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"), 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), 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, as updated by Part II Item 1A, "Risk Factors," in subsequent Forms 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 many of 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. Additionally, in 2009 we consolidated existing facilities at both our Hungary and Bothell, Washington locations in order to improve operational efficiencies of staff and services as well as provide capacity for future growth.

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 us 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 September 30, 2009 was $47.7 million, as compared to $61.4 million for the quarter ended September 30, 2008.

Contract services revenue for the third quarter of 2009 was $39.7 million, compared to $54.1 million for the third 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 third quarter of 2009 than in the third quarter of 2008. Consolidated gross margin was 14.7% for the quarter ended September 30, 2009, compared to 28.4% for the quarter ended September 30, 2008.

During the nine months ended September 30, 2009, cash provided by operations was $29.2 million. The increase of $12.2 million in cash flow from operations from the nine months ended September 30, 2008 resulted primarily from an increase in deferred revenue due to 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. We spent $13.6 million in capital expenditures, primarily related to expansion in Bothell, Washington and Budapest, Hungary. As of September 30, 2009, we had $103.1 million in cash, cash equivalents and investments and $13.5 million in bank and other related debt.

Results of Operations - Three and Nine months ended September 30, 2009 Compared to Three and Nine Months Ended September 30, 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           Nine Months Ended
                                  September 30,                September 30,
            (in thousands)      2009           2008         2009          2008

                 DDS         $    21,523     $ 30,985     $  63,662     $  87,642
                 LSM              18,214       23,157        58,101        58,199
                Total        $    39,737     $ 54,142     $ 121,763     $ 145,841

DDS contract revenues for the quarter ended September 30, 2009, decreased $9.5 million to $21.5 million as compared to $31.0 million for the same quarter in the prior year. DDS contract revenues for the nine months ended September 30, 3009 decreased $24.0 million to $63.6 million as compared to $87.6 million for the same period in the prior year. These decreases are due primarily to a decrease in contract revenue from development and small-scale manufacturing services of $4.9 million for the quarter ended September 30, 2009 and a decrease of $14.3 million for the nine months ended September 30, 2009 from the same periods in 2008. These decreases are primarily 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 $4.6 million for the quarter ended September 30, 2009 and decreased $9.7 million for the nine months ended September 30, 2009, as compared to the same periods in 2008, due primarily to the completion in October 2008 of the funded research component of our on-going collaboration with BMS and the completion of recognition of access fees related to the preliminary screening phase of an on-going natural products collaboration, as well as lower customer demand. We currently expect discovery services and development and small-scale manufacturing services revenue for the fourth quarter of 2009 to remain consistent with amounts recognized in the third quarter of 2009.

LSM revenue for the quarter ended September 30, 2009 decreased $4.9 million from the same period in 2008 primarily due to a decrease of $4.3 million caused by lower demand from GE Healthcare due to its 2009 inventory reduction efforts and a decrease of $3.0 million primarily driven by the reduced demand for the production of clinical supply material. These decreases were offset, in part by an increase in commercial sales of $3.3 million resulting from an increase in demand for existing commercial products. LSM revenue for the nine months ended September 30, 2009 decreased slightly by $0.1 million from the same period in 2008. This decrease was due primarily to decreases in demand from GE Healthcare and timing of customer requirements of $9.7 million, as well as a decrease of $2.7 million for the reduced demand of clinical supply material, offset in part by an increase in commercial sales of $14.4 million resulting from an increase in demand for existing commercial products as mentioned above, along with shipments of an additional commercial product under supply agreements entered into in the third quarter of 2008. We expect LSM contract revenue for the full year of 2009 to decrease from amounts recognized in 2008, primarily due to lower demand from GE Healthcare due to 2009 inventory reduction efforts and additionally as a result of reduced demand for the production of clinical supply material.

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 September 30, Nine Months Ended September 30, 2009 2008 2009 2008

$ 7,929 $ 5,723 $ 27,239 $ 21,529

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 three and nine months ended September 30, 2009 from the same periods in 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 Teva, an increased royalty rate on one Allegra product 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. As provided in the settlement, Teva Pharmaceuticals launched a generic version of Allegra D-12 in November 2009. We will receive quarterly royalties through July 2010 for the branded Allegra D-12 equal to the royalties paid for the quarter ended June 30, 2009. Thereafter, the royalty rate will revert to the rate in effect prior to the signing of the sub-license amendment and we will also receive a royalty on Teva's sales of the generic of Allegra D-12.

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.

Milestone revenue

Milestone revenue is earned for achieving certain milestones included in licensing and research agreements with certain customers. Milestone revenues were as follows:

Three Months Ended September 30, Nine Months Ended September 30, 2009 2008 2009 2008

$ - $ 1,500 $ 4,000 $ 5,500

During the nine months ended September 30, 2009, milestone revenue of $4.0 million was recognized as a result of the submission of a Clinical Trial Application in conjunction with the our licensing and research agreement with BMS. During the three months ended September 30, 2008, milestone revenue of $1.5 million was recognized for advancing a second compound into pre-clinical development in conjunction with our licensing and research agreement with BMS. An additional $4.0 million was recognized during the nine months ended September 30, 2008, for reaching the second milestone in conjunction with our licensing and research agreement with BMS. The milestone payment was triggered by BMS's submission of an application to initiate Phase 1 clinical studies on a compound.

In November 2009, we announced that milestone revenue of $0.8 million will be recognized in the fourth quarter of 2009. This milestone revenue will be received due to advancing a third compound into preclinical development under our licensing agreement with BMS.

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           Nine Months Ended
          Segment                   September 30,                September 30,
          (in thousands)          2009           2008         2009          2008

                 DDS           $    18,787     $ 19,558     $  54,183     $  56,905
                 LSM                15,098       19,201        53,041        51,613
                Total          $    33,885     $ 38,759     $ 107,224     $ 108,518

           DDS Gross Margin           12.7 %       36.9 %        14.9 %        35.1 %
           LSM Gross Margin           17.1 %       17.1 %         8.7 %        11.3 %
          Total Gross Margin          14.7 %       28.4 %        11.9 %        25.6 %

DDS had a contract revenue gross margin of 12.7% for the three months ended September 30, 2009 compared to contract revenue gross margin of 36.9% for the same period in 2008 and gross margin of 14.9% for the nine months ended September 30, 2009 as compared to 35.1% for the same period in 2008. The decrease in gross margin resulted from lower demand for these services in relation to our fixed costs, as well as the completion of the recognition of revenue and access fees associated with the preliminary screening phase of an on-going natural products collaboration project at our Bothell Research facility and the funded research component of our on-going collaboration with BMS. We currently expect DDS contract margins for the fourth quarter of 2009 to remain flat from the percentage realized in the third quarter of 2009.

LSM's contract revenue gross margin remained flat at 17.1% for the three months ended September 30, 2009 compared to the same period in 2008 and decreased to 8.7% for the nine months ended September 30, 2009 as compared to 11.3% for the same period in 2008. This decrease in gross margin is primarily due to non-cash inventory write-downs primarily related to slower moving quantities of a legacy generic product of $1.9 million and higher capacity charges due to lower utilization. We expect gross margins in the LSM segment for the fourth quarter of 2009 to decrease to a negative margin due to decreased utilization and increased capacity charges.

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, our Chief Executive Officer and President of the Company. The incentive awards were as follows:

Three Months Ended September 30, Nine Months Ended September 30, 2009 2008 2009 2008

$ 790 $ 568 $ 2,815 $ 2,224

The increase in technology incentive award expense for the three and nine months ended September 30, 2009 from the same periods ended September 30, 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 September 30, Nine Months Ended September 30, 2009 2008 2009 2008

$ 4,075 $ 3,610 $ 12,061 $ 9,454

R&D expense increased to $4.1 million for the quarter ended September 30, 2009 from $3.6 million in the quarter ended September 30, 2008. This increase is primarily due to manufacturing clinical quantities of an API for an internal R&D project and an increase in process R&D related to both improving the manufacturing process for our generic Active Pharmaceutical Ingredient ("API") products as well as the manufacturing process for our oncology compound. R&D expense increased $2.6 million to $12.1 million for the nine months ended September 30, 2009 as compared to the same period in 2008. This increase is due primarily to the advancement of our oncology compound through Phase I clinical trials and the transition of research staff to our MCH-1 obesity research program upon completion of the funded component of the collaboration with BMS. In addition, the increase is further caused by the continued establishment of R&D activities at our Singapore facility, including in-vitro biology research capabilities along with improving the manufacturing process for our generic API products. We currently expect research and development expenses for the fourth quarter of 2009 to decrease from amounts recognized in the third quarter of 2009, as well as to decrease from those amounts recognized in the fourth quarter of 2008. However, we expect the full year of 2009 R&D expense to remain above amounts recognized in 2008. This increase is related to the above mentioned increase in process R&D used for both improving the manufacturing process for our generic API products as well as the manufacturing process for our Phase I clinical trial oncology compound, along with increased costs associated with the selection and advancement of our MCH-1 pre-clinical candidate from our existing program.

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 ("SG&A") 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. SG&A expenses were as follows:

Three Months Ended September 30, Nine Months Ended September 30, 2009 2008 2009 2008

$ 9,042 $ 9,681 $ 28,063 $ 28,790

SG&A expenses for the three months ended September 30, 2009 decreased $0.6 million from the three months ended September 30, 2008 and decreased $0.7 million for the nine months ended September 30, 2009 from the same period in 2008. These decreases are primarily attributable to a decrease in employee relocation and recruitment expenses due to a reduction in new hires in 2009, along with overall cost savings measures, including cost savings from a reorganization of our large-scale India operations. Additionally, these decreases are due to a reversal of bad debt expense from the collections of previously written-off receivables, offset in part by incremental costs associated with investments in business development that were made throughout 2008. SG&A expenses for the full year 2009 are expected to decrease from amounts recognized in 2008 primarily due to cost savings measures.

Interest income, net

                                  Three Months Ended            Nine Months Ended
                                     September 30,                 September 30,
        (in thousands)           2009             2008          2009           2008

        Interest expense       $     (63 )     $     (139 )   $    (219 )     $  (372 )
        Interest income              156              351           523         1,362
        Interest income, net   $      93       $      212     $     304       $   990

Net interest income decreased $0.1 for the quarter ended September 30, 2009 from the same period in 2008 and decreased $0.7 million for the nine months ended September 30, 2009 from $1.0 million for the same period in 2008 due to overall decreased interest rates on our interest bearing assets and liabilities.

Income tax (benefit) expense

       Three Months Ended September 30,          Nine Months Ended September 30,
               2009                2008           2009                   2008
                                      (in thousands)

             $         (280 )    $  2,492     $        601         $           6,307

Income tax expense decreased for the three and nine months ended September 30, 2009, due primarily to the decrease in pre-tax income as compared to amounts in 2008, as well as the release of previously established reserves for uncertain tax positions. Additionally, the decrease is due to a lower effective tax rate which is partially due to the Credit for Increasing Research Activities.

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 nine months of 2009, we generated cash of $29.2 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 nine months of 2009, we used $12.4 million in investing activities, resulting primarily from the use of $13.6 million for the acquisition of property and equipment, offset in part by the net proceeds from the sale of investment securities of $1.5 million.

Working capital was $150.3 million at September 30, 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 our Company's leverage ratio. As of September 30, 2009, the balance outstanding on the line of credit was $9.7 million, bearing interest at a rate of 2.19%. 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 . . .