UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM 10-K





(Mark
One)


x
            ANNUAL
      REPORT PURSUANT TO SECTION 13
      OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF
      1934


For
the fiscal year ended December 31, 2008


or


 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF
1934


For
the transition period from   
to


Commission
file number 0-25323





Albany
Molecular Research, Inc.


(Exact
name of registrant as specified in its charter)




Delaware
                
                14-1742717(State
      or Other Jurisdiction of
                
                (IRS
      EmployerIncorporation
      or Organization)
                
                Identification
      No.)21
      Corporate Circle, P.O. Box 15098,Albany,
      New York
                
                12212-5098(Address
      of principal executive offices)
                
                (zip
      code)


(518) 464-0279


(Registrant’s
telephone number, including area code)


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




Title of each class
              
              Name of exchange on which registeredCommon
      Stock, par value $.01 per share
              
              The
      NASDAQ Stock Market LLCPreferred
      Stock Purchase Rights


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


None


(Title of
Each Class)




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes  o   No  x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes   o   No  x




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  x    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.  ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “accelerated filer”, “large accelerated filer” and “smaller
reporting company” in  12b-2 of the Exchange Act




o Large accelerated
      filer
                    x Accelerated
      filer
                    o Non-accelerated
      filer
                    o Smaller reporting
      company




Indicate
by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes  o    No  x




The
aggregate market value of the Registrant’s Common Stock held by non-affiliates
of the Registrant on June 30, 2008 was approximately $335 million based
upon the closing price per share of the Registrant’s Common Stock as reported on
the Nasdaq National Market on June 30, 2008. 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 28, 2009, there
were 31,489,817 outstanding shares of the Registrant’s Common Stock, excluding
treasury shares of 3,824,593.





DOCUMENTS
INCORPORATED BY REFERENCE




The
information required pursuant to Part III of this report is incorporated by
reference from the Company’s definitive proxy statement, relating to the annual
meeting of stockholders to be held on or around June 3, 2009, pursuant to
Regulation 14A to be filed with the Securities and Exchange
Commission.













ALBANY
MOLECULAR RESEARCH, INC.


INDEX
TO


ANNUAL
REPORT ON FORM 10-K




Page No.Cover
      pagePart I.Forward-Looking
      Statements
                                3Item
      1.
                                
                                Business
                                4Item
      1A.
                                
                                Risk
      Factors
                                15Item
      1B.
                                
                                Unresolved
      Staff Comments
                                21Item
      2.
                                
                                Properties
                                21Item
      3.
                                
                                Legal
      Proceedings
                                22Item
      4.
                                
                                Submission
      of Matters to a Vote of Security Holders
                                23Part II.Item
      5.
                                
                                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                24Item
      6.
                                
                                Selected
      Financial Data
                                25Item
      7.
                                
                                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                26Item
      7A.
                                
                                Quantitative
      and Qualitative Disclosures about Market Risk
                                41Item
      8.
                                
                                Financial
      Statements and Supplementary Data
                                41Item
      9.
                                
                                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                41Item
      9A.
                                
                                Controls
      and Procedures
                                41Item
      9B.
                                
                                Other
      Information
                                42Part III.Item
      10.
                                
                                Directors,
      Executive Officers and Corporate Governance of the
    Registrant
                                43Item
      11.
                                
                                Executive
      Compensation
                                43Item
      12.
                                
                                Security
      Ownership of Certain Beneficial Owners and Management
                                43Item
      13.
                                
                                Certain
      Relationships, Related Transactions and Director
    Independence
                                43Item
      14.
                                
                                Principal
      Accountant Fees and Services
                                43Part IV.Item
      15.
                                
                                Exhibits
      and Financial Statement Schedules
                                44




2





Forward-Looking
Statements




References
throughout this Form 10-K to the “Company”, “we,” “us,” and “our” refer to
Albany Molecular Research, Inc. and its subsidiaries, taken as a whole.
This Form 10-K 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. These statements may be identified by
forward-looking words such as “may,” “could,” “should,” “would,” “will,”
“intend,” “expect,” “anticipate,” “believe,” and “continue” or similar words,
and include, but are not limited to, statements concerning pension and
postretirement benefit costs, the Company’s relationship with GE Healthcare, the
Company’s collaboration with Bristol-Myers Squibb (“BMS”), the expected results
of the Company’s restructuring of AMRI Hungary, the acquisition of FineKem
Laboratories Pvt. Limited (“FineKem”), future acquisitions, earnings, contract
revenues, costs and margins, royalty revenues, patent protection and the ongoing
Allegra patent infringement litigation, Allegra royalty revenue, government
regulation, retention and recruitment of employees, customer spending and
business trends, foreign operations (including Singapore, India and Hungary),
the effect of the purchase of assets from Ariane Orgachem Private Limited and
Ferico Laboratories Limited, collectively known as AMRI India Pvt. Ltd. (“AMRI
India”), including increasing options and solutions for customers, business
growth and the expansion of the Company’s global market, clinical supply
manufacturing, management’s strategic plans, drug discovery, product
commercialization, license arrangements, research and development projects and
expenses, selling, general and administrative expenses, goodwill impairment,
competition and tax rates. The Company’s actual results may differ materially
from such forward-looking statements as a result of numerous factors, some of
which the Company may not be able to predict and may not be within the Company’s
control. Factors that could cause such differences include, but are not limited
to, the Company’s ability to recruit and retain experienced scientists and other
highly-skilled employees, trends in pharmaceutical and biotechnology companies’
outsourcing chemical and discovery research and development, including softness
in these markets, competition from domestic competitors and foreign companies
operating under lower cost structures,  the loss of a significant
customer, sales of Allegra (including any deviations in sales estimates provided
by sanofi-aventis), the risk of an “at-risk” launch of generic Allegra-D and the
impact of that on the Company’s receipt of significant royalties under the
Allegra license agreement, the risk that Allegra may be approved for
over-the-counter use, the over-the-counter sale of Claritin and Zyrtec, the
over-the-counter sale of generic alternatives for the treatment of allergies and
the risk of new product introductions for the treatment of allergies, such as
Xyzal, including generic forms of Allegra, the Company’s and sanofi-aventis’s
ability to successfully enforce their respective intellectual property, patent
rights and technology rights, including with respect to the generic companies’
Abbreviated New Drug Application filings, the Company’s ability to successfully
develop novel compounds and lead candidates in its research programs and
collaborative arrangements, the Company’s performance under the collaboration
with BMS, BMS’s continued pursuit of programs under which the Company provides
services, delay or denial of marketing approvals from the FDA resulting from,
among other things, adverse FDA decisions or interpretations of data that differ
from BMS’s interpretations and that may require additional clinical trials or
potential changes in the cost, scope and duration of clinical trials, if
approved, the inability to successfully launch, increase sales of or sustain the
product or products in the market, the inability to successfully and efficiently
scale-up manufacturing for commercialized compounds, the outcome of clinical
work that will be required to commercialize compounds, the Company’s ability to
take advantage of proprietary technology and expand the scientific tools
available to it, uncertainty concerning charges associated with the Company’s
restructuring of its AMRI Hungary business unit, which may be higher than
estimated at this time, the risk that the Company will not realize the
anticipated cost savings from its restructuring plans during the time frame
indicated, or even if the anticipated cost savings are achieved, that the AMRI
Hungary business unit may remain unprofitable or operate with low gross margins,
the ability of the Company’s strategic investments and acquisitions to perform
as expected and the cost and any goodwill impairment related to such investments
and acquisitions, customer reaction to the acquisition of AMRI India and
FineKem, the Company's timing and ability to successfully integrate AMRI India
and FineKem’s operations (including implementation of the Company's systems and
controls) and employees, the introduction of new services by competitors or the
entry of new competitors into the markets for the Company's and AMRI India and
FineKem’s services, the failure by the company to retain key employees of AMRI
India and FineKem, failure to further develop and successfully market AMRI India
and FineKem’s service offerings, the Company’s ability to successfully complete
its ongoing expansion projects on schedule, the risks associated with
international operations and managing our international operations, especially
in India, Singapore and Hungary, the Company’s ability to execute its business
plan for compound and chemical screening libraries, failure to achieve
anticipated revenues and earnings, the existence of deficiencies and/or material
weaknesses in the Company’s internal controls over financial reporting, risks
related to the ongoing implementation of its enterprise resource planning
system, the Company’s ability to effectively manage its growth, liability for
harm caused by drugs the Company develops and tests, liability for contamination
or other harm caused by hazardous materials used by the Company, failure to meet
strict regulatory requirements, health care reform reducing the price
pharmaceutical and biotechnology companies can  charge for drugs, thus
reducing resources available to retain the services of our Company, the
fluctuation of the market price of our common stock, changes in the foreign
currency exchange rates and interest rates, and the possibility of a natural
disaster, catastrophic event or terrorist attack. 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. All
forward-looking statements are made as of the date of this report and we do not
undertake any obligation to update our forward-looking statements, except as
required by applicable law.




3





PART I




ITEM
      1.
              BUSINESS.




Overview




Albany
Molecular Research, Inc. (the “Company,” “we,” “us,” and “our”), a Delaware
corporation incorporated on June 20, 1991, provides scientific services,
technologies and products focused on improving the quality of life. The
Company’s core business consists of a fee-for-service contract services platform
encompassing drug discovery, development and manufacturing services, and a
separate, strategic technology division consisting of proprietary technology
investments, internal drug discovery and niche generic active pharmaceutical
ingredient product development. With locations in the U.S., Europe, and Asia,
the Company provides customers with a range of services and cost
models.




Business
Strategy




AMRI is
uniquely positioned in the marketplace to provide a competitive advantage to a
diverse group of customers.  Our reputation of providing the highest
quality service and a variety of pricing options provides more companies with
the security of sourcing discovery, development, small and large scale
manufacturing projects throughout our global network of research and
manufacturing facilities.  The current fragmented market provides us
an opportunity to use our resources and our expanded global footprint to become
a premier player in a much larger marketplace.  A more detailed look
at our strategy to accomplish this includes the following:





§
            Globalizing
      our contract services platform - We provide contract services to
      many of the world’s leading pharmaceutical and biotechnology companies. We
      derive our contract revenue from research and development expenditures and
      commercial manufacturing demands of the pharmaceutical and biotechnology
      industry. We continue to execute our long-term strategy to develop and
      grow a fully integrated global platform from which we can provide these
      services.  Over the past several years, through a combination of
      acquisitions and greenfield startups, we have expanded our global
      footprint to include large-scale manufacturing facilities in India, as
      well as research facilities in Hungary, Singapore and India.  We
      believe that our presence in these locations provides us with increased
      access to key global markets, and enables us to provide our customers with
      a flexible combination of high quality services and competitive cost
      structures to meet their individual outsourcing needs.  Our
      current financial position of significant cash and cash equivalents with
      minimal debt enables us to pursue additional expansion and high-value
      strategic acquisitions in the current economic
  environment.




§
            Leveraging
      integrated contract services - We seek comprehensive research
      and/or supply agreements with our customers, incorporating several of our
      service offerings and/or spanning across the entire pharmaceutical
      research and development process. Our research facilities provide
      discovery, chemical development, analytical, and small-scale current Good
      Manufacturing Practices (“cGMP”) manufacturing services. Compounds
      discovered and developed in our research facilities can then be more
      easily transitioned to production at our large-scale manufacturing
      facilities for use in clinical trials and, ultimately, commercial sales if
      the product meets regulatory approval. We believe that the ability to
      partner with a single provider of pharmaceutical research and development
      services from discovery through commercial production is of significant
      benefit to our customers. Through our comprehensive service offerings, we
      are able to provide customers with a more efficient transition of
      experimental compounds through the research and development process,
      ultimately reducing the time and cost involved in bringing these compounds
      from concept to market.




§
            Expanding
      Margins – Our global platform has increased our market share and
      was developed to allow us to maintain and grow margins.  The
      cost basis of our manufacturing and research facilities are largely fixed
      in nature.  We continue to seek savings opportunities to
      minimize this base of fixed costs, including process efficiencies and
      improved sourcing.  We also seek to drive incremental revenue
      through our facilities through improved execution, increased capacity
      utilization and investments in our sales & marketing
    team.




§
            Capitalizing
      on R&D skills and technologies - We conduct proprietary
      research and development to discover new therapeutically active lead
      compounds with commercial potential. We anticipate that we would then
      license these compounds and underlying technology to third parties in
      return for up-front and service fees and milestone payments, as well as
      recurring royalty payments if these compounds are developed into new
      commercial drugs.




4





Our
proprietary research and development activities previously led to a licensing
agreement with sanofi-aventis and another with Bristol-Myers Squibb Company
(“BMS”).  Under our license agreement with sanofi-aventis, we have had
revenues of $388.2 million to date.  Under our contract with BMS
we have had revenues of approximately $25 million to date, with the potential in
excess of $150 million in up-front license, contract service, and milestone
revenues.  The contract also provides for recurring royalties on
commercial products developed from this technology.




We also
continue to utilize our proprietary technologies to further advance other early
to middle stage internal research programs in the fields of obesity, central
nervous system (“CNS”) disorders and other diseases, with a view to seeking a
licensing partner for these programs at an appropriate research or developmental
stage.




In
addition, research and development is performed for our large-scale
manufacturing business related to the potential manufacture of new products, the
development of processes for the manufacture of generic products with commercial
potential, and the development of alternative manufacturing
processes.




Industry
Overview




Pharmaceutical
and biotechnology companies are under increasing 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, as
well as a reported drop in productivity from pharmaceutical companies’ internal
research pipelines.  Further, large pharmaceutical companies are
facing increased pressures to reduce their fixed costs base and turn to more
flexible cost models.




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.




Small
Molecule 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 laboratory models of disease, screen small molecule
compounds to identify those that demonstrate desired activity and finally create
a marketable drug.




The drug
discovery and development process includes the following steps:




Drug
Discovery




§
            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. The objective of lead
      discovery is to identify a lead compound or screening ‘hit’. Validation of
      a screening hit is performed under the scrutiny of the discovery
      biologists and medicinal chemists in order to identify the ‘hits’ with the
      best chance to obtain a drug-like chemical series or lead compound. Early
      in vitro
      screening for potentially unwanted drug-drug interactions and
      cardiovascular liabilities are also conducted. The objective of lead
      discovery is to identify a lead compound that has desirable drug
      properties and a good prognosis for further optimization in order to
      produce a robust clinical development
candidate.




§
            Lead
      Optimization.  Lead optimization typically involves
      improving the potency, selectivity, absorption/metabolism and
      pharmacokinetics of the lead compound, while maintaining, or generating,
      patentable intellectual property. Optimized lead compounds 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
      chemical services. During lead optimization most compounds are prepared in
      milligram to gram quantities.







5





Drug
Development




§
            Preclinical
      Testing.  Following the advancement of a lead compound to
      a development candidate, advanced preclinical testing is conducted in
      order to evaluate the efficacy and safety of the development candidate
      prior to initiating human clinical trials.  During this phase,
      specialists in chemical development  work to identify the best
      physical form of the compound, selecting appropriate salts and controlling
      polymorphic form and begin to improve the process for preparing the
      candidate in larger quantities, often hundreds of
      grams.  Working with Analytical Chemists, the Development
      Chemists will prepare material of sufficient quality and quantity to be
      used in IND-enabling toxicity studies.  In the United States,
      prior to continuing on to the human clinical trials stage, an
      Investigational New Drug application (“IND”) must be filed with the U.S.
      Food and Drug Administration (“FDA).  Once the application is
      filed, the applicant must wait 30 days for comments from the
      FDA.  If none are received, human clinical trials may
      commence.




§
            Clinical
      Trials.  During clinical trials, several phases of
      studies are conducted to test the safety and efficacy of a drug candidate
      in humans.  The human clinical trials phase is usually costly
      and time-consuming. As study populations increase and trial durations
      lengthen, larger quantities of the active ingredient are required.
      Clinical trials are normally done in three phases and generally take two
      to seven years, but may take longer, to complete. The active
      pharmaceutical ingredient (“API”) and the formulated drug product must be
      prepared under 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 FDA
      requires that manufacturing procedures and operations conform to cGMP
      guidelines, International Conference on Harmonization 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
in Contracting for Drug Discovery and Development




Beginning
in 2005, we began to experience strong demand for our developmental and
small-scale cGMP manufacturing services as a result of a trend in drug
development and discovery outsourcing. The following trends continue to lead to
demand for contract services in drug discovery and development:




•
            development
      of new technologies has continued to increase the number of targets and
      accelerate the identification of active
  compounds;




•
            pressure
      to develop new lead compounds due to the near-term loss of patent
      protection for many drug products;




•
            increased
      pressure to reduce the time spent in drug discovery and development in
      order to bring drugs to market sooner and maximize time on the market
      during the drug’s patent life;




•
            increased
      focus on converting fixed costs to variable costs and streamlining
      operations by contracting for research and development
      services;




•
            heightened
      regulatory environment and increased complexity that have made the
      internal management of complicated discovery, development and
      manufacturing projects more difficult and costly;
  and




•
            emergence
      of biotechnology and start-up pharmaceutical companies in the drug
      discovery process who typically tend to outsource drug discovery and
      development expertise as part of their
strategy.




In recent
years, we have experienced increased demand in the areas of developmental and
small-scale cGMP manufacturing services, reflecting a reduction in budgetary
constraints of our emerging pharmaceutical and biotech customers and their
increased efforts to bring identified compounds into clinical trials. During
this timeframe, partly in recognition of increased competition and consolidation
within the pharmaceutical industry, we established lower-cost international
operations in Hungary, Singapore and India. Contract service providers that were
not able to offer a cost competitive product were forced to exit or
significantly reduce their presence in the marketplace during this time. In
addition to providing customers with a range of technologies and cost options,
expanding internationally has provided increased access to customers and
potential customers in regions of the world which we have, until recently, not
significantly pursued.





6





In
addition to the longer-term trend of growth in development and small scale cGMP
manufacturing services discussed above, we have more recently seen an increased
trend in demand for our discovery services.  This demand increases as
our ability to provide high-quality services under a variety of business models
and cost structures by incorporating our international facilities has been
well-received by our customers.




We
currently expect a decrease in customer delivery patterns and demand caused by
the economic downturn to affect us in the beginning of 2009.  We
anticipate a future return to the increased demand trend and expect the majority
of our 2009 growth to occur in the latter part of 2009.  We continue
to build on our strategy of leveraging our global resources to meet changing and
expanding global outsourcing needs and additionally to expand our global service
platform to meet the needs of our customers.  In 2007, we completed
the construction of a 50,000 square foot research center focusing primarily on
custom synthesis and medicinal chemistry support services at the Shapoorji
Pallonji Biotech Park in Hyderabad, India. In 2008, we completed a 10,000 square
foot expansion of our Singapore Research Center.  In addition to
increasing existing discovery service capabilities, the expansion of our
Singapore Research Center will also include the introduction of in vitro biology
services at the facility.  We also commenced the expansion of our
research facilities in Budapest, Hungary and Bothell, Washington during
2008.




Trends
in Contracting for Pharmaceutical Manufacturing Services




The
trends noted above that have driven demand for drug discovery and development
services in recent years have also led to an increase in demand for contract
manufacturing services as healthcare companies transition their early stage
compounds into clinical and ultimately commercial production. Further, many
healthcare companies have elected to outsource their manufacturing capabilities
in an effort to control costs by eliminating expenses associated with owning and
operating manufacturing facilities. However, new changes in governmental
regulatory issues could potentially affect the current out-sourcing
market.  In addition, the demand for the manufacturing of generic
drugs has significantly increased as healthcare companies’ strategic objectives
increasingly include the ability to introduce generic drug product into the
market upon expiration of patented technologies.




We have
integrated our drug discovery and development research facilities with our
large-scale manufacturing facilities to allow for the easier transition
throughout the entire pharmaceutical research and development process. Through
our comprehensive service offerings, we are able to provide customers with a
more efficient transition of compounds through the research and development
process, ultimately reducing the time and cost involved in bringing these
compounds from concept to market. We enhanced our large-scale manufacturing
capabilities with our acquisitions of manufacturing facilities in India in 2007
and 2008. With these acquisitions, we began to globalize our manufacturing
operations, which offers us the flexibility to produce raw materials and process
intermediates to support our domestic large-scale manufacturing facility. In
addition, we believe that these acquisitions improve our generic drug product
manufacturing capabilities and provide the opportunity to increase our global
manufacturing market share over time.




Our
Capabilities




We
perform services including drug discovery, pharmaceutical development, and
manufacturing of active ingredients and pharmaceutical intermediates for many of
the world’s leading healthcare companies.  The problem-solving
abilities of our scientists can provide added value throughout the drug
discovery, development and manufacturing process. Additionally, we are making
investments to include formulation to our on-going list of
services.  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.





7





Service
Offerings




Drug
Discovery Services




The
competitive drug discovery industry continues to face many challenges, including
a weakening product pipeline, increasing costs, more complex disease targets and
regulatory hurdles.  These challenges have compelled many
companies/research organizations to look outside their own research and
development (“R&D”) function for contract partners to support research and
development at the earliest stages of the drug discovery process.  We
provide a broad spectrum of lead discovery services backed by key employees with
decades of experience.  All services provided by our lead discovery group
are tightly integrated with our chemistry business and can be accessed
independently or as part of a program involving chemistry-driven lead
optimization.




Our Drug
Discovery Services include:




Assay
Development and Design




We offer
custom assay design and development services to clients in the pharmaceutical,
biopharmaceutical and agrochemical industries who are starting from a unique
target or who are supporting ongoing lead discovery programs.  This
service can be delivered independently to a client, or integrated with our full
range of chemistry services.





Key
features of our Assay Design and Development services
include:





·
              Gathering
      assay design requirements and objectives from the
  client


·
              Transferring
      customer developed assays


·
              Optimizing
      and validating assays for screening


Screening





Our
diverse offering of screening capabilities, coupled with access to our range of
sample libraries, give customers the essential tools to efficiently and safely
identify active compounds during the lead discovery phases of drug
discovery.




Key
features of our screening programs and collections include:





·
              Availability
      of high throughput, absolute potency and selectivity screening
      services


·
              Support
      of large scale screens of client or AMRI’s sample
    collections


·
              Extensive
      performance testing


Screening
Libraries





We have
created a series of unique, high purity, cost effective, small molecule
synthetic compound libraries and a complementary collection of natural product
extracts from marine, plant and microbial sources designed for screening and
hit-to-lead programs.  We are uniquely positioned to fully support
active hits from any of these libraries with lead optimization services,
analytical services, custom synthesis and/or small or large scale
manufacturing.





Our
libraries include:





·
              Natural
      Products Libraries


·
              Target
      focused Discovery Libraries


·
              Commercial
      Sample Library (“CSL”)


·
              Diverse
      AMRI Sample Library (“DASL”)
 
 8
  Bioanalytical
Services


We
develop and execute rapid, sensitive, and robust bioanalytical methods for
extraction and quantitation of drug and metabolites in biological fluids and
tissues to support preclinical and clinical studies.


Natural
Product Services


We have a
longstanding, well established ability to deliver on Natural Products discovery
programs.  With a complete team of natural product experts with decades of
experience in the field and access to a variety of complementary discovery
technologies and disciplines, we have the unique ability to rapidly advance a
natural product from hit to lead to qualified drug candidate.


Medicinal
Chemistry





Lead
optimization is the complex, iterative process of altering the chemical
structure of a confirmed hit to identify an improved drug lead with the goal of
progressing to a preclinical candidate.  Well-trained, intuitive and
knowledgeable, our medicinal chemists have years of experience working with
drug-like compounds.  Our Medicinal Chemistry capability is fully
integrated with our other drug discovery services, allowing for a “one stop
shop” approach towards outsourcing lead discovery and optimization efforts, if
so desired.





Computer-Aided
Drug Discovery (“CADD”)





Our CADD
services use sophisticated computational software and techniques to help
identify novel hits or leads against selected therapeutic targets, as well as to
support medicinal chemistry lead optimization programs. CADD methods can
increase the odds of identifying compounds with desirable characteristics, speed
up the hit-to-lead process and improve the chances of getting a compound over
the many hurdles of preclinical testing.





In
vitro ADMET





We
conduct in vitro ADMET assays to evaluate and improve metabolism,
bioavailability, pharmacology and toxicology of compounds.


Early
stage ADMET testing, integrated with Medicinal Chemistry programs, typically
include:


·
              Aqueous
      solubility under physiological
conditions


·
              Metabolic
      and chemical stability


·
              Membrane
      permeability (PAMPA, Caco-2, etc.)


·
              Inhibition
      and induction of major metabolic enzymes
  (CYP450s)


Chemical
Development




Chemical
development involves the scale-up synthesis of a lead compound and
intermediates. 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. With pharmaceutical development
locations around the globe, we have become a top choice for an ever increasing
number of pharmaceutical and biotechnology companies seeking a partner for the
rapid advancement of their drug candidates. Customers throughout the world rely
on our proven technical expertise, commitment to the highest quality and
regulatory standards, flexibility, and strong customer focus to advance their
lead compounds through the drug development process, from bench scale to
commercial production.





Our
Chemical Development services include:





·
            Process
      Research and Development




·
            Custom
      Synthesis




9





·
            Process
      Safety Assessment




·
            Scale-up
      Capabilities




·
            High
      Potency and Controlled Substances




·
            Analytical
      Services




·
            Preformulation
      Services and Physical
Characterization




·
            Preparative
      Chromatography




·
            IND
      support Services




·
            Fermentation
      Development and Optimization




·
            Building
      Blocks Database




cGMP
Manufacturing





We
provide chemical synthesis and manufacturing services for our customers in
accordance with cGMP regulations. 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 regulations as established by
the FDA. Our Albany, New York location has production facilities and quarantine
and restricted access storage necessary to manufacture quantities of drug
substances under cGMP regulations sufficient for conducting clinical trials from
Phase I through Phase II, and later stages for selected products, based on
volume and other parameters. Our large scale manufacturing facility in
Rensselaer, New York is equipped to provide a wide range of custom chemical
development and manufacturing capabilities. We conduct commercial cGMP
manufacturing of APIs and advanced intermediates. Our large-scale cGMP
manufacturing facilities provide synergies with our small-scale development
laboratories, offering our customers services at every scale, from bench to
production.  We have special capabilities in high value-added areas of
pharmaceutical development and manufacturing, including High Potency
Manufacturing.  Cytotoxic and other highly potent compounds present a
number of potential challenges in their production and handling.  We
have extensive experience in the cGMP production of these types of compounds,
from grams to hundreds of kilograms per year.  Our Rensselaer facility
is licensed by the U.S. Drug Enforcement Administration to produce Schedule I,
II, III, IV and V controlled substances.  For over 50 years, the
facility has produced controlled substances such as analgesics, amphetamines,
barbiturates, and anabolic steroids.  In the second quarter of 2008,
our focus on quality was reinforced after a successful FDA inspection of our
Rensselaer facility resulted in no issuances of Form FDA 483 Observations of Objectionable
Conditions and Practices(“Form FDA 483”).





Our
manufacturing facilities are strategically situated in various locations in the
United States and Asia. These locations are globally positioned to provide
tailored customer solutions and enable the efficient and cost-effective transfer
of pre-clinical, clinical and commercial APIs from small-scale to large-scale
production.  Additionally, these locations easily integrate with our
discovery and pharmaceutical development services.





Formulation





We are
currently adding some focused formulation capabilities to our
portfolio.  Working in close collaboration with our already
established chemical synthesis, analytical development and preformulation
groups, we expect to offer solid dosage formulation development services, as
well as cGMP early clinical phase capsule filling using Xcelodose
technology.





Formulation
services that we expect will be available include:





·
            Neat
      API in-capsule filling




·
            Blending
      and sieving




·
            Milling




·
            Tableting




·
            Rheology




·
            Roller
      compaction





10





·
            Wet
      granulation




·
            Fluid
      bed processing, including Wurster
coating




·
            All
      associated analytical testing for dosage formulation
    products





Analytical
Chemistry Services


We
provide broad analytical support for drug discovery, pharmaceutical development
and manufacturing.  With years of industry experience, state-of-the-art
technologies and instrumentation, along with close collaboration with synthesis
chemists, our analytical services are designed to ensure that the right tools
are used to solve even the most difficult problem.


Analytical
services that we provide include:




·
              Impurity
      identification & Structure Elucidation·
              Method
      development, qualification and
validation




·
            Preformulation
      and physical characterization




·
            Quality
      control




·
            Regulatory
      support/quality assurance




·
            Preparative
      Chromatography




·
            Stability
      services




·
            Bioanalytical
      services




Proprietary
Research and Development




Leveraging
our wide array of drug discovery capabilities, 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. We identify lead series by utilizing our high throughput screening
capabilities, coupled with our computer assisted drug design capabilities, to
assess our diverse range of synthetic, virtual and natural product screening
libraries. Applying the expertise of our separate R&D medicinal chemistry
group, supported by our own in vitro biology and in vitro metabolism
capabilities and a select range of in vivo service providers, we optimize these
leads series to develop candidate status, in some cases pursuing these into
early clinical studies. Current drug discovery and development projects are
focused on treatments for cancer, irritable bowel disease, CNS disease and
obesity. Our R&D efforts benefit from access to a broad array of our
scientific services including capabilities in microbial fermentation, molecular
biology, cell culture, gene expression and cloning, scale up synthesis of human
metabolites, preformulation, chemical development and cGMP synthesis. We spent
$13.1 million, $12.8 million and $11.4 million on research and development
activities in 2008, 2007 and 2006, respectively.




Licensing
Agreements




In
October 2005, we licensed the worldwide rights to develop and commercialize
potential products from our amine neurotransmitter reuptake inhibitor technology
and patents identified in one of our proprietary research programs to BMS. In
conjunction with the licensing agreement, we received a non-refundable,
non-creditable up-front payment of $8.0 million. In addition, the agreement
provided for the establishment of a research program under which BMS would
purchase approximately $10.0 million in research and development services over
the initial three year term of the program. The agreement also set forth
milestone events that, if achieved by these products, would entitle the Company
to non-refundable, non-creditable milestone payments of up to $66.0 million for
each of the first and second compounds to achieve these events, and up to $22.0
million for each subsequent product to achieve these events. To date, we have
had revenues of $7.0 million from achieving certain milestones with
BMS.  The agreement also provides for the Company to receive royalty
payments on worldwide sales of any such product that is
commercialized.





11





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
sanofi-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.




In
March 1995, we entered into a license agreement with sanofi-aventis. Under
the terms of the license agreement, we granted sanofi-aventis an exclusive,
worldwide license to any patents issued to us related to our original TAM patent
applications. From the beginning of the agreement through December 31,
2008, we have had revenues of $7.4 million in milestone payments and
$359.9 million in royalties under this license agreement. Sanofi-aventis is
obligated under the license agreement to pay ongoing royalties to us based upon
its sales of Allegra/Telfast and generic fexofenadine.  Additionally
during the fourth quarter of 2008, we entered into an amendment to our licensing
agreement with sanofi-aventis to allow sanofi-aventis to sublicense patents
related to Allegra and Allegra D-12 to Teva Pharmaceuticals and Barr
Laboratories in the United States.  As a result of this amendment, we
received an upfront sublicense fee from sanofi-aventis of $10.0 million and
additionally we will receive royalties from sanofi-aventis on the sale of
products in the United States containing fexofenadine hydrochloride and products
containing fexofenadine hydrochloride (generic Allegra) and pseudoephedrine
hydrochloride (generic Allegra D-12) by Teva Pharmaceuticals and Barr
Laboratories through 2015, along with additional consideration. We are not
entitled, however, to receive any additional milestone payments under the
license agreement. Sales of Allegra/Telfast and generic fexofenadine by
sanofi-aventis worldwide were approximately $1.1 billion for the year ended
December 31, 2008, $1.0 billion for the year ended December 31, 2007, and $0.9
billion for the year ended December 31, 2006.  See
“Item 3—Legal Proceedings” for discussion of current legal proceedings
related to Allegra/Telfast.




Business
Segments




Our large
scale cGMP manufacturing activities represent a distinct business segment as
defined by Statement of Financial Accounting Standards (“SFAS”) No. 131
(“SFAS 131”), “Disclosures about Segments of an Enterprise and Related
Information”. The Company’s remaining activities, including drug lead discovery,
optimization, drug development, and small scale commercial manufacturing
represent a separate distinct business segment as defined by SFAS 131. See Item
7 and the notes to the consolidated financial statements for financial
information on the Company’s business segments.




Customers




Our
customers include pharmaceutical companies and biotechnology companies and, to a
limited extent, agricultural companies, fine chemical companies, contract
chemical manufacturers, government research entities and non-profit
organizations. For the year ended December 31, 2008, contract revenue from
our three largest customers represented 17%, 8% and 7%, respectively, of our
contract revenue. For the year ended December 31, 2007, contract revenue
from our three largest customers represented 19%, 5% and 5%, respectively, of
our contract revenue. For the year ended December 31, 2006, contract
revenue from our three largest customers represented 21%, 7% and 6%,
respectively, of our contract revenue. Our largest customer, General Electric
Company (“GE”), represented 17% of total contract revenue for the year ended
December 31, 2008.  In the first quarter of 2009, we extended the
effective date of a supply agreement with GE thru December 2013. See
Note 16 to the consolidated financial statements for information on
geographic and other customer concentrations.




Marketing




Our
services are marketed primarily by our dedicated sales and business development
personnel and senior management. Because our customer contacts are often highly
skilled scientists, we believe 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 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.





12





Employees




As of
January 31, 2009, we had 1,357 employees. Of these employees, 435 are at
our international facilities. Our U.S. large-scale manufacturing hourly work
force has 99 employees who are subject to a collective bargaining agreement with
the International Chemical Workers Union. A new 4-year collective bargaining
agreement was signed in January 2007 with the union and expires in
January 2011. Additionally, we have 38 union employees at our large-scale
manufacturing facility at AMRI India that are covered by two separate collective
bargaining agreements that expire in April 2009. None of our other employees are
subject to any collective bargaining agreement. We consider our relations with
our employees and the union to be good.




Competition




While a
small number of larger chemistry outsourcing service providers have emerged as
leaders within the industry, the outsourcing market for pharmaceutical and
biotechnology contract chemistry services remains highly
fragmented.  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 many areas of our business we also face
foreign competition from companies in regions 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.




We rely
on many internal factors that allow us to stay competitive and differentiate us
in the marketplace, including:





§
            Our
      globalization of both research and manufacturing facilities allows us to
      increase our access to key global
markets




§
            Our
      ability to offer a flexible combination of high quality, cost-effective
      services




§
            Our
      comprehensive service offerings allow us to provide our customers a more
      efficient transition of experimental compounds through the research and
      development process, ultimately reducing the time and cost involved in
      bringing these compounds from concept to
market




§
            Our
      current strong financial position gives our customers security of our
      continued presence in the marketplace even in the current economic
      environment




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 be assured that any AMRI 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 be certain that in the event that any claims with
respect to any of our patents, if issued, are challenged by one or more third
parties, a 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
be certain 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 various United States and international patents
covering fexofenadine HC1 and certain related manufacturing processes. Our
United States patents begin to expire in 2013, and our international patents
begin to expire in 2014. Additionally, our United States patents related to
substituted biaryl purines as potent anticancer agents and a series of aryl and
heteroaryl tetrahydroisoquinolines related to central nervous system indications
begin to expire in 2020.





13





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 protection is not inordinate. However, we cannot
be certain 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.




Many of
our 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 provide assurance 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 provide assurance that, despite precautions
taken by us, others have not and will not obtain access to our proprietary
technology. Further, we cannot be certain 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 us or our
customers. The nature and the extent to which such regulation may apply to us or
our customers will vary depending on the nature of any such pharmaceutical
products. Virtually all pharmaceutical products developed by us or 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 U.S. 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 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 seven years, but may 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 be certain 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 API 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
unscheduled periodic regulatory inspections to ensure compliance with cGMP
regulations. 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. An FDA inspection of our
Rensselaer manufacturing facility was completed in the second quarter of 2008,
resulting in no issuance of a Form FDA 483. Also, an FDA inspection of our
cGMP manufacturing facility, located at 21 Corporate Circle in Albany, was
completed in the fourth quarter of 2008, resulting in no issuance of a
Form FDA 483.





14





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 be certain that we will not be required to incur
significant costs to comply with environmental laws and regulations in the
future.




Internet
Website




We
maintain an internet website at www.amriglobal.com.
The information contained on our website is not included as a part of, or
incorporated by reference into, this Annual Report on Form 10-K. We make
available on our website, free of charge, our annual report on Form 10-K,
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 (the “Exchange Act”) as soon as reasonably practicable after such
reports are electronically filed with, or furnished to, the SEC. Our reports
filed with, or furnished to, the SEC are also available at the SEC’s website at
www.sec.gov.




ITEM
      1A.
              RISK
      FACTORS




The
following factors should be considered carefully in addition to the other
information in this Form 10-K. 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
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. 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. Although our contract revenues increased in 2008, we
may be adversely affected in future periods as a result of general economic
and/or pharmaceutical industry downturns which has resulted in a diminished
availability of liquidity in the marketplace. If pharmaceutical and
biotechnology companies discontinue or decrease their usage of our services,
including as a result of a slowdown in the overall global economy, our revenues
and earnings could be lower than we currently 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, 2008, revenues from sales of raw material to GE
Healthcare for use in one of its diagnostic imaging agents totaled
$32.3 million and represented approximately 17% of our contract revenue, or
14% of our total revenue.  Our subsidiary,  AMRI Rensselaer,
Inc. (“AMRI Rensselaer”), formerly known as Organichem, entered into a long-term
agreement to supply this material to GE Healthcare in 1999 which was renewed in
2005, extending the expiration date of the original agreement from 2007 to 2010.
In January 2009, we entered into a second amendment to this agreement which
extends the expiration date of the first amendment from 2010 to
2013.  GE Healthcare’s purchases have historically exceeded the
contractual minimum purchases, however, this may not continue. Additionally, in
order to maintain our good relationship with GE Healthcare, we have recently
agreed to price concessions which will impact our margins.  If GE
Healthcare materially reduces its purchase levels or attempts to renegotiate
prices, there may be a material decrease in our revenues and operating income.
In addition, during the year ended December 31, 2008, we provided services
to three major customers, other than GE Healthcare, representing approximately
19% of our contract revenues or 16% of our total revenue. 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 materially decrease.





15





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 currently 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 significant 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. For example, in
October 2005 we licensed our proprietary amine neurotransmitter reuptake
inhibitor technology to BMS. However, we may not be successful in producing any
additional valuable technology or successfully licensing it to a third party in
the future, including our lead R&D oncology program that is currently in
Phase I clinical trials. 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 our collaboration with BMS.




Our
objective is to patent our proprietary technologies and license such
technologies to other companies for the purpose of advancing compounds
associated with these technologies through human clinical trials and ultimately
obtaining regulatory approval for the commercial sale of products containing
these compounds. We seek to enter into licensing arrangements with selected
partners that provide for a combination of up-front license fees, milestone
payments upon the achievement of specified research and development objectives,
and royalty payments based on sales of related commercial products. In
October 2005, we licensed the worldwide rights to develop and commercialize
potential products from our amine neurotransmitter reuptake inhibitors to BMS.
In conjunction with the licensing agreement, we received a non-refundable,
non-creditable up-front fee of $8.0 million. In addition, BMS purchased
approximately $10.0 million in research and development services over the
initial three year term of our agreement. The license agreement also sets forth
development related milestone events that, if achieved by our products, would
entitle us to non-refundable, non-creditable milestone payments of up to $66.0
million for each of the first and second products to achieve these events, and
up to $22.0 million for each subsequent product to achieve these events. The
license agreement also provides for us to receive royalty payments on worldwide
sales of any such product that is commercialized.  To date, we
recognized $7.0 million of milestone revenue in conjunction with this
agreement.




Our
arrangement with BMS is a significant component of our proprietary research and
development business. If there is a delay or failure in BMS’s performance, our
proprietary research and development business may not produce the long-term
revenues, earnings, or strategic benefits that we anticipate. We cannot control
BMS’s performance or the resources it devotes to our collaborative program. BMS
has elected not to utilize our contract research services for this collaboration
upon completing the initial term required under the agreement.  In
addition, we cannot guarantee BMS’s continued pursuit of programs covered by our
agreement. Furthermore, with respect to any drug candidate resulting from our
collaborative program, the FDA may delay or deny marketing approvals because of
adverse FDA decisions or interpretations of data that differ from BMS’s
interpretations and that may require additional clinical trials or potential
changes in the cost, scope and duration of clinical trials. Even if we succeed
in getting market approvals, BMS may not have the ability to successfully
launch, increase sales of or sustain the product or products in the market, or
efficiently scale-up manufacturing for commercialized compounds. Disputes may
arise between us and BMS, which may not be resolved in our favor. Further, BMS
could merge with or be acquired by another company or experience financial or
other setbacks unrelated to our collaboration that could, nevertheless,
adversely affect us. The occurrence of any of these could result in our
proprietary research and development business not producing the long-term
revenues, earnings, or strategic benefits that we anticipate which could have a
material adverse effect on our business.





16





Our
business may be adversely affected if we encounter complications in connection
with our continued implementation and operation of information management
software.




We have
implemented a comprehensive enterprise resource planning (“ERP”) system to the
majority of our locations to enhance operating efficiencies and provide more
effective management of our business operations. Continuing an uninterrupted
performance of our ERP system or other software or hardware is critical to the
success of our business strategy. Any material failure of our ERP system or
other software or hardware that interrupts or delays our operations
could adversely impact our ability to do the following in a timely manner
and have a material adverse effect on our operations:




·
            report
      financial results;




·
            accurately
      reflect inventory costs;




·
            accept
      and process customer orders;




·
            receive
      inventory and ship products;




·
            invoice
      and collect receivables;




·
            place
      purchase orders and pay invoices;
and




·
            accurately
      reflect all other business transactions related to the finance, order
      entry, purchasing, supply chain and human resource processes within the
      ERP system.




Our
goodwill may become impaired.




As of
December 31, 2008, we had $40.3 million of goodwill on our
consolidated balance sheet. We perform an annual assessment of the carrying
value of our goodwill for potential impairment using an independent third-party.
A determination of impairment is made based upon the fair value of the related
reporting unit. 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:




·
            significant
      underperformance relative to historical or projected future operating
      results;




·
            significant
      negative industry or economic trends;
and




·
            our
      market capitalization relative to net book
  value.




Agreements
we have with our employees, customers, consultants and other third parties may
not afford adequate protection for our valuable intellectual property,
confidential information and other proprietary information.




Some of
our most valuable assets include patents.  In addition to patent
protection, we also rely on trade secrets, know-how, continuing technological
innovation and licensing opportunities. In an effort to maintain the
confidentiality and ownership of our customer’s information, such as trade
secrets, proprietary information and other customer confidential information, as
well as our own, we often require our employees, consultants and advisors to
execute confidentiality and proprietary information agreements. However, these
agreements may not provide us with adequate protection against improper use or
disclosure of confidential information and there may not be adequate remedies in
the event of unauthorized use or disclosure. Furthermore, we may from time to
time hire scientific personnel formerly employed by other companies involved in
one or more areas similar to the activities we conduct. In some situations, our
confidentiality and proprietary information agreements may conflict with, or be
subject to, the rights of third parties with whom our employees, consultants or
advisors have prior employment or consulting relationships. Although we require
our employees and consultants to maintain the confidentiality of all proprietary
information of their previous employers, these individuals, or we, may be
subject to allegations of trade secret misappropriation or other similar claims
as a result of their prior affiliations. Finally, others may independently
develop substantially equivalent proprietary information and techniques causing
some technologies that we develop to be patented by other companies. Our failure
to protect our proprietary information and techniques may inhibit our ability to
compete effectively and 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 and if we are unsuccessful in defending these
claims, we may be subject to liability for infringement.  To the
extent that we are unable to protect confidential customer information, we may
encounter material harm to our reputation and to our business.





17





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 professionals.
Expansion of our facilities may lead to increased expenses and may divert
management attention away from operations.




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




In
January 2008, we completed the acquisition of FineKem, a manufacturing facility
in Aurangabad, India.  In June 2007, we completed the acquisition of
two pharmaceutical manufacturing facilities in Aurangabad, India and Navi
Mumbai, India (“AMRI India”). In February 2006, we completed the
acquisition of ComGenex, a privately held drug discovery service company in
Budapest, Hungary. These acquisitions may not be as beneficial to us as we
currently expect. With regards to our strategic equity investments, 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.




Future
acquisitions may disrupt our business and distract our
management.




We have
engaged in a number of acquisitions and strategic investments, and we currently
expect to continue to do so. For example, in January 2008 we completed the
acquisition of FineKem, a manufacturing facility in India and in June 2007 we
completed the acquisition of AMRI India, consisting of two pharmaceutical
manufacturing companies in India.  Also, in February 2006, we
completed the acquisition of ComGenex, a privately held drug discovery service
company in Budapest, Hungary. However, we may not be able to identify additional
suitable acquisition candidates, and if we do identify suitable 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 adversely affected. In addition,
acquisitions can involve charges of significant amounts related to goodwill that
could become impaired and adversely affect our results of
operations.




We
may not be able to effectively manage our international
operations.




We
established contract research facilities in Singapore and Hyderabad, India in
2005, and have continued to expand our facilities in India in 2006, 2007 and
2008. In February 2006, we completed the acquisition of ComGenex, a
privately held drug discovery service company in Budapest, Hungary. Additionally
in June 2007, we acquired AMRI India and in January 2008, we acquired
FineKem.  There are significant risks associated with the
establishment of foreign operations, including, but not limited to: geopolitical
risks, foreign currency exchange rates and the impact of shifts in the U.S. and
local economies on those rates, compliance with local laws and regulations, the
protection of our intellectual property and that of our customers, the ability
to integrate our corporate culture with local customs and cultures, and the
ability to effectively and efficiently supply our international facilities with
the required equipment and materials. If we are unable to effectively manage
these risks, these locations may not produce the revenues, earnings, or
strategic benefits that we anticipate which could have a material adverse affect
on our business.




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 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:




·
            Dr. Thomas
      E. D’Ambra, our Chairman, Chief Executive Officer and
      President;




·
            Mark
      T. Frost, our Senior Vice President, Administration, Chief Financial
      Officer and Treasurer;







18





·
              Dr. Steven
      R. Hagen, our Vice President, Pharmaceutical Development and
      Manufacturing;·
              William
      Steven Jennings, our Senior Vice President, Sales, Marketing and Business
      Development;




·
            Brian
      D. Russell, our Vice President, Human
Resources;




·
            Dr. Bruce
      J. Sargent, our Vice President, Discovery Research and Development;
      and




·
            Dr. Michael
      P. Trova, our Senior Vice President,
Chemistry.




The loss
of any of our key employees, including our scientists, may have a material
adverse effect on our business.




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




We
develop, test and manufacture drugs that are used by humans. If any of the drugs
that we develop, test or manufacture harm 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 material adverse effect 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 material adverse effect on our
financial condition.




We
completed an environmental remediation assessment associated with groundwater
contamination at our Rensselaer, New York location. This contamination is
associated with past practices at the facility prior to 1990, and prior to our
investment or ownership of the facility. 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, we are
expected to pay for monitoring and reporting until 2014. Under a 1999 agreement
with the facility’s previous owner, our maximum liability under the remediation
is $5.5 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 material adverse effect
on our 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 FDA. The FDA
conducts unscheduled 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, 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 could have a material adverse effect 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, these 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 at 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
potential for terrorist attacks, the national and international responses to
terrorist attacks, and other acts of war 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.




19





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 every shareholder’s 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:




·
            Our
      certificate of incorporation provides for three classes of directors with
      the term of office of one class expiring each year, commonly referred to
      as a “staggered board.” By preventing stockholders from voting on the
      election of more than one class of directors at any annual meeting of
      stockholders, this provision may have the effect of keeping the current
      members of our board of directors in control for a longer period of time
      than stockholders may desire.




·
            Our
      certificate of incorporation authorizes our board of directors to issue
      shares of preferred stock without stockholder approval and to establish
      the preferences and rights of any preferred stock issued, which would
      allow the board to issue one or more classes or series of preferred stock
      that could discourage or delay a tender offer or change in
      control.




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 have significant control over us and their interests as
shareholders may differ from our other shareholders’.




At
February 28, 2009, our directors and officers beneficially owned or
controlled approximately 15.5% of our outstanding 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.




Our
stock price is volatile and could experience substantial further
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, the global
economic and potential uncertainty 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 has adversely affected and may further affect the price
of our common stock.




20





Because
we do not intend to pay dividends, our shareholders 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 our shareholders’ 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
shareholders’ purchased their shares.




We
may experience disruptions in or the inability to source raw materials to
support our production processes or to deliver goods to our
customers





We rely
on independent suppliers for key raw materials, consisting primarily of various
chemicals. We generally use raw materials available from more than one
source.  We could experience inventory shortages if we were required
to use an alternative manufacturer on short notice, which could lead to raw
materials being purchased on less favorable terms than we have with our regular
supplier.  Additionally, we rely on various third-party delivery
services to transport both goods from our vendors and finished products to our
customers.  A disruption in our ability to source or transport
materials could delay or halt production and delivery of certain of our products
thereby adversely impacting our ability to market and sell such products and our
ability to compete.





We
may experience significant increases in operational costs beyond our
control





Costs for
certain items which are needed to run our business, such as natural gas, energy
and petroleum, have increased significantly in the past few years.  As
these cost increases are dependent on market conditions, and although we do our
best to hedge these price increases, we may experience increases in our costs
due to the volatility of prices and market conditions.  Increases in
these costs could negatively impact our results of operations.





We
may be subject to foreign currency risks




Our
global business operations give rise to market risk exposure related to changes
in foreign exchange rates, interest rates, commodity prices and other market
factors.  If we fail to effectively manage such risks, it could have a
negative impact on our consolidated financial statements.  For a
further discussion of our foreign currency risks, please see “Item 7A.
Quantitative and Qualitative Disclosures About Market Risk”.




ITEM
      1B.
              UNRESOLVED
      STAFF COMMENTS.




We have
received no written comments regarding our periodic or current reports from the
staff of the Securities and Exchange Commission that were issued 180 days or
more preceding the end of our 2008 fiscal year.




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 1,023,000 square feet, of which 688,000 square feet are owned and
335,000 square feet are leased. Set forth below is information on our principal
facilities:




Location
                    
                    Square Feet
                    
                    Primary PurposeRensselaer,
      New York
                    
                    
                    276,000
                    
                    Manufacturing &
      Research & DevelopmentAlbany,
      New York
                    
                    
                    275,000
                    
                    Manufacturing,
      Research & Development and AdministrationAurangabad,
      India
                    
                    
                    208,000
                    
                    ManufacturingEast
      Greenbush, New York
                    
                    
                    74,000
                    
                    Manufacturing &
      Research & DevelopmentHyderabad,
      India
                    
                    
                    52,000
                    
                    Research &
      DevelopmentBothell,
      Washington
                    
                    
                    33,000
                    
                    Research &
      DevelopmentSyracuse,
      New York
                    
                    
                    28,000
                    
                    Manufacturing &
      Research & DevelopmentBudapest,
      Hungary
                    
                    
                    27,000
                    
                    Research &
      DevelopmentSingapore
                    
                    
                    26,000
                    
                    Research &
      DevelopmentFuzfo,
      Hungary
                    
                    
                    12,000
                    
                    Research &
      DevelopmentMumbai,
      India
                    
                    
                    6,000
                    
                    AdministrativeNavi
      Mumbai, India
                    
                    
                    6,000
                    
                    Manufacturing





21





Our
Rensselaer, NY facility and our Aurangabad, Mumbai and Navi Mumbai, India
facilities are used in our Large-Scale Manufacturing (“LSM”) segment as reported
in the consolidated financial statements. All other facilities are used in our
Discovery/Development/Small Scale Manufacturing (“DDS”) segment, as reported in
the consolidated financial statements. We believe these facilities are generally
in good condition and suitable for their purpose.  We believe that the
capacity associated with these facilities is adequate to meet our anticipated
needs through 2009.




ITEM
      3.
              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.




The
Company, through its former subsidiary AMR Technology that has been merged into
the Company, along with Aventis Pharmaceuticals Inc., the U.S. pharmaceutical
business of sanofi-aventis S.A., is involved in legal proceedings with several
companies seeking to market or which are currently marketing generic versions of
Allegra. Beginning in 2001, Barr Laboratories, Inc., Impax Laboratories, Inc.,
Mylan Pharmaceuticals, Inc., Teva Pharmaceuticals USA, Dr. Reddy’s Laboratories,
Ltd./Dr. Reddy’s Laboratories, Inc., Ranbaxy Laboratories Ltd./Ranbaxy
Pharmaceuticals Inc., Sandoz Inc., Sun Pharma Global, Inc., and Wockhardt filed
Abbreviated New Drug Applications (“ANDAs”) with the FDA to produce and market
generic versions of Allegra products.




In
response to the filings described above, beginning in 2001, Aventis
Pharmaceuticals filed patent infringement lawsuits against Barr Laboratories,
Impax Laboratories, Mylan Pharmaceuticals, Teva Pharmaceuticals, Dr. Reddy’s
Laboratories, Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals
Inc.,  Sandoz, and Wockhardt. Each of the lawsuits was filed in the
U.S. District Court in New Jersey and alleges infringement of one or more
patents owned by Aventis Pharmaceuticals. In addition, beginning on November 14,
2006, Aventis filed two patent infringement suits against Teva Pharmaceuticals
USA, Barr Laboratories, Inc. and Barr Pharmaceuticals, Inc. in the Eastern
District of Texas based on patents owned by Aventis.  Those lawsuits
were transferred to the U.S. District Court in New Jersey.




Further,
beginning on March 5, 2004, the Company through its former subsidiary AMR
Technology, along with Aventis Pharmaceuticals, filed suit in the U.S. District
Court in New Jersey against Barr Laboratories, Impax Laboratories, Mylan
Pharmaceuticals, Teva Pharmaceuticals, Dr. Reddy’s Laboratories, Amino
Chemicals, Ltd., Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc.,
DiPharma S.P.A., DiPharma Francis s.r.l., and Sandoz, asserting infringement of
two of our U.S. patents that are exclusively licensed to Aventis Pharmaceuticals
relating to Allegra and Allegra-D products.  On December 11, 2006, the
Company through its former subsidiary AMR Technology and sanofi-aventis U.S.
LLC, an affiliate of Aventis Pharmaceuticals, also filed a patent infringement
lawsuit in the Republic of Italy against DiPharma Francis s.r.l. and DiPharma
S.P.A. based on European Patent No. 703,902 which is owned by the Company and
licensed to sanofi-aventis.  In addition, on December 22, 2006, the
Company through its former subsidiary AMR Technology, filed a patent
infringement lawsuit in Canada against Novopharm Ltd., Teva Pharmaceutical
Industries Ltd., Teva Pharmaceuticals USA, Inc., DiPharma S.P.A. and DiPharma
s.r.l. based on Canadian Patent No. 2,181,089. On March 20, 2007, the Company
through its former subsidiary AMR Technology filed a patent infringement lawsuit
in Australia against Alphapharm Pty Ltd based on Australian Patent No.
699,799.  On September 28, 2007, the Company through its former
subsidiary AMR Technology filed a patent infringement lawsuit in Australia
against Arrow Pharmaceuticals Pty Ltd, Chemists’ Own Pty Ltd, and Sigma
Pharmaceuticals Limited based on Australian Patent No. 699,799.




Aventis
Pharmaceuticals, the Company, and its former subsidiary AMR Technology have
entered into covenants not to sue on U.S. Patent No. 5,578,610 with defendants
other than Novopharm, DiPharma S.P.A., DiPharma Francis s.r.l., Alphapharm,
Arrow Pharmaceuticals Pty Ltd, Chemists’ Own Pty Ltd, and Sigma Pharmaceuticals
Limited.  Aventis Pharmaceuticals exclusively licenses U.S. Patent No.
5,578,610 from us, but that patent has not been asserted in the litigations in
the U.S.  However, the Company and Aventis Pharmaceuticals have agreed
that Aventis Pharmaceuticals will continue to pay royalties to the Company based
on that patent under the Company’s original license agreement with Aventis
Pharmaceuticals. Under our arrangements with Aventis Pharmaceuticals, we will
receive royalties until expiration of the underlying patents (2013 for U.S.
Patent No. 5,578,610 and 2015 for U.S. Patent No. 5,750,703) unless the patents
are earlier determined to be invalid.





22





On
November 18, 2008, the Company, its former subsidiary AMR Technology, Aventis
Pharmaceuticals, sanofi-aventis, Teva Pharmaceuticals, and Barr Laboratories
reached a settlement regarding the above-described patent infringement
litigations relating to Teva Pharmaceuticals and Barr
Laboratories.  As part of the settlement, the Company entered into an
amendment to its licensing agreement with sanofi-aventis to allow sanofi-aventis
to sublicense patents related to ALLEGRA®and
ALLEGRA®D-12
to
Teva Pharmaceuticals and Barr Laboratories in the United States.  The
Company received an upfront sublicense fee from sanofi-aventis of $10 million,
and sanofi-aventis will pay royalties to the Company on the sale of products in
the United States containing fexofenadine hydrochloride (the generic name for
the active ingredient in ALLEGRA®) and
products containing fexofenadine hydrochloride and pseudoephedrine hydrochloride
(generic ALLEGRA®D-12) by
Teva Pharmaceuticals and Barr Laboratories through 2015, along with additional
consideration.  While the settlement affords the option for a launch
of a generic version of Allegra D-12 in November 2009, the Company will receive
quarterly royalties through July 2010 equal to the royalties paid for the
quarter ended June 30, 2009.  Thereafter, the royalty rate will revert
to the rate in effect prior to the signing of the sub-license
amendment.  The settlement agreements and related licensing
arrangements are subject to review by the Federal Trade Commission and U.S.
state Attorneys General and, under their terms, did not become effective until
certain regulatory notices were given and certain periods during which
applicable regulatory authorities could object to the transactions expired or
were waived.  Pursuant to their terms, the settlement agreements and
related licensing arrangements became effective on January 2,
2009.  If the settlement agreements and related licensing arrangements
are subject to a governmental challenge after January 2, 2009, that could result
in termination of the settlement agreements and related licensing
arrangements.  The settlement arrangements do not affect the pending
litigation as it relates to products intended for use or sale in jurisdictions
other than the United States and do not affect the pending litigation with
respect to defendants other than Teva Pharmaceuticals and Barr
Laboratories.




Under
applicable federal law, marketing of an FDA-approved generic version of Allegra
may not commence until the earlier of a decision favorable to the generic
challenger in the patent litigation or 30 months after the date the patent
infringement lawsuit was filed. In general, the first generic filer is entitled
to a 180-day marketing exclusivity period upon FDA approval.  The
launch of a generic product is considered an “at-risk” launch if the launch
occurs while there is still on-going litigation.  Of the remaining
defendants in the pending litigation, Dr. Reddy’s Laboratories and Mylan
Pharmaceuticals have engaged in at-risk launches of generic fexofenadine
products.




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




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





23





PART II




ITEM
      5.
              MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
      PURCHASES OF EQUITY
SECURITIES.




(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, 2008First
      Quarter
                      
                      $
                      14.40
                      
                      
                      $
                      9.41Second
      Quarter
                      
                      $
                      14.50
                      
                      
                      $
                      11.23Third
      Quarter
                      
                      $
                      18.99
                      
                      
                      $
                      12.54Fourth
      Quarter
                      
                      $
                      16.24
                      
                      
                      $
                      8.68Year
      ending December 31, 2007First
      Quarter
                      
                      $
                      10.71
                      
                      
                      $
                      9.06Second
      Quarter
                      
                      $
                      15.32
                      
                      
                      $
                      9.51Third
      Quarter
                      
                      $
                      16.98
                      
                      
                      $
                      11.57Fourth
      Quarter
                      
                      $
                      18.20
                      
                      
                      $
                      11.98





Stock
Performance Graph




The
following graph provides a comparison, fromDecember 31, 2003
through December 31, 2008,of the cumulative total stockholder return (assuming reinvestment of any
dividends) among the Company, the Nasdaq Stock Market (U.S. Companies) Index
(the “Nasdaq Index”) and the Nasdaq Pharmaceuticals Index(the “Pharmaceuticals
Index”). The historical information set forth below is not necessarily
indicative of future performance. Data for the Nasdaq Index and the
Pharmaceuticals Index were provided by Nasdaq.










Albany Molecular
                    Research, Inc
                  
                  Nasdaq Stock
                    Market
                    (U.S. Companies)
                    Index
                  
                  Nasdaq
                    Pharmaceuticals
                    IndexDecember 31,
      2003
                  
                  
                  100.000
                  
                  
                  
                  100.000
                  
                  
                  
                  100.000December 31,
      2004
                  
                  
                  74.217
                  
                  
                  
                  108.835
                  
                  
                  
                  106.509December 31,
      2005
                  
                  
                  80.946
                  
                  
                  
                  111.155
                  
                  
                  
                  117.290December 31,
      2006
                  
                  
                  70.353
                  
                  
                  
                  122.109
                  
                  
                  
                  114.809December 31,
      2007
                  
                  
                  95.803
                  
                  
                  
                  132.420
                  
                  
                  
                  120.742December 31,
      2008
                  
                  
                  64.890
                  
                  
                  
                  63.803
                  
                  
                  
                  112.344




24





(b) 
Holders.




The
number of record holders of our Common Stock as of February 28, 2009 was
approximately 201. We believe that the number of beneficial owners of our Common
Stock at that date was substantially greater than 201.




(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) 
Equity Compensation Plan Information—The following table provides information
about the securities authorized for issuance under our equity compensation plans
as of December 31, 2008:




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)
                
                
                1,868,448
                
                
                $
                20.34
                
                
                
                2,501,818
                (2)Equity
      compensation plans not approved by security holders
                
                
                —
                
                
                
                —
                
                
                
                —Total
                
                
                1,868,448
                
                
                $
                20.34
                
                
                
                2,501,818







(1)
              Consists
      of the Company’s 1998 Stock Option Plan, the Company’s 2008 Stock Option
      Plan and the Company’s Employee Stock Purchase Plan (“ESPP”). Does not
      include purchase rights accruing under the ESPP because the purchase price
      (and therefore the number of shares to be purchased) will not be
      determined until the end of the purchase
period.




(2)
              Includes
      2,209,406 shares available under the Stock Option Plans and 292,412 shares
      available under the ESPP.




(e)
Issuer Purchases of Equity Securities




On
February 7, 2008, the Company’s Board of Directors approved a stock repurchase
program, which authorized the Company to purchase up to $20.0 million of the
issued and outstanding shares of the Company’s Common Stock in the open market
or in private transactions for the twelve months following the approval of the
program.  Shares may be repurchased from time to time and in such
amounts as market conditions warrant, subject to price ranges set by management
and regulatory conditions.  The following table represents share
repurchases during the year ended December 31, 2008:




Period
                        
                        (a)
                          Total Number
                          of Shares
                          Purchased (1)
                        
                        
                        (b)
                          Average Price
                          Paid Per
                          Share
                        
                        
                        (c)
                          Total Number of
                          Shares
                          Purchased as
                          Part of Publicly
                          Announced
                          Plans or
                          Programs
                        
                        
                        (d)
                          Maximum Dollar
                          Value of Shares
                          that May Yet Be
                          Purchased Under
                          the ProgramOctober
      1, 2008 – October 31, 2008
                        
                        
                        261,200
                        
                        
                        $
                        11.66
                        
                        
                        
                        261,200
                        
                        
                        $
                        736,922November
      1, 2008 – November 30, 2008
                        
                        
                        37,227
                        
                        
                        
                        12.21
                        
                        
                        
                        37,227
                        
                        
                        $
                        282,465December
      1, 2008 – December 31, 2008
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        $
                        282,465Total
                        
                        
                        298,427
                        
                        
                        $
                        11.73
                        
                        
                        
                        298,427





(1)
              No
      shares were purchased during 2008 other than through our publicly
      announced stock buyback
program.





25





ITEM
      6.
            SELECTED
      FINANCIAL DATA.




The
selected financial data shown below for the fiscal years ended December 31,
2008, 2007, and 2006 and as of December 31, 2008 and 2007, have been
derived from our audited consolidated financial statements included in this
Form 10-K. The selected financial data set forth below for the fiscal years
ended December 31, 2005 and 2004 and as of December 31, 2006, 2005 and
2004 have been derived from our audited consolidated financial statements for
those years, which are not included in this Form 10-K. The information
should be read in conjunction with the Company’s audited consolidated financial
statements and related notes and other financial information included herein,
including Item 7, “Management’s Discussion and Analysis of Financial Condition
and Results of Operations”.




As of and for the Year Ending December 31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004(in thousands, except per share data)Consolidated
      Statement of Income (Loss) Data:Contract
      revenue
                  
                  $
                  195,455
                  
                  
                  $
                  163,375
                  
                  
                  $
                  152,783
                  
                  
                  $
                  136,988
                  
                  
                  $
                  121,554Recurring
      royalties
                  
                  
                  28,305
                  
                  
                  
                  27,056
                  
                  
                  
                  27,024
                  
                  
                  
                  46,918
                  
                  
                  
                  47,973Milestone
      revenue
                  
                  
                  5,500
                  
                  
                  
                  2,080
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      revenue
                  
                  
                  229,260
                  
                  
                  
                  192,511
                  
                  
                  
                  179,807
                  
                  
                  
                  183,906
                  
                  
                  
                  169,527Cost
      of contract revenue
                  
                  
                  146,075
                  
                  
                  
                  132,032
                  
                  
                  
                  128,610
                  
                  
                  
                  112,642
                  
                  
                  
                  96,932Write-down
      of library inventories
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,063
                  
                  
                  
                  5,974Total
      cost of contract revenue
                  
                  
                  146,075
                  
                  
                  
                  132,032
                  
                  
                  
                  128,610
                  
                  
                  
                  114,705
                  
                  
                  
                  102,906Technology
      incentive award
                  
                  
                  2,901
                  
                  
                  
                  2,784
                  
                  
                  
                  2,783
                  
                  
                  
                  4,695
                  
                  
                  
                  4,789Research
      and development
                  
                  
                  13,129
                  
                  
                  
                  12,821
                  
                  
                  
                  11,428
                  
                  
                  
                  14,468
                  
                  
                  
                  23,887Selling,
      general and administrative
                  
                  
                  39,361
                  
                  
                  
                  33,250
                  
                  
                  
                  31,899
                  
                  
                  
                  26,494
                  
                  
                  
                  22,812Property
      and equipment impairment
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3,554
                  
                  
                  
                  —
                  
                  
                  
                  4,728Goodwill
      impairment
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  14,494Intangible
      asset impairment
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3,541Restructuring
      charge
                  
                  
                  1,833
                  
                  
                  
                  273
                  
                  
                  
                  2,431
                  
                  
                  
                  —
                  
                  
                  
                  1,184Total
      costs and expenses
                  
                  
                  203,299
                  
                  
                  
                  181,160
                  
                  
                  
                  180,705
                  
                  
                  
                  160,362
                  
                  
                  
                  178,341Income
      (loss) from operations
                  
                  
                  25,961
                  
                  
                  
                  11,351
                  
                  
                  
                  (898
                  )
                  
                  
                  23,544
                  
                  
                  
                  (8,814
                  )Equity
      in loss of unconsolidatedaffiliates
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (65
                  )Interest
      income, net
                  
                  
                  1,170
                  
                  
                  
                  3,192
                  
                  
                  
                  2,990
                  
                  
                  
                  1,787
                  
                  
                  
                  317Loss
      on equity investment
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1,274
                  )Other
      income (loss), net
                  
                  
                  759
                  
                  
                  
                  (158
                  )
                  
                  
                  150
                  
                  
                  
                  (185
                  )
                  
                  
                  (18
                  )Income
      (loss) before income tax expense
                  
                  
                  27,890
                  
                  
                  
                  14,385
                  
                  
                  
                  2,242
                  
                  
                  
                  25,146
                  
                  
                  
                  (9,854
                  )Income
      tax expense
                  
                  
                  7,330
                  
                  
                  
                  5,449
                  
                  
                  
                  59
                  
                  
                  
                  8,825
                  
                  
                  
                  1,837Net
      income (loss)
                  
                  $
                  20,560
                  
                  
                  $
                  8,936
                  
                  
                  $
                  2,183
                  
                  
                  $
                  16,321
                  
                  
                  $
                  (11,691
                  )Basic
      earnings (loss) per share
                  
                  $
                  0.66
                  
                  
                  $
                  0.28
                  
                  
                  $
                  0.07
                  
                  
                  $
                  0.51
                  
                  
                  $
                  (0.37
                  )Diluted
      earnings (loss) per share
                  
                  $
                  0.65
                  
                  
                  $
                  0.27
                  
                  
                  $
                  0.07
                  
                  
                  $
                  0.50
                  
                  
                  $
                  (0.37
                  )Weighted
      average common shares outstanding, basic
                  
                  
                  31,389
                  
                  
                  
                  32,351
                  
                  
                  
                  32,174
                  
                  
                  
                  32,044
                  
                  
                  
                  31,627Weighted
      average common shares outstanding, diluted
                  
                  
                  31,612
                  
                  
                  
                  32,626
                  
                  
                  
                  32,427
                  
                  
                  
                  32,334
                  
                  
                  
                  31,627Consolidated
      Balance Sheet Data:Cash,
      cash equivalents and investment securities
                  
                  $
                  87,470
                  
                  
                  $
                  107,699
                  
                  
                  $
                  107,164
                  
                  
                  $
                  127,910
                  
                  
                  $
                  133,749Property
      and equipment, net
                  
                  
                  167,502
                  
                  
                  
                  158,028
                  
                  
                  
                  153,202
                  
                  
                  
                  151,078
                  
                  
                  
                  145,753Working
      capital
                  
                  
                  140,890
                  
                  
                  
                  138,889
                  
                  
                  
                  149,932
                  
                  
                  
                  162,805
                  
                  
                  
                  179,765Total
      assets
                  
                  
                  390,684
                  
                  
                  
                  386,654
                  
                  
                  
                  375,493
                  
                  
                  
                  383,150
                  
                  
                  
                  376,892Long-term
      debt, excluding current installments
                  
                  
                  13,482
                  
                  
                  
                  4,080
                  
                  
                  
                  13,993
                  
                  
                  
                  18,521
                  
                  
                  
                  48,603Total
      stockholders’ equity
                  
                  
                  326,680
                  
                  
                  
                  334,566
                  
                  
                  
                  318,455
                  
                  
                  
                  313,061
                  
                  
                  
                  295,476Other
      Consolidated Data:Capital
      expenditures
                  
                  $
                  23,938
                  
                  
                  $
                  17,747
                  
                  
                  $
                  16,453
                  
                  
                  $
                  19,166
                  
                  
                  $
                  23,716





26





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




Overview




We
provide scientific services, technologies and products focused on improving the
quality of life while delivering excellence, value and maximum return to our
shareholders. Our core business consists of contract drug discovery, development
and manufacturing services.  In addition to our contract services, we
also have a separate, strategic technology division consisting of proprietary
technology investments, internal drug discovery and niche generic active
pharmaceutical ingredient product development.  We conduct proprietary
research and development to discover new therapeutically active lead compounds
with commercial potential. We anticipate that we would then license these
compounds to third parties in return for up-front and service fees, and
milestone payments as well as recurring royalty payments if these compounds are
developed into new commercial drugs.  Our proprietary research and
development activities previously led us to license the worldwide rights to
develop and commercialize potential products from the amine neurotransmitter
reuptake inhibitor patents and technology identified in one of our proprietary
research programs to Bristol-Myers Squibb Company (“BMS”), in
October 2005.  In addition, these activities also led to the
development, patenting and 1995 licensing of a substantially pure form of, and a
manufacturing process for, the active ingredient in the non-sedating
antihistamine fexofenadine HCl marketed by Sanofi-aventis S.A. as Allegra in the
Americas and as Telfast elsewhere.




Our total
revenue for 2008 was $229.3 million, including $195.5 million from our
contract service business, $5.5 from milestones and $28.3 million from
royalties on sales of Allegra/Telfast. We generated $26.5 million in cash
from operations and used $23.9 million in capital expenditures on our
facilities and equipment, primarily related to the expansion of our research
facilities in Singapore, the expansion and modernization of our large-scale
facilities in India and modernization of our large-scale manufacturing
facilities in the U.S.  In addition, we used $19.7 million on the
repurchase of common stock. We recorded net income of $20.6 million in
2008.  As of December 31, 2008, we had $87.5 million in
cash, cash equivalents and investments and $13.7 million in bank and other
related debt, carrying a blended interest rate of approximately
2.66%.




Strategy




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




We
continue to integrate our research and manufacturing facilities worldwide,
increasing our access to key global markets and enabling us to provide our
customers with a flexible combination of high quality services and competitive
cost structures to meet their individual outsourcing needs.  We seek
comprehensive research and/or supply agreements with our customers,
incorporating several of our service offerings and spanning across the entire
pharmaceutical research and development process.  Our research facilities
provide discovery, chemical development, analytical, and small-scale current
Good Manufacturing Practices (“cGMP”) manufacturing services.  Compounds
discovered and/or developed in our research facilities can then be more easily
transitioned to production at our large-scale manufacturing facilities for use
in clinical trials and, ultimately, commercial sales if the product meets
regulatory approval.  We believe that the ability to partner with a single
provider of pharmaceutical research and development services from discovery
through commercial production is of significant benefit to our customers. 
Through our comprehensive service offerings, we are able to provide customers
with a more efficient transition of experimental compounds through the research
and development process, ultimately reducing the time and cost involved in
bringing these compounds from concept to market.




Our
global platform has increased our market share and was developed in order to
allow us to maintain and grow margins.  In addition to our
globalization, we continue to implement process efficiencies, including our
implementation of a process improvement and cost savings campaign
(“Lean-to-Excellence”), along with efforts to strengthen our
sourcing.  We believe these factors will lead to improved
margins.




We
conduct proprietary research and development to discover new therapeutically
active lead compounds with commercial potential. We anticipate that we would
then license these compounds and underlying technology to third parties in
return for up-front and service fees and milestone payments, as well as
recurring royalty payments if these compounds are developed into new commercial
drugs.





27





Research
and development is performed at our large-scale manufacturing facility related
to the potential manufacture of new products, the development of processes for
the manufacture of generic products with commercial potential, and the
development of alternative manufacturing processes.




In recent
years, we have experienced increased demand in the areas of developmental and
small-scale cGMP manufacturing services, reflecting a reduction in budgetary
constraints of our emerging pharmaceutical and biotech customers and their
increased efforts to bring identified compounds into clinical trials. During
this timeframe, partly in recognition of increased competition and consolidation
within the pharmaceutical industry, we established lower-cost international
operations in Hungary, Singapore and India. Contract service providers that were
not able to offer a cost competitive product were forced to exit or
significantly reduce their presence in the marketplace during this time. In
addition to providing customers with a range of technologies and cost options,
expanding internationally has provided increased access to customers and
potential customers in regions of the world which we have, until recently, not
significantly pursued.




In
addition to the longer-term trend of growth in development and small scale cGMP
manufacturing services discussed above, we have more recently seen an increased
trend in demand for our discovery services.  This demand increases as
our ability to provide high-quality services under a variety of business models
and cost structures by incorporating our international facilities has been
well-received by our customers.  We currently expect a decrease in
customer delivery patterns and demand caused by the economic downturn to affect
us in the beginning of 2009.  We anticipate a future return to the
increased demand trend and expect the majority of our 2009 growth to occur in
the latter part of 2009.   We continue to build on our strategy
of leveraging our global resources to meet changing and expanding global
outsourcing needs and additionally to expand our global service platform to meet
the needs of our customers.  In 2007, we completed the construction of
a 50,000 square foot research center focusing primarily on custom synthesis and
medicinal chemistry support services at the Shapoorji Pallonji Biotech Park in
Hyderabad, India. In 2008, we completed a 10,000 square foot expansion of our
Singapore Research Center.  In addition to increasing existing
discovery service capabilities, the expansion of our Singapore Research Center
will also include the introduction of in vitro biology services at the
facility.  We also commenced the expansion of our research facilities
in Budapest, Hungary and Bothell, Washington during 2008.




Results
of Operations




Operating
Segment Data




We have
organized our sales, marketing and production activities into the
Discovery/Development/Small Scale Manufacturing (“DDS”) and Large Scale
Manufacturing (“LSM”) segments based on the criteria set forth in Statement of
Financial Accounting Standards (“SFAS”) No. 131 (“SFAS 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 allocate resources based on the information we receive
from this internal system. The DDS segment includes activities such as drug lead
discovery, optimization, drug development and small scale commercial
manufacturing. The LSM segment includes pilot to commercial scale manufacturing
of active pharmaceutical ingredients and intermediates and high potency and
controlled substance manufacturing.  API manufacturing is performed at
our Rensselaer facility and is in compliance with cGMP.




Contract
Revenue




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




Year Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006(in thousands)DDS
                  
                  $
                  113,955
                  
                  
                  $
                  87,063
                  
                  
                  $
                  75,777LSM
                  
                  
                  81,500
                  
                  
                  
                  76,312
                  
                  
                  
                  77,006Total
                  
                  $
                  195,455
                  
                  
                  $
                  163,375
                  
                  
                  $
                  152,783





28





DDS
contract revenue for the year ended December 31, 2008 was $114.0 million, an
increase of $26.9 million or 30.9% compared to contract revenue of $87.1 million
for the same period in 2007.  This increase is primarily due to an
increase in discovery services revenue which increased $16.1
million.  This increase is due to increased demand for these services,
as our ability to offer various combinations of services and cost structures at
our U.S. and international locations continues to gain acceptance in the
worldwide marketplace, and approximately $3.4 million due to the completion of
the preliminary screening phase of an on-going natural products collaboration
project at our Bothell Research facility.  The year over year increase
is also due to increased contract revenue from development and small-scale
manufacturing services of $10.8 million, as customers continued to focus on
development-stage projects. We currently expect discovery services and
development and small-scale manufacturing services revenue to remain consistent
with or decrease slightly from amounts recognized in 2008. The flat growth year
over year will be due to completing the recognition of access fees related to
the preliminary screening phase of an on-going natural products collaboration
noted above, as well as the completion of the funded research component of our
on-going collaboration with BMS and lower demand from specialty biotech and soft
pricing in the overall current economic downturn.




LSM
contract revenue increased by $5.2 million, or 6.8%, to $81.5 million for the
year ended December 31, 2008 as compared to $76.3 million for the same period in
2007.  The increase in contract revenue was primarily attributable to
an increase in incremental revenues from our June 2007 AMRI India
acquisition.  Additionally, sales to GE Healthcare increased $1.9
million due to the timing of customer requirements and related deliveries, along
with an increase in revenue from the production of clinical supply materials for
use in advanced stage human trials of commercial product of $1.0
million.  We expect full year LSM contract revenue in 2009 to increase
from amounts recognized in 2008 due to increased U.S. commercial demand for new
commercial and near commercial products.




DDS
contract revenue for the year ended December 31, 2007 was $87.1 million, an
increase of $11.3 million or 14.9% compared to contract revenue of $75.8 million
for the same period in 2006.  This increase was primarily due to an
increase in contract revenue from development and small-scale manufacturing
services of $9.2 million, as customers continued to focus on development-stage
projects. In addition, discovery services revenue increased $2.1 million due to
increased demand for these services, as our ability to offer various
combinations of services and cost structures at our U.S. and international
locations continued to gain acceptance in the worldwide
marketplace.




LSM
contract revenue decreased by $0.7 million, or 0.9%, to $76.3 million for the
year ended December 31, 2007 as compared to $77.0 million for the same period in
2006.  The decrease in contract revenue was primarily attributable to
the decrease in sales to GE Healthcare of $2.6 million due to the timing of
customer requirements, along with a decrease in revenue from the production of
clinical supply materials for use in advanced stage human trials of $1.7
million.  These decreases were offset, in part, by an increase in
incremental revenues from our June 2007 AMRI India acquisition, coupled with
commercial sales of $1.4 million.




Recurring
Royalties




We earn
royalties under our licensing agreement with sanofi-aventis S.A. for the active
ingredient fexofenadine HCl, marketed as Allegra in the Americas and Telfast
elsewhere.  Royalties were as follows:




Year Ended December 31,2008
                        
                        2007
                        
                        
                        2006(in thousands)$
                        28,305
                        
                        $
                        27,056
                        
                        
                        $
                        27,024




Recurring
royalties, which are based on the worldwide sales of Allegra/Telfast, as well as
on sales of sanofi-aventis’ authorized generics, increased $1.2 million for the
year ended December 31, 2008 from the same period in 2007




Recurring
royalties, which are based on the worldwide sales of fexofenadine HCl, marketed
as Allegra in the Americas and Telfast elsewhere, as well as on the sales of
sanofi-aventis’ authorized generics, slightly increased to $27.1 million for the
year ended December 31, 2007 from $27.0 million in 2006.




The
recurring royalties we receive on the sales of Allegra/Telfast have historically
provided a material portion of our revenues, earnings, and operating cash
flows.  During 2006 and 2007, we experienced a decrease in revenues,
earnings, and operating cash flows from historical levels due to the impact of
the “at-risk” launch of generic fexofenadine by Barr Pharmaceuticals, Inc.
and Teva Pharmaceuticals Industries Ltd. on U.S. sales of Allegra by
sanofi-aventis.  We currently expect full year royalty revenues for
2009 to increase from amounts recognized in 2008 which will be driven by the new
royalty stream we will be earning on Teva’s sales of fexofenadine as well as the
amortization of the sub-license fee we received from sanofi-aventis. While
the settlement affords the option for a launch of a generic version of Allegra
D-12 in November 2009, the Company will receive quarterly royalties through
July 2010 equal to the royalties paid for the quarter ended June 30,
2009.





We
continue to develop our business in an effort to supplement the revenues,
earnings and operating cash flows that have historically been provided by
Allegra/Telfast royalties.  We forcefully and vigorously defend our
intellectual property related to Allegra, and we continue to pursue our
intellectual property rights as patent infringement litigation
progresses.





29





Milestone
revenue




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




Year Ended December 31,2008
                      
                      2007
                      
                      
                      2006(in thousands)$
                      5,500
                      
                      $
                      2,080
                      
                      
                      $
                      —




During
the year ended December 31, 2008, the Company recognized $5.5 million of
milestone revenue in conjunction with the Company’s license and research
agreement with BMS.  A $4.0 million milestone payment was triggered by
BMS’s submission of an application to the Health Products and Food Branch
(“HPFB”), Health Canada to initiate Phase 1 clinical studies on a
compound.  An additional $1.5 million was recognized for advancing a
second compound into pre-clinical development under the same agreement with
BMS.




Milestone
revenue received during the year ended December 31, 2007 is primarily due to a
milestone payment of $1.5 million in conjunction with the Company’s license and
research agreement with BMS. This milestone payment was triggered by a compound
being developed under the agreement proceeding into pre-clinical
development.  An additional $0.5 million of milestone revenue was
recognized during the fourth quarter of 2007 from a collaborative research
agreement.




Cost
of Contract Revenue




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




Year Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006(in thousands)DDS
                  
                  $
                  75,981
                  
                  
                  $
                  63,091
                  
                  
                  $
                  53,591LSM
                  
                  
                  70,094
                  
                  
                  
                  68,941
                  
                  
                  
                  75,019Total
                  
                  $
                  146,075
                  
                  
                  $
                  132,032
                  
                  
                  $
                  128,610DDS
      Gross Margin
                  
                  
                  33.3
                  %
                  
                  
                  27.5
                  %
                  
                  
                  29.3
                  %LSM
      Gross Margin
                  
                  
                  14.0
                  %
                  
                  
                  9.7
                  %
                  
                  
                  2.6
                  %Total
      Gross Margin
                  
                  
                  25.3
                  %
                  
                  
                  19.2
                  %
                  
                  
                  15.8
                  %




DDS
contract revenue gross margin was 33.3% for the year ended December 31,
2008, compared to 27.5% in 2007. The increase in gross margin resulted from an
increase in contract revenues in relation to the fixed cost components of DDS
contract business.  We expect DDS contract revenue gross margins to
remain flat or decrease in 2009 due to lower demand for these services in
relation to our fixed costs, as well as the completion of the recognition of
revenue and access fees associated with preliminary screening phase of an
on-going natural products collaboration project at our Bothell Research facility
and the funded research component of our on-going collaboration with
BMS.




LSM
contract revenue gross margin increased to 14.0% for the year ended
December 31, 2008 compared to 9.7% in 2007. The increase is primarily due
to process efficiencies as well as an increase in sales volume from our largest
customer, GE Healthcare.  These increases were partially offset, by a
decrease in margin resulting from start up costs associated with our
acquisitions of AMRI India and FineKem, along with price concessions on sales to
GE Healthcare in 2008.  Although these price concessions decreased our
gross margin, we believed this would strengthen our ability to retain this
customer beyond the contract period ending in 2010.  This result was
achieved in January 2009 when GE Healthcare extended its supply agreement with
us to continue through 2013.  We expect gross margins in the LSM
segment to improve in 2009, from increased revenue and greater capacity
utilization of the facilities for near commercial and new commercial
products.  This improvement will be offset, in part, by a decrease in
margins in relation to further price concessions to GE Healthcare.





DDS
contract revenue gross margin was 27.5% for the year ended December 31,
2007, compared to 29.3% in 2006. The decrease in gross margin largely resulted
from underutilized capacity at some of our international locations, offset in
part, by an increase in contract revenues in relation to the fixed cost
components of DDS contract business.





30





LSM
contract revenue gross margin increased to 9.7% for the year ended
December 31, 2007 compared to 2.6% in 2006. The increase is primarily due
to process efficiencies as well as the recognition of operating cost savings
resulting from the November 2006 restructuring of this segment.  This
increase was offset, in part, by a decrease in margin resulting from start up
costs associated with our acquisition of AMRI India.




Technology
Incentive Award




We
maintain a Technology Development Incentive Plan, the purpose of which is to
stimulate and encourage novel innovative technology development by our
employees.  This plan allows eligible participants to share in a
percentage of the net revenue earned by us relating to patented technology with
respect to which the eligible participant is named as an inventor or made a
significant intellectual contribution. To date, the royalties from Allegra are
the main driver of the awards.  Accordingly, as the creator of the
technology, the award is currently payable primarily to Dr. Thomas D’Ambra,
the Chief Executive Officer and President of the Company. The incentive awards
were as follows:




Year Ended December 31,2008
                      
                      2007
                      
                      
                      2006(in thousands)$
                      2,901
                      
                      $
                      2,784
                      
                      
                      $
                      2,783




The
increase in technology incentive award expense for the year ended December 31,
2008 as compared to 2007 is due to the increase in Allegra royalty revenue and
an increase in awards granted in relation to milestone payments.  We
expect technology incentive award expense to generally fluctuate directionally
and proportionately with fluctuations in Allegra royalties in future
periods.




The
technology incentive award expense remained flat for the year ended December 31,
2007 compared to 2006.  The majority of expense in both years is
primarily due to the incentive paid on Allegra royalty
revenue.  Additionally in 2006, the Company recorded expense for
incentives paid to employees involved in the development of our proprietary
amine neurotransmitter reuptake inhibitors resulting from the licensing of this
technology to BMS, while in 2007 recorded expense related to awards granted in
relation to a milestone payment from BMS for the same project.




Research
and Development




Research
and development (“R&D”) expense consists of compensation and benefits for
scientific personnel for work performed on proprietary technology R&D
projects, costs of chemicals and other out of pocket costs, and overhead costs.
We utilize our expertise in small molecule chemistry, biocatalysis and natural
product technologies to perform our internal R&D projects. The goal of these
programs is to discover new compounds with commercial potential. We would then
seek to license these compounds to a third party in return for a combination of
up-front license fees, milestone payments and recurring royalty payments if
these compounds are successfully developed into new drugs and reach the market.
In addition, research and development is performed at our large-scale
manufacturing facility related to the potential manufacture of new products, the
development of processes for the manufacture of generic products with commercial
potential, and the development of alternative manufacturing
processes.  Research and development expenses were as
follows:




Year Ended December 31,2008
                      
                      2007
                      
                      
                      2006(in thousands)$
                      13,129
                      
                      $
                      12,821
                      
                      
                      $
                      11,428




Research
and development expenses increased 2.4% to $13.1 million for the year ended
December 31, 2008 from $12.8 million for the same period in 2007. The
increase in R&D expense during the year ended December 31, 2008 is due
primarily to the increase in third party costs associated with our oncology
research program and to the establishment of R&D activities at our Singapore
facility, offset in part by a decrease in salaries and benefits caused by the
increased utilization of staff on external customer projects.  We
currently expect R&D expense to increase in 2009 as we continue to advance
our oncology compound through Phase I clinical trials.  Additionally,
we expect increased costs associated with the selection and advancement of two
pre-clinical candidates from our existing programs.





31





Projecting
completion dates and anticipated revenue from our internal research programs is
not practical at this time due to the early stages of the projects and the
inherent risks related to the development of new drugs. Our proprietary amine
neurotransmitter reuptake inhibitor program, which was our most advanced project
at that time, was licensed to BMS in October 2005 in exchange for up-front
license fees, contracted research services, and the rights to future milestone
and royalty payments.  We also continue to utilize our proprietary
technologies to further advance other early to middle-stage internal research
programs in the fields of oncology, irritable bowel syndrome, obesity, and CNS,
with a view to seeking a licensing partner for these programs at an appropriate
research or developmental stage.




We budget
and monitor our research and development expenses by type or category, rather
than by project on a comprehensive or fully allocated basis. In addition, our
R&D expenses are not tracked by project as it benefits multiple projects of
our technology platform. Consequently, fully loaded R&D expense summaries by
project are not available.




Research
and development expenses increased 12.2% to $12.8 million for the year ended
December 31, 2007 from $11.4 million for 2006. The increase in R&D
expense during the year ended December 31, 2007 is due primarily to the
progression of one of our compounds from our proprietary oncology research
program to the advanced preclinical testing phase.




Selling,
General and Administrative




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




Year Ended December 31,2008
                      
                      2007
                      
                      
                      2006(in thousands)$
                      39,361
                      
                      $
                      33,250
                      
                      
                      $
                      31,899




The
increase in selling, general and administrative expenses for the year ended
December 31, 2008 is primarily attributable to incremental administrative costs
at our AMRI India location, which was acquired in June 2007, along with an
increase in bad debt expense and increases in salaries and benefits and
relocation expenses related to an increase in business development,
administrative and information technology personnel.




Selling,
general and administrative expenses are expected to increase slightly in 2009
primarily due to the incremental costs associated with investments in business
development and information technology personnel and resources that were made
throughout 2008.




The
increase in selling, general and administrative expenses in 2007 is primarily
due to an increase in compensation and benefits expense related to the addition
of business development personnel worldwide, the addition of incremental
administrative costs incurred at AMRI India and the addition of administrative
support staff at our Singapore and Hyderabad, India locations.  These
increases were partially offset by a decrease in data processing costs
associated with the implementation of our enterprise resource planning (“ERP”)
system.




Restructuring
Charges




AMRI
Hungary




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




The
Hungary restructuring activity was recorded in the DDS operating
segment.  The restructuring costs are included under the caption
“Restructuring” in the consolidated statement of operations during 2008 and the
remaining restructuring liabilities are included in accounts payable and accrued
expenses on the consolidated balance sheet at December 31, 2008.




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





32




(in
      thousands)
                
                Balance at
                  January 1,
                  2008
                
                
                Charges
                
                
                Incurred
                  Amounts
                
                
                Foreign
                  Currency
                  Translation
                  Adjustments
                
                
                Balance at
                  December 31,
                  2008Termination
      benefits and personnel realignment
                
                $
                —
                
                
                
                901
                
                
                
                (526
                )
                
                
                (50
                )
                
                $
                325Losses
      on grant contracts
                
                
                —
                
                
                
                389
                
                
                
                (72
                )
                
                
                (51
                )
                
                
                266Lease
      abandonment charges
                
                
                —
                
                
                
                463
                
                
                
                (126
                )
                
                
                (75
                )
                
                
                262Administrative
      costs associated with restructuring
                
                
                —
                
                
                
                80
                
                
                
                (33
                )
                
                
                (7
                )
                
                
                40Total
                
                $
                —
                
                
                $
                1,833
                
                
                $
                (757
                )
                
                $
                (183
                )
                
                $
                893





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





The net
cash outflow related to the Hungary restructuring for the year ended December
31, 2008 was $757.  Anticipated cash outflow related to the Hungary
restructuring for 2009 is approximately $0.8 million, which primarily consists
of the payment of termination benefits and personnel realignment and incurring
losses on grant contracts.




Large
Scale Manufacturing Facility





On
November 9, 2006, we announced plans to initiate a restructuring of our LSM
business segment.  Consistent with our continued strategy of
realigning the LSM segment toward a greater focus on manufacturing clinical
trial materials with strong commercial potential, the goals of the restructuring
plan were to strengthen our competitiveness in this area and reduce operating
costs by eliminating overlap in business processes, organization and project
process flow, as well as leveraging existing resources and
assets.  The restructuring plan included a reduction of workforce, as
well as reductions of non-essential operating expenses, raw material costs and
future capital expenditure activities.  We estimated that total large
scale costs were reduced by $5.0 million annually as a result of this
restructuring.  We recorded a restructuring charge of approximately
$2.4 million in the fourth quarter of 2006, including a non-cash asset disposal
charge of approximately $1.6 million, and other charges of approximately $0.8
million consisting primarily of termination benefits.  We
recorded additional restructuring charges of $0.2 million during the first
quarter of 2007, consisting of additional termination benefits associated with
the restructuring.  There were no additional large-scale restructuring
charges taken during 2008.




Interest
income, net




Year Ended December 31,(in thousands)
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006Interest
      expense
                  
                  $
                  (493
                  )
                  
                  $
                  (853
                  )
                  
                  $
                  (985
                  )Interest
      income
                  
                  
                  1,663
                  
                  
                  
                  4,045
                  
                  
                  
                  3,975Interest
      income, net
                  
                  $
                  1,170
                  
                  
                  $
                  3,192
                  
                  
                  $
                  2,990




Interest
expense decreased to $0.5 million for the year ended December 31, 2008 from
$0.9 million for 2007. The decrease was primarily due to the decrease in
interest rates in 2008.




Interest
expense decreased to $0.9 million for the year ended December 31, 2007 from
$1.0 million for 2006. The decrease was primarily due to the reduction of
outstanding interest-bearing debt balances in 2007.




Interest
income decreased to $1.7 million for the year ended December 31, 2008 as
compared to $4.0 million for the year ended December 31, 2007.  This
decrease was primarily due to decreases in the average balances of
interest-bearing cash and investments held by the Company as well as decreases
in the interest rates earned on these balances in 2008.




Interest
income remained constant at $4.0 million for the year ended December 31,
2007 as compared to 2006 as increases in the average balances of
interest-bearing cash and investments held by the Company were offset by
decreases in the interest rates earned on these balances in 2007.





33





Income
tax expense




Year Ended December 31,2008
                      
                      2007
                      
                      
                      2006(in thousands)$
                      7,330
                      
                      $
                      5,449
                      
                      
                      $
                      59




Income
tax expense increased to $7.3 million for the year ended December 31, 2008
from $5.4 million for the same period in 2007.  The Company’s
effective tax rate decreased to 26.3% of pre-tax income for the year ended
December 31, 2008 from 37.9% of pre-tax income for the year ended
December 31, 2007.  The increase in income tax expense is due
primarily to an increase in pre-tax income of $13.5 million and changes in the
composition of taxable income in relation to the applicable tax rates at our
various international locations in 2008.  These increases are
partially offset by the recapture of tax credits derived from certain of the
Company’s R&D expenses and the reversal of reserves for an uncertain tax
position, which was resolved in 2008.  We expect the effective tax
rate to approximate 36% of pre-tax income for 2009.




Income
tax expense increased to $5.4 million for the year ended December 31, 2007,
due primarily to an increase in pre-tax income of $12.1 million. The Company’s
effective tax rate increased to 37.9% of pre-tax income for the year ended
December 31, 2007 from 2.6% of pre-tax income for the year ended
December 31, 2006.  The increase is due to an increase in pre-tax
income in relation to the Company’s deductible items and non-taxable earnings,
which remained consistent in 2007, along with changes in the composition of
taxable income in relation to the applicable tax rates at our various
international locations.




Liquidity
and Capital Resources




We have
historically funded our business through operating cash flows, proceeds from
borrowings and the issuance of equity securities. During 2008, we generated cash
of $26.5 million from operating activities. The primary sources of operating
cash flows are increased contract and milestone revenues in 2008 along with an
increase in accounts payable due to timing of payments, offset by increases in
accounts receivable due to the timing of cash collections and additionally by
increases in inventory purchases.




The
recurring royalties we receive on the sales of Allegra/Telfast have historically
provided a material portion of our operating cash flows. As discussed in Item 3
of this Form 10-K, several generic manufacturers had 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. On November 18, 2008, the Company, its former
subsidiary AMR Technology, Aventis Pharmaceuticals, sanofi-aventis, Teva
Pharmaceuticals, and Barr Laboratories reached a settlement regarding the
above-described patent infringement litigations relating to Teva Pharmaceuticals
and Barr Laboratories.  As part of the settlement, the Company entered
into an amendment to its licensing agreement with sanofi-aventis to allow
sanofi-aventis to sublicense patents related to ALLEGRA®and
ALLEGRA®D-12
to
Teva Pharmaceuticals and Barr Laboratories in the United States.  The
Company received an upfront sublicense fee from sanofi-aventis of $10 million,
and sanofi-aventis will pay royalties to the Company on the sale of products in
the United States containing fexofenadine hydrochloride (the generic name for
the active ingredient in ALLEGRA®) and
products containing fexofenadine hydrochloride and pseudoephedrine hydrochloride
(generic ALLEGRA®D-12) by
Teva Pharmaceuticals and Barr Laboratories through 2015, along with additional
consideration.   While the settlement affords the option for a launch
of a generic version of Allegra D-12 in November 2009, we will receive quarterly
royalties through July 2010 equal to the royalties paid for the quarter ended
June 30, 2009.  Thereafter, the royalty rate will revert to the rate
in effect prior to the signing of the sub-license
amendment.




During
2008, we generated $9.0 million in cash for investing activities, primarily
consisting of $23.9 million for the acquisition of property and equipment and
$1.7 million related to the acquisition of FineKem, partially offset by proceeds
from sales and maturities of investment securities, net of purchases of these
securities, of $35.0 million . During 2008, we used $18.6 million for financing
activities, consisting primarily of $19.7 million for the purchase of treasury
stock, offset, in part, by $1.4 million provided by proceeds from the sale of
common stock, stock option exercises and stock purchase plan
withholdings.




As of
December 31, 2008, we have repurchased a total of 1.7 million shares of common
stock of our company at a total cost of $19.7 million.




Working
capital was $140.9 million as of December 31, 2008, compared to $138.9
million at December 31, 2007. The primary reasons for the increase were
increases in contract and milestone revenue and the refinancing of current debt
into a long-term line of credit.  These increases were partially
offset by the use of cash and investments to fund treasury share repurchases,
capital expenditures and the acquisition of FineKem.  We believe we
have mitigated a potentially significant risk associated with auction rate
securities, which are included in investment securities, available-for-sale, on
our consolidated balance sheet, by reducing our balance of these types of
securities from $28.0 million at December 31, 2007 to $2.4 million at December
31, 2008.





34





Total
capital expenditures for the year ended December 31, 2008 were $23.9 million as
compared to $17.7 million for the year ended December 31, 2007. Capital
expenditures in 2008 were primarily related to the expansion of our research
facilities in Singapore, the expansion and modernization of our large-scale
facilities in India and modernization of our large-scale manufacturing
facilities in the U.S.  For 2009, we expect to incur $25.0 - $30.0
million in capital expenditures, primarily related to the expansion of our
facilities in Bothell, Washington and Budapest, Hungary, as well as the
initiation of our GMP compliant manufacturing facility in India.




During
2003, we entered into a credit facility consisting of a $30.0 million term loan
and a $35.0 million line of credit to fund the acquisition of AMRI Rensselaer,
Inc. (“AMRI Rensselaer”) (formerly known as Organichem). The term loan matured
in February 2008.  In June 2008, we refinanced this loan, which
included converting the balance of the term loan into a revolving line of
credit, increasing the amount available under the line of credit to $45.0
million, and extending the maturity date on the line of credit to June
2013.  The line of credit bears interest at a variable rate based on
the Company’s leverage ratio. As of December 31, 2008, the balance outstanding
on the line of credit was $9.7 million, bearing interest at a rate of
3.54%.  The credit facility contains certain financial covenants,
including a maximum leverage ratio, a minimum required operating cash flow
coverage ratio, a minimum earnings before interest and taxes to interest ratio
and a minimum current ratio. Other covenants include limits on asset disposals
and the payment of dividends.  As of December 31, 2008 and 2007,
we were in compliance with all covenants under the credit facility.




Working
capital was $138.9 million as of December 31, 2007, compared to $149.9
million at December 31, 2006. The primary reasons for the decrease were the
use of cash and investments to fund capital expenditures, the acquisition of
AMRI India and the maturity of a portion of the Company’s long-term
debt.  These decreases were partially offset by a decrease in deferred
revenue due primarily to the recognition of deferred up-front licensing fees
received in conjunction with our licensing and research agreement with
BMS.




Total
capital expenditures for the year ended December, 31 2007 were $17.7 million as
compared to $16.5 million for the year ended December 31, 2006. Capital
expenditures in 2007 were primarily related to the construction of our research
facilities in Singapore and Hyderabad, India and modernization of our
large-scale manufacturing facilities.




During
2007, we used $9.8 million in cash for investing activities, primarily
consisting of $17.7 million for the acquisition of property and equipment and
$11.9 million related to the acquisition of AMRI India, partially offset
by  proceeds from sales and maturities of investment securities, net
of purchases of these securities, of $18.8 million. During 2007, we used $3.0
million for financing activities, consisting primarily of $4.6 million in
long-term debt repayments, offset, in part, by $1.4 million provided by proceeds
from stock option exercises and stock purchase plan withholdings.




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




Off
Balance Sheet Arrangements




We do not
use special purpose entities or other off-balance sheet financing techniques
that we believe have or are reasonably likely to have a current or future
material effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity or capital
resources.




Contractual
Obligations




The
following table sets forth our long-term contractual obligations and commitments
as of December 31,  2008.





35





Payments
Due by Period (in thousands)




Total
                  
                  
                  Under 1 Year
                  
                  
                  1-3 Years
                  
                  
                  4-5 Years
                  
                  
                  After 5 YearsLong-Term
      Debt (principal)
                  
                  $
                  13,742
                  
                  
                  $
                  260
                  
                  
                  $
                  545
                  
                  
                  $
                  10,242
                  
                  
                  $
                  2,695Long-Term
      Debt (interest)(1)
                  
                  
                  1,736
                  
                  
                  
                  364
                  
                  
                  
                  720
                  
                  
                  
                  546
                  
                  
                  
                  106Operating
      Leases
                  
                  
                  28,078
                  
                  
                  
                  3,016
                  
                  
                  
                  6,801
                  
                  
                  
                  6,034
                  
                  
                  
                  12,227Purchase
      Commitments
                  
                  
                  26,550
                  
                  
                  
                  26,550
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Pension
      Plan Contributions
                  
                  
                  500
                  
                  
                  
                  500
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —





(1)
              The
      amounts shown are based on the current arrangement at current interest
      rates.




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 of,
co-inventor of, or have made a significant intellectual contribution to 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 2008,
2007 and 2006 we awarded Technology Incentive Compensation primarily to Thomas
D’Ambra, our Chairman, President and Chief Executive Officer and the inventor of
the terfenadine carboxylic acid metabolite technology, which is covered by the
Company’s patents relating to the active ingredient in
Allegra.  Additionally, in 2006 we awarded Technology incentive
compensation to employees involved in the development of our proprietary amine
neurotransmitter reuptake inhibitors as a result of the successful licensing of
this technology to BMS.  In addition, in 2007 and 2008, awards were
granted in relation to the milestone payment from BMS made pursuant to the
licensing and research agreement between the Company and BMS.  The
amounts awarded and included in the consolidated statements of income for the
years ended December 31, 2008, 2007 and 2006 are $2.9 million, $2.8 million
and $2.8 million, respectively.  Included in accrued compensation in
the accompanying consolidated balance sheets at both December 31, 2008 and
2007 are unpaid Technology Development Incentive Compensation awards of
approximately $0.7 million.




Telecommunication
Services




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 approximately $221,000, $228,000 and
$156,000 for services rendered to the Company in 2008, 2007 and 2006,
respectively.




Critical
Accounting Policies and Estimates




Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
inventories, intangible assets, equity investments, unbilled revenue, income
taxes, pension and postretirement benefit plans, and contingencies. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.




We
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 that 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. 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 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
Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with
Multiple Deliverables”, and 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.




36





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. FTE contracts can run in one month
increments, but typically have terms of six months or longer. Our FTE contracts
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 a project that involves a research
component with a timeframe or outcome that has some level of unpredictability.
There are no fixed deliverables that must be met for payment 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 reimbursement 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. Typically, 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. In
certain instances, our customers request that we retain materials produced upon
completion of the project due to the fact that the customer does not have a
qualified facility to store those materials. In these instances, the revenue
recognition process is considered complete when necessary project documentation
(batch records, Certificates of Analysis, etc.) has been delivered to the
customer and payment has been collected.




Up-Front License Fees, Milestone,
and Royalty Revenue.We recognize revenue from
up-front non-refundable licensing fees on a straight-line basis over the period
of the underlying project. We will recognize revenue arising from a substantive
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.




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, we 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 typically recognized at the time the products
are ultimately shipped, however, in certain instances, the revenue recognition
process is considered complete when necessary project documentation (batch
records, Certificates of Analysis, etc.) has been delivered to the customer and
payment has been collected, as noted above.




Recurring Royalty Revenue
Recognition.Recurring royalties consist
of royalties under a license agreement with sanofi-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/Telfast occur. Royalty payments from sanofi-aventis are due within
45 days after each calendar quarter and are determined based on sales of
Allegra/Telfast in that quarter.




Restructuring
Charges




We
account for our restructuring costs as required by SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS
No. 146”). SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at its fair value in the period in which the liability is incurred,
except for one-time termination benefits that meet certain
requirements.




Inventory




Inventory
consists primarily of commercially available fine chemicals used as raw
materials, work-in-process and finished goods in our large-scale manufacturing
plant.  Large-scale manufacturing inventories are valued on a
first-in, first-out (FIFO) basis. Inventories are stated at the lower of cost or
market.  The Company writes down inventories 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 results in a charge to operations.




37





Goodwill




In
accordance with the provisions of SFAS No. 142, we perform an annualassessment of the
carrying value of goodwill for potential impairment (or on an interim basis if
certain triggering events occur). A determination of impairment is made based
upon the estimated fair value of the related reporting unit.  If
goodwill is determined to be impaired in the future we would be required to
record a charge to our results of operations. Factors the Company considers
important that could result in an impairment include the following:




·
            significant
      underperformance relative to historical or projected future operating
      results;




·
            significant
      negative industry or economic trends;
and




·
            market
      capitalization relative to net book
value.




If
management’s expectations of future operating results change, or if there are
changes to other assumptions, the estimate of the fair value of our reporting
units could change significantly. Such a change could result in goodwill
impairment charges in future periods, which could have a significant impact on
our consolidated financial statements. Total goodwill recorded on the Company’s
consolidated balance sheet at December 31, 2008 was $40.3 million,
including $23.1 million associated with the Company’s acquisition of AMRI
Rensselaer, $10.5 million of goodwill associated with the Company’s acquisition
of AMRI Hungary, $3.1 million of goodwill associated with the Company’s
acquisition of AMRI India in June 2007 and $0.9 million of goodwill associated
with the Company’s acquisition of FineKem .




Long-Lived
Assets




In
accordance with the provisions of SFAS No. 144, we assess the impairment of
long-lived assets whenever events or changes in circumstances indicate that
their carrying value may not be recoverable. Factors we consider important that
could trigger an impairment review include, among others, the
following:




·
            a
      significant change in the extent or manner in which a long-lived asset is
      being used;




·
            a
      significant change in the business climate that could affect the value of
      a long-lived asset; and




·
            a
      significant decrease in the market value of
  assets.




If we
determine that the carrying value of long-lived assets may not be recoverable,
based upon the existence of one or more of the above indicators of impairment,
we compare the carrying value of the asset group to the undiscounted cash flows
expected to be generated by the asset group. If the carrying value exceeds the
undiscounted cash flows an impairment charge is recorded. An impairment charge
is recognized to the extent that the carrying amount of the asset group exceeds
their fair value and will reduce only the carrying amounts of the long-lived
assets.




Equity
Investments




We have
equity investments in leveraged private companies that have operations in areas
within our strategic focus. 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 assess the fair value of these investments quarterly or
whenever events or changes in circumstance, such as changes in market
conditions, poor operating results of the underlying investments, or the
inability of the entities to obtain additional financing indicate that the
investment value may not be recoverable. However, should the events and
conditions that are indicative of impairment as noted above arise, the Company
may be required to record additional impairment charges in future periods. Total
equity investments recorded on the Company’s consolidated balance sheet at
December 31, 2008 were $1.0 million.





38





Pension
and Postretirement Benefit Plans




We
maintain pension and postretirement costs and liabilities that are developed
from actuarial valuations. Inherent in these valuations are key assumptions,
including discount rates, expected return on plan assets, and trends in health
care costs, 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. Effective December 31, 2006, the
Company adopted SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”).
SFAS No. 158 requires an employer that sponsors one or more defined
benefit pension plans or other postretirement plans to recognize the funded
status of a plan, measured as the difference between plan assets at fair value
and the benefit obligation, in the balance sheet; recognize in shareholders’
equity as a component of accumulated other comprehensive loss, net of tax, the
gains or losses and prior service costs or credits that arise during the period
but are not yet recognized as components of net periodic benefit cost; measure
defined benefit plan assets and obligations as of the date of the employer’s
fiscal year-end balance sheet; and disclose in the notes to the financial
statements additional information about the effects on net periodic benefit cost
for the next fiscal year that arise from delayed recognition of the gains or
losses, prior service costs or credits, and transition asset or
obligation.




Allowance
for Doubtful Accounts




We record
an allowance for doubtful accounts to reflect estimated receivable losses as
circumstances arise that bring into doubt our ability to fully collect on
outstanding receivable balances. The allowance and related accounts receivable
are reduced when the account is deemed uncollectible.




Environmental
Liabilities




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.




Stock-Based
Compensation




Effective
January 1, 2006, the Company adopted SFAS 123(R), which amends SFAS 123 and
supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting
for Stock Issued to Employees,” (“APB 25”) in establishing standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services, as well as transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity’s equity instruments or that may be settled by the issuance of
those equity instruments. This Statement requires that the cost resulting from
all share-based payment transactions be recognized in the financial statements
based on the fair value of the share-based payment. This Statement establishes
fair value as the measurement objective in accounting for share-based payment
transactions with employees, except for equity instruments held by employee
share ownership plans. As allowed under SFAS 123(R), the Company elected the
modified prospective method of adoption, under which compensation cost is
recognized in the financial statements beginning with the effective date of
SFAS  123(R) for all share-based payments granted after that date, and
for all unvested awards granted prior to the effective date of SFAS 123(R).
Accordingly, prior period amounts have not been restated.




Compensation
cost is based on the fair value of the options on their grant date, and is
recognized over the period of requisite service. The fair value of stock option
grants is determined utilizing the Black-Scholes option pricing model. Inherent
in these valuations are key assumptions, including expected volatility in the
Company’s common share price, risk-free interest rates, and the expected lives
of the options granted, and are updated for each option grant. We are required
to consider current market conditions, including interest rates and the market
for the Company’s common stock, as well as historical data regarding option
exercises and forfeitures in making these assumptions. Changes in the related
compensation costs associated with future grants may occur due to changes in the
assumptions.




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.




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, and records a valuation allowance
on deferred tax assets when considered necessary.





39





On
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
Statement No. 109” (“FIN 48”). FIN 48 provides recognition criteria and a
related measurement model for tax positions taken by companies. In accordance
with FIN 48, a tax position is a position in a previously filed tax return or a
position expected to be taken in a future tax filing that is reflected in
measuring current or deferred income tax assets and liabilities. Tax positions
are recognized only when it is more likely than not (likelihood of greater than
50%), based on technical merits, that the position would be sustained upon
examination by taxing authorities. Tax positions that meet the more likely than
not threshold are measured using a probability-weighted approach as the largest
amount of tax benefit that is greater than 50% likely of being realized upon
settlement.   The adoption of FIN 48 did not result in a change
to the liability of unrecognized benefits.





Recent
Accounting Pronouncements




In
November 2007, the Emerging Issues Task Force issued EITF Issue 07-01 (“EITF
07-01”), “Accounting for Collaborative Arrangements”.  EITF 07-01
requires collaborators to present the results of activities for which they act
as the principal on a gross basis and report any payments received from (made
to) other collaborators based on other applicable GAAP or, in the absence of
other applicable GAAP, based on analogy to authoritative accounting literature
or a reasonable, rational, and consistently applied accounting policy election.
Further, EITF 07-01 clarified that the determination of whether
transactions within a collaborative arrangement are part of a vendor-customer
(or analogous) relationship subject to Issue 01-9, “Accounting for Consideration
Given by a Vendor to a Customer”. EITF 07-01 is effective for fiscal years
beginning after December 15, 2008.  We do not anticipate the
adoption of this standard to have a  material impact on our
consolidated financial statements




On
December 4, 2007, the FASB issued SFAS No. 160 (“SFAS 160”),
“Noncontrolling Interests in Consolidated Financial Statements — An
Amendment of ARB No. 51”.  SFAS 160 establishes new
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. Specifically, this
statement requires the recognition of a noncontrolling interest (minority
interest) as equity in the consolidated financial statements and separate from
the parent’s equity. The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement. SFAS 160 clarifies that changes in a parent’s ownership interest
in a subsidiary that do not result in deconsolidation are equity transactions if
the parent retains its controlling financial interest. In addition, this
statement requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. Such gain or loss will be measured using the fair
value of the noncontrolling equity investment on the deconsolidation date.
SFAS 160 also includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption is
prohibited.  We do not anticipate the adoption of this standard to
have a  material impact on our consolidated financial
statements





In
December 2007, the FASB issued SFAS No. 141(R) (“SFAS 141(R)”), “Business
Combinations”.  SFAS 141(R) establishes principles and requirements
for how an acquirer in a business combination recognizes and measures the assets
acquired, liabilities assumed and any noncontrolling interest in the acquiree.
This statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first fiscal year beginning on or after December 15, 2008.
We do not anticipate the adoption of this statement will have a material impact
on our consolidated financial statements for previous acquisitions, but could
have a material impact on our consolidated financials statements with regards to
future acquisitions.




In March
2008, the FASB issued Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133”. This Statement changes disclosure requirements for
derivative instruments and hedging activities. Companies are required to provide
enhanced disclosures about (i) how and why a company uses derivative
instruments, (ii) how derivative instruments and related hedged items are
accounted for under Statement No. 133 and its related interpretations, and
(iii) how derivative instruments and related hedged items affect a
Company's financial position, financial performance and cash flows. This
Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2008.  We do not anticipate the
adoption of this statement will have a material impact on our consolidated
financial statements.





40





In
November 2008, the FASB issued EITF Issue No. 08-7, “Accounting for Defensive Intangible
Assets”(“EITF 08-7”). EITF 08-7 addresses the accounting for
assets acquired in a business combination or asset acquisition that an entity
does not intend to actively use, otherwise referred to as a ‘defensive asset.’
EITF 08-7 requires defensive intangible assets to be initially accounted
for as a separate unit of accounting and not included as part of the cost of the
acquirer’s existing intangible asset(s) because it is separately identifiable.
EITF 08-7 also requires that defensive intangible assets be assigned a
useful life in accordance with paragraph 11 of FASB Statement No. 142,
“Goodwill and Other Intangible
Assets”.We do not anticipate that the adoption of this statement will
have a material impact on our consolidated financial statements.




In
December 2008, the FASB issued FASB Staff Position No. FAS 132(R)-1,
“Employers’ Disclosures about
Postretirement Benefit Plan Assets”(“FSP FAS 132(R)-1”). FSP
FAS 132(R)-1 amends FASB Statement No. 132 (revised 2003), “Employers’ Disclosures about
Pensions and Other Postretirement Benefits”,(“FAS 132(R)”), to
provide guidance on an employer’s disclosures about plan assets of a defined
benefit pension or other postretirement plan. The additional disclosure
requirements under this FSP include expanded disclosures about an entity’s
investment policies and strategies, the categories of plan assets,
concentrations of credit risk and fair value measurements of plan assets. The
Company anticipates that the adoption of this statement will significantly
expand its consolidated financial statement footnote disclosures.




ITEM
      7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




We have
market risk with respect to foreign currency exchange rates and interest rates.
The market risk is the potential loss arising from adverse changes in these
rates as discussed below.




The
Company has facilities in Singapore, India and Hungary and therefore is subject
to foreign currency risk. This risk is composed of both potential losses from
the translation of foreign currency financial statements and the remeasurement
of foreign currency transactions. The total net assets of non-U.S. operations
denominated in non-functional currencies subject to potential loss amount to
approximately $50.9 million. The potential loss in fair value resulting from a
hypothetical 10% adverse change in quoted foreign currency exchange rates
amounts to approximately $5.1 million. Furthermore, related to foreign currency
transactions, the Company has exposure to non-functional currency balances
totaling approximately $10.3 million. This amount includes, on an absolute
basis, exposures to foreign currency assets and liabilities. On a net basis, the
Company had approximately $8.7 million of foreign currency assets as of
December 31, 2008.  As currency rates change, these
non-functional currency balances are revalued, and the corresponding adjustment
is recorded in the consolidated statement of income. A hypothetical change of
10% in currency rates could result in an adjustment to the consolidated
statement of income of approximately $0.9 million.




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 $9.7 million line of
credit and $4.1 million industrial development authority bonds.  The
potential loss in 2009 cash flows from a 10% adverse change in quoted interest
rates would approximate $36,000.




ITEM
      8.
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY
DATA.




Financial
statements and notes thereto appear on pages F-1 to F-41 of this Annual
Report on Form 10-K.




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




None.




ITEM
      9A.
              CONTROLS
      AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures




As
required by rule 13a-15(b) under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), as of the end of the period covered by this
Annual Report on Form 10-K, the Company’s management conducted an
evaluation under the supervision and with the participation of the Company’s
Chief Executive Officer and Chief Financial Officer regarding the effectiveness
of the design and operation of the Company’s disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act). Based upon that evaluation the Company’s management has concluded that the
Company’s disclosure controls and procedures were effective as of
December 31, 2008.





41





Management’s
Annual Report on Internal Control over Financial Reporting




The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in
Rule 13a-15(f) under the Exchange Act. The Company’s internal control
over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally
accepted accounting principles, and includes those policies and procedures
that:




·
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;




·
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with U.S. generally
      accepted accounting principles and, that receipts and expenditures of the
      Company are being made only in accordance with authorization of management
      and directors of the Company; and




·
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




The
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, assessed as of December 31, 2008 the effectiveness of the
Company’s internal control over financial reporting. In making this assessment,
management used the criteria set forth in the framework in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on the results of this evaluation, management has concluded that
the Company’s internal control over financial reporting as of December 31,
2008 was effective.




Attestation
Report of the Registered Public Accounting Firm




The
Company’s independent registered public accounting firm that audited the
consolidated financial statements included in this Annual Report has issued an
attestation report on the Company’s internal control over financial
reporting.  The attestation report is included on page F-3 of this
Annual Report on Form 10-K and incorporated herein by reference.




Changes
in Internal Control Over Financial Reporting




There
were no changes in the Company’s internal control over financial reporting
identified in connection with the evaluation required by Rule 13a-15(d) or Rule
15d-15 under the Exchange Act that occurred during the Company’s fiscal quarter
ended December 31, 2008 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial
reporting.




ITEM
9B. OTHER INFORMATION




None.





42





PART III




ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
..




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 or around June 3, 2009 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 or
around June 3, 2009 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 or around June 3, 2009 is incorporated herein by
reference.




ITEM
      13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE.




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 or around June 3, 2009 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 or
around June 3, 2009 is incorporated herein by reference.





43





PART IV




ITEM
      15.
              EXHIBITS
      AND FINANCIAL STATEMENT
SCHEDULES




(a) (1)Financial
Statements.




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




Page
                    NumberReports
      of Independent Registered Public Accounting Firm
                  F-2Consolidated
      Statements of Income for the Years Ended December 31, 2008, 2007 and
      2006
                  F-4Consolidated
      Balance Sheets at December 31, 2008 and 2007
                  F-5Consolidated
      Statements of Stockholders’ Equity and Comprehensive Income for the Years
      Ended December 31, 2008, 2007 and 2006
                  F-6Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
      2006
                  F-7Notes
      to Consolidated Financial Statements
                  F-9




(a) (2)     
Financial Statement Schedules




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




Schedule
      II—Valuation and Qualifying Accounts
                  F-42




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.




(a) (3)     
Exhibits




EXHIBIT
INDEX




Exhibit
                No.
              
              Description2.1
              
              Business
      Transfer Agreement, dated May 16, 2007 between Albany Molecular Research,
      Inc. and Ariane Orgachem Private Limited (incorporated by reference to
      Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q for the
      quarterly period ended June 30, 2007, File No.
  000-25323).2.2
              
              Business
      Transfer Agreement, dated May 16, 2007 between Albany Molecular Research,
      Inc. and Ferico Laboratories Limited (incorporated by reference to Exhibit
      2.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly
      period ended June 30, 2007, File No. 000-25323).2.3
              
              Stock
      Purchase Agreement, dated January 27, 2006, between Albany Molecular
      Research, Inc. and ComGenex Kutato-Fejleszto Rt. (incorporated herein
      by reference to Exhibit 2.1 to the Company’s Quarterly Report on
      Form 10-Q for the quarterly period ended March 31, 2006, 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).4.2
              
              Certificate
      of Designations, Preferences and Rights of a Series of Preferred
      Stock of Albany Molecular Research, Inc. classifying and designating
      the Series A Junior Participating Cumulative Preferred Stock.
      (incorporated herein by reference to Exhibit 3.1 to the Company’s
      Registration Statement on Form 8-A filed with the Securities and
      Exchange Commission on September 19, 2002, File
      No. 000-25323).4.3
              
              Shareholder
      Rights Agreement, dated as of September 18, 2002, between the Company
      and Mellon Investor Services LLC, as Rights Agent (incorporated herein by
      reference to Exhibit 3.2 to the Company’s Registration Statement on
      Form 8-A filed with the Securities and Exchange Commission on
      September 19, 2002, File
  No. 000-25323).





44





Exhibit
                No.
              
              Description10.1
              
              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 sanofi-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).10.7*
              
              Amendment
      to 1998 Stock Option and Incentive Plan of the Company (incorporated
      herein by reference to Exhibit 10.7 to the Company’s Annual Report on
      Form 10-K for the fiscal year ended December 31, 2004, File
      No. 000-25323).10.8*
              
              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).10.9*
              
              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).10.10
              
              Credit
      Agreement, dated as of February 12, 2003, by and between the Company
      and Fleet National Bank, Fleet Securities, Inc., JP Morgan Chase
      Bank, and Citizens Bank of Massachusetts (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, 2004, File
      No. 000-25323).10.11
              
              Second
      Amendment, dated as of June 30, 2005, to Credit Agreement between
      Albany Molecular Research, Inc. and Bank of America, N.A., JP Morgan
      Chase Bank, N.A. and Citizens Bank of Massachusetts (incorporated herein
      by reference to Exhibit 10.1 to the Company’s Quarterly Report on
      Form 10-Q for the quarter ended June 30, 2005 filed with the
      Securities and Exchange Commission on August 9, 2005, File
      No. 000-25323).10.12
              
              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).10.13*
              
              Form of
      Restricted Stock Award Agreement under 1998 Stock Option and Incentive
      Plan (incorporated herein by reference to Exhibit 10.1 to the
      Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on March 17, 2005,
      File No. 000-25323).10.14*
              
              Albany
      Molecular Research, Inc. Incentive Bonus Plan (incorporated herein by
      reference to Exhibit 10.1 to the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission on
      May 3, 2005, File No. 000-25323).10.15*
              
              Form of
      Incentive Stock Option Agreement under 1998 Stock Option and Incentive
      Plan (incorporated herein by reference to Exhibit 10.2 to the
      Company’s Quarterly Report on Form 10-Q for the quarter ended
      March 31, 2005 filed with the Securities and Exchange Commission on
      May 10, 2005, File No. 000-25323).10.16*
              
              Form of
      Non-Qualified Stock Option Agreement under 1998 Stock Option and Incentive
      Plan (incorporated herein by reference to Exhibit 10.3 to the
      Company’s Quarterly Report on Form 10-Q for the quarter ended
      March 31, 2005 filed with the Securities and Exchange Commission on
      May 10, 2005, File
No. 000-25323).





45








Exhibit
                    No.
                  
                  Description10.17
                  
                  Supply
      Agreement, dated as of August 31, 2005, between Organichem
      Corporation and Amersham Health AS, a wholly-owned subsidiary of GE
      Healthcare, Inc. (filed with certain information omitted pursuant to
      a request for confidential treatment and filed separately with the
      Securities and Exchange Commission) (incorporated herein by reference to
      Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for
      the quarter ended September 30, 2005 filed with the Securities and
      Exchange Commission on November 4, 2005, File
      No. 000-25323).10.18
                  
                  License
      and Research Agreement, dated as of October 20, 2005, between Albany
      Molecular Research, Inc., AMR Technology, Inc. and Bristol-Myers
      Squibb Company (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, 2006, File No. 000-25323).10.19*
                  
                  Form of
      Notice of Acceleration of Certain Stock Options and Acknowledgement of
      Lock-Up dated January 25, 2006 (incorporated herein by reference to
      Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal
      year ended December 31, 2005, File No. 000-25323).10.20*
                  
                  Amended
      and Revised Technology Department Incentive Plan, dated October 13,
      2003 (incorporated herein by reference to Exhibit 10.1 to the
      Company’s Quarterly Report on Form 10-Q for the quarterly period
      ended March 31, 2006, File No. 0-25323).10.21*
                  
                  Amended
      and Restated Employment Agreement, dated August 5, 2008, between Albany
      Molecular Research, Inc. and Thomas E. D’Ambra, Ph.D. (incorporated herein
      by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
      10-Q for the quarterly period ended June 30, 2008, filed with the
      Securities and Exchange Commission on August 7, 2008, File No.
      000-25323).10.22*
                  
                  Amended
      and Restated Employment Agreement, dated August 5, 2008, between Albany
      Molecular Research, Inc. and Mark T. Frost (incorporated herein by
      reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q
      for the quarterly period ended June 30, 2008, filed with the Securities
      and Exchange Commission on August 7, 2008, File No.
      000-25323).10.23*
                  
                  Amended
      and Restated Employment Agreement, dated August 5, 2008, between Albany
      Molecular Research, Inc. and W. Steven Jennings (incorporated herein by
      reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q
      for the quarterly period ended June 30, 2008, filed with the Securities
      and Exchange Commission on August 7, 2008, File No.
      000-25323).10.24*
                  
                  2008
      Stock Option and Incentive Plan, approved on June 4, 2008 (incorporated
      herein by reference to Exhibit 1 to Schedule 14A filed with the Securities
      and Exchange Commission on April 29, 2008, File No.
      000-25323).10.25
                  
                  Amendment
      to License Agreement Regarding Sublicensing , dated November 19, 2008, by
      and between Albany Molecular Research, Inc., AMR Technology, Inc.
      (formerly a subsidiary of AMRI, which has subsequently been merged into
      AMRI) and sanofi-aventis U.S. LLC (filed with certain information omitted
      pursuant to a request for confidential treatment and filed separately with
      the Securities and Exchange Commission) (filed herein).10.26
                  
                  Second
      Amendment to the August 31, 2005 Supply Agreement, dated January 9, 2009,
      by and between AMRI Rensselaer, Inc. (formerly Organichem Corporation) and
      GE Healthcare AS (formerly Amersham Healthcare AS) (filed with certain
      information omitted pursuant to a request for confidential treatment and
      filed separately with the Securities and Exchange Commission) (filed
      herein).10.27*
                  
                  Employment
      Agreement, dated August 5, 2008, between Albany Molecular Research, Inc.
      and Steven R. Hagen, Ph.D. (filed herein).10.28
                  
                  Fifth
      Amendment to Credit Agreement, dated as of June 26, 2008, by and among
      Albany Molecular Research, Inc., Bank of America, N.A. and RBS Citizens,
      National Association (successor by merger to Citizens Bank of
      Massachusetts) (filed herein).21.1
                  
                  Subsidiaries
      of the Company (filed herein).23.1
                  
                  Consent
      of KPMG LLP (filed herein).31.1
                  
                  Rule 13a-14(a)/15d-14(a) certification
      (filed herein).31.2
                  
                  Rule 13a-14(a)/15d-14(a) certification
      (filed herein).32.1
                  
                  Section 1350
      certification (filed herein).32.2
                  
                  Section 1350
      certification (filed
herein).







*
              Denotes
      management contract of compensation plan or
  arrangement




46





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:
      March 13, 2009
              Albany
      Molecular Research, Inc.By:
              /s/ ThomasE. D’AmbraThomas
      E. D’Ambra, Ph.D.President
      and Chief Executive Officer




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/ ThomasE. D’Ambra
                              
                              Chairman
      of the Board, President, Chief Executive
                              
                              March
      13, 2009Thomas
      E. D’Ambra, Ph.D.
                              
                              Officer
      and Director (Principal Executive Officer)/s/ MarkT. Frost
                              
                              Senior
      Vice President, Administration, Chief Financial Officer and
      Treasurer
                              
                              March
      13, 2009Mark
      T. Frost
                              
                              (Principal
      Financial and Accounting Officer)/s/ PaulS. Anderson
                              
                              Director
                              
                              March
      13, 2009Paul
      S. Anderson, Ph.D./s/ DonaldE. Kuhla
                              
                              Director
                              
                              March
      13, 2009Donald
      E. Kuhla, Ph.D./s/ KevinO’Connor
                              
                              Director
                              
                              March
      13, 2009Kevin
      O’Connor/s/ ArthurJ. Roth
                              
                              Director
                              
                              March
      13, 2009Arthur
      J. Roth/s/Anthony P.
      Tartaglia
                              
                              Director
                              
                              March
      13, 2009Anthony
      P. Tartaglia, M.D./s/Veronica G.H.
      Jordan
                              
                              Director
                              
                              March
      13, 2009Veronica
      G.H. Jordan, Ph.D./s/Una S.
      Ryan
                              
                              Director
                              
                              March
      13, 2009Una
      S. Ryan, Ph.D., O.B.E.




47




INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS


ALBANY
MOLECULAR RESEARCH, INC.




PageReports
      of Independent Registered Public Accounting Firm
                
                
                F–2Consolidated
      Statements of Income for the Years Ended December 31, 2008, 2007
      and 2006
                
                
                F–4Consolidated
      Balance Sheets at December 31, 2008 and 2007
                
                
                F–5Consolidated
      Statements of Stockholders’ Equity and Comprehensive Income for the Years
      Ended December 31, 2008, 2007 and 2006
                
                
                F–6Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008, 2007
      and 2006
                
                
                F–7Notes
      to Consolidated Financial Statements
                
                
                F–9





F-1




Report
of Independent Registered Public Accounting Firm





The Board
of Directors and Stockholders


Albany
Molecular Research, Inc.:





We have
audited the accompanying consolidated balance sheets of Albany Molecular
Research, Inc. and subsidiaries (the Company) as of December 31, 2008 and 2007,
and the related consolidated statements of income, stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2008. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule listed in the index appearing under Item 15(a)(2). These consolidated
financial statements and financial statement schedule are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.





We
conducted our audits in accordance with the 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Albany Molecular Research,
Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2008, in conformity with U.S. generally accepted accounting
principles.  Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.





As
discussed in Note 1 to the consolidated financial statements, effective December
31, 2006, the Company adopted FASB Statement of Financial Accounting Standards
No. 158, Employers’ Accounting
for Defined Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R).


.


We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Albany Molecular Research, Inc’s. internal
control over financial reporting as of December 31, 2008, based upon criteria
established in Internal
Control—Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 12,
2009, expressed an unqualified opinion on the effectiveness of Albany Molecular
Research, Inc.’s internal control over financial reporting.




/s/KPMG
LLP


Albany,
New York


March 12,
2009




F-2




Report
of Independent Registered Public Accounting Firm




The Board
of Directors and Stockholders


Albany
Molecular Research, Inc.:




We have
audited internal control over financial reporting of Albany Molecular Research,
Inc. and subsidiaries (the Company) as of December 31, 2008, based on criteria
established in Internal
Control—Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Annual Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our
audit.





We
conducted our audit in accordance with the 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a


reasonable
basis for our opinion.





A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





In our
opinion, Albany Molecular Research, Inc. and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control—Integrated
Frameworkissued by COSO.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Albany
Molecular Research, Inc. and subsidiaries as of December 31, 2008 and 2007, the
related consolidated statements of income, stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2008, and the related financial statement schedule,
and our report dated March 12, 2009, expressed an unqualified opinion on those
consolidated financial statements and related


financial
statement schedule.




/s/KPMG
LLP


Albany,
New York


March 12,
2009




F-3




ALBANY
MOLECULAR RESEARCH, INC.




CONSOLIDATED
STATEMENTS OF INCOME




Years
Ended December 31, 2008, 2007 and 2006




(Dollars
in thousands, except per share amounts)




Year Ended December 31,2008
                
                
                2007
                
                
                2006Contract
      revenue
                
                $
                195,455
                
                
                $
                163,375
                
                
                $
                152,783Recurring
      royalties
                
                
                28,305
                
                
                
                27,056
                
                
                
                27,024Milestone
      revenue
                
                
                5,500
                
                
                
                2,080
                
                
                
                —Total
      revenue
                
                
                229,260
                
                
                
                192,511
                
                
                
                179,807Cost
      of contract revenue
                
                
                146,075
                
                
                
                132,032
                
                
                
                128,610Technology
      incentive award
                
                
                2,901
                
                
                
                2,784
                
                
                
                2,783Research
      and development
                
                
                13,129
                
                
                
                12,821
                
                
                
                11,428Selling,
      general and administrative
                
                
                39,361
                
                
                
                33,250
                
                
                
                31,899Property
      and equipment impairment
                
                
                —
                
                
                
                —
                
                
                
                3,554Restructuring
      charge
                
                
                1,833
                
                
                
                273
                
                
                
                2,431Total
      costs and expenses
                
                
                203,299
                
                
                
                181,160
                
                
                
                180,705Income
      (loss) from operations
                
                
                25,961
                
                
                
                11,351
                
                
                
                (898
                )Interest
      expense
                
                
                (493
                )
                
                
                (853
                )
                
                
                (985
                )Interest
      income
                
                
                1,663
                
                
                
                4,045
                
                
                
                3,975Other
      income (expense), net
                
                
                759
                
                
                
                (158
                )
                
                
                150Income
      before income tax expense
                
                
                27,890
                
                
                
                14,385
                
                
                
                2,242Income
      tax expense
                
                
                7,330
                
                
                
                5,449
                
                
                
                59Net
      income
                
                $
                20,560
                
                
                $
                8,936
                
                
                $
                2,183Basic
      earnings per share
                
                $
                0.66
                
                
                $
                0.28
                
                
                $
                0.07Diluted
      earnings per share
                
                $
                0.65
                
                
                $
                0.27
                
                
                $
                0.07




See
Accompanying Notes to Consolidated Financial Statements.




F-4





ALBANY
MOLECULAR RESEARCH, INC.




CONSOLIDATED
BALANCE SHEETS




Years
Ended December 31, 2008 and 2007




(In
thousands, except per share amounts)




December 31,2008
                  
                  
                  2007AssetsCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  60,400
                  
                  
                  $
                  45,506Investment
      securities, available-for-sale
                  
                  
                  27,070
                  
                  
                  
                  62,193Accounts
      receivable (net of allowance for doubtful accounts of $621 at
      December 31, 2008 and $252 at December 31, 2007)
                  
                  
                  38,529
                  
                  
                  
                  28,006Royalty
      income receivable
                  
                  
                  6,670
                  
                  
                  
                  6,086Inventory
                  
                  
                  28,670
                  
                  
                  
                  22,581Unbilled
      services
                  
                  
                  159
                  
                  
                  
                  259Prepaid
      expenses and other current assets
                  
                  
                  8,944
                  
                  
                  
                  5,698Deferred
      income taxes
                  
                  
                  4,073
                  
                  
                  
                  4,931Total
      current assets
                  
                  
                  174,515
                  
                  
                  
                  175,260Property
      and equipment, net
                  
                  
                  167,502
                  
                  
                  
                  158,028Goodwill
                  
                  
                  40,272
                  
                  
                  
                  46,575Intangible
      assets and patents, net
                  
                  
                  2,018
                  
                  
                  
                  2,232Equity
      investment in unconsolidated affiliates
                  
                  
                  956
                  
                  
                  
                  956Pension
      and postretirement benefits
                  
                  
                  —
                  
                  
                  
                  624Other
      assets
                  
                  
                  5,421
                  
                  
                  
                  2,979Total
      assets
                  
                  $
                  390,684
                  
                  
                  $
                  386,654Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Accounts
      payable and accrued expenses
                  
                  $
                  16,453
                  
                  
                  $
                  13,562Deferred
      revenue
                  
                  
                  7,300
                  
                  
                  
                  6,922Accrued
      compensation
                  
                  
                  6,111
                  
                  
                  
                  3,893Accrued
      pension benefits
                  
                  
                  500
                  
                  
                  
                  303Income
      taxes payable
                  
                  
                  3,198
                  
                  
                  
                  1,789Current
      installments of long-term debt
                  
                  
                  260
                  
                  
                  
                  9,900Total
      current liabilities
                  
                  
                  33,822
                  
                  
                  
                  36,369Long-term
      liabilities:Long-term
      debt, excluding current installments
                  
                  
                  13,482
                  
                  
                  
                  4,080Deferred
      rent
                  
                  
                  1,156
                  
                  
                  
                  —Deferred
      income taxes
                  
                  
                  9,142
                  
                  
                  
                  11,446Pension
      and postretirement benefits
                  
                  
                  6,211
                  
                  
                  
                  —Environmental
      liabilities
                  
                  
                  191
                  
                  
                  
                  191Total
      liabilities
                  
                  
                  64,004
                  
                  
                  
                  52,086Commitments
      and contingencies (notes 12, 14)Stockholders’
      equity:Preferred
      stock, $0.01 par value, authorized 2,000 shares, none issued or
      outstanding
                  
                  
                  —
                  
                  
                  
                  —Common
      stock, $0.01 par value, authorized 50,000 shares, 35,278 shares
      issued in 2008 and 35,075 shares issued in 2007
                  
                  
                  353
                  
                  
                  
                  351Additional
      paid-in capital
                  
                  
                  199,020
                  
                  
                  
                  195,985Retained
      earnings
                  
                  
                  190,816
                  
                  
                  
                  170,256Accumulated
      other comprehensive (loss) income, net
                  
                  
                  (6,621
                  )
                  
                  
                  5,147383,568
                  
                  
                  
                  371,739Less,
      treasury shares at cost, 3,825 shares in 2008 and 2,077
      shares in 2007
                  
                  
                  (56,888
                  )
                  
                  
                  (37,171
                  )Total
      stockholders’ equity
                  
                  
                  326,680
                  
                  
                  
                  334,568Total
      liabilities and stockholders’ equity
                  
                  $
                  390,684
                  
                  
                  $
                  386,654




See
Accompanying Notes to Consolidated Financial Statements.





F-5





ALBANY
MOLECULAR RESEARCH, INC.




CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME




Years
Ended December 31, 2008, 2007 and 2006




(In
thousands)




AccumulatedCommon Stock
                                                          
                                                          
                                                          Additional
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          Other
                                                          
                                                          
                                                          Treasury StockPreferred
                                                          
                                                          
                                                          Number of
                                                          
                                                          
                                                          Par
                                                          
                                                          
                                                          Paid-in
                                                          
                                                          
                                                          Retained
                                                          
                                                          
                                                          Comprehensive
                                                          
                                                          
                                                          Number of
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          ComprehensiveStock
                                                          
                                                          
                                                          Shares
                                                          
                                                          
                                                          Value
                                                          
                                                          
                                                          Capital
                                                          
                                                          
                                                          Earnings
                                                          
                                                          
                                                          (Loss
      ) Income
                                                          
                                                          
                                                          Shares
                                                          
                                                          
                                                          Amount
                                                          
                                                          
                                                          Total
                                                          
                                                          
                                                          IncomeBalances
      at January 1, 2006
                                                          
                                                          $
                                                          —
                                                          
                                                          
                                                          
                                                          34,471
                                                          
                                                          
                                                          $
                                                          345
                                                          
                                                          
                                                          $
                                                          191,145
                                                          
                                                          
                                                          $
                                                          159,137
                                                          
                                                          
                                                          $
                                                          (395
                                                          )
                                                          
                                                          
                                                          (2,077
                                                          )
                                                          
                                                          $
                                                          (37,171
                                                          )
                                                          
                                                          $
                                                          313,061Comprehensive
      Income:Net
      income
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          2,183
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          2,183
                                                          
                                                          
                                                          $
                                                          2,183Unrealized
      gain on investment securities, available-for-sale, net of
      taxes
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          165
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          165
                                                          
                                                          
                                                          
                                                          165Unrealized
      loss on interest rate swap contract, net of taxes
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (61
                                                          )
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (61
                                                          )
                                                          
                                                          
                                                          (61
                                                          )Foreign
      currency translation gain
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          255
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          255
                                                          
                                                          
                                                          
                                                          255Decrease
      in additional minimum pension liability, net of taxes
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          254
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          254
                                                          
                                                          
                                                          
                                                          254Total
      other comprehensive income
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          613Total
      comprehensive income
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          $
                                                          2,796Adjustment
      to initially apply FASB Statement No. 158, net of tax
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          614
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          614Tax
      benefit from exercise of stock options
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          34
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          34Tax
      benefit from cancellation of BMS warrants
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          197
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          197Share-based
      payment expense
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          561
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          561Issuance
      of restricted stock
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          194
                                                          
                                                          
                                                          
                                                          2
                                                          
                                                          
                                                          
                                                          (2
                                                          )
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          —Amortization
      of unearned compensation - restricted stock
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          611
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          611Forfeiture
      of unearned compensation - restricted stock
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (32
                                                          )
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          —Issuance
      of common stock in connection with stock option plan and
    ESPP
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          116
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          581
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          581Balances
      at December 31, 2006
                                                          
                                                          $
                                                          —
                                                          
                                                          
                                                          
                                                          34,749
                                                          
                                                          
                                                          $
                                                          347
                                                          
                                                          
                                                          $
                                                          193,127
                                                          
                                                          
                                                          $
                                                          161,320
                                                          
                                                          
                                                          $
                                                          832
                                                          
                                                          
                                                          
                                                          (2,077
                                                          )
                                                          
                                                          $
                                                          (37,171
                                                          )
                                                          
                                                          $
                                                          318,455Comprehensive
      Income:Net
      income
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          8,936
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          8,936
                                                          
                                                          
                                                          $
                                                          8,936Unrealized
      gain on investment securities, available-for-sale, net of
      taxes
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          83
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          83
                                                          
                                                          
                                                          
                                                          83Unrealized
      loss on interest rate swap contract, net of taxes
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (92
                                                          )
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (92
                                                          )
                                                          
                                                          
                                                          (92
                                                          )Pension
      and other postretirement benefits:Amortization
      of actuarial gain, net of taxes
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          4
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          4
                                                          
                                                          
                                                          
                                                          4Current
      year actuarial gain, net of taxes
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          413
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          413
                                                          
                                                          
                                                          
                                                          413Foreign
      currency translation gain
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          3,907
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          3,907
                                                          
                                                          
                                                          
                                                          3,907Total
      other comprehensive income
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          4,315Total
      comprehensive income
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          $
                                                          13,251Tax
      benefit from exercise of stock options
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          121
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          121Share-based
      payment expense
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          584
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          584Issuance
      of restricted stock
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          197
                                                          
                                                          
                                                          
                                                          2
                                                          
                                                          
                                                          
                                                          (2
                                                          )
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          —Amortization
      of unearned compensation - restricted stock
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          720
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          720Forfeiture
      of unearned compensation - restricted stock
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (98
                                                          )
                                                          
                                                          
                                                          (1
                                                          )
                                                          
                                                          
                                                          1
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          —Issuance
      of common stock in connection with stock option  plan and
      ESPP
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          227
                                                          
                                                          
                                                          
                                                          3
                                                          
                                                          
                                                          
                                                          1,434
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          1,437Balances
      at December 31, 2007
                                                          
                                                          $
                                                          —
                                                          
                                                          
                                                          
                                                          35,075
                                                          
                                                          
                                                          $
                                                          351
                                                          
                                                          
                                                          $
                                                          195,985
                                                          
                                                          
                                                          $
                                                          170,256
                                                          
                                                          
                                                          $
                                                          5,147
                                                          
                                                          
                                                          
                                                          (2,077
                                                          )
                                                          
                                                          $
                                                          (37,171
                                                          )
                                                          
                                                          $
                                                          334,568Comprehensive
      Income:Net
      income
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          20,560
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          20,560
                                                          
                                                          
                                                          $
                                                          20,560Unrealized
      gain on investment securities, available-for-sale, net of
      taxes
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          67
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          67
                                                          
                                                          
                                                          
                                                          67Unrealized
      loss on interest rate swap contract, net of taxes
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (5
                                                          )
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (5
                                                          )
                                                          
                                                          
                                                          (5
                                                          )Pension
      and other postretirement benefits:Amortization
      of actuarial gain, net of taxes
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          8
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          8
                                                          
                                                          
                                                          
                                                          8Current
      year actuarial loss, net of taxes
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (4,510
                                                          )
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (4,510
                                                          )
                                                          
                                                          
                                                          (4,510
                                                          )Foreign
      currency translation loss
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (7,328
                                                          )
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (7,328
                                                          )
                                                          
                                                          
                                                          (7,328
                                                          )Total
      other comprehensive loss
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (11,768
                                                          )Total
      comprehensive income
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          $
                                                          8,792Treasury
      stock purchases
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (1,748
                                                          )
                                                          
                                                          
                                                          (19,717
                                                          )
                                                          
                                                          
                                                          (19,717
                                                          )Tax
      benefit from exercise of stock options
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          56
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          56Share-based
      payment expense
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          665
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          665Issuance
      of restricted stock
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          175
                                                          
                                                          
                                                          
                                                          2
                                                          
                                                          
                                                          
                                                          (2
                                                          )
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          —Amortization
      of unearned compensation - restricted stock
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          1,031
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          1,031Forfeiture
      of unearned compensation - restricted stock
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (68
                                                          )
                                                          
                                                          
                                                          (1
                                                          )
                                                          
                                                          
                                                          1
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          —Issuance
      of common stock in connection with stock option  plan and
      ESPP
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          96
                                                          
                                                          
                                                          
                                                          1
                                                          
                                                          
                                                          
                                                          1,284
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          1,285Balances
      at December 31, 2008
                                                          
                                                          $
                                                          —
                                                          
                                                          
                                                          
                                                          35,278
                                                          
                                                          
                                                          $
                                                          353
                                                          
                                                          
                                                          $
                                                          199,020
                                                          
                                                          
                                                          $
                                                          190,816
                                                          
                                                          
                                                          $
                                                          (6,621
                                                          )
                                                          
                                                          
                                                          (3,825
                                                          )
                                                          
                                                          $
                                                          (56,888
                                                          )
                                                          
                                                          $
                                                          326,680





See
Accompanying Notes to Consolidated Financial Statements.




F-6




ALBANY
MOLECULAR RESEARCH, INC.




CONSOLIDATED
STATEMENTS OF CASH FLOWS




Years
Ended December 31, 2008, 2007 and 2006




(In
thousands)





Year ended December 31,2008
                                          
                                          
                                          2007
                                          
                                          
                                          2006Operating
      ActivitiesNet
      income
                                          
                                          $
                                          20,560
                                          
                                          
                                          $
                                          8,936
                                          
                                          
                                          $
                                          2,183Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                                          
                                          
                                          17,784
                                          
                                          
                                          
                                          16,816
                                          
                                          
                                          
                                          15,281Net
      amortization of premiums on securities
                                          
                                          
                                          238
                                          
                                          
                                          
                                          174
                                          
                                          
                                          
                                          264Provision
      for obsolete inventories
                                          
                                          
                                          3,975
                                          
                                          
                                          
                                          2,891
                                          
                                          
                                          
                                          1,406Property,
      plant and equipment impairment
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (31
                                          )
                                          
                                          
                                          3,876Provision
      for doubtful accounts
                                          
                                          
                                          480
                                          
                                          
                                          
                                          27
                                          
                                          
                                          
                                          260Forgiven
      principal on notes receivable
                                          
                                          
                                          69
                                          
                                          
                                          
                                          89
                                          
                                          
                                          
                                          147Deferred
      income tax expense (benefit)
                                          
                                          
                                          1,535
                                          
                                          
                                          
                                          1,350
                                          
                                          
                                          
                                          (724
                                          )Loss
      on disposal of property, plant and equipment
                                          
                                          
                                          274
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          1,123Stock-based
      compensation expense
                                          
                                          
                                          1,696
                                          
                                          
                                          
                                          1,304
                                          
                                          
                                          
                                          1,172(Increase)
      decrease in operating assets, net of business
combinations:Accounts
      receivable
                                          
                                          
                                          (10,961
                                          )
                                          
                                          
                                          6,727
                                          
                                          
                                          
                                          (11,767
                                          )Royalty
      income receivable
                                          
                                          
                                          (584
                                          )
                                          
                                          
                                          139
                                          
                                          
                                          
                                          22Unbilled
      services
                                          
                                          
                                          100
                                          
                                          
                                          
                                          (259
                                          )
                                          
                                          
                                          213Inventory
                                          
                                          
                                          (10,024
                                          )
                                          
                                          
                                          (2,105
                                          )
                                          
                                          
                                          6,674Prepaid
      expenses and other assets
                                          
                                          
                                          (5,804
                                          )
                                          
                                          
                                          (2,392
                                          )
                                          
                                          
                                          1,800Increase
      (decrease) in operating liabilities, net of business
      combinations:Accounts
      payable, accrued compensation and accrued expenses
                                          
                                          
                                          4,735
                                          
                                          
                                          
                                          (197
                                          )
                                          
                                          
                                          1,870Income
      taxes payable
                                          
                                          
                                          1,409
                                          
                                          
                                          
                                          356
                                          
                                          
                                          
                                          (6,149
                                          )Deferred
      revenue
                                          
                                          
                                          378
                                          
                                          
                                          
                                          (1,363
                                          )
                                          
                                          
                                          (5,371
                                          )Pension
      and postretirement benefits
                                          
                                          
                                          (476
                                          )
                                          
                                          
                                          (750
                                          )
                                          
                                          
                                          (998
                                          )Deferred
      Rent
                                          
                                          
                                          1,156
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Environmental
      liability
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (45
                                          )
                                          
                                          
                                          —Net
      cash provided by operating activities
                                          
                                          
                                          26,540
                                          
                                          
                                          
                                          31,667
                                          
                                          
                                          
                                          11,282Investing
      ActivitiesPurchases
      of securities
                                          
                                          
                                          (25,265
                                          )
                                          
                                          
                                          (67,665
                                          )
                                          
                                          
                                          (141,373
                                          )Proceeds
      from sales and maturities of investment securities
                                          
                                          
                                          60,262
                                          
                                          
                                          
                                          86,476
                                          
                                          
                                          
                                          160,646Purchase
      of business, net of cash acquired
                                          
                                          
                                          (1,729
                                          )
                                          
                                          
                                          (11,898
                                          )
                                          
                                          
                                          (11,607
                                          )Purchases
      of property, plant and equipment
                                          
                                          
                                          (23,938
                                          )
                                          
                                          
                                          (17,747
                                          )
                                          
                                          
                                          (16,453
                                          )Payments
      for patent applications and other costs
                                          
                                          
                                          (423
                                          )
                                          
                                          
                                          (516
                                          )
                                          
                                          
                                          (518
                                          )Proceeds
      from disposal of property, plant and equipment
                                          
                                          
                                          71
                                          
                                          
                                          
                                          1,565
                                          
                                          
                                          
                                          256Net
      cash provided by (used in) investing activities
                                          
                                          
                                          8,978
                                          
                                          
                                          
                                          (9,785
                                          )
                                          
                                          
                                          (9,049
                                          )Financing
      ActivitiesPurchases
      of treasury stock
                                          
                                          
                                          (19,717
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Principal
      payments on long-term debt
                                          
                                          
                                          (9,643
                                          )
                                          
                                          
                                          (4,554
                                          )
                                          
                                          
                                          (4,585
                                          )Borrowings
      on long-term debt
                                          
                                          
                                          9,405
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Tax
      benefit of stock option exercises
                                          
                                          
                                          56
                                          
                                          
                                          
                                          121
                                          
                                          
                                          
                                          34Proceeds
      from exercise of options and ESPP
                                          
                                          
                                          1,285
                                          
                                          
                                          
                                          1,437
                                          
                                          
                                          
                                          581Net
      cash used in financing activities
                                          
                                          
                                          (18,614
                                          )
                                          
                                          
                                          (2,996
                                          )
                                          
                                          
                                          (3,970
                                          )Effect
      of exchange rate changes on cash flows
                                          
                                          
                                          (2,010
                                          )
                                          
                                          
                                          496
                                          
                                          
                                          
                                          255Increase
      (decrease) in cash and cash equivalents
                                          
                                          
                                          14,894
                                          
                                          
                                          
                                          19,382
                                          
                                          
                                          
                                          (1,482
                                          )Cash
      and cash equivalents at beginning of period
                                          
                                          
                                          45,506
                                          
                                          
                                          
                                          26,124
                                          
                                          
                                          
                                          27,606Cash
      and cash equivalents at end of period
                                          
                                          $
                                          60,400
                                          
                                          
                                          $
                                          45,506
                                          
                                          
                                          $
                                          26,124Supplemental
      disclosure of non-cash investing and financing activities:Unrealized
      gain on securities available-for-sale, net of tax
                                          
                                          $
                                          67
                                          
                                          
                                          $
                                          83
                                          
                                          
                                          $
                                          165Unrealized
      loss on swap contract, net of tax
                                          
                                          $
                                          (5
                                          )
                                          
                                          $
                                          (92
                                          )
                                          
                                          $
                                          (61
                                          )Actuarial
      (gain) loss on pension and other postretirement liability, net of
      tax
                                          
                                          $
                                          (4,502
                                          )
                                          
                                          $
                                          417
                                          
                                          
                                          $
                                          254Adjustment
      for SFAS No. 158 implementation
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          614Issuance
      of restricted stock
                                          
                                          $
                                          2,041
                                          
                                          
                                          $
                                          2,035
                                          
                                          
                                          $
                                          1,993Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                                          
                                          $
                                          493
                                          
                                          
                                          $
                                          856
                                          
                                          
                                          $
                                          1,071Income
      taxes
                                          
                                          $
                                          2,906
                                          
                                          
                                          $
                                          5,828
                                          
                                          
                                          $
                                          6,471





F-7




ALBANY
MOLECULAR RESEARCH, INC.
  CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
  Years
Ended December 31, 2008, 2007 and 2006
  (In
thousands)


In 2008,
the Company, through a wholly-owned subsidiary, completed the purchase of
FineKem, a manufacturing facility located in Aurangabad, India for an aggregate
purchase price of $1,701.  In conjunction with the acquisition, assets
were acquired and liabilities were assumed as follows:




Fair
      value of assets acquired
                  
                  $
                  1,905Cash
      paid for net assets
                  
                  
                  (204
                  )Liabilities
      assumed
                  
                  $
                  1,701




In 2007,
the Company, through a wholly-owned subsidiary, acquired certain assets of
Ariane Orgachem Private Limited and Ferico Laboratories Limited, collectively
known as AMRI Pvt. Ltd. (“AMRI India”) for an aggregate purchase price of
$11,926.  In conjunction with the acquisition, assets were acquired
and liabilities were assumed as follows:




Fair
      value of assets acquired
                  
                  $
                  12,346Cash
      paid for net assets
                  
                  
                  (420
                  )Liabilities
      assumed
                  
                  $
                  11,926




See
Accompanying Notes to Consolidated Financial Statements.




F-8




ALBANY
MOLECULAR RESEARCH, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




December 31,
2008, 2007 and 2006




(In
thousands, except per share amounts)





1.
            Summary
      of Significant Accounting Policies




Nature
of Business:




Albany
Molecular Research, Inc. (the “Company”) provides scientific services,
technologies and products focused on improving the quality of life. The
Company’s core business consists of a fee-for-service contract services platform
encompassing drug discovery, development and manufacturing and a separate,
stand-alone research and development division consisting of proprietary
technology investments, internal drug discovery and niche generic active
pharmaceutical ingredient product development.  With locations in the
U.S., Europe, and Asia, the Company provides customers with a range of services
and cost models.




Basis
of Presentation:




The
consolidated financial statements include the accounts of Albany Molecular
Research, Inc. (“AMRI”) and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated during consolidation. When
necessary, prior years’ consolidated financial statements have been reclassified
to conform to the current year presentation. Assets and liabilities of non-U.S.
operations are translated at period-end rates of exchange, and the statements of
income (loss) are translated at the average rates of exchange for the period.
Gains or losses resulting from translating non-U.S. currency financial
statements are recorded in accumulated other comprehensive (loss) income in the
accompanying December 31, 2008 and 2007 consolidated balance
sheets.




Use
of Management Estimates:




The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles 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. The
most significant estimates included in the accompanying consolidated financial
statements include assumptions regarding the collectibility of receivables, the
valuation of inventory, and the fair value of goodwill, intangible assets, and
long-lived assets. Other significant estimates include assumptions utilized in
determining the amount and realizabilty of deferred tax assets and assumptions
utilized in determining actuarial obligations in conjunction with the Company’s
pension and postretirement health plans. Actual results can vary from these
estimates.




Contract
Revenue Recognition:




The
Company’s contract revenue consists primarily of fees earned under contracts
with third-party customers and reimbursed expenses under such contracts. The
Company also seeks to include provisions in certain contracts that contain a
combination of up-front licensing fees, milestone and royalty payments should
the Company’s proprietary technology and expertise lead to the discovery of new
products that become commercial. Reimbursed expenses consist of chemicals and
other project specific costs. Generally, the Company’s contracts may be
terminated by the customer upon 30 days’ to one year’s prior notice,
depending on the size of the contract. The Company analyzes its agreements to
determine whether the elements can be separated and accounted for individually
or as a single unit of accounting in accordance with Emerging Issues Task Force
(“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables,” and
Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition”. Allocation of
revenue to individual elements that qualify for separate accounting is based on
the estimated fair value of the respective elements.




The
Company generates contract revenue on the following basis:




Full-time Equivalent
(“FTE”). An FTE
agreement establishes the number of Company 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. FTE contracts can run in one month
increments, but typically have terms of six months or longer. FTE contracts
typically provide for annual adjustments in billing rates for the scientists
assigned to the contract.




F-9




ALBANY
MOLECULAR RESEARCH, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




December 31,
2008, 2007 and 2006




(In
thousands, except per share amounts)




These
contracts involve the Company’s scientists providing services on a “best
efforts” basis on a project that may involve a research component with a
timeframe or outcome that has some level of unpredictability. There are no fixed
deliverables that must be met for payment as part of these services. As such,
the Company recognizes 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 the Company charges customers an hourly rate plus
reimbursement for chemicals and other project specific costs. The Company
recognizes 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 the Company charges a fixed agreed upon amount for a deliverable.
Fixed-fee contracts have fixed deliverables upon completion of the project.
Typically, the Company recognizes revenue for fixed-fee contracts after projects
are completed, delivery is made and title transfers to the customer, and
collection is reasonably assured. In certain instances, the Company’s customers
request that the Company retain materials produced upon completion of the
project due to the fact that the customer does not have a qualified facility to
store those materials or for other reasones. In these instances, the revenue
recognition process is considered complete when project documents (batch
records, Certificates of Analysis, etc.) have been delivered to the customer and
payment has been collected.




Up-Front License Fees, Milestone,
and Royalty Revenue.The Company recognizes revenue from up-front non-refundable licensing
fees on a straight-line basis over the period of the underlying project. The
Company will recognize revenue arising from a substantive 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.




Recurring Royalty Revenue
Recognition.  Recurring
royalties consist of royalties under a license agreement with Sanofi-aventis
based on the worldwide sales of fexofenadine HCl, marketed as Allegra in the
Americas and Telfast elsewhere, as well as on sales of Sanofi-aventis’
authorized generics. The Company records royalty revenue in the period in which
the sales of Allegra/Telfast occur, because we can reasonably estimate such
royalties. Royalty payments from Sanofi-aventis are due within 45 days
after each calendar quarter and are determined based on sales of Allegra/Telfast
in that quarter.




Cash
Equivalents:




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. Management reviews outstanding receivable balances on a regular basis in
order to assess the collectibility of these balances, and adjusts the allowance
for doubtful accounts accordingly. 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, work-in-process and finished goods in our large-scale manufacturing
plant.  Large-scale manufacturing inventories are valued on a
first-in, first-out (“FIFO”) basis.  Inventories are stated at the
lower of cost or market.  The Company writes down inventories 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 results in a charge to operations.




F-10




ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  Investment
Securities:
  In
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
“Accounting for Certain Debt and Equity Securities,” investment securities are
classified as available-for-sale. Available-for-sale securities are carried at
fair value, with the unrealized gains and losses reported in accumulated other
comprehensive (loss) income. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in interest income or expense. Realized
gains and losses and declines in value judged to be other-than-temporary, if
any, on available-for-sale securities are included in other income or expense.
The cost of securities sold is based on the specific identification method.
Interest and dividends on securities classified as available-for-sale are
included in interest income.
  At
December 31, 2008 and 2007, the Company’s Investments in Securities in the
current assets section of the consolidated balance sheets include $2.4 million
and $28.0 million, respectively, of auction rate municipal bonds, classified as
available-for-sale securities. The Company’s investments in these securities are
recorded at cost, which approximates fair market value due to their variable
interest rates, which typically reset every 7 to 35 days, and, despite the
long-term nature of their stated contractual maturities, the Company generally
has the ability to quickly liquidate these securities.  As a result,
there are no cumulative gross unrealized holding gains (losses) or gross
realized gains (losses) from these securities.  All income generated
from these current investments is recorded as interest income.
  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 lesser of the life of the asset or the lease
term.
  Equity
Investments in Unconsolidated Subsidiaries:
  The
Company maintains two equity investments in companies that have operations in
areas within its strategic focus. These investments are in leveraged start-up
companies and were recorded at historical cost.
  The
Company records an impairment charge when 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.
  Long-Lived
Assets:
  In
accordance with the provisions of SFAS No. 144,“Accounting for the
Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), the Company
assesses the impairment of long-lived assets whenever events or changes in
circumstances indicate that their carrying value may not be recoverable. Factors
the Company considers important that could trigger an impairment review include,
among others, the following:
  F-11
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  ·
              a
      significant change in the extent or manner in which a long-lived asset is
      being used;
  ·
              a
      significant change in the business climate that could affect the value of
      a long-lived asset; and
  ·
              a
      significant decrease in the market value of
  assets.
  If the
Company determines that the carrying value of long-lived assets may not be
recoverable, based upon the existence of one or more of the above indicators of
impairment, the Company compares the carrying value of the asset group to the
undiscounted cash flows expected to be generated by the asset group. If the
carrying value exceeds the undiscounted cash flows an impairment charge is
recorded. An impairment charge is recognized to the extent that the carrying
amount of the asset group exceeds their fair value and will reduce only the
carrying amounts of the long-lived assets. The Company utilizes the assistance
of an independent valuation firm in determining the fair values.
  Goodwill:
  In
accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible
Assets” (“SFAS No. 142”), the Company performs an annualassessment of the
carrying value of goodwill for potential impairment (or on an interim basis if
certain triggering events occur). A determination of impairment is made based
upon the fair value of the related reporting unit. If goodwill is determined to
be impaired in the future, the Company would be required to record a charge to
its results of operations. Factors the Company considers important which could
result in an impairment include the following:
  ·           significant
underperformance relative to historical or projected future operating
results;
  ·           significant
negative industry or economic trends; and
  ·market capitalization relative to net book
value
  Included
in goodwill as of December 31, 2008 are $23.1 million related to the
acquisition of AMRI Rensselaer, Inc (“AMRI Rensselaer”), $10.5 million related
to the acquisition of ComGenex Kutato-Fejleszto Rt.,  $3.1 million
related to the acquisition of AMRI India and $0.9 million related to the
acquisition of FineKem.  See Note 19 for further information on the
Company’s goodwill balances.
  Patents,
Patent Application Costs, and Licensing Rights:
  The costs
of patents issued and acquired are being amortized on the straight-line method
over the estimated remaining lives of the issued patents. 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.
  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.
  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 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.
  F-12
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  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.
  On
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
Statement No. 109” (“FIN 48”). FIN 48 provides recognition criteria and a
related measurement model for tax positions taken by companies. In accordance
with FIN 48, a tax position is a position in a previously filed tax return or a
position expected to be taken in a future tax filing that is reflected in
measuring current or deferred income tax assets and liabilities. Tax positions
are recognized only when it is more likely than not (likelihood of greater than
50%), based on technical merits, that the position would be sustained upon
examination by taxing authorities. Tax positions that meet the more likely than
not threshold are measured using a probability-weighted approach as the largest
amount of tax benefit that is greater than 50% likely of being realized upon
settlement.   The adoption of FIN 48 did not result in a change
to the liability of unrecognized benefits.
  Stock-Based
Compensation:
  Effective
January 1, 2006, the Company adopted SFAS No. 123 (Revised 2004), “Share-Based
Payment” (“SFAS No. 123 (R)”), which amended SFAS No. 123 and superseded
Accounting Principals Board (“APB”) No. 25in establishing
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services, as well as transactions in which an
entity incurs liabilities in exchange for goods or services that are based on
the fair value of the entity’s equity instruments or that may be settled by the
issuance of those equity instruments. This Statement requires that the cost
resulting from all share-based payment transactions be recognized in the
financial statements based on the fair value of the share-based payment. This
Statement establishes fair value as the measurement objective in accounting for
share-based payment transactions with employees, except for equity instruments
held by employee share ownership plans. As allowed under SFAS No. 123 (R), the
Company elected the modified prospective method of adoption, under which
compensation cost is recognized in the financial statements beginning with the
effective date of SFAS No. 123 (R) for all share-based payments granted
after that date, and for all unvested awards granted prior to the effective date
of SFAS No. 123 (R).
  F-13
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  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:
  2008
                    
                    
                    2007
                    
                    
                    2006Expected
      life in years:
                    
                    
                    5
                    
                    
                    
                    5
                    
                    
                    
                    5Interest
      rate
                    
                    
                    2.63
                    %
                    
                    
                    4.24
                    %
                    
                    
                    4.95
                    %Volatility
                    
                    
                    43
                    %
                    
                    
                    39
                    %
                    
                    
                    41
                    %Dividend
      yield
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
  Earnings
Per Share:
  Basic
earnings per share is 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 and
warrants).
  The
following table provides basic and diluted earnings per share
calculations:
  Year Ended December 31, 2008
                            
                            
                            Year Ended December 31, 2007
                            
                            
                            Year Ended December 31, 2006Net
                              Income
                            
                            
                            Weighted
                              Average
                              Shares
                            
                            
                            Per Share
                              Amount
                            
                            
                            Net
                              Income
                            
                            
                            Weighted
                              Average
                              Shares
                            
                            
                            Per Share
                              Amount
                            
                            
                            Net
                              Income
                            
                            
                            Weighted
                              Average
                              Shares
                            
                            
                            Per Share
                              AmountBasic
      earnings per share
                            
                            $
                            20,560
                            
                            
                            
                            31,389
                            
                            
                            $
                            0.66
                            
                            
                            $
                            8,936
                            
                            
                            
                            32,351
                            
                            
                            $
                            0.28
                            
                            
                            $
                            2,183
                            
                            
                            
                            32,174
                            
                            
                            $
                            0.07Dilutive
      effect of stock options
                            
                            
                            —
                            
                            
                            
                            40
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            85
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            167
                            
                            
                            
                            —Dilutive
      effect of restricted stock
                            
                            
                            —
                            
                            
                            
                            183
                            
                            
                            
                            (0.01
                            )
                            
                            
                            —
                            
                            
                            
                            190
                            
                            
                            
                            (0.01
                            )
                            
                            
                            —
                            
                            
                            
                            86
                            
                            
                            
                            —Diluted
      earnings per share
                            
                            $
                            20,560
                            
                            
                            
                            31,612
                            
                            
                            $
                            0.65
                            
                            
                            $
                            8,936
                            
                            
                            
                            32,626
                            
                            
                            $
                            0.27
                            
                            
                            $
                            2,183
                            
                            
                            
                            32,427
                            
                            
                            $
                            0.07
  The
weighted average number of anti-dilutive options and warrants outstanding were
1,573, 1,895 and 1,966 for the years ended December 31, 2008, 2007 and
2006, respectively, and were excluded from the calculation of diluted earnings
per share.
  Restructuring
Charges:
  The
Company accounts for its restructuring costs as required by SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS
No. 146”). SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at its fair value in the period in which the liability is incurred,
except for one-time termination benefits that meet certain
requirements.
  Recent
Accounting Pronouncements:
  In
November 2007, the Emerging Issues Task Force issued EITF Issue 07-01 (“EITF
07-01”), “Accounting for Collaborative Arrangements”.  EITF 07-01
requires collaborators to present the results of activities for which they act
as the principal on a gross basis and report any payments received from (made
to) other collaborators based on other applicable GAAP or, in the absence of
other applicable GAAP, based on analogy to authoritative accounting literature
or a reasonable, rational, and consistently applied accounting policy election.
Further, EITF 07-01 clarified that the determination of whether
transactions within a collaborative arrangement are part of a vendor-customer
(or analogous) relationship subject to Issue 01-9, “Accounting for Consideration
Given by a Vendor to a Customer”. EITF 07-01 is effective for fiscal years
beginning after December 15, 2008. The Company does not anticipate the
adoption of this standard to have a material impact on the consolidated
financial statements.
  F-14
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  On
December 4, 2007, the FASB issued SFAS No. 160 (“SFAS 160”),
“Noncontrolling Interests in Consolidated Financial Statements — An
Amendment of ARB No. 51”.  SFAS 160 establishes new
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. Specifically, this
statement requires the recognition of a noncontrolling interest (minority
interest) as equity in the consolidated financial statements and separate from
the parent’s equity. The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement. SFAS 160 clarifies that changes in a parent’s ownership interest
in a subsidiary that do not result in deconsolidation are equity transactions if
the parent retains its controlling financial interest. In addition, this
statement requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. Such gain or loss will be measured using the fair
value of the noncontrolling equity investment on the deconsolidation date.
SFAS 160 also includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption is
prohibited.  The Company does not anticipate the adoption of this
standard to have a material impact on the consolidated financial
statements.
 
 In
December 2007, the FASB issued SFAS No. 141(R) (“SFAS 141(R)”), “Business
Combinations”.  SFAS 141(R) establishes principles and requirements
for how an acquirer in a business combination recognizes and measures the assets
acquired, liabilities assumed and any noncontrolling interest in the acquiree.
This statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first fiscal year beginning on or after December 15,
2008.  The Company does not anticipate that the adoption of this
statement will have a material impact on our consolidated financial statements
for previous acquisitions, but could have a material impact on our consolidated
financials statements with regards to future acquisitions.
  In March
2008, the FASB issued Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133”. This Statement changes disclosure requirements for
derivative instruments and hedging activities. Companies are required to provide
enhanced disclosures about (i) how and why a company uses derivative
instruments, (ii) how derivative instruments and related hedged items are
accounted for under Statement No. 133 and its related interpretations, and
(iii) how derivative instruments and related hedged items affect a
Company's financial position, financial performance and cash flows. This
Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2008.  We do not anticipate the
adoption of this statement will have a material impact on our consolidated
financial statements.
  In
November 2008, the FASB issued EITF Issue No. 08-7, “Accounting for Defensive Intangible
Assets”(“EITF 08-7”). EITF 08-7 addresses the accounting for
assets acquired in a business combination or asset acquisition that an entity
does not intend to actively use, otherwise referred to as a ‘defensive asset.’
EITF 08-7 requires defensive intangible assets to be initially accounted
for as a separate unit of accounting and not included as part of the cost of the
acquirer’s existing intangible asset(s) because it is separately identifiable.
EITF 08-7 also requires that defensive intangible assets be assigned a
useful life in accordance with paragraph 11 of FASB Statement No. 142,
“Goodwill and Other Intangible
Assets”.The Company does not anticipate that the adoption of this
statement will have a material impact on its consolidated financial
statements.
  In
December 2008, the FASB issued FASB Staff Position No. FAS 132(R)-1,
“Employers’ Disclosures about
Postretirement Benefit Plan Assets”(“FSP FAS 132(R)-1”). FSP
FAS 132(R)-1 amends FASB Statement No. 132 (revised 2003), “Employers’ Disclosures about
Pensions and Other Postretirement Benefits”,(“FAS 132(R)”), to
provide guidance on an employer’s disclosures about plan assets of a defined
benefit pension or other postretirement plan. The additional disclosure
requirements under this FSP include expanded disclosures about an entity’s
investment policies and strategies, the categories of plan assets,
concentrations of credit risk and fair value measurements of plan assets. The
Company anticipates that the adoption of this statement will significantly
expand its consolidated financial statement footnote
disclosures.
  F-15
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  2.      Business
Combinations
  Acquisition
of FineKem
  On
January 17, 2008, the Company, through a wholly-owned subsidiary, completed the
purchase of FineKem, a manufacturing facility located in Aurangabad,
India.  The aggregate purchase price of $1,701 included cash payments
totaling $1,665 and capitalized costs related to the acquisition, primarily
professional fees, of $36.
  The
following table summarizes the preliminary allocation of the purchase price to
the estimated fair value of the net assets acquired.
  January
      17, 2008Assets
      AcquiredAccounts
      receivable
                      
                      $
                      42Inventory
                      
                      
                      139Prepaid
      expenses and other current assets
                      
                      
                      26Property
      and equipment
                      
                      
                      556Goodwill
                      
                      
                      1,142Total
      assets acquired
                      
                      $
                      1,905Liabilities
      AssumedAccounts
      payable and accrued expenses
                      
                      $
                      204Total
      liabilities assumed
                      
                      $
                      204Net
      assets acquired
                      
                      $
                      1,701
  Pro forma
financial information for the year ended December 31, 2008, as if the FineKem
acquisition had been completed as of January 1, 2008, has been excluded due to
the immateriality of the operating results of FineKem in relation to the
Company’s consolidated operating results as a whole.
  Acquisition
of AMRI India
  On June
29, 2007, the Company, through a wholly-owned subsidiary, acquired certain
assets of AMRI India.
  The
aggregate purchase price of $11,926 included cash payments totaling $11,073 and
capitalized costs related to the acquisition, primarily professional fees, of
$853.
  The
following table summarizes the allocation of the purchase price to the estimated
fair value of the net assets acquired.
  F-16
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
 
 June 29, 2007Assets
      AcquiredAccounts
      receivable, net
                      
                      $
                      13Inventory
                      
                      
                      624Prepaid
      expenses and other current assets
                      
                      
                      229Property
      and equipment, net
                      
                      
                      7,787Goodwill
                      
                      
                      3,693Total
      assets acquired
                      
                      $
                      12,346Liabilities
      AssumedAccounts
      payable and accrued expenses
                      
                      $
                      420Total
      liabilities assumed
                      
                      $
                      420Net
      assets acquired
                      
                      $
                      11,926
  Pro forma
financial information for the years ended December 31, 2008 and 2007, as if the
AMRI India acquisition had been completed as of January 1, 2007, has been
excluded due to the immateriality of the operating results of AMRI India in
relation to the Company’s consolidated operating results as a
whole.
  3.
                Restructuring
  AMRI
Hungary
 
 In May
2008, the Company initiated a restructuring of its Hungary
location.  The goal of the restructuring was to realign the business
model for these operations to better support the Company’s long-term strategy
for providing Discovery Services in the European marketplace.  The
Company recorded a restructuring charge of approximately $1,833 in the second
quarter of 2008, including termination benefits and personnel realignment costs
of approximately $901, losses on grant contracts of approximately $389, lease
abandonment charges of approximately $463 and administrative costs associated
with the restructuring plan of $80.
  The
restructuring costs are included under the caption “Restructuring” in the
consolidated financial statement of operations during 2008 and the restructuring
liabilities are included in “Accounts payable and accrued expenses” on the
consolidated balance sheet at December 31, 2008.
  The
Hungary restructuring activity was recorded in the Company’s
Discovery/Development/Small Scale Manufacturing (“DDS”) operating
segment.  The following table displays AMRI Hungary’s restructuring
activity and liability balances within our DDS operating segment:
 
 Balance
      at
                                                                    January
      1,
                                                                    2008
                                                                  
                                                                  
                                                                  Charges
                                                                  
                                                                  
                                                                  Incurred
      Amounts
                                                                  
                                                                  
                                                                  Foreign
                                                                    Currency
                                                                    Translation
      Adjustments
                                                                  
                                                                  
                                                                  Balance
      at
                                                                    December
      31,
                                                                    2008Termination
      benefits and personnel realignment
                                                                  $
                                                                  —
                                                                  
                                                                  
                                                                  901
                                                                  
                                                                  
                                                                  (526
                                                                  )
                                                                  
                                                                  (50)
                                                                  
                                                                  $
                                                                  325Losses
      on grant contracts
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  389
                                                                  
                                                                  
                                                                  (72
                                                                  )
                                                                  
                                                                  (51)
                                                                  
                                                                  
                                                                  266Lease
      abandonment charges
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  463
                                                                  
                                                                  
                                                                  (126
                                                                  )
                                                                  
                                                                  (75)
                                                                  
                                                                  
                                                                  262Administrative
      costs associated with restructuring
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  80
                                                                  
                                                                  
                                                                  (33
                                                                  )
                                                                  
                                                                  (7)
                                                                  
                                                                  
                                                                  40Total
                                                                  $
                                                                  —
                                                                  
                                                                  $
                                                                  1,833
                                                                  
                                                                  $
                                                                  (757
                                                                  )
                                                                  $
                                                                  (183)
                                                                  
                                                                  $
                                                                  893
  F-17
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
 
 Termination
benefits and personnel realignment costs relate to severance packages,
outplacement services, and career counseling for employees affected by this
restructuring.  Losses on grant contracts represent estimated
contractual losses that will be incurred in performing grant-based work under
Hungary’s legacy business model.  Lease abandonment charges relate to
costs associated with exiting the current facility.
 
 The net
cash outflow related to the Hungary restructuring for the year ended December
31, 2008 was $757.  Anticipated cash outflows related to the Hungary
restructuring for 2009 is approximately $804, which primarily consists of the
payment of termination benefits and personnel realignment and incurring losses
on grant contracts.
  Large
Scale Manufacturing Facility
 
 On
November 9, 2006, the Company announced plans to initiate a restructuring of the
Company’s Large Scale Manufacturing (“LSM”) business segment.  The
Company recorded a restructuring charge of approximately $2,400 in the fourth
quarter of 2006, including a non-cash asset disposal charge of approximately
$1,600, and other charges of approximately $800, consisting primarily of
termination benefits, and additional restructuring charges of $273 in 2007,
consisting of termination benefits.  There were no LSM restructuring
charges taken during the year ended December 31, 2008.
  The
restructuring costs are included under the caption “Restructuring” in the
consolidated statements of operations during 2007, and the restructuring
liabilities are included in “Accounts payable and accrued expenses” on the
consolidated balance sheets at December 31, 2007.
  Termination
benefits relate to severance packages, outplacement services and career
counseling for employees affected by the restructuring. Asset disposal costs
relate primarily to the carrying value of underutilized assets that were
identified for disposal in conjunction with the restructuring plan.
  The large
scale manufacturing restructuring activity was recorded in the LSM operating
segment. The net cash outflow related to the large scale manufacturing
restructuring for the year ended December 31, 2008 and 2007 were $140 and $815,
respectively.  There are no more anticipated cash outflows related to
the large scale manufacturing restructuring.
  4.
                Inventory
  Inventory
consisted of the following at December 31, 2008 and 2007:
  December 31,2008
                      
                      
                      2007Raw
      materials
                      
                      $
                      8,996
                      
                      
                      $
                      5,818Work
      in process
                      
                      
                      3,396
                      
                      
                      
                      2,064Finished
      goods
                      
                      
                      16,278
                      
                      
                      
                      14,582Libraries
                      
                      
                      —
                      
                      
                      
                      117Total
      inventories, at cost
                      
                      $
                      28,670
                      
                      
                      $
                      22,581
  F-18
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  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, 2008Amortized
                                                Cost
                                              
                                              Gross
                                                Unrealized
                                                Gains
                                              
                                              Gross
                                                Unrealized
                                                Losses
                                              
                                              
                                              
                                              Fair
                                                ValueObligations
      of states and political subdivisions
                                              
                                              $
                                              24,537
                                              
                                              $
                                              139
                                              
                                              $
                                              (6
                                              )
                                              
                                              $
                                              24,670Auction
      rate securities
                                              
                                              
                                              2,400
                                              
                                              
                                              —
                                              
                                              
                                              —
                                              
                                              
                                              
                                              2,400$
                                              26,937
                                              
                                              $
                                              139
                                              
                                              $
                                              (6
                                              )
                                              
                                              $
                                              27,070
  December 31, 2007Amortized
                                                                    Cost
                                                                  
                                                                  Gross
                                                                    Unrealized
                                                                    Gains
                                                                  
                                                                  Gross
                                                                    Unrealized
                                                                    Losses
                                                                  
                                                                  
                                                                  
                                                                  Fair
                                                                    ValueObligations
      of states and political subdivisions
                                                                  
                                                                  $
                                                                  32,197
                                                                  
                                                                  $
                                                                  29
                                                                  
                                                                  $
                                                                  (8
                                                                  )
                                                                  
                                                                  $
                                                                  32,218U.S.
      Government and Agency obligations
                                                                  
                                                                  
                                                                  2,000
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  2,000Auction
      rate securities
                                                                  
                                                                  
                                                                  27,975
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  27,975$
                                                                  62,172
                                                                  
                                                                  $
                                                                  29
                                                                  
                                                                  $
                                                                  (8
                                                                  )
                                                                  
                                                                  $
                                                                  62,193
  Auction
rate securities are structured to be tendered at par, at the option of the
investor, at auctions usually occurring every 30–35 days. Recent disruption
in the financial and capital markets has resulted in reduced liquidity of these
auction rate securities as auctions that have occurred throughout 2008 have not
been successful. During 2008, the Company had reduced its holdings in these
securities to approximately $2,400. Given the negative impact of the liquidity
situation in the financial markets, the fair value of these auction rate debt
securities may become lower than their carrying value. A continuation of the
recent disruption in the financial and capital markets may result in impairment
write-downs on the auction rate debt securities and/or realized losses on the
disposition of the remaining auction rate securities.
  Contractual
maturities of securities classified as available-for-sale at December 31,
2008 and 2007 were as follows:
  December 31, 2008
                                                              
                                                              
                                                              December 31, 2007Amortized
                                                                Cost
                                                              
                                                              
                                                              Fair
                                                                Value
                                                              
                                                              
                                                              Amortized
                                                                Cost
                                                              
                                                              
                                                              Fair
                                                                ValueDue
      less than one year
                                                              
                                                              $
                                                              17,606
                                                              
                                                              $
                                                              17,668
                                                              
                                                              $
                                                              14,758
                                                              
                                                              $
                                                              14,761Due
      after one year through five years
                                                              
                                                              
                                                              6,931
                                                              
                                                              
                                                              7,002
                                                              
                                                              
                                                              2,425
                                                              
                                                              
                                                              2,439Due
      after five years through ten years
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              1,087
                                                              
                                                              
                                                              1,096Due
      after ten years
                                                              
                                                              
                                                              2,400
                                                              
                                                              
                                                              2,400
                                                              
                                                              
                                                              43,902
                                                              
                                                              
                                                              43,897$
                                                              26,937
                                                              
                                                              $
                                                              27,070
                                                              
                                                              $
                                                              62,172
                                                              
                                                              $
                                                              62,193
  F-19
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
 
 Information
on temporarily impaired securities at December 31, 2008, segregated
according to the length of time such securities had been in a continuous
unrealized loss position, is summarized as follows:
  Less than 12 Months
                          
                          
                          12 Months or Longer
                          
                          
                          TotalFair
                            Value
                          
                          
                          Unrealized
                            Loss
                          
                          
                          Fair
                            Value
                          
                          
                          Unrealized
                            Loss
                          
                          
                          Fair
                            Value
                          
                          
                          Unrealized
                            LossObligations
      of states and political subdivisions
                          
                          $
                          1,917
                          
                          
                          $
                          (6
                          )
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          1,917
                          
                          
                          $
                          (6
                          )`
                          
                          $
                          1,917
                          
                          
                          $
                          (6
                          )
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          1,917
                          
                          
                          $
                          (6
                          )
  Information
on temporarily impaired securities at December 31, 2007, segregated
according to the length of time such securities had been in a continuous
unrealized loss position, is summarized as follows:
  Less than 12 Months
                          
                          
                          12 Months or Longer
                          
                          
                          TotalFair
                            Value
                          
                          
                          Unrealized
                            Loss
                          
                          
                          Fair
                            Value
                          
                          
                          Unrealized
                            Loss
                          
                          
                          Fair
                            Value
                          
                          
                          Unrealized
                            LossObligations
      of states and political subdivisions
                          
                          $
                          603
                          
                          
                          $
                          (1
                          )
                          
                          $
                          1,203
                          
                          
                          $
                          (7
                          )
                          
                          $
                          1,806
                          
                          
                          $
                          (8
                          )$
                          603
                          
                          
                          $
                          (1
                          )
                          
                          $
                          1,203
                          
                          
                          $
                          (7
                          )
                          
                          $
                          1,806
                          
                          
                          $
                          (8
                          )
  The above
tables represent 5 and 6 securities at December 31, 2008 and 2007,
respectively, where the current fair value is less than the related amortized
cost. These unrealized losses do not reflect any deterioration of the credit
worthiness of the issuing entities. No security has a rating that is below “A1.”
The unrealized losses on these temporarily impaired securities are a result of
changes in interest rates for fixed-rate securities where the interest rate
received is less than the current rate available for new offerings of similar
securities and changes in market spreads as a result of shifts in supply and
demand. The Company has the ability and intent to hold these securities to
maturity, at which time full recovery of the investment is
expected.
  The
Company received proceeds of $60,262, $86,476 and $160,646 and recorded realized
gains/(losses) of $0 from maturities and sales of available-for-sale securities
during the years ended December 31, 2008, 2007 and 2006.
  6.
                Property
      and Equipment
  Property
and equipment consists of the following:
  December 31,2008
                        
                        
                        2007Laboratory
      equipment and fixtures
                        
                        $
                        120,518
                        
                        
                        $
                        107,238Office
      equipment
                        
                        
                        25,801
                        
                        
                        
                        24,753Leasehold
      improvements
                        
                        
                        41,526
                        
                        
                        
                        37,951Buildings
                        
                        
                        60,695
                        
                        
                        
                        54,249Land
                        
                        
                        1,227
                        
                        
                        
                        1,101249,767
                        
                        
                        
                        225,292Less
      accumulated depreciation and amortization
                        
                        
                        (95,102
                        )
                        
                        
                        (79,706
                        )154,665
                        
                        
                        
                        145,586Construction-in-progress
                        
                        
                        12,837
                        
                        
                        
                        12,442$
                        167,502
                        
                        
                        $
                        158,028
  Depreciation
and amortization expense of property and equipment was approximately $17,082,
$16,100 and $14,600 for the years ended December 31, 2008, 2007 and 2006,
respectively.
  F-20
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  7.
                Equity
      Investments
  The
Company has entered into equity investments with two entities in the Company’s
area of strategic focus. The Company accounts for these investments using the
cost method of accounting as the Company’s ownership interest in each investee
is below 20% and the Company does not have the ability to exercise significant
influence over the investees.
  The
carrying value of equity investments at December 31, 2008 and 2007 was
$956.
  8.
                Long-Term
      Debt and Swap Contracts
  Long-Term
Debt
  During
2003, the Company entered into a credit facility consisting of a $30,000 term
loan and a $35,000 line of credit.  The term loan matured in February
2008.  In June 2008, the Company  refinanced this debt,
which included converting the balance of the term loan into a revolving line of
credit, increasing the amount available under the line of credit to $45,000, and
extending the maturity date on the line of credit to June 2013.  The
line of credit bears interest at a variable rate based on the Company’s leverage
ratio.  As of December 31, 2008, the balance outstanding on the line
of credit was $9,662, bearing interest at a rate of 3.38%.  The credit
facility contains certain financial covenants, including a maximum leverage
ratio, a minimum required operating cash flow coverage ratio, a minimum earnings
before interest and taxes to interest ratio and a minimum current ratio. Other
covenants include limits on asset disposals and the payment of dividends. As of
December 31, 2008, we were in compliance with all covenants under the credit
facility.
  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 0.95%.
  The
following table summarizes long-term debt:
  December 31,
                                    2008
                                  
                                  
                                  
                                  December 31,
                                    2007Revolving
      line of credit
                                  
                                  $
                                  9,662
                                  
                                  
                                  $
                                  9,645Industrial
      development authority bonds
                                  
                                  
                                  4,080
                                  
                                  
                                  
                                  4,33513,742
                                  
                                  
                                  
                                  13,980Less
      current portion
                                  
                                  
                                  (260
                                  )
                                  
                                  
                                  (9,900
                                  )Total
      long-term debt
                                  
                                  $
                                  13,482
                                  
                                  
                                  $
                                  4,080
  The
aggregate maturities of long-term debt at December 31, 2008 are as
follows:
  2009
                    
                    $
                    2602010
                    
                    
                    2702011
                    
                    
                    2752012
                    
                    
                    2852013
                    
                    
                    9,957Thereafter
                    
                    
                    2,695
  Swap
Contracts
  The
Company entered into two swap agreements effective April 1,
2003.  The objective of these swaps was to hedge interest rate risk
associated with future cash flows on a portion of the $30,000 variable rate
term loan.  Both the term loan and the swaps matured in February
2008.  The Company currently has no swap agreements for any of its
debt.
  The fair
value of these hedges, which represented the cash the Company would have paid to
settle the agreements, was recorded as a swap contract asset/liability with a
corresponding offset to other comprehensive income.
  F-21
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  The
weighted average rate received from the counterparties on all swaps was 4.85%,
5.32% and 5.09% for the years ended December 31, 2008, 2007 and 2006,
respectively.  The fair value of the interest rate swap agreements
that was included in other long-term assets in the consolidated balance sheets
at December 31, 2008 and 2007 was $0 and $8, respectively.  The
Company recorded an unrealized loss, net of tax, of $5, $92 and $61 representing
the change in the fair value of its hedges during the years ended
December 31, 2008, 2007 and 2006, respectively.  The Company
recognized $8, $164 and $191 of interest income related to the net settlement of
the swaps during the years ended December 31, 2008, 2007 and 2006,
respectively.
 
 9.
                Income
      Taxes
  The
components of income before taxes and income tax expense are as
follows:
  Year Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006Income
      (loss) before taxes:U.S.
                      
                      $
                      31,852
                      
                      
                      $
                      18,457
                      
                      
                      $
                      1,822Foreign
                      
                      
                      (3,962
                      )
                      
                      
                      (4,072
                      )
                      
                      
                      420$
                      27,890
                      
                      
                      $
                      14,385
                      
                      
                      $
                      2,242Income
      tax expense (benefit):Current:Federal
                      
                      $
                      6,791
                      
                      
                      $
                      3,928
                      
                      
                      $
                      646State
                      
                      
                      (1,951
                      )
                      
                      
                      2
                      
                      
                      
                      10Foreign
                      
                      
                      955
                      
                      
                      
                      169
                      
                      
                      
                      1275,795
                      
                      
                      
                      4,099
                      
                      
                      
                      783Deferred:Federal
                      
                      
                      2,108
                      
                      
                      
                      1,683
                      
                      
                      
                      (830
                      )State
                      
                      
                      18
                      
                      
                      
                      160
                      
                      
                      
                      105Foreign
                      
                      
                      (591
                      )
                      
                      
                      (494
                      )1,535
                      
                      
                      
                      1,350
                      
                      
                      
                      (724
                      )$
                      7,330
                      
                      
                      $
                      5,449
                      
                      
                      $
                      59
  The
differences between income tax expense and income taxes computed using a federal
statutory rate of 35% for the years ended December 31, 2008, 2007 and 2006,
were as follows:
  Year Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Pre-tax
      income at statutory rate
                  
                  $
                  9,765
                  
                  
                  $
                  5,035
                  
                  
                  $
                  762Increase
      (reduction) in taxes resulting from:Tax-exempt
      interest income
                  
                  
                  (421
                  )
                  
                  
                  (890
                  )
                  
                  
                  (737
                  )State
      taxes, net of federal benefit
                  
                  
                  (1,210
                  )
                  
                  
                  105
                  
                  
                  
                  75Extraterritorial
      income credit
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (185
                  )Rate
      differential on foreign operations
                  
                  
                  589
                  
                  
                  
                  1,126
                  
                  
                  
                  (16
                  )Domestic
      production deduction
                  
                  
                  (159
                  )
                  
                  
                  (140
                  )
                  
                  
                  —Change
      in valuation allowance
                  
                  
                  833
                  
                  
                  
                  —
                  
                  
                  
                  —Research
      and development credits
                  
                  
                  (2,232
                  )
                  
                  
                  —
                  
                  
                  
                  —Stock
      compensation expense
                  
                  
                  (14
                  )
                  
                  
                  76
                  
                  
                  
                  83Other,
      net
                  
                  
                  179
                  
                  
                  
                  137
                  
                  
                  
                  77$
                  7,330
                  
                  
                  $
                  5,449
                  
                  
                  $
                  59
  F-22
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  The tax
effects of temporary differences giving rise to significant portions of the
deferred tax assets and liabilities are as follows:
  December 31,2008
                  
                  
                  2007Deferred
      tax assets:Nondeductible
      accrued expenses
                  
                  $
                  281
                  
                  
                  $
                  140Allowance
      for doubtful accounts
                  
                  
                  218
                  
                  
                  
                  89Library
      amortization
                  
                  
                  606
                  
                  
                  
                  563Inventory
      reserves
                  
                  
                  3,783
                  
                  
                  
                  3,347Warrants
                  
                  
                  155
                  
                  
                  
                  168Environmental
      reserves
                  
                  
                  67
                  
                  
                  
                  67Pension
      and postretirement costs
                  
                  
                  322
                  
                  
                  
                  438Research
      and experimentation credit carryforwards
                  
                  
                  193
                  
                  
                  
                  193State
      tax credit carryforward
                  
                  
                  6,181
                  
                  
                  
                  4,373Foreign
      deferred tax
                  
                  
                  —
                  
                  
                  
                  441Impairment
      charges
                  
                  
                  1,926
                  
                  
                  
                  1,954Investment
      write-downs and losses
                  
                  
                  869
                  
                  
                  
                  869Capital
      loss on sale of fixed assets
                  
                  
                  77
                  
                  
                  
                  77Deferred
      revenue
                  
                  
                  —
                  
                  
                  
                  703Stock
      based compensation
                  
                  
                  900
                  
                  
                  
                  824Net
      operating loss carryforwards
                  
                  
                  2,856
                  
                  
                  
                  75818,434
                  
                  
                  
                  15,004Less
      valuation allowance
                  
                  
                  (8,685
                  )
                  
                  
                  .(6,028
                  )Deferred
      tax assets, net
                  
                  
                  9,749
                  
                  
                  
                  8,976Deferred
      tax liabilities:Property
      and equipment depreciation differences
                  
                  
                  (16,184
                  )
                  
                  
                  (14,235
                  )Prepaid
      real estate taxes
                  
                  
                  (195
                  )
                  
                  
                  (194
                  )Foreign
      deferred tax
                  
                  
                  (239
                  )
                  
                  
                  —Deferred
      revenue
                  
                  
                  (50
                  )
                  
                  
                  —Goodwill
      amortization
                  
                  
                  (519
                  )
                  
                  
                  (450
                  )Net
      deferred tax liability
                  
                  $
                  (7,438
                  )
                  
                  $
                  (5,903
                  )
  The
preceding table does not include deferred tax (liabilities) assets of $(54) and
$(9) at December 31, 2008 and 2007, respectively, associated with the
Company’s net unrealized losses/gains on investment securities discussed in
Note 5, deferred tax liability of $0 and $3 at December 31, 2008 and
2007, respectively, associated with the Company’s swap contract asset as
discussed in Note 8, and deferred tax asset/(liability) of $2,406 and ($600) at
December 31, 2008 and 2007, respectively, associated the Company’s pension
liability as discussed in Note 11.
  The
Company’s U.S. Federal net operating loss carry forwards were fully utilized in
2008. The Company’s state investment tax credit carry forwards begin to expire
in 2018. The Company’s research and development credit carry forwards begin to
expire in 2011.
  The
Company has not recorded an income tax provision on earnings from certain of its
foreign operations due to the fact that it has been granted certain tax
holidays, which expire in 2012 and may be extended to 2015 if the Company meets
additional criteria.
  F-23
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  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 carry back can be
applied. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and taxable income in the carry
back 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 and tax planning strategies, a valuation
allowance of $8,685 and $6,028 at December 31, 2008 and 2007, respectively,
is included in deferred tax assets above. The net deferred tax assets represent
a level where management believes it is more likely than not that the Company
will realize the benefits of those deductible differences. The increase in
valuation allowance in 2008 is directly related to the generation of additional
state investment tax credit carry forwards and a net operating loss carry
forward at AMRI Hungary. The amount of the deferred tax asset considered
realizable could be reduced if estimates of future taxable income during the
carry forward period are reduced.
  On
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
Statement No. 109” (“FIN 48”). FIN 48 provides recognition criteria and a
related measurement model for tax positions taken by companies. In accordance
with FIN 48, a tax position is a position in a previously filed tax return or a
position expected to be taken in a future tax filing that is reflected in
measuring current or deferred income tax assets and liabilities. Tax positions
are recognized only when it is more likely than not (likelihood of greater than
50%), based on technical merits, that the position would be sustained upon
examination by taxing authorities. Tax positions that meet the more likely than
not threshold are measured using a probability-weighted approach as the largest
amount of tax benefit that is greater than 50% likely of being realized upon
settlement.   The adoption of FIN 48 did not result in a change
to the liability of unrecognized benefits.
 
 A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
 
 2008Balance
      at January 1, 2008
                          
                          $
                          3,124Decreases
      related to prior year tax positions
                          
                          
                          (1,363
                          )Increases
      related to current year tax position
                          
                          
                          724Settlements
                          
                          
                          (921
                          )Lapse
      of statute
                          
                          
                          (284
                          )Balance
      at December 31, 2008
                          
                          $
                          1,280
 
 During
the year ended December 31, 2008, the change in the reserve related to tax
positions of prior years is substantially due to the completion of the 2000 -
2005 New York State audit.  Additions to, and remainder of, the
reserve for the year ended December 31, 2008 represent the amount of
unrecognized tax benefits that, if recognized, would favorably affect the
effective tax rate for future periods.
  The
Company classifies interest expense and penalties related to unrecognized tax
benefits as a component of income tax expense.  This policy did not
change with adoption of FIN 48.  As of December 31, 2008, the Company
has not accrued any penalties related to its uncertain tax position as it
believes that it is more likely than not that there will not be any assessment
of penalties.  The total amount of accrued interest resulting from
such unrecognized tax benefits was $84 at December 31, 2008, of which $37 was
recognized in 2008.
  The
Company files Federal income tax returns, as well as multiple state and foreign
jurisdiction tax returns. The Company’s federal income tax returns have been
examined by the Internal Revenue Service through the year ended December 31,
2005.  All significant state and foreign matters have been concluded for
years through 2003.  Tax examinations are scheduled to begin during
2009.  Management of the Company believes that the reserves associated
with FIN48 tax positions are adequate to support any future tax
examinations.
  The
Company intends to reinvest indefinitely any of its unrepatriated foreign
earnings. The Company has not provided for U.S. income taxes on these
undistributed earnings of its foreign subsidiaries because management considers
such earnings to be reinvested indefinitely outside of the U.S. If the
earnings were distributed, the Company may be subject to both foreign
withholding taxes and U.S. income taxes that may not be fully offset by
foreign tax credits.
  F-24
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  10.
                Share-based
      Compensation
  During
the years ended December 31, 2008, 2007 and 2006, the Company recognized
total share based compensation cost of $1,696, $1,304 and $1,172,
respectively.
  Employee
Stock Purchase Plan
  The
Company’s 1998 Employee Stock Purchase Plan (the “Purchase Plan”) was adopted
during August 1998. Up to 600,000 shares of common stock may be issued
under the Purchase Plan, which is administered by the Compensation Committee of
the Board of Directors. The Purchase Plan establishes 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 Purchase 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 Purchase Plan.
  During
each offering, an employee may purchase shares under the Purchase 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
shares.  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.
  Under
SFAS No. 123(R), the 15% discount and the look-back feature are considered
compensatory items for which expense must be recognized.  The Company
values Purchase Plan shares as a combination position consisting of 15% of a
share of nonvested stock and 85% of a six-month stock option.  The
value of the nonvested stock is estimated based on the fair market value of the
Company’s common stock at the beginning of the offering period. The value of the
stock option is calculated using the Black-Scholes valuation model using
historical expected volatility percentages, a risk free interest rate equal to
the six-month U.S. Treasury rate at the beginning of the offering period, and an
expected life of six months. The resulting per-share value is multiplied by the
shares estimated to be purchased during the offering period based on historical
experience to arrive at a total estimated compensation cost for the offering
period.  The estimated compensation cost is recognized on a
straight-line basis over the offering period.
  During
the years ended December 31, 2008, 2007 and 2006, 29, 37 and 40 shares,
respectively, were issued under the Purchase Plan. During the years ended
December 31, 2008 and 2007, cash received from stock option exercises and
employee stock purchase plan purchases was $1,285 and $1,437,
respectively.
  Stock
Option Plan
  The
Company has a Stock Option Plan, through which incentive stock options or
non-qualified stock options may be issued. 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 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 have a duration
of not more than ten years.
  F-25
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  Following
is a summary of the status of stock option programs during 2008, 2007 and
2006:
  Weighted AverageWeighted
                                                                                                
                                                                                                Remaining
                                                                                                
                                                                                                AggregateNumber of
                                                                                                
                                                                                                Exercise
                                                                                                
                                                                                                Contractual Term
                                                                                                
                                                                                                IntrinsicShares
                                                                                                
                                                                                                Price
                                                                                                
                                                                                                (Years)
                                                                                                
                                                                                                ValueOutstanding,
      January 1, 2006
                                                                                                
                                                                                                
                                                                                                2,241
                                                                                                
                                                                                                
                                                                                                19.99Granted
                                                                                                
                                                                                                
                                                                                                96
                                                                                                
                                                                                                
                                                                                                10.33Exercised
                                                                                                
                                                                                                
                                                                                                (73
                                                                                                )
                                                                                                
                                                                                                1.74Forfeited
                                                                                                
                                                                                                
                                                                                                (82
                                                                                                
                                                                                                
                                                                                                24.12Expired
                                                                                                
                                                                                                
                                                                                                (11
                                                                                                )
                                                                                                
                                                                                                1.10Outstanding,
      December 31, 2006
                                                                                                
                                                                                                
                                                                                                2,171
                                                                                                
                                                                                                
                                                                                                20.12Granted
                                                                                                
                                                                                                
                                                                                                188
                                                                                                
                                                                                                
                                                                                                13.40Exercised
                                                                                                
                                                                                                
                                                                                                (200
                                                                                                )
                                                                                                
                                                                                                6.26Forfeited
                                                                                                
                                                                                                
                                                                                                (195
                                                                                                )
                                                                                                
                                                                                                19.75Expired
                                                                                                
                                                                                                
                                                                                                (1
                                                                                                )
                                                                                                
                                                                                                1.53Outstanding,
      December 31, 2007
                                                                                                
                                                                                                
                                                                                                1,963
                                                                                                
                                                                                                
                                                                                                20.12Granted
                                                                                                
                                                                                                
                                                                                                144
                                                                                                
                                                                                                
                                                                                                11.54Exercised
                                                                                                
                                                                                                
                                                                                                (58
                                                                                                )
                                                                                                
                                                                                                13.91Forfeited
                                                                                                
                                                                                                
                                                                                                (181
                                                                                                )
                                                                                                
                                                                                                22.08Outstanding,
      December 31, 2008
                                                                                                
                                                                                                
                                                                                                1,868
                                                                                                
                                                                                                $
                                                                                                20.34
                                                                                                
                                                                                                4.3
                                                                                                
                                                                                                $
                                                                                                37Options
      exercisable, December 31, 2008
                                                                                                
                                                                                                
                                                                                                1,552
                                                                                                
                                                                                                $
                                                                                                22.05
                                                                                                
                                                                                                3.4
                                                                                                
                                                                                                $
                                                                                                —
  The
weighted average fair value per share of stock options granted during the years
ended December 31, 2008, 2007 and 2006 was $4.72, $5.46 and $4.49,
respectively. The total intrinsic value of stock options exercised during the
years ended December 31, 2008, 2007 and 2006 was $37, $1,465 and $673,
respectively.  The actual tax benefit realized for the tax deductions
from stock option exercises was $56 and $121 during the years ended
December 31, 2008 and 2007.
  As of
December 31, 2008, there was $1,185 of total unrecognized compensation cost
related to non-vested stock options. That cost is expected to be recognized over
a weighted-average period of 2.2 years. The total fair value of shares vested
during the years ended December 31, 2008, 2007 and 2006 was approximately
$376,$3,184 and $300,
respectively.
  The
following summarizes information about stock options outstanding as of
December 31, 2008:
  Outstanding Options
                                                                                                                                    
                                                                                                                                    Exercisable OptionsWeighted-AverageRange of Option
                                                                                                                                    
                                                                                                                                    Number
                                                                                                                                    
                                                                                                                                    Remaining
                                                                                                                                    
                                                                                                                                    Weighted-Average
                                                                                                                                    
                                                                                                                                    Number
                                                                                                                                    
                                                                                                                                    Weighted-AverageExercise Prices
                                                                                                                                    
                                                                                                                                    Outstanding
                                                                                                                                    
                                                                                                                                    Contractual Life
                                                                                                                                    
                                                                                                                                    Exercise Price
                                                                                                                                    
                                                                                                                                    Exercisable
                                                                                                                                    
                                                                                                                                    Exercise Price$0.00-$6.54
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    —
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    —
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    —
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    —
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    —$6.54-$13.09
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    437
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    6.44
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    10.75
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    258
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    11.19$13.09-$19.63
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    647
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    5.56
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    15.32
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    510
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    15.54$19.63-$26.18
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    476
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    2.19
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    24.64
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    476
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    24.64$26.18-$32.72
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    90
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    1.95
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    27.82
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    90
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    27.82$32.72-$39.26
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    38
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    1.81
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    33.95
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    38
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    33.95$39.26-$45.81
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    168
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    2.08
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    43.24
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    168
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    43.24$45.81-$52.35
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    7
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    1.48
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    48.95
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    7
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    48.95$52.35-$58.89
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    4
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    1.86
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    54.94
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    4
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    54.94$58.89-$65.44
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    1
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    1.98
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    65.44
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    1
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    65.441,868
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    4.32
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    20.34
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    1,552
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    22.05
  F-26
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  The
following are the shares of common stock reserved for issuance at
December 31, 2008:
  Number of
                            SharesEmployee
      Stock Option Plans
                          
                          
                          4,078Employee
      Stock Purchase Plan
                          
                          
                          292Shares
      reserved for issuance
                          
                          
                          4,370
  Restricted
Stock
  The
Company also issues restricted shares of common stock to employees of the
Company under the 2008 Stock Option and Incentive Plan. The shares are issued as
restricted stock and are held in the custody of the Company until all vesting
restrictions are satisfied. Shares vest under this grant over a period of five
years, with 60% vesting after three years of continuous employment from the
grant date and an additional 20% vesting after each of four and five years of
continuous employment from the grant date. If the vesting terms under which the
award was granted are not satisfied, the shares are forfeited. Unearned
compensation in equity is recorded based on the market value of the shares on
the grant date, and is amortized to expense on a straight-line basis over the
applicable vesting period. The Company reduces the straight-line compensation
expense by an estimated forfeiture rate to account for the estimated impact of
shares of restricted stock that are expected to be forfeited before becoming
fully vested. This estimate is based on our historical forfeiture
experience.
  Following
is a summary of the restricted stock activity during 2008, 2007 and
2006:
  Number of
                                      Shares
                                    
                                    
                                    
                                    Weighted
                                      Average Grant Date
                                      Fair ValueOutstanding,
      January 1, 2006
                                    
                                    
                                    257
                                    
                                    
                                    $
                                    8.75Granted
                                    
                                    
                                    194
                                    
                                    
                                    
                                    10.28Vested
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Forfeited
                                    
                                    
                                    (32
                                    )
                                    
                                    
                                    9.45Outstanding,
      December 31, 2006
                                    
                                    
                                    419
                                    
                                    
                                    $
                                    9.40Granted
                                    
                                    
                                    197
                                    
                                    
                                    
                                    10.33Vested
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Forfeited
                                    
                                    
                                    (98
                                    )
                                    
                                    
                                    9.23Outstanding,
      December 31, 2007
                                    
                                    
                                    518
                                    
                                    
                                    $
                                    9.79Granted
                                    
                                    
                                    175
                                    
                                    
                                    
                                    11.66Vested
                                    
                                    
                                    (115
                                    )
                                    
                                    
                                    8.83Forfeited
                                    
                                    
                                    (68
                                    )
                                    
                                    
                                    10.10Outstanding,
      December 31, 2008
                                    
                                    
                                    509
                                    
                                    
                                    $
                                    10.61
  For the
years ended December 31, 2008 and 2007, unearned compensation of $2,040 and
$2,035, respectively, was recorded based on the market value of the shares on
the grant date, and is included as a separate component of stockholders’ equity
and amortized over the applicable vesting period. During the years ended
December 31, 2008 and 2007, a total of 68 and 98 shares, respectively, with
an unamortized unearned compensation balance of $691 and $904, respectively,
were forfeited.  The amount amortized to expense during years ended
December 31, 2008, 2007 and 2006, net of the impact of forfeitures, was
approximately $1,031, $720 and $611, respectively.  As of
December 31, 2008, there was $3,732 of total unrecognized compensation cost
related to non-vested restricted shares. That cost is expected to be recognized
over a weighted-average period of 2.77 years. During the years ended
December 31, 2008 and 2007, 115 and 0 shares vested,
respectively.
 F-27
 ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  Shareholder
Rights Plan
  The
Company has adopted a Shareholder Rights Plan, the purpose of which is, among
other things, to enhance the Board of Directors’ 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 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.
 Share
Repurchase Program
  On
February 7, 2008, the Company’s Board of Directors approved a stock repurchase
program, which authorized the Company to purchase up to $20,000 of the issued
and outstanding shares of the Company’s Common Stock in the open market or in
private transactions during the next twelve months.  Shares may be
repurchased from time to time and in such amounts as market conditions warrant,
subject to price ranges set by management and regulatory
considerations.  As of December 31, 2008, the Company had repurchased
1,748 shares totaling $19,718.
  11.
                Employee
      Benefit Plans
  Defined
Contribution Plans
  The
Company maintains a savings and profit sharing plan under
section 401(k) of the Internal Revenue Code covering all eligible
non-union 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 100% of their compensation, subject to IRS limitations. The
Company currently makes matching contributions equal to 50% of the participants’
contributions (up to a limit of 10% of the participants’ compensation). In
addition, the Company has reserved the right to make discretionary profit
sharing contributions to employee accounts. The Company 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 approximately $1,696, $1,576 and
$1,375 for the years ended December 31, 2008, 2007 and 2006,
respectively.
  The
Company also sponsors a savings and profit sharing plan under
section 401(k) of the Internal Revenue Code covering union employees.
Employees must complete one calendar month of service and be over 18 years
of age as of the plan’s entry dates. Participants may contribute from 1% to 100%
of their regular wages, subject to IRS limitations, and the Company matches 50%
of each dollar contributed by the employee up to 10% of their wages. Employer
matching contributions vest at a rate of 20% per year beginning after two years
of participation in the plan, however the employer match under this plan does
not begin until the employee completes one year of service. Employer matching
contributions were $139, $158 and $78 for the years ended December 31,
2008, 2007 and 2006, respectively.
  F-28
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  Defined
Benefit and Postretirement Welfare Plan
  AMRI
Rensselaer maintains a non-contributory defined benefit plan (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 AMRI Rensselaer.
  Effective
June 5, 2003, the Company eliminated all benefits under the
non-contributory, unfunded post-retirement welfare plan for salaried employees.
Effective August 1, 2003, the Company curtailed the salaried defined
benefit pension plan. Effective March 1, 2004, the Company curtailed the
hourly defined benefit pension plan.
  In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans” (“SFAS
No. 158”), requiring an employer to recognize the overfunded or underfunded
status of its postretirement plans in the statement of financial position and to
recognize changes in that funded status in the year in which the changes occur.
Additionally, an employer is required to measure the funded status of a plan as
of the end of the employer’s fiscal year. The Company adopted SFAS No. 158
effective December 31, 2006.
  The
following table provides a reconciliation of the changes in the plans’ benefit
obligations and fair value of the plans’ assets during the years ended
December 31, 2008 and 2007, and a reconciliation of the funded status to
the net amount recognized in the consolidated balance sheets as of
December 31 (the plans’ measurement dates) of both years:
  Pension Benefits
                    
                    
                    Postretirement
                      Benefits2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007Change
      in benefit obligation:Benefit
      obligation at January 1
                    
                    $
                    20,746
                    
                    
                    $
                    21,678
                    
                    
                    $
                    745
                    
                    
                    $
                    755Service
      cost
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    55
                    
                    
                    
                    46Interest
      cost
                    
                    
                    1,256
                    
                    
                    
                    1,220
                    
                    
                    
                    51
                    
                    
                    
                    36Plan
      amendments
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Actuarial
      loss (gain)
                    
                    
                    128
                    
                    
                    
                    (861
                    )
                    
                    
                    322
                    
                    
                    
                    (92
                    )Benefits
      paid
                    
                    
                    (1,424
                    )
                    
                    
                    (1,291
                    )
                    
                    
                    —
                    
                    
                    
                    —Benefit
      obligation at December 31
                    
                    
                    20,706
                    
                    
                    
                    20,746
                    
                    
                    
                    1,173
                    
                    
                    
                    745Change
      in plan assets:Fair
      value of plan assets at January 1
                    
                    
                    21,812
                    
                    
                    
                    21,319
                    
                    
                    
                    —
                    
                    
                    
                    —Actual
      return on plan assets
                    
                    
                    (5,511
                    )
                    
                    
                    1,218
                    
                    
                    
                    —
                    
                    
                    
                    —Employer
      contributions
                    
                    
                    291
                    
                    
                    
                    566
                    
                    
                    
                    —
                    
                    
                    
                    —Benefits
      paid
                    
                    
                    (1,424
                    )
                    
                    
                    (1,291
                    )
                    
                    
                    —
                    
                    
                    
                    —Fair
      value of plan assets at December 31
                    
                    
                    15,168
                    
                    
                    
                    21,812
                    
                    
                    
                    —
                    
                    
                    
                    —Funded
      status
                    
                    $
                    (5,538
                    )
                    
                    $
                    1,066
                    
                    
                    $
                    (1,173
                    )
                    
                    $
                    (745
                    )
  The
Company included $4,502 and $417 in other comprehensive loss for the years ended
December 31, 2008 and 2007, respectively, which represent the respective
fluctuations in the additional minimum pension liability, net of related tax
benefits.
  At
December 31, 2008 and 2007, the accumulated benefit obligation (the
actuarial present value of benefits, vested and non-vested, earned by employees
based on current and past compensation levels) for the Company’s pension plans
totaled $20,706 and $20,746, respectively.
  F-29
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  The
following table provides the components of net periodic benefit (income) cost
for the years ended December 31:
  Pension Benefits
                                              
                                              
                                              Postretirement
                                                Benefits2008
                                              
                                              
                                              2007
                                              
                                              
                                              2006
                                              
                                              
                                              2008
                                              
                                              
                                              2007
                                              
                                              
                                              2006Service
      cost
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              55
                                              
                                              
                                              $
                                              46
                                              
                                              
                                              $
                                              71Interest
      cost
                                              
                                              
                                              1,256
                                              
                                              
                                              
                                              1,220
                                              
                                              
                                              
                                              1,193
                                              
                                              
                                              
                                              51
                                              
                                              
                                              
                                              36
                                              
                                              
                                              
                                              31Expected
      return on plan assets
                                              
                                              
                                              (1,558
                                              )
                                              
                                              
                                              (1,486
                                              )
                                              
                                              
                                              (1,349
                                              )
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Amortization
      of net loss
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              53
                                              
                                              
                                              
                                              11
                                              
                                              
                                              
                                              7
                                              
                                              
                                              
                                              10Net
      periodic benefit (income) cost
                                              
                                              $
                                              (302
                                              )
                                              
                                              $
                                              (266
                                              )
                                              
                                              $
                                              (103
                                              )
                                              
                                              $
                                              117
                                              
                                              
                                              $
                                              89
                                              
                                              
                                              $
                                              112Recognized
      in AOCI (pre-tax):Prior
      service cost
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              5
                                              
                                              
                                              $
                                              5
                                              
                                              
                                              $
                                              6Net
      actuarial loss(gain)
                                              
                                              
                                              5,415
                                              
                                              
                                              
                                              (1,781
                                              )
                                              
                                              
                                              (1,189
                                              )
                                              
                                              
                                              513
                                              
                                              
                                              
                                              201
                                              
                                              
                                              
                                              300Total
      recognized in AOCI (pre-tax)
                                              
                                              $
                                              5,415
                                              
                                              
                                              $
                                              (1,781
                                              )
                                              
                                              $
                                              (1,189
                                              )
                                              
                                              $
                                              518
                                              
                                              
                                              $
                                              206
                                              
                                              
                                              $
                                              306Total
      recognized in consolidated statement of income and AOCI
                                              
                                              $
                                              5,113
                                              
                                              
                                              $
                                              2,047
                                              
                                              
                                              $
                                              1,292
                                              
                                              
                                              $
                                              635
                                              
                                              
                                              $
                                              295
                                              
                                              
                                              $
                                              418
  In 2009,
the Company expects to amortize $1 of prior service cost and $25 of net
actuarial loss from shareholders’ equity into postretirement benefit plan
cost.
  The
following assumptions were used to determine the periodic pension cost for the
defined benefit pension plans for the year ended December 31:
  2008
                    
                    
                    2007
                    
                    
                    2006Discount
      rate
                    
                    
                    6.25
                    %
                    
                    
                    6.25
                    %
                    
                    
                    5.75
                    %Expected
      return on plan assets
                    
                    
                    8.00
                    %
                    
                    
                    8.00
                    %
                    
                    
                    8.00
                    %Rate
      of compensation increase
                    
                    
                    N/A
                    
                    
                    
                    N/A
                    
                    
                    
                    N/A
  The
discount rates utilized for determining the Company’s pension obligation and net
periodic benefit cost were selected using high-quality long-term corporate bond
indices as of the plan’s measurement date. The rate selected as a result of this
process was substantiated by comparing it to the composite discount rate that
produced a liability equal to the plan’s expected benefit payment stream
discounted using the Citigroup Pension Discount Curve (“CPDC”). The CPDC was
designed to provide a means for plan sponsors to value the liabilities of their
postretirement benefit plans. The CPDC is a yield curve of hypothetical double-A
zero coupon bonds with maturities up to 30 years. This curve includes
adjustments to eliminate the call features of corporate bonds.  As a
result of this modeling process, the discount rate remained constant
at  6.25% from December 31, 2007 to December 31,
2008.
  The
following assumptions were used to determine the periodic postretirement benefit
cost for the postretirement welfare plan for the year ended
December 31:
  2008
                    
                    
                    2007
                    
                    
                    2006Health
      care cost trend rate assumed for next year
                    
                    
                    10.0
                    %
                    
                    
                    10.0
                    %
                    
                    
                    9.0
                    %Rate
      to which the cost trend rate is assumed to decline (the ultimate trend
      rate)
                    
                    
                    5.0
                    %
                    
                    
                    5.0
                    %
                    
                    
                    4.5
                    %Year
      that the rate reaches the ultimate trend rate
                    
                    2014
                    
                    
                    2013
                    
                    
                    2012
  F-30
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  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
                                        
                                        $
                                        30
                                        
                                        
                                        $
                                        (23
                                        )Effect
      on accumulated postretirement benefit obligation for the year ended
      December 31, 2008
                                        
                                        $
                                        323
                                        
                                        
                                        $
                                        (244
                                        )
  The
Company’s pension plan weighted-average asset allocations at December 31 by
asset category are as follows:
  2008
                                  
                                  
                                  
                                  2007Equity
      securities
                                  
                                  
                                  59
                                  %
                                  
                                  
                                  59
                                  %Debt
      securities
                                  
                                  
                                  34
                                  
                                  
                                  
                                  34Real
      Estate
                                  
                                  
                                  5
                                  
                                  
                                  
                                  5Other
                                  
                                  
                                  2
                                  
                                  
                                  
                                  2Total
                                  
                                  
                                  100
                                  %
                                  
                                  
                                  100
                                  %
  The
overall objective of the Company’s defined benefit plans is to provide the means
to pay benefits to participants and their beneficiaries in the amounts and at
the times called for by the plan. This is expected to be achieved through the
investment of the Company’s contributions and other assets and by utilizing
investment policies designed to achieve adequate funding over a reasonable
period of time.
  Defined
benefit plan assets are invested so as to achieve a return on investment, based
on levels of liquidity and investment risk that is prudent and reasonable under
circumstances which exist from time to time. While the Company recognizes the
importance of the preservation of capital, it also adheres to the theory of
capital market pricing which maintains that varying degrees of investment risk
should be rewarded with compensating returns.
  The asset
allocation decision includes consideration of the non-investment aspects of the
Company’s defined benefit plans, including future retirements, lump-sum
elections, contributions, and cash flow. These actual characteristics of the
plans place certain demands upon the level, risk, and required growth of trust
assets. The Company regularly conducts analyses of the plans’ current and likely
future financial status by forecasting assets, liabilities, benefits and
contributions over time. In so doing, the impact of alternative investment
policies upon the plans’ financial status is measured and an asset mix which
balances asset returns and risk is selected.
  The
Company’s decision with regard to asset mix is reviewed periodically. Asset mix
guidelines include target allocations and permissible ranges for each asset
category. Assets are monitored on an ongoing basis and rebalanced as required to
maintain an asset mix within the permissible ranges. The guidelines will change
from time to time, based on an ongoing evaluation of the plan’s tolerance of
investment risk.
  The
market-related value of plan assets is used in developing the expected rate of
return on plan assets. In developing the expected rate of return, the
market-related value of plan assets phases in recognition of capital
appreciation by recognizing investment gains and losses over a four-year period
at 25% per year.
  The
expected future benefit payments under the plans are as follows for the years
ending December 31:
  F-31
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  Pension
                      Benefits
                    
                    Postretirement
                      Benefits2009
                    
                    $
                    1,364
                    
                    
                    $
                    —2010
                    
                    
                    1,429
                    
                    
                    
                    —2011
                    
                    
                    1,492
                    
                    
                    
                    —2012
                    
                    
                    1,514
                    
                    
                    
                    —2013
                    
                    
                    1,530
                    
                    
                    
                    —2014
      - 2018
                    
                    
                    7,951
                    
                    
                    
                    174
 
  The
Company expects to contribute $500 to its pension plans in 2009.
  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 a substantial portion of its research
and development laboratory facilities. The expiration dates on the present
leases range from March 2009 to July 2019. The leases contain renewal options at
the option of the Company. The Company is responsible for paying the cost of
utilities, operating costs, and increases in property taxes at its leased
facilities.
  Future
minimum lease payments under non-cancelable operating leases (with initial or
remaining lease terms in excess of one year) as of December 31, 2008 are as
follows:
  Year
      ending December 31,2009
                    
                    $
                    3,0162010
                    
                    
                    3,3862011
                    
                    
                    3,4152012
                    
                    
                    3,3372013
                    
                    
                    2,697Thereafter
                    
                    
                    12,227
  Rental
expense amounted to approximately $3,751, $3,502 and $2,977 during the years
ended December 31, 2008, 2007 and 2006, respectively.
  F-32
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  13.
                Related
      Party Transactions
  (a)
Technology Development Incentive Plan
  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 and must be the
inventor, co-inventor or have made a significant intellectual contribution of
novel technology that results in new revenues received 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 2008,
2007 and 2006, the Company awarded Technology Incentive Compensation primarily
to the inventor of the terfenadine carboxylic acid metabolite technology, which
is covered by the Company’s patents relating to the active ingredient in
Allegra. The inventor is Thomas D’Ambra, the Company’s Chairman, President and
Chief Executive Officer.  In 2006, the Company awarded employees
involved in the development of its proprietary amine neurotransmitter reuptake
inhibitors as a result of successful licensing of this technology to
Bristol-Myers Squibb (“BMS”).  Additionally, in 2007 and 2008, the
Company granted awards to employees in relation to milestone payments from
BMS.  The amounts awarded and included in the consolidated statements
of income for the years ended December 31, 2008, 2007 and 2006 are $2,901,
$2,784 and $2,783, respectively.  Included in accrued compensation in
the accompanying consolidated balance sheets at both December 31, 2008 and
2007 are unpaid Technology Development Incentive Compensation awards of
approximately $667 and $659.
  (b)
Telecommunication Services
  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 approximately $221, $228 and $156 for
services rendered to the Company in 2008, 2007 and 2006,
respectively.
  14.
                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.
  The
Company, through its former subsidiary AMR Technology that has been merged into
the Company, along with Aventis Pharmaceuticals Inc., the U.S. pharmaceutical
business of sanofi-aventis S.A., is involved in legal proceedings with several
companies seeking to market or which are currently marketing generic versions of
Allegra. Beginning in 2001, Barr Laboratories, Inc., Impax Laboratories, Inc.,
Mylan Pharmaceuticals, Inc., Teva Pharmaceuticals USA, Dr. Reddy’s Laboratories,
Ltd./Dr. Reddy’s Laboratories, Inc., Ranbaxy Laboratories Ltd./Ranbaxy
Pharmaceuticals Inc., Sandoz Inc., Sun Pharma Global, Inc., and Wockhardt filed
Abbreviated New Drug Applications (“ANDAs”) with the FDA to produce and market
generic versions of Allegra products.
  In
response to the filings described above, beginning in 2001, Aventis
Pharmaceuticals filed patent infringement lawsuits against Barr Laboratories,
Impax Laboratories, Mylan Pharmaceuticals, Teva Pharmaceuticals, Dr. Reddy’s
Laboratories, Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals
Inc.,  Sandoz, and Wockhardt. Each of the lawsuits was filed in the
U.S. District Court in New Jersey and alleges infringement of one or more
patents owned by Aventis Pharmaceuticals. In addition, beginning on November 14,
2006, Aventis filed two patent infringement suits against Teva Pharmaceuticals
USA, Barr Laboratories, Inc. and Barr Pharmaceuticals, Inc. in the Eastern
District of Texas based on patents owned by Aventis.  Those lawsuits
were transferred to the U.S. District Court in New Jersey.
  F-33
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  Further,
beginning on March 5, 2004, the Company through its former subsidiary AMR
Technology, along with Aventis Pharmaceuticals, filed suit in the U.S. District
Court in New Jersey against Barr Laboratories, Impax Laboratories, Mylan
Pharmaceuticals, Teva Pharmaceuticals, Dr. Reddy’s Laboratories, Amino
Chemicals, Ltd., Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc.,
DiPharma S.P.A., DiPharma Francis s.r.l., and Sandoz, asserting infringement of
two of our U.S. patents that are exclusively licensed to Aventis Pharmaceuticals
relating to Allegra and Allegra-D products.  On December 11, 2006, the
Company through its former subsidiary AMR Technology and sanofi-aventis U.S.
LLC, an affiliate of Aventis Pharmaceuticals, also filed a patent infringement
lawsuit in the Republic of Italy against DiPharma Francis s.r.l. and DiPharma
S.P.A. based on European Patent No. 703,902 which is owned by the Company and
licensed to sanofi-aventis.  In addition, on December 22, 2006, the
Company through its former subsidiary AMR Technology, filed a patent
infringement lawsuit in Canada against Novopharm Ltd., Teva Pharmaceutical
Industries Ltd., Teva Pharmaceuticals USA, Inc., DiPharma S.P.A. and DiPharma
s.r.l. based on Canadian Patent No. 2,181,089. On March 20, 2007, the Company
through its former subsidiary AMR Technology filed a patent infringement lawsuit
in Australia against Alphapharm Pty Ltd based on Australian Patent No.
699,799.  On September 28, 2007, the Company through its former
subsidiary AMR Technology filed a patent infringement lawsuit in Australia
against Arrow Pharmaceuticals Pty Ltd, Chemists’ Own Pty Ltd, and Sigma
Pharmaceuticals Limited based on Australian Patent No. 699,799.
  Aventis
Pharmaceuticals, the Company, and its former subsidiary AMR Technology have
entered into covenants not to sue on U.S. Patent No. 5,578,610 with defendants
other than Novopharm, DiPharma S.P.A., DiPharma Francis s.r.l., Alphapharm,
Arrow Pharmaceuticals Pty Ltd, Chemists’ Own Pty Ltd, and Sigma Pharmaceuticals
Limited.  Aventis Pharmaceuticals exclusively licenses U.S. Patent No.
5,578,610 from us, but that patent has not been asserted in the litigations in
the U.S.  However, the Company and Aventis Pharmaceuticals have agreed
that Aventis Pharmaceuticals will continue to pay royalties to the Company based
on that patent under the Company’s original license agreement with Aventis
Pharmaceuticals. Under our arrangements with Aventis Pharmaceuticals, we will
receive royalties until expiration of the underlying patents (2013 for U.S.
Patent No. 5,578,610 and 2015 for U.S. Patent No. 5,750,703) unless the patents
are earlier determined to be invalid.
  On
November 18, 2008, the Company, its former subsidiary AMR Technology, Aventis
Pharmaceuticals, sanofi-aventis, Teva Pharmaceuticals, and Barr Laboratories
reached a settlement regarding the above-described patent infringement
litigations relating to Teva Pharmaceuticals and Barr
Laboratories.  As part of the settlement, the Company entered into an
amendment to its licensing agreement with sanofi-aventis to allow sanofi-aventis
to sublicense patents related to ALLEGRA®and
ALLEGRA®D-12
to
Teva Pharmaceuticals and Barr Laboratories in the United States.  The
Company received an upfront sublicense fee from sanofi-aventis of $10 million,
and sanofi-aventis will pay royalties to the Company on the sale of products in
the United States containing fexofenadine hydrochloride (the generic name for
the active ingredient in ALLEGRA®) and
products containing fexofenadine hydrochloride and pseudoephedrine hydrochloride
(generic ALLEGRA®D-12) by
Teva Pharmaceuticals and Barr Laboratories through 2015, along with additional
consideration.  While the settlement affords the option for a launch
of a generic version of Allegra D-12 in November 2009, the Company will receive
quarterly royalties through July 2010 equal to the royalties paid for the
quarter ended June 30, 2009.  Thereafter, the royalty rate will revert
to the rate in effect prior to the signing of the sub-license
amendment.  The settlement agreements and related licensing
arrangements are subject to review by the Federal Trade Commission and U.S.
state Attorneys General and, under their terms, did not become effective until
certain regulatory notices were given and certain periods during which
applicable regulatory authorities could object to the transactions expired or
were waived.  Pursuant to their terms, the settlement agreements and
related licensing arrangements became effective on January 2,
2009.  If the settlement agreements and related licensing arrangements
are subject to a governmental challenge after January 2, 2009, that could result
in termination of the settlement agreements and related licensing
arrangements.  The settlement arrangements do not affect the pending
litigation as it relates to products intended for use or sale in jurisdictions
other than the United States and do not affect the pending litigation with
respect to defendants other than Teva Pharmaceuticals and Barr
Laboratories.
  Under
applicable federal law, marketing of an FDA-approved generic version of Allegra
may not commence until the earlier of a decision favorable to the generic
challenger in the patent litigation or 30 months after the date the patent
infringement lawsuit was filed. In general, the first generic filer is entitled
to a 180-day marketing exclusivity period upon FDA approval.  The
launch of a generic product is considered an “at-risk” launch if the launch
occurs while there is still on-going litigation.  Of the remaining
defendants in the pending litigation, Dr. Reddy’s Laboratories and Mylan
Pharmaceuticals have engaged in at-risk launches of generic fexofenadine
products.
  F-34
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  15.
                Environmental
      Costs
  The
Company has completed an environmental remediation assessment 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, the Company is expected to pay for monitoring and reporting
until 2014. Under a 1999 agreement with the facility’s previous owner, the
Company’s maximum liability under the remediation is $5,500. For the years ended
December 31, 2008, 2007 and 2006, no 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 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 both
December 31, 2008 and 2007, $191 was recorded for future environmental
liabilities in the consolidated balance sheets.
  16.
                Concentration
      of Business
  For the
year ended December 31, 2008, contract revenue from the Company’s three
largest customers represented 17%, 8% and 7%, respectively, of its contract
revenue. For the year ended December 31, 2007, contract revenue from the
Company’s three largest customers represented 19%, 5% and 5%, respectively, of
its contract revenue. For the year ended December 31, 2006, contract
revenue from the Company’s three largest customers respectively represented 21%,
7% and 6% of its contract revenue.  The Company’s largest customer, GE
Healthcare, represented 17% of total contract revenue for the year ended
December 31, 2008.  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 31,2008
                                                                    
                                                                    
                                                                    
                                                                    2007
                                                                    
                                                                    
                                                                    
                                                                    2006United
      States
                                                                    
                                                                    
                                                                    69
                                                                    %
                                                                    
                                                                    
                                                                    69
                                                                    %
                                                                    
                                                                    
                                                                    66
                                                                    %Europe
                                                                    
                                                                    
                                                                    20
                                                                    %
                                                                    
                                                                    
                                                                    26
                                                                    %
                                                                    
                                                                    
                                                                    31
                                                                    %Other
      countries
                                                                    
                                                                    
                                                                    11
                                                                    %
                                                                    
                                                                    
                                                                    5
                                                                    %
                                                                    
                                                                    
                                                                    3
                                                                    %Total
                                                                    
                                                                    
                                                                    100
                                                                    %
                                                                    
                                                                    
                                                                    100
                                                                    %
                                                                    
                                                                    
                                                                    100
                                                                    %
  F-35
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  17.
                Business
      Segments
  The
Company has organized its sales, marketing and production activities into the
DDS and LSM 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.
  DDS
includes activities such as drug lead discovery, optimization, drug development
and small scale commercial manufacturing. LSM 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. Corporate activities include business development and administrative
functions, as well as research and development costs that have not been
allocated to the operating segments.
  The
following table summarizes information by segment for the year ended
December 31, 2008:
  DDS
                      
                      
                      LSM
                      
                      
                      TotalContract
      revenue
                      
                      $
                      113,955
                      
                      
                      $
                      81,500
                      
                      
                      $
                      195,455Milestone
      revenue
                      
                      
                      5,500
                      
                      
                      
                      —
                      
                      
                      
                      5,500Recurring
      royalties
                      
                      
                      28,305
                      
                      
                      
                      —
                      
                      
                      
                      28,305Total
      revenue
                      
                      $
                      147,760
                      
                      
                      $
                      81,500
                      
                      
                      $
                      229,260Operating
      income (before unallocated expenses)
                      
                      $
                      67,045
                      
                      
                      $
                      11,406
                      
                      
                      $
                      78,451Unallocated
      expenses:Research
      and development
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      13,129Selling,
      general and administrative
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      39,361Total
      unallocated expenses
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      52,490Operating
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      25,961Reconciling
      items:Interest
      income, net
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,170Other
      loss, net
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      759Income
      before income tax expense
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      27,890Supplemental
      information:Depreciation
      and amortization
                      
                      $
                      11,057
                      
                      
                      $
                      6,965
                      
                      
                      $
                      18,022
  The
following table summarizes other information by segment as of December 31,
2008:
  DDS
                      
                      
                      LSM
                      
                      
                      TotalTotal
      assets
                      
                      $
                      235,043
                      
                      
                      $
                      155,641
                      
                      
                      $
                      390,684Goodwill
      included in total assets
                      
                      
                      13,208
                      
                      
                      
                      27,064
                      
                      
                      
                      40,272Investments
      in unconsolidated affiliates
                      
                      
                      956
                      
                      
                      
                      —
                      
                      
                      
                      956Capital
      expenditures
                      
                      
                      17,439
                      
                      
                      
                      6,499
                      
                      
                      
                      23,938
  F-36
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  The
following table summarizes information by segment for the year ended
December 31, 2007:
  DDS
                    
                    
                    LSM
                    
                    
                    TotalContract
      revenue
                    
                    $
                    87,061
                    
                    
                    $
                    76,314
                    
                    
                    $
                    163,375Recurring
      royalties
                    
                    
                    2,000
                    
                    
                    
                    80
                    
                    
                    
                    2,080Total
      revenue
                    
                    
                    27,056
                    
                    
                    
                    —
                    
                    
                    
                    27,056Operating
      income (before unallocated expenses)
                    
                    $
                    116,117
                    
                    
                    $
                    76,394
                    
                    
                    $
                    192,511Unallocated
      expenses:Research
      and development
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    12,821Selling,
      general and administrative
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    33,250Total
      unallocated expenses
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    46,071Operating
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    11,351Reconciling
      items:Interest
      income, net
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3,192Other
      loss, net
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (158
                    )Income
      before income tax expense
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    14,385Supplemental
      information:Depreciation
      and amortization
                    
                    $
                    10,534
                    
                    
                    $
                    6,456
                    
                    
                    $
                    16,990
  The
following table summarizes other information by segment as of December 31,
2007:
  DDS
                    
                    
                    LSM
                    
                    
                    TotalTotal
      assets
                    
                    $
                    235,603
                    
                    
                    $
                    151,051
                    
                    
                    $
                    386,654Goodwill
      included in total assets
                    
                    
                    14,141
                    
                    
                    
                    32,434
                    
                    
                    
                    46,575Investments
      in unconsolidated affiliates
                    
                    
                    956
                    
                    
                    
                    —
                    
                    
                    
                    956Capital
      expenditures
                    
                    
                    13,711
                    
                    
                    
                    4,036
                    
                    
                    
                    17,747
  18.
                Fair
      Value of Financial
Instruments
  In
September 2006, SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157), was
issued.  This statement defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements.  This statement applies
under other accounting pronouncements that require or permit fair value
measurements.  FASB Staff Position (“FSP”) 157-2 amended SFAS No. 157
to delay the effective date of SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities to fiscal years beginning after November 15,
2008.
 
 The
adoption of SFAS No. 157 for financial assets and financial liabilities,
effective January 1, 2008, did not have a material impact on the Company’s
consolidated financial position, results of operations or cash
flows.  The Company is evaluating the effect the adoption of SFAS No.
157 for nonfinancial assets and nonfinancial liabilities will have on its
consolidated financial position, results of operations and cash
flows.
 
 SFAS No.
157 establishes a three-tiered fair value hierarchy, which prioritizes the
inputs used in measuring fair value.  These tiers
include:  Level 1 – defined as quoted prices in active markets for
identical instruments; Level 2 – defined as inputs other than quoted prices in
active markets that are either directly or indirectly observable; and Level 3 –
defined as unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own assumptions.
 
 The
following table presents the fair value of marketable securities by type and
their determined level based on the three-tiered fair value hierarchy as of
December 31, 2008:
  F-37
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
 
 Fair
      Value Measurements as of December 31, 2008Marketable Securities
                      
                      Total
                      
                      
                      Level
      1
                      
                      
                      Level
      2
                      
                      
                      Level
      3Obligations
      of states and political subdivisions
                      
                      $
                      24,670
                      
                      
                      $
                      —
                      
                      
                      $
                      24,670
                      
                      
                      $
                      —Auction
      rate securities
                      
                      
                      2,400
                      
                      
                      $
                      —
                      
                      
                      
                      2,400
                      
                      
                      
                      —Total
                      
                      $
                      27,070
                      
                      
                      $
                      —
                      
                      
                      $
                      27,070
                      
                      
                      $
                      —
  The
Company’s marketable securities are fixed maturity securities and are valued
using pricing for similar securities, recently executed transactions, cash flow
models with yield curves, broker/dealer quotes and other pricing models
utilizing observable inputs. The valuation for the Company’s fixed maturity
securities is classified as Level 2.
  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 and cash equivalents,
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: Investment securities’ fair
values are based on quoted market prices of comparable
instruments.  When necessary, the Company utilizes matrix pricing from
a third party pricing vendor to determine fair value pricing.  Matrix
prices are based on quoted prices for securities with similar coupons, ratings,
and maturities, rather than on specific bids and offers for the designated
security.
  Long-term debt:The carrying value of
long-term debt was approximately equal to fair value at December 31, 2008
and 2007 due to the resetting dates of the variable interest rates.
  Swap Contracts:As discussed in Note 8,
the Company no longer has swap contracts as of December 31, 2008.  The
swap contract asset was carried at fair value on the consolidated balance sheet
at December 31, 2007.
  19.
                Goodwill
      and Intangible Assets
  Goodwill
  The
carrying amount of goodwill, by segment, as of December 31, 2008 and 2007
are as follows:
  DDS
                      
                      
                      LSM
                      
                      
                      TotalDecember 31,
      2008Goodwill
                      
                      $
                      13,208
                      
                      
                      $
                      27,064
                      
                      
                      $
                      40,272December 31,
      2007Goodwill
                      
                      $
                      14,141
                      
                      
                      $
                      32,434
                      
                      
                      $
                      46,575
  The
decrease in goodwill within the DDS segment from December 31, 2007 to
December 31, 2008 is related to the impact of foreign currency
translation.  The decrease in goodwill within the LSM segment from
December 31, 2007 to December 31, 2008 is related primarily to the valuation
adjustments on AMRI India, as well as the impact of foreign currency
translation, offset in part by the acquisition of FinKem described in Note
2.
  F-38
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
  Intangible
Assets
  The
components of intangible assets are as follows:
  Cost
                              
                              
                              Accumulated
                                Amortization
                              
                              
                              Net
                              
                              Amortization
                                PeriodDecember 31,
      2008Patents
      and Licensing Rights
                              
                              $
                              3,181
                              
                              
                              $
                              (1,163
                              )
                              
                              $
                              2,018
                              
                              2-16
      yearsOther
                              
                              
                              894
                              
                              
                              
                              (894
                              )
                              
                              
                              —
                              
                              18-24
      monthsTotal
                              
                              $
                              4,075
                              
                              
                              $
                              (2,057
                              )
                              
                              $
                              2,018December 31,
      2007Patents
      and Licensing Rights
                              
                              $
                              2,976
                              
                              
                              $
                              (1,075
                              )
                              
                              $
                              1,901
                              
                              2-16
      yearsOther
                              
                              
                              973
                              
                              
                              
                              (642
                              )
                              
                              
                              331
                              
                              18-24
      monthsTotal
                              
                              $
                              3,949
                              
                              
                              $
                              (1,717
                              )
                              
                              $
                              2,232
  Amortization
expense related to intangible assets for the years ended December 31, 2008,
2007 and 2006 was $640, $697 and $643, respectively.
  The
following chart represents estimated future annual amortization expense related
to intangible assets:
  Year
      ending December 31,2009
                  
                  $
                  1942010
                  
                  
                  1802011
                  
                  
                  1802012
                  
                  
                  1802013
                  
                  
                  169Thereafter
                  
                  
                  1,115
  F-39
  ALBANY
MOLECULAR RESEARCH, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
2008, 2007 and 2006
  (In
thousands, except per share amounts)
 
 20.
                Selected
      Quarterly Consolidated Financial Data
  (unaudited)
  The
following tables present unaudited consolidated financial data for each quarter
of 2008 and 2007:
  First
                      Quarter
                    
                    
                    Second
                      Quarter
                    
                    
                    Third
                      Quarter
                    
                    
                    Fourth
                      Quarter2008Contract
      revenue
                    
                    $
                    45,337
                    
                    
                    $
                    46,362
                    
                    
                    $
                    54,142
                    
                    
                    $
                    49,614Gross
      profit
                    
                    
                    9,109
                    
                    
                    
                    12,831
                    
                    
                    
                    15,383
                    
                    
                    
                    12,057Recurring
      royalties
                    
                    
                    8,233
                    
                    
                    
                    7,573
                    
                    
                    
                    5,723
                    
                    
                    
                    6,776Income
      from operations
                    
                    
                    4,317
                    
                    
                    
                    8,987
                    
                    
                    
                    8,747
                    
                    
                    
                    3,910Net
      income
                    
                    
                    4,739
                    
                    
                    
                    5,677
                    
                    
                    
                    7,003
                    
                    
                    
                    3,141Net
      income per share:Basic
                    
                    $
                    0.15
                    
                    
                    $
                    0.18
                    
                    
                    $
                    0.22
                    
                    
                    $
                    0.11Diluted
                    
                    $
                    0.15
                    
                    
                    $
                    0.18
                    
                    
                    $
                    0.22
                    
                    
                    $
                    0.102007Contract
      revenue
                    
                    $
                    41,231
                    
                    
                    $
                    39,936
                    
                    
                    $
                    41,571
                    
                    
                    $
                    40,637Gross
      profit
                    
                    
                    8,544
                    
                    
                    
                    9,933
                    
                    
                    
                    8,167
                    
                    
                    
                    4,699Recurring
      royalties
                    
                    
                    7,146
                    
                    
                    
                    7,838
                    
                    
                    
                    5,986
                    
                    
                    
                    6,086Income
      (loss) from operations
                    
                    
                    3,937
                    
                    
                    
                    6,527
                    
                    
                    
                    2,137
                    
                    
                    
                    (1,250
                    )Net
      income (loss)
                    
                    
                    3,224
                    
                    
                    
                    4,576
                    
                    
                    
                    1,980
                    
                    
                    
                    (844
                    )Net
      income (loss) per share:Basic
                    
                    $
                    0.10
                    
                    
                    $
                    0.14
                    
                    
                    $
                    0.06
                    
                    
                    $
                    (0.02
                    )Diluted
                    
                    $
                    0.10
                    
                    
                    $
                    0.14
                    
                    
                    $
                    0.06
                    
                    
                    $
                    (0.03
                    )
  F-40
  ALBANY
MOLECULAR RESEARCH, INC.
  SCHEDULE
II—VALUATION AND QUALIFYING ACCOUNTS
  Years
Ended December 31, 2008, 2007 and 2006
  Description
                          
                          Balance at
                            Beginning of
                            Period
                          
                          Charged to Cost
                            and Expenses
                          
                          Charged to Other
                            Accounts
                          
                          Deductions
                            Charged to
                            Reserves
                          
                          
                          Balance at
                            End of
                            PeriodAllowance
      for doubtful accounts receivable2008
                          
                          $
                          252,232
                          
                          
                          $
                          480,000
                          
                          
                          
                          —
                          
                          
                          $
                          (110,764
                          )
                          
                          $
                          621,4682007
                          
                          $
                          293,224
                          
                          
                          $
                          26,851
                          
                          
                          
                          —
                          
                          
                          $
                          (67,843
                          )
                          
                          $
                          252,2322006
                          
                          $
                          98,338
                          
                          
                          $
                          197,886
                          
                          
                          
                          —
                          
                          
                          $
                          (3,000
                          )
                          
                          $
                          293,224Deferred
      tax asset valuation allowance2008
                          
                          $
                          6,028,231
                          
                          
                          $
                          2,656,907
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          8,685,1382007
                          
                          $
                          3,189,895
                          
                          
                          $
                          2,838,336
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          6,028,2312006
                          
                          $
                          2,997,335
                          
                          
                          $
                          192,560
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          3,189,895