Use these links to rapidly review the documentALBANY MOLECULAR RESEARCH, INC. INDEX TO ANNUAL REPORT ON FORM 10-K/A INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ALBANY MOLECULAR RESEARCH, INC. PART III



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K/A

Amendment No. 1

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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(  ) OF THE
SECURITIES EXCHANGE ACT OF 1934

|(Mark One)                                                           |                                                                                          
|-------------------------------------------------------------------- | -----------------------------------------------------------------------------------------
|ý                                                                    | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(  ) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2003                         
|or                                                                  
|o                                                                    | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(  ) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                                    to

Commission file number 0-25323

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Albany Molecular Research, Inc.(Exact name of registrant as specified in its charter)

|Delaware(State or Other Jurisdiction of
Incorporation or Organization)                        |  | 14-1742717(IRS Employer Identification No.)
|--------------------------------------------------------------------------------------------- |  | -------------------------------------------
|21 Corporate Circle, P.O. Box 15098,
Albany, New York(Address of principal executive offices) |  | 12212-5098(zip code)                       
|(518) 464-0279(Registrant's telephone number, including area code)                           

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Securities registered pursuant to Section 12(b) of the Act:
None

Securities
registered pursuant to Section 12(g) of the Act:

Title of Each Class
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes ý    No o

The aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant on June 30, 2003 was approximately
$404 million based upon the closing price per share of the Registrant's Common Stock as reported on the Nasdaq National Market on June 30, 2003. Shares of Common Stock held by each
officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.

As
of February 12, 2004, there were 31,660,761 outstanding shares of the Registrant's Common Stock.

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following document are incorporated by reference into Part III of this Report on Form 10-K:



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ALBANY MOLECULAR RESEARCH, INC.  INDEX TO  ANNUAL REPORT ON FORM 10-K/A



|                                                     |  |                                                                                       |  | Page No.
|---------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | --------
|                                                     |  | Cover page                                                                            |  |         
|Part I.                                              |  |                                                                                      
|Cautionary Note Regarding Forward-Looking Statements |  |                                                                                      
|Item 1.                                              |  | Business                                                                              |  | 1       
|Item 2.                                              |  | Properties                                                                            |  | 12      
|Item 3.                                              |  | Legal Proceedings                                                                     |  | 12      
|Item 4.                                              |  | Submission of Matters to a Vote of Security Holders                                   |  | 13      
|Part II.                                             |  |                                                                                      
|Item 5.                                              |  | Market for Registrant's Common Equity and Related Stockholder Matters                 |  | 13      
|Item 6.                                              |  | Selected Financial Data                                                               |  | 15      
|Item 7.                                              |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 16      
|Item 7A.                                             |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 36      
|Item 8.                                              |  | Financial Statements and Supplementary Data                                           |  | 36      
|Item 9.                                              |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 36      
|Item 9A.                                             |  | Controls and Procedures                                                               |  | 36      
|Part III.                                            |  |                                                                                      
|Item 10.                                             |  | Directors and Executive Officers of the Registrant                                    |  | 38      
|Item 11.                                             |  | Executive Compensation                                                                |  | 38      
|Item 12.                                             |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 38      
|Item 13.                                             |  | Certain Relationships and Related Transactions                                        |  | 38      
|Item 14.                                             |  | Principal Accountant Fees and Services                                                |  | 38      
|Part IV.                                             |  |                                                                                      
|Item 15.                                             |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  | 38      

Explanatory Note

This Amendment No. 1 to the Annual Report on Form 10-K of Albany Molecular Research, Inc. (the "Company") for the year ended
December 31, 2003 (the "Original Form 10-K") amends our Annual Report on Form 10-K for the year ended December 31, 2003, as filed on
March 15, 2004 to reflect the restatement of our financial statements for the years ended December 31, 2001 through 2003. Included herein are restated consolidated balance sheets as of
December 31, 2003 and 2002, restated consolidated statements of income, stockholders equity and comprehensive income and cash flows for the three years ended December 31, 2003 and
restated financial data for the three years ended December 31, 2003. The Company has filed this amendment to 1) properly recognize premium and discount amortization on certain debt
securities as required by FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," as fully outlined in Note 22 to the Company's Consolidated Financial
Statements and 2) revise Part IIItem 9AControls and Procedures. Although we have revised Item 6Selected Financial Data,
Item 7Management's Discussion and Analysis of Financial Condition and Results of Operations, Item 8Financial Statements and Supplementary Data,
Item 9AControls and Procedures and Item 15Exhibits, Financial Statement Schedules and Reports on Form 8-K from the Original Form 10-K to give effect to
these matters, other information contained herein has not been updated.

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This
Form 10-K/A, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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. 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, trends in pharmaceutical and biotechnology companies outsourcing chemical research and development, the loss of a significant customer, sales of
Allegra (including any deviations in estimates provided by Aventis) and the Company's receipt of significant royalties from the Allegra license agreement, the risk that Allegra may be approved for
over-the-counter use and Claritin's approval for over-the-counter use, the Company's and Aventis' ability to successfully enforce their respective
intellectual property, patent rights and technology, including with respect to the generic companies' Abbreviated New Drug Application filings, the integration and operating risks associated with the
Company's acquisition of Organichem, the Company's ability to successfully develop novel compounds and lead candidates in its collaborative arrangements, the Company's ability to take advantage of
proprietary technology and expand the scientific tools available to it, the ability of the Company's strategic investments and acquisitions to perform as expected and any goodwill impairment related
to such investments and acquisitions, the Company's ability to successfully complete its ongoing expansion projects on schedule, the Company's ability to execute its business plan for compound and
chemical screening sample collections, and the Company's ability to effectively manage its growth. 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. References to "we," "us," and "our," refers to Albany Molecular Research, Inc. and its subsidiaries, taken as a whole. Readers are
cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ
materially and adversely from those expressed in any forward-looking statements. Readers should review carefully the risks and uncertainties identified below under the caption "Risk Factors and
Certain Factors Affecting Forward-Looking Statements" and elsewhere in this 10-K/A. We do not undertake any obligation to update our forward-looking statements, except as required by
applicable law.

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PART I

ITEM 1. BUSINESS.

Overview

We are a leading chemistry-based drug discovery and development company focused on identifying and developing novel biologically active small molecules with
applications in the drug market. We conduct research and development projects and collaborate with many leading pharmaceutical, and biotechnology companies, and are developing new chemistry technology
for potential pharmaceutical products. We engage in chemistry research, from lead discovery, optimization and development to commercial manufacturing. We believe we are the only company providing a
critical mass of contract chemistry services to customers across the entire product development cycle from lead discovery to commercial manufacturing. Most of the services we offer have been
traditionally provided by chemistry divisions within pharmaceutical and biotechnology companies, including drug lead discovery, medicinal chemistry, chemical development, analytical chemistry services
and small-scale, pilot-plant and large-scale manufacturing. In February of 2003 we completed the acquisition of Organichem Corporation which is now our wholly-owned subsidiary. Organichem is a full
service, custom manufacturer adhering to current Good Manufacturing Practices, ("cGMP"), and specializing in process development, pilot to commercial scale synthesis, high potency, low temperature and
controlled substance manufacturing. Our Organichem location has manufactured ethical and over-the-counter drugs for more than 100 years. We have designed our services to
permit our customers to reduce overall drug development time and cost and to simultaneously pursue a greater number of drug discovery and development opportunities.

In
addition to our chemistry research services, we also conduct proprietary research and development to discover new lead compounds with commercial potential. We anticipate that we would
then license these compounds to third parties in return for up-front service fees and milestone
payments as well as recurring royalty payments if these compounds are developed into new commercial drugs. In 1995, our proprietary research and development activities led to the development,
patenting and licensing of a substantially pure form of, and a manufacturing process for, the active ingredient in the non-sedating antihistamine fexofenadine HCl marketed by Aventis S.A.
as Allegra in the Americas and as Telfast elsewhere. Pursuant to a licensing agreement with Aventis, we have earned a total of $218.3 million in milestones and royalties from the beginning of
the contract in 1995 through December 31, 2003 and are entitled to receive ongoing royalties from Aventis based upon a percentage of sales of Allegra. In addition, many of our discovery
technology contracts provide for us to receive licensing, milestone and royalty payments for discoveries that lead to commercial products.

Industry Overview

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

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

Drug Discovery, Development and Manufacturing Process

Although many scientific disciplines are required for new drug discovery and development, chemistry and biology are core technologies. Chemists and biologists
typically work together to develop

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laboratory
models of disease, screen small molecule compounds to identify those that demonstrate the desired activity and finally create a marketable drug. The drug discovery and development process
includes the following steps:



The Importance of Chemistry in the Drug Discovery and Development Process

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

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

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

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chemical
services. During this phase, specialists in chemical development continue to conduct significant process research to optimize the production of a compound.

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

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

Trends Toward Contracting for Chemistry Services

While contract services have traditionally been limited to the later stages of drug development, such as clinical trial management and manufacturing, many
pharmaceutical and biotechnology companies are utilizing contract chemistry service providers to complement, or in some cases supplement, internal chemistry expertise. Currently, only a few companies
provide chemistry services for drug discovery, development and manufacturing, and these companies have typically focused only on certain stages of the drug development process. We believe the
following trends have led and will continue to lead to an increase in demand for contract chemistry services in drug discovery, development and manufacturing:



We
believe that significant opportunities exist for a company that provides a comprehensive range of contract chemistry services throughout the drug discovery, development and
manufacturing process.

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Our Capabilities

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

Service Offerings

Drug Lead Discovery and Technologies

We provide chemistry services and proprietary drug discovery technologies used to identify new lead compounds. We have developed biocatalysis technology that
assists in the creation of novel chemistry libraries. Biocatalysis technology uses enzymes and microbial cell systems to synthesize new compounds which are unattainable by traditional means in one or
two chemical steps. Additional discovery technologies that we provide include isolation, purification, structure elucidation and the supply of sample collection libraries from microbial and botanical
sources, computational chemistry, virtual screening, microbiology, fermentation, asymmetric synthesis and high throughput metabolic screening.

As
part of our acquisition of New Chemical Entities in Bothell, WA in January 2001, we acquired an extensive collection of over 100,000 diverse compounds and natural product
screening extracts. In February 2003, we obtained Eli Lilly and Co.'s collection of natural product assets including source
materials, purified screening library samples, chemical analytical data and chemistry database tools. As part of our collaboration with Eli Lilly we have also significantly enhanced our biological
screening capabilities. In January of 2004 we completed the construction and equipping of a new high throughput screening facility at our Bothell, WA location.

We
have also begun to develop and market specialized compound collections, and to bundle access to all or a part of these collections in more strategic research collaborative
opportunities. During 2002, we launched our novel semi-exclusive compound library of approximately 30,000 compounds which are not otherwise available commercially. We sold nine copies of
this novel compound library in 2003 and have retained additional quantities for screening collaborations. We are currently developing our next semi-exclusive library offering which we
expect to offer in 2004. We are also currently developing a chemical sample screening library of over 100,000 diverse compounds which we expect to launch in early 2004. This latter library was
designed using computational techniques to be chemically representative of an equivalent library of over 4.3 million compounds.

We
seek to bundle our drug discovery technologies and screening collections in a strategic alliance to cost effectively identify new drug candidates with selected partners. As part of a
strategic alliance we would seek to leverage or bundle our natural product collections, natural product chemistry, biological screening, biocatalysis, small molecule libraries, computer aided drug
design capabilities, medicinal chemistry, combinatorial chemistry, optimization, and other chemistry capabilities. In return, we would expect to receive a combination of fee for service, milestone and
royalty payments based on the success of the drug candidate.

We
may also seek to sell or license our natural product and chemical libraries, or subsets, to customers for near term revenue through a combination of fee for service, milestone and
royalty terms.

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



Medicinal Chemistry

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



Chemical Development

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



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Analytical Chemistry Services

Our analytical chemistry services develop assays for studying the purity of the various substances we synthesize, examining and detecting impurities, conduct
physical testing, validate methods against established protocols and conduct stability testing. We also provide regulatory consulting services, including the preparation of regulatory filings,
chemistry manufacturing and control documentation and testing, and scientific and technical writing. The cGMP guidelines mandated by the FDA necessitate employing analytical support for drugs under
development, as well as for drugs already on the market. Our analytical services are designed to support our customers' compliance with these guidelines. We typically provide these services at several
stages throughout the drug discovery, development and manufacturing process starting with lead optimization. Analytical services that we provide include:



cGMP Manufacturing Services



We provide chemical synthesis and manufacturing services for our customers in accordance with cGMP guidelines. All facilities and manufacturing techniques used in
the manufacture of products for clinical use or for sale in the United States must be operated in conformity with cGMP guidelines as established by the FDA. Our Albany, N.Y. location has production
facilities and quarantine and restricted access storage necessary to manufacture quantities of drug substance under cGMP conditions sufficient for conducting clinical trials from Phase I through Phase
II, and later stages for selected products, based on volume and other parameters.



Our Organichem location is equipped to provide a wide range of custom chemical development and manufacturing capabilities. Through Organichem, we conduct
commercial cGMP manufacturing of active pharmaceutical ingredients and advanced intermediates. Organichem's large-scale cGMP manufacturing facilities provide synergies with our small-scale development
laboratories, offering our customers excellence at every scale, from bench to production. In addition, Organichem provides a number of highly specialized production capabilities, including
manufacturing of highly potent and cytotoxic agents, purification using critical fluid technology, production of controlled substances, and cryogenic reaction capabilities. In January 2003 our
focus on quality was reinforced after a successful FDA inspection of Organichem resulted in no issuances of Form FDA 483Observations of Objectionable Conditions and
Practices.

Consulting Services

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

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Proprietary Research and Development

Leveraging our wide array of chemistry disciplines and discovery technologies, we seek to discover and develop promising drug candidates and license these
candidates in return for upfront fees, milestones and downstream royalty payments for commercialized drug products. Utilizing our medicinal chemistry expertise, high throughput biological screening
capabilities, our combinatorial biocatalysis technology, natural products sample collections and other chemically and structurally diverse chemical collections generated through the application of
combinatorial chemistry integrated with our computer assisted drug design capabilities, we pursue drug discovery opportunities and generate novel biologically active chemical substances. Our broad
array of scientific disciplines also include capabilities in microbial fermentation, molecular biology, cell culture technologies, gene expression and cloning,in
vitrodrug metabolism testing and scale up synthesis of human metabolites.

Allegra/Telfast Licensing Agreement

Our proprietary research and development efforts to date have contributed to the discovery and development of one product that has reached the market. We
discovered a new process to prepare a metabolite known as terfenadine carboxylic acid, or TAM, in a purer form. The purer form of TAM is the active ingredient in the non-sedating
antihistamine known as fexofenadine HCl, which is sold by Aventis under the name Allegra in the Americas and as Telfast elsewhere. We have been issued several United States and foreign patents
relating to TAM and the process chemistry by which TAM is produced. Subject to payment of government annuities and maintenance fees, our issued patents relating to TAM expire between 2013 and 2015.
See "Item 3Legal Proceedings" for discussion of current legal proceedings related to Allegra/Telfast.

In
March 1995, we entered into a license agreement with Aventis. Under the terms of the license agreement, we granted Aventis an exclusive, worldwide license to any patents issued
to us related to our original TAM patent applications. Since the beginning of the agreement through December 31, 2003, we have earned $7.4 million in milestone payments and
$210.9 million in royalties under this
license agreement. Aventis is obligated under the license agreement to pay ongoing royalties to us based upon sales of Allegra/Telfast. We are not entitled, however, to receive any additional
milestone payments under the license agreement. Sales of Allegra/Telfast worldwide were approximately $1.97 billion for the year ended December 31, 2003, $1.92 billion for the
year ended December 31, 2002, and $1.56 billion for the year ended December 31, 2001.

Customers

Our customers include pharmaceutical companies and biotechnology companies and, to a limited extent, agricultural companies, fine chemical companies and contract
chemical manufacturers. For the year ended December 31, 2003, contract revenue from our three largest customers represented 34%, 8% and 6%, respectively, of our contract revenue. For the year
ended December 31, 2002, contract revenue from our three largest customers respectively represented approximately 12%, 12% and 7% of our contract revenue. For the year ended December 31,
2001, contract revenue from our three largest customers respectively represented approximately 18%, 14% and 10% of our contract revenue. Our largest customer, Amersham Health PLC, or Amersham,
represented 34% of total contract revenue for the year ended December 31, 2003.

Marketing

Our services are marketed primarily by our senior management and dedicated business development personnel. Because our customers are typically highly skilled
scientists, our use of technical experts in marketing has allowed us to establish strong customer relationships. In addition to our internal marketing efforts, we also rely on the marketing efforts of
consultants, both in the United

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States
and abroad. We market our services directly to customers through targeted mailings, meetings with senior management of pharmaceutical and biotechnology companies, maintenance of an extensive
Internet web site, participation in trade conferences and shows, and advertisements in scientific and trade journals. We also receive a significant amount of business from customer referrals and
through expansion of existing contracts.

Employees

We believe that the successful recruitment and retention of qualified Ph.D., masters and bachelor level scientists is a key element in achieving our strategic
goals. We believe that as competitive pressures in
the pharmaceutical and biotechnology industries increase, the recruitment and retention of chemists will become increasingly competitive. In order to meet this challenge, we actively recruit
scientists at colleges and universities, through third-party recruitment firms and through contacts of our employees. We believe the sophisticated chemistry performed in the course of our business
will assist us in attracting and retaining qualified scientists. We offer competitive salaries and benefits to our scientists. As an incentive directed toward the recruitment and retention of highly
skilled scientists, we have a program which provides that any scientist or scientists employed by us and named as an inventor on a patent not obtained in connection with a customer contract will
receive a percentage of any net licensing, milestone and royalty revenues received by us with respect to such patent. Under this program, Thomas E. D'Ambra, Ph.D., our Chairman, President and Chief
Executive Officer, receives payments as the sole inventor on the patents for fexofenadine HCl. Dr. D'Ambra earned $5.2 million in 2003, $5.1 million in 2002, and
$4.2 million in 2001 under this program. During 2003 six employees received payments equal to 10% of the $170,000 revenue earned by us relating to the achievement of certain milestones included
in customer contracts.

As
of January 31, 2004, we had 848 employees. Organichem's hourly work force of 105 employees is covered by a collective bargaining agreement with the International Chemical
Workers Union. A new 3-year collective bargaining agreement was signed in January 2004 with the union and expires on January 10, 2007. None of our other employees are covered
by a collective bargaining agreement. We consider our relations with our employees and the union to be good.

Competition

We face competition based on a number of factors, including size, relative expertise and sophistication, speed and costs of identifying and optimizing potential
lead compounds and of developing and optimizing chemical processes. In certain aspects of our business we also face foreign competition with lower cost structures. We compete with the research
departments of pharmaceutical companies, biotechnology companies, combinatorial chemistry companies, contract research companies, contract drug manufacturing companies and research and academic
institutions. Many of these competitors have greater financial and other resources and more experience in research and development than we do. Smaller companies may also prove to be significant
competitors, particularly through arrangements with large corporate collaborators.

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

We
anticipate that we will face increased competition in the future as new companies enter the market, including overseas competitors, and as advanced technologies become available. We
also

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anticipate
increased foreign competition from Asia, India and Eastern Europe and other low cost environments. Our services and expertise may be rendered obsolete or uneconomical by technological
advances or entirely different approaches developed by one or more of our competitors. The existing approaches of our competitors or new approaches or technologies developed by our competitors may be
more effective than those developed by us. We cannot give assurance that our competitors will not develop more effective or more affordable technologies or services, thus rendering our technologies
and/or services obsolete, uncompetitive or uneconomical.

Patents and Proprietary Rights

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

We
have a policy of seeking patent protection for patentable aspects of our proprietary technology. We have been issued thirteen United States patents, five New Zealand patents, seven
Australian patents, three Canadian patents, three Norwegian patents, two Japanese patents, two Finnish patents, two Irish patents, one South Korean patent, two Dutch patents, two Spanish patents, two
Swiss patents, two British patents, two Swedish patents, two Portugese patents, two Monaco patents, two Italian patents, two patents from Luxembourg, two Greek patents, two German patents, two French
patents, two
patents from Denmark, two Belgian patents, and one European patent collectively covering fexofenadine HCl and certain related manufacturing processes. Subject to payment of government annuities and
maintenance fees, our United States patents expire between 2013 and 2015, our Canadian, European, and Japanese patents expire in 2014 and our New Zealand, South Korean, Irish, Dutch, Spanish, Swiss,
British, Finnish, Swedish, Portuguese, Monaco, Italian, Luxembourg, Greek, German, French, Danish, Belgian, Australian and Norwegian patents expire between 2014 and 2016. Additionally, we have been
issued two United States patents relating to Substituted Biaryl Purines as potent anticancer agents. Subject to payment of government annuities and maintenance fees, these patents expire in 2020 and
2021 respectively.

We
seek patent protection with respect to products and processes developed in the course of our activities when we believe such protection is in our best interest and when the cost of
seeking such

9

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protection
is not inordinate. However, we cannot assure you that any patent application will be filed, that any filed applications will result in issued patents or that any issued patents will provide
us with a competitive advantage or will not be successfully challenged by third parties. The protections afforded by patents will depend upon their scope and validity, and others may be able to design
around our patents.

We
may also enter into collaborations or other arrangements whereby we retain certain ownership rights or may be entitled to receive milestones and royalties with respect to proprietary
technology developed by us. On March 15, 2002, we signed an agreement with Bristol-Myers Squibb Company, or BMS, which included the transfer of ownership to us of three patent applications
related to Attention Deficit Hyperactivity Disorder, or ADHD, and central nervous system indications was issued. In 2003, one of the United States patents applications relating to a series of aryl and
heteroaryl tetrahydroisoquinolines for these indications. Subject to the payment of government annuities and maintenance fees, this patent expires in 2020. We intend to seek a third party licensee to
develop this technology. Many of our other current contracts with our customers provide that ownership of proprietary technology developed by us in the course of work performed under the contract is
vested in the customer, and we retain little or no ownership interest.

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

Government Regulation

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

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

10

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

All
facilities and manufacturing techniques used in the manufacture of products for clinical use or for sale in the United States must be operated in conformity with cGMP guidelines as
established by the
FDA. Our facilities are subject to scheduled periodic regulatory inspections to ensure compliance with cGMP requirements. Failure on our part to comply with applicable requirements could result in the
termination of ongoing research or the disqualification of data for submission to regulatory authorities. A finding that we had materially violated cGMP requirements could result in additional
regulatory sanctions and, in severe cases, could result in a mandated closing of our facilities or significant fines, which would materially and adversely affect our business, financial condition and
results of operations.

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

Internet Website

We maintain a website on the World Wide Web at www.albmolecular.com. We make available, free of charge, on our website our annual report on
Form 10-K/A, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonable practicable after such reports are electronically filed with, or furnished to, the SEC. Our
report filed with, or furnished to, the SEC are also available at the SEC's website atwww.sec.gov.

11

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ITEM 2. PROPERTIES.

Our principal manufacturing and research and development facilities are located in the United States. The aggregate square footage of our operating facilities is
approximately 694,000 square feet, of which 429,400 square feet are owned and 264,600 square feet are leased. Set forth below is information on our principal facilities:

|Location                 |  | Square Feet |  | Primary Purpose                                         
|------------------------ |  | ----------- |  | --------------------------------------------------------
|Albany, New York         |  | 260,500     |  | Manufacturing, Research & Development and Administration
|East Greenbush, New York |  | 64,600      |  | Manufacturing & Research & Development                  
|Rensselaer, New York     |  | 251,400     |  | Manufacturing & Research & Development                  
|Mt. Prospect, Illinois   |  | 88,000      |  | Manufacturing & Research & Development                  
|Bothell, Washington      |  | 29,500      |  | Research & Development                                  

We
consider these facilities to be in good condition and suitable for their purpose. The capacity associated with these facilities is adequate to meet our anticipated needs through 2004.

ITEM 3. LEGAL PROCEEDINGS.

From time to time we may be involved in various claims and legal proceedings arising in the ordinary course of business. Except as noted below in regards to
litigation relating to Allegra, we are not currently a party to any such claims or proceedings which, if decided adversely to us, would either individually or in the aggregate have a material adverse
effect on our business, financial condition, results of operations or cash flows.

We,
along with Aventis Pharmaceuticals, the U.S. pharmaceutical business of Aventis S.A., are currently involved in legal proceedings with five companies currently seeking to market
generic versions of fexofenadine. During 2001, Barr Laboratories, Inc. filed an Abbreviated New Drug Application (ANDA) with the U.S. Food and Drug Administration seeking authorization to
produce and market a generic
version of Allegra. Aventis Pharmaceuticals filed three patent infringement suits against Barr in August and September of 2001 and in January 2002 alleging infringement of certain U.S. patents
related to 30, 60, and 180 mg tablets of fexofenadine HCl, and Allegra-D, an extended-release tablet for oral administration. In addition, Aventis filed a patent infringement lawsuit
against Impax Laboratories in March 2002 after Impax filed an ANDA to produce and market a generic version of Allegra-D. In late 2002 and early 2003, Mylan Pharmaceuticals, Teva
Pharmaceuticals and Dr. Reddy's Laboratories filed ANDAs to market generic versions of Allegra products. Under applicable federal law, marketing of an FDA-approved generic capsule
or tablet at minimum may not commence unless and until a decision favorable to a generic challenger is rendered in the patent litigation or until 30 months have elapsed from the relevant patent
infringement lawsuit, whichever comes first.

In
late 2003, Dr. Reddy's Laboratories filed a Section 505(b)(2) application with the FDA seeking authorization to produce and market versions of Allegra 30, 60, and 180 mg
tablets, as well as an ANDA seeking authorization to market a generic version of Allegra-D. Aventis has filed a patent infringement lawsuit against Dr. Reddy's in response to
Dr. Reddy's 505(b)(2) filing. The five lawsuits filed by Aventis are pending in the U.S. District Court of New Jersey.

On
March 5, 2004, we, along with Aventis, filed additional patent infringement lawsuits in the U.S. District Court in New Jersey against Barr Laboratories, Mylan Pharmaceuticals,
Teva Pharmaceuticals, Impax Laboratories and Dr. Reddy's Laboratories based on several of our patents relating to Allegra and Allegra-D products. In those suits, we asserted that
the defendants' commercial manufacture, importation, use or sales of products relating to their FDA applications do or will infringe on one or more claims of our patents. In a conference on
March 8, 2004, the District Court of New Jersey set April 15, 2005 as the end date for the discovery phase of the five previously filed Aventis cases as well

12

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as
the lawsuits filed by us and Aventis. The previously-set trial date of September 2004 is no longer in effect and no new trial date has been scheduled.

Aventis
is taking the lead in preparing and executing a strategy to defend and enforce the intellectual property rights that exist with respect to Allegra. In the U.S., Aventis holds
multiple methods of use, formulation, process and composition patents with respect to Allegra. Under our arrangements with Aventis, we will receive royalties until expiration of its underlying patents
(between 2013 and 2015) or until they are earlier determined to be invalid. See "Risk Factors And Certain Factors Affecting Forward-Looking StatementsThe royalties we earn on Allegra may
decrease."

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

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

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

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

Period

High

LowYear ending December 31, 2003First Quarter

$
17.94

$
12.95Second Quarter

$
15.35

$
10.97Third Quarter

$
16.56

$
13.46Fourth Quarter

$
15.26

$
13.03Year ended December 31, 2002First Quarter

$
28.94

$
21.58Second Quarter

$
24.45

$
19.85Third Quarter

$
23.15

$
16.51Fourth Quarter

$
17.71

$
13.95


(b)   Holders.
The number of record holders of our Common Stock as of February 17, 2004 was approximately 210. We believe that the number of beneficial owners of our
Common Stock at that date was substantially greater than 210.

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

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

None.

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(e)   Equity
Compensation Plan InformationThe following table provides information about the securities authorized for issuance under our equity compensation
plans as of December 31, 2003:

|Plan Category                                              |  | (a)
Number of securities to be
issued upon exercise of
outstanding options,
warrants
and rights |  | (b)
Weighted-average
exercise price of
outstanding options,
warrants and rights |       | (c)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders(1)  |  | 2,854                                                                                           |  | $                                                                               | 20.10 |                                                                                                                                                
|Equity compensation plans not approved by security holders |  |                                                                                                |  |                                                                                 |      |                                                                                                                                                
|Total                                                      |  | 2,854                                                                                           |  | $                                                                               | 20.10 |                                                                                                                                                

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ITEM 6. SELECTED FINANCIAL DATA.

|                                                    |                                                      | As of and for the Year Ended December 31, |        
|--------------------------------------------------- | ---------------------------------------------------- | ----------------------------------------- | -------
|
|
|
|Consolidated Statements of Income Data:             |                                                      |                                           |        
|Contract revenue                                    |                                                      | $                                         | 144,667
|Recurring royalties                                 |                                                      |                                           | 51,682 
|                                                    |                                                      |                                           |        
|                                                    | Total revenue                                        |                                           |        
|                                                    |                                                      |                                           |        
|Cost of contract revenue                            |                                                      |                                           | 101,753
|Technology incentive award                          |                                                      |                                           | 5,183  
|Research and development                            |                                                      |                                           | 22,466 
|Selling, general and administrative                 |                                                      |                                           | 20,318 
|                                                    |                                                      |                                           |        
|                                                    | Total operating expenses                             |                                           |        
|                                                    |                                                      |                                           |        
|Income from operations                              |                                                      |                                           | 46,629 
|                                                    |                                                      |                                           |        
|Other income (expense):                             |                                                      |                                           |        
|                                                    | Equity in income (loss) of unconsolidated affiliates |                                           |        
|                                                    | Interest income, net                                 |                                           |        
|                                                    | Minority interest in consolidated subsidiaries       |                                           |        
|                                                    | Other income (expense), net                          |                                           |        
|                                                    |                                                      |                                           |        
|Total other income, net                             |                                                      |                                           | 949    
|                                                    |                                                      |                                           |        
|Income before income tax expense                    |                                                      |                                           | 47,578 
|Income tax expense                                  |                                                      |                                           | 16,714 
|                                                    |                                                      |                                           |        
|Net income                                          |                                                      | $                                         | 30,864 
|                                                    |                                                      |                                           |        
|Basic earnings per share                            |                                                      | $                                         | 0.97   
|                                                    |                                                      |                                           |        
|Diluted earnings per share                          |                                                      | $                                         | 0.95   
|                                                    |                                                      |                                           |        
|Weighted average common shares outstanding, basic   |                                                      |                                           | 31,880 
|Weighted average common shares outstanding, diluted |                                                      |                                           | 32,366 
|Consolidated Balance Sheet Data:                    |                                                      |                                           |        
|Cash, cash equivalents and investments              |                                                      | $                                         | 124,628
|Property and equipment, net                         |                                                      |                                           | 146,639
|Working capital                                     |                                                      |                                           | 173,596
|Total assets                                        |                                                      |                                           | 392,631
|Long-term debt, less current maturities             |                                                      |                                           | 53,129 
|Total stockholders' equity                          |                                                      |                                           | 301,935
|Other Consolidated Data:                            |                                                      |                                           |        
|Capital expenditures                                |                                                      | $                                         | 30,554 

NoteThe
Company's December 31, 2003, 2002 and 2001 financial statements have been restated as further described in Note 22 of the accompanying Consolidated Financial
Statements.

15

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

The following discussion of the results of our operations and financial condition should be read in conjunction with the accompanying Consolidated Financial
Statements and the Notes thereto included within this report.

Restatement

The 2001, 2002 and 2003 consolidated financial statements of the Company have been restated to properly recognize premium and discount amortization on debt
securities as required by FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities", as more fully outlined in Note 22 to the Company's Consolidated
Financial Statements.

In
October 2004, management of the Company identified that the accounting principles as set forth in SFAS 115, regarding amortization of premiums and discounts paid on
bonds, had not been properly applied in prior periods to certain of its debt investments. During a review of the Company's accounting for bond investments, the Company identified an accounting error
that had resulted in the overstatement of interest income since 2001. This error resulted in a cumulative overstatement of interest income of $931,000 and a corresponding overstatement of
stockholders' equity of $349,000 from 2001 through December 31, 2003. The cumulative impact of this error as of December 31, 2003, including the related income tax effect, resulted in a
$582,000 understatement of accumulated other comprehensive income, a $349,000 understatement of deferred income tax liability, and a $931,000 overstatement of retained earnings.

Although
the Company believes the impact of the error is not material to any previously issued financial statements, management, after consultation with the Audit Committee of the
Company's Board of Directors, determined that the impact of the cumulative adjustment would be significant to operating results in 2004. As a result, on November 3, 2004, the Audit
Committee concluded that the Company's financial statements for the fiscal years ended December 31, 2003, 2002 and 2001 should no longer be relied upon and should be restated. The restatement
will not impact the Company's previously reported cash and cash equivalents or investment securities available for sale.

On
November 3, 2004, the Company's management and Audit Committee discussed the matters described above with the Company's independent registered public accounting firm,
PricewaterhouseCoopers ("PwC"). PwC informed the Audit Committee that it concurs with the conclusions of management and the Audit Committee described above.

The
Company's decision to restate previously issued financial statements was based on the impact of a cumulative correction on the 2004 financial statements rather than the impact on any
previously issued financial statement.

16

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The
effect of these errors is detailed, by reporting period, below.

|                           |                                           | December 31, 2003          |   | December 31, 2002 |         | December 31, 2001
|-------------------------- | ----------------------------------------- | -------------------------- | - | ----------------- | ------- | -----------------
|
|
|Balance Sheet:             |                                           |                            |   |                   |         |                  
|                           | Deferred income taxes                     |                            |   | 11,860            |         |                  
|                           |                                           | Total liabilities          |   |                   | 90,347  |                  
|                           | Retained earnings                         |                            |   | 155,438           |         |                  
|                           | Accumulated other comprehensive loss, net |                            |   | (685              | )       |                  
|                           |                                           | Total stockholders' equity |   |                   | 302,284 |                  
|Statement of Income:       |                                           |                            |   |                   |         |                  
|                           | Interest income                           |                            |   | 2,555             |         |                  
|                           | Income before provision for income taxes  |                            |   | 47,902            |         |                  
|                           |                                           | Net income                 |   |                   | 31,188  |                  
|Earnings per common share: |                                           |                            |   |                   |         |                  
|                           | Basic                                     |                            | $ | 0.98              |         | $                
|                           | Diluted                                   |                            | $ | 0.96              |         | $                

Overview

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

In
addition to our chemistry contract services, we also conduct proprietary research and development to discover new therapeutically-active lead compounds with commercial potential. We
anticipate that we would then license these compounds to third parties in return for up-front service fees and milestone payments as well as recurring royalty payments if these compounds
are developed into new commercial drugs. In 1995, our proprietary research and development activities led to the development, patenting and licensing of a substantially pure form of, and a
manufacturing process for, the active ingredient in the non-sedating antihistamine fexofenadine HCl marketed by Aventis S.A. as Allegra in the Americas and as Telfast elsewhere. In
addition, certain of our discovery technology contracts provide for us to receive milestone and royalty payments for discoveries that lead to commercial products.

Our
total revenue for 2003 was $196.3 million, including $144.7 million from our chemistry contract business and $51.7 million revenue from our royalties on sales of
Allegra. During 2003 we performed work for more than 150 customers, including 40 new customers. We earned $30.9 million in net income in 2003, generated $46.3 million in cash from
operations and spent $30.6 million in capital on our facilities and equipment, primarily related to the construction of our high throughput screening laboratories, the expansion of our
manufacturing suites at Organichem and the construction of our new corporate headquarters. We also spent $13.5 million during 2003 to repurchase 959,032 shares of our common stock. As of
December 31, 2003, we had $124.6 million in cash, cash equivalents and investments and $57.6 million in bank and other related debt, carrying a blended interest rate of
approximately 3.0%.

We
continue to execute a long-term strategy to grow our platform chemistry services business while leveraging our proprietary technologies and capabilities to provide greater
value to our customers and

17

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further
growth for the company. We have enhanced our chemistry service offerings with the addition of our high throughput screening expertise and technologies, the addition of Eli Lilly and Co.'s
natural product collection, the launch of our semi-exclusive synthetic chemical library and the completion of our diverse chemical sample collection. We believe that the pharmaceutical
industry is placing more emphasis on the quality and content of compound libraries and their related screening versus the quantity of the compounds. We have also enhanced our service offerings with
the addition of certain physical chemistry services to evaluate polymorphic forms and crystal habits and to evaluate salt selection for potential new drug candidates.

In
early 2003 we completed the full acquisition of Organichem. Organichem strategically positions us to offer high quality clinical trial and large scale cGMP production capabilities for
our customers, as well as expertise in high potency and controlled drug substance manufacturing which provide higher profit margins. We realized strategic benefits from Organichem in 2003 by
successfully transitioning several of our customers clinical supply manufacturing projects from our smaller scale chemistry laboratories into the facilities of Organichem. We will continue to seek
opportunities to add services and technologies that add value to our customers. We are also evaluating opportunities to leverage our large-scale cGMP production facilities at Organichem, including
identifying niche products to manufacture and sell as well as assessing complementary lines of business that support cGMP production.

We
continue to advance our proprietary technologies and programs with the goal to generate licensing or other revenue opportunities. Our most near-term licensing opportunity
relates to intellectual property transferred to us from BMS. The intellectual property provides us with ownership of one of BMS's pre-clinical drug candidates, along with patent
applications covering attention deficit hyperactivity disorder ADHD and other central nervous system indications. While we continue to invest in this program, we are also in discussions to license
this technology in exchange for a combination of up front license fees, milestones and royalty payments. In connection with the agreement, by March 31, 2004, we must issue additional warrants
to BMS or return the technology and all improvements made to date. It has been our desire to seek a licensing deal in which upfront licensing payments would offset all or a portion of the expense
related to issuing the warrants. Given the upcoming deadline with the BMS agreement, we anticipate issuing warrants in the first quarter of 2004 to BMS to purchase approximately 2,200,000 shares of
our common stock and to record an expense of approximately $3.0 million related to the issuance of the warrants. We initially issued 53,053 warrants for the purchase of our common stock to BMS
in early 2002 as part of the signing of the agreement. The exercise prices of the initial 53,053 warrants range from $40 to $45 per share. The exercise prices of the remaining 525,000 warrants will
range from $15 to $20 per share above our stock price at the time the warrants are issued. This second warrant issue will satisfy all equity-related obligations to BMS under our agreement. We also
continue to utilize our proprietary technologies, including our biocatalysis and natural product capabilities, to further advance other early stage internal research programs in the fields of
oncology, immunosuppresion and inflammation. We have initiated an internal screening program to screen our own chemical and natural product collections with the goal of generating lead candidates. If
successful, we would seek a licensing partner at an appropriate research or developmental stage.

Additionally,
we continue to include provisions in certain contracts which contain a combination of fee for service, milestone and royalty payments should our proprietary technology and
expertise lead to the discovery of new products that reach the market. We received two milestone payments in the amount of $170,000 in the third quarter of 2003 resulting from such customer contracts.
One of these customer contracts relates to a drug candidate in phase III clinical trials for which we may have the right to receive a fractional royalty based on commercialized sales if the drug is
approved by the FDA.

The
business environment for chemistry outsourcing continues to be challenging. Our customers remain under budgetary pressures and are currently spending a greater portion of their
research and

18

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development
dollars on later stage development projects. While overall pharmaceutical spending is projected to increase in 2004, in certain areas of our business there has been a significant increase
in foreign competition that has substantially lower cost structures. The lower cost structures result from parts of the world where salaries are a fraction of what they are in industrialized
countries. This trend has resulted in pricing pressures in the U.S. and is impacting our ability to increase or maintain pricing on our customer contracts. We expect the increase in competition from
lower cost locations, such as Asia and India, to continue. In early 2004, we have experienced an increase in the number of customer inquiries with particular demand for our chemical development and
early stage cGMP manufacturing.

The
competitive environment facing Allegra has also intensified during the past year. In November 2002, Schering Plough received approval by the FDA to voluntarily switch the
status of Claritin from prescription to over-the-counter (OTC) status. In December 2002, Schering Plough began to market and sell Claritin as an OTC drug. The marketing
of Claritin as an OTC drug, the subsequent marketing of generic alternatives to Claritin, and health maintenance organization (HMO) programs attempting to direct consumers towards OTC antihistamines,
resulted in flat sales of Allegra in the United States compared to the prior year. Further, Aventis has projected a mid-single digit percentage decline in Worldwide sales of Allegra in
2004 from 2003, consisting of a high single digit decline in the U.S. offset by growth in the international market. As a result, we have incorporated in our earnings guidance up to a 10% decline in
royalty revenues for 2004.

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 accounting principles generally accepted in the United States of America. The preparation of these 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 and contingencies. We base our estimates on historical experience and on various other assumptions that are believed
to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions.

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

Contract Revenue Recognition

Our contract revenue consists primarily of fees earned under contracts with third-party customers and reimbursed expenses under such contracts. We also seek to
include provisions in certain contracts which contain a combination of up-front licensing fees, milestone and royalty payments should our proprietary technology and expertise lead to the
discovery of new products that reach the market. Reimbursed expenses consist of chemicals and other project specific costs. We view contract revenue as our primary measure of revenue growth rather
than licensing fees and royalties, which are dependent upon our licensees' sales. Generally, our contracts may be terminated by the customer upon 30 days' to one year's prior notice, depending
on the size of the contract.

We
generate contract revenue on the following basis:

Full-time Equivalent (FTE).An FTE agreement establishes the number of our employees contracted for a project or
a series of projects, the duration of the contract period, the price per FTE, plus an allowance for chemicals and other project specific costs, which may or may not be incorporated in the FTE rate.
Typically, our FTE contracts have terms of six months or longer. Our FTE contracts

19

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typically
provide for annual adjustments in billing rates for the scientists assigned to the contract. These contracts involve our scientists providing services on a "best efforts" basis in the
development of novel chemistry for our customers. There are no fixed deliverables as part of these services. As such, we recognize revenue under FTE contracts on a monthly basis as services are
performed according to the terms of the contract.

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

Fixed Fee.Under a fixed-fee contract we charge a fixed agreed upon amount for a deliverable.
Fixed-fee contracts have fixed deliverables upon completion of the project. We recognize revenue for fixed fee contracts after projects are completed, delivery is made and title transfers
to the customer and collection is reasonably assured.

Up-Front License Fees, Milestone and Royalty Revenue.We analyze our agreements to determine whether the elements
can be separated and accounted for individually or as a single unit of accounting in accordance with EITF No. 00-21,Revenue Arrangements with Multiple
Deliverablesand SAB 104,Revenue Recognition. Allocation of revenue to individual elements which qualify for separate
accounting is based on the estimated fair value of the respective elements. Generally, the provisions for licensing, milestone and royalty payments included in our contracts are related to the
occurrence of specific identifiable events. We will recognize revenue from up-front non-refundable licensing fees on a straight line basis over the period we have continuing
involvement in the underlying project. We will recognize revenue arising from a milestone payment upon the successful achievement of the event, and the resolution of any uncertainties or contingencies
regarding potential collection of the related payment, or if appropriate over the remaining term of the agreement.

We
recognized revenue from two milestone payments totaling $170,000 from two customers during the third quarter of 2003. One of these milestone payments was for an early stage lead
discovery project that involved the use of our computer-assisted drug design technologies. The other milestone payment was for our chemical development work on a compound that is currently in phase
III clinical trials. If this compound currently in Phase III clinical trials is approved by the FDA, we may have the right to receive a fractional royalty on the commercial sales of the product.

Deferred Revenue.Deferred revenue represents monies received for services that have not yet been performed as well as
customer billings related to completed production which has not yet shipped. As an added service, during 2003 we began to temporarily store completed cGMP production at our facilities for certain
customers. Under these arrangements, upon completion of the customer project we typically will enter into a storage agreement with the customer. We will temporarily store and subsequently ship the
completed production, often in multiple shipments to multiple sites. The revenue related to these arrangements is recognized at the time the products are ultimately shipped. At the end of 2003, we had
approximately $200,000 in deferred revenue related to the storage of completed production.

Recurring Royalty Revenue Recognition

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

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Natural Product and Lead Finding Sample Collections

As part of our strategy to provide a comprehensive offering of natural product and chemical lead finding discovery services and technologies to our customers, we
have acquired natural product sample collections and related assets and are producing novel compound libraries and chemical screening collections. We are also capitalizing the cost of internally
producing our novel compound and screening collections in our inventory. We launched our novel semi-exclusive compound library of approximately 30,000 compounds in 2002 on a
semi-exclusive basis. We sold nine copies of this novel compound library in 2003 and realized revenue of $1.4 million. We are currently preparing our second
semi-exclusive library offering which we expect to market during 2004. At December 31, 2003 the inventory value of our semi-exclusive library on our consolidated balance
sheet was $1.4 million.

We
anticipate completing our chemical screening library of approximately 110,000 diverse compounds in March 2004 and are currently marketing this library alone or as part of a
larger discovery collaboration including target screening. At December 31, 2003 the inventory value of our chemical screening library on our balance sheet was $3.7 million.

We
have estimated the fair value of our natural product collections obtained as part of our acquisition of New Chemical Entities in January 2001 and have included their value in
our inventory. In February 2003, we acquired Eli Lilly and Co.'s collection of natural product libraries including source materials, purified screening library samples, chemical analytical data
and chemistry database tools. As part of our collaboration with Eli Lilly, we also significantly enhanced our biological screening capabilities. Our investment in biological screening capabilities
became operational in January 2004. The combination of these investments should enhance our ability to market and sell our natural product collections, sales of which to date have not been
significant. Total natural product related assets recorded on our consolidated balance sheet as of December 31, 2003 were $7.4 million.

If
we are unable to successfully execute our business plan, within certain time constraints, including achievement of annual revenue targets, or if actual market conditions are less
favorable than those projected by management, we may be required to write-down the value of certain library assets ($11.1 million) and goodwill and intangible assets
($18.0 million), resulting in a charge to operations.

Goodwill

We perform an annual assessment of the carrying value of our goodwill for potential impairment. A determination of impairment is made based upon the estimated
future cash flows of the operations associated with goodwill. An independent third-party impairment review was completed in 2003 and the conclusion was that no impairment was required. If goodwill is
determined to be impaired in the future we would be required to record a charge to our results of operations. Factors we consider important which could result in an impairment include the following:



We
have $42.1 million of goodwill on our consolidated balance sheet as of December 31, 2003. Approximately $14.2 million of this balance related to the acquisition
of New Chemical Entities and approximately $24.9 million to the acquisition of Organichem.

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Intangible Assets

Our intangible assets are amortized on a straight-line basis over fifteen to sixteen years. We review our intangible assets for impairment whenever
events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. A determination of impairment is made based on estimates of future cash flows. If such assets
are considered to be impaired the amount of the impairment would be based on the excess of the carrying value over the fair value of the assets.

Equity Investments

We have equity investments in leveraged private companies that have operations in areas within our strategic focus. During 2003, we made equity investments in two
private companies totaling $2.1 million. Under the terms of these agreements, we provided FTE services to each customer in exchange for equity securities, plus additional fee for service cash
payments. The value of our investment was based on the market value of the contract services we provided. The underlying securities of the private companies were priced at either the most recent
equity financing or the pricing on the next round of equity financing. Both of these companies are currently in the process of raising additional financing.

We
account for these investments using the cost method of accounting for investments as our ownership interest in each customer is below 20% and we do not have the ability to exercise
significant influence over the entities. We have recorded these investments at cost equal to the value of the services we provided. Fee-for-service revenue was recognized under
the customer contracts as we performed our services. In addition to these equity investments, as of December 31, 2003, our outstanding accounts and notes receivable balance resulting from our
fee-for-service work for these two companies was $1.6 million. We determined that revenue recognition was appropriate as collection of the receivables was reasonably
assured. For one of these entities, collection is contingent upon the entity either entering into a proposed collaboration arrangement or obtaining additional financing. We record an impairment charge
when we believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions, poor operating results of underlying investments or the
inability of the entities to obtain additional financing could result in our inability to recover the carrying value of the investments, thereby requiring an impairment charge in the future.

Research and Development

Research and development expense consists of compensation and benefits for scientific personnel for work performed on proprietary technology development and
research projects, costs of chemicals and other out-of-pocket costs, and overhead costs. In addition, research and development is performed at Organichem related to the
improvement of production processes as well as research related to the potential manufacture of new products. We are funding several internal research and development programs 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. We utilize our expertise in biocatalysis, natural products and small molecule chemistry to perform
our internal research and development projects. Included in our internal research and development initiatives is our central nervous system program, the generation of our novel chemical and screening
libraries and our program to screen our natural products and chemical collections to identify new lead compounds. We are also utilizing our proprietary technologies to further advance early stage
internal research programs in the fields of oncology, immunosuppresion and inflammation, including a Cooperative Research and Development Agreement with the National Cancer Institute to develop
anti-cancer compounds.

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Pension Benefits

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

Allowance for Doubtful Accounts

We record an allowance for doubtful accounts to absorb estimated receivable losses. The allowance and related accounts receivable are reduced when the account is
deemed uncollectible.

Inventory

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

Results of Operations

Effective January 1, 2003, we began consolidating our financial results with Organichem Corporation. For the period January 1, 2003 through
February 11, 2003, our consolidated financial results reflect a 75.0% ownership of Organichem. Effective February 12, 2003, the date of our purchase of the remaining 25% ownership of
Organichem, our financial results reflect 100% ownership of Organichem. As a result, our revenues and operating expenses in 2003 include the results for Organichem. During 2002, we included our
proportionate share of Organichem's net income in our income statement as equity in income of unconsolidated affiliates.

Operating Segment Data

We have organized our sales, marketing and production activities into the Albany Molecular Research (AMR) and Organichem segments based on the criteria set forth
in SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." We rely on an internal management accounting system to report results of these segments. The accounting
system includes revenue and cost information by segment. We make financial decisions and allocates resources based on the information it receives from this internal system.

The
AMR segment includes activities such as drug lead discovery, optimization, drug development and small scale manufacturing. The Organichem segment includes pilot to commercial scale
manufacturing of active pharmaceutical ingredients and intermediates and high potency and controlled substance manufacturing all of which are in compliance with the Food and Drug Administration's
(FDA) current Good Manufacturing Practices, or cGMP.

Contract Revenue.Contract revenue consists primarily of fees earned under contracts with third-party customers. Contract
revenue increased 102% to $144.7 for the year ended December 31, 2003 from $71.7 million for 2002. The increase in contract revenue is attributable to our acquisition of Organichem,
which had total revenue of $79.1 million in 2003, offset by a decrease in AMR contract revenue of $6.1 million.

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Contract
revenue for AMR for 2003 was $65.6 million, a decrease of 8% compared to contract revenue of $71.7 million in 2002. The reduction in our contract services was
attributable to reduced spending by our customers due to a weak economic environment, leading to budgetary pressures within the pharmaceutical and biotech industries. Additionally, an increase in
foreign competition operating with lower cost structures impacted certain areas of our business during 2003. Contract revenue at Organichem declined by $7.2 million, or 8% to
$79.1 million in 2003 compared to 2002. The decline in contract revenue was attributable to soft demand from our customers due to a weak economic environment. We believe these budgetary
pressures and foreign competition will continue, at least for the short-term.

Contract
revenue for AMR increased 19% to $71.7 million for the year ended December 31, 2002, compared to $60.3 million for 2001. This increase was due principally
to a greater number of projects under contract primarily for medicinal and chemical development services.

Recurring Royalties.We earned royalties under our licensing agreement with Aventis S.A. for the active ingredient in
Allegra/Telfast. Recurring royalties increased 1% to $51.7 million for the year ended December 31, 2003 from $51.1 million for 2002. The slight increase is primarily attributable
to increased sales of Alegra/Telfast by Aventis, despite over-the-counter competition from Allegra's primary competitor, Claritin. Aventis has projected a
mid-single digit percentage decline in worldwide sales of Allegra in 2004 from 2003, consisting of a high single digit decline in the U.S. offset by growth in the international market. A
mid-single digit percentage decline in worldwide sales of Allegra in 2004 would result in approximately a $5.0 million decline in our royalty revenue.

Recurring
royalties for the year ended December 31, 2002 increased 23% to $51.1 million, compared to $41.7 million for 2001. The increase was attributable to
increased sales and market share of Alegra/Telfast by Aventis.

Cost of Contract Revenue.Cost of contract revenue, from which we derive gross profit from contract revenue, consists
primarily of compensation and associated fringe benefits for employees, chemicals, depreciation and other indirect costs. Cost of contract revenue increased 146% to $101.8 million for the year
ended December 31, 2003 from $41.3 million for 2002. The increase in cost of contract revenue is
primarily attributable to our acquisition of Organichem, which had cost of contract revenue of $58.8 million in 2003.

Cost
of contract revenue for AMR increased $1.7 million due primarily to increased salary and related benefit costs for our scientific staff. AMR's contract revenue margin was 35%
for the year ended December 31, 2003 compared to 42% for 2002. The decrease in AMR's contract revenue margin was due to lower overhead absorption resulting from decreased contract revenues.
Organichem's contract revenue margin increased to 26% in 2003 from 24% in 2002 as a result of cost reduction programs and synergies related to the acquisition. Included in Organichem's cost of
contract revenue in 2003 was $1.0 million in purchase accounting expenses related to an increase in the value of inventories acquired in the acquisition.

Cost
of contract revenue increased 18% to $41.3 million for the year ended December 31, 2002, compared to $34.9 million for 2001. Contract revenue margin was 42% in
2002 and 2001, primarily due to increased rates on customer contracts and leveraging the expansion of our facilities.

Technology Incentive Award.We maintain a Technology Development Incentive Plan designed to stimulate and encourage novel
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. Under our Technology Development Incentive Plan, Thomas E. D'Ambra, our Chairman, President and Chief Executive Officer, receives payments as the sole
inventor of the patents for fexofenadine HCl equal to 10% of the total payments received by us with respect to those patents. During 2003 six employees received

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payments
equal to 10% of the revenue earned by us relating to the achievement of certain milestones included in customer contracts. The technology incentive award expense incurred under our Technology
Development Incentive Plan increased 1% to $5.2 million for the year ended December 31, 2003, compared to $5.1 million for 2002. The technology incentive award expense increased
23% to $5.1 million for the year ended December 31, 2002, compared to $4.2 million for 2001. Both increases were directly attributable to the increase in recurring royalties.

Research and Development.Research and development expense consists of compensation and benefits for scientific personnel for
work performed on proprietary technology development, research projects, costs of chemicals and other out-of-pocket costs and overhead costs. In addition, research and
development is performed at Organichem related to the improvement of production processes as well as research related to the potential manufacture of new products. Research and development expenses
increased 217% to $22.5 million for the year ended December 31, 2003 from $7.1 million for 2002. The consolidation of financial results with Organichem added $4.7 million
in research and development costs in 2003. The generation of our novel chemical and screening collections and enhancement of our related high throughput screening technology added $7.2 million
of R&D expenses in 2003. In addition, $3.0 million of the increase related to the funding of our internal research program initiatives. The continued development of our technologies primarily
in
biocatalysis and biosciences added an additional $0.5 million of R&D costs in 2003. Due to the decline in demand for our contract business 2003, we re-allocated scientific personnel
from customer projects to our internal research program initiatives.

In
connection with the agreement we entered into with BMS in 2002 we anticipate issuing warrants to BMS in the first quarter of 2004 to purchase approximately 2,200,000 shares of our
common stock and to record an expense of approximately $3.0 million related to the issuance of the warrants. Under that agreement, BMS transferred intellectual property to us, providing us with
ownership of one of BMS's late-stage pre-clinical drug candidates, along with patent applications covering Attention Deficit Hyperactivity Disorder and central nervous system.

Research
and development expense increased 65% to $7.1 million for the year ended December 31, 2002 compared to $4.3 million for 2001. The increase was due to an
increase in internally funded research efforts utilizing drug discovery technologies acquired through acquisitions. Also contributing to the increase was the issuance of 53,000 stock purchase warrants
to BMS in connection with an agreement with BMS with a value to us of $0.5 million.

Selling, General and Administrative.Selling, general and administrative expense consists of compensation and related fringe
benefits for marketing, operational and administrative employees, professional services, marketing costs and all costs related to facilities and information services. Selling, general and
administrative costs increased 58% to $20.3 million for the year ended December 31, 2003 from $12.9 million for 2002. The increase in selling, general and administrative costs is
primarily attributable to the acquisition of Organichem, which had $2.0 million in selling, general and administrative costs for 2003, increased payroll related costs of $3.0 million,
and a $1.4 million expense related to the relocation of our Iowa operations.

Selling,
general and administrative expenses increased 6% to $12.9 million for the year ended December 31, 2002, compared to $12.2 million for 2001. The increase was
primarily attributable to a $0.4 million increase in administrative and marketing staff to support the expansion of our operations, additional expenses of $1.0 million related to the
operations of our research center in Mount Prospect, Illinois which was acquired in September 2001 offset by a decrease in recruitment expenses of $0.9 million. Included in selling,
general and administrative expenses for the year ended December 31, 2001 was $1.6 million of goodwill amortization. In accordance with SFAS No. 142, we ceased amortizing goodwill
effective January 1, 2002. Accordingly, no goodwill was amortized in 2003 or 2002.

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Equity in income (loss) of unconsolidated affiliates.Equity in income (loss) of unconsolidated affiliates decreased 113% to
($0.4) million for the year ended December 31, 2003 from $2.8 million for 2002. The decrease is attributed to our acquisition of the remaining stock of Organichem in 2003, which
increased our ownership percentage to 100% from 39.2% at December 31, 2002. Equity in income (loss) of
unconsolidated affiliates increased 147% to $2.8 million for the year ended December 31, 2002 compared to $1.1 million for 2001. The increase resulted from our proportionate share
of Organichem's net income under equity method accounting.

Interest expense.Interest expense increased $1.2 million to $1.4 million for the year ended
December 31, 2003 compared to 2002. The increase was the result of our new credit facility which we entered into on February 12, 2003 to fund the purchase of Organichem's remaining
shares. Interest expense was $0.2 million for the years ended December 31, 2002 and 2001.

Interest income.Interest income decreased 32% to $2.2 million for the year ended December 31, 2003 from
$3.3 million for 2002. Interest income decreased 52% to $3.3 million for the year ended December 31, 2002 from $6.9 million for 2001. The decreases were the result of the
lower interest rate environment on the Company's municipal and government bond portfolio in both years.

Income tax expense.Income tax expense decreased to $16.7 million for the year ended December 31, 2002,
compared to $22.7 million for 2001. The effective rate for our provision for income taxes was 35% in 2003 compared to 36% in 2002 and 2001. The lower tax rate is attributable to the
preferential tax treatment Organichem receives for its foreign export sales.

Liquidity and Capital Resources

Working capital was $173.6 million at December 31, 2003 compared to $163.1 million at December 31, 2002. The increase of
$10.5 million resulted primarily from an increase in inventory of $20.9 million, primarily due to the Organichem acquisition, and an increase in accounts receivable of
$4.7 million offset by a $4.9 million decrease in cash and cash equivalents and investments, an increase of $4.8 million in accounts payable and accrued expenses and an increase
of $2.5 million in accrued pension costs which represents what we expect to contribute in 2004 to our defined benefit pension plans.

We
have historically funded our business through operating cash flows, proceeds from borrowings and the issuance of equity securities. For the year ended December 31, 2003, we
generated cash of $46.3 million from operating activities as compared to $34.3 million for the year ended December 31, 2002.

Total
capital expenditures for the year ended December 31, 2003 were $30.6 million as compared to $17.4 million for the year ended December 31, 2002. Capital
expenditures in 2003 were predominantly in connection with the expansion of our facilities in Albany, New York and at Organichem. These expenditures were primarily financed through operating cash
flows. For 2004. we expect to incur $25 million in capital expenditures. As of December 31, 2003, we have approximately $4.7 million in purchase commitments for construction
contracts.

During
2003, we generated $8.8 million from financing activities, consisting primarily of $30.0 million in borrowings for the acquisition of Organichem, offset by
$13.5 million used to purchase shares of common stock under our stock repurchase programs and $9.0 million of debt repayments.

During
the first quarter of 2003, we completed the acquisition of Organichem. On January 1, 2003 we exercised our conversion option with respect to $15.0 million of
Organichem subordinated debentures. The conversion of the debentures into additional shares of Organichem common stock increased our ownership in Organichem from 39.2% to 75.0%. On February 12,
2003, we purchased the remaining outstanding shares of Organichem for $29.9 million in cash. The purchase price was funded

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through
borrowings under our new five year $30.0 million term loan which matures on February 11, 2008. The term loan bears interest at a variable rate. As of December 31, 2003,
$20.0 million of the $30.0 million bears an interest rate of 4.57% and $10.0 million of the $30.0 million bears an interest rate of 2.34%. We also entered into a
$30.0 million revolving credit facility to payoff Organichem's bank debt. At December 31, 2003 we had $25.5 million outstanding under this line. We also assumed a
$5.0 million note payable to Amersham which was paid in full during 2003. Covenants on the term loan and revolver require us to maintain a minimum leverage ratio and a minimum current ratio, as
well as other financial and non-financial covenants. As of December 31, 2003, we are in compliance with the covenant requirements of our term loan and revolving credit facility.

We
are pursuing the expansion of our operations through internal growth and strategic acquisitions. We expect that such activities for the next 12 months will be funded from
existing cash and cash equivalents, cash flow from operations, the issuance of debt or equity securities and borrowings. Future acquisitions, if any, could be funded with cash on hand, cash from
operations, borrowings under our credit facility and/or the issuance of equity or debt securities. There can be no assurance that attractive acquisition opportunities will be available to us or will
be available at prices and upon such other terms that are attractive to us. We regularly evaluate potential acquisitions of other businesses, products and product lines and may hold discussions
regarding such potential acquisitions. As a general rule, we will publicly announce such acquisitions only after a definitive agreement has been signed. In addition, in order to meet our
long-term liquidity needs or consummate future acquisitions, we may incur additional indebtedness or issue additional equity or debt securities, subject to market and other conditions.
There can be no assurance that such additional financing will be available on terms acceptable to us or at all. The failure to raise the funds necessary to finance our future cash requirements or
consummate future acquisitions could adversely affect our ability to pursue our strategy and could negatively affect our operations in future periods.

The
recurring royalties we receive on the sales of Allegra/Telfast have historically provided a material portion of our operating cash flows, representing 65% of our operating cash flows
in 2003. As discussed in Part I, Item III of this Form 10-K/A, several generic manufacturers have filed ANDA applications with the FDA seeking authorization to produce and
market a generic version of Allegra. We and Aventis Pharmaceuticals have filed several patent infringement suits against these generic companies alleging infringement of certain U.S. patents. The
previously-set trial date of
September 2004 is no longer in effect and no new trial date has been scheduled. Should we or Aventis be unsuccessful in defending these patents we would experience a material decrease in
operating cash flows.

Contractual Obligations

The following table sets forth our long-term contractual obligations and commitments as of December 31, 2003.

Payments Due by Period (in thousands)

|                      |  | Total |        | Under 1 Year |   | 1-3 Years |  | 4-5 Years |        | After 5 Years
|--------------------- |  | ----- | ------ | ------------ | - | --------- |  | --------- | ------ | -------------
|Long-Term Debt        |  | $     | 57,650 |              | $ | 4,521     |  | $         | 34,602 |              
|Operating Leases      |  | $     | 13,863 |              | $ | 2,096     |  | $         | 4,086  |              
|Purchase Committments |  | $     | 4,700  |              | $ | 4,700     |  |           |        |              

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Related Party Transactions

Technology Development Incentive Plan

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

In
2003, 2002 and 2001 we awarded Technology Incentive Compensation to the inventor of the terfenadine carboxylic acid metabolite technology. The inventor is Thomas D'Ambra, our
Chairman, President and Chief Executive Officer. The amounts awarded and included in the consolidated statements of income for the years ended December 31, 2003, 2002 and 2001 are
$5.2 million, $5.1 million and $4.2 million, respectively. Included in accrued compensation in the accompanying consolidated balance sheets at both December 31, 2003 and
2002 are unpaid Technology Development Incentive Compensation awards of $1.3 million.

Notes Receivable

From time to time we make loans to non-officer employees in the form of notes receivable. The notes receivable and accrued interest will not be repaid
to us provided the employee remains in our employ throughout the term of the loan. If employment is terminated prior to the end of the loan term, a pro-rata portion of the principal and
interest shall be repaid to us. Notes receivable from employees at December 31, 2003 and 2002 totaled $134,000 and $340,000, respectively. The amounts forgiven and charged to operations in the
consolidated statements of income for the years ended December 31, 2003, 2002 and 2001 are $192,000, $200,000 and $20,000, respectively.

Recent Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). This interpretation explains
how to identify variable interest entities and how an enterprise assesses its interest in a variable interest entity to decide whether to consolidate that entity. This interpretation requires existing
unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that
effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interest that effectively recombines risks that were previously dispersed. The
interpretation applies to us in the first quarter of 2004. We do not expect the adoption of this interpretation to have a material impact on our financial position, results of operations or cash
flows.

In
May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The Statement requires
certain instruments to be classified as a liability, including instruments issued in the form of shares that are mandatory redeemable, instruments that at inception embodies an obligation to
repurchase the issuer's equity shares, and instruments that embody unconditional obligations that must or may be settled by issuing a variable number of equity shares. The Statement does not change
the classification requirements of convertible bonds, or other outstanding shares that are conditionally redeemable. The Statement is effective for instruments entered into after May 31, 2003.
The adoption of this statement did not have a material effect on our financial position, results of operations or cash flows.

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RISK FACTORS AND CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

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

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

We depend on pharmaceutical and biotechnology companies that use our services for a large portion of our revenues. Although there has been a trend among
pharmaceutical and biotechnology companies to outsource drug research and development functions, this trend may not continue. We have experienced increasing pressure on the part of our customers to
reduce expenses, including the use of our services as a result of negative economic trends generally and in the pharmaceutical industry. Our contract revenues declined in 2003 and we may continue to
be adversely effected should economic conditions worsen. If pharmaceutical and biotechnology companies discontinue or decrease their usage of our services, including as a result of a slowdown in the
overall United States economy, our revenues and earnings could be lower than we expect and our revenues may decrease or not grow at historical rates.

We may lose one or more of our major customers.

During the year-ended December 31, 2003, revenues from Amersham totaled $49.6 million and represented approximately 63% of our contract
revenue, or 25% of our total revenue. Organichem entered into a long-term supply agreement with Amersham in 1999 under which Amersham's purchases from us begin to expire in 2006 and
terminate at the end of 2007. Additionally, Amersham's purchases have historically exceeded the contractual minimum purchases, however, this may not continue. If Amersham materially reduces its
historical purchase levels or we can not renew or replace the revenue from this contract, there may be a material decrease in our revenues and operating income. In addition, during the year ended
December 31, 2003, our AMR segment provided services to three major customers of approximately 16% of our contract revenues or 12% of our total revenue. Contracts with these customers typically
may cancel their contracts with 30 days' to one-year's prior notice depending on the size of the contract, for a variety of reasons, many of which are beyond our control. If any one
of our major customers cancels its contract with us, our contract revenues may decrease.

The royalties we earn on Allegra may decrease.

We have been issued several patents on a pure form of, and a manufacturing process for, fexofenadine HCl. The patent positions of pharmaceutical, medical and
biotechnology firms can be uncertain and can involve complex legal and factual questions. Litigation, in particular patent litigation, can be complex and time-consuming and the outcome is
inherently uncertain. We cannot assure investors that Aventis will ultimately succeed in its current or any future litigation against generic drug manufacturers involving patents with respect to
Allegra. In the event that one or more of the patents owned by us or Aventis are ultimately determined to be invalid or unenforceable, Aventis and we would lose exclusivity with respect to the claims
covered by those patents. Any such loss of exclusivity and the contemporaneous introduction of generic forms of fexofenadine HCl may cause a reduction in Allegra sales. In addition, under our current
arrangements with Aventis, Aventis, with consultation from us, will take the lead with respect to preparing and executing a strategy to defend and enforce

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certain
of the patents relating to Allegra, and Aventis is executing that role in the current litigation. As a result, we may not be able to control the conduct of such litigation and the strategic
decisions that are made during the course of such litigation. See "Item 3Legal Proceedings."

On
May 11, 2001, an FDA advisory panel recommended that the prescription allergy drugs Claritin, Allegra and Zyrtec are safe enough to be made available
over-the-counter. The panel had been assembled as a result of a 1998 petition by Blue Cross of California (now Wellpoint Health Networks) requesting that the three
top-selling prescription antihistamines be changed to OTC status. The FDA panel's only consideration was whether Claritin, Allegra and Zyrtec have the safety profile for
over-the-counter use without a learned intermediary. The panel's recommendation remains under consideration by the full FDA. The FDA's reaction to its advisory panel's
recommendation with regard to the safety of Allegra is uncertain. In November 2002, Schering Plough received approval by the FDA to voluntarily switch the status of Claritin from prescription
to OTC status. In December 2002, Schering Plough began to market and sell Claritin as an OTC drug.

Royalties
from sales of Allegra currently constitute a significant portion of our total revenues and operating income. During the year ended December, 31 2003, our royalties from Allegra
were $51.6 million, which represented approximately 26% of our total revenues. For the year ended December 31, 2002, our royalties from Allegra were $51.1 million, which
represented approximately 42% of our total revenues. The marketing of OTC Claritin and subsequent private-label antihistamine OTC products in the U.S. has adversely effected Allegra's reimbursement
status by third-party payers resulting in a decline in sales growth in the U.S. during 2003. Further Claritin OTC competition, the potential for generic Allegra competition and the possibility that
the FDA requires Allegra or Zyrtec to be sold in an over-the-counter form, may further adversely affect Allegra's reimbursement status by third-party payers and the price at
which it can be sold. Any such price reduction may not be adequately offset by increased volume of sales. If the dollar amount of Allegra sales subject to our license agreement decreases, due to these
or any other factors, our revenues from our license agreement with Aventis will also decrease. Because we have very few costs
associated with the Allegra license, a decrease in revenues from our license agreement for Allegra would have a material effect on our revenue and operating income. For example, a $5.0 million
decrease in our Allegra royalty revenue would decrease our operating income by $4.5 million.

We face increased competition.

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

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

We have expended and continue to expend time and money on internal research and development with the intention of producing proprietary technologies in order to
patent and then license them to other companies. However, we may not be successful in producing any valuable technology or

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successful
in licensing it to a third party. To the extent we are unable to produce technology that we can license, we may not receive any revenues related to our internal research and development
efforts.

We may be unsuccessful in selling or licensing the chemical and natural product collections currently in our inventory.

As of December 31, 2003 the total cost of our chemical and natural product libraries included in our inventory is $9.4 million. Although we write
down our inventories for estimated obsolescence or unmarketable inventory, if we are not able to execute our business plan within certain prescribed
timeframes, or if actual market conditions are less favorable than we project, additional inventory write-downs may be required in the future.

Our goodwill may become impaired.

As of December 31, 2003, we have $42.1 million of goodwill on our consolidated balance sheet. We perform an annual assessment of the carrying value
of our goodwill for potential impairment through an independent third-party. A determination of impairment is made based upon the estimated future cash flows of the operations associated with
goodwill. An independent third-party impairment review was completed in 2003 and determined that no impairment was required. If goodwill is determined to be impaired in the future we would be required
to record a charge to our results of operations. Factors we consider important which could result in an impairment include the following:



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

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

Our failure to manage our expansion may adversely affect us.

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

Future acquisitions may disrupt our business and distract our management.

We have engaged in a number of acquisitions and strategic investments, and we expect to continue to do so. We may not be able to identify suitable acquisition
candidates, and if we do identify suitable

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candidates,
we may not be able to make such acquisitions on commercially acceptable terms or at all. If we acquire another company, we may not be able to successfully integrate the acquired business
into our existing business in a timely and non-disruptive manner or at all. We may have to devote a significant amount of time and resources to do so. Even with this investment of time and
resources, an acquisition may not produce the revenues, earnings or business synergies that we anticipate. If we fail to integrate the acquired business effectively or if key employees of that
business leave, the anticipated benefits of the acquisition would be jeopardized. The time, capital, management and other resources spent on an acquisition that fails to meet our expectations could
cause our business and financial condition to be materially and adversely affected. In addition, acquisitions can involve non-recurring charges of significant amounts of goodwill that
could become impaired and adversely affect our results of operations.

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

We acquired EnzyMed, Inc., a provider of combinatorial biocatalysis discovery services, in October 1999; American Advanced Organics, Inc., a
contract manufacturer of novel compounds, pharmaceutical intermediates and test drug substances, in February 2000; New Chemical Entities, a chemistry-based drug discovery company, in
January 2001; and Great Lakes Chemical Company's research and
development facility outside of Chicago, Illinois in September 2001. We made a strategic investment in Organichem Corporation in December 1999 to facilitate a management buyout of a
chemical manufacturing facility from Nycomed Amersham, plc and completed the full acquisition of Organichem in February 2003. These transactions may not be as beneficial to us as we expect. We
also have an investment in Fluorous Technologies, Inc. Fluorous Technologies is a development stage company and may not be able to successfully develop technology and products. During 2003, we
made additional equity investments in two private companies. Under the terms of these agreements, we also provided FTE services to each company in exchange for equity securities and fee for service
cash payments. Both of these companies are currently in the process of raising additional financing. We record an impairment charge when we believe an investment has experienced a decline in value
that is other than temporary. Future adverse changes in market conditions, poor operating results of underlying investments or the investees' inability to obtain additional financing could result in
our inability to recover the carrying value of the investments, thereby requiring an impairment charge in the future.

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

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

We may lose one or more of our key employees.

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



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

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

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

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

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

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

Our research and development processes involve the use of hazardous materials. We are subject to Federal, state and local regulation governing the use,
manufacture, handling, storage and disposal of hazardous materials. We cannot completely eliminate the risk of contamination or injury resulting from hazardous materials and we may incur liability as
a result of any contamination or injury. We may also incur expenses relating to compliance with environmental laws. Such expenses or liabilities could have a significant negative impact on our
financial condition.

Organichem
has completed an environmental remediation associated with groundwater contamination at its Rensselaer, New York location. Ongoing costs associated with the remediation
include biannual monitoring and reporting to the State of New York's Department of Environmental Conservation. Under the remediation plan, Organichem is expected to pay for monitoring and reporting
until 2009. Under a 1999 agreement with the facility's previous owner, Organichem's maximum liability under the remediation is $5.0 million. If the State of New York Department of Environmental
Conservation finds that we fail to comply with the appropriate regulatory standards, it may impose fines on us which could have a negative impact on our operations. Additionally, if we are unable to
enforce our contractual maximum remediation liability of $5.0 million, it may have an adverse affect on our results of operations.

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

All facilities and manufacturing techniques used to manufacture drugs in the United States must conform to standards that are established by the federal Food and
Drug Administration, or FDA. The FDA conducts scheduled periodic inspections of our facilities to monitor our compliance with regulatory standards. If the FDA finds that we fail to comply with the
appropriate regulatory standards,

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it
may impose fines on us or, if the FDA determines that our non-compliance is severe, it may close our facilities. Any adverse action by the FDA would have a negative impact on our
operations.

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

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

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

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

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

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

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

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



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

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

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

At February 17, 2004, our directors and officers beneficially owned or controlled approximately 15.9% of our common stock. Individually and in the
aggregate, these stockholders significantly influence our management, affairs and all matters requiring stockholder approval. In particular, this concentration of ownership may have the effect of
delaying, deferring or preventing an acquisition of us and may adversely affect the market price of our common stock.

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

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

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

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

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have market risk with respect to interest rates. The risk is composed of changes in future cash flows due to changes in interest rates on our variable rate
$30.0 million term loan and $25.5 million line of credit.

To
mitigate this risk, we have entered into interest rate swap agreements that have fixed the interest rate on 33% of our debt. Included in liabilities is $243,000, which represents the
estimated decline in market value since entering into the swap agreements.

The
potential loss in future cash flows from a 10% adverse change in quoted interest rates would approximate $416,000.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Financial statements and notes thereto appear on pages F-1 to F-43 of this Form 10-K/A Annual Report.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

The Company's management, with the participation of the Company's chief executive officer and chief financial officer, evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2003. Based on this evaluation, the Company's chief
executive officer and chief financial officer had originally concluded that, as of December 31, 2003, the Company's disclosure controls and procedures were (1) designed to ensure that
the material information relating to the Company, including its consolidated subsidiaries, is made known to the Company's chief executive officer and chief financial officer by others within those
entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms. Subsequent to
filing the Original Form 10-K, and in connection with the review of our financial statements for the third quarter of 2004, the Company identified an accounting error related to the
amortization of premiums and discounts on certain bond investments. As a result, the Company's chief executive officer and chief financial officer determined that a material weakness existed in the
design of the Company's disclosure controls and procedures, and accordingly, that the Company's disclosure controls and procedures were not effective as of December 31, 2003. Approximately
$931,000 of amortization on bond premiums was not appropriately recorded during the three year period ended December 31, 2003. No procedure was in place to insure that the bond amortization was
properly recorded by the Company and included in its consolidated statements of income. Additionally, a reconciliation of the Company's accumulated other comprehensive income to the general ledger
balance was not being performed during this period. The lack of such preventative and detective controls allowed this accounting error to occur and escape detection.

On
November 3, 2004, the Company's Audit Committee held a meeting with management and PricewaterhouseCoopers to discuss the issue. The Company's Audit Committee and management
concluded that the Company's financial statements for the fiscal years ended December 31, 2003, 2002 and 2001 should be restated. See Note 22 to consolidated financial statements.

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The
Company has corrected the identified weaknesses in the Company's disclosure controls and procedures that led to the above errors by taking the following steps: (a) requiring
that a review of bond investment accounting be performed by additional accounting personnel; and (b) requiring that a reconciliation of general ledger accounts with the calculation of
accumulated other comprehensive income be performed by the accounting department and reviewed by an appropriate supervisor. After the need for a restatement of the Company's previously issued
financial statements was determined, an evaluation was performed of the effectiveness of the design and operation of the Company's disclosure controls and procedures by senior management. Based on
that evaluation, the Company's management, including our chief executive officer and chief financial officer, concluded that the Company's disclosure controls and procedures were effective as of
November 8, 2004.

Changes in internal controls over financial reporting.Other than the procedures and controls identified above, no change in
the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information appearing under the captions "Directors and Executive Officers," "Section 16(a) Beneficial Ownership Reporting Compliance" and "Code of
Ethics" in the Company's definitive proxy statement relating to the Annual Meeting of Stockholders to be held on May 19, 2004 is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

The information appearing under the captions "Executive CompensationSummary Compensation,Compensation Committee Interlocks and Insider
Participation, andAgreements with Named Executive Officers," and "Information Regarding DirectorsThe Board of Directors and its Committees" in the Company's definitive proxy
statement relating to the Annual Meeting of Stockholders to be held on May 19, 2004 is incorporated herein by reference.

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

The information appearing under the caption "Principal and Management Stockholders" in the Company's definitive proxy statement relating to the Annual Meeting of
Stockholders to be held on May 19, 2004 is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information appearing under the caption "Certain Transactions" in the Company's definitive proxy statement relating to the Annual Meeting of Stockholders to
be held on May 19, 2004 is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information appearing under the caption "Audit Fees" in the Company's definitive proxy statement relating to the Annual Meeting of Stockholders to be held on
May 19, 2004 is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.



The
consolidated financial statements required by this item are submitted in a separate section beginning on page F-1 of this report.



Page
NumberReport of independent Registered Public Accounting Firm

F-2Consolidated statements of income

F-3Consolidated balance sheets

F-4Consolidated statements of stockholders' equity and comprehensive income

F-5Consolidated statements of cash flows

F-6Notes to consolidated financial statements

F-7


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The
following financial schedule of Albany Molecular Research, Inc. is included in this annual report on Form 10-K/A.

Schedule IIValuation
and Qualifying Accounts

Schedules
other than that which is listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the consolidated
financial statements or related notes.

Exhibits
are as set forth in the "Index to Exhibits" which follows the Notes to the Consolidated Financial Statements and immediately precedes the exhibits filed.



On
October 23, 2003, Albany Molecular Research, Inc. filed a current report on Form 8-K reporting under Item 9 that the Company issued a press release
announcing its third quarter financial results.



The
Company hereby files as part of this Annual Report on Form 10-K/A the Exhibits listed in the attached Exhibit Index on pages 30 through 31 of this Annual Report.



The
Company hereby files as part of this Annual Report on Form 10-K/A the financial statement schedule listed in Item 15(a)(2) set forth above.

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EXHIBIT INDEX

|Exhibit
No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                 
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |  | Agreement and Plan of Merger, dated as of December 19, 2000, by and between the Company and NCE Acquisition Corp., New Chemical Entities, Inc. and Certain Stockholders Thereof (incorporated herein by reference to Exhibit
2.1 to the Company's Current Report on Form 8-K dated January 25, 2000, File No. 000-25323).                                                                                                                   
|2.2         |  | Stock Purchase Agreement dated as of December 21, 1999 by and among the Company, Organichem Corporation and the other parties named therein (incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated December 21,
 1999, File No. 000-25323).                                                                                                                                                     
|2.3         |  | Debenture Purchase Agreement, dated as of December 21, 1999, by and among the Company and Organichem Corporation (incorporated herein by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K/A dated December 21, 1999 and filed on
January 5, 2000, File No. 000-25323).                                                                                                                                                  
|3.1         |  | Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 000-25323).                                                                                                                                                                                                                         
|3.2         |  | Amended and Restated By-Laws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 000-25323).                                                                                                                                                                                                                                  
|4.1         |  | Specimen certificate for shares of Common Stock, $0.01 par value, of the Company (incorporated herein by reference to Exhibit 4.1 to Amendment No. 3 to the Company's Registration Statement on Form S-1 (File No. 333-58795)).                                                                                                                                                                                                             
|10.1        |  | Lease dated as of October 9, 1992, as amended, by and between the Company and Hoffman Enterprises (incorporated herein by reference to Exhibit 10.1 to Amendment No. 3 to the Company's Registration Statement on Form S-1 (File No. 333-58795)
).                                                                                                                                                                                          
|10.2*       |  | 1998 Stock Option and Incentive Plan of the Company (incorporated herein by reference to Exhibit 10.2 to Amendment No. 3 to the Company's Registration Statement on Form S-1 (File No. 333-58795)).                                                                                                                                                                                                                                         
|10.3*       |  | Amended and Restated 1992 Stock Option Plan of the Company (incorporated herein by reference to Exhibit 10.3 to Amendment No. 2 to the Company's Registration Statement on Form S-1 (File No. 333-58795)).                                                                                                                                                                                                                                  
|10.4*       |  | 1998 Employee Stock Purchase Plan of the Company (incorporated herein by reference to Exhibit 10.4 to Amendment No. 2 to the Company's Registration Statement on Form S-1 (File No. 333-58795)).                                                                                                                                                                                                                                            
|10.5        |  | Form of Indemnification Agreement between the Company and each of its directors (incorporated herein by reference to Exhibit 10.5 to Amendment No. 2 to the Company's Registration Statement on Form S-1 (File No. 333-58795)).                                                                                                                                                                                                             
|10.6        |  | License Agreement dated March 15, 1995 by and between the Company and Marion Merrell Dow Inc. (now Aventis, S.A.) (excluding certain portions which have been omitted as indicated based upon an order for confidential treatment, but which have been
filed separately with the Commission) (incorporated herein by reference to Exhibit 10.7 to Amendment No. 3 to the Company's Registration Statement on Form S-1 (File No. 333-58795)).
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                             

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|10.7   |  | Principles of Cooperation Between Albany Molecular Research and Cambrex Corporation dated February 1, 1997 by and between the Company and Cambrex Corporation (excluding certain portions which have been omitted as indicated based upon an order for
confidential treatment, but which have been filed separately with the Commission) (incorporated herein by reference to Exhibit 10.8 to Amendment No. 3 to the Company's Registration Statement on Form S- 1 (File No. 333-58795)).
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.8   |  | Agreement dated December 16, 1997 by and between the Company and Eli Lilly and Company (excluding certain portions which have been omitted as indicated based upon an order for confidential treatment, but which have been filed separately with the
Commission) (incorporated herein by reference to Exhibit 10.9 to Amendment No. 3 to the Company's Registration Statement on Form S-1 (File No. 333-58795)).                                                                        
|10.9*  |  | Technology Development Incentive Plan (incorporated herein by reference to Exhibit 10.10 to Amendment No. 2 to the Company's Registration Statement on Form S-1 (File No. 333-58795)).                                                                                                                                                                                                                                                                                                   
|10.10* |  | Employment Agreement between the Company and Thomas E. D'Ambra, Ph.D. (incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 000-25323).                                                                                                                                                                                                                                                   
|10.11* |  | Employment Agreement between the Company and Harold Meckler, Ph.D. (incorporated herein by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 000-25323).                                                                                                                                                                                                                                                      
|10.12* |  | Employment Agreement between the Company and Michael P. Trova, Ph.D. (incorporated herein by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 000-25323).                                                                                                                                                                                                                                                    
|10.13* |  | Form of Employee Innovation, Proprietary Information and Post-Employment Activity Agreement between the Company and each of its executive officers (incorporated herein by reference to Exhibit 10.14 to Amendment No. 3 to the Company's Registration
Statement on Form S-1 (File No. 333-58795)).                                                                                                                                                                                      
|10.15* |  | Employment Agreement between the Company and Donald E. Kuhla, Ph.D. (incorporated herein by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 000-25323).                                                                                                                                                                                                                                                     
|10.16* |  | Employment Agreement between the Company and Lawrence D. Jones, Ph.D. (incorporated herein by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 000-25323).                                                                                                                                                                                                                                                   
|10.17* |  | Employment Agreement between the Company and David P. Waldek (incorporated herein by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 000-25323).                                                                                                                                                                                                                                                            
|10.18* |  | Employment Agreement between the Company and James J. Grates (incorporated herein by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, File No. 000-25323).                                                                                                                                                                                                                                                            
|10.19  |  | Loan Agreement, dated as of June 29, 1998, by and between the Company and Fleet National Bank (incorporated herein by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, File No.
000-25323).                                                                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

41

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|10.20  |  | Amendment to Agreements, dated as of February 8, 1999, by and between the Company and Fleet National Bank (incorporated herein by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, File
No. 000-25323).                      
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.21  |  | Restated and Revised Lease Agreement, dated as of December 1, 1999, between the University at Albany Foundation and the Company (incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, File No. 000-25323).
|10.22* |  | Amended and Restated Technology Development Incentive Plan (confidential treatment has been requested as to certain portions of this Exhibit).                                                                                                                                                  
|21.1   |  | Subsidiaries of the Company (incorporated herein by reference to Exhibit 21.1 to Amendment No. 2 to the Company's Registration Statement on Form S-1 (File No. 333-58795)).                                                                                                                     
|23.1   |  | Consent of PricewaterhouseCoopers LLP (filed herewith).                                                                                                                                                                                                                                         
|23.2   |  | The description of the Company's Rights to purchase shares of the Company's Series A Junior Participating Cumulative Preferred Stock contained in the Registration Statement on Form 8-A filed with the Securities and Exchange Commission on
September 19, 2002.                               
|31.1   |  | Rule 13a-14(a)/15d-14(a) certification                                                                                                                                                                                                                                                          
|31.2   |  | Rule 13a-14(a)/15d-14(a) certification                                                                                                                                                                                                                                                          
|32.1   |  | Section 1350 certification                                                                                                                                                                                                                                                                      
|32.2   |  | Section 1350 certification                                                                                                                                                                                                                                                                      

---

42

---





SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|Dated: November 8, 2004 |  | ALBANY MOLECULAR RESEARCH, INC.
|----------------------- |  | -------------------------------
|                        |  | By:                            

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

|Signature                                           |  | Title                                                                                                |  | Date            
|--------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | ----------------
|                                                    |  |                                                                                                      |  |                 
|/s/THOMAS E. D'AMBRA, PH.D.Thomas E. D'Ambra, Ph.D. |  | Chairman of the Board, President, Chief Executive Officer and Director (Principal Executive Officer) |  | November 8, 2004
|/s/DAVID P. WALDEK                                  |  |                                                                                                      |  |                 
|David P. Waldek                                     |  | Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer)        |  | November 8, 2004
|/s/PAUL S. ANDERSON, PH.D.                          |  |                                                                                                      |  |                 
|Paul S. Anderson, Ph.D.                             |  | Director                                                                                             |  | November 8, 2004
|/s/FRANK W. HAYDU, III                              |  |                                                                                                      |  |                 
|Frank W. Haydu, III                                 |  | Director                                                                                             |  | November 8, 2004
|/s/DONALD E. KUHLA, PH.D.                           |  |                                                                                                      |  |                 
|Donald E. Kuhla, Ph.D.                              |  | Director                                                                                             |  | November 8, 2004
|/s/KEVIN O'CONNOR                                   |  |                                                                                                      |  |                 
|Kevin O'Connor                                      |  | Director                                                                                             |  | November 8, 2004
|/s/ARTHUR J. ROTH                                   |  |                                                                                                      |  |                 
|Arthur J. Roth                                      |  | Director                                                                                             |  | November 8, 2004
|/s/ANTHONY P. TARTAGLIA, M.D.                       |  |                                                                                                      |  |                 
|Anthony P. Tartaglia, M.D.                          |  | Director                                                                                             |  | November 8, 2004

43

---





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS        ALBANY MOLECULAR RESEARCH, INC.



|                                                                                                                              |  | Page
|----------------------------------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Registered Public Accounting Firm                                                                       |  | F-2 
|Consolidated Statements of Income for the Years Ended December 31, 2003, 2002 and 2001                                        |  | F-3 
|Consolidated Balance Sheets at December 31, 2003 and 2002                                                                     |  | F-4 
|Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years Ended December 31, 2003, 2002
and 2001 |  | F-5 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001                                    |  | F-6 
|Notes to Consolidated Financial Statements                                                                                    |  | F-7 

F-1

---





Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of
Albany Molecular Research, Inc.

In
our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Albany
Molecular Research, Inc. and its subsidiaries at December 31, 2003 and 2002 and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index
appearing under 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

As
discussed in Note 20 to the consolidated financial statements, on January 1, 2002 the Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.

As
discussed in Note 22 to the consolidated financial statements, the Company has restated its financial statements for the years ended December 31, 2003, 2002 and 2001 to
properly record premium and discount amortization on debt securities.

/s/
PricewaterhouseCoopers LLP

Albany,
New York
February 9, 2004, except for Note 22, as to which the date is November 4, 2004

F-2

---





ALBANY MOLECULAR RESEARCH, INC.        CONSOLIDATED STATEMENTS OF INCOME        Years Ended December 31, 2003, 2002 and 2001        (Dollars in thousands, except per share
amounts)

|                                                     |                          | Year ended December 31, |        
|---------------------------------------------------- | ------------------------ | ----------------------- | -------
|
|
|Contract revenue                                     |                          | $                       | 144,667
|Recurring royalties                                  |                          |                         | 51,682 
|                                                     |                          |                         |        
|                                                     | Total revenue            |                         |        
|                                                     |                          |                         |        
|Cost of contract revenue                             |                          |                         | 101,753
|Technology incentive award                           |                          |                         | 5,183  
|Research and development                             |                          |                         | 22,466 
|Selling, general and administrative                  |                          |                         | 20,318 
|                                                     |                          |                         |        
|                                                     | Total operating expenses |                         |        
|                                                     |                          |                         |        
|Income from operations                               |                          |                         | 46,629 
|Other income (expense):                              |                          |                         |        
|Equity in income (loss) of unconsolidated affiliates |                          |                         | (372   
|Interest expense                                     |                          |                         | (1,446 
|Interest income                                      |                          |                         | 2,231  
|Minority interest in consolidated subsidiaries       |                          |                         | 133    
|Other income                                         |                          |                         | 403    
|                                                     |                          |                         |        
|                                                     | Total other income, net  |                         |        
|                                                     |                          |                         |        
|Income before income tax expense                     |                          |                         | 47,578 
|Income tax expense                                   |                          |                         | 16,714 
|                                                     |                          |                         |        
|Net income                                           |                          | $                       | 30,864 
|                                                     |                          |                         |        
|Basic earnings per share                             |                          | $                       | 0.97   
|                                                     |                          |                         |        
|Diluted earnings per share                           |                          | $                       | 0.95   
|                                                     |                          |                         |        

See
Accompanying Notes to Consolidated Financial Statements.

F-3

---





ALBANY MOLECULAR RESEARCH, INC.  CONSOLIDATED BALANCE SHEETS  December 31, 2003 and 2002  (In thousands, except per share amounts)

|                                                                          |                                                                                                                         | December 31,              |        
|------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | ------------------------- | -------
|
|
|Assets                                                                    |                                                                                                                         |                           |        
|Current assets:                                                           |                                                                                                                         |                           |        
|                                                                          | Cash and cash equivalents                                                                                               |                           | $      
|                                                                          | Investment securities, available-for-sale                                                                               |                           |        
|                                                                          | Accounts receivable (net of allowance for doubtful accounts of $309 at December 31, 2003 and $218 at December 31, 2002) |                           |        
|                                                                          | Royalty income receivable                                                                                               |                           |        
|                                                                          | Inventory (net of obsolescence reserves of $1,636 at December 31, 2003 and $150 at December 31, 2002)                   |                           |        
|                                                                          | Unbilled services                                                                                                       |                           |        
|                                                                          | Prepaid expenses and other current assets                                                                               |                           |        
|                                                                          |                                                                                                                         |                           |        
|                                                                          |                                                                                                                         | Total current assets      |        
|                                                                          |                                                                                                                         |                           |        
|Property and equipment, net                                               |                                                                                                                         |                           | 146,639
|Other assets:                                                             |                                                                                                                         |                           |        
|                                                                          | Goodwill                                                                                                                |                           |        
|                                                                          | Intangible assets and patents, net                                                                                      |                           |        
|                                                                          | Equity investment in unconsolidated affiliates                                                                          |                           |        
|                                                                          | Convertible subordinated debentures from unconsolidated affiliate                                                       |                           |        
|                                                                          | Other assets                                                                                                            |                           |        
|                                                                          |                                                                                                                         |                           |        
|                                                                          |                                                                                                                         | Total other assets        |        
|                                                                          |                                                                                                                         |                           |        
|                                                                          |                                                                                                                         | Total assets              |        
|                                                                          |                                                                                                                         |                           |        
|Liabilities and Stockholders' Equity                                      |                                                                                                                         |                           |        
|Current liabilities:                                                      |                                                                                                                         |                           |        
|                                                                          | Accounts payable and accrued expenses                                                                                   |                           | $      
|                                                                          | Unearned income                                                                                                         |                           |        
|                                                                          | Customer deposits                                                                                                       |                           |        
|                                                                          | Accrued compensation                                                                                                    |                           |        
|                                                                          | Accrued pension benefits                                                                                                |                           |        
|                                                                          | Income taxes payable                                                                                                    |                           |        
|                                                                          | Current installments on capital leases                                                                                  |                           |        
|                                                                          | Current installments of long-term debt                                                                                  |                           |        
|                                                                          |                                                                                                                         |                           |        
|                                                                          |                                                                                                                         | Total current liabilities |        
|                                                                          |                                                                                                                         |                           |        
|Long-term liabilities:                                                    |                                                                                                                         |                           |        
|                                                                          | Long-term debt, excluding current installments                                                                          |                           |        
|                                                                          | Deferred income taxes                                                                                                   |                           |        
|                                                                          | Pension and postretirement benefits                                                                                     |                           |        
|                                                                          | Environmental liabilities                                                                                               |                           |        
|                                                                          | Swap contract                                                                                                           |                           |        
|                                                                          |                                                                                                                         |                           |        
|Total liabilities                                                         |                                                                                                                         |                           | 90,696 
|                                                                          |                                                                                                                         |                           |        
|Commitments and contingencies                                             |                                                                                                                         |                           |        
|Stockholders' equity:                                                     |                                                                                                                         |                           |        
|                                                                          | Preferred stock, $0.01 par value, authorized 2,000 shares, none issued or outstanding                                   |                           |        
|                                                                          | Common stock, $0.01 par value, authorized 100,000 shares; 33,694 shares issued in 2003 and 33,445 shares issued in 2002 |                           |        
|Additional paid-in capital                                                |                                                                                                                         |                           | 184,365
|Retained earnings                                                         |                                                                                                                         |                           | 154,507
|Accumulated other comprehensive loss, net                                 |                                                                                                                         |                           | (103   
|                                                                          |                                                                                                                         |                           |        
|                                                                          |                                                                                                                         |                           | 339,106
|Less, treasury shares at cost, 2,077 shares in 2003; 1,118 shares in 2002 |                                                                                                                         |                           | (37,171
|                                                                          |                                                                                                                         |                           |        
|                                                                          | Total stockholders' equity                                                                                              |                           |        
|                                                                          |                                                                                                                         |                           |        
|                                                                          | Total liabilities and stockholders' equity                                                                              |                           | $      
|                                                                          |                                                                                                                         |                           |        

See Accompanying Notes to Consolidated Financial Statements.

F-4

---





ALBANY MOLECULAR RESEARCH, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Years Ended December 31, 2001, 2002 and 2003

(In thousands)

|                                                                       |                                                                            |                    |   | Common Stock |        |     |   |     |   |   |         |       |   |         |        |   |      |      |       
|---------------------------------------------------------------------- | -------------------------------------------------------------------------- | ------------------ | - | ------------ | ------ | --- | - | --- | - | - | ------- | ----- | - | ------- | ------ | - | ---- | ---- | ------
|
|
|
|Balances at January 1, 2001                                            |                                                                            | $                  |  |              | 32,786 |     | $ | 328 |   | $ | 178,871 |       | $ | 49,305  |        | $ | 29   |      |      
|Comprehensive Income:                                                  |                                                                            |                    |   |              |        |     |   |     |   |   |         |       |   |         |        |   |      |      |       
|                                                                       | Net income                                                                 |                    |   |              |        |     |   |     |   |   |         |       |   |         | 34,614 |   |      |      |       
|                                                                       | Unrealized gain on investment securities, available-for-sale, net of taxes |                    |   |              |        |     |   |     |   |   |         |       |   |         |        |   |      | 83   |       
|Organichem Corporation Other                                           |                                                                            |                    |   |              |        |     |   |     |   |   |         |       |   |         |        |   |      |      |       
|                                                                       | Comprehensive Loss                                                         |                    |   |              |        |     |   |     |   |   |         |       |   |         |        |   |      | (674 | )     
|                                                                       | Total comprehensive income                                                 |                    |   |              |        |     |   |     |   |   |         |       |   |         |        |   |      |      |       
|Tax benefit from exercise of stock options                             |                                                                            |                    |   |              |        |     |   |     |   |   | 533     |       |   |         |        |   |      |      |       
|Issuance of common stock in connection with stock option plan and ESPP |                                                                            |                    |   |              | 341    |     |   | 3   |   |   | 1,120   |       |   |         |        |   |      |      |       
|Treasury shares purchased                                              |                                                                            |                    |   |              |        |     |   |     |   |   |         |       |   |         |        |   |      |      | (20   
|Balances at December 31, 2001(Restated)                                |                                                                            |                    |  |              | 33,127 |     |   | 331 |   |   | 180,524 |       |   | 83,919  |        |   | (562 | )    | (20   
|Comprehensive income:                                                  |                                                                            |                    |   |              |        |     |   |     |   |   |         |       |   |         |        |   |      |      |       
|                                                                       | Net income                                                                 |                    |   |              |        |     |   |     |   |   |         |       |   |         | 39,724 |   |      |      |       
|                                                                       | Unrealized gain on investment securities, available-for-sale, net of taxes |                    |   |              |        |     |   |     |   |   |         |       |   |         |        |   |      | 130  |       
|Organichem Corporation                                                 |                                                                            |                    |   |              |        |     |   |     |   |   |         |       |   |         |        |   |      |      |       
|                                                                       | Other Comprehensive Loss                                                   |                    |   |              |        |     |   |     |   |   |         |       |   |         |        |   |      | (361 | )     
|                                                                       | Total comprehensive income                                                 |                    |   |              |        |     |   |     |   |   |         |       |   |         |        |   |      |      |       
|Tax benefit from exercise of stock options                             |                                                                            |                    |   |              |        |     |   |     |   |   | 427     |       |   |         |        |   |      |      |       
|Issuance of common stock in connection with stock option plan and ESPP |                                                                            |                    |   |              | 318    |     |   | 3   |   |   | 1,191   |       |   |         |        |   |      |      |       
|Issuance of warrants to BMS                                            |                                                                            |                    |   |              |        |     |   |     |   |   | 500     |       |   |         |        |   |      |      |       
|Treasury shares purchased                                              |                                                                            |                    |   |              |        |     |   |     |   |   |         |       |   |         |        |   |      |      | (1,098
|Balances at December 31, 2002(Restated)                                |                                                                            |                    |  |              | 33,445 |     |   | 334 |   |   | 182,642 |       |   | 123,643 |        |   | (793 | )    | (1,118
|Comprehensive income:                                                  |                                                                            |                    |   |              |        |     |   |     |   |   |         |       |   |         |        |   |      |      |       
|                                                                       | Net income                                                                 |                    |   |              |        |     |   |     |   |   |         |       |   |         | 30,864 |   |      |      |       
|                                                                       | Unrealized loss on investment securities, available-for-sale, net of taxes |                    |   |              |        |     |   |     |   |   |         |       |   |         |        |   |      | (189 | )     
|                                                                       | Organichem Corporation Other                                               |                    |   |              |        |     |   |     |   |   |         |       |   |         |        |   |      |      |       
|                                                                       |                                                                            | Comprehensive Loss |   |              |        |     |   |     |   |   |         |       |   |         |        |   |      |      | 1,035 
|                                                                       | Unrealized loss on interest rate swap contract, net of taxes               |                    |   |              |        |     |   |     |   |   |         |       |   |         |        |   |      | (156 | )     
|                                                                       | Total comprehensive income                                                 |                    |   |              |        |     |   |     |   |   |         |       |   |         |        |   |      |      |       
|                                                                       | Tax benefit from exercise of stock options                                 |                    |   |              |        |     |   |     |   |   |         | 591   |   |         |        |   |      |      |       
|                                                                       | Issuance of common stock in connection with stock option plan and ESPP     |                    |   |              |        | 249 |   |     | 3 |   |         | 1,132 |   |         |        |   |      |      |       
|                                                                       | Treasury shares purchased                                                  |                    |   |              |        |     |   |     |   |   |         |      |   |         |        |   |      |      |       
|Balances at December 31, 2003(Restated)                                |                                                                            | $                  |  |              | 33,694 |     | $ | 337 |   | $ | 184,365 |       | $ | 154,507 |        | $ | (103 | )    | (2,077

See Accompanying Notes to Consolidated Financial Statements.

F-5

---





ALBANY MOLECULAR RESEARCH, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS        Years Ended December 31, 2003, 2002 and 2001        (In thousands)

|                                                                              |                                                                                    | Year ended December 31,                                                           |        
|----------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | -------
|
|
|Operating activities:                                                         |                                                                                    |                                                                                   |        
|                                                                              | Net income                                                                         |                                                                                   | $      
|                                                                              |                                                                                    | Adjustments to reconcile net income to net cash provided by operating activities: |        
|                                                                              | Depreciation and amortization                                                      |                                                                                   |        
|Net amortization (accretion) of premiums (discounts) on investment securities |                                                                                    |                                                                                   | 324    
|                                                                              | Provision for deferred taxes                                                       |                                                                                   |        
|                                                                              | Abandonment loss                                                                   |                                                                                   |        
|                                                                              | Pension and postretirement benefits                                                |                                                                                   |        
|                                                                              | Tax benefit of stock option exercises                                              |                                                                                   |        
|                                                                              | Provision for obsolete inventories                                                 |                                                                                   |        
|                                                                              | Provision for doubtful accounts                                                    |                                                                                   |        
|                                                                              | Non-cash interest income                                                           |                                                                                   |        
|                                                                              | Equity in income (loss) of unconsolidated affiliate                                |                                                                                   |        
|                                                                              | Change in fair value of non-hedge interest rate swap                               |                                                                                   |        
|                                                                              | Forgiven principal on notes receivable-related party                               |                                                                                   |        
|                                                                              | Minority interest in subsidiary                                                    |                                                                                   |        
|Change in operating assets and liabilities, net of business combination:      |                                                                                    |                                                                                   |        
|                                                                              | Increase in accounts receivable                                                    |                                                                                   |        
|                                                                              | Decrease (increase) in royalty income receivable                                   |                                                                                   |        
|                                                                              | Increase in inventory                                                              |                                                                                   |        
|                                                                              | Decrease (increase) in unbilled services                                           |                                                                                   |        
|                                                                              | Decrease (increase) in income taxes                                                |                                                                                   |        
|                                                                              | Decrease in prepaid expenses and other assets                                      |                                                                                   |        
|                                                                              | Increase (decrease) in accounts payable, accrued compensation and accrued expenses |                                                                                   |        
|                                                                              | Decrease in customer deposits                                                      |                                                                                   |        
|                                                                              | Decrease in environmental liability                                                |                                                                                   |        
|                                                                              | Increase (decrease) in unearned income                                             |                                                                                   |        
|                                                                              |                                                                                    |                                                                                   |        
|Net cash provided by operating activities                                     |                                                                                    |                                                                                   | 46,294 
|                                                                              |                                                                                    |                                                                                   |        
|Investing activities:                                                         |                                                                                    |                                                                                   |        
|                                                                              | Net purchases of investment securities                                             |                                                                                   |        
|                                                                              | Net maturities of investment securities                                            |                                                                                   |        
|                                                                              | Purchase of equity investment in unconsolidated affiliate                          |                                                                                   |        
|                                                                              | Purchases of property and equipment                                                |                                                                                   |        
|                                                                              | Purchases of business, net of cash acquired                                        |                                                                                   |        
|                                                                              | Payments for patent application and other related costs                            |                                                                                   |        
|                                                                              |                                                                                    |                                                                                   |        
|Net cash used in investing activities                                         |                                                                                    |                                                                                   | (42,449
|                                                                              |                                                                                    |                                                                                   |        
|Financing activities:                                                         |                                                                                    |                                                                                   |        
|                                                                              | Principal payments on long-term debt                                               |                                                                                   |        
|                                                                              | Principal payments under capital lease obligations                                 |                                                                                   |        
|                                                                              | Proceeds from borrowings under long-term debt                                      |                                                                                   |        
|                                                                              | Payment to acquire treasury shares                                                 |                                                                                   |        
|                                                                              | Issuance of stock purchase warrant                                                 |                                                                                   |        
|                                                                              | Proceeds from exercise of options and ESPP                                         |                                                                                   |        
|                                                                              |                                                                                    |                                                                                   |        
|Net cash provided by (used in) financing activities                           |                                                                                    |                                                                                   | 8,754  
|                                                                              |                                                                                    |                                                                                   |        
|                                                                              | Increase (decrease) in cash and cash equivalents                                   |                                                                                   |        
|Cash and cash equivalents at beginning of period                              |                                                                                    |                                                                                   | 34,838 
|                                                                              |                                                                                    |                                                                                   |        
|                                                                              | Cash and cash equivalents at end of period                                         |                                                                                   | $      
|                                                                              |                                                                                    |                                                                                   |        
|                                                                              |                                                                                    |                                                                                   |        

F-6

---



|Supplemental disclosure of non-cash investing and financing activities: |                                                                                                |  |   |        |   |   |        |  |   |       
|----------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- |  | - | ------ | - | - | ------ |  | - | ------
|                                                                        | Increase (decrease) in net unrealized gain/(loss) on securities available-for-sale, net of tax |  | $ | (189   | ) | $ | 130    |  | $ | 83    
|                                                                        | Decrease in net unrealized gain/(loss) on swap contract, net of tax                            |  | $ | (156   | ) |   |       |  |   |      
|                                                                        | Conversion of accounts receivable to equity investments and note receivable                    |  | $ | 2,894  |   |   |       |  |   |      
|                                                                        | Conversion of debenture receivable to investment in Organichem                                 |  | $ | 15,000 |   |   |       |  |   |      
|Supplemental disclosures of cash flow information:                      |                                                                                                |  |   |        |   |   |        |  |   |       
|                                                                        | Cash paid during the period for:                                                               |  |   |        |   |   |        |  |   |       
|                                                                        | Interest                                                                                       |  | $ | 1,265  |   | $ | 152    |  | $ | 221   
|                                                                        | Income taxes                                                                                   |  | $ | 10,728 |   | $ | 20,899 |  | $ | 17,964

The Company purchased all remaining stock of Organichem Corporation for $29,926. In conjunction with the acquisition, liabilities were assumed as follows:

Fair value of assets acquired

$
79,493Cash paid for the capital stock, net of cash acquired


(28,304
)Liabilities assumed

$
51,189


See Accompanying Notes to Consolidated Financial Statements.

F-7

---





ALBANY MOLECULAR RESEARCH, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        December 31, 2003, 2002 and 2001        (In thousands, except per share amounts)

1. Summary of Significant Accounting Policies

Nature of Business:

Albany Molecular Research, Inc. (the "Company") is a leading chemistry-based drug discovery and development company focused on applications for new small
molecule prescription drugs. The Company conducts research and development projects and collaborates with many leading pharmaceutical and biotechnology companies, and is developing new chemistry
technology for potential pharmaceutical products. The Company engages in chemistry research, from lead discovery, optimization and development to commercial manufacturing. In addition to its chemistry
research services, the Company also conducts proprietary research and development to develop new technologies and to discover new lead compounds with commercial potential. The Company seeks to license
these compounds to third parties in return for up-front service fees and milestone payments as well as recurring royalty payments if these compounds are developed into new drugs
successfully reaching the market. The Company is also producing novel compound collections and chemical screening collections.

On
September 21, 2001, the Company completed its $10,000 acquisition of Great Lakes Chemical Corporation's laboratory facilities in Mt. Prospect, Illinois. The facility, renamed
the Mount Prospect Research Center, has expertise in a range of chemical and biochemical disciplines, including chemical process development, analytical chemistry, biocatalysis, microbiology,
fermentation, and asymmetric synthesis. See Note 2 for discussion of the Company's acquisition of the Great Lakes Chemical Corporation's research laboratory facilities and operations.

On
January 25, 2001, the Company completed its acquisition of the outstanding stock of New Chemical Entities, Inc. (NCE) of Bothell, Washington, for approximately $23,000.
NCE, renamed AMRI Bothell Research Center, is now a wholly owned subsidiary of the Company. NCE provides a range of drug discovery services, as well as platform technologies for proprietary lead
discovery. The company's core technologies include: isolation, purification, structure elucidation and the supply of natural products collections from microbial marine and botanical sources;
computational and combinatorial chemistry, including chemoinformatics, proprietary databases and proprietary data mining capabilities; and chemical synthesis. See Note 2 for the discussion of
the Company's acquisition of NCE.

On
December 21, 1999, the Company made a $30,000 strategic investment as a founding investor of Organichem Corporation (formerly the Rensselaer, New York-based
chemical manufacturing facilities of Nycomed Amersham). Organichem Corporation operates a chemical manufacturing facility in Rensselaer, New York, and performs large-scale manufacturing of
pharmaceutical intermediates and active ingredients. During the first quarter of 2003 the Company completed the acquisition of Organichem. See Note 3.

Basis of Presentation:

The consolidated financial statements include the accounts of Albany Molecular Research, Inc. ("AMR") and its wholly-owned subsidiaries, Organichem
Corporation ("Organichem"), AMRI Bothell Research Center, AMR Technology, Inc. and Albany Molecular Research Export, Inc. All intercompany balances and transactions have been eliminated
during consolidation.

F-8

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Under
the terms of the Debenture Purchase Agreement with Organichem Corporation described in Note 3, the Company converted debentures into additional shares of Organichem common
stock on January 1, 2003, thereby increasing the Company's ownership interest of Organichem Corporation to 75.0%. Accordingly, 100% of the operating results of Organichem Corporation have been
included in the Company's results of operations from January 1, 2003 to February 11, 2003, with an offset to minority interest in consolidated subsidiaries equal to 23.3% of Organichem
Corporation's operating results.

On
February 12, 2003, the Company exercised its call option under the Put/Call Agreement described in Note 3 and acquired all of the remaining outstanding common stock of
Organichem Corporation for $29.9 million in cash. Accordingly, 100% of Organichem Corporation's operating results are included in the Company's results of operations since February 12,
2003.

The
Company's acquisition of Great Lake Chemicals Corporation laboratory facilities on September 21, 2001 has been accounted for as a purchase business combination as further
discussed in Note 2. Accordingly, the operating results of the Mount Prospect Research Center have been included in the Company's results of operation from the date of acquisition.

The
Company's acquisition of NCE on January 25, 2001 has been accounted for as a purchase business combination as further discussed in Note 2. Accordingly, the operating
results of AMRI Bothell Research Center have been included in the Company's results of operation from the date of acquisition.

It
is the Company's policy to reclassify prior year consolidated financial statements to conform to the current year presentation.

Revenue Recognition:

The Company's revenue recognition policies are in accordance with the Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin No. 104,
"Revenue Recognition" ("SAB 104").

The
Company recognizes revenue under full-time equivalent contracts on a monthly basis as work is performed based on the terms of the contract. Time and material contract
revenues are recognized based on the number of hours devoted to the project multiplied by the customer's billing rates plus the material costs incurred. Fixed fee contract revenue is recognized by the
Company as projects are completed and delivery is made to the customer. Revenues from manufacturing performed contracts are recognized upon shipment and the transfer of title and risk of loss to the
customer. In general, contract provisions include predetermined payment schedules, or the submission of appropriate billing detail establishing prerequisites for billings. Deferred revenue represents
monies received for services that have not yet been performed as well as customer billings related to completed production which has not yet shipped. Any losses on contracts are recorded when they are
determinable and estimable.

Certain
of the Company's contracts for discovery services include provisions which contain milestone and royalty payments should the Company's proprietary technology and expertise lead
to the discovery of new products that reach the market. Generally, the provisions for milestone and royalty payments included in our contracts are related to the occurrance of specific identifiable
events.

F-9

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The
Company recognizes revenue in accordance with EITF No. 00-21,Revenue Arrangements with Multiple Deliverablesand
SAB 104,Revenue Recognition. Generally, the provisions for licensing, milestone and royalty payments included in contracts are related to the
occurrence of specific identifiable events. The Company recognizes revenue from up-front non-refundable licensing fees on a straight line basis over the period the Company's
has a continuing involvement in the underlying project. The Company will recognize revenue arising from a milestone payment either over the remaining contract term or upon the successful achievement
of the event, the resolution of any uncertainties or contingencies regarding potential collection of the related payment, and when the payment approximates the fair value of achieving the milestone.

Cash Equivalents and Short-Term Investment:

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

Allowance for Doubtful Accounts:

The Company records an allowance for doubtful accounts for estimated receivable losses. The allowance and related accounts receivable are reduced when the account
is deemed uncollectible.

Inventory:

Inventory consists primarily of commercially available fine chemicals used as raw materials in the research and production process,
work-in-process and finished goods in our Organichem location and chemical compounds in the form of natural product and novel compound libraries. The Company capitalizes the
costs associated with the production of its novel compound
libraries. Inventories are stated at the lower of cost (first-in, first-out basis) or market. The Company writes down inventories for obsolescence equal to the difference
between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Any such write-down would result in a charge to operations.

Investment Securities:

The Company accounts for its investment securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Investment securities consist of state and political subdivision obligations, corporate debt obligations, and bond mutual funds, with the Company holding
all of these securities as available-for-sale.

Unrealized
holding gains and losses, net of related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate
component of stockholders' equity until realized. Interest income is recognized when earned. Realized gains and losses for securities classified as available-for-sale are
included in earnings and are determined using the specific identification method.

F-10

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Property and Equipment:

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

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

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

Laboratory equipment and fixtures

718 yearsOffice equipment

37 yearsComputer equipment

35 yearsBuildings

39 years


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

Equity Investments in Unconsolidated Subsidiaries:

The Company maintains three equity investments in companies that have operations in areas within its strategic focus Two of these investments are in leveraged
start-up companies and are recorded at historical cost. The third equity investment is accounted for under the equity method of accounting.

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

Impairment of Long-Lived Assets:

Long-lived assets and certain identified intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset
and its eventual disposal. Measurement of an impairment loss for long-lived assets and certain identified intangible assets that management expects to hold and use are based on the fair
value of the asset. Long-lived assets and certain identified intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

F-11

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Goodwill and Intangible Assets:

The excess purchase price over fair values assigned to net assets acquired (goodwill) had been amortized on a straight-line basis over 15 to
20 years. Beginning in 2002, the Company adopted the provisions of FAS No. 142 "Goodwill and Other Intangible Assets" which eliminated the prior practice of goodwill amortization and
instead adopted an impairment-only approach. Goodwill and other long-lived assets are reviewed for impairment whenever events such as significant changes in the business
climate, changes in product offerings, or other circumstances indicate that the carrying amount may not be recoverable. In accordance with FAS No. 142, the Company performs a test for goodwill
impairment at least annually as of the end of second quarter of the year.

Patents and Patent Application Costs:

The costs of patents issued and acquired are being amortized on the straight-line method over the estimated remaining lives of the issued patents,
generally 17 years. Patent application and processing costs are capitalized and will be amortized over the estimated life once a patent is acquired or expensed in the period the patent
application is denied or the related appeal process has been exhausted.

Accumulated
amortization at December 31, 2003 and 2002 was $113 and $60, respectively.

Licensing Rights:

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

Accumulated
amortization at December 31, 2003 and 2002 was $14 and $12, respectively.

Swap contracts:

The Company maintained three interest rate swap agreements. Two of these agreements have been designated as interest rate hedges on future cash flows of our
variable debt instruments. Accordingly, these contracts are reported at fair value in the consolidated balance sheet, and any change in fair value is recorded as an adjustment to accumulated other
comprehensive income. The third swap agreement was entered into by Organichem as an interest rate hedge on future cash flows of its variable debt instrument. The variable debt was paid in full upon
the purchase of Organichem in February 2003. The swap agreement was not terminated and expired in November 2003. Since no hedging relationship existed for this swap agreement, the change
in fair value was reported as a gain in other income in the consolidated statement of income.

Pension and postretirement benefits:

The Company maintains pension and post-retirement benefit costs and liabilities that are developed from actuarial valuations. Inherent in these
valuations are key assumptions, including

F-12

---



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

Environmental costs:

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

Research and Development:

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

Income Taxes:

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

Stock-Based Compensation:

The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations, in accounting for its fixed plan stock options. As such, compensation expense would be recorded only if, on the date of grant, the current market
price of the underlying stock exceeded the exercise price. Any compensation expense would be recognized over the vesting period.

The
Company adopted SFAS 148, "Accounting for Stock-Based CompensationTransition and Disclosure" during the period ended December 31, 2003. Accordingly, the
Company continued to apply the fair value recognition method under the provisions of SFAS 123, "Accounting for Stock Based Compensation" for disclosure purposes. Under SFAS 123,
compensation cost for stock option grants would be based on the fair value at the grant date, and the resulting compensation expense would be shown as an expense on the consolidated statements of
income. Had compensation cost for the

F-13

---



Company'
been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro-forma amounts:

Year Ended December 31,2003

2002

2001(Restated)

(Restated)

(Restated)Net income:As reported

$
30,864

$
39,724

$
34,614Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects.


2,701


2,363


2,025Pro forma

$
28,163

$
37,361

$
32,589Earnings per share:Basic as reported

$
0.97

$
1.22

$
1.05Basic pro forma

$
0.88

$
1.14

$
0.99Diluted as reported

$
0.95

$
1.19

$
1.01Diluted pro forma

$
0.87

$
1.12

$
0.95


Earnings Per Share:

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

The
following tables provide basic and diluted earnings per share calculations:

|                                 |  | Year Ended December 31, 2003 |        | Year Ended December 31, 2002 |        | Year Ended December 31, 2001 |  
|-------------------------------- |  | ---------------------------- | ------ | ---------------------------- | ------ | ---------------------------- | -
|
|
|Basic earnings per share         |  | $                            | 30,864 |                              | 31,880 |                              | $
|Dilutive effect of stock options |  |                              |       |                              | 486    |                              |  
|                                 |  |                              |        |                              |        |                              |  
|Diluted earnings per share       |  | $                            | 30,864 |                              | 32,366 |                              | $
|                                 |  |                              |        |                              |        |                              |  

The
amount of anti-dilutive options and warrants outstanding were 2,025, 1,452 and 428 for the years ended December 31, 2003, 2002 and 2001, respectively.

F-14

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Use of Management Estimates:

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period. Actual results can vary from these estimates.

Recent Accounting Pronouncements:

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). This interpretation explains
how to identify variable interest entities and how an enterprise assesses its interest in a variable interest entity to decide whether to consolidate that entity. This interpretation requires existing
unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that
effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interest that effectively recombines risks that were previously dispersed. The
interpretation applies to the Company in the first quarter of 2004. The Company does not expect the
adoption of this interpretation to have a material impact on its financial position, results of operations or cash flows.

In
May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". The statement requires
certain instruments to be classified as a liability, including instruments issued in the form of shares that are mandatory redeemable, instruments that at inception embodies an obligation to
repurchase the issuer's equity shares, and instruments that embody unconditional obligations that must or may be settled by issuing a variable number of equity shares. The statement does not change
the classification requirements of convertible bonds, or other outstanding shares that are conditionally redeemable. The statement is effective for instruments entered into after May 31, 2003.
The adoption of this statement did not have a material effect on the Company's financial position, results of operations or cash flows.

2. Business Combinations

Great Lakes Chemical Corporation Mt. Prospect Facility

On September 21, 2001, the Company consummated its acquisition of Great Lakes Chemical Corporation's laboratory facility in Mount Prospect, Illinois for
approximately $10,000 in cash. The results of operations for this business have been included in the consolidated financial statements since the acquisition date. The facility has a total of
eighty-eight thousand square feet of laboratory and support space and is located on 5.5 acres of land. The facility includes chemistry synthesis labs, which contain 55 fully equipped scientific
workstations; a two-bay, non-GMP chemical pilot plant; research fermentation facilities; associated analytical support; scale-up fermentation capacity; and
supporting office space. The purchase provides the Company with a modern facility, fully equipped with a scientific staff of approximately fifty people with opportunities for expansion. Pro forma
information has not been provided because the acquisition is not material.

F-15

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The
following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired at the date of acquisition:

Property, plant and equipment

$
9,000Goodwill


1,242Total assets acquired


10,242Current liabilities


242Net assets acquired

$
10,000


New Chemical Entities

On January 25, 2001, the Company consummated its acquisition of New Chemical Entities, Inc. (NCE) of Bothell, Washington for approximately $23,000
of which $22,400 was in cash and $600 in assumed shareholder debt which was repaid at the closing. NCE, renamed AMRI Bothell Research Center, is a wholly owned subsidiary of the Company. The excess
purchase price over the fair value of the net assets acquired, has been recorded as goodwill. Amortization expense for the year ended December 31, 2001 was approximately $995.

The
purchase price of $22,400 has been allocated as follows:

Cash

$
19Accounts receivable, net


255Chemical libraries


3,759Other current assets


55Property and equipment


2,233Deferred tax assets


1,926Intangible assets


4,511Goodwill


14,237Other assets


459Total assets

$
27,454Accounts payable and accrued expenses


989Unearned revenue


235Long-term debt, current


428Deferred taxes


1,942Long-term debt, less current portion


1,460Total liabilities


5,054Net assets

$
22,400


Pro
forma information has not been presented for 2001 because the acquisition occurred on January 25, 2001 and the results of operations prior to that date were not significant.

F-16

---





3. Investment in Organichem

On December 21, 1999, the Company completed an equity method investment in Organichem Corporation ("Organichem") pursuant to a Stock Purchase Agreement and
purchased convertible subordinated debentures of Organichem pursuant to a Debenture Purchase Agreement. Under the terms of the Stock Purchase Agreement, the Company acquired shares of common stock of
Organichem representing 37.5% of Organichem's outstanding common stock, for an aggregate purchase price of $15,131, which included direct costs of $131 attributable to the Organichem equity
investment. During 2000, Organichem purchased a portion of its common stock into treasury, increasing the Company's ownership interest in Organichem to 39.2%. As a result, the Company recorded a one
time benefit to earnings of $159, net of taxes of $98. The Stock Purchase Agreement also incorporated a Put/Call Agreement among the Company, Organichem and its stockholders that permited the Company
to purchase, at the Company's option, all of the outstanding shares of common stock of Organichem within 90 days subsequent to the year ending December 31, 2002.

The
Company also entered into a Debenture Purchase Agreement with Organichem at December 21, 1999. Under the terms of the Debenture Purchase Agreement, the Company purchased
convertible subordinated debentures ("Debentures") for an aggregate purchase price of $15,000. Debentures beared interest, payable semi-annually, on the unpaid principal amount at margins
over specified fixed or variable London Interbank Offer Rate ("LIBOR") as provided for within the Company's credit agreement with Organichem (4.10% and 5.96% at December 31, 2002 and 2001,
respectively). The agreement provided that the interest payable under the Debentures through December 21, 2000 shall be added to the principal of the Debenture, with semi-annual
cash interest payments to begin subsequent to December 21, 2000, provided that Organichem was in compliance with the financial covenants of its credit agreement. Accrued interest through
December 21, 2000 totaling $1,436 was added to the principal of the Debentures. In addition, pursuant to the terms of the Debenture Purchase Agreement, the Company and Organichem agreed that in
the event that either the aforementioned put or call options were exercised, 62.5% of the accrued interest not paid by Organichem as of the date of the put or call exercise shall be applied to reduce
the purchase price as determined under the Put/Call Agreement. Accrued interest receivable from Organichem at December 31, 2002 and 2001 totaled $19 and $24, respectively.

The
Company converted the debentures under the Debenture Purchase Agreement into additional shares of common stock on January 1, 2003, thereby increasing the Company's ownership
interest to 76.7%. On February 12, 2003, the Company exercised its call option under the Put/Call Agreement and acquired all of the outstanding common stock of Organichem for
$29.9 million in cash. The purchase price was determined based on Organichem's earnings before interest, taxes, depreciation and amortization ("EBITDA"), as defined in the Put/Call Agreement,
for the year ending December 31, 2002. The purchase price was funded through borrowings under the Company's new five year $30.0 million term loan which matures on February 11,
2008. The term loan bears interest at a variable rate based on the Company's leverage ratio. The Company also refinanced $25.5 million of Organichem's existing bank debt using the Company's new
$35.0 million line of credit. The line of credit also bears interest at a variable rate based on the Company's leverage ratio.

F-17

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The
following table summarizes the final allocation of the purchase price to the estimated fair value of the assets acquired as of February 12, 2003.

Assets:Cash and cash equivalents

$
1,621Accounts receivable, net


7,256Inventory


18,685Prepaid expenses and other current assets


3,305Property, plant and equipment, net


57,921Other assets


571Total Assets


89,359Liabilities:Accounts payable and accrued expenses


13,958Long-term debt


25,546Deferred income taxes


4,699Other liabilities


6,123Total Liabilities


50,326Purchase price adjustments:Inventory write up to fair value


441Post-retirement and pension liability adjustment to projected benefit obligation


(2,432
)Long-term debt fair value adjustment


(393
)Deferred tax adjustment


1,696Settlement of post-retirement benefits


475Curtailment of pension benefits


1,322Fixed asset fair value adjustment


(330
)Accrued liabilities and other


(308
)Net Assets Acquired


39,504Less: Jan 1Feb 12 Organichem net loss included in consolidated operations


399Total net assets acquired


39,903Purchase price:Cash


29,926Conversion of subordinated debentures


15,000Accumulated equity investment at January 1, 2003


19,852Purchase Price


64,778Goodwill

$
24,875


F-18

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The
following table shows the unaudited condensed pro forma statements of income for the periods ended December 31, 2003 and 2002 as if the Organichem purchase had occurred at
January 1, 2003 and 2002, respectively:

Period Ended December 31,2003

2002(restated)

(restated)Contract revenue

$
144,667

$
157,930Recurring royalties


51,682


51,138Total revenue


196,349


209,068Cost of contract revenue


101,753


107,894Technology incentive award


5,183


5,108Research and development


22,466


10,489Selling, general and administrative


20,318


17,180Total costs and expenses


149,720


140,671Income from operations


46,629


68,397Equity in loss of unconsolidated affiliates


(372
)

(316
)Interest income (expense), net


785


(860
)Other income, net


403


854Income before income tax expense


47,445


68,075Income tax expense


16,668


24,497Net income

$
30,777

$
43,578Basic earnings per share

$
0.97

$
1.34Diluted earnings per share

$
0.95

$
1.31


4. Inventory

Inventory consisted of the following at December 31, 2003 and 2002:

December 31,2003

2002Raw materials

$
11,771

$
3,426Work in process


9,445


6,381Finished goods


13,076


3,595Total

$
34,292

$
13,402


At
December 31, 2003 and 2002, the Company had inventory of libraries included in work in progress of $5,823 and $5,186, respectively, and in finished goods of $3,595 for both
years.

F-19

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5. Investment Securities, Available-for-sale

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

|                                                 |  | December 31, 2003
|------------------------------------------------ |  | -----------------
|
|Obligations of states and political subdivisions |  | $                
|Corporate debt obligations                       |  |                  
|                                                 |  |                  
|                                                 |  | $                
|                                                 |  |                  

|                                                 |  | December 31, 2002
|------------------------------------------------ |  | -----------------
|
|Obligations of states and political subdivisions |  | $                
|Corporate debt obligations                       |  |                  
|                                                 |  |                  
|                                                 |  | $                
|                                                 |  |                  

Maturities
of corporate debt obligations and obligations of states and political subdivisions classified as available-for-sale at December 31, 2002 and
2003 were as follows:

|                                       |  | December 31, 2003 |        | December 31, 2002
|-------------------------------------- |  | ----------------- | ------ | -----------------
|
|Due less than one year                 |  | $                 | 35,683 |                  
|Due after one year through five years  |  |                   | 41,425 |                  
|Due after five years through ten years |  |                   |       |                  
|Due after ten years                    |  |                   |       |                  
|                                       |  | $                 | 77,108 |                  

6. Property and Equipment

Property and equipment consists of the following:

December 31,2003

2002Laboratory equipment and fixtures

$
84,255

$
45,420Office equipment


11,468


7,085Leasehold improvements


15,166


15,451Construction-in-progress


31,213


7,631Buildings


29,634


10,348Land


1,905


1,396173,641


87,331Less accumulated depreciation and amortization


(27,002
)

(14,813
)$
146,639

$
72,518


F-20

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Depreciation
and amortization expense of property and equipment was $12,729, $4,625 and $3,801 for the years ended December 31, 2003, 2002 and 2001, respectively.

Abandonment Loss:

In March 2003, the Company terminated its lease at its Coralville, IA facility subsequent to relocating its combinatorial biocatalysis discovery operations
from Coralville, IA to its Mt. Prospect, IL facility. The relocation was conducted to gain operating efficiencies by integrating its combinatorial biocatalysis discovery operations with existing
infrastructure established at the Mt. Prospect facility.

The
Company abandoned leasehold improvements at the Coralville, IA facility in connection with the closing. The Company recorded a loss of $1,400 equal to the carrying amount of the
assets as of March 2003. The loss was included in selling, general and administrative expenses in the consolidated statement of income.

Note 7. Equity Investments and Note Receivable

The Company periodically enters into equity investments with companies in the Company's area of strategic focus. During the year ended December 31, 2003,
the Company made two such equity investments in its customers, totaling $2,126. Under the terms of these agreements, the Company provides full-time equivalent services to each customer in
exchange for cash and equity securities. The value of the equity securities issued to the Company is determined based upon the recent cash selling price of the customer's equity securities. The
Company accounts for these investments using the cost method of accounting for investments as the Company's ownership interest in each customer is below 20% and the Company does not have the ability
to exercise significant influence over the investee.

The
Company has recorded these investments at fair value. Revenue was recognized under the original contract agreements. At the time of conversion, the Company determined that revenue
recognition was appropriate as collection of the receivables was reasonably assured. For one of these entities, collection is contingent upon the entity either entering into a proposed collaboration
arrangement or obtaining additional financing

The
Company has also entered into a note receivable with one of the companies in which it maintains an equity investment in. Under the terms of the agreement, the Company provides
full-time equivalent services to the customer in exchange for the note. As of December 31, 2003, the amount outstanding on the note was $768 and is included in "other current
assets" on the consolidated balance sheet. In March 2004, fifty percent of the balance of the note was repaid, along with all accrued interest. The remaining balance on the note is due in six
equal monthly installments and bears an interest rate of 10%. Revenue was recognized under the original contract agreements. At the time of the agreements, the Company determined that revenue
recognition was appropriate as collection of the receivable was reasonably assured.

F-21

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8. Long-Term Debt and Swap Contracts

Long-Term Debt

The Company entered into a $30.0 million term loan and $35.0 million line of credit to fund the acquisition of Organichem. The term loan matures in
February, 2008 and bears interest at a variable rate based on the Company's leverage ratio. As of December 31, 2003 the variable interest rate was 2.39%. The line of credit expires in
February 2006 and bears interest at a variable rate based on the Company's leverage ratio. As of December 31, 2003 the variable interest rate was 2.34%. The term loan and line of credit
contain 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. At December 31, 2003, the Company was in compliance with these covenants.

The
Company maintains variable interest rate industrial development authority bonds due in increasing annual installments through 2021. Interest payments are due monthly with a current
interest rate of 1.15%.

The
following table summarizes long-term debt:

December 31,
2003

December 31,
2002Term loan

$
26,785


Line of credit


25,546


Variable interest rate industrial development authority bonds


5,275

$
5,487Note payable to financing company in monthly installments through 2008


44


957,650


5,496Less current portion


4,521


215Total long-term debt

$
53,129

$
5,281


The
aggregate maturities of long-term debt at December 31, 2003 are as follows:

2004

$
4,5212005


4,5222006


30,0802007


4,5392008


9,908Thereafter


4,080$
57,650


F-22

---



Swap Contracts

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

|Swap Description   |  | Original
Notional
Amount |        | AMR pays |            | AMR
Receives |       | Maturity Date |                | Reprice/Settlement
Dates
|------------------ |  | ------------------------ | ------ | -------- | ---------- | ------------ | ----- | ------------- | -------------- | ------------------------
|April 1, 2003 Swap |  | $                        | 13,333 |          | Fixed 3.37 | %            | LIBOR |               | February, 2008 |                         
|April 1, 2003 Swap |  | $                        | 6,667  |          | Fixed 3.37 | %            | LIBOR |               | February, 2008 |                         
|Total              |  | $                        | 20,000 |          |            |              |       |               |                |                         

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

Organichem
maintained a swap agreement that hedged its previous term facility interest rate exposure. The Company acquired the swap as part of the acquisition described in Note 3.
Under the terms of the agreement, each party made interest payments on a notional amount. The Company paid a fixed rate of 7.15% and the counterparty paid a floating rate based on LIBOR. The swap
agreement expired on November 15, 2003. Since the previous term facility has been refinanced with new loans, the swap was an ineffective hedge. Therefore, for the period ended
December 31, 2003, changes in the fair value of this swap contract resulted in a gain of $231 to the consolidated statement of income.

For
the period ended December 31, 2003, the weighted average rate received from the counterparties on all swaps was 1.20%. The fair value of the interest rate swap agreements was
$243 at December 31, 2003 and was included as "swap contract liability" in the consolidated balance sheet. The Company recognized $560 as interest expense related to the swaps during the period
ended December 31, 2003.

F-23

---



9. Income Taxes

Income tax expense (benefit) consists of the following:

Year Ended December 31,2003

2002

2001Current:Federal

$
13,432

$
18,790

$
17,481State


2


485


48413,434


19,275


17,965Deferred:Federal


2,622


2,911


1,519State


658


500


2233,280


3,411


1,742$
16,714

$
22,686

$
19,707


The
differences between income tax expense and income taxes computed using a federal statutory rate of 35% for the years ended December 31, 2003, 2002 and 2001, were as follows:

Year Ended December 31,2003

2002

2001(Restated)

(Restated)

(Restated)Pre-tax income at statutory rate

$
16,652

$
21,843

$
19,012Increase (reduction) in taxes resulting from:Tax-free interest income


(237
)

(43
)

(326
)State taxes, net of federal benefit


429


640


459Non-deductable Organichem purchase accounting expenses


358





Extraterritorial income credit


(560
)




Other, net


72


246


562$
16,714

$
22,686

$
19,707


F-24

---



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

December 31,2003

2002Restated

RestatedDeferred tax assets:Accruals

$
44

$
121Doubtful accounts and notes receivable


332


Amortization





305Lease costs





43Inventory


780


88Interest





376Minimum pension liability


1,588Postretirement costs


102


Equity losses in earnings of unconsolidated affiliates


439


302Other





4Research and experimentation credit carryforwards


174


174Alternative minimum tax credit


300


Net operating loss carryforwards


1,193


1,320Deferred tax assets


4,952


2,733Deferred tax liabilities:Property and equipment depreciation differences (accelerated depreciation for tax purposes)


(15,869
)

(5,579
)Pension costs


(577
)

Prepaid real estate taxes


(203
)

Environmental costs


(512
)

Other


(50
)

Non-taxable equity earnings





(2,340
)Net deferred tax liability

$
(12,259
)
$
(5,186
)


The
preceding table does not include deferred tax asset of $97 and $0 at December 31, 2003 and 2002, associated with the Company's swap contract liability discussed in
Note 8, as well as deferred tax liabilities of $35 and $161 at December 31, 2003 and 2002 associated with the Company's unrealized gains on investment securities discussed in
Note 5.

The
deferred tax assets and liabilities associated with interest, amortization and non-taxable equity earnings at December 31, 2002 were reclassified to goodwill as
part of the Organichem Corporation acquisition discussed in Note 3.

The
Company's net operating loss carryforwards begin to expire in 2015. As a result of the change in control related to the EnzyMed merger, the Company's use of the net operating loss
carryforwards is limited to approximately $1,000 per year.

F-25

---





In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the taxable income in the two previous tax years to which tax loss carryback can be
applied. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, taxable income in the carryback period and tax planning strategies in making this
assessment. Based upon the level of projected future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company
will realize the benefits of those deductible differences. The amount of the deferred tax asset considered realizable could be reduced if estimates of future taxable income during the carryforward
period are reduced.

10. Stockholders' Equity

During the years ended December 31, 2003 and 2002, the Company repurchased 959 shares at a cost of $13,492 and 1,098 shares at a cost of $23,228,
respectively.

Employee Stock Purchase Plan

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

During
each offering, an employee may purchase shares under the Plan by authorizing payroll deductions up to 10% of their cash compensation during the offering period. The maximum number
of shares to be issued to any single employee during an offering period is limited to one thousand. At the end of the offering period, the accumulated payroll deductions will be used to purchase
common stock on the last business day of the offering period at a price equal to 85% of the closing price of the common stock on the first or last day of the offering period, whichever is lower.
During the years ended December 31, 2003 and 2002 employees purchased 43 and 34 shares, respectively.

Stock Option Plan

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

F-26

---



grant
date, 20% at the end of the fourth anniversary of the grant date and 20% at the end of the fifth anniversary of the grant date. Non-qualified stock option vesting terms are
established at the date of grant, but shall have a duration of not more than ten years.

Following
is a summary of the status of stock option programs during 2003, 2002 and 2001:

|                                 |           | Year Ended December 31,
|-------------------------------- | --------- | -----------------------
|
|
|Outstanding, beginning of year   |           | 2,427                  
|                                 | Granted   |                        
|                                 | Exercised |                        
|                                 | Forfeited |                        
|Outstanding, end of year         |           | 2,854                  
|Options exercisable, end of year |           | 1,014                  

The
following table summarizes information about stock options outstanding as of December 31, 2003:

|               |  | Outstanding Options |  | Exercisable Options
|-------------- |  | ------------------- |  | -------------------
|
|$  0.00  6.54 |  | 513                 |  | 3.57               
|$  6.5513.09  |  | 231                 |  | 5.54               
|$13.1019.63   |  | 703                 |  | 9.01               
|$19.6426.18   |  | 820                 |  | 7.31               
|$26.1932.72   |  | 136                 |  | 6.87               
|$32.7339.26   |  | 82                  |  | 7.02               
|$39.2745.81   |  | 342                 |  | 7.09               
|$45.8252.35   |  | 21                  |  | 6.68               
|$52.3658.89   |  | 4                   |  | 6.87               
|$58.9065.44   |  | 2                   |  | 6.99               
|               |  | 2,854               |  | 6.85               

F-27

---



The
following summarizes information about stock options outstanding as of December 31, 2002:

|                |  | Outstanding Options |  | Exercisable Options
|--------------- |  | ------------------- |  | -------------------
|
|$  0.06$  6.54 |  | 700                 |  | 4.50               
|$  6.54$13.09  |  | 233                 |  | 6.18               
|$13.09$19.63   |  | 32                  |  | 7.47               
|$19.63$26.18   |  | 856                 |  | 8.32               
|$26.18$32.72   |  | 145                 |  | 7.91               
|$32.72$39.26   |  | 84                  |  | 8.03               
|$39.26$45.81   |  | 348                 |  | 8.09               
|$45.81$52.35   |  | 22                  |  | 7.45               
|$52.35$58.89   |  | 5                   |  | 7.87               
|$58.89$65.44   |  | 2                   |  | 7.99               
|                |  | 2,427               |  | 7.66               

The
following are the shares of common stock reserved for issuance at December 31, 2003:

Number of
SharesEmployee Stock Option Plans

3,945Employee Stock Purchase Plan

486Shares reserved for issuance

4,431


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

2003

2002

2001Expected Life (years):ISO

5

5

4Non-qualified

5

5

4Interest rate

2.96
%
3.03
%
4.39
%Volatility

62.23
%
71.29
%
71.20
%Dividend yield








Shareholder Rights Plan

The Company has adopted a Shareholder Rights Plan, the purpose of which is, among other things, to enhance the Board's ability to protect shareholder interests
and to ensure that shareholders receive fair treatment in the event any coercive takeover attempt of the Company is made in the future. The Shareholder Rights Plan could make it more difficult for a
third party to acquire, or could discourage a third party from acquiring, the Company or a large block of the Company's Common Stock. The following summary description of the Shareholder Rights Plan
does not purport to be complete and is qualified in its entirety by reference to the Company's Shareholder Rights Plan, which

F-28

---



has
been previously filed with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form 8-A.

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

Stock Purchase Warrants

In March 2002, the Company issued warrants to purchase 53 shares of common stock at an exercise price of $40 for 26 shares and $45 for 27 shares to
Bristol-Myers Squibb Company (BMS) in connection with an agreement entered into with BMS. Such warrants, which had a value of $500 on the date of issuance, were charged to operations with a
corresponding credit to stockholders' equity during the period ended December 31, 2002. The value of warrants issued was determined using the Black-Scholes option-pricing model with the
following assumptions.

Expected Life (years)

5.0Interest rate

4.18
%Volatility

62.00
%Dividend yield




Under
this agreement, BMS transferred intellectual property to the Company, consisting of one of BMS's pre-clinical drug candidates, along with patent applications covering
Attention Deficit Hyperactivity Disorder and central nervous system indications related both to this candidate and structural analogs. If the Company is successful in out-licensing this
intellectual property to a third-party, the Company will be required to issue additional warrants to BMS to purchase Company common stock with a value of approximately $3,000. Alternatively, the
Company may elect to retain the intellectual property for internal development, at which time the Company would be required to issue the additional warrants to BMS. The Company may also opt to return
the intellectual property to BMS within two years of the agreement (March 2004).

F-29

---





11. Employee Benefit Plans

Defined Contribution Plans:

AMR maintains a savings and profit sharing plan under section 401(k) of the Internal Revenue Code covering all eligible employees. Employees must complete
one calendar month of service and be over 20.5 years of age as of the plan's entry dates. Participants may contribute up to 50% of their compensation, subject to IRS limitations. AMR currently
makes matching contributions equal to 50% of the participant's contributions (up to a limit of 6% of the participant's compensation). In addition, AMR has reserved the right to make discretionary
profit sharing contributions to employee accounts. AMR has made no discretionary profit sharing contributions. Employer matching contributions vest at a rate of 20% per year beginning after two years
of participation in the plan. Employer matching contributions were $766, $608 and $436 for the years ended December 31, 2003, 2002 and 2001, respectively.

Organichem
sponsors a savings and profit sharing plan under section 401(k) of the Internal Revenue Code covering hourly and salaried employees. Employees may contribute from 1% to
16% of their regular wages, subject to IRS limitations, and Organichem matches 100% of each dollar contributed by the employee up to 3% of their wages and matches 50% of the next 2% contributed by
salaried employees. Employer matching contributions vest at a rate of 20% per year beginning after two years of participation in the plan. Employer matching contributions were $398 for the year ended
December 31, 2003.

Defined
Benefit and Postretirement Welfare Plan:

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

At
January 1, 2003, the liability was increased $2,432 by the purchase price allocation of Organichem (see Note 3) to equal the projected benefit obligation in excess of
plan assets as of the date of the acquisition.

Effective
June 5, 2003, the Company eliminated all benefits under the non-contributory, unfunded post-retirement welfare plan for salaried employees. The
settlement resulted in a reduction to the long-term pension and post-retirement liability and a decrease to goodwill of $475 in the Organichem purchase price allocation
discussed in Note 3.

Effective
August 1, 2003, the Company curtailed the salaried defined benefit pension plan. The curtailment resulted in a reduction to the long-term pension and
post-retirement liability and a decrease to goodwill of $1,322 in the Organichem purchase price allocation discussed in Note 3.

F-30

---



At
December 31, 2003, $5,344 was recorded as long-term pension and post-retirement liabilities in the condensed consolidated balance sheet as shown below:

Obligations and Funded Status

Pension
Benefits

Postretirement
Benefits

TotalAt December 31, 2003Change in benefit obligationBenefit obligation at beginning of year

$


$


$
Acquired in purchase of Organichem (Note 3)


18,975


691


19,666Service costs


566


60


626Interest costs


1,231


30


1,261Benefits paid


(710
)




(710
)Actuarial loss


1,401


111


1,512FAS 88 events


(1,882
)

(658
)

(2,540
)Benefit obligation at end of year


19,581


234


19,815Change in plan assetsFair Value of plan assets at beginning of year








Acquired in purchase of Organichem (Note 3)


11,509





11,509Actual return on plan assets


2,733





2,733Employer contribution


1,507





1,507Benefits paid


(710
)




(710
)Fair Value of plan assets at end of year


15,039





15,039Funded status


4,542


234


4,776Unrecognized net actuarial loss (gain)


51


(226
)

(175
)FAS 88 events


560


183


743Net amount recognized

$
5,153

$
191

$
5,344


Components
of net periodic benefit cost for the period ended December 31, 2003 is summarized below:

Component of Net Periodic Benefit Cost

Pension
Benefit

Postretirement
Benefits

TotalService Cost

$
566

$
60

$
626Interest Cost


1,231


30


1,261Expected Return on plan assets


(1,061
)

0


(1,061
)Recognized net (gain) loss


(21
)

2


(19
)Net periodic benefit cost

$
715

$
92

$
807


The
following assumptions were used to determine the periodic pension cost for the defined benefit pension plans and the curtailment of the salaried defined benefit
pension plan for the period ending December 31, 2003:

Discount rate

6.75%Assumed rate of return on plan assets

8.00%Assumed annual rate of compensation increase

3.50%


F-31

---



The
following assumptions were used to determine the periodic postretirement benefit cost and the settlement of the postretirement welfare plan for the period ending
December 31, 2003:

Assumed
health care cost trend rates at December 31

Health care cost trend rate assumed for next year

5.00%Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)

3.50%Year that the rate reaches the ultimate trend rate

2006


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

1-Percentage-
Point Increase

1-Percentage-
Point DecreaseEffect on total of service and interest cost

$
28

$
(21
)Effect on accumulated postretirement benefit obligation


75


(55
)


Plan
Assets:

The
Company's pension plan weighted-average asset allocations at December 31,2003 by asset category are as follows:

Asset Category

Plan Assets
at December 31
2003Equity Securities

60
%Debt Securities

33Real Estate

5Other

2Total

100
%


The
Company expects to contribute $2.5 million to its pension plan in 2004.

12. Lease Commitments

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

The
Company has long-term operating leases for its Albany, New York office and laboratory facilities. The present leases expire in December 2013. The leases contain a
renewal option at the option of the Company. The Company is responsible for paying the cost of utilities, operating costs, and increases in property taxes.

F-32

---



The
Company leases additional laboratory facilities under separate agreements with non-related parties. The Company also leases various equipment with terms ranging from one
to three years.

Future
minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2003 are as follows:

Year ending December 312004

$
2,0962005


2,0372006


2,0492007


1,8772008


1,331Thereafter


4,473$
13,863


Rental
expense amounted to approximately $2,086, $1,922 and $1,635 during the years ended December 31, 2003, 2002 and 2001, respectively. Included within rent expense was
approximately $758, $709 and $275 that was paid to the aforementioned related party of the Company during the years ended December 31, 2003, 2002 and 2001, respectively.

13. Related Party Transactions



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

In
2003, 2002 and 2001, the Company awarded Technology Incentive Compensation to the inventor of the terfenadine carboxylic acid metabolite technology. The inventor is a director,
officer and shareholder of the Company. The amounts awarded and included in the consolidated statements of income for the years ended December 31, 2003, 2002 and 2001 are $5,166, $5,107 and
$4,165, respectively. Included in accrued compensation in the accompanying consolidated balance sheets at December 31, 2003 and 2002 are unpaid Technology Development Incentive Compensation
awards of $1,301 and $1,327, respectively.

F-33

---







From time to time the Company makes loans to non-officer employees of the Company in the form of notes receivable. The notes receivable and accrued
interest will not be repaid to the Company provided the employee remains in the employ of the Company throughout the term of the loan. If employment is terminated prior to the end of the loan term, a
pro-rata portion of the principal and interest shall be repaid to the Company. Notes receivable from employees at December 31, 2003 and 2002 totaled $134 and $340, respectively. The
amounts forgiven and charged to operations in the consolidated statements of income for the years ended December 31, 2003, 2002 and 2001 are $192, $200 and $20, respectively.



A member of the Company's board of directors is the Chief Executive Officer of one of the providers of telephone and internet services to the Company. This
telecommunications company was paid $165 and $162 for services rendered to the Company in 2003 and 2002, respectively.

14. Royalty & Licensing Arrangement

On March 15, 1995, the Company entered into a License Agreement and a Stock Purchase Agreement with Marion Merrell Dow Inc., now Aventis, S.A.
("Aventis"). Under the terms of the License Agreement, the Company granted Aventis an exclusive, worldwide license, with the right to grant sublicenses, upon the prior written consent of the Company,
to any patents issued to the Company
related to its original terfenadine carboxylic acid metabolite patent application. Terfenadine carboxylic acid metabolite is the active ingredient in the non-sedating antihistamine
fexofenadine HCl, marketed as a prescription medicine by Aventis, under the brand names "Allegra" in the Americas and "Telfast" in the rest of the world. In return for the license, Aventis agreed to
pay the Company up to $6,500 based upon the achievement of five patenting milestones and future royalties based on sales of fexofenadine HCl. The five patenting milestones consisted of:



Substantially
all of the Company's license, milestone and royalty revenue is derived from milestones and royalties related to its patented fexofenadine HCl technology.

15. Legal Proceedings

The Company, from time to time, may be involved in various claims and legal proceedings arising in the ordinary course of business. Except as noted below in
regards to litigation relating to Allegra, the Company is not currently a party to any such claims or proceedings which, if decided adversely to the Company, would either individually or in the
aggregate have a material adverse effect on The Company's business, financial condition, results of operations or cash flows.

F-34

---



The
Company, along with Aventis Pharmaceuticals, the U.S. pharmaceutical business of Aventis S.A., currently involved in legal proceedings with five companies currently seeking to market
generic versions of fexofenadine. During 2001, Barr Laboratories, Inc. filed an Abbreviated New Drug Application (ANDA) with the U.S. Food and Drug Administration seeking authorization to
produce and market a generic version of Allegra. Aventis Pharmaceuticals filed three patent infringement suits against Barr in August and September of 2001 and in January 2002 alleging
infringement of certain U.S. patents related
to 30, 60, and 180 mg tablets of fexofenadine HCl, and Allegra-D, an extended-release tablet for oral administration. In addition, Aventis filed a patent infringement lawsuit against Impax
Laboratories in March 2002 after Impax filed an ANDA to produce and market a generic version of Allegra-D. In late 2002 and early 2003, Mylan Pharmaceuticals, Teva Pharmaceuticals
and Dr. Reddy's Laboratories filed ANDAs to market generic versions of Allegra products. Under applicable federal law, marketing of an FDA-approved generic capsule or tablet at
minimum may not commence unless and until a decision favorable to a generic challenger is rendered in the patent litigation or until 30 months have elapsed from the date of the patent
infringement lawsuit, whichever comes first.

In
late 2003, Dr. Reddy's Laboratories filed a Section 505(b)(2) application with the FDA seeking authorization to produce and market versions of Allegra 30, 60, and 180 mg
tablets, as well as an ANDA seeking authorization to market a generic version of Allegra-D. Aventis has filed a patent infringement lawsuit against Dr. Reddy's in response to
Dr. Reddy's 505(b)(2) filing.

On
March 5, 2004, the Company, along with Aventis, filed patent infringement lawsuits in the U.S. District Court in New Jersey against Barr Laboratories, Mylan Pharmaceuticals,
Teva Pharmaceuticals, Impax Laboratories and Dr. Reddy's Laboratories based on several of our patents relating to Allegra and Allegra-D products. In those suits, the Company
asserted that the defendants' commercial manufacture, importation, use or sales of products relating to their applications do or will infringe on one or more claims of the Company's patents. In a
conference on March 8, 2004, the District Court of New Jersey set April 15, 2005 as the end date for the discovery phase of these cases. The previously-set trial date of
September 2004 is no longer in effect and no new trial date has been scheduled.

16. Environmental Costs

Organichem has completed an environmental remediation associated with groundwater contamination at its Rensselaer, NY location. Ongoing costs associated with the
remediation include biannual monitoring and reporting to the State of New York's Department of Environmental Conservation. Under the remediation plan, Organichem is expected to pay for monitoring and
reporting until 2009. Under a 1999 agreement with the facility's previous owner, Organichem's maximum liability under the remediation is $5,000. The Company assumed a $424 liability in connection with
the acquisition of Organichem described in Note 3. For the period ended December 31, 2003, $81 in costs have been paid by the Company.

Management
has estimated the future liability associated with the monitoring based on enforcement rulings, market prices from third parties, when available, and historical cost
information for similar activities. Management's estimates could be materially impacted in the future by changes in

F-35

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legislative
and enforcement rulings. While a change in estimate based on these factors is reasonably possible in the near term, based on currently available data, the Company believes that current
compliance with the remediation plan will not have a material adverse effect on the Company's financial position, results of operations or cash flows.

At
December 31, 2003, $343 was recorded for future environmental liabilities in the condensed consolidated balance sheet.

17. Concentration of Business

Contract revenue from Organichem's largest customer Amersham Health PLC ("Amersham") represented 34% of total contract revenue for the year ended
December 31, 2003. Our contract with Amersham terminates in 2007. For the year ended December 31, 2002, contract revenue from the Company's two largest customers represented
approximately 12%, and 12%, respectively, of total contract revenue. For the year ended December 31, 2001, contract revenue from the Company's largest three customers represented approximately
18%, 14% and 10%, respectively, of total contract revenue. In the majority of circumstances, there are agreements in force with these entities that provide for the Company's continued involvement in
present research projects. However, there regularly exists the possibility that the Company will have no further association with these entities once these projects conclude.

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

Year Ended
December 30,2003

2002

2001United States

57
%
93
%
93
%Europe

40

4

4Other countries

3

3

3Total

100
%
100
%
100
%


All
significant long-lived assets of the Company are located within the United States.

18. Business Segments

The Company has organized its sales, marketing and production activities into the Albany Molecular Research (AMR) and Organichem segments based on the criteria
set forth in SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The Company's management relies on an internal management accounting system to report results
of the segments. The system includes revenue and cost information by segment. The Company's management makes financial decisions and allocates resources based on the information it receives from this
internal system.

Albany
Molecular Research includes activities such as drug lead discovery, optimization, drug development and small scale commercial manufacturing. Organichem includes pilot to
commercial scale manufacturing of active pharmaceutical ingredients and intermediates and high potency and controlled

F-36

---



substance
manufacturing all of which are in compliance with the Food and Drug Administration's (FDA) current Good Manufacturing Practices.

The
accounting methodology for each segment item is noted below:

RevenueRevenue
is recorded based upon services and sales to each segment's defined customers.

Recurring
Royalty RevenueRoyalties from agreements with third parties.

Operating
Income (before unallocated expenses)Represents total revenues less cost of contract revenue and technology incentive award.

The
following table summarizes information by segment for the year ended December 31, 2003:

AMR

Organichem

Total(restated)Contract revenue

$
65,600

$
79,067

$
144,667Recurring royalties


51,682





51,682Total revenue

$
117,282

$
79,067

$
196,349Operating income (before unallocated expenses)

$
69,136

$
20,277

$
89,413Unallocated expenses:Research and development








22,466Selling, general and administrative








20,318Total unallocated expenses








42,784Operating income








46,629Reconciling items:Equity in loss of unconsolidated affiliates








(372
)Minority interest in consolidated subsidiary








133Interest income (expense), net








785Other income, net








403Income before income tax expense







$
47,578Supplemental information:Depreciation and amortization

$
7,783

$
5,322

$
13,105


The
following table summarizes other information by segment as of December 31, 2003:

AMR

Organichem

Total(in thousands)Total assets

$
275,191

$
117,440

$
392,631Goodwill included in total assets

$
17,181

$
24,875

$
42,056Investments in unconsolidated affiliates

$
2,191




$
2,191Capital expenditures

$
20,489

$
10,065

$
30,554


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---



19. Fair Value of Financial Instruments

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

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

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

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

Long-term Debt:The carrying value of long-term debt was approximately equal to fair value at
December 31, 2003 and 2002 due to the repricing dates of the variable interest rates.

Swap Contract:As discussed in Note 8, the swap contract liability is carried at fair value at December 31,
2003.

20. Goodwill and Intangible Assets

Effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standard No. 142 "Goodwill and Other Intangible
Assets". The following table summarizes what reported net income would have been for all periods presented exclusive of amortization expense

F-38

---



recognized
in those periods related to goodwill, intangible assets that are no longer being amortized and equity method goodwill.

For the year ended December 31,2003

2002

2001(in thousands except per share amounts)
(restated)(restated)

(restated)Net IncomeReported Net income

$
30,864

$
39,724

$
34,614Add back: Goodwill amortization








1,568Adjusted Net income

$
30,864

$
39,724

$
36,182Basic earnings per shareReported Net income

$
0.97

$
1.22

$
1.05Add back: Goodwill amortization








.05Adjusted Net income

$
0.97

$
1.22

$
1.10Diluted earnings per shareReported Net income

$
0.95

$
1.19

$
1.01Add back: Goodwill amortization








.05Adjusted Net income

$
0.95

$
1.19

$
1.06


The
Company is required to perform goodwill impairment tests on an annual basis. In 2003, the Company completed its transition impairment test for goodwill as of January 1, 2003
based on a discounted cash flow method and no impairment charge was required. The Company performs its annual impairment test as of June 30 each year as required by SFAS No. 142. The
Company's valuation is reviewed by a third party. To date, the results of the valuation have indicated there was no impairment of the Company's goodwill. However, there can be no assurance that future
goodwill impairment tests will not result in a charge to earnings.

The
components of intangible assets are as follows:

Cost

Accumulated
Amortization

Net

Amortization
PeriodDecember 31, 2003Microbial Cultures

$
4,511

$
751

$
3,760

15 yearsPatents and Licensing Rights


1,231


127


1,104

16 years$
5,742

$
878

$
4,864December 31, 2002Microbial Cultures

$
4,511

$
454

$
4,057

15 yearsPatents and Licensing Rights


819


72


747

16 years$
5,330

$
526

$
4,804


Estimated
future annual amortization expense related to intangible assets is approximately $353 through the year ended December 31, 2008.

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Effective
January 1, 2002, the Company adopted Emerging Issues Task Force (EITF) 00-10, "Accounting for Shipping and Handling Fees and Costs," which requires
reimbursed expenses such as chemicals and shipping costs to be included both as revenue and cost of goods sold in the income statement. Prior to adoption, the Company included these costs as a
reduction of contract revenue. The Adoption of EITF 00-10 had no impact on the Company's operating results but did have the effect of reducing the Company's gross margin percentage. The
implementation of EITF 00-10 resulted in additional contract revenues and cost of contract revenues of $2,674, $3,303 and $3,522 for the years ended December 31, 2001, 2002 and
2003, respectively.

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21. Selected Quarterly Consolidated Financial Data (unaudited)

The following tables present unaudited consolidated financial data for each quarter of 2003 and 2002, which reflect the effect of the restatement further
described in Note 22:

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter(restated)

(restated)

(restated)

(restated)2003Contract revenue

$
33,839

$
38,777

$
33,005

$
39,046Gross profit


7,827


9,619


10,982


14,486Milestones and royalties


11,100


15,200


12,400


12,982Income from operations


6,123


12,443


12,600


15,463Net income


4,052


8,207


8,233


10,372Net income per share:Basic

$
0.13

$
0.26

$
0.26

$
0.32Diluted

$
0.13

$
0.25

$
0.25

$
0.322002Contract revenue

$
16,680

$
17,756

$
19,015

$
18,237Gross profit


7,105


7,478


8,122


7,670Milestones and royalties


10,725


14,075


13,061


13,278Income from operations


12,081


14,800


14,620


14,913Net income


8,767


10,471


9,782


10,704Net income per share:Basic

$
0.26

$
0.32

$
0.30

$
0.34Diluted

$
0.26

$
0.31

$
0.30

$
0.32


Contract
revenue and gross profit have been reclassified to reflect the impact of EITF 00-10 as discussed in Note 20.

|               |  | As Originally Reported |        | Adjustment |   | As Restated
|-------------- |  | ---------------------- | ------ | ---------- | - | -----------
|
|
|               |  |                        | 2003  
|First Quarter  |  | $                      | 4,132  |            | $ | 0.13       
|Second Quarter |  | $                      | 8,269  |            | $ | 0.26       
|Third Quarter  |  | $                      | 8,313  |            | $ | 0.26       
|Fourth Quarter |  | $                      | 10,474 |            | $ | 0.33       
|               |  |                        | 2002  
|First Quarter  |  | $                      | 8,768  |            | $ | 0.26       
|Second Quarter |  | $                      | 10,560 |            | $ | 0.32       
|Third Quarter  |  | $                      | 10,211 |            | $ | 0.32       
|Fourth Quarter |  | $                      | 11,012 |            | $ | 0.34       

F-41

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22. Restatement

The accompanying consolidated 2001, 2002 and 2003 financial statements of the Company have been restated to correct an error to properly recognize premium and
discount amortization on debt securities as required by FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities".

In
October 2004, management of the Company identified that the accounting principles as set forth in SFAS 115, regarding amortization of premiums and discounts paid on
bonds, had not been properly applied in prior periods to certain of its debt investments. During a review of the Company's accounting for bond investments, the Company identified an accounting error
that had resulted, since 2001, in the overstatement of interest income. This error resulted in a cumulative overstatement of interest income of $931,000 and a corresponding overstatement of
stockholders' equity of $349,000 from 2001 through December 31, 2003. The cumulative impacts of this error as of December 31, 2003, including the related income tax effect, resulted in a
$582,000 understatement of accumulated other comprehensive income, a $349,000 understatement of deferred income tax liability, and a $931,000 overstatement of retained earnings.

While
the Company believes the impact of this error is not material to any previously issued financial statements, the Company determined, on November 3, 2004, that the cumulative
adjustment required to correct this calculation error would be significant to operating results in 2004, and that the error was most appropriately corrected through restatement of previously issued
financial statements for the fiscal years ended December 31, 2003, 2002 and 2001.

F-42

---



The
effect of these errors is detailed, by reporting period, below.

|                                          |  | December 31, 2003 |         | December 31, 2002 |   | December 31, 2001
|----------------------------------------- |  | ----------------- | ------- | ----------------- | - | -----------------
|
|
|Balance Sheet:                            |  |                   |         |                   |   |                  
|Deferred income taxes                     |  | $                 | 11,860  |                   | $ | 12,209           
|Total liabilities                         |  |                   | 90,347  |                   |   | 90,696           
|Retained earnings                         |  |                   | 155,438 |                   |   | 154,507          
|Accumulated other comprehensive loss, net |  |                   | (685    | )                 |   | (103             
|Total stockholders' equity                |  | $                 | 302,284 |                   | $ | 301,935          
|Statement of Income:                      |  |                   |         |                   |   |                  
|Interest income                           |  | $                 | 2,555   |                   | $ | 2,231            
|Income before provision for income taxes  |  |                   | 47,902  |                   |   | 47,578           
|Net income                                |  | $                 | 31,188  |                   | $ | 30,864           
|Earnings per common share:                |  |                   |         |                   |   |                  
|Basic                                     |  | $                 | 0.98    |                   | $ | 0.97             
|Diluted                                   |  | $                 | 0.96    |                   | $ | 0.95             

F-43

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ALBANY MOLECULAR RESEARCH, INC.        SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS        Years Ended December 31, 2003, December 31, 2002 and December 31, 2001

|Description                                |      | Balance at
Beginning of
Period |   | Charged to Cost
and Expenses |  | Charged to Other
Accounts |         | Deductions
Charged to
Reserves |   | Balance at
End of
Period
|------------------------------------------ | ---- | ------------------------------ | - | ---------------------------- |  | ------------------------- | ------- | ------------------------------ | - | ------------------------
|Allowance for obsolete inventories         |      |                                |   |                              |  |                           |         |                                |   |                         
|                                           | 2003 |                                | $ | 150,000                      |  | $                         | 645,000 |                                | $ | 991,000                 
|                                           | 2002 |                                | $ | 150,000                      |  |                           |        |                                |   |                        
|                                           | 2001 |                                | $ |                             |  | $                         | 150,000 |                                |   |                        
|Allowance for doubtful accounts receivable |      |                                |   |                              |  |                           |         |                                |   |                         
|                                           | 2003 |                                | $ | 218,000                      |  | $                         | 278,715 |                                |   |                        
|                                           | 2002 |                                | $ | 218,000                      |  |                           |        |                                |   |                        
|                                           | 2001 |                                | $ | 110,000                      |  | $                         | 200,000 |                                |   |                        
|Note receivable reserve                    |      |                                |   |                              |  |                           |         |                                |   |                         
|                                           | 2003 |                                | $ | 32,277                       |  |                           |        |                                |   |                        
|                                           | 2002 |                                | $ | 40,277                       |  |                           |        |                                | $ | (8,000                  
|                                           | 2001 |                                | $ | 40,277                       |  |                           |        |                                |   |                        

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