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, the Company's relationship with 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, the approval of an Investigational New Drug Application ("IND") submitted to the U.S. Food and Drug Administration ("FDA") in July 2008, 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, 2007 as filed with the Securities and Exchange Commission on March 17, 2008 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 manufacturing facilities in the United States, Hungary, Singapore and India. We purchased additional large-scale manufacturing sites 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 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 increases 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 ("Lean-to-Excellence") campaign, along with efforts to strengthen our sourcing. We believe these factors will lead to improved margins.

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 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 addition, research and development 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.

Our total revenue for the quarter ended June 30, 2008 was $57.9 million, as compared to $49.4 million for the quarter ended June 30, 2007.

Contract services revenue for the second quarter of 2008 was $46.4 million, compared to $39.9 million in the second quarter of 2007. Discovery, development, and small scale manufacturing ("DDS") revenues increased $9.8 million from the quarter ended June 30, 2007 due to increased demand for these services. Large Scale Manufacturing ("LSM") revenue decreased by $3.3 million due primarily to a decrease in commercial sales of $2.9 million and a decrease in sales of commercial products to GE Healthcare of $3.1 million, offset in part by an increase in sales from the production of clinical supply materials for use in advanced stage human trials of $1.2 million. Additionally, there was incremental revenue from the AMRI India acquisition in June 2007. We currently expect the overall trend of slightly increased demand for clinical supply materials to continue for the remainder 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, were lower than in the quarter ended June 30, 2007.

Consolidated gross margin was 27.7% for the quarter ended June 30, 2008, compared to 24.9% for the quarter ended June 30, 2007. Gross margin at the DDS operating segment increased to 35.7% in the second quarter of 2008 from 25.7% for the same period in 2007, primarily resulting from an improvement in gross margin due to an increase in contract revenues in relation to the fixed cost components of the DDS segment. Gross margin at the LSM operating segment was 12.9% in the second quarter of 2008, compared with a gross margin of 24.0% in the second quarter of 2007. The decrease in gross margin from the second quarter of 2007 is due primarily to a decrease in commercial sales, which generally yield a higher margin, along with start up costs associated with our acquisitions of AMRI India and FineKem and price concessions given during 2008.

During the six months ended June 30, 2008, cash provided by operations was $11.8 million. The decrease of $11.0 million in cash flow from operations from the six months ended June 30, 2007 resulted primarily from an increase in accounts receivable resulting from increased revenue and timing of cash collections in the first six months of 2008, offset in part by an increase in accounts payable primarily due to the timing of inventory purchases. We spent $1.7 million on our acquisition of FineKem and $9.6 million in capital expenditures, primarily on the construction of a new research center in Singapore and on upgrading and maintaining our facilities and equipment in our large-scale manufacturing suites and for additions to our new research center in India. In addition, we spent $16.2 million in purchases of treasury stock in conjunction with our treasury share purchase plan approved by the Board of Directors in February 2008. As of June 30, 2008, we had $91.0 million in cash, cash equivalents and investments and $13.7 million in bank and other related debt.

Results of Operations - Three Months and Six Months ended June 30, 2008 Compared to Three Months and Six Months Ended June 30, 2007

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 June 30,        Six Months Ended June 30,
    (in thousands)        2008              2007            2008             2007

    DDS              $       30,064    $       20,295   $      56,657    $      40,505
    LSM                      16,298            19,641          35,042           40,662
    Total            $       46,362    $       39,936   $      91,699    $      81,167

DDS contract revenues for the quarter ended June 30, 2008, increased $9.8 million to $30.1 million as compared to $20.3 million for the same quarter in the prior year. Additionally, DDS contract revenues for the six months ended June 30, 2008 increased $16.2 million to $56.7 million from the same period in 2007. The increases are due primarily to an increase in contract revenue from discovery services of $5.2 million for the three months ended June 30, 2008 and an increase of $8.6 million for the six months ended June 30, 2008 due to increased demand for these services, as our ability to offer various combinations of services and cost structures at our U.S. and international locations continues to gain acceptance in the worldwide marketplace. In addition, development and small-scale manufacturing services increased $4.6 million for the three months ended June 30, 2008 and $7.6 million for the six months ended June 30, 2008 as customers continue to focus on development-stage projects. We currently expect the overall growth trends in both discovery services and development and small-scale manufacturing services to continue throughout 2008.

LSM revenue for the quarter ended June 30, 2008 decreased by $3.3 million, due primarily to a decrease in commercial sales of $2.9 million and a decrease in sales to GE Healthcare of $3.1 million due to timing of customer requirements, offset in part by an increase in revenue from the production of clinical supply materials for use in advance stage human trials of commercial products of $1.2 million. For the six months ended June 30, 2008, LSM revenue decreased by $5.6 million to $35.0 million from the same period in 2007. This decrease is primarily due to a decrease in commercial sales of $7.3 million and a decrease in sales to GE Healthcare of $1.0 million. The decreases in revenue for the three and six months ended June 30, 2008 from the same period in 2007 were partially offset by incremental revenue from our AMRI India acquisition in June 2007. We expect full year LSM contract revenue in 2008 to increase slightly from amounts recognized in 2007 due to increased India generic API sales and U.S. commercial demand.

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 June 30, Six Months Ended June 30, 2008 2007 2008 2007

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' authorized generics, slightly decreased for the quarter ended June 30, 2008 from the same period in 2007 and increased $0.8 million to $15.8 million in the six months ended June 30, 2008 from the same period in 2007.

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. During 2006 and 2007, we experienced a decrease in revenues, earnings, and operating cash flows from historical levels due to the impact of the "at-risk" launch of generic fexofenadine by Barr Pharmaceuticals, Inc. and Teva Pharmaceuticals Industries Ltd. on U.S. sales of Allegra by Sanofi-Aventis. We currently expect full year royalty revenues for 2008 to decrease slightly from amounts recognized in 2007.

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 and operating cash flows. Furthermore, an at-risk launch of a generic version of Allegra-D by a generic competitor could result in further material decreases in royalty revenues.

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 June 30, Six Months Ended June 30, 2008 2007 2008 2007

During the three months ended June 30, 2008, milestone revenue of $4.0 million was recognized for reaching the second milestone in conjunction with the Company's licensing and research agreement with Bristol-Myers Squibb ("BMS"). The milestone payment was triggered by BMS's submission of an application to initiate Phase 1 clinical studies on a compound. During the three months ended June 30, 2007, the Company recognized $1.5 million of milestone revenue under the same agreement with BMS for reaching the first milestone, which was advancing the compound into pre-clinical development.

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:

Segment                Three Months Ended June 30,        Six Months Ended June 30,
(in thousands)            2008              2007            2008             2007
       DDS           $       19,328    $       15,078   $      37,347    $      29,775
       LSM                   14,203            14,925          32,412           32,915
      Total          $       33,531    $       30,003   $      69,759    $      62,690

 DDS Gross Margin              35.7 %            25.7 %          34.1 %           26.5 %
 LSM Gross Margin              12.9 %            24.0 %           7.5 %           19.1 %
Total Gross Margin             27.7 %            24.9 %          23.9 %           22.8 %

DDS had a contract revenue gross margin of 35.7% for the three months ended June 30, 2008 compared to contract revenue gross margin of 25.7% for the same period in 2007 and 34.1% for the six months ended June 30, 2008 as compared to 26.5% for the same period in 2007. The increase in gross margin resulted from an increase in contract revenues in relation to the fixed cost components of the DDS segment during the three and six months ended June 30, 2008. We currently expect full year DDS contract margins to slightly decrease from the percentage realized in the first half of 2008.

LSM's contract revenue gross margin decreased to 12.9% for the three months ended June 30, 2008 compared to 24.0% for the same period in 2007. This decrease in gross margin is primarily due to decreases in commercial sales, which historically have generated higher margins. Additionally, this decrease is due in part to start up costs associated with our acquisition of AMRI India and FineKem, along with price concessions on sales to our largest customer, GE Healthcare, in 2008. Although these price concessions are expected to decrease our gross margin, we believe this strengthens our ability to retain this customer for future business beyond the current contract terms ending in 2010. LSM had contract revenue gross margin of 7.5% for the six months ended June 30, 2008 as compared with 19.1% for the same period in 2007. We expect full year 2008 gross margins in the LSM segment to remain consistent with the percentage realized in the second quarter of 2008 from increased demand for commercial services and our continued implementation of cost savings and process efficiencies in our Rensselaer facilities. This improvement will be offset, in part, by a decrease in margins in relation to the above mentioned price concessions to GE Healthcare.

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 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 June 30, Six Months Ended June 30, 2008 2007 2008 2007

The increase in technology incentive award expense for the quarter ended June 30, 2008 from the quarter ended June 30, 2007 is due to incentive awards granted in relation to milestone payments, offset, in part by a decrease in Allegra royalty revenue. The increase in technology incentive award expense for the six months ended June 30, 2008 from the same period in 2007 is due to the increase in Allegra royalty revenue and an increase in awards granted in relation to milestone payments.

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 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. On October 30, 2006, we announced the selection of a compound from our proprietary oncology research program for advanced preclinical testing. We submitted an IND with the FDA during the third quarter of 2008. In addition, research and development 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 June 30, Six Months Ended June 30, 2008 2007 2008 2007

The decrease in R&D expense of $0.8 million for the quarter ended June 30, 2008 from $3.7 million in the quarter ended June 30, 2007 is due primarily to a decrease in salaries and benefits caused by the increased utilization of staff on external customer projects and a decrease in timing of third party costs associated with external studies. R&D expense decreased in the six months ended June 30, 2008 due primarily to a decrease in salaries and benefits caused by the increased utilization of staff on external customer projects, offset in part by an increase in third party costs associated with our oncology research program.

We currently expect research and development expenses to increase in 2008 from amounts recognized in 2007, as we continue to advance our oncology compound through clinical trials, pending review of our IND submission by the FDA. Additionally, we expect increased costs associated with the continued development of specialty generics, as well as researching and developing processes to manufacture intermediates at our AMRI India facility. These intermediates have historically been purchased from third parties to be used at our domestic locations.

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/emesis, 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 June 30, Six Months Ended June 30, 2008 2007 2008 2007

The increase in selling, general and administrative expenses for the three and six months ended June 30, 2008 is primarily attributable to incremental administrative costs at our AMRI India location, which was acquired in June 2007, along with increases in salaries and benefits related to an increase in business development, administrative and information technology personnel and an increase in property taxes.

Selling, general and administrative expenses are expected to increase in 2008 primarily due to increased business development personnel costs and a full year of expenses related to AMRI India.

Impairment and restructuring charges

AMRI Hungary

In May 2008, we initiated a restructuring of our Hungary location. The goal of the restructuring was to realign the business model for these operations to better support the Company's long-term strategy for providing Discovery Services in the European marketplace. The Company has estimated that total AMRI operating Hungary costs will be reduced by $1.1 million annually as a result of this restructuring, primarily from a reduction of workforce. The Company recorded a restructuring charge of approximately $1.8 million in the second quarter of 2008, including termination benefits and personnel realignment costs of approximately $0.9 million, losses accrued on grant contracts of approximately $0.4 million, lease abandonment charges of approximately $0.5 million and administrative costs associated with the restructuring plan of $0.1 million.

The Hungary restructuring activity was recorded in the DDS operating segment. The restructuring costs are included under the caption "Restructuring" in the consolidated financial statement of operations during 2008 and the restructuring liabilities are included in accounts payable and accrued expenses on the consolidated balance sheet at June 30, 2008.

The following table displays AMRI Hungary's restructuring activity and liability balances within our DDS operating segment:

                            Balance at
                            January 1,                    Incurred       Balance at
                               2008          Charges       Amounts      June 30, 2008
                                                 (in thousands)
     Termination
     benefits and
     personnel
     realignment          $            -           901          (428 ) $           473
     Losses accrued on
     grant contracts                   -           389           (29 )             360
     Lease abandonment
     charges                           -           463             -               202
     Administrative
     costs associated
     with restructuring                -            80           (33 )              47
     Total                $            -   $     1,833   $      (490 ) $         1,343

Termination benefits and personnel realignment costs relate to severance packages, outplacement services, relocation, and career counseling for employees affected by this restructuring. Losses accrued on grant contracts represent estimated contractual losses that will be incurred in performing grant-based work under Hungary's legacy business model. Lease abandonment charges relate to costs associated with exiting the current facility.

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