Forward-Looking Statements

The following discussion of our results of operations and financial condition should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and the Notes thereto included within this report. This quarterly report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by forward-looking words such as "may," "could," "should," "would," "will," "intend," "expect," "anticipate," "believe," and "continue" or similar words and include, but are not limited to, statements concerning pension and postretirement benefit costs, GE Healthcare, the Company's collaboration with Bristol-Myers Squibb ("BMS"), the expected results of the Company's restructuring of AMRI Hungary, the acquisition of FineKem Laboratories Pvt. Limited ("FineKem"), future acquisitions, earnings, contract revenues, costs and margins, royalty revenues, patent protection and the ongoing Allegra patent infringement litigation, Allegra royalty revenue, government regulation, retention and recruitment of employees, customer spending and business trends, foreign operations (including Singapore, India and Hungary), the effect of the purchase of assets from Ariane Orgachem Private Limited and Ferico Laboratories Limited, collectively known as AMRI India Pvt. Ltd. ("AMRI India"), including increasing options and solutions for customers, business growth and the expansion of the Company's global market, clinical supply manufacturing, management's strategic plans, drug discovery, product commercialization, license arrangements, research and development projects and expenses, selling, general and administrative expenses, goodwill impairment, competition and tax rates. The Company's actual results may differ materially from such forward-looking statements as a result of numerous factors, some of which the Company may not be able to predict and may not be within the Company's control. Factors that could cause such differences include, but are not limited to, those discussed in Part I, Item 1A, "Risk Factors", of the Company's Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on March 13, 2009, and in Part II Item 1A, "Risk Factors," in this Form 10-Q. All forward-looking statements are made as of the date of this report, and we do not undertake to update any such forward-looking statements in the future, except as required by law. References to the "Company," "we," "us," and "our," refer to Albany Molecular Research, Inc. and its subsidiaries, taken as a whole.

Strategy and Overview

We provide contract services to the world's leading pharmaceutical and biotechnology companies. We derive our contract revenue from research and development expenditures and commercial manufacturing demands of the pharmaceutical and biotechnology industry. We continue to execute our long-term strategy to develop and grow an integrated global platform from which we can provide these services. We have research and/or manufacturing facilities in the United States, Hungary, Singapore and India. We purchased an additional large-scale manufacturing site in India in January 2008 and completed a 10,000 square foot expansion of our Singapore Research Center in 2008.

We continue to integrate our research and manufacturing facilities worldwide, increasing our access to key global markets and enabling us to provide our customers with a flexible combination of high quality services and competitive cost structures to meet their individual outsourcing needs. We seek comprehensive research and/or supply agreements with our customers, incorporating several of our service offerings and spanning across the entire pharmaceutical research and development process. Our research facilities provide discovery, chemical development, analytical, and small-scale current Good Manufacturing Practices ("cGMP") manufacturing services. Compounds discovered and/or developed in our research facilities can then be more easily transitioned to production at our large-scale manufacturing facilities for use in clinical trials and, ultimately, commercial sales 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.

Our global platform has increased our market share and was developed in order to allow us to maintain and grow margins. In addition to our globalization, we continue to implement process efficiencies, including our implementation of a process improvement and cost savings campaign ("Lean-to-Excellence"), along with efforts to strengthen our sourcing. We believe these factors will lead to improved margins in the long-term, as well as helping the Company to remain competitive during the current challenging economic environment.

We conduct proprietary research and development to discover new therapeutically active lead compounds with commercial potential. We anticipate that we would then license these compounds and underlying technology 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.

Our total revenue for the quarter ended March 31, 2009 was $54.0 million, as compared to $53.6 million for the quarter ended March 31, 2008.

Contract services revenue for the first quarter of 2009 was $43.2 million, compared to $45.3 million in the first quarter of 2008. Recurring royalty revenues, which are 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 and estimates of sales of Teva's authorized generics, were higher in the first quarter of 2009 than in the quarter ended March 31, 2008. Consolidated gross margin was 15.3% for the quarter ended March 31, 2009, compared to 20.1% for the quarter ended March 31, 2008.

During the three months ended March 31, 2009, cash provided by operations was $21.9 million. The increase of $24.0 million in cash flow from operations from the three months ended March 31, 2008 resulted primarily from an increase in deferred revenue due to the receipt of the $10.0 million sub-licensing fee in 2009 from sanofi-aventis in conjunction with the amended licensing agreement entered into in the fourth quarter of 2008, an increase in accounts payable due to the timing of payments and a decrease in accounts receivable due to the timing of cash collections. We spent $8.7 million in capital expenditures, primarily related to expansion in Bothell, Washington and Budapest, Hungary. As of March 31, 2009, we had $99.9 million in cash, cash equivalents and investments and $13.7 million in bank and other related debt.

Results of Operations - Three Months ended March 31, 2009 Compared to Three
Months Ended March 31, 2008

Revenues

Total contract revenue

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

                                     Three Months Ended March 31,
                 (in thousands)        2009                 2008

                      DDS         $       22,524       $       26,593
                      LSM                 20,720               18,744
                     Total        $       43,244       $       45,337

DDS contract revenues for the quarter ended March 31, 2009, decreased $4.1 million to $22.5 million as compared to $26.6 million for the same quarter in the prior year. The decrease is due primarily to a decrease in contract revenue from development and small-scale manufacturing services of $2.3 million due to lower demand from specialty pharma/biotech customers and more competitive pricing in the overall current economic downturn. In addition, discovery services contract revenue decreased $2.3 million due primarily to the completion in October 2008 of the funded research component of our on-going collaboration with BMS. We currently expect discovery services and development and small-scale manufacturing services revenue for the full year 2009 to decrease from amounts recognized in 2008. The decrease will be due to completing the recognition of access fees related to the preliminary screening phase of an on-going natural products collaboration, as well as the completion of the funded research component of our on-going collaboration with BMS. Additionally, further decreases will be due to lower demand from specialty pharma/biotech customers and more competitive pricing as a result of the overall current economic downturn.

LSM revenue for the quarter ended March 31, 2009 increased by $2.0 million, due primarily to an increase in commercial sales of $6.2 million due to an increase in demand for existing commercial products as well as shipments of an additional commercial product under supply agreements entered into in the third quarter of 2008. Additionally, there was an increase in sales from the production of clinical supply materials for use in advanced stage human trials of commercial products of $1.1 million. These increased revenues were offset in part by a decrease in revenue from sales to GE Healthcare of $4.6 million primarily due to the timing of customer requirements. We expect LSM contract revenue for the full year of 2009 to decrease slightly from amounts recognized in 2008 primarily due to lower demand from GE Healthcare due to 2009 inventory reduction efforts and as a result of regulatory delays to certain customer projects, as well as customer discontinuation of a late-stage clinical trial, with a resulting conclusion to API production activities.

Recurring royalty revenue

We earn royalties under our licensing agreement with sanofi-aventis S.A. for the active ingredient in Allegra. Royalties were as follows:

Three Months Ended March 31, 2009 2008

Recurring royalties, which are 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 and Teva Pharmaceuticals Industries Ltd's ("Teva") authorized generics, increased for the quarter ended March 31, 2009 from the quarter ended March 31, 2008, primarily due to an increase in international sales of Allegra by sanofi-aventis as well as the addition of royalties on the sale of authorized generics by Barr and Teva and the recognition of sublicensing fees received under the amended agreement with sanofi-aventis.

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 currently expect royalty revenues for 2009 to increase from amounts recognized in 2008, which will be driven by the new royalty stream we will be earning on Teva's sales of fexofenadine as well as the amortization of the sub-license fee we received from sanofi-aventis. While the settlement affords the option for a launch of a generic version of Allegra D-12 in November 2009, the Company will receive quarterly royalties for Allegra D-12 through July 2010 equal to the royalties paid for the quarter ended June 30, 2009.

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 forcefully and vigorously defend our intellectual property related to Allegra, and we continue to pursue our intellectual property rights as patent infringement litigation progresses.

Costs and Expenses

Cost of contract revenue

Cost of contract revenue consists primarily of compensation and associated
fringe benefits for employees, as well as chemicals, depreciation and other
indirect project related costs. Cost of contract revenue for our DDS and LSM
segments were as follows:

                                       Three Months Ended March 31,
                    Segment              2009                 2008
                 (in thousands)

                              DDS   $       18,380       $       18,019
                              LSM           18,263               18,209
                            Total   $       36,643       $       36,228

                 DDS Gross Margin             18.4 %               32.2 %
                 LSM Gross Margin             11.9 %                2.9 %
               Total Gross Margin             15.3 %               20.1 %

DDS had a contract revenue gross margin of 18.4% for the three months ended March 31, 2009 compared to contract revenue gross margin of 32.2% for the same period in 2008. The decrease in gross margin primarily resulted from lower demand for these services in relation to our fixed costs, as well as the completion of the funded research component of our on-going collaboration with BMS. We currently expect DDS contract margins for the remainder of 2009 to slightly increase from the percentage realized in the first quarter.

LSM's contract revenue gross margin increased to 11.9% for the three months ended March 31, 2009 compared to 2.9% for the same period in 2008. This increase in gross margin is primarily due to increases in commercial sales, which historically have generated higher margins. We expect gross margins in the LSM segment for full year 2009 to remain flat with those recognized for the full year of 2008 of approximately 14%.

Technology incentive award

We maintain a Technology Development Incentive Plan, the purpose of which is to stimulate and encourage novel innovative technology developments 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 or made a significant intellectual contribution. To date, the royalties from Allegra are the main driver of the awards. Accordingly, as the creator of the technology, the award is currently payable primarily to Dr. Thomas D'Ambra, the Chief Executive Officer and President of the Company. The incentive awards were as follows:

Three Months Ended March 31, 2009 2008

The increase in technology incentive award expense for the quarter ended March 31, 2009 from the quarter ended March 31, 2008 is due to the increase in Allegra royalty revenue. We expect technology incentive award expense to generally fluctuate directionally and proportionately with fluctuations in Allegra royalties in future periods.

Research and development

Research and development ("R&D") expense consists of compensation and benefits for scientific personnel for work performed on proprietary technology R&D projects, costs of chemicals and other out of pocket costs, and overhead costs. We utilize our expertise in small molecule chemistry, biocatalysis and natural product technologies to perform our internal R&D 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, R&D is performed at our large-scale manufacturing facility related to the potential manufacture of new products, the development of processes for the manufacture of generic products with commercial potential, and the development of alternative manufacturing processes. Research and development expenses were as follows:

Three Months Ended March 31, 2009 2008

The increase in R&D expense of $0.5 million for the quarter ended March 31, 2009 from $2.9 million in the quarter ended March 31, 2008 is due primarily to the transition of research staff upon completion of the funded component of the collaboration with BMS. In addition, the increase is due to the continued establishment of R&D activities at our Singapore facility, including the establishment of in-vitro biology research capabilities. We currently expect research and development expenses to increase slightly in 2009 from amounts recognized in 2008, as we continue to advance our oncology compound through Phase I clinical trials. Additionally, we expect increased costs associated with the selection and advancement of two pre-clinical candidates from our existing programs.

Projecting 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 proprietary amine neurotransmitter reuptake inhibitor program, which was our most advanced project at that time, was licensed to BMS in October 2005 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, irritable bowel syndrome, obesity and CNS, with a view to seeking a licensing partner for these programs at an appropriate research or developmental stage.

We budget and monitor our R&D costs by type or category, rather than by project on a comprehensive or fully allocated basis. In addition, our R&D expenses are not tracked by project as they benefit multiple projects or our overall technology platform. Consequently, fully loaded R&D cost summaries by project are not available.

Selling, general and administrative

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

Three Months Ended March 31, 2009 2008

The increase in selling, general and administrative expenses for the three months ended March 31, 2009 from the three months ended March 31, 2008 is primarily attributable to increases in salaries and benefits, including relocation expenses. Selling, general and administrative expenses for the full year 2009 are expected to remain flat from amounts recognized in 2008 primarily due to the incremental costs associated with investments in business development and information technology personnel and resources that were made throughout 2008, offset in part by cost savings measures.

Interest income, net

                           Three Months Ended March 31,
(in thousands)             2009                  2008

Interest expense       $        (91 )       $          (126 )
Interest income                 202                     648
Interest income, net   $        111         $           522

Net interest income decreased to $0.1 million for the quarter ended March 31, 2009 from $0.5 million for the same period in 2008 due to overall decreased interest rates on the Company's interest bearing assets and liabilities.

Income tax expense

Three Months Ended March 31, 2009 2008

Income tax expense increased for the quarter ended March 31, 2009, due primarily to the reversal of reserves for an uncertain tax position upon resolution of this matter in 2008, offset in part by a decrease in taxable income.

Liquidity and Capital Resources

We have historically funded our business through operating cash flows, proceeds from borrowings and the issuance of equity securities. During the first three months of 2009, we generated cash of $21.9 million from operating activities. The primary sources of operating cash flows resulted primarily from the receipt of the $10.0 million sub-licensing fee from sanofi-aventis in conjunction with the amended licensing agreement entered into in the fourth quarter of 2008 and decreases in accounts receivable due to timing of cash collections.

During the first three months of 2009, we used $6.1 million in investing activities, resulting primarily from the use of $8.7 million for the acquisition of property and equipment.

Working capital was $142.8 million at March 31, 2009 as compared to $140.7 million as of December 31, 2008. There have been no significant changes in future maturities on our long-term debt since December 31, 2008.

We currently have a revolving line of credit in the amount of $45.0 million which has a maturity date in June 2013. The line of credit bears interest at a variable rate based on the Company's leverage ratio. As of March 31, 2009, the balance outstanding on the line of credit was $9.7 million, bearing interest at a rate of 3.38%. 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 March 31, 2009 and 2008, we were in compliance with all of the covenants under the credit facility.

The disclosure of payments we have committed to make under our contractual obligations is set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" under Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. There have been no material changes to our contractual obligations since December 31, 2008. As of March 31, 2009, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission's Regulation S-K.

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 and/or 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.

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 refer to the policies and estimates set forth in the section "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Other than the adoption of EITF 03-6-1, there have been no material changes or modifications to the policies since December 31, 2008.