMS’s performance, our proprietary research and development business may not produce the long-term revenues, earnings, or strategic benefits that we anticipate. We cannot control BMS’s performance or the resources it devotes to our collaborative program. We cannot guarantee BMS’s continuous utilization of our services at levels set forth in our agreement after the initial term of the agreement, and we cannot guarantee BMS’s continued pursuit of programs covered by our agreement. Furthermore, with respect to any drug candidate resulting from our collaborative program, the FDA may delay or deny marketing approvals because of adverse FDA decisions or interpretations of data that differ from BMS’s interpretations and that may require additional clinical trials or potential changes in the cost, scope and duration of clinical trials. Even if we succeed in getting market approvals, BMS may not have the ability to successfully launch, increase sales of or sustain the product or products in the market, or efficiently scale-up manufacturing for commercialized compounds. Disputes may arise between us and BMS, which may not be resolved in our favor. Further, BMS could merge with or be acquired by another company or experience financial or other setbacks unrelated to our collaboration that could, nevertheless, adversely affect us. The occurrence of any of these could result in our proprietary research and development business not producing the long-term revenues, earnings, or strategic benefits that we anticipate.

Our business may be adversely affected if we encounter complications in connection with our implementation of information management software.

In July 2006, we completed the first of several phases of the implementation of a new comprehensive enterprise resource planning (“ERP”) system to enhance operating efficiencies and provide more effective management of our business operations. Continuing and uninterrupted performance of our ERP system is critical to the success of our business strategy. Any material failure of our ERP system that interrupts or delays our operations could adversely impact our ability to do the following in a timely manner and have a material adverse effect on our operations:

· report financial results;

· accurately reflect inventory costs;

· accept and process customer orders;

· receive inventory and ship products;

· invoice and collect receivables;

· place purchase orders and pay invoices; and

· accurately reflect all other business transactions related to the finance, order entry, purchasing, supply chain and human resource processes within the new ERP information system.

The restructuring of our Large Scale Manufacturing segment may not have the desired impact on the results of our operations.

On November 9, 2006 we announced a restructuring plan designed to improve the efficiency and profitability of our LSM operating segment by eliminating overlap in business processes, organization and project process flow, as well as leveraging existing resources and assets. The key elements of the restructuring plan include workforce reductions, including changes in leadership, as well as non-workforce-related actions such as disposal of underutilized assets, elimination of non-essential operating expenses, and reductions in raw material costs. Most of these initiatives have been implemented by the end of 2006. We expect to realize annual savings of approximately $5 million from the restructuring plan beginning in 2007. The plan as currently constituted, however, may not be sufficient to achieve the desired level of cost savings during the time period indicated. Additional restructuring activities may be required to attain the intended reduction in operating costs and the expected impact on operating margins within our Large Scale Manufacturing segment. Furthermore, the implementation of the restructuring plan could cause disruptions to Large Scale Manufacturing operations that could have an adverse impact on the results of our operations.

Our goodwill may become impaired.

As of December 31, 2006, we have $35.8 million of goodwill on our consolidated balance sheet. We perform an annual assessment of the carrying value of our goodwill for potential impairment using an independent third-party. A determination of impairment is made based upon the estimated future cash flows of the operations associated with goodwill, comparable company multiples and recent transactions involving similar entities. If goodwill is determined to be impaired in the future we would be required to record a charge to our results of operations. For example, during 2004 we recorded goodwill impairment charges totaling $14.5 million. Factors we consider important which could result in an impairment include the following:

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

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

· significant negative industry or economic trends; and

· our market capitalization relative to net book value.

See Note 19 to the consolidated financial statements for further information regarding the 2004 impairment charge.

We may lose valuable intellectual property if we are unable to protect it.

Some of our most valuable assets include patents and trade secrets. Part of our business is developing technologies that we patent and then license to other companies. However, some technologies that we develop may already be patented by other companies. For this and other reasons, we may not be able to obtain patents for each new technology that we develop. Even if we are able to obtain patents, the patents may not sufficiently protect our interest in the technology. Similarly, we may not be able to protect our trade secrets by keeping them confidential. Additionally, protecting our patents and trade secrets may be costly and time consuming. To the extent we are unable to protect intellectual property, our investment in those technologies may not yield the benefits we expected. In addition, we may be subject to claims that we are infringing on the intellectual property of others. We could incur significant costs defending such claims. If we are unsuccessful in defending these claims, we may be subject to liability for infringement.

Our failure to manage our expansion may adversely affect us.

Our business has expanded rapidly in the past several years. Expansion places increased stress on our financial, managerial and human resources. As we expand, we will need to recruit and retain additional highly skilled scientists and technicians. Expansion of our facilities may lead to increased expenses and may divert management attention away from operations.

Future acquisitions may disrupt our business and distract our management.

We have engaged in a number of acquisitions and strategic investments, and we currently expect to continue to do so. For example, in February 2006, we completed the acquisition of ComGenex, a privately held drug discovery service company in Budapest, Hungary. However, we may not be able to identify additional suitable acquisition candidates, and if we do identify suitable candidates, we may not be able to make such acquisitions on commercially acceptable terms or at all. If we acquire another company, we may not be able to successfully integrate the acquired business into our existing business in a timely and non-disruptive manner or at all. We may have to devote a significant amount of time and resources to do so. Even with this investment of time and resources, an acquisition may not produce the revenues, earnings or business synergies that we anticipate. If we fail to integrate the acquired business effectively or if key employees of that business leave, the anticipated benefits of the acquisition would be jeopardized. The time, capital, management and other resources spent on an acquisition that fails to meet our expectations could cause our business and financial condition to be materially and adversely affected. In addition, acquisitions can involve charges of significant amounts related to goodwill that could become impaired and adversely affect our results of operations.

We may not be able to realize the benefits of recent acquisitions and strategic investments.

We made a strategic investment in Organichem Corporation in December 1999 to facilitate a management buyout of a chemical manufacturing facility from Nycomed Amersham, plc (now GE Healthcare) and completed the full acquisition of Organichem in February 2003. Also during 2003, we made equity investments in two private companies. Under the terms of these agreements, we provided FTE services to each company in exchange for equity securities and fee for service cash payments. One of these companies is currently in the process of raising additional financing. In February 2006, we completed the acquisition of ComGenex, a privately held drug discovery service company in Budapest, Hungary. These transactions may not be as beneficial to us as we currently expect. We record an impairment charge when we believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions, poor operating results of underlying investments or the investees’ inability to obtain additional financing could result in our inability to recover the carrying value of the investments, thereby requiring an impairment charge in the future. For example, during the fourth quarter of 2004 we recorded a $1.3 million impairment charge related to an investment we made in a drug discovery company.

We may not be able to effectively manage our international operations.

We established contract research facilities in Singapore and Hyderabad, India in 2005, and have continued to expand our facilities in India in 2006. In February 2006, we completed the acquisition of ComGenex, a privately held drug discovery service company in Budapest, Hungary. There are significant risks associated with the establishment of foreign operations, including, but not limited to: geopolitical risks, foreign currency exchange rates and the impact of shifts in the U.S. and local economies on those rates, compliance with local laws and regulations, the protection of our intellectual property and that of our customers, the ability to integrate our corporate culture with local customs and cultures, and the ability to effectively and efficiently supply our international facilities with the required equipment and materials. If we are unable to effectively manage these risks, these locations may not produce the revenues, earnings, or strategic benefits that we anticipate.

We may not be able to recruit and retain the highly skilled employees we need.

Our future growth and profitability depends upon the research and efforts of our highly skilled employees, such as our scientists, and their ability to keep pace with changes in drug discovery and development technologies. We compete vigorously with pharmaceutical firms, biotechnology firms, contract research firms, and academic and research institutions to recruit scientists. If we cannot recruit and retain scientists and other highly skilled employees, we will not be able to continue our existing services and will not be able to expand the services we offer to our customers.

We may lose one or more of our key employees.

Our business is highly dependent on our senior management and scientific staff, including:

· Dr. Thomas E. D’Ambra, our Chairman, Chief Executive Officer and President;

· Mark T. Frost, our Chief Financial Officer and Treasurer;

· Brian D. Russell, our Vice President, Human Resources;

· Eric Smart, our Vice President, Business Development;

· Dr. Michael P. Trova, our Senior Vice President, Chemistry;

· Dr. Bruce J. Sargent, our Vice President, Discovery Research and Development;

· Dr. Michael D. Ironside, our Vice President cGMP and Chemical Development;

· Dr. Harold Meckler, our Vice President, Science & Technology; and;

· Dr. Steven R. Hagen, our Vice President, Quality and Analytical Services.

Although we have employment agreements with certain individuals listed above, we do not have employment agreements with all of our key employees. Additionally, the loss of any of our other key employees, including our scientists, may have an adverse effect on our business.

The royalties we earn on Allegra will likely be affected by the seasonal nature of allergies.

Allergic reactions to plants, pollens and other airborne allergens generally occur during the spring and summer seasons. Therefore, we currently expect the demand for Allegra to be lower during other times of the year. Because Allegra sales change seasonally based on the demand for allergy medicines, our quarter-to-quarter revenues will likely experience fluctuations.

We may be held liable for harm caused by drugs that we develop and test.

We develop, test and manufacture drugs that are used by humans. If any of the drugs that we develop, test or manufacture harm people, we may be required to pay damages to those persons. Although we carry liability insurance, we may be required to pay damages in excess of the amounts of our insurance coverage. Damages awarded in a product liability action could be substantial and could have a negative impact on our financial condition.

We may be liable for contamination or other harm caused by hazardous materials that we use.

Our research and development processes involve the use of hazardous materials. We are subject to Federal, state and local regulation governing the use, manufacture, handling, storage and disposal of hazardous materials. We cannot completely eliminate the risk of contamination or injury resulting from hazardous materials and we may incur liability as a result of any contamination or injury. We may also

incur expenses relating to compliance with environmental laws. Such expenses or liabilities could have a significant negative impact on our financial condition.

We have completed an environmental remediation assessment associated with groundwater contamination at our Rensselaer, New York location. This contamination is associated with past practices at the facility prior to 1990, and prior to AMRI’s investment or ownership of the facility. Ongoing costs associated with the remediation include biannual monitoring and reporting to the State of New York’s Department of Environmental Conservation. Under the remediation plan, we are expected to pay for monitoring and reporting until 2014. Under a 1999 agreement with the facility’s previous owner, our maximum liability under the remediation is $5.5 million. If the State of New York Department of Environmental Conservation finds that we fail to comply with the appropriate regulatory standards, it may impose fines on us which could have a negative impact on our operations. Additionally, if we are unable to enforce our contractual maximum remediation liability of $5.5 million, it may have an adverse affect on our results of operations.

If we fail to meet strict regulatory requirements, we could be required to pay fines or even close our facilities.

All facilities and manufacturing techniques used to manufacture drugs in the United States must conform to standards that are established by the federal Food and Drug Administration, or FDA. The FDA conducts unscheduled periodic inspections of our facilities to monitor our compliance with regulatory standards. If the FDA finds that we fail to comply with the appropriate regulatory standards, it may impose fines on us or, if the FDA determines that our non-compliance is severe, it may close our facilities. Any adverse action by the FDA would have a negative impact on our operations.

Our operations may be interrupted by the occurrence of a natural disaster or other catastrophic event at our primary facilities.

We depend on our laboratories and equipment for the continued operation of our business. Our research and development operations and all administrative functions are primarily conducted at our facilities in Albany and Rensselaer, New York. Although we have contingency plans in effect for natural disasters or other catastrophic events, these events could still disrupt our operations. Even though we carry business interruption insurance policies, we may suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies. Any natural disaster or catastrophic event in the Albany area or at our facilities could have a significant negative impact on our operations.

Terrorist attacks or acts of war may seriously harm our business.

Terrorist attacks or acts of war may cause damage or disruption to our company, our employees, our facilities and our customers, which could significantly impact our revenues, costs and expenses and financial condition. For example, the terrorist attacks that took place in the United States on September 11, 2001 were unprecedented events that have created many economic and political uncertainties, some of which may materially adversely affect our business, results of operations and financial condition. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war, including the current war in Iraq, or hostility have created many economic and political uncertainties, which could materially adversely affect our business, results of operations, and financial condition in ways that we currently cannot predict.

Health care reform could reduce the prices pharmaceutical and biotechnology companies can charge for drugs they sell which, in turn, could reduce the amounts that they have available to retain our services.

We depend on contracts with pharmaceutical and biotechnology companies for a majority of our revenues. We therefore depend upon the ability of pharmaceutical and biotechnology companies to earn enough profit on the drugs they market to devote substantial resources to the research and development of new drugs. Future legislation may limit the prices pharmaceutical and biotechnology companies can charge for the drugs they market. Such laws may have the effect of reducing the resources that pharmaceutical and biotechnology companies can devote to the research and development of new drugs. If pharmaceutical and biotechnology companies decrease the resources they devote to the research and development of new drugs, the amount of services that we perform, and therefore our revenues, could be reduced.

The ability of our stockholders to control our policies and effect a change of control of our company is limited, which may not be in your best interests.

There are provisions in our certificate of incorporation and bylaws which may discourage a third party from making a proposal to acquire us, even if some of our stockholders might consider the proposal to be in their best interests. These provisions include the following:

· Our certificate of incorporation provides for three classes of directors with the term of office of one class expiring each year, commonly referred to as a “staggered board.” By preventing stockholders from voting on the election of more than one class of directors at any annual meeting of stockholders, this provision may have the effect of keeping the current members of our board of directors in control for a longer period of time than stockholders may desire.

· Our certificate of incorporation authorizes our board of directors to issue shares of preferred stock without stockholder approval and to establish the preferences and rights of any preferred stock issued, which would allow the board to issue one or more classes or series of preferred stock that could discourage or delay a tender offer or change in control.

Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which, in general, imposes restrictions upon acquirers of 15% or more of our stock.

We have adopted a Shareholder Rights Plan, the purpose of which is, among other things, to enhance the Board’s ability to protect shareholder interests and to ensure that shareholders receive fair treatment in the event any coercive takeover attempt of us is made in the future. Under the terms of the Shareholder Rights Plan, the Board can in effect prevent a person or group from acquiring more than 15% of the outstanding shares of our Common Stock. Once a shareholder acquires more than 15% of our outstanding Common Stock without Board approval (the “acquiring person”), all other shareholders will have the right to purchase securities from us at a price less than their then fair market value. These subsequent purchases by other shareholders substantially reduce the value and influence of the shares of Common Stock owned by the acquiring person.

Our officers and directors have significant control over us and their interests may differ from yours.

At February 21, 2007, our directors and officers beneficially owned or controlled approximately 14.9% of our common stock. Individually and in the aggregate, these stockholders significantly influence our management, affairs and all matters requiring stockholder approval. In particular, this concentration of ownership may have the effect of delaying, deferring or preventing an acquisition of us and may adversely affect the market price of our common stock.

Because our stock price may be volatile, our stock price could experience substantial declines.

The market price of our common stock has historically experienced and may continue to experience volatility. Our quarterly operating results, changes in general conditions in the economy or the financial markets and other developments affecting us or our competitors could cause the market price of our common stock to fluctuate substantially. In addition, in recent years, the stock market has experienced significant price and volume fluctuations. In addition, the global economic and potential uncertainty, including as a result of the war in Iraq and the international controversy that accompanied it, have created significant additional volatility in the United States capital markets. This volatility and the recent market decline has affected the market prices of securities issued by many companies, often for reasons unrelated to their operating performance or their business prospects, and may adversely affect the price of our common stock.

Because we do not intend to pay dividends, you will benefit from an investment in our common stock only if it appreciates in value.

We have never declared or paid any cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of your investment in our common stock will depend entirely upon any future appreciation. There is no guarantee that our common stock will appreciate in value or even maintain the price at which you purchased your shares.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

We have received no written comments regarding our periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of our 2006 fiscal year.

ITEM 2. PROPERTIES.

Our principal manufacturing and research and development facilities are located in the United States. The aggregate square footage of our operating facilities is approximately 785,000 square feet, of which 458,000 square feet are owned and 327,000 square feet are leased. Set forth below is information on our principal facilities:

Location	Square Feet	Primary Purpose
Albany, New York	268,000	Manufacturing, Research & Development and Administration
Rensselaer, New York	251,400	Manufacturing & Research & Development
East Greenbush, New York	64,000	Manufacturing & Research & Development
Syracuse, New York	28,000	Manufacturing & Research & Development
Bothell, Washington	33,000	Research & Development
Singapore	16,000	Research & Development
Hyderabad, India	7,000	Research & Development
Budapest, Hungary	27,000	Research & Development
Fuzfo, Hungary	37,000	Research & Development
Mt. Prospect, Illinois	88,000	Held for Sale and Under Contract for Sale

Our Rensselaer, NY facility is used in our Large-Scale Manufacturing (“LSM”) segment as reported in the consolidated financial statements. All other facilities are used in our Discovery/Development/Small Scale Manufacturing (“DDS”) segment as reported in the consolidated financial statements. We consider these facilities to be in good condition and suitable for their purpose. The capacity associated with these facilities is adequate to meet our anticipated needs through 2007.

ITEM 3. LEGAL PROCEEDINGS.

The Company, from time to time, may be involved in various claims and legal proceedings arising in the ordinary course of business. 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 the aggregate have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

AMR Technology, a subsidiary of the Company, along with Aventis Pharmaceuticals Inc., the U.S. pharmaceutical business of Sanofi-Aventis S.A., is involved in legal proceedings with several companies seeking to market generic versions of Allegra. Beginning in 2001, Barr Laboratories, Inc., Impax Laboratories, Inc., Mylan Pharmaceuticals, Inc., Teva Pharmaceuticals USA, Dr. Reddy’s Laboratories, Ltd./Dr. Reddy’s Laboratories, Inc., Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc., and Sandoz Inc. filed Abbreviated New Drug Applications (ANDAs) with the U.S. Food and Drug Administration, or FDA, to produce and market generic versions of Allegra products.

In response to the filings described above, beginning in 2001, Aventis Pharmaceuticals filed patent infringement lawsuits against Barr Laboratories, Impax Laboratories, Mylan Pharmaceuticals, Teva Pharmaceuticals, Dr. Reddy’s Laboratories, Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals 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 patents owned by Aventis Pharmaceuticals. In addition, on November 14, 2006, Aventis filed a patent infringement suit against Teva Pharmaceuticals USA, Barr Laboratories, Inc. and Barr Pharmaceuticals, Inc. in the Eastern District of Texas based on patents owned by Aventis. Further, beginning in March 5, 2004, AMR Technology, along with Aventis Pharmaceuticals, filed suit in the U.S. District Court in New Jersey against Barr Laboratories, Impax Laboratories, Mylan Pharmaceuticals, Teva Pharmaceuticals, Dr. Reddy’s Laboratories, Amino Chemicals, Ltd., Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc., DiPharma S.P.A., DiPharma Francis s.r.l., and Sandoz, asserting infringement of two of our U.S. patents that are exclusively licensed to Aventis Pharmaceuticals relating to Allegra and Allegra-D products. On December 11, 2006, AMR Technology and Sanofi-Aventis U.S. LLC, an affiliate of Aventis Pharmaceuticals, also filed a patent infringement lawsuit in the Republic of Italy against DiPharma Francis s.r.l. and DiPharma S.P.A. based on European Patent No. 703,902 which is owned by AMR Technology and licensed to Sanofi-Aventis U.S. LLC. In addition, on December 22, 2006, AMR Technology filed a patent infringement lawsuit in Canada against Novopharm Ltd., 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.

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

Under applicable federal law, marketing of an FDA-approved generic version of Allegra may not commence until the earlier of a decision favorable to the generic challenger in the patent litigation or 30 months after the date the patent infringement lawsuit was filed. In general, the first generic filer is entitled to a 180-day marketing exclusivity period upon FDA approval.

generic product is considered an “at-risk” launch due to the on-going litigation. This generic launch has had a material adverse impact on U.S. sales of Allegra by Sanofi-Aventis since the fourth quarter of 2005 and in turn, the royalties earned by the Company on those sales. The launch has not had a material impact on non-U.S. sales of Allegra to date.

On September 20, 2005, AMR Technology, along with Aventis Pharmaceuticals, filed a Motion for Preliminary Injunction in the U.S. District Court in New Jersey seeking to enjoin Barr Pharmaceuticals, Inc., Teva Pharmaceuticals Ltd., Ranbaxy Laboratories, Ltd. and Amino Chemicals, Ltd. from the 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 Aventis Pharmaceuticals for a preliminary injunction. An appeal of that decision was taken to the U.S. Court of Appeals for the Federal Circuit and, on November 8, 2006, the appellate court affirmed the District Court’s denial of a preliminary injunction. The Federal Circuit’s decisions on the preliminary injunction application is not dispositive of the merits of the claims being asserted as described above.

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

Should the Company be unsuccessful in defending these patents, the Company will continue to experience a material decrease in operating cash flows and a material adverse effect on our results of operations and financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There were no matters submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through solicitation of proxies or otherwise.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.

(a) Market Information. The Common Stock of the Company is traded on the Nasdaq National Market (“Nasdaq”) under the symbol “AMRI.” The following table sets forth the high and low closing prices for our Common Stock as reported by Nasdaq for the periods indicated:

Period	High		Low
Year ending December 31, 2006
First Quarter	$	12.44	$	9.70
Second Quarter	$	10.81	$	9.22
Third Quarter	$	10.41	$	8.50
Fourth Quarter	$	12.43	$	9.19
Year ending December 31, 2005
First Quarter	$	11.27	$	8.06
Second Quarter	$	14.20	$	9.01
Third Quarter	$	16.99	$	11.77
Fourth Quarter	$	13.71	$	10.79

Stock Performance Graph

The following graph provides a comparison, from December 31, 2001 through December 29 2006, of the cumulative total stockholder return (assuming reinvestment of any dividends) among the Company, the Nasdaq Stock Market (U.S. Companies) Index (the “Nasdaq Index”) and the Nasdaq Pharmaceuticals Index (the “Pharmaceuticals Index”). The historical information set forth below is not necessarily indicative of future performance. Data for the Nasdaq Stock Market Index and the Nasdaq Pharmaceuticals Index were provided to the Company by Nasdaq.

	Albany Molecular Research, Inc		Nasdaq Stock Market (U.S. Companies) Index		Nasdaq Pharmaceuticals Index
December 31, 2001		100.000		100.000		100.000
December 31, 2002		55.832		69.130		64.616
December 31, 2003		56.663		103.364		94.718
December 31, 2004		42.054		112.488		100.885
December 31, 2005		45.886		114.878		111.103

(b) Holders. The number of record holders of our Common Stock as of February 21, 2007 was approximately 198. We believe that the number of beneficial owners of our Common Stock at that date was substantially greater than 198.

(c) Dividends. We have not declared any cash dividends on our Common Stock since our inception in 1991. We currently intend to retain our earnings for future growth and, therefore, do not anticipate paying cash dividends in the foreseeable future. Under Delaware law, we are permitted to pay dividends only out of our surplus, or, if there is no surplus, out of our net profits. Although our current bank credit facility permits us to pay cash dividends, subject to certain limitations, the payment of cash dividends may be prohibited under agreements governing debt which we may incur in the future.

(d) Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities.

In March 2004, we issued to Bristol-Myers Squibb Company (BMS) warrants to purchase up to 516,232 shares of our common stock, with exercise prices ranging from $30.24 to $35.24 per share. The exercise period for these warrants was 5.5 years. The issuance of these warrants resulted from a 2002 agreement whereby BMS transferred intellectual property to us, providing us with ownership of one of BMS’s preclinical drug candidates, along with patent applications covering attention deficit hyperactivity disorder (ADHD) and central nervous system indications. In connection with the agreement, in March 2004, we elected to retain ownership of the technology and all improvements made to date by us, resulting in the issuance of the warrants to BMS. The warrants were offered and sold in reliance upon Section 4(2) of the Securities Act of 1933, as amended.

(e) Equity Compensation Plan Information—The following table provides information about the securities authorized for issuance under our equity compensation plans as of December 31, 2006:

Plan Category	(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights		(b) Weighted-average exercise price of outstanding options, warrants and rights			(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders(1)		2,171,413		$	20.12		1,539,879
Equity compensation plans not approved by security holders		—		—			—
Total		2,171,413		$	20.12		1,539,879	(2)

(1) Consists of the Stock Option Plan and the Employee Stock Purchase Plan (ESPP). Does not include purchase rights accruing under the ESPP because the purchase price (and therefore the number of shares to be purchased) will not be determined until the end of the purchase period. Includes shares available for future issuance under the ESPP and Stock Option Plan.

(2) Includes 1,181,526 shares available for the Stock Option Plan and 358,353 shares available for the ESPP.

ITEM 6. SELECTED FINANCIAL DATA.

The selected financial data shown below for the fiscal years ended December 31, 2006, 2005, and 2004 and as of December 31, 2006 and 2005, have been derived from our audited consolidated financial statements included in this Form 10-K. The selected financial data set forth below for the fiscal years ended December 31, 2003 and 2002 and as of December 31, 2004, 2003 and 2002 have been derived from our audited consolidated financial statements for those years, which are not included in this Form 10-K. All share and per share amounts have been adjusted for stock splits. The information should be read in conjunction with the Company’s audited consolidated financial statements and related notes and other financial information included herein, including Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

	As of and for the Year Ending December 31,
	2006			2005			2004			2003			2002
	(in thousands, except per share data)
Consolidated Statements of Income (Loss) Data:
Contract revenue	$	152,783		$	136,988		$	121,554		$	144,667		$	71,688
Recurring royalties	27,024			46,918			47,973			51,682			51,139
Total revenue	179,807			183,906			169,527			196,349			122,827
Cost of contract revenue	128,610			112,642			96,932			101,753			41,313
Write-down of library inventories	—			2,063			5,974			—			—
Total cost of contract revenue	128,610			114,705			102,906			101,753			41,313
Technology incentive award	2,783			4,695			4,789			5,183			5,107
Research and development	11,428			14,468			23,887			22,466			7,096
Selling, general and administrative	31,899			26,494			22,812			20,318			12,897
Property and equipment impairment	3,554			—			4,728			—			—
Goodwill impairment	—			—			14,494			—			—
Intangible asset impairment	—			—			3,541			—			—
Restructuring charge	2,431			—			1,184			—			—
Total costs and expenses	180,705			160,362			178,341			149,720			66,413
Income (loss) from operations	(898		)	23,544			(8,814		)	46,629			56,414
Equity in (loss) income of unconsolidated affiliates	—			—			(65		)	(372		)	2,795
Interest income, net	2,990			1,787			317			785			3,108
Minority interest in consolidated subsidiaries	—			—			—			133			—
Loss on equity investment	—			—			(1,274		)	—			—
Other (loss) income, net	150			(185		)	(18		)	403			93
Income (loss) before income tax expense	2,242			25,146			(9,854		)	47,578			62,410
Income tax expense	59			8,825			1,837			16,714			22,686
Net income (loss)	$	2,183		$	16,321		$	(11,691	)	$	30,864		$	39,724
Basic earnings (loss) per share	$	0.07		$	0.51		$	(0.37	)	$	0.97		$	1.22
Diluted earnings (loss) per share	$	0.07		$	0.50		$	(0.37	)	$	0.95		$	1.19
Weighted average common shares outstanding, basic	32,036			32,044			31,627			31,880			32,632
Weighted average common shares outstanding, diluted	32,289			32,334			31,627			32,366			33,309
Consolidated Balance Sheet Data:
Cash, cash equivalents and investment securities	$	107,164		$	127,910		$	133,749		$	124,628		$	129,537
Property and equipment, net	153,202			151,078			145,753			146,639			72,518
Working capital	149,932			162,805			179,765			174,609			163,133
Total assets	375,493			383,150			376,892			390,945			302,736
Long-term debt, excluding current installments	13,993			18,521			48,603			53,129			5,281
Total stockholders’ equity	318,455			313,061			295,476			301,935			282,147
Other Consolidated Data:
Capital expenditures	$	16,453		$	19,166		$	23,716		$	30,554		$	17,387

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

We are a global chemistry-based drug discovery and development company, focused on identifying and developing novel biologically active small molecules with applications primarily in the prescription drug market. We engage in comprehensive research from lead discovery, optimization and development to commercial manufacturing and conduct cell and non-cell based high throughput screening on a variety of biological targets. We perform research for many of the leading pharmaceutical and biotechnology companies and for our own internal research and development.

In addition to our contract services, we also conduct proprietary research and development to discover new therapeutically active lead compounds with commercial potential. We anticipate that we would then license these compounds to third parties in return for up-front and service fees, and milestone payments as well as recurring royalty payments if these compounds are developed into new commercial drugs. In October 2005, we licensed the worldwide rights to develop and commercialize potential products from our amine neurotransmitter reuptake inhibitors identified in one of our proprietary research programs to Bristol-Myers Squibb Company (“BMS”). Our proprietary research and development activities previously led to the development, patenting and 1995 licensing of a substantially pure form of, and a manufacturing process for, the active ingredient in the non-sedating antihistamine fexofenadine HCl marketed by Sanofi-Aventis S.A. as Allegra in the Americas and as Telfast elsewhere.

Our total revenue for 2006 was $179.8 million, including $152.8 million from our contract service business and $27.0 million from our royalties on sales of Allegra. We generated $11.3 million in cash from operations and spent $11.6 million related to the acquisition of AMRI Hungary. In addition, we spent $16.5 million in capital on our facilities and equipment, primarily related to the construction and outfitting of research facilities in Singapore and India, the expansion of our manufacturing suites at our Rensselaer facility, and the implementation of a company-wide enterprise resource planning (“ERP”) system. In addition, we paid down $4.6 million in outstanding principal on our credit facilities. We recorded net income of $2.2 million in 2006. As of December 31, 2006, we had $107.2 million in cash, cash equivalents and investments and $18.5 million in bank and other related debt, carrying a blended interest rate of approximately 4.13%.

Strategy

We continue to execute a long-term strategy to grow our global platform services business while leveraging our proprietary technologies and capabilities to provide greater value to our customers and further growth for the Company. In 2005, we established operations in Singapore and India, enabling us to provide our research and development services in lower-cost environments. In February 2006, we completed the acquisition of ComGenex (now known as AMRI Hungary), a privately held drug discovery service company in Budapest, Hungary. The addition of AMRI Hungary has provided the Company with a European base in a European Union member state and significantly increased access to the European market, as well as another lower-cost environment from which we can provide our services. We have designed our operating structure and our services to provide our customers with opportunities to reduce overall drug development time and cost and to simultaneously pursue a greater number of drug discovery and development opportunities across a wide range of technologies, geographic locations, and cost structures.

We also continued to transition and expand our clinical supply manufacturing revenue stream at our large-scale manufacturing facility, enabling us to seamlessly transfer our customers’ clinical supply manufacturing projects through the drug discovery and development process from the development of these materials at our smaller scale chemistry laboratories to large-scale production for use in advanced stage human trials. Clinical supply manufacturing supplements our large-scale facility’s legacy services,

which include cGMP commercial production, as well as high potency and controlled drug substance manufacturing, and is expected to assist us in recovering lost revenues resulting from the 2005 discontinuation of purchases of one of the products that we sold to GE Healthcare. Sales of this product totaled $17.0 million in 2005, which represented 21% of large scale manufacturing revenue for the year ended December 31, 2005. In addition, clinical supply manufacturing presents additional commercial production opportunities, as we seek to enter into comprehensive agreements with our customers that also provide for commercial supply of these materials upon meeting regulatory approval. We entered into two of these types of agreements during the second quarter of 2006. The materials to be produced under these agreements received positive regulatory announcements in October 2006, and the commercial manufacturing of a product under one of these contracts began in the fourth quarter of 2006. Clinical supply manufacturing represented 32% of our LSM revenue in 2006, compared to 22% in 2005.

In November 2006, we announced plans to initiate a restructuring of our LSM business segment. Consistent with our continued strategy of realigning this segment toward a greater focus on manufacturing clinical trial materials with strong commercial potential as noted above, the goals of the restructuring plan are to strengthen our competitiveness in this area and reduce operating costs by eliminating overlap in business processes, organization and project process flow, as well as leveraging existing resources and assets. The restructuring plan called for us to reduce our workforce in this segment by approximately 40 employees or approximately 15%, as well as reduce non-essential operating expenses, raw material costs and future capital expenditure activities. We estimate that total large scale costs will be reduced by $5 million annually as a result of this restructuring. We are also evaluating opportunities to leverage our large-scale cGMP production facilities, including identifying niche products to manufacture such as active pharmaceutical ingredients (“API”) for use in generic versions of compounds whose patents have expired or will be expiring, as well as assessing complementary lines of business that support cGMP production.

We continue to advance our proprietary technologies and programs with the goal to generate licensing and other revenue opportunities. In October 2006, the Company announced the selection of a compound from its proprietary oncology research program for advanced preclinical testing, with the goal of submitting an Investigational New Drug Application (“IND”) with the U.S. Food and Drug Administration (“FDA”) in late 2007 or early 2008. We also continue to utilize our proprietary technologies to further advance other early to middle stage internal research programs in the fields of oncology, immunosuppresion, bacterial infection and other diseases, with a view to seeking a licensing partner for these programs at an appropriate research or developmental stage.

Additionally, we continue to seek comprehensive research and/or supply agreements with our customers, incorporating several of our service offerings in a variety of locations and cost structures worldwide, and spanning across the entire pharmaceutical research and development process, including access to our chemical compound and natural product libraries, performance of screening and other lead discovery activities, performance of lead optimization and pre-clinical testing, and large-scale manufacturing for clinical trials and commercial sale if the product meets regulatory approval. We believe that the ability to partner with a single provider of pharmaceutical research and development services from discovery through commercial production is of significant benefit to our customers. Through our comprehensive service offerings, we are able to provide customers with a more efficient transition of experimental compounds through the research and development process, ultimately reducing the time and cost involved in bringing these compounds from concept to market. Under these comprehensive agreements, we typically receive a combination of fees for performance and delivery of goods and services, as well as milestone and royalty payments should collaborative efforts lead to the discovery of new products that reach the market.

We are currently in the process of implementing a company-wide enterprise resource planning (“ERP”) system, which will ultimately result in the management of all components of our business across all locations within one integrated operating system. We completed the implementation of this system in all U.S. locations in July 2006, and we expect to implement this system in our international locations in

2007. We expect the ERP to provide increased visibility into the operation and management of our contract services and research and development businesses. In addition, we expect to realize efficiencies through the consolidated processing of our administrative functions in a uniform manner across all locations.

The trends that began to emerge in chemistry outsourcing during 2005 continued in 2006. We continued to experience strong demand for our developmental and small-scale cGMP manufacturing services, further extending the growth trend that began in the second half of 2004. Pricing for our services remained extremely competitive, and the trend of sourcing contracted services to lower-cost providers continued. Our ability to provide services under a variety of business models and cost structures by incorporating our lower cost international facilities that were established in India and Singapore in 2005, as well as AMRI Hungary, which was acquired in February 2006, continued to be well-received by our customers. Our global platform helped to drive an increase in worldwide demand for our discovery services. This trend, which began in the latter portion of 2005 and ended a two-year period of declining demand for these services, continued through 2006. We currently expect the trend of increased worldwide demand for our services to continue in 2007, and we expect to continue to expand our global service platform to meet the needs of our customers. In addition to continuing to integrate our existing facilities in India, Singapore, and Hungary into our global service offerings, we initiated construction on a new 50,000 square foot R&D centre at the Shapoorji Pallonji Biotech Park in Hyderabad, India in 2006. The facility will conduct contract projects in early stage drug discovery research and house a development laboratory, and is expected to be completed in late 2007.

As discussed in Item 3 of this Form 10-K, beginning in September 2005, several generic manufacturers began to produce and market a generic version of Allegra. We and Aventis Pharmaceuticals have filed several patent infringement suits against these generic companies alleging infringement of certain U.S. and Canadian patents. The launch of the generic product is considered an “at-risk” launch due to the on-going litigation. The at-risk launch of generic fexofenadine had a material adverse impact on U.S. sales of Allegra by Sanofi-Aventis in 2006 and in turn, the royalties earned by us on those sales. We continue to forcefully and vigorously defend our intellectual property related to Allegra, and we continue to pursue our intellectual property rights as the patent infringement litigation progresses. However, should we or Sanofi-Aventis be unsuccessful in defending these patents we would continue to experience a material decrease in royalty revenues and operating cash flows.

The recurring royalties we receive on the sales of Allegra/Telfast have historically provided a material portion of our revenues, earnings, and operating cash flows. The at-risk launch of generic fexofenadine had a material adverse impact on U.S. sales of Allegra in 2006, resulting in a 42% year-over-year decrease in our royalty revenues for the year. We currently expect 2007 Allegra royalty revenues to remain flat or decrease slightly from amounts recognized in 2006. We expect to experience a decrease in earnings and operating cash flows in the short term as we continue to develop our business in an effort to supplement the revenues, earnings and operating cash flows that have historically been provided by Allegra/Telfast royalties.

Mt. Prospect Impairment

During the fourth quarter of 2006, we secured a letter of intent related to the potential sale of the Mt. Prospect facility for approximately $1.5 million. As a result, we recorded an additional impairment charge of approximately $0.5 million in the fourth quarter of 2006 to reduce the carrying amount of these assets to reflect the sales price per the letter of intent less estimated selling costs. We currently anticipate the sale to be completed in the first half of 2007.

The facility qualified for held for sale treatment in accordance with SFAS No. 144 during the fourth quarter of 2004. At that time, we anticipated the completion of the sale of the facility by June 2006. We previously disclosed that if a definitive agreement to sell the facility was not in place as of June 30, 2006, we

would reassess the classification of the facility as held for sale in accordance with SFAS No. 144. We were not able to secure a definitive agreement to sell the facility as of June 30, 2006. Accordingly, and in connection with the preparation of our second quarter results, we reassessed Mt. Prospect as a held for sale facility. As a result of this assessment, we reaffirmed our intention to sell the Mt. Prospect facility, and determined that a further write-down of the carrying value of the facility was required. Management estimated the fair value based upon its intention to sell the facility within twelve months and comparable real estate transactions in the facility’s market area. We recorded an impairment charge of $3.1 million during the quarter ended June 30, 2006 to reflect the estimated fair value of the facility less estimated selling costs.

Results of Operations

Operating Segment Data

We have organized our sales, marketing and production activities into the Discovery/Development/Small Scale Manufacturing (“DDS”) and Large Scale Manufacturing (“LSM”) segments based on the criteria set forth in SFAS No. 131, ‘‘Disclosures about Segments of an Enterprise and Related Information.’’ We rely on an internal management accounting system to report results of these segments. The accounting system includes revenue and cost information by segment. We make financial decisions and allocate resources based on the information we receive from this internal system. The DDS segment includes activities such as drug lead discovery, optimization, drug development and small scale commercial manufacturing. The LSM segment includes pilot to commercial scale manufacturing of active pharmaceutical ingredients and intermediates and high potency and controlled substance manufacturing, all of which are in compliance with the Food and Drug Administration’s (“FDA”) current Good Manufacturing Practices, or cGMP.

Contract Revenue

Contract revenue consists primarily of fees earned under contracts with third-party customers. Our contract revenues for each of our DDS and LSM segments were as follows:

	Year Ended December 31,
	2006		2005		2004
	(in 000’s)
DDS	$	75,777	$	55,645	$	53,488
LSM	77,006		81,343		68,066
Total	$	152,783	$	136,988	$	121,554

DDS contract revenue for 2006 was $75.8 million, an increase of $20.2 million or 36.2% compared to contract revenue of $55.6 for 2005. The increase in contract revenue was primarily attributable to an increase in discovery services revenue of $12.1 million or 44% due to the recognition of license fee and FTE services revenues resulting from our License and Research Agreement with BMS, strong worldwide demand for discovery services provided through both our U.S. and Singapore facilities, and the addition of $8.1 million in revenue from AMRI Hungary. In addition, contract revenue from chemical development, small-scale GMP manufacturing and analytical services increased by $8.1 million or 29% as our customers continue to focus on development-stage projects and demand for development services provided through our India facility increased. We expect the growth trends in both discovery services and development and small-scale manufacturing services to continue in 2007.

LSM contract revenue decreased by $4.3 million, or 5.3%, to $77.0 million in 2006 compared to $81.3 in 2005. The decrease in contract revenue was primarily attributable to the discontinuation of purchases of one of LSM’s products by GE Healthcare in the second quarter of 2005. Sales of this product totaled $17.0 million in 2005, which represented 21% of 2005 LSM revenue, and 12% of total contract revenue for the

year ended December 31, 2005. The decrease is largely offset by an increase in demand for clinical supply products for advanced stage human trials as we shift the focus of our large-scale manufacturing operations. Clinical supply manufacturing revenues were $24.3 million in 2006, or 32% of total LSM revenue, compared to $17.9 million in 2005, or 22.0% of total LSM revenue. The decrease is further offset by a $5.5 million increase in sales of commercial products to customers other than GE due to the timing of customer requirements. We expect an increase in large-scale contract revenue in 2007 as we experience continued growth in the area of clinical supply manufacturing for advanced stage human trials and additionally increase our customer base for other commercial products.

DDS contract revenue for 2005 was $55.6 million, an increase of 4% compared to contract revenue of $53.5 million in 2004. The increase in contract revenue was due to an increase in demand for development and small-scale manufacturing services, as our customers increased their efforts to further develop previously identified compounds and bring them into clinical trials. The increase in development and small-scale manufacturing revenue was partially offset by a decrease in discovery services revenues, as the industry trends of reduced spending and sourcing of these services to lower-cost international providers continued in 2005. However, upon commencing lower-cost international operations in Singapore and India, our ability to offer our services under a variety of business models and cost structures was well-received by our customers, resulting in an increase in demand for our discovery services both internationally and domestically during the latter portion of 2005. In addition, the License and Research Agreement that we signed with BMS in October 2005 includes a significant contract research component and also results in the recognition of an $8 million up-front payment over a three-year research term. These factors contributed to an 18% year-over-year increase in discovery services revenue in the fourth quarter of 2005.

LSM contract revenue increased by $13.3 million, or 19.5%, to $81.3 million in 2005 compared to $68.1 in 2004. The increase in contract revenue was primarily attributable to an increase in demand for clinical supply products for advanced stage human trials as we shift the focus of our large-scale manufacturing operations. Clinical supply manufacturing revenues were $17.9 million in 2005, or 22% of total LSM revenue, compared to $8.1 million in 2004, or 12% of total LSM revenue. Our largest LSM customer, GE, discontinued purchases of one of the products that we sell to them in 2005. Sales of this product totaled $17.0 million, which represented 21% of 2005 LSM revenue, and 12% of total contract revenue for the year ended December 31, 2005.

Recurring Royalties

We earned royalties under our licensing agreement with Sanofi-Aventis S.A. for the active ingredient in Allegra/Telfast. Royalties were as follows:

Year Ended December 31,
2006	2005		2004
	(in 000’s)
$27,024	$	46,918	$	47,973

Recurring royalties decreased 42.4% to $27.0 million for the year ended December 31, 2006 from $46.9 million for 2005. The decrease is primarily attributable to the impact of the at-risk launch of generic fexofenadine by Barr Pharmaceuticals, Inc. and Teva Pharmaceuticals Industries Ltd.

Recurring royalties decreased 2% to $46.9 million for the year ended December 31, 2005 from $48.0 million for 2004. The decrease is primarily attributable to the fourth quarter 2005 impact of the at-risk launch of generic fexofenadine by Barr Pharmaceuticals, Inc. and Teva Pharmaceuticals Industries Ltd., which occurred on September 6, 2005.

The recurring royalties we receive on the sales of Allegra/Telfast have historically provided a material portion of our revenues, earnings, and operating cash flows. We expect to continue to experience a

decrease in revenues, earnings, and operating cash flows from historical levels in the short term as we continue to develop our business in an effort to supplement the revenues, earnings and operating cash flows that have historically been provided by Allegra/Telfast royalties. We continue to forcefully and vigorously defend our intellectual property related to Allegra, and we continue to pursue our intellectual property rights as patent infringement litigation progresses. However, should we or Aventis be unsuccessful in defending these patents we would continue to experience a material decrease from historic royalty revenues. Furthermore, an at-risk launch of a generic version of Allegra-D by a generic competitor could result in further decreases in royalty revenues.

Cost of Contract Revenue

Cost of contract revenue, from which we derive gross profit from contract revenue, consists primarily of compensation and associated fringe benefits for employees, chemicals, depreciation and other indirect costs. Cost of contract revenue for our DDS and LSM segments were as follows:

	Year Ended December 31,
	2006			2005			2004
	(in 000’s)
DDS	$	53,591		$	45,179		$	51,186
LSM	75,019			69,526			51,720
Total	$	128,610		$	114,705		$	102,906
DDS Gross Margin	29.3		%	18.8		%	4.3		%
LSM Gross Margin	2.6		%	14.5		%	24.0		%
Total Gross Margin	15.8		%	16.3		%	15.3		%

DDS contract revenue gross margin was 29.3% for the year ended December 31, 2006, compared to 18.8% in 2005. The increase in gross margin largely resulted from the increase in contract revenues in relation to the fixed cost components of DDS contract business, including the addition of license fee revenues associated with our Licensing and Research Agreement with BMS. The recognition of license fees contributed approximately $2.9 million to DDS contract revenue for 2006, with no corresponding incremental cost. We also realized good margin contributions on services performed at AMRI Hungary. DDS contract gross margin was also favorably impacted by a $1.2 million decrease in the amortization of the Company’s chemical compound and natural product library inventories for the year ended December 31, 2006, due to the impairment of these libraries in the fourth quarter of 2005. This item was offset by increased salary and benefit expenses due to annual merit increases and the recognition of additional share-based compensation expense under SFAS No. 123 (R). We expect the trend of increased DDS contract revenue gross margins to continue in 2007 due to increases in contract revenues both domestically and internationally in relation to the fixed costs at these locations.

LSM contract revenue gross margin decreased to 2.6% for the year ended December 31, 2006 compared to 14.5% in 2005. The decrease is due to the impact of the transition of our large-scale manufacturing facility from specializing in the repetitive manufacturing of commercial products to the non-repetitive manufacturing of clinical supply compounds for numerous customers for use in clinical trials. In November 2006 we announced a restructuring plan to realign the facility’s operations and cost structure with this business model. The goal of the restructuring plan is to improve the efficiency and profitability of the LSM operating segment by eliminating overlap in business processes, organization and project process flow, as well as leveraging existing resources and assets. As a result, we expect gross margins in the LSM segment to improve in 2007, as we expect to realize annual savings of approximately $5 million from the restructuring plan beginning in 2007. The savings are expected to occur through the announced workforce reductions as well as non-workforce-related actions such as the disposal of underutilized assets, elimination of non-essential operating expenses, and reductions in raw material costs.

DDS contract revenue gross margin was 18.8% for the year ended December 31, 2005, compared to 4.3% in 2004. The increase in gross margin largely resulted from the increase in contract revenues in relation to the fixed cost components of DDS contract business, as well as decreases in facilities and overhead costs, compensation and benefits expense due to a reduction in scientific personnel, as well as decreases in write-downs of our library and raw material inventories. LSM contract revenue gross margin decreased to 14.5% for the year ended December 31, 2005 compared to 24.0% in 2004. The decline in gross margin was due to the transition of our large-scale manufacturing facility from specializing in the manufacturing of commercial products to the manufacturing of clinical supply compounds for use in human trials.

Technology Incentive Award

We maintain a Technology Development Incentive Plan, the purpose of which is to stimulate and encourage novel innovative technology development by our employees. This plan allows eligible participants to share in a percentage of the net revenue earned by us relating to patented technology with respect to which the eligible participant is named as an inventor. Awards are currently payable primarily to Dr. Thomas D’Ambra, the Chief Executive Officer and President of the Company. The incentive awards were as follows:

Year Ended December 31,
2006	2005		2004
(in 000’s)
$2,783	$	4,695	$	4,789

The technology incentive award expense incurred under our Technology Development Incentive Plan decreased 40.7% to $2.8 million for the year ended December 31, 2006, compared to $4.7 million for 2005. The decrease was directly attributable to the continued decrease in Allegra royalties in 2006, partially offset by technology incentive awards paid to employees involved in the development of our proprietary amine neurotransmitter reuptake inhibitors as a result of the successful licensing of this technology to BMS. We expect technology incentive award expense to generally fluctuate directionally and proportionately with fluctuations in Allegra royalties in future periods.

The technology incentive award expense incurred under our Technology Development Incentive Plan decreased 2% to $4.7 million for the year ended December 31, 2005, compared to $4.8 million for 2004. The decrease was directly attributable to the decrease in Allegra royalties in 2005.

Research and Development

Research and development expense consists of compensation and benefits for scientific personnel, costs of chemicals and other out-of-pocket costs and overhead costs for work performed on proprietary technology research and development projects. We utilize our expertise in small molecule chemistry, biocatalysis and natural products to perform our internal research and development projects. The goal of these programs is to discover new compounds with commercial potential. We would then seek to license these compounds to a third party in return for a combination of up-front license fees, milestone payments and recurring royalty payments if these compounds are successfully developed into new drugs and reach the market. In addition, research and development is performed at our Rensselaer, NY facility related to the improvement of production processes as well as research related to the potential manufacture of new products. Research and development expenses were as follows:

Year Ended December 31,
2006	2005		2004
(in 000’s)
$11,428	$	14,468	$	23,887

Research and development expenses decreased 21.0% to $11.4 million for the year ended December 31, 2006 from $14.5 million for 2005. The decrease in R&D expense during the year ended December 31, 2006 is due primarily to the out-licensing of our CNS programs, which represented our most significant investment in R&D in 2005, to BMS in October 2005. As a result, after signing the agreement in October 2005, we did not incur significant R&D expenditures that would have been necessary to further advance these programs. In addition, certain costs associated with these programs, primarily consisting of compensation, employee benefit, and overhead costs related to the AMRI scientific personnel working on these programs have been allocated to cost of contract revenue related to the contract research we are performing for BMS in conjunction with the Licensing and Research Agreement. On October 30, 2006, the Company announced the selection of a compound from its proprietary oncology research program for advanced preclinical testing, with the goal of submitting an Investigational New Drug Application (“IND”) with the U.S. Food and Drug Administration (“FDA”) in late 2007 or early 2008. We currently expect research and development expense increases in 2007 as we advance our oncology compound towards an IND submission with the FDA.

Projecting expected project completion dates and anticipated revenue from our internal research programs is not practical at this time due to the early stages of the projects and the inherent risks related to the development of new drugs. Our internal central nervous system program, which was our most advanced project to date, was licensed to BMS in exchange for up-front license fees, contracted research services, and the rights to future milestone and royalty payments. We also continue to utilize our proprietary technologies to further advance other early to middle-stage internal research programs in the fields of oncology, immunosuppresion and inflammation, with a view to seeking a licensing partner for these programs at an appropriate research or developmental stage.

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

Research and development expenses decreased 39% to $14.5 million for the year ended December 31, 2005 from $23.9 million for 2004. The decrease in research and development expenses was due to the fact that research and development expenses for the year ended December 31, 2004 included a $3.1 million charge related to the issuance of warrants to BMS in conjunction with our acquisition of intellectual property related to our central nervous system (“CNS”) programs. The decrease was also due to the fact that we licensed our CNS programs, which represented our most significant investment in R&D in both 2005 and 2004, to BMS in October 2005. As a result, after signing the agreement in October 2005, we did not incur significant R&D expenditures that would have been necessary to further advance these programs. In addition, certain costs associated with these programs, primarily consisting of compensation and benefit costs related to the AMRI scientific personnel working on these programs, shifted to cost of contract revenue related to the contract research we are performing for BMS in conjunction with the licensing and research agreement. Finally, the decrease was also due to initiatives we undertook to reorganize our internal departments in order to have a more formalized and structured R&D business group in 2005, resulting in a more narrow focus of the scope of our research and development activities.

Selling, General and Administrative

Selling, general and administrative expenses consist of compensation and related fringe benefits for marketing, operational and administrative employees, professional services, marketing costs and costs related to facilities and information services. Selling, general and administrative expenses were as follows:

Year Ended December 31,
2006	2005		2004
(in 000’s)
$31,899	$	26,494	$	22,812

The increase in selling, general and administrative expenses in 2006 is primarily due to the addition of $3.5 million in incremental administrative costs incurred at AMRI Hungary, an increase in salaries and benefits expense of $2.1 million due to the addition of administrative and business development personnel and the recognition of additional share-based compensation expense under SFAS No. 123 (R), as well as an increase in costs of $0.9 million due to the implementation and maintenance of our ERP system. These increases were partially offset by a decrease of $0.4 million from a refund of property taxes at our Mt. Prospect facility and an incremental decrease of $0.3 million in our Singapore expenses. Selling, general and administrative expenses are expected to increase in 2007 due to increased business development personnel costs, the recognition of additional stock-based compensation costs, additional travel costs associated with our international operations, and additional recruiting costs associated with the staffing of scientific personnel at both our domestic and international operations resulting from the anticipated increased demand for our contract services.

The increase in selling, general and administrative expenses in 2005 was due to an increase in salary and benefit expenses of $2.7 million resulting from the addition of administrative and business development personnel, as well as the reallocation of certain personnel expenses to more appropriately reflect the current use of these resources; the addition of $2.4 million in start-up and administrative costs associated with our Singapore and India operations; and a $1.1 million increase in facilities costs associated with the reallocation of these costs to more appropriately reflect the current cost of operating our laboratory and administrative facilities. These increases were partially offset by $1.4 million of employee and equipment relocation costs associated with the closure of our Mount Prospect facility incurred during 2004, as well as a decrease in professional fees of $1.3 million due to an overall decrease in Sarbanes-Oxley compliance service costs and additional accounting and valuation service fees associated with the impairment analyses performed at our Bothell and Mount Prospect facilities in 2004.

Impairment and Restructuring Charges

Large Scale Manufacturing Restructuring

On November 9, 2006, the Company announced plans to initiate a restructuring of the Company’s LSM business segment. Consistent with the Company’s continued strategy of realigning its LSM segment toward a greater focus on manufacturing clinical trial materials with strong commercial potential, the goals of the restructuring plan are to strengthen the Company’s competitiveness in this area and reduce operating costs by eliminating overlap in business processes, organization and project process flow, as well as leveraging existing resources and assets. The restructuring plan called for the Company to reduce its workforce in this segment by approximately 40 employees or approximately 15%, as well as reduce non-essential operating expenses, raw material costs and future capital expenditure activities. The Company has estimated that total large scale costs will be reduced by $5 million annually as a result of this restructuring. The Company recorded a restructuring charge of approximately $2.4 million in the fourth quarter of 2006, including a non-cash asset disposal charge of approximately $1.6 million, and cash charges of approximately $0.8 million consisting primarily of termination benefits.

The large scale restructuring costs are included under the caption restructuring charge in the consolidated statement of income for the year ended December 31, 2006 and the restructuring liabilities are included in accounts payable and accrued expenses on the consolidated balance sheet at December 31, 2006. The following table displays the restructuring activity and liability balances:

	Balance at January 1, 2006			Restructuring Charges			Incurred Amounts			Balance at December 31, 2006
	(in 000’s)
Termination benefits		$	—		874		(192		)		$	682
Asset disposal costs		—			1,557		(1,175		)		382
Total		$	—		$	2,431	$	(1,367	)		$	1,064

Costs of termination benefits relate to severance packages, outplacement services and career counseling for employees affected by the restructuring. Asset disposal costs relate primarily to the carrying value of underutilized assets that were identified for disposal in conjunction with the restructuring plan.

The large scale manufacturing restructuring activity was recorded in the LSM operating segment. The net cash outflow related to the large scale manufacturing restructuring for the year ended December 31, 2006 was $0.07 million. Anticipated cash outflows related to the large scale manufacturing restructuring for 2007 are $0.8 million, which primarily consists of the payment of accrued termination benefits.

Mt. Prospect Restructuring and Impairment Charges

During the fourth quarter of 2006, we secured a letter of intent related to the potential sale of the facility for approximately $1.5 million. As a result, we recorded an additional impairment charge of approximately $0.5 million in the fourth quarter of 2006 to reduce the carrying amount of these assets to reflect the sales price per the letter of intent less estimated selling costs. We previously recorded an impairment charge of $3.1 million during the quarter ended June 30, 2006 to reflect the estimated fair value of the facility less estimated selling costs.

As of June 30, 2004 we completed an in-depth review of the carrying value of all of our natural product and chemical compound library inventories. As a result of this review, which was based on expected future revenues, it was determined that a significant write-down in the carrying value of library inventories was required. The reduction in the carrying value of the library inventories reflected less favorable market conditions than previously projected.

The write-down of library inventories triggered an assessment of the recoverability of certain other related long-lived assets and goodwill within the Bothell reporting unit, including the goodwill and intangibles which resulted from the 2001 acquisition of New Chemical Entities (NCE), in accordance with the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), and SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). Based on our review, we determined that an impairment of certain related goodwill and long-lived assets had occurred.

In addition, we initiated a restructuring which resulted in the closure of our Mt. Prospect Research Center and the consolidation of Mt. Prospect’s operations in our New York facilities. The restructuring triggered an assessment of the carrying value of the Mt. Prospect Research Center property and equipment and related goodwill. Based on this review, and in accordance with the provisions of SFAS No. 144 and SFAS No. 142, we determined that an impairment of certain related goodwill and property and equipment had occurred. Further, we incurred restructuring costs related to the Mt. Prospect restructuring.

We previously disclosed that if a definitive agreement to sell the facility was not in place as of June 30, 2006, it would reassess the classification of the facility as held for sale in accordance with SFAS No. 144 at that time. We were not able to secure a definitive agreement to sell the facility as of June 30, 2006. Accordingly, and in connection with the preparation of its second quarter results, the Company reassessed Mt. Prospect as a held for sale facility. As a result of this assessment, the Company reaffirmed its intention to sell the Mt. Prospect facility, and determined that a further write-down of the carrying value of the facility was required. Management estimated the fair value based upon its intention to sell the facility within twelve months and comparable real estate transactions in the facility’s market area.

The restructuring costs are included under the caption restructuring charge in the consolidated statement of loss for the year ended December 31, 2004. The subsequent impairment of the Mt. Prospect facility and the resulting adjustments to the related restructuring liabilities are included under the caption property and equipment impairment in the consolidated statement of income for the year ended December 31, 2006. The restructuring liabilities are included in accounts payable and accrued expenses on

the consolidated balance sheets at December 31, 2006 and 2005. The following table displays the restructuring activity and liability balances:

	Balance at January 1, 2006			Adjustments			Payments		Balance at December 31, 2006
	(in 000’s)
Asset disposal costs		513			(323	)		—		190
Total		$	513		(323	)		—		$	190

Asset disposal costs relate primarily to brokerage commissions, legal fees, and marketing expenses associated with the planned sale of the Mount Prospect Research Center facility, which is included in property and equipment held for sale on the consolidated balance sheet.

The Company also incurred $1.4 million in employee and equipment relocation costs during 2004. These relocation costs are included under the caption “selling, general and administrative” in the consolidated statement of loss.

The Mt. Prospect restructuring activity was recorded in the DDS operating segment. The net cash outflow related to the Mt. Prospect restructuring for the year ended December 31, 2006 was $0. Anticipated cash outflows related to the large scale manufacturing restructuring for 2007 are $0.2 million, which primarily consists of the payment of accrued asset disposal costs.

Equity in income (loss) of unconsolidated affiliates

Equity in income (loss) of unconsolidated affiliates represented the Company’s proportionate share in the income or loss of investees that the Company accounts for under the equity method. Equity in income (loss) of unconsolidated affiliates was as follows:

Year Ended December 31,
2006	2005		2004
(in 000’s)
$—		$—	$	(65	)

The loss recorded in 2004 reduced the value of the Company’s investment to $0, and as such, no further adjustments will be recorded until the investee returns to a position of positive net worth.

Interest income (expense), net

	Year Ended December 31,
(in thousands)	2006			2005			2004
Interest expense	$	(1,072	)	$	(1,772	)	$	(1,641	)
Interest income	4,062			3,559			1,958
Interest income (expense), net	$	2,990		$	1,787		$	3171

Interest expense decreased $0.7 million to $1.1 million for the year ended December 31, 2006 from $1.8 million for 2005. The decrease was primarily due to the paydown of the $25.5 million outstanding balance on the Company’s line of credit in the third quarter of 2005.

Interest expense increased $0.1 million or 8% to $1.8 million for the year ended December 31, 2005 from $1.6 million in 2004. The increase was due to increases in the rates paid on the Company’s variable rate debt that were not hedged by its interest rate swaps, partially offset by the paydown of the $25.5 million outstanding balance on the Company’s line of credit in the third quarter of 2005.

Interest income increased $0.5 million to $4.1 million for the year ended December 31, 2006 from $3.6 million for 2005. The increase was due to increases in the rates earned on investment securities, interest bearing cash accounts and other short-term cash equivalents, partially offset by decreases in the underlying interest-earning balances held by the Company.

Interest income increased $1.6 million or 82% to $3.6 million for the year ended December 31, 2005 from $2.0 million for 2004. The increase in interest income was primarily due to increases in the rates earned on short-term cash equivalents and investment securities, as well as an effort by management to maximize balances held in short-term cash equivalent accounts, which are higher yielding than interest-bearing cash accounts.

Loss on equity investment

We have equity investments in leveraged private companies that have operations in areas within our strategic focus. During 2003, we made equity investments in two private companies totaling $2.1 million. Under the terms of these agreements, we provided FTE services to each customer in exchange for equity securities, plus additional fee for service cash payments. We assess the fair value of these investments quarterly or whenever events or changes in circumstance indicate that the investment value may not be recoverable. During the fourth quarter of 2004, one of our investees attempted to raise additional financing in order to fund its operations, but was unable to secure such financing on acceptable terms. As such, we performed an assessment of the carrying value of our investment based on an analysis of the investee’s current financial condition, its prospects of generating additional cash flow from operating activities, the market conditions for raising capital funding for companies in this industry and the likelihood that any funding raised would significantly dilute our ownership percentage. As a result of this analysis it was our judgment that an other-than-temporary impairment had occurred and that the fair value of our investment was zero, resulting in a non-cash loss on investment of $1.3 million.

We determined that no impairment was required for our remaining $956,000 equity investment based on our analysis as of December 31, 2006 and 2005. However, should the events and conditions that are indicative of impairment as noted above arise, the Company may be required to record additional impairment charges in future periods.

Income tax expense

Year Ended December 31,
2006	2005		2004
(in 000’s)
$59	$	8,825	$	1,837

Income tax expense decreased to $59,000 for the year ended December 31, 2006, compared to $8.8 million for 2005. The overall decrease in income tax expense is primarily attributable to a decrease in pre-tax income. The Company’s effective tax rate decreased to 2.6% of pre-tax income for the year ended December 31, 2006 from 35.1% of pre-tax income for the year ended December 31, 2005. The decrease is due to the consistency of the Company’s deductible items and non-taxable earnings and a decrease in the pre-tax income, as well as the benefit recognized from tax holidays that the Company has been granted on earnings from certain foreign operations. We expect the effective tax rate to approximate 31% of pre-tax income for 2007.

Income tax expense increased to $8.8 million for the year ended December 31, 2005, compared to $1.8 million for 2004. The overall increase in income tax expense was attributable to an increase in income before income tax expense, even though income tax expense for 2004 reflects the goodwill and intangible asset impairment charges as non-deductible tax items. The fluctuation in the effective rate resulted primarily from the impact the revised 2004 projected annual results had in relationship to the 2004

projected annual permanent differences. Our 2005 effective tax rate was consistent with the Company’s historical experience excluding the impact of the 2004 impairment charges.

Liquidity and Capital Resources

We have historically funded our business through operating cash flows, proceeds from borrowings and the issuance of equity securities. During 2006, we generated cash of $11.3 million from operating activities. The primary sources of operating cash flows were payments received for the performance of contract services and royalty payments received from Sanofi-Aventis based upon a percentage of sales of Allegra. The primary uses of operating cash flows are the payment of compensation and benefits to both scientific and administrative personnel, purchases of inventory and supplies, and payment of occupancy costs.

The recurring royalties we receive on the sales of Allegra/Telfast have historically provided a material portion of our operating cash flows. As discussed in Item 3 of this Form 10-K, several generic manufacturers have filed ANDA applications with the FDA seeking authorization to produce and market a generic version of Allegra. We and Aventis Pharmaceuticals have filed several patent infringement suits against these generic companies alleging infringement of certain U.S. patents. On September 6, 2005, Barr Pharmaceuticals, Inc. and Teva Pharmaceuticals Industries Ltd. announced that they had entered into an agreement for the launch of Fexofenadine Hydrochloride 30 mg, 60 mg and 180 mg tablets, the generic version of Allegra tablets in the United States. The launch of the generic product is considered an “at-risk” launch due to the on-going litigation. The at-risk launch of generic fexofenadine has had a material 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, along with Aventis Pharmaceuticals, filed a Motion for Preliminary Injunction in the U.S. District Court in New Jersey seeking to enjoin Barr Pharmaceuticals, Inc., Teva Pharmaceuticals Ltd., Ranbaxy Laboratories, Ltd. and Amino Chemicals, Ltd. from the sale of generic versions of Allegra in the United States. On January 30, 2006, the U.S. District Court denied our request for a preliminary injunction. An appeal of that decision was taken to the U.S. Court of Appeals for the Federal Circuit and, on November 8, 2006, the appellate court affirmed the District Court’s denial of a preliminary injunction. The Federal Circuit’s decisions on the preliminary injunction application is not dispositive of the merits of the claims being asserted as described above. Subsequent to the preliminary injunction proceeding in the District Court, Dr. Reddy’s Laboratories has engaged in an at-risk launch of generic fexofenadine products. Should we or Aventis be unsuccessful in defending these patents we would continue to experience a material decrease in royalty revenues and operating cash flows.

During 2006, we used $9.0 million in cash for investing activities, primarily resulting from $16.5 million for the acquisition of property and equipment, and $11.6 million related to the acquisition of ComGenex, offset by proceeds from sales and maturities of investment securities net of purchases of these securities of $19.3 million. During 2006, we used $4.0 million for financing activities, consisting of $4.6 million in long-term debt repayments, offset by $0.6 million provided by proceeds from stock option exercises and stock purchase plan withholdings.

Working capital was $149.9 million as of December 31, 2006, compared to $162.8 million at December 31, 2005. The primary sources of the decrease were the use of cash and investments to fund capital expenditures and the acquisition of AMRI Hungary, and a decrease in the carrying value of our held-for-sale Mt. Prospect facility. These decreases were partially offset by a decrease in deferred revenue due primarily to the recognition of deferred up-front licensing fees received in conjunction with our Licensing and Research Agreement with BMS as well as the completion of the revenue recognition process on several fixed fee contracts, and an increase in accounts receivable due to the timing of invoicing and collecting on sales to customers.

Total capital expenditures for the year ended December, 31 2006 were $16.5 million as compared to $19.2 million for the year ended December 31, 2005. Capital expenditures in 2006 were primarily related to

the construction of our research facilities in Singapore and India, development of an enterprise resource planning (“ERP”) system and expansion and modification of our large-scale manufacturing facilities. For 2007, we expect to incur $18.0 - $20.0 million in capital expenditures, primarily related to the continued outfitting of our research facilities in Singapore and Hungary, the completion of a 50,000 square foot research centre in India, the implementation of our ERP system at our international locations, and the addition or replacement, as appropriate, of equipment for our domestic discovery, development, small-scale manufacturing, and large scale manufacturing services.

We entered into a credit facility consisting of a $30.0 million term loan and a $35.0 million line of credit to fund the acquisition of Organichem during 2003. The term loan matures in February, 2008. As of December 31, 2006, the interest rate on $10.0 million of the outstanding term loan balance was 4.37% and the interest rate on the remaining $5.0 million was 6.37%. On June 30, 2005, the Company amended the credit facility to extend the maturity date on the line of credit from February, 2006 to June, 2010. The line of credit bears interest at a variable rate based on the Company’s leverage ratio. As of December 31, 2006, the outstanding balance of the line of credit was $0. The credit facility contains certain financial covenants, including a maximum leverage ratio, a minimum required operating cash flow coverage ratio, a minimum earnings before interest and taxes to interest ratio and a minimum current ratio. Other covenants include limits on asset disposals and the payment of dividends. As of December 31, 2006 and 2005 we were in compliance with all covenants under the credit facility.

Working capital was $162.8 million as of December 31, 2005, compared to $179.8 million at December 31, 2004. The decrease of $21.0 million resulted from a $6.6 million increase in income taxes payable due to the timing of income tax payments and the generation of additional taxable income in 2005. In addition, there was a decrease in cash, cash equivalents, and investments of $5.8 million, which primarily resulted from the pay-down of outstanding balances on our line of credit of $30.1 million and capital expenditures of $19.2 million. These decreases were partially offset by cash flows from operations of $42.8 million, which includes the receipt of an $8.0 million up-front license fee from BMS in conjunction with a license and research agreement signed in October 2005. The up-front fee was included in deferred revenue and will be recognized over the initial three-year term of the agreement. Finally, there was a decrease in royalty receivables of $5.9 million due to reduced royalties on sales of Allegra/Telfast resulting from the at-risk launch of generic fexonfenadine in the fourth quarter of 2005. These decreases are partially offset by an increase in accounts receivable of $8.0 million due to increased contract revenues and the timing of payments received from our customers.

Total capital expenditures for the year ended December 31, 2005 were $19.2 million as compared to $23.7 million for the year ended December 31, 2004. Capital expenditures in 2005 were primarily related to the expansion and modification of our large-scale manufacturing facilities, the construction of our research facilities in Singapore and India, and initial development of an ERP system.

During 2005, we used $27.6 million in cash for investing activities, primarily resulting from $19.2 million for the acquisition of property and equipment, and purchases of investment securities net of proceeds from sales and maturities of these securities of $8.1 million. During 2005, we used $28.7 million for financing activities, consisting of $30.1 million in long-term debt repayments, offset by $1.3 million provided by proceeds from stock option and stock purchase plan exercises.

We continue to pursue the expansion of our operations through internal growth and strategic acquisitions. We expect that such activities will be funded from existing cash and cash equivalents, cash flow from operations, the issuance of debt or equity securities and borrowings. Future acquisitions, if any, could be funded with cash on hand, cash from operations, borrowings under our credit facility and/or the issuance of equity or debt securities. There can be no assurance that attractive acquisition opportunities will be available to us or will be available at prices and upon such other terms that are attractive to us. We regularly evaluate potential acquisitions of other businesses, products and product lines and may hold

discussions regarding such potential acquisitions. As a general rule, we will publicly announce such acquisitions only after a definitive agreement has been signed. In addition, in order to meet our long-term liquidity needs or consummate future acquisitions, we may incur additional indebtedness or issue additional equity or debt securities, subject to market and other conditions. There can be no assurance that such additional financing will be available on terms acceptable to us or at all. The failure to raise the funds necessary to finance our future cash requirements or consummate future acquisitions could adversely affect our ability to pursue our strategy and could negatively affect our operations in future periods. Furthermore, a continued significant decrease in royalties from Allegra would negatively affect our cash flow from operations and financial condition in future periods.

Off Balance Sheet Arrangements

We do not use special purpose entities or other off-balance sheet financing techniques that we believe have or reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital resources.

Contractual Obligations

The following table sets forth our long-term contractual obligations and commitments as of December 31, 2006.

Payments Due by Period (in thousands)

	Total		Under 1 Year			1-3 Years		4-5 Years			After 5 Years
Long-Term Debt (principal)	$	18,534		$	4,541	$	10,173		$	545		$	3,275
Long-Term Debt (interest)(1)	2,266			924		395			277			670
Operating Leases	9,167			2,007		2,562			2,494			2,104
Purchase Commitments	20,264			20,264		—			—			—
Pension Plan Contributions	639			639		—			—			—

(1) Represents estimated interest payments on the Company’s long-term debt based on current interest rates.

Related Party Transactions

Technology Development Incentive Plan

In 1993, we adopted a Technology Development Incentive Plan to provide a method to stimulate and encourage novel innovative technology development. To be eligible to participate, the individual must be an employee and must be the inventor or co-inventor of novel technology that results in new revenues received by us. Eligible participants will share in awards based on a percentage of the licensing, royalty or milestone revenue received by us, as defined by the Plan.

In 2006, 2005 and 2004 we awarded Technology Incentive Compensation primarily to the inventor of the terfenadine carboxylic acid metabolite technology, which is covered by the Company’s patents relating to the active ingredient in Allegra. The inventor is Thomas D’Ambra, our Chairman, President and Chief Executive Officer. Additionally, in 2006 we awarded employees involved in the development of our proprietary amine neurotransmitter reuptake inhibitors as a result of successful licensing of this technology to BMS. The amounts awarded and included in the consolidated statements of income (loss) for the years ended December 31, 2006, 2005 and 2004 are $2.8 million, $4.7 million and $4.8 million, respectively. Included in accrued compensation in the accompanying consolidated balance sheets, at both December 31,

2006 and 2005, are unpaid Technology Development Incentive Compensation awards of approximately $623,000.

Notes Receivable

From time to time we make loans to non-officer employees in the form of notes receivable. The notes receivable and accrued interest will not be repaid to us provided the employee remains in our employ throughout the term of the loan. If employment is terminated prior to the end of the loan term, a pro-rata portion of the principal and interest shall be repaid to us. Notes receivable from employees at December 31, 2006 and 2005 totaled $162,000 and $284,000, respectively. The amounts forgiven and charged to operations in the consolidated statements of income (loss) for the years ended December 31, 2006, 2005 and 2004 are $147,000, $185,000 and $91,000, respectively.

Telecommunication Services

A member of the Company’s board of directors is the Chief Executive Officer of one of the providers of telephone and internet services to the Company. This telecommunications company was paid approximately $156,000, $194,000 and $169,000 for services rendered to the Company in 2006, 2005 and 2004, respectively.

Critical Accounting Policies and Estimates

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

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Contract Revenue Recognition

Our contract revenue consists primarily of fees earned under contracts with third-party customers and reimbursed expenses under such contracts. We also seek to include provisions in certain contracts which contain a combination of up-front licensing fees, milestone and royalty payments should our proprietary technology and expertise lead to the discovery of new products that reach the market. Reimbursed expenses consist of chemicals and other project specific costs. Generally, our contracts may be terminated by the customer upon 30 days’ to one year’s prior notice, depending on the size of the contract. We analyze our agreements to determine whether the elements can be separated and accounted for individually or as a single unit of accounting in accordance with EITF No. 00-21, “Revenue Arrangements with Multiple Deliverables” and SAB 104, “Revenue Recognition”. Allocation of revenue to individual elements which qualify for separate accounting is based on the estimated fair value of the respective elements.

We generate contract revenue on the following basis:

Full-timeEquivalent (FTE). An FTE agreement establishes the number of our employees contracted for a project or a series of projects, the duration of the contract period, the price per FTE, plus an allowance for chemicals and other project specific costs, which may or may not be incorporated in the FTE rate. FTE contracts can run in one month increments, but typically have terms of six months or longer. Our FTE contracts typically provide for annual adjustments in billing rates for the scientists assigned to the contract. These contracts involve our scientists providing services on a “best efforts” basis in a project which involve a research component with a timeframe or outcome that has some level of unpredictability. There are no fixed deliverables that must be met for payment as part of these services. As such, we recognize revenue under FTE contracts on a monthly basis as services are performed according to the terms of the contract.

Time and Materials. Under a time and materials contract we charge our customers an hourly rate plus reimbursement for chemicals and other project specific costs. We recognize revenue for time and material contracts based on the number of hours devoted to the project multiplied by the customer’s billing rate plus other project specific costs incurred.

Fixed Fee. Under a fixed-fee contract we charge a fixed agreed upon amount for a deliverable. Fixed-fee contracts have fixed deliverables upon completion of the project. Typically, we recognize revenue for fixed fee contracts after projects are completed, delivery is made and title transfers to the customer and collection is reasonably assured. In certain instances, our customers request that we retain materials produced upon completion of the project due to the fact that the customer does not have a qualified facility to store those materials. In these instances, the revenue recognition process is considered complete when necessary project documentation (batch records, Certificates of Analysis, etc.) has been delivered to the customer and payment has been collected.

Up-Front License Fees Milestone and Royalty Revenue. We recognize revenue from up-front non-refundable licensing fees on a straight-line basis over the period of the underlying project. We will recognize revenue arising from a substantive milestone payment upon the successful achievement of the event, and the resolution of any uncertainties or contingencies regarding potential collection of the related payment, or if appropriate over the remaining term of the agreement.

Deferred Revenue. Deferred revenue represents monies received for services that have not yet been performed as well as customer billings related to completed production which has not yet shipped. As an added service, during 2003 we began to temporarily store completed cGMP production at our facilities for certain customers. Under these arrangements, upon completion of the customer project we typically will enter into a storage agreement with the customer. We will temporarily store and subsequently ship the completed production, often in multiple shipments to multiple sites. The revenue related to these arrangements is typically recognized at the time the products are ultimately shipped, however, in certain instances, the revenue recognition process is considered complete when necessary project documentation (batch records, Certificates of Analysis, etc.) has been delivered to the customer and payment has been collected, as noted above.

Recurring Royalty Revenue Recognition. Recurring royalties consist of royalties under a license agreement with Sanofi-Aventis based on the worldwide sales of fexofenadine HCl, marketed as Allegra in the Americas and Telfast elsewhere. We record royalty revenue in the period in which the sales of Allegra/Telfast occur. Royalty payments from Sanofi-Aventis are due within 45 days after each calendar quarter and are determined based on sales of Allegra/Telfast in that quarter.

Restructuring Charges

We account for our restructuring costs as required by SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at its fair value in the period in which the liability is incurred, except for one-time termination benefits that meet certain requirements.

Inventory

Inventory consists primarily of commercially available fine chemicals used as raw materials in the research and production process, work-in-process and finished goods at our large-scale manufacturing location and chemical compounds in the form of natural product and novel compound collections. Inventories are stated at the lower of cost (first-in, first-out basis) or market. We record reserves for excess and obsolete inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions, which could result in a charge to operations.

Goodwill

In accordance with the provisions of SFAS No. 142, we perform 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, comparable company multiples and recent transactions involving similar entities. If goodwill is determined to be impaired in the future we would be required to record a charge to our results of operations. Factors the Company considers important which could result in an impairment include the following:

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

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

· significant negative industry or economic trends; and

· market capitalization relative to net book value.

If management’s expectations of future operating results change, or if there are changes to other assumptions, the estimate of the fair value of our reporting units could change significantly. Such a change could result in goodwill impairment charges in future periods, which could have a significant impact on our consolidated financial statements. Total goodwill recorded on the Company’s consolidated balance sheet at December 31, 2006 was $35.8 million, including $23.1 million associated with the Company’s acquisition of Organichem Corporation and $10.1 million of goodwill associated with the Company’s acquisition of ComGenex Kutato-Fejleszto Rt.

Long-Lived Assets

In accordance with the provisions of SFAS No. 144, we assess the impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors we consider 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 we determine that the carrying value of long-lived assets may not be recoverable, based upon the existence of one or more of the above indicators of impairment, we compare the carrying value of the asset group to the undiscounted cash flows expected to be generated by the asset group. If the carrying value exceeds the undiscounted cash flows an impairment charge is recorded. An impairment charge is recognized to the extent that the carrying amount of the asset group exceeds their fair value and will reduce only the carrying amounts of the long-lived assets. We utilize the assistance of an independent valuation firm in determining the fair values.

Equity Investments

We have equity investments in leveraged private companies that have operations in areas within our strategic focus. We account for these investments using the cost method of accounting for investments as our ownership interest in each customer is below 20% and we do not have the ability to exercise significant influence over the entities. We assess the fair value of these investments quarterly or whenever events or changes in circumstance, such as changes in market conditions, poor operating results of the underlying investments, or the inability of the entities to obtain additional financing indicate that the investment value may not be recoverable. However, should the events and conditions that are indicative of impairment as noted above arise, the Company may be required to record additional impairment charges in future periods. Total equity investments recorded on the Company’s consolidated balance sheet at December 31, 2006 were $1.0 million.

Pension and Postretirement Benefit Plans

We maintain pension and postretirement costs and liabilities that are developed from actuarial valuations. Inherent in these valuations are key assumptions, including discount rates, expected return on plan assets, and trends in health care costs, which are updated on an annual basis. We are required to consider current market conditions, including changes in interest rates, in making these assumptions. Changes in the related pension benefit costs may occur in the future due to changes in the assumptions. In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). SFAS No. 158 requires an employer that sponsors one or more defined benefit pension plans or other postretirement plans to recognize the funded status of a plan, measured as the difference between plan assets at fair value and the benefit obligation, in the balance sheet; recognize in shareholders’ equity as a component of accumulated other comprehensive loss, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not yet recognized as components of net periodic benefit cost; measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end balance sheet; and disclose in the notes to the financial statements additional information about the effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. The Company adopted SFAS No. 158 effective December 31, 2006.

Allowance for Doubtful Accounts

We record an allowance for doubtful accounts to absorb estimated receivable losses as circumstances arise that bring into doubt our ability to fully collect on outstanding receivable balances. The allowance and related accounts receivable are reduced when the account is deemed uncollectible.

Environmental Liabilities

and regulations, advancements in environmental technologies, the quality of information available related to specific sites, the assessment stage of each site investigation, preliminary findings and the length of time involved in the remediation or settlement. The Company accrues environmental cleanup related costs when those costs are believed to be probable and can be reasonably estimated.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123 (R)”), which amends SFAS No. 123 and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” in establishing standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, as well as transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This Statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements based on the fair value of the share-based payment. This Statement establishes fair value as the measurement objective in accounting for share-based payment transactions with employees, except for equity instruments held by employee share ownership plans. As allowed under SFAS No. 123 (R), the Company elected the modified prospective method of adoption, under which compensation cost is recognized in the financial statements beginning with the effective date of SFAS No. 123 (R) for all share-based payments granted after that date, and for all unvested awards granted prior to the effective date of SFAS No. 123 (R). Accordingly, prior period amounts have not been restated.

Prior to January 1, 2006, the Company applied the intrinsic value-based method of accounting prescribed by APB No. 25 in accounting for its fixed plan stock options. As such, compensation expense was recorded only if, on the date of grant, the current market price of the underlying stock exceeded the exercise price. Any compensation expense was to be recognized over the vesting period.

Compensation cost is based on the fair value of the options on their grant date, and is recognized over the period of requisite service. The fair value of stock option grants is determined utilizing the Black-Scholes option pricing model. Inherent in these valuations are key assumptions, including expected volatility in the Company’s common share price, risk-free interest rates, and the expected lives of the options granted, and are updated for each option grant. We are required to consider current market conditions, including interest rates and the market for the Company’s common stock, as well as historical data regarding option exercises and forfeitures in making these assumptions. Changes in the related compensation costs associated with future grants may occur due to changes in the assumptions.

Effective December 30, 2005, pursuant to and in accordance with the recommendation of the Compensation Committee (the “Committee”) of the Board of Directors, the Board of Directors of the Company approved full acceleration of the vesting of each otherwise unvested stock option that had an exercise price of $15.00 or greater granted under the Company’s 1998 Stock Option and Incentive Plan (the “Plan”) that was held by employees, officers, and non-employee directors. These options had exercise prices in excess of the current market value of the Company’s common stock, based on the closing price of $12.15 per share on December 30, 2005 (i.e., such options were “underwater”). Options to purchase approximately 1.3 million shares of the Company’s common stock, including approximately 101,000 options held by executive officers, were subject to this acceleration.

permitted under the option’s pre-acceleration vesting terms or, if earlier, the officer’s or director’s last day of employment or upon a “change in control” as defined in the Plan.

The decision to accelerate the vesting of these underwater options was made primarily to minimize certain future compensation expenses that the Company would otherwise recognize in its consolidated statements of income (loss) with respect to these options pursuant to SFAS No. 123 (R). The Company also believes that the acceleration may have a positive effect on employee morale, retention and the perception of option value. The acceleration had no effect on reported net income for the year ended December 31, 2005, and an approximate $3.9 million, net of tax, impact on pro forma net income in the fourth quarter of 2005.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the taxable income in the two previous tax years to which tax loss carryback can be applied. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, taxable income in the carryback period and tax planning strategies in making this assessment, and records a valuation allowance on deferred tax assets when considered necessary.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). SFAS No. 158 requires an employer that sponsors one or more defined benefit pension plans or other postretirement plans to recognize the funded status of a plan, measured as the difference between plan assets at fair value and the benefit obligation, in the balance sheet; recognize in shareholders’ equity as a component of accumulated other comprehensive loss, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not yet recognized as components of net periodic benefit cost; measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end balance sheet; and disclose in the notes to the financial statements additional information about the effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. The Company adopted SFAS No. 158 effective December 31, 2006.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). Among other things, FIN 48 requires the application of a “more likely than not” threshold to the de-recognition of tax positions, and provides for enhanced quantitative and qualitative disclosures regarding unrecognized tax benefits resulting from tax positions taken by an entity. This Interpretation applies to the Company effective January 1, 2007. The Company is currently assessing the impact of applying this Interpretation.

measurements of share-based payments and measurements that are similar to, but not intended to be, fair value. Its applicability is also limited by the practicability exceptions to applying fair value currently found in some standards. The Statement imposes no requirements for additional fair-value measures in financial statements. The provisions of SFAS No. 157 will be applied to fair value measurements and disclosures in the Company’s condensed consolidated financial statements beginning in the first quarter of 2008. The Company is currently assessing the impact of applying this Statement.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have market risk with respect to foreign currency exchange rates and interest rates. The market risk is the potential loss arising from adverse changes in these rates as discussed below.

The Company has research facilities in Singapore, India and Hungary and therefore is subject to foreign currency risk. This risk is composed of both potential losses from the translation of foreign currency financial statements and the remeasurement of foreign currency transactions. The total net assets of non-U.S. operations denominated in non-functional currencies subject to potential loss amount to approximately $33.0 million. The potential loss in fair value resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates amounts to approximately $3.3 million. Furthermore, related to foreign currency transactions, the Company has exposure to non-functional currency balances totaling approximately $1.8 million. This amount includes, on an absolute basis, exposures to foreign currency assets and liabilities. On a net basis, the Company had approximately $1.3 million of foreign currency liabilities as of December 31, 2006. As currency rates change, these non-functional currency balances are revalued, and the corresponding adjustment is recorded in the consolidated statement of income. A hypothetical change of 10% in currency rates could result in an adjustment to the consolidated statement of income of approximately $131,000.

With respect to interest rates, the risk is composed of changes in future cash flows due to changes in interest rates on our variable rate $13.9 million term loan and $4.6 million industrial development authority bonds.

To mitigate this risk, we have entered into interest rate swap agreements that have fixed the interest rate on 54% of our variable rate debt. Included in other assets is approximately $161,000, which represents the estimated market value of the swap agreements.

The potential loss in 2007 cash flows from a 10% adverse change in quoted interest rates would approximate $43,000.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Financial statements and notes thereto appear on pages F-1 to F-41 of this Form 10-K Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

On May 18, 2005, the Company dismissed PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”) as the Company’s independent registered public accounting firm. The decision to dismiss PricewaterhouseCoopers was made and approved by the Audit Committee of the Board of Directors of the Company on May 18, 2005, and ratified at a meeting of the Board of Directors held on May 19, 2005.

On May 19, 2005, the Audit Committee of the Board of Directors of the Company engaged KPMG LLP (“KPMG”), subject to the completion of KPMG’s client acceptance procedures (which were completed on May 20, 2005), as its new independent registered public accounting firm to audit the Company’s consolidated financial statements for the year ending December 31, 2005. The Company’s

decision to engage KPMG as its independent registered public accounting firm was the result of a competitive selection process involving several accounting firms.

The Company filed a report on Form 8-K with the Securities and Exchange Commission with respect to this matter.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Annual Report on Form 10-K, the Company’s management conducted an evaluation with the participation of the Company’s Chief Executive Officer and Chief Financial Officer regarding the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2006.

Management’s Annual Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, and includes those policies and procedures that:

· pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

· provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and, that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and

· provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, assessed as of December 31, 2006 the effectiveness of the Company’s internal control over financial reporting. In making this assessment, management used the criteria set forth in the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of this evaluation, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2006.

In making this assessment, management has excluded the internal control over financial reporting of AMRI Hungary, which was acquired on February 28, 2006 and whose financial statements constitute 3.8 percent of total consolidated assets and 4.5 percent of consolidated revenues as of and for the year ended December 31, 2006.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included on page F-3 of this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE .

The information appearing under the captions “Directors and Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Code of Ethics” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on June 4, 2007 is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

The information appearing under the captions “Executive Compensation—Summary Compensation,—Compensation Committee Interlocks and Insider Participation, and—Agreements with Named Executive Officers,” and “Information Regarding Directors—The Board of Directors and its Committees” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on June 4, 2007 is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information appearing under the caption “Principal and Management Stockholders” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on June 4, 2007 is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

The information appearing under the caption “Certain Transactions” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on June 4, 2007 is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information appearing under the caption “Audit Fees” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on June 4, 2007 is incorporated herein by reference.

ALBANY MOLECULAR RESEARCH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 2006, 2005 and 2004

											Unamortized						Accumulated
			Common Stock					Additional			Compensation						Other			Treasury Stock
	Preferred		Number of			Par		Paid-in			Restricted			Retained			Comprehensive			Number of							Comprehensive
	Stock		Shares			Value		Capital			Stock			Earnings			Income (Loss)			Shares			Amount		Total		Income (Loss)
Balances at December 31, 2003		$ —		33,694			$ 337		$ 184,365			$ —			$ 154,507			$ (103	)		(2,077	)	$ (37,171	)	$ 301,935
Comprehensive Loss:
Net loss															(11,691	)									(11,691	)		$ (11,691	)
Unrealized loss on investment securities, available-for-sale, net of taxes																		(218	)						(218	)		(218	)
Reclassification adjustment for net securities losses included in net income, net of taxes																		22							22			22
Unrealized gain on interest rate swap contract, net of taxes																		182							182			182
Total comprehensive loss																												$ (11,705	)
Tax benefit from exercise of stock options									347																347
Issuance of warrants to BMS									3,053																3,053
Issuance of common stock in connection with stock option plan and ESPP				248			3		1,843																1,846
Balances at December 31, 2004		$ —		33,942			$ 340		$ 189,608			$ —			$ 142,816			$ (117	)		(2,077	)	$ (37,171	)	$ 295,476
Comprehensive loss:
Net income															16,321										16,321			$ 16,321
Unrealized loss on investment securities, available-for-sale, net of taxes																		(92	)						(92	)		(92	)
Unrealized gain on interest rate swap contract, net of taxes																		132							132			132
Increase in additional minimum pension liability, net of taxes																		(254	)						(254	)		(254	)
Foreign currency translation loss																		(64	)						(64	)		(64	)
Total comprehensive income																												$ 16,043
Tax benefit from exercise of stock options									416																416
Modifications of stock options									37																37
Cancellation of BMS warrants									(562	)															(562	)
Issuance of restricted stock				288			3		2,505			(2,508	)												—
Amortization of unearned compensation—restricted stock												327													327
Forfeiture of unearned compensation—restricted stock				(31	)		—		(260	)		260													—
Issuance of common stock in connection with stock option plan and ESPP				272			2		1,322																1,324
Balances at December 31, 2005		$ —		34,471			$ 345		$ 193,066			$ (1,921	)		$ 159,137			$ (395	)		(2,077	)	$ (37,171	)	$ 313,061
Comprehensive Income:
Net income															2,183										2,183			$ 2,183
Unrealized gain on investment securities, available-for-sale, net of taxes																		165							165			165
Unrealized loss on interest rate swap contract, net of taxes																		(61	)						(61	)		(61	)
Foreign currency translation gain																		255							255			255
Decrease in additional minimum pension liability, net of taxes																		254							254			254
Total comprehensive income																												$ 2,796
Adjustment to initially apply FASB Statement No. 158, net of tax																		614							614
Tax benefit from exercise of stock options									34																34
Tax benefit from cancellation of BMS warrants									197																197
Share-based payment expense									561																561
Issuance of restricted stock				194			2		1,993			(1,995	)												—
Amortization of unearned compensation—restricted stock												611													611
Forfeiture of unearned compensation—restricted stock				(32	)		—		(303	)		303													—
Issuance of common stock in connection with stock option plan and ESPP				116			—		581																581
Balances at December 31, 2006		$ —		34,749			$ 347		$ 196,129			$ (3,002	)		$ 161,320			$ 832			(2,077	)	$ (37,171	)	$ 318,455

See Accompanying Notes to Consolidated Financial Statements.

F-8

ALBANY MOLECULAR RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2006, 2005 and 2004
(In thousands)

	Year ended December 31,
	2006			2005			2004
Operating Activities
Net income (loss)	$	2,183		$	16,321		$	(11,691	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	15,281			15,260			15,264
Net amortization of premiums on securities	264			259			446
Provision for obsolete inventories	1,406			1,950			3,579
Write-down of library inventories	—			2,063			5,974
Property, plant and equipment impairment	3,876			—			4,728
Goodwill impairment	—			—			14,494
Intangible asset impairment	—			—			3,541
Warrant issuance expense	—			—			3,053
Provision for doubtful accounts	260			(103		)	(77		)
Loss on equity investment in unconsolidated affiliates	—			—			1,274
Tax benefit of stock option exercises	34			416			347
Equity in loss of unconsolidated affiliates	—			—			65
Forgiven principal on notes receivable—related parties	147			186			91
Deferred income tax benefit	(724		)	(2,787		)	(4,366		)
Net realized loss on sale of securities	—			—			36
Loss on disposal of property, plant and equipment	1,123			236			—
Stock-based compensation expense	1,172			364			—
Foreign exchange gain	3			(3		)	—
(Increase) decrease in operating assets, net of business combination:
Accounts receivable	(11,767		)	(7,871		)	3,971
Royalty income receivable	22			5,931			792
Unbilled services	213			(192		)	227
Inventory	6,674			(3,420		)	(8,286		)
Prepaid expenses and other assets	1,797			(2,485		)	1,523
Increase (decrease) in operating liabilities, net of business combination:
Accounts payable, accrued compensation and accrued expenses	1,870			86			1,445
Income taxes payable	(6,149		)	7,500			846
Deferred revenue	(5,371		)	9,886			910
Pension and postretirement benefits	(998		)	(690		)	(1,574		)
Environmental liability	—			(60		)	(47		)
Net cash provided by operating activities	11,316			42,847			36,565
Investing Activities
Net purchases of securities	(141,373		)	(183,117		)	(63,213		)
Proceeds from sales and maturities of investment securities	160,646			174,980			76,268
Purchase of business, net of cash acquired	(11,607		)	—			—
Purchases of property, plant and equipment	(16,453		)	(19,166		)	(23,716		)
Payments for patent applications and other costs	(518		)	(334		)	(245		)
Proceeds from disposal of property, plant and equipment	256			38			—
Net cash used in investing activities	(9,049		)	(27,599		)	(10,906		)
Financing Activities
Principal payments on long-term debt	(4,585		)	(30,072		)	(4,521		)
Proceeds from exercise of options and ESPP	581			1,323			1,846
Net cash used in financing activities	(4,004		)	(28,749		)	(2,675		)
Effect of exchange rate changes on cash flows	255			(64		)	—
(Decrease) increase in cash and cash equivalents	(1,482		)	(13,565		)	22,984
Cash and cash equivalents at beginning of period	27,606			41,171			18,187
Cash and cash equivalents at end of period	$	26,124		$	27,606		$	41,171
Supplemental disclosure of non-cash investing and financing activities:
Increase in net unrealized loss on securities available-for-sale, net of tax	$	165		$	(92	)	$	(196	)
Increase (decrease) in net unrealized gain/(loss) on swap contract, net of tax	$	(61	)	$	132		$	182
Increase in additional minimum pension liability, net of tax	$	254		$	(254	)	$	—
Adjustment for SFAS No. 158 implementation	$	614		$	—		$	—
Issuance of restricted stock	$	1,993		$	2,505		$	—
Conversion of accounts receivable to equity investments and note receivable	$	—		$	—		$	104
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	1,071		$	1,812		$	1,846
Income taxes	$	6,471		$	4,900		$	4,545

F-9

ALBANY MOLECULAR RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2006, 2005 and 2004
(In thousands)

In 2006, the Company purchased all of the outstanding shares of ComGenenx Kutato-Fejleszto Rt. for an aggregate purchase price of $11,930. In conjunction with the acquisition, assets were acquired and liabilities were assumed as follows:

Fair value of assets acquired	$	14,411
Cash paid for the outstanding shares, net of cash acquired	(11,607		)
Liabilities assumed	$	2,804

See Accompanying Notes to Consolidated Financial Statements.

F-10

ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(In thousands, except per share amounts)

1. Summary of Significant Accounting Policies

Nature of Business:

Albany Molecular Research, Inc. (the “Company”) is a global chemistry-based drug discovery and development company focused on identifying and developing novel biologically active small molecules with applications in the drug market. The Company engages in new drug research services and manufacturing, from lead discovery, optimization and development to commercial manufacturing and has operations in the United States, India, Singapore and Hungary. The Company conducts research and development projects and collaborates with many leading pharmaceutical and biotechnology companies, and is developing proprietary technology for potential pharmaceutical products.

Basis of Presentation:

The consolidated financial statements include the accounts of Albany Molecular Research, Inc. (“AMRI”) and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated during consolidation. When necessary, prior years’ consolidated financial statements have been reclassified to conform to the current year presentation. Assets and liabilities of non-U.S. operations are translated at period-end rates of exchange, and the statements of income (loss) are translated at the average rates of exchange for the period. Gains or losses resulting from translating non-U.S. currency financial statements are recorded in accumulated other comprehensive income (loss) in the accompanying December 31, 2006 and 2005 consolidated balance sheets.

Use of Management Estimates:

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates included in the accompanying consolidated financial statements include assumptions regarding the collectibility of receivables, the valuation of inventory, and the fair value of goodwill, intangible assets, and long-lived assets. Other significant estimates include assumptions utilized in determining the amount and realizabilty of deferred tax assets and assumptions utilized in determining actuarial obligations in conjunction with the Company’s pension and postretirement health plans. Actual results can vary from these estimates.

Revenue Recognition:

The Company’s contract revenue consists primarily of fees earned under contracts with third-party customers and reimbursed expenses under such contracts. The Company also seeks to include provisions in certain contracts which contain a combination of up-front licensing fees, milestone and royalty payments should the Company’s proprietary technology and expertise lead to the discovery of new products that reach the market. Reimbursed expenses consist of chemicals and other project specific costs. Generally, the Company’s contracts may be terminated by the customer upon 30 days’ to one year’s prior notice, depending on the size of the contract. The Company analyzes its agreements to determine whether the elements can be separated and accounted for individually or as a single unit of accounting in accordance with EITF No. 00-21, “Revenue Arrangements with Multiple Deliverables,” and SAB 104, “Revenue

F-11

Recognition”. Allocation of revenue to individual elements which qualify for separate accounting is based on the estimated fair value of the respective elements.

The Company generates contract revenue on the following basis:

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

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

Time and Materials. Under a time and materials contract the Company charges customers an hourly rate plus reimbursement for chemicals and other project specific costs. The Company recognizes revenue for time and material contracts based on the number of hours devoted to the project multiplied by the customer’s billing rate plus other project specific costs incurred.

Fixed-Fee. Under a fixed-fee contract the Company charges a fixed agreed upon amount for a deliverable. Fixed-fee contracts have fixed deliverables upon completion of the project. Typically, the Company recognizes revenue for fixed-fee contracts after projects are completed, delivery is made and title transfers to the customer and collection is reasonably assured. In certain instances, the Company’s customers request that the Company retain materials produced upon completion of the project due to the fact that the customer does not have a qualified facility to store those materials. In these instances, the revenue recognition process is considered complete when required project documentation (batch records, Certificates of Analysis, etc.) has been delivered to the customer and payment has been collected.

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

Recurring Royalty Revenue Recognition. Recurring royalties consist of royalties under a license agreement with Sanofi-Aventis based on the worldwide sales of fexofenadine HCl, marketed as Allegra in the Americas and Telfast elsewhere, as well as on sales of Sanofi-Aventis’ authorized generics. The Company records royalty revenue in the period in which the sales of Allegra/Telfast occur, because we can reasonably estimate such royalties. Royalty payments from Sanofi-Aventis are due within 45 days after each calendar quarter and are determined based on sales of Allegra/Telfast in that quarter.

Cash Equivalents:

Cash equivalents consist of money market accounts and overnight deposits. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Allowance for Doubtful Accounts:

The Company records an allowance for doubtful accounts for estimated receivable losses. Management reviews outstanding receivable balances on a regular basis in order to assess the collectibility

F-12

of these balances, and adjusts the allowance for doubtful accounts accordingly. The allowance and related accounts receivable are reduced when the account is deemed uncollectible.

Inventory:

Inventory consists primarily of commercially available fine chemicals used as raw materials, work-in-process and finished goods in our large scale manufacturing plant and chemical compounds in the form of natural product and novel compound libraries. Inventories are stated at the lower of cost (first-in, first-out basis) or market. Large-scale manufacturing inventories are valued based on standard costs as they are produced. Variances from standard costs are accumulated as they are incurred and are included in the carrying value of inventory. Accumulated variances are deferred and recognized through cost of contract revenue in the consolidated statement of income (loss) over the estimated period of inventory turns. The Company writes down inventories for obsolescence equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Any such write-down results in a charge to operations.

Investment Securities:

In accordance with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Debt and Equity Securities,” short-term investments are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in accumulated other comprehensive income (loss). The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income or expense. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in other income or expense. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income.

At December 31, 2006 and 2005, our investments in securities in the current assets section of the consolidated balance sheets included $32.6 million and $15.9 million, respectively, of auction rate municipal bonds, classified as available-for-sale securities. Our investments in these securities are recorded at cost, which approximates fair market value due to their variable interest rates, which typically reset every 7 to 35 days, and, despite the long-term nature of their stated contractual maturities, we have the ability to quickly liquidate these securities. As a result, there are no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from these securities. All income generated from these current investments is recorded as interest income.

Property and Equipment:

Property and equipment are recorded at cost. Expenditures for maintenance and repairs are expensed when incurred. When assets are sold, retired, or otherwise disposed of, the applicable costs and accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized.

Depreciation is determined using the straight-line method over the estimated useful lives of the individual assets. Accelerated methods of depreciation have been used for income tax purposes.

The Company provides for depreciation of property and equipment over the following estimated useful lives:

Laboratory equipment and fixtures		7-18 years
Office equipment		3-7 years
Computer equipment		3-5 years
Buildings		39 years

Leasehold improvements are amortized over the lesser of the life of the asset or the lease term.

F-13

Equity Investments in Unconsolidated Subsidiaries:

The Company maintains two equity investments in companies that have operations in areas within its strategic focus. These investments are in leveraged start-up companies and were recorded at historical cost.

The Company records an impairment charge when we believe an investment has experienced a decline in value that is other-than-temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in the Company’s inability to recover the carrying value of the investments thereby requiring an impairment charge in the future.

Long-Lived Assets:

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 the Company determines that the carrying value of long-lived assets may not be recoverable, based upon the existence of one or more of the above indicators of impairment, the Company compares the carrying value of the asset group to the undiscounted cash flows expected to be generated by the asset group. If the carrying value exceeds the undiscounted cash flows an impairment charge is recorded. An impairment charge is recognized to the extent that the carrying amount of the asset group exceeds their fair value and will reduce only the carrying amounts of the long-lived assets. The Company utilizes the assistance of 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, comparable company multiples and recent transactions involving similar entities. 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:

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

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

· significant negative industry or economic trends; and

· market capitalization relative to net book value.

Included in goodwill as of December 31, 2006 are $23.1 million related to the acquisition of Organichem and $10.1 million related to the acquisition of ComGenex Kutato-Fejleszto Rt. See Note 19 for further information on the Company’s goodwill balances.

F-14

Patents, Patent Application Costs, and Licensing Rights:

The costs of patents issued and acquired are being amortized on the straight-line method over the estimated remaining lives of the issued patents. Patent application and processing costs are capitalized and will be amortized over the estimated life once a patent is acquired or expensed in the period the patent application is denied or the related appeal process has been exhausted.

Licensing costs are accumulated and amortized once the license agreement is executed. The costs of licensing rights are being amortized on the straight-line method over the term of the license agreement. Licensing costs are written off in the period the licensing rights are canceled or are determined not to provide future benefits.

Swap Contracts:

The Company maintains two interest rate swap agreements. These agreements have been designated as interest rate hedges on future cash flows of our variable debt instruments in accordance with SFAS No. 133, “Accounting for Derivatives and Hedging Activities” as amended by SFAS No. 138, “Accounting for Certain Derivative and Certain Hedging Activities.” Accordingly, these contracts are reported at fair value in the consolidated balance sheets, and any change in fair value is recorded as an adjustment to accumulated other comprehensive income (loss), net of tax, because the hedges are deemed effective.

Pension and Postretirement Benefits:

The Company maintains pension and post-retirement benefit costs and liabilities that are developed from actuarial valuations. Inherent in these valuations are key assumptions, including discount rates and expected return on plan assets, which are updated on an annual basis. The Company is required to consider current market conditions, including changes in interest rates, in making these assumptions. Changes in the related pension and post-retirement benefit costs may occur in the future due to changes in the assumptions.

Environmental Costs:

In the ordinary course of business the Company is subject to environmental laws and regulations, and has made provisions for the estimated financial impact of environmental cleanup related costs. The quantification of environmental exposures requires an assessment of many factors, including changing laws and regulations, advancements in environmental technologies, the quality of information available related to specific sites, the assessment stage of each site investigation, preliminary findings and the length of time involved in the remediation or settlement. The Company accrues environmental cleanup related costs when those costs are believed to be probable and can be reasonably estimated.

Research and Development:

Research and development costs are charged to operations when incurred and are included in operating expenses.

Income Taxes:

F-15

Stock-Based Compensation:

Effective January 1, 2006, the Company adopted SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123 (R)”), which amends SFAS No. 123 and supersedes APB No. 25 in establishing standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, as well as transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This Statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements based on the fair value of the share-based payment. This Statement establishes fair value as the measurement objective in accounting for share-based payment transactions with employees, except for equity instruments held by employee share ownership plans. As allowed under SFAS No. 123 (R), the Company elected the modified prospective method of adoption, under which compensation cost is recognized in the financial statements beginning with the effective date of SFAS No. 123 (R) for all share-based payments granted after that date, and for all unvested awards granted prior to the effective date of SFAS No. 123 (R). Accordingly, prior period amounts have not been restated.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to its share-based payments during 2005 and 2004:

	December 31,
	2005		2004
Net income (loss), as reported	$	16,321	$	(11,691	)
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects	218		—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	7,633		4,696
Pro forma	$	8,906	$	(16,387	)
Earnings (loss) per share:
Basic as reported	$	0.51	$	(0.37	)
Basic pro forma	$	0.28	$	(0.52	)
Diluted as reported	$	0.50	$	(0.37	)
Diluted pro forma	$	0.28	$	(0.52	)

Effective December 30, 2005, pursuant to and in accordance with the recommendation of the Compensation Committee (the “Committee”) of the Board of Directors, the Board of Directors of the Company approved full acceleration of the vesting of each otherwise unvested stock option that had an exercise price of $15.00 or greater granted under the Company’s 1998 Stock Option and Incentive Plan (the “Plan”) that was held by employees, officers, and non-employee directors. These options had exercise prices in excess of the current market value of the Company’s common stock, based on the closing price of $12.15 per share, on December 30, 2005 (i.e., such options were “underwater”). Options to purchase approximately 1.3 million shares of the Company’s common stock, including approximately 101,000 options held by executive officers, were subject to this acceleration.

The Committee also required that, as a condition to the acceleration of vesting, each executive officer and each non-employee director agree to refrain from selling shares of the Company’s common stock acquired upon the exercise of accelerated options (other than shares needed to cover the exercise price and satisfy withholding taxes) until the date on which the exercise of such options would have been permitted under the option’s pre-acceleration vesting terms or, if earlier, the officer’s or director’s last day of employment or upon a “change in control” as defined in the Plan.

F-16

The decision to accelerate the vesting of these underwater options was made primarily to minimize certain future compensation expenses that the Company would otherwise recognize in its consolidated statements of income (loss) with respect to these options pursuant to SFAS No. 123 (R), which became effective for the Company beginning January 1, 2006. The Company also believes that the acceleration may have a positive effect on employee morale, retention and the perception of option value. The acceleration had no effect on reported net income for the year ended December 31, 2005, and an approximate $3,881, net of tax, impact on pro forma net income in the fourth quarter of 2005. The impact of the acceleration is reflected in the pro forma amounts above.

The per share weighted-average fair value of stock options granted is determined using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	2006		2005		2004
Expected life in years:	5		5		5
Interest rate	4.95	%	4.06	%	3.41	%
Volatility	41	%	48	%	59	%
Dividend yield	—		—		—

Earnings Per Share:

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company (such as stock options and warrants).

The following table provides basic and diluted earnings per share calculations:

	Year Ended December 31, 2006							Year Ended December 31, 2005								Year Ended December 31, 2004
	Net Income		Weighted Average Shares		Per Share Amount			Net Income		Weighted Average Shares		Per Share Amount				Net Loss			Weighted Average Shares		Per Share Amount
Basic earnings per share	$	2,183		32,174		$	0.07	$	16,321		32,044		$	0.51		$	(11,691	)		31,627		$	(0.37	)
Dilutive effect of stock options	—			167		—		—			239		(0.01		)	—				—		—
Dilutive effect of restricted stock	—			86		—		—			51		—			—				—		—
Diluted earnings per share	$	2,183		32,427		$	0.07	$	16,321		32,334		$	0.50		$	(11,691	)		31,627		$	(0.37	)

The weighted average amount of anti-dilutive options and warrants outstanding were 1,966, 2,390 and 3,519 for the years ended December 31, 2006, 2005 and 2004, respectively, and were excluded from the calculation of diluted earnings per share.

Restructuring Charges:

The Company accounts for its restructuring costs as required by SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at its fair value in the period in which the liability is incurred, except for one-time termination benefits that meet certain requirements.

F-17

Recent Accounting Pronouncements:

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). Among other things, FIN 48 requires the application of a “more likely than not” threshold to the de-recognition of tax positions, and provides for enhanced quantitative and qualitative disclosures regarding unrecognized tax benefits resulting from tax positions taken by an entity. This Interpretation applies to the Company effective January 1, 2007. The Company is currently assessing the impact of applying this Interpretation.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. The Statement applies to fair-value measurements that are already required or permitted by existing standards except for measurements of share-based payments and measurements that are similar to, but not intended to be, fair value. Its applicability is also limited by the practicability exceptions to applying fair value currently found in some standards. The Statement imposes no requirements for additional fair-value measures in financial statements. The provisions of SFAS No. 157 will be applied to fair value measurements and disclosures in the Company’s condensed consolidated financial statements beginning in the first quarter of 2008. The Company is currently assessing the impact of applying this Statement.

Note 2—Business Combination

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

The aggregate purchase price of $11,930 included cash payments totaling $11,160 and capitalized costs related to the acquisition, primarily professional fees, of $770. The purchase price may be adjusted based upon the final release of purchase funds currently held in escrow in accordance with the provisions of the purchase agreement. The results of ComGenex’s operations have been included in the consolidated statement of income for the year ended December 31, 2006 from the date of acquisition.

F-18

The following table summarizes the allocation of the purchase price to the estimated fair value of the net assets acquired. The allocation will be finalized upon final determination of the purchase price and the completion of the Company’s valuation of the acquired assets and liabilities of ComGenex.

	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		1,270
Goodwill		10,064
Intangible assets and patents, net		792
Other assets		21
Total assets acquired		$	14,734
Liabilities Assumed
Accounts payable and accrued expenses		$	1,545
Deferred revenue		1,119
Deferred income taxes		78
Other long term liabilities		62
Total liabilities assumed		$	2,804
Net assets acquired		$	11,930

Pro forma financial information for the years ended December 31, 2006 and 2005 as if the ComGenex acquisition had been completed as of January 1, 2005 has been excluded due to the immateriality of the operating results of ComGenex in relation to the Company’s consolidated operating results as a whole.

3. Restructuring

Large Scale Manufacturing Facility

On November 9, 2006, the Company announced plans to initiate a restructuring of the Company’s LSM business segment. Consistent with the Company’s continued strategy of realigning its LSM segment toward a greater focus on manufacturing clinical trial materials with strong commercial potential, the goals of the restructuring plan are to strengthen the Company’s competitiveness in this area and reduce operating costs by eliminating overlap in business processes, organization and project process flow, as well as leveraging existing resources and assets. The restructuring plan includes a reduction of workforce in this segment by approximately 40 employees or approximately 15%, as well as reductions of non-essential operating expenses, raw material costs and future capital expenditure activities. The Company has estimated that total large scale costs will be reduced by $5,000 annually as a result of this restructuring. The Company recorded a restructuring charge of approximately $2,400 in the fourth quarter of 2006, including a non-cash asset disposal charge of approximately $1,600, and other charges of approximately $800 consisting primarily of termination benefits.

F-19

The following table displays the restructuring activity and liability balances:

	Balance at January 1, 2006			Charges			Incurred Amounts			Balance at December 31, 2006
	(in 000’s)
Termination benefits		$	—		874		(192		)		$	682
Asset disposal costs		—			1,557		(1,175		)		382
Total		$	—		$	2,431	$	(1,367	)		$	1,064

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

The large scale manufacturing restructuring activity was recorded in the LSM operating segment. The net cash outflow related to the large scale manufacturing restructuring for the year ended December 31, 2006 was $72. Anticipated cash outflows related to the large scale manufacturing restructuring for 2007 are $1,000, which primarily consists of the payment of termination benefits.

Mt. Prospect Research Center

During the fourth quarter of 2006, the Company secured a letter of intent related to the potential sale of the Mt. Prospect facility for approximately $1.5 million. As a result, the Company recorded an additional impairment charge of approximately $0.5 million in the fourth quarter of 2006 to reduce the carrying amount of these assets to reflect the sales price per the letter of intent less estimated selling costs. The Company currently anticipates the sale to be completed in the first half of 2007.

The facility qualified for held for sale treatment in accordance with SFAS No. 144 during the fourth quarter of 2004. The long-lived assets associated with Mt. Prospect have been segregated to a separate line item in the consolidated balance sheets until they are sold and depreciation expense has ceased with respect to those assets. At the time that the facility qualified for held for sale treatment in accordance with SFAS No. 144, the Company anticipated the completion of the sale of the facility by June 2006. The Company previously disclosed that if a definitive agreement to sell the facility was not in place as of June 30, 2006, it would reassess the classification of the facility as held for sale in accordance with SFAS No. 144 at that time. The Company was not able to secure a definitive agreement to sell the facility as of June 30, 2006. Accordingly, and in connection with the preparation of its second quarter 2006 unaudited condensed consolidated financial statements, the Company reassessed Mt. Prospect as a held for sale facility.

As a result of this assessment, the Company reaffirmed its intention to sell the Mt. Prospect facility, and determined that a $3,376 write-down of the carrying value of the facility was required during the quarter ended June 30, 2006. Management estimated the fair value based upon its intention to sell the facility within twelve months and comparable real estate transactions in the facility’s market area.

At December 31, 2006, the Company had recorded restructuring liabilities totaling $190 related to asset disposal costs, including brokerage commissions, legal fees, and marketing expenses associated with the planned sale of the Mt. Prospect Research Center facility. These restructuring liabilities are included in accounts payable and accrued expenses in the Company’s consolidated balance sheet. The Company’s restructuring liabilities decreased by $323 during the year ended December 31, 2006, representing a reduction of estimated brokerage commissions as a result of the reduction in carrying value and estimated sales price of the Mt. Prospect facility as described above.

In 2004 the Company consolidated operations by relocating its Mt. Prospect facility operations to its facilities in New York. All activities of Mt. Prospect were relocated to New York and continue to be fully

F-20

integrated with the Company’s drug discovery and development technologies. The restructuring resulted in the closure of the Mt. Prospect Research Center in the fourth quarter of 2004. The consolidation was initiated as a result of a lack of anticipated growth in the Company’s chemical development services at the facility. As a result of the restructuring, 33 employees were terminated and 25 employees were relocated to facilities in New York.

The following table displays the restructuring activity and liability balances:

											Balance at
	Balance at January 1, 2006			Charges				Payments			December 31, 2006
Asset disposal costs		513			(323		)		—			190
Total		$	513		$	(323	)		$	—		$	190

												Balance at
	Balance at											December 31,
	January 1, 2005			Charges				Payments				2005
Termination benefits		$	129		$	(65	)		$	(64	)		$	—
Asset disposal costs		513			—				—				513
Total		$	642		$	(65	)		$	(64	)		$	513

											Balance at
	Balance at										December 31,
	January 1, 2004			Charges			Payments				2004
Termination benefits		$	—		$	645		$	(516	)		$	129
Asset disposal costs		—			513			—				513
Other associated costs		—			26			(26		)		—
Total		$	—		$	1,184		$	(542	)		$	642

Costs of termination benefits related to severance packages, outplacement services and career counseling for employees affected by the restructuring. Asset disposal costs relate primarily to brokerage commissions, legal fees, and marketing expenses associated with the planned sale of the Mt. Prospect Research Center facility, which is included in property and equipment held for sale on the consolidated balance sheet.

The Company also incurred approximately $0, $200 and $1,400 in employee and equipment relocation costs during the years ended December 31, 2006, 2005 and 2004, respectively. These relocation costs are included under the caption “selling, general and administrative” in the consolidated statements of income (loss).

The Mt. Prospect restructuring activity was recorded in the DDS operating segment while the Large Scale Manufacturing restructuring activity was recorded in the LSM operating segment. The net cash outflow related to the restructuring for the years ended December 31, 2006, 2005 and 2004 was $0, $64 and $542, respectively. Anticipated cash outflows related to the large scale manufacturing restructuring for 2007 are $190, which primarily consists of the payment of accrued asset disposal costs.

The restructuring costs are included under the caption restructuring charge in the consolidated statements of income (loss) and the restructuring liabilities are included in accounts payable and accrued expenses in the consolidated balance sheets at December 31, 2006 and 2005.

F-21

4. Inventory

Inventory consisted of the following at December 31, 2006 and 2005:

	December 31,
	2006		2005
Raw materials	$	7,525	$	13,039
Work in process	1,914		2,188
Finished goods	12,858		15,029
Libraries	347		347
Total inventories, at cost	$	22,644	$	30,603

In connection with the ongoing evaluation of library inventory for the year ended December 31, 2005, the Company determined that an unfavorable shift in the market for compound libraries had occurred, and the Company was unable to forecast any demand for its chemical lead finding sample collections. As a result, the Company recorded a reserve of $2,063 to eliminate the remaining carrying value of these collections.

For the quarter ended June 30, 2004, the Company completed an in-depth review of the carrying value of its library inventories and determined that the carrying value of its natural product and chemical lead finding libraries exceeded their forecasted revenues. The Company’s forecasted revenues from natural product and chemical lead finding libraries had been lowered to reflect less favorable market conditions than previously projected. As a result, the Company recorded a $6,000 non-cash charge to reduce the carrying value of its library inventories. See Note 19 for a discussion of impairment charges on related microbial cultures in 2004.

5. Investment Securities, Available-for-Sale

The amortized cost, gross unrealized gains, gross unrealized losses and fair value for available-for-sale investment securities by major security type were as follows:

	December 31, 2006
	Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses				Fair Value
Obligations of states and political subdivisions		$	38,232		$	3		$	(32	)	$	38,203
U.S. Government and Agency obligations		10,351			—			(89		)	10,262
Auction rate securities		32,575			—			—			32,575
		$	81,158		$	3		$	(121	)	$	81,040

	December 31, 2005
	Amortized Cost		Gross Unrealized Gains			Gross Unrealized Losses				Fair Value
Obligations of states and political subdivisions	$	54,166		$	1		$	(98	)	$	54,069
U.S. Government and Agency obligations	30,629			—			(294		)	30,335
Auction rate securities	15,900			—			—			15,900
	$	100,695		$	1		$	(392	)	$	100,304

F-22

Maturities of corporate debt obligations, obligations of states and political subdivisions, and auction rate securities classified as available-for-sale at December 31, 2006 and 2005 were as follows:

	December 31, 2006					December 31, 2005
	Amortized Cost			Fair Value		Amortized Cost		Fair Value
Due less than one year		$	13,891	$	13,845	$	42,023	$	41,704
Due after one year through five years		10,923		10,855		8,196		8,124
Due after five years through ten years		1,945		1,945		1,683		1,684
Due after ten years		54,399		54,395		48,793		48,792
		$	81,158	$	81,040	$	100,695	$	100,304

Information on temporarily impaired securities at December 31, 2006, segregated according to the length of time such securities had been in a continuous unrealized loss position, is summarized as follows:

	Less than 12 Months						12 Months or Longer						Total
	Fair Value		Unrealized Loss				Fair Value		Unrealized Loss				Fair Value		Unrealized Loss
Obligations of states and political subdivisions	$	4,398		$	(9	)	$	5,980		$	(23	)	$	10,378		$	(32	)
U.S. Government and Agency obligations	3,969			(31		)	6,293			(58		)	10,262			(89		)
	$	8,367		$	(40	)	$	12,273		$	(81	)	$	20,640		$	(121	)

Information on temporarily impaired securities at December 31, 2005, segregated according to the length of time such securities had been in a continuous unrealized loss position, is summarized as follows:

	Less than 12 Months						12 Months or Longer						Total
	Fair Value		Unrealized Loss				Fair Value		Unrealized Loss				Fair Value		Unrealized Loss
Obligations of states and political subdivisions	$	11,862		$	(43	)	$	3,243		$	(27	)	$	15,105		$	(70	)
U.S. Government and Agency obligations	12,864			(114		)	30,942			(208		)	43,806			(322		)
	$	24,726		$	(157	)	$	34,185		$	(235	)	$	58,911		$	(392	)

The above table represents 26 and 42 securities at December 31, 2006 and 2005, respectively, where the current fair value is less than the related amortized cost. These unrealized losses do not reflect any deterioration of the credit worthiness of the issuing entities. No security has a rating that is below “A2.” The unrealized losses on these temporarily impaired securities are a result of changes in interest rates for fixed-rate securities where the interest rate received is less than the current rate available for new offerings of similar securities and changes in market spreads as a result of shifts in supply and demand. The Company has the ability and intent to hold these securities to maturity, at which time full recovery of the investment is expected.

The Company received proceeds of $160,646, $174,980 and $76,268 and recorded realized losses of $0, $0 and $36 from maturities and sales of available-for-sale securities during the years ended December 31, 2006, 2005 and 2004, respectively.

F-23

6. Property and Equipment

Property and equipment consists of the following:

	December 31,
	2006			2005
Laboratory equipment and fixtures	$	90,901		$	94,703
Office equipment	21,421			15,416
Leasehold improvements	37,688			28,188
Buildings	52,966			53,894
Land	2,155			2,152
	205,131			194,353
Less accumulated depreciation and amortization	(64,249		)	(49,956		)
	140,882			144,397
Construction-in-progress	13,820			12,057
Less: Property and equipment held for sale (Note 3)	(1,500		)	(5,376		)
	$	153,202		$	151,078

Depreciation and amortization expense of property and equipment was approximately $14,600, $13,800 and $14,200 for the years ended December 31, 2006, 2005, and 2004, respectively.

Refer to Note 3 for details regarding the status of the Mt. Prospect facility and related impairment charges.

7. Equity Investments

The Company has entered into equity investments with two entities in the Company’s area of strategic focus. The Company accounts for these investments using the cost method of accounting as the Company’s ownership interest in each investee is below 20% and the Company does not have the ability to exercise significant influence over the investees.

During the fourth quarter of 2004, the Company performed an assessment of the carrying value of one of its investments based on an analysis of the investee’s current financial condition, its prospects of generating additional cash flow from operating activities, the current market conditions for raising capital funding for companies in its industry and the likelihood that any funding raised would significantly dilute the Company’s ownership percentage was performed. As a result of this analysis it was the Company’s judgment that an other than temporary impairment had occurred and that the fair value of our investment was zero, resulting in a non-cash loss on investment of $1,300.

The carrying value of equity investments at December 31, 2006 and 2005 was $956.

8. Long-Term Debt and Swap Contracts

Long-Term Debt

The Company entered into a $30,000 term loan and $35,000 line of credit to fund the acquisition of Organichem. The term loan matures in February, 2008 and bears interest at a variable rate based on the Company’s leverage ratio. As of December 31, 2006, the variable interest rate was 6.37%. On June 30, 2005, the Company amended the credit facility to extend the maturity date on the line of credit from February 2006 to June 2010. The line of credit bears interest at a variable rate based on the Company’s leverage ratio. As of December 31, 2006, the outstanding balance of the line of credit was $0. The credit facility contains certain financial covenants, including a maximum leverage ratio, a minimum required operating cash flow coverage ratio, a minimum earnings before interest and taxes to interest ratio and a minimum current ratio. Other covenants include limits on asset disposals and the payment of dividends. As

F-24

of December 31, 2006 and 2005, the Company was in compliance with all covenants under the credit facility.

The Company maintains variable interest rate industrial development authority bonds due in increasing annual installments through 2021. Interest payments are due monthly with a current interest rate of 3.9%.

The following table summarizes long-term debt:

	December 31, 2006				December 31, 2005
Term loan		$	13,941			$	18,214
Industrial development authority bonds		4,580				4,820
Notes payable to financing company due in monthly installments through 2008		13				23
		18,534				23,057
Less current portion		(4,541		)		(4,536		)
Total long-term debt		$	13,993			$	18,521

The aggregate maturities of long-term debt at December 31, 2006 are as follows:

2007	$	4,541
2008	9,913
2009	260
2010	270
2011	275
Thereafter	3,275

Swap Contracts

The Company entered into two swap agreements effective April 1, 2003. The objective of these swaps is to hedge interest rate risk associated with future cash flows on a portion of the $30,000 variable rate term loan. The following table summarizes these swap transactions:

Swap Description

Original
Notional
Amount

AMRI pays

AMRI
Receives

Maturity Date

Reprice/Settlement
Dates

April 1, 2003 Swap

13,333

Fixed 3.37%

LIBOR

February, 2008

End of fiscal quarter

April 1, 2003 Swap

6,667

Fixed 3.37%

LIBOR

February, 2008

End of fiscal quarter

Total

20,000

The fair value of these hedges, which represents the cash the Company would pay to settle the agreements, is recorded as a swap contract asset/liability with a corresponding offset to other comprehensive income (loss).

The weighted average rate received from the counterparties on all swaps was 5.09%, 3.29% and 1.46% for the years ended December 31, 2006, 2005 and 2004, respectively. The fair value of the interest rate swap agreements was $161 and $263 and was included in other long-term assets in the consolidated balance sheets at December 31, 2006 and 2005, respectively. The Company recorded an unrealized gain (loss), net of tax, of ($61), $132 and $182 in accumulated other comprehensive income (loss) representing the change in the fair value of its hedges during the years ended December 31, 2006, 2005 and 2004, respectively. The Company recognized $191 of interest income and $14 and $328 in additional interest expense related to the net settlement of the swaps during the years ended December 31, 2006, 2005 and 2004, respectively.

F-25

9. Income Taxes

The components of income (loss) before taxes and income tax expense (benefit) are as follows:

	Year Ended December 31,
	2006			2005			2004
Income (loss) before taxes:
U.S.	$	1,841		$	25,058		$	(9,854	)
Foreign	420			88			—
	$	2,261		$	25,146		$	(9,854	)
Income tax expense (benefit):
Current:
Federal	$	647		$	11,572		$	4,923
State	10			10			1,280
Foreign	127			30			—
	784			11,612			6,203
Deferred:
Federal	(830		)	(3,014		)	(1,934		)
State	105			227			(2,432		)
	(725		)	(2,787		)	(4,366		)
	$	59		$	8,825		$	1,837

The differences between income tax expense and income taxes computed using a federal statutory rate of 35% for the years ended December 31, 2006, 2005 and 2004, were as follows:

	Year Ended December 31,
	2006			2005			2004
Pre-tax income at statutory rate	762			8,801			(3,449		)
Increase (reduction) in taxes resulting from:
Tax-free interest income	(737		)	(412		)	(222		)
Goodwill and intangible asset impairment	—			—			5,972
State taxes, net of federal benefit	75			154			(818		)
Extraterritorial income credit	(185		)	(448		)	(558		)
Increase in valuation reserve for realized and unrealized capital losses	—			—			481
Domestic production deduction	—			(86		)	—
Termination of outstanding warrants	—			818			—
Stock compensation expense	83			—			—
Other, net	61			(2		)	431
	$	59		$	8,825		$	1,837

F-26

The tax effects of temporary differences giving rise to significant portions of the deferred tax assets and liabilities are as follows:

	December 31,
	2006			2005
Deferred tax assets:
Nondeductible accrued expenses	$	413		$	422
Allowance for doubtful accounts	105			36
Library amortization	574			574
Inventory reserves	3,116			2,938
Warrants	185			198
Environmental reserves	86			88
Pension and postretirement costs	714			1,003
Research and experimentation credit carryforwards	192			192
Alternative minimum tax credit	228			—
State tax credit carryforward	2,348			2,153
Foreign deferred tax	44			—
Impairment charges	2,019			2,048
Investment write-downs and losses	885			885
Capital loss on sale of fixed assets	77			77
Deferred revenue	1,680			2,907
Stock based compensation	448			—
Net operating loss carryforwards	217			375
	13,331			13,896
Less valuation allowance	(3,286		)	(2,997		)
Deferred tax assets, net	10,045			10,899
Deferred tax liabilities:
Property and equipment depreciation differences (accelerated depreciation for tax purposes)	(14,046		)	(15,593		)
Prepaid real estate taxes	(191		)	(242		)
Goodwill amortization	(387		)	(316		)
Net deferred tax liability	$	(4,579	)	$	(5,252	)

The preceding table does not include deferred tax assets of $47 and $156 at December 31, 2006 and 2005, respectively, associated with the Company’s unrealized losses/gains on investment securities discussed in Note 5, deferred tax liability of $64 and $98 at December 31, 2006 and 2005, respectively, associated with the Company’s swap contract asset as discussed in Note 8, and deferred tax (liability) asset of $(325) and $114 at December 31, 2006 and 2005, respectively, associated the Company’s adoption of SFAS No. 158 and additional minimum pension liability as discussed in Note 11.

The Company’s net operating loss carryforwards begin to expire in 2012. As a result of change in control related to acquisitions, the Company’s use of net operating loss carryforwards is limited to approximately $451 per year. The Company’s state investment tax credit carryforwards begin to expire in 2018. The Company’s research and development credit carryforwards begin to expire in 2011.

The Company has not recorded an income tax provision on earnings from certain of its foreign operations due to the fact that it has been granted certain tax holidays.

F-27

the two previous tax years to which tax loss carryback can be applied. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, taxable income in the carryback period and tax planning strategies in making this assessment. Based upon the level of projected future taxable income over the periods in which the deferred tax assets are deductible and tax planning strategies, a valuation allowance of $3,190 and $2,997 at December 31, 2006 and 2005, respectively, is included in deferred tax assets above. The net deferred tax assets represent a level where management believes it is more likely than not that the Company will realize the benefits of those deductible differences. The increase in valuation allowance in 2006 is directly related to the generation of additional state investment tax credit carryforwards and a net operating loss carryforward at AMRI Hungary. The amount of the deferred tax asset considered realizable could be reduced if estimates of future taxable income during the carryforward period are reduced.

10. Stockholders’ Equity

During the years ended December 31, 2006 and 2005, the Company recognized total share based compensation cost, net of tax, of $886 and $218, respectively.

Employee Stock Purchase Plan

The Company’s 1998 Employee Stock Purchase Plan (the “Purchase Plan”) was adopted during August 1998. Up to 600 shares of common stock may be issued under the Purchase Plan, which is administered by the Compensation Committee of the Board of Directors. The Purchase Plan establishes two stock offering periods per calendar year, the first beginning on January 1 and ending on June 30, and the second beginning on July 1 and ending December 31. All employees who work more than 20 hours per week are eligible for participation in the Purchase Plan. Employees who are deemed to own greater than 5% of the combined voting power of all classes of stock of the Company are not eligible for participation in the Purchase Plan.

During each offering, an employee may purchase shares under the Purchase Plan by authorizing payroll deductions up to 10% of their cash compensation during the offering period. The maximum number of shares to be issued to any single employee during an offering period is limited to one thousand. At the end of the offering period, the accumulated payroll deductions will be used to purchase common stock on the last business day of the offering period at a price equal to 85% of the closing price of the common stock on the first or last day of the offering period, whichever is lower.

Under SFAS No. 123 (R), the 15% discount and the look-back feature are considered compensatory items for which expense must be recognized. The Company values Purchase Plan shares as a combination position consisting of 15% of a share of nonvested stock and 85% of a six-month stock option. The value of the nonvested stock is estimated based on the fair market value of the Company’s common stock at the beginning of the offering period. The value of the stock option is calculated using the Black-Scholes valuation model using historical expected volatility percentages, a risk free interest rate equal to the six-month U.S. Treasury rate at the beginning of the offering period, and an expected life of six months. The resulting per-share value is multiplied by the shares estimated to be purchased during the offering period based on historical experience to arrive at a total estimated compensation cost for the offering period. The estimated compensation cost is recognized on a straight-line basis over the offering period.

During the years ended December 31, 2006, 2005 and 2004, 40, 41 and 48 shares, respectively, were issued under the Purchase Plan. During the years ended December 31, 2006 and 2005, cash received from stock option exercises and employee stock purchase plan purchases was $581 and $1,322, respectively. The actual tax benefit realized for the tax deductions from stock option exercises was $34 and $416 during the years ended December 31, 2006 and 2005.

F-28

Stock Option Plan

The Company has a Stock Option Plan, through which incentive stock options or non-qualified stock options may be issued. Incentive stock options granted to employees may not be granted at prices less than 100% of the fair market value of the Company’s common stock at the date of option grant. Non-qualified stock options may be granted to employees, directors, advisors, consultants and other key persons of the Company at prices established at the date of grant, and may be less than the fair market value at the date of grant. All incentive stock options may be exercised at any time, after vesting, over a ten-year period subsequent to the date of grant. Incentive stock options generally vest over five years, with a 60% vesting occurring at the end of the third anniversary of the grant date, 20% at the end of the fourth anniversary of the grant date and 20% at the end of the fifth anniversary of the grant date. Non-qualified stock option vesting terms are established at the date of grant, but have a duration of not more than ten years.

During the year ended December 31, 2005 the Company applied the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for its share-based payments.

Following is a summary of the status of stock option programs during 2006, 2005 and 2004:

							Weighted Average
				Weighted			Remaining		Aggregate
	Number of			Exercise			Contractual Term		Intrinsic
	Shares			Price			(Years)		Value
Outstanding, January 1, 2004		2,854			$	20.10
Granted		544			14.48
Exercised		(200	)		6.41
Forfeited		(384	)		21.66
Outstanding, December 31, 2004		2,814			19.76
Granted		47			13.36
Exercised		(221	)		3.91
Forfeited		(399	)		26.56
Outstanding, December 31, 2005		2,241			19.99
Granted		96			10.33
Exercised		(73	)		1.74
Forfeited		(82	)		24.12
Expired		(11	)		1.10
Outstanding, December 31, 2006		2,171			$	20.12		5.2		$	1,301
Options exercisable, December 31, 2006		1,959			$	21.08		4.9		$	1,262

The weighted average fair value per share of stock options granted during the years ended December 31, 2006, 2005 and 2004 was $4.49, $6.01 and $7.57, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2006, 2005 and 2004 was $673, $1,666 and $1,263, repectively.

As of December 31, 2006, there was $917 of total unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a weighted-average period of 2.3 years. The total fair value of shares vested during the years ended December 31, 2006, 2005 and 2004 was approximately $300, $14,800 and $7,000, respectively.

F-29

(the “Plan”) that was held by employees, officers, and non-employee directors. These options had exercise prices in excess of the current market value of the Company’s common stock, based on the closing price of $12.15 per share, on December 30, 2005 (i.e., such options were “underwater”). Options to purchase approximately 1.3 million shares of the Company’s common stock, including approximately 101,000 options held by executive officers, were subject to this acceleration.

The following summarizes information about stock options outstanding as of December 31, 2006:

	Outstanding Options							Exercisable Options
			Weighted-Average
Range of Option	Number		Remaining		Weighted-Average			Number		Weighted-Average
Exercise Prices	Outstanding		Contractual Life		Exercise Price			Exercisable		Exercise Price
$0.00-$6.54		144		0.82		$	2.07		144		$	2.07
$6.54-$13.09		373		7.16		10.99			174		11.10
$13.09-$19.63		708		6.55		15.54			694		15.56
$19.63-$26.18		580		4.21		24.63			580		24.63
$26.18-$32.72		103		3.92		27.92			104		27.92
$32.72-$39.26		43		3.82		34.04			43		34.04
$39.26-$45.81		198		4.09		43.24			198		43.24
$45.81-$52.35		15		4.14		48.60			15		48.60
$52.35-$58.89		5		3.87		54.84			5		54.84
$58.89-$65.44		2		3.99		65.44			2		65.44
		2,171		5.22		$	20.12		1,959		$	21.08

The following are the shares of common stock reserved for issuance at December 31, 2006:

	Number of Shares
Employee Stock Option Plans		3,353
Employee Stock Purchase Plan		358
Shares reserved for issuance		3,711

F-30

Restricted Stock

The Company also issues restricted shares of common stock to employees of the Company under the 1998 Stock Option and Incentive Plan. The shares are issued as restricted stock and are held in the custody of the Company until all vesting restrictions are satisfied. Shares vest under this grant over a period of five years, with 60% vesting after three years of continuous employment from the grant date and an additional 20% vesting after each of four and five years of continuous employment from the grant date. If the vesting terms under which the award was granted are not satisfied, the shares are forfeited. Unearned compensation in equity is recorded based on the market value of the shares on the grant date, and is amortized to expense on a straight-line basis over the applicable vesting period. The Company reduces the straight-line compensation expense by an estimated forfeiture rate to account for the estimated impact of shares of restricted stock that are expected to be forfeited before becoming fully vested. This estimate is based on our historical forfeiture experience and is currently estimated at 6%.

A summary of unvested restricted stock activity as of December 31, 2006 and 2005 and changes during the years then ended is presented below:

	Number of Shares			Weighted Average Grant Date Fair Value
Outstanding, December 31, 2004		—			$	—
Granted		288			8.71
Vested		—			—
Forfeited		(31	)		8.45
Outstanding, December 31, 2005		257			8.75
Granted		194			10.28
Vested		—			—
Forfeited		(32	)		9.45
Outstanding, December 31, 2006		419			$	9.40

For the years ended December 31, 2006 and 2005, unearned compensation of $1,995 and $2,508, respectively, was recorded based on the market value of the shares on the grant date, and is included as a separate component of stockholders’ equity and amortized over the applicable vesting period. During the years ended December 31, 2006 and 2005, a total of 32 and 31 shares, respectively, with an unamortized unearned compensation balance of $303 and $260, respectively, had been forfeited. The amount amortized to expense during years ended December 31, 2006 and 2005, net of the impact of forfeitures, was approximately $611 and $327, respectively. As of December 31, 2006, there was $3,002 of total unrecognized compensation cost related to non-vested restricted shares. That cost is expected to be recognized over a weighted-average period of 3.75 years. No restricted shares vested during the years ended December 31, 2006 and 2005.

Shareholder Rights Plan

The Company has adopted a Shareholder Rights Plan, the purpose of which is, among other things, to enhance the Board of Directors’ ability to protect shareholder interests and to ensure that shareholders receive fair treatment in the event any coercive takeover attempt of the Company is made in the future. The Shareholder Rights Plan could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, the Company or a large block of the Company’s Common Stock. The following summary description of the Shareholder Rights Plan does not purport to be complete and is qualified in its entirety by reference to the Company’s Shareholder Rights Plan, which has been previously filed with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form 8-A.

F-31

In connection with the adoption of the Shareholder Rights Plan, the Board of Directors of the Company declared a dividend distribution of one preferred stock purchase right (a “Right”) for each outstanding share of Common Stock to stockholders of record as of the close of business on September 19, 2002. The Rights currently are not exercisable and are attached to and trade with the outstanding shares of Common Stock. Under the Shareholder Rights Plan, the Rights become exercisable if a person becomes an “acquiring person” by acquiring 15% or more of the outstanding shares of Common Stock or if a person commences a tender offer that would result in that person owning 15% or more of the Common Stock. A stockholder owning 15% or more of the common stock of the Company as of September 19, 2002, is “grandfathered” under the Shareholder Rights Plan and will become an “acquiring person” upon acquiring an additional 1¤2% of the Common Stock. If a person becomes an “acquiring person,” each holder of a Right (other than the acquiring person) would be entitled to purchase, at the then-current exercise price, such number of shares of the Company’s preferred stock which are equivalent to shares of Common Stock having twice the exercise price of the Right. If the Company is acquired in a merger or other business combination transaction after any such event, each holder of a Right would then be entitled to purchase, at the then-current exercise price, shares of the acquiring company’s common stock having a value of twice the exercise price of the Right.

Stock Purchase Warrants

In March 2004, the Company issued warrants to purchase up to 516 shares of the Company’s common stock, with exercise prices ranging from $30.24 to $35.24, to Bristol-Myers Squibb Company (“BMS”). The warrants expired in September, 2009. The issuance of these warrants resulted from a 2002 agreement whereby BMS transferred intellectual property to the Company, providing the Company with ownership of one of BMS’s preclinical drug candidates, along with patent applications covering attention deficit hyperactivity disorder (“ADHD”) and central nervous system indications. In connection with the agreement, in March 2004, the Company elected to retain ownership of the technology and all improvements made to date, resulting in the issuance of the warrants to BMS. The issuance of these warrants satisfied all equity-related obligations to BMS and resulted in the Company’s full ownership of these preclinical drug candidates and related intellectual property. Such warrants, which had a value of $3,100 on the date of issuance, were charged to research and development costs, with a corresponding credit to stockholders’ equity, during the three months ended March 31, 2004.

The value of warrants issued was determined using the Black-Scholes option-pricing model with the following assumptions:

Expected Life (years)	5.5
Interest rate	2.73	%
Volatility	62.00	%
Dividend yield	—

F-32

In October 2005, the Company entered into a License and Research Agreement (“the Agreement”) with BMS. In conjunction with the Agreement, all outstanding warrants were cancelled. The cancellation of the warrants was deemed to represent additional up-front licensing consideration from BMS. As a result, the cancelled warrants, which had a value of $562 on the date of cancellation, were recorded as deferred revenue, with a corresponding debit to shareholders’ equity during the quarter ended December 31, 2005. The value of the cancelled warrants will be recognized as contract revenue in the consolidated statement of income (loss) over the three-year term of the Agreement. The value of warrants cancelled was determined using the Black-Scholes option-pricing model with the following weighted-average assumptions.

Expected Life (years)	3.2
Interest rate	4.30	%
Volatility	42.68	%
Dividend yield	—

11. Employee Benefit Plans

Defined Contribution Plans

AMRI maintains a savings and profit sharing plan under section 401(k) of the Internal Revenue Code covering all eligible non-union employees. Employees must complete one calendar month of service and be over 20.5 years of age as of the plan’s entry dates. Participants may contribute up to 100% of their compensation, subject to IRS limitations. AMRI currently makes matching contributions equal to 50% of the participants’ contributions (up to a limit of 10% of the participants’ compensation). In addition, AMRI has reserved the right to make discretionary profit sharing contributions to employee accounts. AMRI has made no discretionary profit sharing contributions. Employer matching contributions vest at a rate of 20% per year beginning after two years of participation in the plan. Employer matching contributions were approximately $1,375, $1,335 and $1,143 for the years ended December 31, 2006, 2005 and 2004, respectively.

AMRI also sponsors a savings and profit sharing plan under section 401(k) of the Internal Revenue Code covering union employees. Employees must complete one calendar month of service and be over 18 years of age as of the plan’s entry dates. Participants may contribute from 1% to 100% of their regular wages, subject to IRS limitations, and AMRI matches 50% of each dollar contributed by the employee up to 10% of their wages. Employer matching contributions vest at a rate of 20% per year beginning after two years of participation in the plan, however the employer match under this plan does not begin until the employee completes one year of service. Employer matching contributions were $78, $143 and $71 for the years ended December 31, 2006, 2005 and 2004, respectively.

Defined Benefit and Postretirement Welfare Plan

Organichem maintains a non-contributory defined benefit plan (salaried and hourly) and a non-contributory, unfunded post-retirement welfare plan, covering substantially all employees. Benefits for the salaried defined benefit plan are based on salary and years of service. Benefits for the hourly defined benefit plan (for union employees) are based on negotiated benefits and years of service. The hourly defined benefit plan is covered under a collective bargaining agreement with the International Chemical Workers Union which represents the hourly workforce at Organichem.

Effective June 5, 2003, the Company eliminated all benefits under the non-contributory, unfunded post-retirement welfare plan for salaried employees. Effective August 1, 2003, the Company curtailed the salaried defined benefit pension plan. Effective March 1, 2004, the Company curtailed the hourly defined benefit pension plan.

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In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”), requiring an employer to recognize the overfunded or underfunded status of its postretirement plans in the statement of financial position and to recognize changes in that funded status in the year in which the changes occur. Additionally, an employer is required to measure the funded status of a plan as of the end of the employer’s fiscal year. The Company adopted SFAS No. 158 effective December 31, 2006.

The following table provides a reconciliation of the changes in the plans’ benefit obligations and fair value of the plans’ assets during the years ended December 31, 2006 and 2005, and a reconciliation of the funded status to the net amount recognized in the consolidated balance sheets as of December 31 (the plans’ measurement dates) of both years:

	Pension Benefits						Postretirement Benefits
	2006			2005			2006		2005
Change in benefit obligation:
Benefit obligation at January 1	$	21,483		$	20,803		$	521	$	462
Service cost	—			—			71		63
Interest cost	1,192			1,161			31		25
Plan amendments	—			—			6		—
Actuarial loss (gain)	168			532			126		(29		)
Benefits paid	(1,165		)	(1,013		)	—		—
Benefit obligation at December 31	21,678			21,483			755		521
Change in plan assets:
Fair value of plan assets at January 1	18,876			17,900			—		—
Actual return on plan assets	2,593			1,252			—		—
Employer contributions	1,015			737			—		—
Benefits paid	(1,165		)	(1,013		)	—		—
Fair value of plan assets at December 31	21,319			18,876			—		—
Funded status	$	359		2,607			$	755	521
Unrecognized net actuarial gain (loss)				428					(184		)
Net amount recognized				$	3,035				$	337

The net amount recognized for pension benefits at December 31, 2005, included an additional minimum pension liability of $368. The Company included $254 and $(254) in other comprehensive income for the years ended December 31, 2006 and 2005, respectively, which represent the respective fluctuations in the additional minimum pension liability, net of related tax benefits.

At December 31, 2006 and 2005, the accumulated benefit obligation (the actuarial present value of benefits, vested and non-vested, earned by employees based on current and past compensation levels) for the Company’s pension plans totaled $21,678 and $21,483, respectively.

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The following table provides the components of net periodic benefit (income) cost for the years ended December 31:

	Pension Benefits									Postretirement Benefits
	2006			2005			2004			2006		2005			2004
Service cost	$	—		$	—		$	39		$	71		$	63		$	34
Interest cost	1,193			1,161			1,169			31			25			16
Expected return on plan assets	(1,349		)	(1,230		)	(1,100		)	—			—			—
Amortization of net loss	53			21			—			10			8			—
Net periodic benefit (income) cost	$	(103	)	$	(48	)	$	108		$	112		$	96		$	50
Recognized in AOCI:
Prior service cost	$	—								$	6
Net actuarial (gain) loss	(1,189		)							300
Total recognized in AOCI	$	(1,189	)							$	306

The following table represents the incremental effect of applying SFAS No. 158 on individual line items in the consolidated balance sheet as of December 31, 2006:

	Before Application of SFAS No. 158				Adjustments				After Application of SFAS No. 158
Liability for pension benefits		$	2,372			$	(1,258	)		$	1,114
Deferred income taxes		4,531				390				4,921
Total liabilities		53,181				(868		)		52,313
Accumulated other comprehensive income		(36		)		868				832
Total stockholders’ equity		317,587				868				318,455

The following assumptions were used to determine the periodic pension cost for the defined benefit pension plans for the year ended December 31:

	2006		2005		2004
Discount rate	5.75	%	5.50	%	5.75	%
Expected return on plan assets	8.00	%	8.00	%	8.00	%
Rate of compensation increase	N/A		N/A		N/A

The discount rate that was utilized for determining the Company’s fiscal 2006 pension obligation and projected fiscal 2007 net periodic benefit cost was selected using high-quality long-term corporate bond indices as of the plan’s measurement date. The rate selected as a result of this process was substantiated by comparing it to the composite discount rate that produced a liability equal to the plan’s expected benefit payment stream discounted using the Citigroup Pension Discount Curve (“CPDC”). The CPDC was designed to provide a means for plan sponsors to value the liabilities of their postretirement benefit plans. The CPDC is a yield curve of hypothetical double-A zero coupon bonds with maturities up to 30 years. This curve includes adjustments to eliminate the call features of corporate bonds. As a result of this modeling process, the discount rate was increased from 5.50% at December 31, 2005 to 5.75% at December 31, 2006.

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The following assumptions were used to determine the periodic postretirement benefit cost for the postretirement welfare plan for the year ended December 31:

	2006		2005		2004
Health care cost trend rate assumed for next year	9.00	%	8.00	%	8.00	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	4.50	%	4.00	%	4.00	%
Year that the rate reaches the ultimate trend rate	2012		2010		2009

Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement welfare plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

	1-Percentage- Point Increase			1-Percentage- Point Decrease
Effect on total of service and interest cost		$	30		$	(23	)
Effect on accumulated postretirement benefit obligation for the year ended December 31, 2006		$	218		$	(164	)

The Company’s pension plan weighted-average asset allocations at December 31 by asset category are as follows:

	2006			2005
Equity securities		60	%		59	%
Debt securities		33			34
Real Estate		5			5
Other		2			2
Total		100	%		100	%

The overall objective of the Company’s defined benefit plans is to provide the means to pay benefits to participants and their beneficiaries in the amounts and at the times called for by the plan. This is expected to be achieved through the investment of the Company’s contributions and other assets and by utilizing investment policies designed to achieve adequate funding over a reasonable period of time.

Defined benefit plan assets are invested so as to achieve a return on investment, based on levels of liquidity and investment risk that is prudent and reasonable under circumstances which exist from time to time. While the Company recognizes the importance of the preservation of capital, it also adheres to the theory of capital market pricing which maintains that varying degrees of investment risk should be rewarded with compensating returns.

The asset allocation decision includes consideration of the non-investment aspects of the Company’s defined benefit plans, including future retirements, lump-sum elections, contributions, and cash flow. These actual characteristics of the plans place certain demands upon the level, risk, and required growth of trust assets. The Company regularly conducts analyses of the plans’ current and likely future financial status by forecasting assets, liabilities, benefits and contributions over time. In so doing, the impact of alternative investment policies upon the plans’ financial status is measured and an asset mix which balances asset returns and risk is selected.

The Company’s decision with regard to asset mix is reviewed periodically. Asset mix guidelines include target allocations and permissible ranges for each asset category. Assets are monitored on an ongoing basis and rebalanced as required to maintain an asset mix within the permissible ranges. The guidelines will change from time to time, based on an ongoing evaluation of the plan’s tolerance of investment risk.

F-36

The market-related value of plan assets is used in developing the expected rate of return on plan assets. The market-related value of plan assets phases in recognition of capital appreciation by recognizing investment gains and losses over a four-year period at 25% per year.

The expected future benefit payments under the plans are as follows for the years ending December 31:

	Pension Benefits			Postretirement Benefits
2007		$	1,109		—
2008		1,129			—
2009		1,290			—
2010		1,416			—
2011		1,520			—
2012 - 2016		8,129			69

The Company expects to contribute $639 to its pension plans in 2007.

12. Lease Commitments

The Company leases both facilities and equipment used in its operations and classifies those leases as operating leases following the provisions of SFAS No. 13, “Accounting for Leases”.

The Company has long-term operating leases for a substantial portion of its research and development laboratory facilities. The expiration dates on the present leases range from September 2007 to April 2015. The leases contain renewal options at the option of the Company. The Company is responsible for paying the cost of utilities, operating costs, and increases in property taxes at its leased facilities.

Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2006 are as follows:

Year ending December 31,
2007	$	2,007
2008	1,281
2009	1,281
2010	1,238
2011	1,256
Thereafter	2,104

Rental expense amounted to approximately $2,977, $2,400 and $2,300 during the years ended December 31, 2006, 2005 and 2004, respectively.

13. Related Party Transactions

(a) Technology Development Incentive Plan

F-37

In 2006, 2005 and 2004 we awarded Technology Incentive Compensation primarily to the inventor of the terfenadine carboxylic acid metabolite technology, which is covered by the Company’s patents relating to the active ingredient in Allegra. The inventor is Thomas D’Ambra, our Chairman, President and Chief Executive Officer. Additionally, in 2006 we awarded employees involved in the development of our proprietary amine neurotransmitter reuptake inhibitors as a result of successful licensing of this technology to BMS. The amounts awarded and included in the consolidated statements of income (loss) for the years ended December 31, 2006, 2005 and 2004 are $2,783, $4,695 and $4,789, respectively. Included in accrued compensation in the accompanying consolidated balance sheets at both December 31, 2006 and 2005 are unpaid Technology Development Incentive Compensation awards of approximately $623.

(b) Notes Receivable

From time to time we make loans to non-officer employees in the form of notes receivable. The notes receivable and accrued interest will not be repaid to us provided the employee remains in our employ throughout the term of the loan. If employment is terminated prior to the end of the loan term, a pro-rata portion of the principal and interest shall be repaid to us. Notes receivable from employees at December 31, 2006 and 2005 totaled $162 and $284, respectively. The amounts forgiven and charged to operations in the consolidated statements of income (loss) for the years ended December 31, 2006, 2005 and 2004 were $147, $185 and $91, respectively.

(c) Telecommunication Services

A member of the Company’s board of directors is the Chief Executive Officer of one of the providers of telephone and internet services to the Company. This telecommunications company was paid approximately $156, $194 and $169 for services rendered to the Company in 2006, 2005 and 2004, respectively.

14. Legal Proceedings

AMR Technology, a subsidiary of the Company, along with Aventis Pharmaceuticals Inc., the U.S. pharmaceutical business of Sanofi-Aventis S.A., are involved in legal proceedings with several companies seeking to market generic versions of Allegra. Beginning in 2001, Barr Laboratories, Inc., Impax Laboratories, Inc., Mylan Pharmaceuticals, Inc., Teva Pharmaceuticals USA, Dr. Reddy’s Laboratories, Ltd./Dr. Reddy’s Laboratories, Inc., Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc., and Sandoz Inc. filed Abbreviated New Drug Applications (ANDAs) with the U.S. Food and Drug Administration, or FDA, to produce and market generic versions of Allegra products.

F-38

Pharmaceuticals, Dr. Reddy’s Laboratories, Amino Chemicals, Ltd., Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc., DiPharma S.P.A., DiPharma Francis s.r.l., and Sandoz, asserting infringement of two of our U.S. patents that are exclusively licensed to Aventis Pharmaceuticals relating to Allegra and Allegra-D products. On December 11, 2006, AMR Technology and Sanofi-Aventis U.S. LLC, an affiliate of Aventis Pharmaceuticals, also filed a patent infringement lawsuit in the Republic of Italy against DiPharma Francis s.r.l. and DiPharma S.P.A. based on European Patent No. 703,902 which is owned by AMR Technology and licensed to Sanofi-Aventis U.S. LLC. In addition, on December 22, 2006, AMR Technology filed a patent infringement lawsuit in Canada against Novopharm Ltd., 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.

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

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

Should the Company be unsuccessful in defending these patents, the Company would continue to experience a material decrease in operating cash flows and a material adverse effect on our results of operations and financial condition.

F-39

15. Environmental Costs

The Company has completed an environmental remediation assessment associated with groundwater contamination at its Rensselaer, NY location. Ongoing costs associated with the remediation include biannual monitoring and reporting to the State of New York’s Department of Environmental Conservation. Under the remediation plan, the Company is expected to pay for monitoring and reporting until 2014. Under a 1999 agreement with the facility’s previous owner, the Company’s maximum liability under the remediation is $5.5 million. The Company assumed a liability of approximately $400 in connection with the acquisition of Organichem described in Note 2. For the years ended December 31, 2006 and 2005, respectively, $0 and $256 in costs have been paid by the Company.

Management has estimated the future liability associated with the monitoring based on enforcement rulings, market prices from third parties, when available, and historical cost information for similar activities. Management’s estimates could be materially impacted in the future by changes in legislative and enforcement rulings. While a change in estimate based on these factors is reasonably possible in the near term, based on currently available data, the Company believes that current compliance with the remediation plan will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

At both December 31, 2006 and 2005, $236 was recorded for future environmental liabilities in the consolidated balance sheets.

16. Concentration of Business

For the year ended December 31, 2006, contract revenue from our three largest customers represented 21%, 7% and 6%, respectively, of our contract revenue. For the year ended December 31, 2005, contract revenue from our three largest customers respectively represented 37%, 6% and 4% of our contract revenue. For the year ended December 31, 2004, contract revenue from our three largest customers respectively represented approximately 38%, 6% and 4% of our contract revenue. Our largest customer, GE Biosciences, represented 21% of total contract revenue for the year ended December 31, 2006. In the majority of circumstances, there are agreements in force with these entities that provide for the Company’s continued involvement in present research projects. However, there regularly exists the possibility that the Company will have no further association with these entities once these projects conclude.

Contract revenue by geographic region, based on the location of the customer, and expressed as a percentage of total contract revenue follows:

	Year Ended December 31,
	2006			2005			2004
United States		66	%		59	%		61	%
Europe		31	%		38	%		37	%
Other countries		3	%		3	%		2	%
Total		100	%		100	%		100	%

17. Business Segments

The Company has organized its sales, marketing and production activities into the Discovery/Development/Small Scale Manufacturing (“DDS”) and Large Scale Manufacturing (“LSM”) segments based on the criteria set forth in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”. The Company’s management relies on an internal management accounting system to report results of the segments. The system includes revenue and cost information by segment.

F-40

The Company’s management makes financial decisions and allocates resources based on the information it receives from this internal system.

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

The following table summarizes information by segment for the year ended December 31, 2006:

	DDS		LSM			Total
Contract revenue	$	75,777	$	77,006		$	152,783
Recurring royalties	27,024		—			27,024
Total revenue	$	102,801	$	77,006		$	179,807
Operating income (before unallocated expenses)	$	42,873	$	(444	)	$	42,429
Unallocated expenses:
Research and development						11,428
Selling, general and administrative						31,899
Total unallocated expenses						43,327
Operating income						(898		)
Reconciling items:
Interest income, net						2,990
Other loss, net						150
Income before income tax expense						$	2,242
Supplemental information:
Depreciation and amortization	$	9,231	$	6,050		$	15,281

The following table summarizes other information by segment as of December 31, 2006:

	DDS		LSM		Total
	(in thousands)
Total assets	$	241,204	$	129,564	$	370,768
Goodwill included in total assets	12,751		23,060		35,811
Investments in unconsolidated affiliates	956		—		956
Capital expenditures	10,278		6,175		16,453

F-41

The following table summarizes information by segment for the year ended December 31, 2005:

	DDS		LSM		Total
Contract revenue	$	55,645	$	81,343	$	136,988
Recurring royalties	46,918		—		46,918
Total revenue	$	102,563	$	81,343	$	183,906
Operating income (before unallocated expenses)	$	52,689	$	11,817	$	64,506
Unallocated expenses:
Research and development					14,468
Selling, general and administrative					26,494
Total unallocated expenses					40,962
Operating income					23,544
Reconciling items:
Interest income, net					1,787
Other loss, net					(185		)
Income before income tax expense					$	25,146
Supplemental information:
Depreciation and amortization	$	9,500	$	5,760	$	15,260

The following table summarizes other information by segment as of December 31, 2005:

	DDS		LSM			Total
			(in thousands)
Total assets	$	242,818		$	136,364	$	379,182
Goodwill included in total assets	2,687			23,060		25,747
Investments in unconsolidated affiliates	956			—		956
Capital expenditures	8,428			10,738		19,166

18. Fair Value of Financial Instruments

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, Disclosures About Fair Value of Financial Instruments. Although the estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies, the estimates presented are not necessarily indicative of the amounts that the Company could realize in current market exchanges.

The Company is estimating its fair value disclosures for financial instruments using the following methods and assumptions:

Cash and cash equivalents, receivables, and accounts payable: The carrying amounts reported in the consolidated balance sheets approximate their fair value because of the short maturities of these instruments.

Investment securities, available-for-sale: As disclosed in Note 5, investment securities are estimated based on quoted market prices at the consolidated balance sheet date.

Long-term debt: The carrying value of long-term debt was approximately equal to fair value at December 31, 2006 and 2005 due to the resetting dates of the variable interest rates.

Swap Contracts: As discussed in Note 8, the swap contract asset is carried at fair value at December 31, 2006 and 2005.

F-42

19. Goodwill and Intangible Assets

Goodwill

During the quarter ended June 30, 2004, due to the triggering events discussed in Notes 3, 4, and 6 above, the Company determined that the carrying value of its goodwill at its Bothell reporting unit may be impaired. Accordingly, the Company conducted a goodwill impairment review as required under SFAS No. 142, and concluded that an impairment had occurred and therefore recorded a $13,251 goodwill impairment charge, which reflects a full impairment of the Bothell goodwill. In calculating the goodwill impairment charge, the fair value of the Bothell reporting unit was determined with the assistance of an independent valuation firm using a discounted cash flow valuation approach. Significant assumptions used in this analysis include (i) expected future revenue growth rates, reporting unit profit margins, and working capital levels, (ii) a discount rate, and (iii) a terminal value multiple. The revenue growth rates, working capital levels and reporting unit profit margins were based on management’s best estimate of future results.

Also during the quarter ended June 30, 2004, due to the triggering events discussed in Notes 3, 4, and 6 above, the Company determined that the carrying value of its goodwill at its Mt. Prospect reporting unit may be impaired. Accordingly, the Company conducted a goodwill impairment review as required under SFAS No. 142. The Company completed its assessment and concluded that an impairment had occurred and recorded a $1,243 goodwill impairment charge based upon a valuation of the reporting unit. The valuation was prepared with the assistance of an independent valuation firm using a discounted cash flow approach. Significant assumptions used were similar to those used for the Bothell reporting unit valuation.

The carrying amount of goodwill, by segment, as of December 31, 2006 and 2005 are as follows:

	DDS		LSM		Total
*December 31, 2006*
Goodwill	$	12,751	$	23,060	$	35,811
*December 31, 2005*
Goodwill	$	2,687	$	23,060	$	25,747

The increase in goodwill within the DDS segment from December 31, 2005 to December 31, 2006 is related to the Company’s acquisition of ComGenex described in Note 2.

Intangible Assets

Due to the write-down of the Company’s natural product libraries as discussed in Note 4 above, the Company also performed an assessment of the carrying value of its microbial cultures and related technologies during the quarter ended June 30, 2004. The microbial cultures and related technologies are the starting materials and technology used in the development of the natural product libraries, and therefore, would be used to make incremental copies of the natural product libraries. Based on its assessment, the Company concluded that the carrying value of the microbial cultures and related technologies was not recoverable, and accordingly recorded a $3,541 impairment charge representing the entire remaining carrying value of microbial cultures and related technologies, which are included in the Company’s AMR reporting segment.

F-43

The components of intangible assets are as follows:

	Cost		Accumulated Amortization				Net		Amortization Period
*December 31, 2006*
Patents and Licensing Rights	$	3,121		$	(1,020	)	$	2,101		16 years
*December 31, 2005*
Patents and Licensing Rights	$	1,811		$	(377	)	$	1,434		16 years

Amortization expense related to patents and licensing rights for the years ended December 31, 2006, 2005, and 2004 was $643, $101 and $367, respectively.

The following chart represents estimated future annual amortization expense related to intangible assets:

Year ending December 31,
2007	$	613
2008	176
2009	137
2010	137
2011	137
Thereafter	901

20. Selected Quarterly Consolidated Financial Data (unaudited)

The following tables present unaudited consolidated financial data for each quarter of 2006 and 2005:

	First Quarter		Second Quarter			Third Quarter		Fourth Quarter
2006
Contract revenue	$	36,188	$	38,383		$	37,907	$	40,305
Gross profit	5,045		5,894			5,775		7,459
Recurring royalties	7,178		7,200			6,333		6,313
Income (loss) from operations	1,953		(1,127		)	780		(2,504		)
Net income (loss)	1,894		(353		)	1,406		(764		)
Net income (loss) per share:
Basic	$	0.06	$	(0.01	)	$	0.04	$	(0.02	)
Diluted	$	0.06	$	(0.01	)	$	0.04	$	(0.02	)
2005
Contract revenue	$	36,627	$	35,948		$	31,550	$	32,863
Gross profit	7,491		6,621			5,413		2,758
Recurring royalties	12,007		15,892			12,779		6,240
Income (loss) from operations	8,356		11,045			6,514		(2,371		)
Net income (loss)	5,597		7,294			4,373		(943		)
Net income (loss) per share:
Basic	$	0.18	$	0.23		$	0.14	$	(0.03	)
Diluted	$	0.17	$	0.23		$	0.13	$	(0.03	)

F-44

Delaware		14-1742717
(State or Other Jurisdiction of		(IRS Employer
Incorporation or Organization)		Identification No.)
21 Corporate Circle, P.O. Box 15098,
Albany, New York		12212-5098
(Address of principal executive offices)		(zip code)

Title of each class		Name of exchange on which registered
Common Stock, par value $.01 per share		The NASDAQ Stock Market LLC
Preferred Stock Purchase Rights

		Page No.
	Cover page
	Part I.
Cautionary Note Regarding Forward-Looking Statements		3
Item 1.	Business	5
Item 1A.	Risk Factors	16
Item 1B.	Unresolved Staff Comments	25
Item 2.	Properties	25
Item 3.	Legal Proceedings	26
Item 4.	Submission of Matters to a Vote of Security Holders	27
	Part II.
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	28
Item 6.	Selected Financial Data	30
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	53
Item 8.	Financial Statements and Supplementary Data	53
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	53
Item 9A.	Controls and Procedures	54
Item 9B.	Other Information	55
	Part III.
Item 10.	Directors, Executive Officers and Corporate Governance of the Registrant	56
Item 11.	Executive Compensation	56
Item 12.	Security Ownership of Certain Beneficial Owners and Management	56
Item 13.	Certain Relationships, Related Transactions and Director Independence	56
Item 14.	Principal Accountant Fees and Services	56
	Part IV.
Item 15.	Exhibits and Financial Statement Schedules	57

	Page Number
Reports of Independent Registered Public Accounting Firms		F-2
Consolidated statements of income (loss)		F-6
Consolidated balance sheets		F-7
Consolidated statements of stockholders’ equity and comprehensive income (loss)		F-8
Consolidated statements of cash flows		F-9
Notes to consolidated financial statements		F-11

Exhibit No.				Description
2.1				Stock Purchase Agreement, dated January 27, 2006, between Albany Molecular Research, Inc. and ComGenex Kutato-Fejleszto Rt. (incorporated herein by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006, File No. (0-25323)
3.1				Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 000-25323).
3.2				Amended and Restated By-Laws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 000-25323).
4.1				Specimen certificate for shares of Common Stock, $0.01 par value, of the Company (incorporated herein by reference to Exhibit 4.1 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (File No. 333-58795)).
4.2				Certificate of Designations, Preferences and Rights of a Series of Preferred Stock of Albany Molecular Research, Inc. classifying and designating the Series A Junior Participating Cumulative Preferred Stock. (incorporated herein by reference to Exhibit 3.1 to the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on September 19, 2002 (File No. 000-25323).

4.3		Shareholder Rights Agreement, dated as of September 18, 2002, between the Company and Mellon Investor Services LLC, as Rights Agent (incorporated herein by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on September 19, 2002 (File No. 000-25323).
10.1		Lease dated as of October 9, 1992, as amended, by and between the Company and Hoffman Enterprises (incorporated herein by reference to Exhibit 10.1 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (File No. 333-58795)).
10.2*		1998 Stock Option and Incentive Plan of the Company (incorporated herein by reference to Exhibit 10.2 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (File No. 333-58795)).
10.3*		Amended and Restated 1992 Stock Option Plan of the Company (incorporated herein by reference to Exhibit 10.3 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-58795)).
10.4*		1998 Employee Stock Purchase Plan of the Company (incorporated herein by reference to Exhibit 10.4 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-58795)).
10.5		Form of Indemnification Agreement between the Company and each of its directors (incorporated herein by reference to Exhibit 10.5 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-58795)).
10.6		License Agreement dated March 15, 1995 by and between the Company and Marion Merrell Dow Inc. (now Sanofi-Aventis, S.A.) (excluding certain portions which have been omitted as indicated based upon an order for confidential treatment, but which have been filed separately with the Commission) (incorporated herein by reference to Exhibit 10.7 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (File No. 333-58795)).
10.7*		Amendment to 1998 Stock Option and Incentive Plan of the Company (incorporated herein by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 File No. 000-25323)
10.8*		Technology Development Incentive Plan (incorporated herein by reference to Exhibit 10.10 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-58795)).
10.9*		Employment Agreement between the Company and Harold Meckler, Ph.D. (incorporated herein by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 000-25323).
10.10*		Form of Employee Innovation, Proprietary Information and Post-Employment Activity Agreement between the Company and each of its executive officers (incorporated herein by reference to Exhibit 10.14 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (File No. 333-58795)).
10.11		Credit Agreement, dated as of February 12, 2003, by and between the Company and Fleet National Bank, Fleet Securities, Inc., JP Morgan Chase Bank, and Citizens Bank of Massachusetts (incorporated herin by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 File No. 000-25323).
10.12		Second Amendment, dated as of June 30, 2005, to Credit Agreement between Albany Molecular Research, Inc. and Bank of America, N.A., JP Morgan Chase Bank, N.A. and Citizens Bank of Massachusetts (incorporated herin by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 filed with the Securities and Exchange Commission on August 9, 2005 File No. 000-25323).
10.13		Restated and Revised Lease Agreement, dated as of December 1, 1999, between the University at Albany Foundation and the Company (incorporated herein by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999, File No. 000-25323).

10.14*		Form of Restricted Stock Award Agreement under 1998 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 17, 2005 File No. 000-25323)
10.15*		Albany Molecular Research, Inc. Incentive Bonus Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2005 File No. 000-25323)
10.16*		Form of Incentive Stock Option Agreement under 1998 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 filed with the Securities and Exchange Commission on May 10, 2005 File No. 000-25323)
10.17*		Form of Non-Qualified Stock Option Agreement under 1998 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 filed with the Securities and Exchange Commission on May 10, 2005 File No. 000-25323)
10.18		Supply Agreement, dated as of August 31, 2005, between Organichem Corporation and Amersham Health AS, a wholly-owned subsidiary of GE Healthcare, Inc. (filed with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission) (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 filed with the Securities and Exchange Commission on November 4, 2005 File No. 000-25323)
10.19		License and Research Agreement, dated as of October 20, 2005, between Albany Molecular Research, Inc., AMR Technology, Inc. and Bristol-Myers Squibb Company (filed herewith with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission)
10.20*		Form of Notice of Acceleration of Certain Stock Options and Acknowledgement of Lock-Up dated January 25, 2006 (incorporated herein by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, File No. 000-25323)
10.21*		Amended and Revised Technology Department Incentive Plan, dated October 13, 2003 (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended Mrch 31, 2006, File No. 0-25323)
10.22*		Amended and Restated Employment Agreement, dated June 30, 2006, between Albany Molecular Research Inc. and Thomas E. D’Ambra (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006, File No. 0-25323)
10.23*		Form of Amended and Restated Employment Agreement, dated June 30, 2006, between Albany Molecular Research, Inc. and each of Mark T. Frost, Michael Trova and Kenton L. Shultis (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006, File No. 0-25323)
21.1		Subsidiaries of the Company (filed herewith).
23.1		Consent of KPMG LLP (filed herewith).
23.2		Consent of PricewaterhouseCoopers LLP (filed herewith).
31.1		Rule 13a-14(a)/15d-14(a) certification
31.2		Rule 13a-14(a)/15d-14(a) certification
32.1		Section 1350 certification
32.2		Section 1350 certification

Dated: March 15, 2007	ALBANY MOLECULAR RESEARCH, INC.
	By:	/s/ THOMAS E. D’AMBRA
		Thomas E. D’Ambra, Ph.D.
		Chairman of the Board, President, Chief Executive Officer and Director

	Signature		Title		Date
/s/ THOMAS E. D’AMBRA		Chairman of the Board, President, Chief Executive		March 15, 2007
Thomas E. D’Ambra, Ph.D.		Officer and Director (Principal Executive Officer)
/s/ MARK T. FROST		Chief Financial Officer and Treasurer		March 15, 2007
Mark T. Frost		(Principal Financial and Accounting Officer)
/s/ PAUL S. ANDERSON		Director		March 15, 2007
Paul S. Anderson, Ph.D.
/s/ DONALD E. KUHLA		Director		March 15, 2007
Donald E. Kuhla, Ph.D.
/s/ KEVIN O’CONNOR		Director		March 15, 2007
Kevin O’Connor
/s/ ARTHUR J. ROTH		Director		March 15, 2007
Arthur J. Roth
/s/ ANTHONY P. TARTAGLIA		Director		March 15, 2007
Anthony P. Tartaglia, M.D.
/s/ VERONICA G.H. JORDAN		Director		March 15, 2007
Veronica G.H. Jordan, Ph.D.
/s/ UNA S. RYAN		Director		March 15, 2007
Una S. Ryan, Ph.D., O.B.E.

		Page
Reports of Independent Registered Public Accounting Firms		F-2
Consolidated Statements of Income (Loss) for the Years Ended December 31, 2006, 2005 and 2004		F-6
Consolidated Balance Sheets at December 31, 2006 and 2005		F-7
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the Years Ended December 31, 2006, 2005 and 2004		F-8
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004		F-9
Notes to Consolidated Financial Statements		F-11

Description	Balance at Beginning of Period			Charged to Cost and Expenses				Charged to Other Accounts				Deductions Charged to Reserves				Balance at End of Period
Allowance for doubtful accounts receivable
2006		$	98,338		$	197,886			—				$	(3,000	)	$	293,224
2005		$	205,072		$	(70,691	)		—				$	(36,043	)	$	98,338
2004		$	309,000		$	(77,315	)		$	(25,000	)		$	(1,613	)	$	205,072
Note receivable reserve
2006		$	—		$	—			—				—			$	—
2005		$	32,277		$	(32,277	)		—				—			$	—
2004		$	32,277		—				—				—			$	32,277
Deferred tax asset valuation allowance
2006		$	2,997,335		$	192,560			—				—			$	3,189,895
2005		$	1,769,331		$	1,228,004			—				—			$	2,997,335
2004		$	1,149,211		$	620,110			—				—			$	1,769,331

Date: March 15, 2007
		/s/ THOMAS E. D’AMBRA, PH.D.
	Name:	Thomas E. D’Ambra, Ph.D.
	Title:	Chairman of the Board, President, Chief
		Executive Officer and Director