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, 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 fiscal 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 and among other things, the global economic uncertainty and tightening of the credit and capital markets. 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 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 ("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 September 30, 2008 was $61.4 million, as compared to $47.6 million for the quarter ended September 30, 2007.

Contract services revenue for the third quarter of 2008 was $54.1 million, compared to $41.6 million in the third quarter of 2007. Discovery, development, and small scale manufacturing ("DDS") revenues increased $7.3 million, or 31%, from the quarter ended September 30, 2007. Large Scale Manufacturing ("LSM") revenue increased $5.2 million, or 29%, from the quarter ended September 30, 2007. Additionally, there was incremental revenue from the AMRI India acquisition in June 2007.

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 September 30, 2007.

Consolidated gross margin was 28.4% for the quarter ended September 30, 2008, compared to 19.6% for the quarter ended September 30, 2007. Gross margin at the DDS operating segment increased to 36.9% in the third quarter of 2008 from 29.8% for the same period in 2007. Gross margin at the LSM operating segment was 17.1% in the third quarter of 2008, compared with a gross margin of 6.3% in the third quarter of 2007.

During the nine months ended September 30, 2008, cash provided by operations was $17.0 million. The decrease of $6.4 million in cash flow from operations from the nine months ended September 30, 2007 resulted primarily from an increase in accounts receivable resulting from increased revenue and timing of cash collections in the first nine months of 2008, offset in part by an increase in accounts payable primarily due to the timing of inventory purchases. We spent $14.4 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 and $1.7 million on our acquisition of FineKem. In addition, during the nine months ended September 30, 2008, 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 September 30, 2008, we had $91.3 million in cash, cash equivalents and marketable securities and $13.7 million in bank and other related debt.

Results of Operations - Three Months and Nine Months ended September 30, 2008
Compared to Three Months and Nine Months Ended September 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 September 30,         Nine months Ended September 30,
(in thousands)         2008                  2007                2008                2007

DDS              $          30,985     $          23,633   $         87,642    $         64,138
LSM                         23,157                17,938             58,199              58,600
Total            $          54,142     $          41,571   $        145,841    $        122,738

DDS contract revenues for the quarter ended September 30, 2008, increased $7.3 million to $31.0 million as compared to $23.6 million for the same quarter in the prior year. Additionally, DDS contract revenues for the nine months ended September 30, 2008 increased $23.5 million to $87.6 million from the same period in 2007. The increases are due primarily to an increase in contract revenue from discovery services of $5.9 million for the three months ended September 30, 2008 and an increase of $14.5 million for the nine months ended September 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. Discovery services revenue also increased by approximately $2.0 million during the third quarter of 2008 due to the completion of the preliminary screening phase of an on-going natural products collaboration project at our Bothell Research facility. In addition, development and small-scale manufacturing services increased $1.4 million for the three months ended September 30, 2008 and $9.0 million for the nine months ended September 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; however, this growth will be moderated due to the completion of the preliminary screening phase of an on-going natural products collaboration noted above, as well as the completion of the funded research component of our on-going collaboration with BMS.

LSM revenue for the quarter ended September 30, 2008 increased by $5.2 million, due primarily to an increase in sales to GE Healthcare of $3.6 million due to timing of customer requirements, along with an increase in commercial sales of $2.5 million and incremental revenue of $0.5 million from our AMRI India acquisition in September 2007, offset in part by a decrease in revenue from the production of clinical supply materials for use in advance stage human trials of commercial products of $1.4 million. For the nine months ended September 30, 2008, LSM revenue remained flat from the same period in 2007. Although total LSM revenue remained flat, commercial sales decreased $4.8 million and revenue from the production of clinical supply materials for use in advance stage human trials of commercial product decreased $1.7 million. The decreases in revenue for the nine months ended September 30, 2008 from the same period in 2007 were offset by an increase in sales to GE Healthcare of $2.5 million along with incremental revenue of $3.5 million from our AMRI India acquisition in September 2007. We expect full year LSM contract revenue in 2008 to increase slightly from amounts recognized in 2007 due to increased India generic Active Pharmaceutical Ingredients ("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 fexofenadine HCI, marketed as Allegra in the Americas and Telfast elsewhere. Royalties were as follows:

Three Months Ended September 30, Nine Months Ended September 30, 2008 2007 2008 2007

$ 5,723 $ 5,986 $ 21,529 $ 20,970

Recurring royalties, which are based on the worldwide sales of Allegra/Telfast, as well as on sales of Sanofi-Aventis' authorized generics, slightly decreased for the quarter ended September 30, 2008 from the same period in 2007 and increased $0.6 million to $21.5 million in the nine months ended September 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 September 30, Nine Months Ended September 30, 2008 2007 2008 2007

$ 1,500 $ - $ 5,500 $ 1,580

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 the Company's licensing and research agreement with BMS. During the nine months ended September 30, 2008, in addition to the $1.5 million recognized in the third quarter of 2008, $4.0 million of milestone revenue was recognized for reaching the second milestone under the same BMS licensing and research agreement. The $4.0 million milestone payment was triggered by BMS's submission of an application to the Health Products and Food Branch ("HPFB"), Health Canada to initiate Phase 1 clinical studies on a compound. During the nine months ended September 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 September 30,         Nine Months Ended September 30,
(in thousands)                      2008                  2007                2008                2007

            DDS               $          19,558     $          16,600   $          56,905    $        46,375
            LSM                          19,201                16,804              51,613             49,719
           Total              $          38,759     $          33,404   $         108,518    $        96,094

     DDS Gross Margin                      36.9 %                29.8 %              35.1 %             27.7 %
     LSM Gross Margin                      17.1 %                 6.3 %              11.3 %             15.2 %
    Total Gross Margin                     28.4 %                19.6 %              25.6 %             21.7 %

DDS had a contract revenue gross margin of 36.9% for the three months ended September 30, 2008 compared to contract revenue gross margin of 29.8% for the same period in 2007 and 35.1% for the nine months ended September 30, 2008 as compared to 27.7% 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 nine months ended September 30, 2008. We currently expect full year DDS contract margins to slightly decrease from the percentage realized in the first nine months of 2008 due to the completion of 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.

LSM's contract revenue gross margin increased to 17.1% for the three months ended September 30, 2008 compared to 6.3% for the same period in 2007. This increase in gross margin is primarily due to increases in commercial sales, which historically have generated higher margins, along with an increase in sales volume from our largest customer, GE Healthcare. This increase is partially offset by price concessions on sales to 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 11.3% for the nine months ended September 30, 2008 as compared with 15.2% for the same period in 2007. This decrease from the nine months ended September 30, 2007 is primarily due to a decrease in commercial sales and start up costs associated with our acquisition of AMRI India and FineKem. We expect fourth quarter 2008 gross margins in the LSM segment to remain consistent with the percentage realized in the third quarter of 2008. Additionally, we expect full year 2008 gross margin to increase from the percentage realized in the first nine months 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 September 30, Nine Months Ended September 30, 2008 2007 2008 2007

$ 568 $ 599 $ 2,224 $ 2,126

The slight decrease in technology incentive award expense for the quarter ended September 30, 2008 from the quarter ended September 30, 2007 is due a decrease in Allegra royalty revenue. The increase in technology incentive award expense for the nine months ended September 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 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. On October 30, 2006, we announced the selection of a compound from our proprietary oncology research program for advanced preclinical testing. We submitted an Investigational New Drug ("IND") application to the U.S. Food and Drug Administration ("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 September 30, Nine Months Ended September 30, 2008 2007 2008 2007

$ 3,610 $ 3,107 $ 9,454 $ 9,225

The increase in R&D expense of $0.5 million for the quarter ended September 30, 2008 from $3.1 million in the quarter ended September 30, 2007 is due primarily to the establishment of R&D activities at our Singapore facility along with an increase in generics development at our large scale facility. R&D expense increased in the nine months ended September 30, 2008 due primarily to an increase in third party costs associated with our oncology research program and to the establishment of R&D activities at our Singapore facility, offset in part by a decrease in salaries and benefits caused by the increased utilization of staff on external customer projects.

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, as well as the reallocation of research scientists from providing contract services under the funded research component of the on-going BMS collaboration to internal proprietary research programs. 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 September 30, Nine Months Ended September 30, 2008 2007 2008 2007

$ 9,681 $ 8,310 $ 28,790 $ 24,957

The increase in selling, general and administrative expenses for the three months ended September 30, 2008 is primarily due to increases in salaries and benefits related to an increase in business development personnel. The increase for the nine months ended September 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 and relocation expenses 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 Hungary operating 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 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 statement of operations during 2008 and the restructuring liabilities are included in accounts payable and accrued expenses on the . . .