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, 2009
 or
 o
              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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).   Yes  o    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. o
 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, 2009 was approximately $180 million based
upon the closing price per share of the Registrant’s Common Stock as reported on
the Nasdaq National Market on June 30, 2009. 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, 2010, there
were 31,672,511 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 2, 2010, 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
                        
                        16Item
      1B.
                        
                        Unresolved
      Staff Comments
                        
                        23Item
      2.
                        
                        Properties
                        
                        23Item
      3.
                        
                        Legal
      Proceedings
                        
                        24Item
      4.
                        
                        Removed
      and Reserved
                        
                        25Part II.Item
      5.
                        
                        Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                        
                        26Item
      6.
                        
                        Selected
      Financial Data
                        
                        27Item
      7.
                        
                        Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                        
                        28Item
      7A.
                        
                        Quantitative
      and Qualitative Disclosures about Market Risk
                        
                        42Item
      8.
                        
                        Financial
      Statements and Supplementary Data
                        
                        43Item
      9.
                        
                        Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                        
                        43Item
      9A.
                        
                        Controls
      and Procedures
                        
                        43Item
      9B.
                        
                        Other
      Information
                        
                        44Part III.Item
      10.
                        
                        Directors,
      Executive Officers and Corporate Governance of the
    Registrant
                        
                        45Item
      11.
                        
                        Executive
      Compensation
                        
                        45Item
      12.
                        
                        Security
      Ownership of Certain Beneficial Owners and Management
                        
                        45Item
      13.
                        
                        Certain
      Relationships, Related Transactions and Director
    Independence
                        
                        45Item
      14.
                        
                        Principal
      Accountant Fees and Services
                        
                        45Part IV.Item
      15.
                        
                        Exhibits
      and Financial Statement Schedules
                        
                        46
  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”), 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, Hungary and the United Kingdom), 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 Food and Drug Administration (“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 India or AMRI Hungary business units, 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 India and the AMRI Hungary business units 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, the Company's
timing and ability to successfully integrate Excelsyn and AMRI India’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, Excelsyn’s and AMRI India’s
services, the failure by the company to retain key employees of these locations,
failure to further develop and successfully market AMRI India’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, Hungary
and the U.K., 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,” “AMRI”, “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 wide range of services,
technologies 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.  What has been a historically fragmented
market is currently undergoing consolidation, which 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.  Additionally, in February 2010, we acquired a
      development and large scale manufacturing facility in the
      UK.  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.
  §
              Broaden
      service offerings– In an effort to capture additional market
      penetration and increase the comprehensive nature of the services that we
      are able to provide to our customers, we seek to broaden the scope of our
      service offerings through a combination of organic growth and strategic
      acquisitions.  We introduced formulation development and
      manufacturing to our service offerings in 2009 and we are also expanding
      our biology capabilities in response to customer demand for integration of
      these services into their chemistry programs.  Furthermore, 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.  This will enable us to be a stronger competitor as
      the market recovers.  Additionally, as the industry rebounds, it
      is expected that there will be an increase in outsourcing of research and
      development by larger pharmaceutical companies and a return to growth by
      biotech and specialty pharmaceuticals.  We continue to pursue
      making large pharmaceutical companies  a larger part of our
      customer portfolio.  We believe our ability to offer a hybrid
      services model, which allows customers to use a combination of our U.S.
      and international locations, will result in an increase in demand as these
      companies return to outsourcing R&D in order to replace fixed costs
      with variable costs.
  §
              Leveraging
      integrated contract services - Our research facilities provide
      discovery, chemical development, analytical, and small-scale current Good
      Manufacturing Practices (“cGMP”) manufacturing 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. Within our
      discovery services platform, in response to changing industry trends, we
      are developing responses to customer demand of integrated programs which
      offers a combination of chemistry and biology services in order to fully
      integrate all of their needs into one
provider.
  4
  Compounds
developed in our small scale 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.
  §
              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.
  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 approximately $423 million through December 31, 2009
..  Under our contract with BMS we have had revenues of approximately
$30 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 cancer, irritable
bowel disease, obesity and central nervous system (“CNS”) 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 niche
commercial potential, and the development of alternative manufacturing
processes.
  §
              Return to
      expanding margins – Our global platform has increased our market
      penetration and was developed to help us to maintain and grow
      margins.  Although the current economy has led to a decrease in
      margins from prior years, we were able to mitigate an even larger
      reduction by proactively managing our expenses through a variety of
      savings measures.  The cost bases of our manufacturing and
      research facilities are largely fixed in nature, however, 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 from our facilities through improved execution
      at our facilities, lower cost markets and investments in our sales &
      marketing team.
  Industry
Overview
  Pharmaceutical
and biotechnology companies are under increasing pressure to deliver new drugs
to market, lower the current high cost of new drug research and development 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.  However,
commencing in the fourth quarter of 2008 and continuing into 2009, many of these
companies cut some of their internal R&D projects due to the current
economic volatility.  In response to this financial crisis, many
companies have experienced decreases in cash due to tightening of credit
policies by banks and other sources of capital.  Furthermore, entities
with additional sources of funding have chosen to become more selective in
continuing programs in order to preserve cash.
  5
  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.
  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
      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.
  6
  Trends
in Contracting for Drug Discovery and Development
  Beginning
in 2005 and continuing through 2008, we experienced strong demand for our
developmental and small-scale cGMP manufacturing services as a result of a trend
toward drug development and discovery outsourcing. The following trends led 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.
  We
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 2009,
we experienced a decrease in customer delivery patterns and demand caused by the
economic downturn.  As the industry emerges from this economic
downturn, we are cautiously optimistic that demand for our discovery and
development services should return.  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 and have recently planned a 40,000
square foot expansion of this facility.  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 also included the introduction of in vitro biology
services at the facility.  We also completed the expansion of our
research facilities in Budapest, Hungary and Bothell, Washington during
2009.
  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.
  7
  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.  In 2009, we completed the modernization and expansion of
our pilot plant facilities in India.  Additionally, in February 2010,
we acquired Excelsyn Ltd. which will provide us with additional development and
large scale manufacturing services in Europe.  With these acquisitions
and expansion, we have globalized 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
penetration 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.
  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
 ·
                Developing,
      optimizing and validating assays for
screening
 
 Screening
 
 Our
diverse offering of screening capabilities, coupled with access to our range of
sample collections, 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
  8
 
 ·
                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”)
 ·
                Diverse
      Fragment Based Library
 
 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
  9
 
 ·
                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
  ·
              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 Collection and 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”).
  10
 
 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 have
added some focused formulation capabilities to our portfolio.  Working
in close collaboration with our already established chemical synthesis,
analytical development and preformulation groups, we are offering solid dosage
formulation development services, cGMP early clinical phase capsule filling
using Xcelodose technology, cGMP early clinical Powder in Bottle (“PIB”) for
solution and suspension.
 
 Formulation
services include:
 
 ·
              Neat
      API in-capsule filling
 ·
                PIB
      for solution and suspension
 ·
                Blending
      and sieving
 ·
                Milling
 ·
                Tableting
 ·
                Rheology
 ·
                Roller
      compaction
 ·
                Wet
      granulation
 ·
                Fluid
      bed processing, including Wurster
coating
 ·
                All
      associated analytical testing for dosage formulation
    products
 
 Analytical
Chemistry Services
 We
provide broad analytical chemistry services 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
  ·
              Stability
      services
  ·
              Analytical
      and preparative Supercritical Fluid Chromatography
  (“SFC”)
  ·
              Preparative
      chromatography
  ·
              Good
      Laboratory Practices (“GLP”) bioanalytical
  services
  ·
              Regulatory
      support/quality assurance
  11
  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
lead series to development 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 diseases 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.
Additionally, a portion of our R&D efforts focuses on improving the
manufacturing process for our generic API products.  We spent $14.5
million, $13.1 million and $12.8 million on research and development activities
in 2009, 2008 and 2007, 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.  These
milestone events include candidate nomination, IND or equivalent regulatory
filings, commencement of middle- and late-stage clinical trials, and regulatory
approval of compounds for commercial sale.  The agreement also
provides for the Company to receive royalty payments on worldwide sales of any
such product that is commercialized.  From the entry into this
agreement through December 31, 2009, we have recorded $11.8 million from
achieving certain milestones with BMS.
  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,
2009, we have had revenues of $7.4 million in milestone payments and
approximately $423 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.  Subsequently, Teva Pharmaceuticals acquired Barr
Laboratories.  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 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, $1.1 billion and $1.0 billion for the year ended
December 31, 2009, 2008 and 2007, respectively.  See
“Item 3—Legal Proceedings” for discussion of current legal proceedings
related to Allegra®/Telfast.
  12
  Business
Segments
  We have
organized our activities into two distinct segments.  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.  Our large scale manufacturing activities,
including pilot to commercial scale manufacturing of active pharmaceutical
ingredients and intermediates and high potency and controlled substance
manufacturing represent our LSM distinct business segment and our remaining
activities, including drug lead discovery, optimization, drug development, and
small scale commercial manufacturing represent our DDS business
segment.  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, 2009, contract
revenue from our three largest customers represented 14%, 12% and 8%,
respectively, of our contract revenue.  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. Our largest
customer, General Electric Company (“GE”), represented 14% of total contract
revenue for the year ended December 31, 2009.  In the first
quarter of 2009, we extended the effective date of a supply agreement with GE
through 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.
  Employees
  As of
January 31, 2010, we had 1,266 employees. Of these employees, 454 are at
our international facilities. Our U.S. large-scale manufacturing hourly work
force has 84 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 37 union employees at our large-scale
manufacturing facility at AMRI India that are covered by a collective bargaining
agreement that expires in May 2010. None of our other employees are subject to
any collective bargaining agreement. We consider our relations with our
employees and the unions 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 is currently under consolidation from
what has recently been highly fragmented.  We face competition based
on a number of factors, including size, relative expertise and sophistication,
quality and costs of identifying and optimizing potential lead compounds and
speed and costs of 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:
  13
 
 §
              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.
  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.
  14
  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 designing, 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.
  Our
manufacturing and research and development processes involve the controlled use
of hazardous or potentially hazardous materials and substances. We are subject
to federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of such materials, including radioactive
compounds and certain waste products. Additionally, we are subject to various
laws and regulations relating to safe working conditions, laboratory and
manufacturing practices and emissions and wastewater
discharges.  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 predict the extent of regulations that might result from
any future legislative or administrative actions, therefore we could be required
to incur significant costs to comply with environmental laws and regulations and
these actions could restrict our operations 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.
  15
  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.
  The
introduction of a generic Allegra®D could
further erode our royalty revenue.
  Royalties
from sales of Allegra®currently constitute a significant portion of our revenue, operating
income and operating cash flow.  In 2005, the Company began to
experience a decrease in our royalties from Allegra®, which
is primarily attributable to the at-risk launch of generic fexofenadine
announced by Barr Pharmaceuticals, Inc. and Teva Pharmaceuticals Industries
Ltd. on September 6, 2005.  The launch of the generic product was
considered an “at-risk” launch due to on-going patent infringement
litigations.  On November 18, 2008, the Company reached a settlement
regarding the patent infringement litigations relating to Teva Pharmaceuticals
and Barr Laboratories.  Subsequently, Teva Pharmaceutivals acquired
Barr Labroatoties.  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 in the United States.  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 through 2015, along with additional
consideration.  As provided in the settlement, Teva Pharmaceuticals
launched a generic version of Allegra®D-12 in
November 2009.  The Company will receive quarterly royalties through
July 2010 for the branded Allegra®D-12
equal to the royalties paid for the quarter ended June 30,
2009.  Thereafter, the royalty rate will revert to the rate in effect
prior to the signing of the sub-license amendment and the Company will also
receive a royalty on Teva’s sales of the generic D-12.  Once the
royalty rate reverts back to the rate in effect prior to the amendment, royalty
revenue could be negatively impacted.  Continued generic Allegra®competition, including the at-risk launch of Allegra®D, may
further adversely affect U.S. sales of Allegra®.
  We have
been issued several patents on a pure form of, and a manufacturing process for,
fexofenadine HCl. The patent positions of pharmaceutical, medical and
biotechnology firms can be uncertain and can involve complex legal and factual
questions. Litigation, in particular patent litigation, can be complex and
time-consuming and the outcome is inherently uncertain. We cannot assure our
stockholders that we and/or sanofi-aventis will ultimately succeed in any
current or future litigation against generic drug manufacturers involving
patents with respect to Allegra®. In the
event that one or more of the patents owned by us or sanofi-aventis are
ultimately determined to be invalid or unenforceable, sanofi-aventis and we
would lose exclusivity with respect to the claims covered by those patents. Any
such loss of exclusivity or the introduction of generic forms of fexofenadine
HCl may cause a reduction in Allegra®sales.
In addition, under our current arrangements with sanofi-aventis, sanofi-aventis,
with consultation from us, has the right to lead with respect to preparing and
executing a strategy to defend and enforce certain of the patents relating to
Allegra®, and is
executing that role in the current litigation. As a result, we may not be able
to control the conduct of such litigation and the strategic decisions that are
made during the course of such litigation.  See “Item 3—Legal
Proceedings.”
  The
transition of Allegra® to an over-the-counter (“OTC”) product could materially
impact royalty revenue.
  In
December 2009, sanofi-aventis announced the acquisition of Chattem, Inc., an
entity that specializes in OTC transitions.  In conjunction with that
acquisition sanovi-aventis also announced their intention to transition
Allegra®to an OTC product in the U.S.  While we believe that this
transition could be positive in the long term, due to our limited knowledge on
the process of transition, U.S. Allegra®sales
could be negatively impacted by this transition in the short
term.
  If the
dollar amount of Allegra®sales
subject to our license agreement decreases, due to these or any other factors,
our revenues from our license agreement with sanofi-aventis will also decrease.
Because we have very few costs associated with the Allegra®license,
royalties carry a 90% margin.  Therefore, a decrease in revenues from
our license agreement for Allegra®would
have a material adverse effect on our revenue, operating income and financial
condition.
  16
  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 more specifically
in the pharmaceutical industry.  Our contract revenues decreased in
2009 and 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 continue to decrease or not grow at historical
rates.
  We
may lose one or more of our major customers.
  During
the year-ended December 31, 2009, revenues from sales of raw material to GE
Healthcare for use in one of its diagnostic imaging agents totaled $21.8 million
and represented approximately 14% of our contract revenue, or 11% of our total
revenue.  In January 2009, we entered into an amendment to an existing
agreement with GE Healthcare, which extends the expiration date of the agreement
to 2013.  Additionally, in order to maintain our sales to GE
Healthcare, we have agreed to price concessions which have and will continue to
impact our margins.  GE Healthcare’s purchases had historically
exceeded the contractual minimum purchases, however, due to their inventory
reduction efforts in 2009, they did not meet these purchase
requirements.  If GE Healthcare continues to materially reduce 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, 2009 sales to another customer of ours totaled $18.6
million and represented approximately 12% of our contract revenue, or 9% of our
total revenue.  In addition, during the year ended December 31,
2009, we provided services to two other major customers representing
approximately 14% of our contract revenues or 11% 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.
  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.
  17
  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 approximately $11.8 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 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.
  Our
business may be adversely affected if we encounter complications in connection
with our continued implementation and operation of information management
software and infrastructure.
  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.
  We
may be required to record additional goodwill impairment
charges.
  We test
goodwill for impairment annually and whenever events or circumstances make it
more likely than not that the fair value of a reporting unit has fallen below
its carrying amount.  We perform our annual assessment of the carrying
value of our goodwill for potential impairment using an independent third-party
specialist.  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.
  18
  As of
December 31, 2009, we had $17.6 million of goodwill on our consolidated
balance sheet.  During 2009, we recorded a goodwill impairment charge
of $22.9 million in our LSM segment as a result of our annual goodwill
impairment testing, which determined a decline in fair value to below its
carrying value. If any of the factors noted above occur or future annual
goodwill impairment tests indicate a further decline in the fair value of our
segments, we may be required to record additional goodwill impairment charges in
future periods.
  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 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.
  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 recent
years, we have engaged in a number of acquisitions and strategic
investments.  Most recently, in February 2010, we completed the
acquisition of Excelsyn Ltd, a chemical development and large scale
manufacturing business in the United Kingdom. These acquisitions may not be as
beneficial to us as we currently expect or as expected at the time of
acquisition.  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. 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.
  19


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. In June
2007, we acquired AMRI India and in January 2008, we acquired FineKem, which is
now a part of AMRI India.  In February 2010, we acquired Excelsyn Ltd,
a chemical development and large scale manufacturing business in the United
Kingdom.  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;




·
            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
manufacturing and research and development processes involve the use of
hazardous or potentially hazardous materials and substances. We are subject to
Federal, state and local laws and regulation governing the use, manufacture,
handling, storage and disposal of such materials, including but not limited to
radioactive compounds and certain waste products.  Additionally, we
are subject to various laws and regulations relating to safe working conditions,
laboratory and manufacturing practices and emissions and wastewater
discharges.  Although we believe that our activities currently comply
with the standards prescribed by such laws and regulations, we cannot completely
eliminate the risk of contamination or injury resulting from these
materials.  We may incur liability as a result of any contamination or
injury.  In addition, we cannot predict the extent of regulations that
might result from any future legislative or administrative actions, therefore we
could be required to incur significant costs to comply with environmental laws
and regulations and these actions could restrict our operations in the
future.  Such expenses, liabilities or restrictions could have a
material adverse effect on our operations and financial
condition.


20


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 at any of 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.




Domestic
policy changes, including income tax and health care reform could reduce the
prices pharmaceutical and biotechnology companies can charge for drugs they
sell, including some of our potential products, 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.  Additionally, we rely on our collaborative partners to obtain
acceptable prices or an adequate level of reimbursement for our current and
potential future products.  Continued efforts of government and
third-party payors to contain or reduce the cost of heath care through various
means, could affect our levels of revenues and earnings.  In certain
foreign markets, pricing and/or profitability of pharmaceutical products are
subject to governmental control.  Domestically, there have been and
may continue to be proposals to implement similar governmental
control.  Future legislation may limit the prices pharmaceutical and
biotechnology companies can charge for the drugs they market and cost control
initiatives could affect the amounts that third-party payors agree to reimburse
for those drugs.   We cannot assure that our collaborative
partners will be able to obtain acceptable prices for our products which would
allow us to sell these products on a competitive and profitable
basis.  As a result, such laws and initiatives 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.


21


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, 2010, our directors and officers beneficially owned or
controlled approximately 15.1% 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.




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.


22


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 energy and certain
materials, have the potential to fluctuate.  As these cost increases
are often dependent on market conditions, and although we do our best to manage
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.





Delays
in, or failure of, the approval of our customers’ regulatory submissions could
impact our revenue and earnings.





The
successful transition of clinical and preclinical candidates into long term
commercial supply agreements is a key component of the LSM business
strategy.  If our customers do not receive approval of their
regulatory submissions, this could have a significant negative impact on our
revenue and earnings.




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.




None.




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 1,032,000 square feet, of which 662,000 square feet are owned and
370,000 square feet are leased. Set forth below is information on our principal
facilities:




Location
              
              Square Feet
              
              Primary PurposeAlbany,
      New York
              
              279,000
              
              Manufacturing,
      Research & Development and AdministrationRensselaer,
      New York
              
              276,000
              
              Manufacturing &
      Research & DevelopmentAurangabad,
      India
              
              208,000
              
              ManufacturingEast
      Greenbush, New York
              
              64,000
              
              Manufacturing &
      Research & DevelopmentHyderabad,
      India
              
              59,000
              
              Research &
      DevelopmentBothell,
      Washington
              
              44,000
              
              Research &
      DevelopmentBudapest,
      Hungary
              
              42,000
              
              Research &
      DevelopmentSyracuse,
      New York
              
              28,000
              
              Manufacturing &
      Research & DevelopmentSingapore
              
              26,000
              
              Research &
      DevelopmentNavi
      Mumbai, India
              
              6,000
              
              Manufacturing




Our
Rensselaer, NY facility and our Aurangabad 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.




23




Not included in
the above chart are our manufacturing and R&D facilities in the U.K., which
we recently obtained through our acquisition of Excelsyn Ltd. in February
2010.




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 2010.




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
regard 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., has been 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,
Wockhardt, and Sun Pharma Global, Inc.  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
U.S. Patent Nos. 5,581,011 and 5,750,703 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.  On September 9, 2009, the Company
filed patent infringement lawsuits in the U.S. District Court in New Jersey
against Dr. Reddy’s Laboratories, Ltd, Dr. Reddy’s Laboratories, Inc., and
Sandoz, Inc. asserting infringement of U.S. Patent No. 7,390,906, seeking
statutory damages.




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 the Company, 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 the Company’s arrangements
with Aventis Pharmaceuticals, the Company 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.




24


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.  Subsequently, Teva Pharmaceuticals acquired Barr
Laboratories.  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 through 2015, along with additional
consideration.  As provided in the settlement, Teva Pharmaceuticals
launched a generic version of Allegra D-12 in November 2009.  The
Company will receive quarterly royalties through July 2010 for the branded
Allegra D-12 equal to the royalties paid for the quarter ended June 30,
2009.  Thereafter, the royalty rate will revert to the rate in effect
prior to the signing of the sub-license amendment and the Company will also
receive a royalty on Teva Pharmaceutivals’s sales of the generic
D-12.  The Company and Aventis Pharmaceuticals have also dismissed
their claims against Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc. and
Sandoz, Inc. without prejudice.  The Company has also dismissed its
claims against DiPharma S.P.A. and DiPharma s.r.l. in Canada without
prejudice.




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
single-entity products.




ITEM
4.  REMOVED AND RESERVED




25




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, 2009First
      Quarter
                  
                  $
                  10.90
                  
                  
                  $
                  7.45Second
      Quarter
                  
                  $
                  10.23
                  
                  
                  $
                  8.23Third
      Quarter
                  
                  $
                  10.07
                  
                  
                  $
                  7.69Fourth
      Quarter
                  
                  $
                  9.40
                  
                  
                  $
                  8.11Year
      ending December 31, 2008First
      Quarter
                  
                  $
                  14.40
                  
                  
                  $
                  9.41Second
      Quarter
                  
                  $
                  14.50
                  
                  
                  $
                  11.23Third
      Quarter
                  
                  $
                  18.99
                  
                  
                  $
                  12.54Fourth
      Quarter
                  
                  $
                  16.24
                  
                  
                  $
                  8.68







Stock
Performance Graph




The
following graph provides a comparison, fromDecember 31, 2004
through December 31, 2009,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,
      2004
                        
                        
                        100.000
                        
                        
                        100.000
                        
                        
                        100.000December 31,
      2005
                        
                        
                        109.066
                        
                        
                        102.135
                        
                        
                        110.123December 31,
      2006
                        
                        
                        94.794
                        
                        
                        112.187
                        
                        
                        107.793December 31,
      2007
                        
                        
                        129.084
                        
                        
                        121.681
                        
                        
                        113.364December 31,
      2008
                        
                        
                        87.433
                        
                        
                        58.639
                        
                        
                        105.476December 31,
      2009
                        
                        
                        81.508
                        
                        
                        84.282
                        
                        
                        118.522




26


(b)   
Holders.




The
number of record holders of our Common Stock as of February 28, 2010 was
approximately 208. We believe that the number of beneficial owners of our Common
Stock at that date was substantially greater than 208.




(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, 2009:




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)
                      
                      
                      1,863,666
                      
                      
                      $
                      19.65
                      
                      
                      
                      2,318,077
                      (2)Equity
      compensation plans not approved by security holders
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Total
                      
                      
                      1,863,666
                      
                      
                      $
                      19.65
                      
                      
                      
                      2,318,077







(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
      2,074,946 shares available under the Stock Option Plans and 243,131 shares
      available under the ESPP.




ITEM
6. SELECTED FINANCIAL DATA.




The
selected financial data shown below for the fiscal years ended December 31,
2009, 2008 and 2007, and as of December 31, 2009 and 2008, 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, 2006 and 2005 and as of December 31, 2007, 2006 and
2005 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”.


27





As of and for the Year Ending December 31,2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005(in thousands, except per share data)Consolidated
      Statement of Operations Data:Contract
      revenue
                
                $
                156,800
                
                
                $
                195,455
                
                
                $
                163,375
                
                
                $
                152,783
                
                
                $
                136,988Recurring
      royalties
                
                
                34,867
                
                
                
                28,305
                
                
                
                27,056
                
                
                
                27,024
                
                
                
                46,918Milestone
      revenue
                
                
                4,750
                
                
                
                5,500
                
                
                
                2,080
                
                
                
                —
                
                
                
                —Total
      revenue
                
                
                196,417
                
                
                
                229,260
                
                
                
                192,511
                
                
                
                179,807
                
                
                
                183,906Cost
      of contract revenue
                
                
                138,739
                
                
                
                146,075
                
                
                
                132,032
                
                
                
                128,610
                
                
                
                112,642Write-down
      of library inventories
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2,063Total
      cost of contract revenue
                
                
                138,739
                
                
                
                146,075
                
                
                
                132,032
                
                
                
                128,610
                
                
                
                114,705Technology
      incentive award
                
                
                3,594
                
                
                
                2,901
                
                
                
                2,784
                
                
                
                2,783
                
                
                
                4,695Research
      and development
                
                
                14,547
                
                
                
                13,129
                
                
                
                12,821
                
                
                
                11,428
                
                
                
                14,468Selling,
      general and administrative
                
                
                38,191
                
                
                
                39,361
                
                
                
                33,250
                
                
                
                31,899
                
                
                
                26,494Property
      and equipment impairment
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                3,554
                
                
                
                —Goodwill
      impairment
                
                
                22,900
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Restructuring
      charge
                
                
                329
                
                
                
                1,833
                
                
                
                273
                
                
                
                2,431
                
                
                
                —Total
      costs and expenses
                
                
                218,300
                
                
                
                203,299
                
                
                
                181,160
                
                
                
                180,705
                
                
                
                160,362(Loss)
      income from operations
                
                
                (21,883
                )
                
                
                25,961
                
                
                
                11,351
                
                
                
                (898
                )
                
                
                23,544Interest
      income, net
                
                
                376
                
                
                
                1,170
                
                
                
                3,192
                
                
                
                2,990
                
                
                
                1,787Other
      (loss) income, net
                
                
                (545
                )
                
                
                759
                
                
                
                (158
                )
                
                
                150
                
                
                
                (185
                )(Loss)
      income before income tax expense
                
                
                (22,052
                )
                
                
                27,890
                
                
                
                14,385
                
                
                
                2,242
                
                
                
                25,146Income
      tax (benefit) expense
                
                
                (5,357
                )
                
                
                7,330
                
                
                
                5,449
                
                
                
                59
                
                
                
                8,825Net
      (loss) income
                
                $
                (16,695
                )
                
                $
                20,560
                
                
                $
                8,936
                
                
                $
                2,183
                
                
                $
                16,321Basic
      (loss) earnings per share
                
                $
                (0.54
                )
                
                $
                0.66
                
                
                $
                0.28
                
                
                $
                0.07
                
                
                $
                0.51Diluted
      (loss) earnings per share
                
                $
                (0.54
                )
                
                $
                0.65
                
                
                $
                0.27
                
                
                $
                0.07
                
                
                $
                0.50Weighted
      average common shares outstanding, basic
                
                
                31,062
                
                
                
                31,389
                
                
                
                32,351
                
                
                
                32,174
                
                
                
                32,044Weighted
      average common shares outstanding, diluted
                
                
                31,062
                
                
                
                31,612
                
                
                
                32,626
                
                
                
                32,427
                
                
                
                32,334Consolidated
      Balance Sheet Data:Cash,
      cash equivalents and investment securities
                
                $
                111,058
                
                
                $
                87,470
                
                
                $
                107,699
                
                
                $
                107,164
                
                
                $
                127,910Property
      and equipment, net
                
                
                166,746
                
                
                
                167,502
                
                
                
                158,028
                
                
                
                153,202
                
                
                
                151,078Working
      capital
                
                
                149,730
                
                
                
                140,890
                
                
                
                138,889
                
                
                
                149,932
                
                
                
                162,805Total
      assets
                
                
                373,692
                
                
                
                390,684
                
                
                
                386,654
                
                
                
                375,493
                
                
                
                383,150Long-term
      debt, excluding current installments
                
                
                13,212
                
                
                
                13,482
                
                
                
                4,080
                
                
                
                13,993
                
                
                
                18,521Total
      stockholders’ equity
                
                
                314,613
                
                
                
                326,680
                
                
                
                334,566
                
                
                
                318,455
                
                
                
                313,061Other
      Consolidated Data:Capital
      expenditures
                
                $
                15,172
                
                
                $
                23,938
                
                
                $
                17,747
                
                
                $
                16,453
                
                
                $
                19,166




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




Overview




We
provide scientific services, products and technologies 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.


28


Our total
revenue for 2009 was $196.4 million, including $156.8 million from our contract
service business, $4.8 million from milestones and $34.9 million from royalties
on sales of Allegra®/Telfast.  We generated $39.1 million in cash from
operations and used $15.2 million in capital expenditures on our facilities and
equipment, primarily related to the expansion and relocation of our facilities
in Bothell, Washington and Budapest, Hungary.  We recorded a net loss
of $16.7 million in 2009, primarily as a result of a $22.9 million goodwill
impairment charge recorded in the fourth quarter. As of December 31, 2009,
we had $111.1 million in cash, cash equivalents and investments and
$13.5 million in bank and other related debt.




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.  In
2008, we purchased an additional large-scale manufacturing site in India and
completed a 10,000 square foot expansion of our Singapore Research
Center.  In 2009, we completed the expansion of our Bothell,
Washington and Budapest, Hungary facilities.  Most recently, in
February 2010, we acquired Excelsyn Ltd, a well recognized leader in providing
chemical development and manufacturing services to the pharmaceutical industry
in Europe.




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 penetration 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
continued efforts of process improvement and cost savings measures, 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.




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.




Beginning
in 2005 and continuing through 2008, we 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 had not
significantly pursued.  In addition to this growth in development and
small scale cGMP manufacturing services, we had also seen an increased trend in
demand for our discovery service as we increased our ability to provide
high-quality services under a variety of business models and cost structures by
incorporating our international facilities.


29


In 2009,
we experienced a decrease in customer delivery patterns and demand caused by the
economic downturn. As the industry emerges from this economic downturn, we are
cautiously optimistic that demand for our discovery and development services
should return.  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.  Additionally, we have recently planned a 40,000 square foot
expansion of this facility.  Our 2008 expansion of our Singapore
Research Center not only increased existing discovery service capabilities, but
also included the introduction of in vitro biology services at the
facility.  We also completed the expansion of our research facilities
in Budapest, Hungary and Bothell, Washington during 2009.




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.  In 2009, we completed the modernization and expansion of
our pilot plant facilities in India.  Additionally, in February 2010,
we acquired Excelsyn Ltd., which will provide us with additional development and
large scale manufacturing services in Europe.  With these acquisitions
and expansion, we have globalized 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
penetration over time.




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 ASC 280,
‘‘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 31,2009
                  
                  
                  2008
                  
                  
                  2007(in thousands)DDS
                  
                  $
                  85,793
                  
                  
                  $
                  113,955
                  
                  
                  $
                  87,063LSM
                  
                  
                  71,007
                  
                  
                  
                  81,500
                  
                  
                  
                  76,312Total
                  
                  $
                  156,800
                  
                  
                  $
                  195,455
                  
                  
                  $
                  163,375




DDS
contract revenue for the year ended December 31, 2009 decreased 24.7% to $85.8
million as compared to the same period in 2008.  This result is
primarily due to a decrease in contract revenue from development and small-scale
manufacturing services of $18.2 million caused by lower demand from specialty
pharma/biotech customers and more competitive pricing in the overall current
economic downturn.  In addition, discovery services contract revenue
decreased $10.0 million due primarily to the completion of revenue recognition
in October 2008 related to the licensing and  funded research
component of our on-going collaboration with BMS and the completion of recognition
of access fees related to the preliminary screening phase of an on-going natural
products collaboration.  The decrease was also due to lower customer
demand for services performed at our international locations, offset in part by
an increase in US medicinal chemistry demand.


30


We
currently expect DDS contract revenue for full year 2010 to increase over
amounts recognized in 2009 primarily due to increases in demand for our
international based services, particularly in the area of integrated drug
programs, as well as our global hybrid offering.




LSM
revenue for the year ended December 31, 2009 decreased 12.9% to $71.0 million
from the same period in 2008 primarily due to decreases in demand from GE
Healthcare and timing of customer requirements of $9.8 million, a decrease of
$6.7 million related to reduced demand for clinical supply materials, as well as
production interruptions at our international facility.  These
decreases were offset in part by an increase in commercial sales of $8.1
million, resulting from an increase in demand for existing commercial products,
along with shipments of an additional commercial product in 2009.




We
currently expect LSM contract revenue for full year 2010 to increase over
amounts recognized in 2009 primarily due to returning demand by our largest
customer to pre-2009 levels, as well as increased demand for our pilot plant
facility in India.




DDS
contract revenue for the year ended December 31, 2008 increased $26.9 million or
30.9% compared to contract revenue for the same period in 2007.  This
was primarily due to an increase in discovery services revenue of $16.1 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. An
additional $3.4 million increase was 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 was 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.




LSM
contract revenue increased by $5.2 million, or 6.8%, for the year ended December
31, 2008 as compared to 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.




Recurring
Royalties




We earn
royalties under our licensing agreement with sanofi-aventis S.A. for the active
ingredient in Allegra®.  Royalties were as follows:




Year Ended December 31,2009
                    
                    2008
                    
                    
                    2007(in thousands)$
                    34,867
                    
                    $
                    28,305
                    
                    
                    $
                    27,056




Recurring
royalties, which are based on the worldwide sales of Allegra®/Telfast, as well
as on sales of sanofi-aventis’ authorized generics, increased $6.6 million for
the year ended December 31, 2009 from the same period in 2008 primarily due to
an increase in international sales of Allegra® by sanofi-aventis as well as the
addition of royalties on the sale of authorized generics by Teva, an increased
royalty rate on one Allegra® product and the recognition of sublicensing fees
received under the amended agreement with sanofi-aventis.




Recurring
royalties increased $1.2 million for the year ended December 31, 2008 from the
same period in 2007.




The
recurring royalties we receive on the sales of Allegra®/Telfast have
historically provided a material portion of our revenues, earnings and operating
cash flows.  As provided in the settlement, Teva Pharmaceuticals
launched a generic version of Allegra D-12® in November 2009.  We will
receive quarterly royalties through July 2010 for the branded Allegra D-12®
equal to the royalties paid forthe quarter ended June
30, 2009.  Thereafter, the royalty rate will revert to the rate in
effect prior to the signing of the sub-license amendment and we will also
receive a royalty on Teva Pharmaceuticals’ sales of  generic Allegra
D-12®.





We currently expect
royalty revenues for 2010 to decrease from amounts recognized in
2009.The decrease is driven by the generic launch of Allegra
D-12, which will begin to impact royalties in the second half of 2010, along
with the potential transition from generics to the OTC market within the US
market by Sanofi-Aventis through their acquisition of Chattem,
Inc.  Although this switch could be positive in the longer term, it
could potentially have a negative impact on our royalties in the short
term.


31





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





Milestone
revenue




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




Year Ended December 31,2009
                    
                    2008
                    
                    
                    2007(in thousands)$
                    4,750
                    
                    $
                    5,500
                    
                    
                    $
                    2,080




During
the year ended December 31, 2009, milestone revenue of $4.8 million was
recognized in conjunction with the Company’s license and research agreement with
BMS.  $4.0 million was recognized as a result of the submission of a
Clinical Trial Application and an additional $0.8 million was recognized for
advancing a third compound into preclinical development.




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 preclinical development under the same agreement with
BMS.




Milestone
revenue received during the year ended December 31, 2007 was 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 preclinical
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 31,2009
                  
                  
                  2008
                  
                  
                  2007(in thousands)DDS
                  
                  $
                  72,867
                  
                  
                  $
                  75,981
                  
                  
                  $
                  63,091LSM
                  
                  
                  65,872
                  
                  
                  
                  70,094
                  
                  
                  
                  68,941Total
                  
                  $
                  138,739
                  
                  
                  $
                  146,075
                  
                  
                  $
                  132,032DDS
      Gross Margin
                  
                  
                  15.1
                  %
                  
                  
                  33.3
                  %
                  
                  
                  27.5
                  %LSM
      Gross Margin
                  
                  
                  7.2
                  %
                  
                  
                  14.0
                  %
                  
                  
                  9.7
                  %Total
      Gross Margin
                  
                  
                  11.5
                  %
                  
                  
                  25.3
                  %
                  
                  
                  19.2
                  %




DDS had
contract revenue gross margin of 15.1% for the year ended December 31, 2009 as
compared to 33.3% for the same period in 2008.  This decrease resulted
from lower demand for these services in relation to our fixed costs, as well as
the completion of the recognition of revenue and access fees associated with the
preliminary screening phase of an on-going natural products collaboration
project at our Bothell Research facility and the completion of the recognition
of revenue from the licensing and funded research components of our on-going
collaboration with BMS.  Additionally, this decrease was further
caused by soft customer demand at our European and Asian
locations.  We currently expect DDS contract margins for 2010 to
moderately improve from amounts recognized in 2009.


32


LSM’s
contract revenue gross margin decreased to 7.2% for the year ended December 31,
2009 as compared to 14.0% for the same period in 2008.  This decrease
is primarily due to decreased plant utilization as a result of order reductions
by our largest customer in 2009, as well as delays in NDA submissions and
approvals for customer materials that were queued up for
production.  Additionally, the decrease was further related to
non-cash inventory write-downs primarily related to slower moving quantities of
a legacy generic product of $1.9 million.  We currently expect LSM
contract margins for 2010 to moderately improve from amounts recognized in
2009.




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
increased contract revenues in relation to the fixed cost components of DDS
contract business.




LSM
contract revenue gross margin increased to 14.0% for the year ended
December 31, 2008 compared to 9.7% in 2007. The increase was 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 through 2013.





Technology
Incentive Award




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




Year Ended December 31,2009
                            
                            2008
                            
                            
                            2007(in thousands)$
                            3,594
                            
                            $
                            2,901
                            
                            
                            $
                            2,784






We expect
technology incentive award expense to generally fluctuate directionally and
proportionately with fluctuations in Allegra® royalties in future
periods.




The
increase in technology incentive award expense for the year ended December 31,
2008 as compared to 2007 was due to the increase in Allegra® royalty revenue and
an increase in awards granted in relation to milestone payments.





Research
and Development




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




Year Ended December 31,2009
                    
                    2008
                    
                    
                    2007(in thousands)$
                    14,547
                    
                    $
                    13,129
                    
                    
                    $
                    12,821




Research
and development expenses increased 10.8% to $14.5 million for the year ended
December 31, 2009 from the same period in 2008. The increase in R&D
expense during the year ended December 31, 2009 was due primarily to
improving the manufacturing process for our generic API products and by the
continued establishment of R&D activities at our Singapore facility,
including in-vitro biology research capabilities.  The increase was
further due to the advancement of our oncology compound through Phase I clinical
trials and the transition of research staff to our MCH-1 obesity research
program upon completion of the funded component of the collaboration with
BMS.




33


We
currently expect R&D expense to remain flat in 2010 from amounts recognized
in 2009, as we manage overall R&D expenditures to move our most advanced
programs forward.




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




We budget
and monitor our R&D 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 they often benefit multiple projects in our technology
platform. Consequently, fully loaded R&D expense summaries by project are
not available.




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. This
increase was 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.




Selling,
General and Administrative




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




Year Ended December 31,2009
                    
                    2008
                    
                    
                    2007(in thousands)$
                    38,191
                    
                    $
                    39,361
                    
                    
                    $
                    33,250




Selling,
general and administrative expenses decreased 3.0% to $38.1 million for the year
ended December 31, 2009 as compared to the same period in 2008.  These
decreases are primarily attributable to overall cost savings measures in 2009,
including incremental cost savings from our restructuring of our Hungary
operations and additionally from a reorganization of our large-scale India
operations.




SG&A
expenses are expected to remain flat or slightly increase in 2010 from amounts
recognized in 2009.




The
increase in selling, general and administrative expenses for the year ended
December 31, 2008 as compared with the year ended December 31, 2007 was
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.




Restructuring
Charges





AMRI
India




In
December 2009, we initiated a restructuring of our AMRI India location which
consisted of closing and consolidating its Mumbai administrative office into its
Hyderabad location as part of our goal to streamline operations and eliminate
duplicate administrative functions.  We recorded a restructuring
charge of approximately $0.4 million in the fourth quarter of 2009, including
lease termination charges of $0.2 million, leasehold improvement abandonment
charges of $0.1 million and administrative costs of less than $0.1
million.




The
restructuring costs are included under the caption “Restructuring charge” in the
consolidated financial statement of operations during 2009 and the restructuring
liabilities are included in “Accounts payable and accrued expenses” on the
consolidated balance sheet at December 31, 2009.






34






Balance at
                    January 1,
                    2009
                  
                  
                  Charges
                  
                  
                  Paid
                    Amounts
                  
                  
                  Foreign
                    Currency
                    Translation
                    Adjustments
                  
                  
                  Balance at
                    December 31,
                    2009Lease
      termination charges
                  
                  $
                  —
                  
                  
                  $
                  215
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  215Leasehold
      improvement abandonment charges
                  
                  
                  —
                  
                  
                  
                  107
                  
                  
                  
                  (107
                  )
                  
                  
                  —
                  
                  
                  
                  —Administrative
      costs associated with restructuring
                  
                  
                  —
                  
                  
                  
                  42
                  
                  
                  
                  (31
                  )
                  
                  
                  —
                  
                  
                  
                  11Total
                  
                  $
                  —
                  
                  
                  $
                  364
                  
                  
                  $
                  (138
                  )
                  
                  $
                  —
                  
                  
                  $
                  226





Lease
termination charges and leasehold improvement abandonment charges relate to
costs associated with exiting the current facility.




The net
cash outflow related to the AMRI India restructuring for the year ended December
31, 2009 was less than $0.1 million.  Anticipated cash outflows
related to the AMRI India restructuring for 2010 is approximately $0.2 million,
which primarily consists of lease termination 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 our long-term strategy for providing Discovery Services in the
European marketplace.  We recorded a restructuring charge of
approximately $1.8 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 termination charges of
approximately $0.5 million and administrative costs associated with the
restructuring plan of $0.1 million.





During
August 2009, we closed and consolidated our Balaton, Hungary facility into the
new facility in Budapest, Hungary as part of our goal to streamline operations
and to consolidate locations, equipment and operating costs.  As a
result of this restructuring, we recorded a restructuring charge of
approximately $0.3 million in the second quarter of 2009, including termination
benefits and personnel realignment costs of approximately $0.1 million, lease
termination charges of $0.2 million and administrative costs associated with the
restructuring plan of less than $0.1 million.




The
restructuring costs are included under the caption “Restructuring charge” in the
consolidated financial statement of operations during the years ended December
31, 2009 and 2008 and the restructuring liabilities are included in “Accounts
payable and accrued expenses” on the consolidated balance sheets at December 31,
2009 and 2008.  The Hungary restructuring activity was recorded in the
DDS operating segment.




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





Balance at
                  January 1, 2009
                
                
                Charges
                
                
                Paid
                  Amounts
                
                
                Reversals
                
                
                Foreign
                  Currency
                  Translation Adjustments
                
                
                Balance at
                  December 31,
                  2009Termination
      benefits and personnel realignment
                
                $
                325
                
                
                $
                134
                
                
                $
                (89
                )
                
                
                (305
                )
                
                $
                (10
                )
                
                $
                55Losses
      on grant contracts
                
                
                266
                
                
                
                —
                
                
                
                (19
                )
                
                
                —
                
                
                
                (1
                )
                
                
                246Lease
      termination charges
                
                
                262
                
                
                
                182
                
                
                
                (150
                )
                
                
                (20
                )
                
                
                1
                
                
                
                275Administrative
      costs associated with restructuring
                
                
                40
                
                
                
                11
                
                
                
                —
                
                
                
                (37
                )
                
                
                (2
                )
                
                
                12Total
                
                $
                893
                
                
                $
                327
                
                
                $
                (258
                )
                
                
                (362
                )
                
                $
                (12
                )
                
                $
                588





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 termination charges relate to
costs associated with exiting the current facility.  The reversals in
2009 were primarily due to actual termination benefit and personnel realignment
costs being lower than initially anticipated at the time of the
restructuring.





The net
cash outflow related to the Hungary restructuring for the year ended December
31, 2009 was $0.3 million.  Anticipated cash outflow related to the
Hungary restructuring for 2010 is approximately $0.6 million, which primarily
consists of lease termination charges and incurring losses on grant
contracts.


35





Goodwill
Impairment




Year Ended December 31,2009
                        
                        2008
                        
                        
                        2007(in thousands)$
                        22,900
                        
                        $
                        —
                        
                        
                        $
                        —





We
recorded a goodwill impairment charge of $22.9 million in our LSM operating
segment due to a change in the implied fair value of the segment’s goodwill to
below its carrying value during the fourth quarter of 2009.  The
change in the fair value of the segment was primarily attributable to the fact
that in the fourth quarter of 2009 several issues occurred in the LSM segment
that significantly impacted our expected future performance.  Two phase III
products that were expected to receive FDA approval were delayed, one by the FDA
requiring more information and one by the customer in an effort to proactively
collect more data before submitting to the FDA.  It was expected throughout
2009 that commercial manufacturing would commence on both these products at the
Rensselaer LSM facility beginning in 2010.  This has now been delayed to
2011 and beyond.  In addition, the company was notified of additional
unexpected reductions in demand for product under the commercial supply
agreement with its largest customer, GE Healthcare.  These additional
unplanned demand reductions in Q4 add an element of risk related to the
Company’s ability to achieve the significant revenues expected from this
contract that are reflected in the future projections for the
segment.




Interest
income, net




Year Ended December 31,(in thousands)
                      
                      2009
                      
                      
                      2008
                      
                      
                      2007Interest
      expense
                      
                      $
                      (270
                      )
                      
                      $
                      (493
                      )
                      
                      $
                      (853
                      )Interest
      income
                      
                      
                      646
                      
                      
                      
                      1,663
                      
                      
                      
                      4,045Interest
      income, net
                      
                      $
                      376
                      
                      
                      $
                      1,170
                      
                      
                      $
                      3,192




Interest
expense decreased to $0.3 million for the year ended December 31, 2009 as
compared with the same period in 2008 due to the decrease of interest rates on
our outstanding debt.




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
income decreased to $0.6 million for the year ended December 31, 2009 as
compared with the same period in 2008.  This decrease was primarily
due to the decrease in interest rates earned on interest bearing investments
during 2009, along with decreases in the average balances of interest bearing
cash and investments held during the year.




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.




Other
(expense) income, net




Year Ended December 31,2009
                          
                          2008
                          
                          
                          2007(in thousands)$
                          (545
                          )
                          $
                          759
                          
                          
                          $
                          (158
                          )




Other
expense for the year ended December 31, 2009 was $0.5 million as compares to
other income of $0.8 million for the same period in 2008.  This
difference is primarily due to a net loss in 2009 associated with our foreign
currency transactions as compared to a net gain in
2008.  Additionally, in 2009, we recorded greater losses on disposal
of fixed assets as compared with 2008.


36




Income
tax (benefit) expense


Year Ended December 31,2009
                      
                      2008
                      
                      
                      2007(in thousands)$
                      (5,357
                      )
                      $
                      7,330
                      
                      
                      $
                      5,449




Income
tax benefit for the year ended December 31, 2009 was $5.4 million as compared to
income tax expense of $7.3 million for the same period in 2008.  The
Company’s effective tax rate of 24.3% of pre-tax loss for the year ended
December 31, 2009 differs from the statutory rate of 35% primarily due to the
establishment of valuation reserves on certain net operating loss carry
forwards.  The Company’s effective tax rate of 26.3% of pre-tax income
for the year ended December 31, 2008 differs from the statutory rate of 35%
primarily due to the recapture of tax credits derived from certain of the
Company’s R&D expenses and the reversal of reserves for uncertain tax
positions, which were resolved in 2008.




We
currently expect our effective tax rate for 2010 to be 30 - 35% of pre-tax
income.




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 was 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 were
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 were resolved in 2008.


37


Liquidity
and Capital Resources




We have
historically funded our business through operating cash flows and proceeds from
borrowings. During 2009, we generated cash of $39.1 million from operating
activities. The sources of operating cash flows were primarily from the receipt
of a $10.0 million in 2009 for a sub-licensing fee from sanofi-aventis in
conjunction with the amended licensing agreement entered into in the fourth
quarter of 2008, a decrease in accounts receivable due to the timing of cash
collections and Allegra royalties.




The
recurring royalties we receive on the sales of Allegra®/Telfast have
historically provided a material portion of our revenues and 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.  Subsequently, Teva Pharmaceutical acquired Barr
Laboratories.  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 through 2015, along with additional
consideration.   Although the launch of a generic version of Allegra
D-12 occurred 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
2009, we used $19.1 million in cash for investing activities, primarily
consisting of $15.2 million for the acquisition of property and equipment and
$3.4 million for net purchases of investment securities.  During 2009,
we generated $0.3 million for financing activities, consisting primarily of $0.5
million provided by proceeds from the sale of common stock, stock option
exercises and stock purchase plan withholdings offset, in part, by $0.2 million
for payments of long-term debt.




Working
capital, defined as current assets less current liabilities, was $149.7 million
as of December 31, 2009, compared to $140.7 million at December 31,
2008.   This increase is primarily due to the receipt of the $10
million upfront sublicense fee received in 2009.





Total
capital expenditures for the year ended December 31, 2009 were $15.2 million as
compared to $23.9 million for the year ended December 31, 2008. Capital
expenditures in 2009 were primarily related to the expansion of our facilities
in Bothell, Washington and in Budapest, Hungary.  For 2010, we expect
to incur $15.0 to $20.0 million in capital expenditures as we expand our
international lab and manufacturing footprint.




We
currently have a revolving line of credit in the amount of $45.0 million which
has a maturity date in June 2013.  The line of credit bears interest
at a variable rate based on our Company’s leverage ratio. As of December 31,
2009, the balance outstanding on the line of credit was $9.7 million, bearing
interest at a rate of 1.31%.  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, 2009
and 2008, we were in compliance with all of the covenants under the credit
facility.




Working
capital was $140.7 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.





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.


38


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.  During 2008, we repurchased a total of 1.7 million
shares of common stock of our company at a total cost of $19.7
million.




We
continue to pursue the expansion of our operations through internal growth and
strategic acquisitions.  In February 2010, the Company acquired
Excelsyn Ltd. a chemical development and large scale manufacturing services
company in North Wales, UK.  Under the terms of the agreement, AMRI
has purchased all of the outstanding shares of Excelsyn for approximately $19
million in cash, which was funded from existing cash and cash
equivalents.  We expect that additional expansion 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,  2009.




Payments
Due by Period (in thousands)




Total
                  
                  
                  Under 1 Year
                  
                  
                  1-3 Years
                  
                  
                  4-5 Years
                  
                  
                  After 5 YearsLong-Term
      Debt (principal)
                  
                  $
                  13,482
                  
                  
                  $
                  270
                  
                  
                  $
                  560
                  
                  
                  $
                  10,262
                  
                  
                  $
                  2,390Operating
      Leases
                  
                  
                  29,897
                  
                  
                  
                  4,027
                  
                  
                  
                  7,898
                  
                  
                  
                  6,726
                  
                  
                  
                  11,246Purchase
      Commitments
                  
                  
                  4,087
                  
                  
                  
                  4,087
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Pension
      Plan Contributions
                  
                  
                  290
                  
                  
                  
                  218
                  
                  
                  
                  72
                  
                  
                  
                  —
                  
                  
                  
                  —




Related
Party Transactions




Technology
Development Incentive Plan




We have 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 2009,
2008 and 2007 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.  In
2007, 2008 and 2009, 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, 2009, 2008 and 2007
are $3.6 million, $2.9 million and $2.8 million,
respectively.  Included in accrued compensation in the accompanying
consolidated balance sheets at both December 31, 2009 and 2008 are unpaid
Technology Development Incentive Compensation awards of approximately $0.8
million and $0.7 million, respectively.


39


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 $0.2 million each year for
services rendered to the Company in 2009, 2008 and 2007.




Critical
Accounting Estimates




Accounting
estimates and assumptions discussed in this section are those that we consider
to be the most critical to an understanding of our financial statements because
they inherently involve significant judgments and uncertainties. All of these
estimates reflect our best judgment and are based on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances.   Under different assumptions or conditions, it is
reasonably possible that the judgments and estimates described below could
change, which may result in future impairments of inventories, goodwill, and
long-lived assets, as well as increased pension liabilities, the establishment
of valuation allowances on deferred tax assets and increased tax liabilities,
among other effects. Also see Note 1, Summary of Significant Accounting
Policies, in Part II, Item 8. “Financial Statements and Supplementary Data” of
this report, which discusses the significant accounting policies that we have
selected from acceptable alternatives.





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 valued at the
lower of cost or market.  We regularly review inventories on hand and
record a charge for slow-moving and obsolete inventory, inventory not meeting
quality standards and inventory subject to expiration. The charge for
slow-moving and obsolete inventory is based on current estimates of future
product demand, market conditions and related management judgment. Any
significant unanticipated changes in future product demand or market conditions
that vary from current expectations could have an impact on the value of
inventories.  Total inventories,recorded on our consolidated balance
sheet at December 31, 2009 and 2008 were $25.1 million and $28.7 million,
respectively.  We recorded charges to reduce obsolete inventory
balances of $4.6 million, $4.0 million and $2.9 million for the years ended
December 31, 2009, 2008 and 2007, respectively.





Goodwill




We test
goodwill for impairment annually and whenever events or circumstances make it
more likely than not that the fair value of a reporting unit has fallen below
its carrying amount.  Factors we consider 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, as well as to the aggregate of
      reporting unit fair values.





Determining
whether an impairment has occurred requires valuation of the respective
reporting unit, which is estimated based on a variety of
techniques.  In applying this methodology, we rely on a number of
factors and assumptions, including actual operating results, future business
plans, economic projections, market data, and discount rates.





If this
analysis indicates goodwill is impaired, measuring the impairment requires a
fair value estimate of each identified and previously unidentified tangible and
intangible asset. In this case, we supplement the cash flow approach discussed
above, including the use of independent appraisals, if deemed
necessary.  Total goodwill recorded on our consolidated balance sheet
at December 31, 2009 was $17.6 million.  A goodwill impairment charge
of $22.9 million was recorded in our LSM segment in the fourth quarter of 2009
as a result of our annual goodwill impairment testing, which determined a
decline in fair value to below its carrying value.





Long-Lived
Assets




We review
long-lived assets for impairment whenever events or changes in circumstances
indicate that the related carrying amounts 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;




40




·
            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.





Determining
whether an impairment has occurred typically requires various estimates and
assumptions, including determining which undiscounted cash flows are directly
related to the potentially impaired asset, the useful life over which cash flows
will occur, their amount, and the asset’s residual value, if any. In turn,
measurement of an impairment loss requires a determination of fair value, which
is based on the best information available. We derive the required undiscounted
cash flow estimates from our historical experience, internal business plans and
our understanding of current marketplace valuation estimates. To determine fair
value, we use our internal cash flow estimates discounted at an appropriate
interest rate, quoted market prices when available and independent appraisals,
as appropriate.





Pension
and Postretirement Benefit Plans




We
utilize actuarial models to measure pension and postretirement benefit
obligations and related effects on operations. Three assumptions – discount
rate, expected return on assets, and trends in healthcare costs– are important
elements of plan expense and asset/liability measurement. We evaluate these
critical assumptions at least annually. We periodically evaluate other
assumptions involving demographic factors, such as retirement age, mortality and
turnover, and update them to reflect our experience and expectations for the
future. Actual results in any given year will often differ from actuarial
assumptions because of economic and other factors.





Accumulated
and projected benefit obligations are expressed as the present value of future
cash payments. We discount those cash payments using the weighted average of
market-observed yields for high quality fixed income securities with maturities
that correspond to the payment of benefits. Lower discount rates increase
present values; higher discount rates decrease present values.





Our
discount rates for our pension plan at December 31, 2009, 2008 and 2007
were 5.65%, 6.25% and 6.25%, respectively, reflecting market interest
rates.





To
determine the expected long-term rate of return on pension plan assets, we
consider current and expected asset allocations, as well as historical and
expected returns on various categories of plan assets. In developing future
return expectations for our pension plan’s assets, we evaluate general market
trends as well as key elements of asset class returns such as expected earnings
growth, yields and spreads across a number of potential scenarios.  In
2009, assets in our pension plan earned 23.1% and posted cumulative returns of
(3.66%), 1.7%, and 3.68% for the three-, five- and eight-year periods ended
December 31, 2009, respectively. Assets in our pension plan declined 31.4% in
2008, and posted cumulative returns of (6.0%), (0.1%) and 1.5% for the three-,
five- and nine-year periods ended December 31, 2008, respectively. Based on our
analysis of future expectations of asset performance, past return results, and
our current and expected asset allocations, we have assumed an 8.0% long-term
expected return on those assets.





Healthcare
cost trend rates have a significant effect on the amounts reported for our
postretirement welfare plan.  Due to the fact that no retirees are
currently covered by the Postretirement Welfare Plan, survey data is reviewed
for industry averages.  Per our review, a trend of a 10% annual cost
increase grading to an ultimate rate of 5% is within industry
norms.




Income
Taxes




Our
annual tax rate is based on our income, statutory tax rates and tax planning
opportunities available to us in the various jurisdictions in which we operate.
Tax laws are complex and subject to different interpretations by the taxpayer
and respective governmental taxing authorities. Significant judgment is required
in determining our tax expense and in evaluating our tax positions, including
evaluating uncertainties and the need for valuation allowances. We review our
tax positions quarterly and adjust the balances as new information becomes
available. Our income tax rate is significantly affected by the tax rates on our
international operations, each of which are subject to local country tax laws
and regulations.





Deferred
income tax assets represent amounts available to reduce income taxes payable on
taxable income in future years. Such assets arise because of temporary
differences between the financial reporting and tax bases of assets and
liabilities, as well as from net operating loss and tax credit carry-forwards.
We evaluate the recoverability of these future tax deductions and credits by
assessing the adequacy of future expected taxable income from all sources,
including reversal of taxable temporary differences, forecasted operating
earnings and available tax planning strategies. These sources of income
inherently rely heavily on estimates.  To the extent we do not
consider it more likely than not that a deferred tax asset will be recovered, a
valuation allowance is established.  We use our historical experience
and our short and long-range business forecasts to provide insight. Further, our
global business structure gives us the opportunity to employ various prudent and
feasible tax planning strategies to facilitate the recoverability of future
deductions. Amounts recorded for deferred tax assets, net of valuation
allowances, were $21.2 million and $9.7 million at December 31, 2009 and
2008, respectively.  Such 2009 year-end amounts are expected to be
fully recoverable within the applicable statutory expiration
periods.




41





Loss
Contingencies




Other
loss contingencies are recorded as liabilities when it is probable that a
liability has been incurred and the amount of the loss is reasonably estimable.
Disclosure is required when there is a reasonable possibility that the ultimate
loss will materially exceed the recorded provision. Contingent liabilities are
often resolved over long time periods. Estimating probable losses requires
analysis of multiple forecasts that often depend on judgments about potential
actions by third parties such as regulators.





Recent
Accounting Pronouncements




In
December 2009, the FASB issued ASC 860-10 “Accounting for Transfers of Financial
Assets” intends to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial statements about a transfer of  financial assets; the
effects of a transfer on its financial position, financial performance, and cash
flows; and a transferor’s continuing involvement, if any, in transferred
financial assets..  Effective as of the beginning of the first annual
reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period, and for interim and annual reporting
periods thereafter, Earlier application is prohibited.  This ASC must
be applied to transfers occurring on or after the effective
date.   The Company is currently evaluating the impact of this
statement on its financial statements.





In
October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue
Arrangements”, which addresses how revenues should be allocated among all
products and services included in our sales arrangements. It establishes a
selling price hierarchy for determining the selling price of each product or
service, with vendor-specific objective evidence (“VSOE”) at the highest level,
third-party evidence of VSOE at the intermediate level, and a best estimate at
the lowest level. It replaces “fair value” with “selling price” in revenue
allocation guidance. It also significantly expands the disclosure requirements
for such arrangements. ASU 2009-13 will be effective prospectively for sales
entered into or materially modified in fiscal years beginning on or after June
15, 2010.  The FASB permits early adoption of ASU 2009-13, applied
retrospectively, to the beginning of the year of adoption.  The
Company is currently evaluating the impact on its financial
statements.





In June
2009, the FASB issued ASC 810, “Amendments to FASB Interpretation
No. 46R.” This revises FIN 46R by eliminating the exemption for
qualifying special purpose entities, by establishing a new approach for
determining who should consolidate a variable-interest entity and by changing
when it is necessary to reassess who should consolidate a variable-interest
entity.  This statement is effective for annual reporting periods
beginning after November 15, 2009.  The Company is currently
evaluating the impact of this statement on its financial
statements.




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 $57.5 million. The potential loss in fair value resulting from a
hypothetical 10% adverse change in quoted foreign currency exchange rates
amounts to approximately $5.8 million. Furthermore, related to foreign currency
transactions, the Company has exposure to non-functional currency balances
totaling approximately $7.6 million. This amount includes, on an absolute basis,
exposures to foreign currency assets and liabilities. On a net basis, the
Company had approximately $3.3 million of foreign currency assets as of
December 31, 2009.  As currency rates change, these
non-functional currency balances are revalued, and the corresponding adjustment
is recorded in the consolidated statement of operations. A hypothetical change
of 10% in currency rates could result in an adjustment to the consolidated
statement of operations of approximately $0.3 million.




42




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 $3.8 million industrial development authority bonds.  The
potential loss in 2010 cash flows from a 10% adverse change in quoted interest
rates would approximate fourteen thousand dollars.




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, 2009.




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, 2009 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,
2009 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, 2009 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial
reporting.




43




ITEM
      9B.
              OTHER
      INFORMATION




None.


44


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 2, 2010 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 2, 2010 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 2, 2010 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 2, 2010 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 2, 2010 is incorporated herein by reference.


45


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 Operations for the Years Ended December 31, 2009, 2008 and
      2007
                  
                  F-4Consolidated
      Balance Sheets at December 31, 2009 and 2008
                  
                  F-5Consolidated
      Statements of Stockholders’ Equity and Comprehensive (Loss) Income for the
      Years Ended December 31, 2009, 2008 and 2007
                  
                  F-6Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
      2007
                  
                  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-40




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).




46




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).


47





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, 2005, 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) (incorporated
      herein by reference to Exhibit 10.25 to the company’s Annual Report on
      Form 10-K for the fiscal year ended December 31, 2008, File No.
      000-25323).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) (incorporated
      herein by reference to Exhibit 10.26 to the company’s Annual Report on
      Form 10-K for the fiscal year ended December 31, 2008, File No.
      000-25323).10.27*
              
              Employment
      Agreement, dated August 5, 2008, between Albany Molecular Research, Inc.
      and Steven R. Hagen, Ph.D. (incorporated
      herein by reference to Exhibit 10.27 to the company’s Annual Report on
      Form 10-K for the fiscal year ended December 31, 2008, File No.
      000-25323).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) (incorporated
      herein by reference to Exhibit 10.28 to the company’s Annual Report on
      Form 10-K for the fiscal year ended December 31, 2008, File No.
      000-25323).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




48


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 12, 2010
              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
      12, 2010Thomas
      E. D’Ambra, Ph.D.
                                      
                                      Officer
      and Director (Principal Executive Officer)/s/ MarkT. Frost
                                      
                                      Senior
      Vice President, Administration, Chief Financial Officer and
      Treasurer
                                      
                                      March
      12, 2010Mark
      T. Frost
                                      
                                      (Principal
      Financial and Accounting Officer)/s/ PaulS. Anderson
                                      
                                      Director
                                      
                                      March
      12, 2010Paul
      S. Anderson, Ph.D./s/Veronica G.H.
      Jordan
                                      
                                      Director
                                      
                                      March
      12, 2010Veronica
      G.H. Jordan, Ph.D./s/ KevinO’Connor
                                      
                                      Director
                                      
                                      March
      12, 2010Kevin
      O’Connor/s/ ArthurJ. Roth
                                      
                                      Director
                                      
                                      March
      12, 2010Arthur
      J. Roth/s/Una S.
      Ryan
                                      
                                      Director
                                      
                                      March
      12, 2010Una
      S. Ryan, Ph.D., O.B.E./s/Anthony P.
      Tartaglia
                                      
                                      Director
                                      
                                      March
      12, 2010Anthony
      P. Tartaglia, M.D.


49


INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




ALBANY
MOLECULAR RESEARCH, INC.





PageReports
      of Independent Registered Public Accounting Firm
                  
                  F-2Consolidated
      Statements of Operations for the Years Ended December 31, 2009, 2008
      and 2007
                  
                  F-4Consolidated
      Balance Sheets at December 31, 2009 and 2008
                  
                  F-5Consolidated
      Statements of Stockholders’ Equity and Comprehensive (Loss) Income for the
      Years Ended December 31, 2009, 2008 and 2007
                  
                  F-6Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009, 2008
      and 2007
                  
                  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, 2009 and 2008,
and the related consolidated statements of operations, stockholders’ equity and
comprehensive (loss) income, and cash flows for each of the years in the
three-year period ended December 31, 2009. 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, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2009, 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.





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, 2009, 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,
2010, 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,
2010


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, 2009, 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, 2009, 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, 2009 and 2008, the
related consolidated statements of operations, stockholders’ equity and
comprehensive (loss) income, and cash flows for each of the years in the
three-year period ended December 31, 2009, and the related financial statement
schedule, and our report dated March 12, 2010, expressed an unqualified opinion
on those consolidated financial statements and related financial statement
schedule.




/s/KPMG
LLP


Albany,
New York


March 12,
2010


F-3


ALBANY
MOLECULAR RESEARCH, INC.




CONSOLIDATED
STATEMENTS OF OPERATIONS




Years
Ended December 31, 2009, 2008 and 2007




(Dollars
in thousands, except per share amounts)




Year Ended December 31,2009
                
                
                2008
                
                
                2007Contract
      revenue
                
                $
                156,800
                
                
                $
                195,455
                
                
                $
                163,375Recurring
      royalties
                
                
                34,867
                
                
                
                28,305
                
                
                
                27,056Milestone
      revenue
                
                
                4,750
                
                
                
                5,500
                
                
                
                2,080Total
      revenue
                
                
                196,417
                
                
                
                229,260
                
                
                
                192,511Cost
      of contract revenue
                
                
                138,739
                
                
                
                146,075
                
                
                
                132,032Technology
      incentive award
                
                
                3,594
                
                
                
                2,901
                
                
                
                2,784Research
      and development
                
                
                14,547
                
                
                
                13,129
                
                
                
                12,821Selling,
      general and administrative
                
                
                38,191
                
                
                
                39,361
                
                
                
                33,250Goodwill
      impairment
                
                
                22,900
                
                
                
                —
                
                
                
                —Restructuring
      charge
                
                
                329
                
                
                
                1,833
                
                
                
                273Total
      costs and expenses
                
                
                218,300
                
                
                
                203,299
                
                
                
                181,160(Loss)
      income from operations
                
                
                (21,883
                )
                
                
                25,961
                
                
                
                11,351Interest
      expense
                
                
                (270
                )
                
                
                (493
                )
                
                
                (853
                )Interest
      income
                
                
                646
                
                
                
                1,663
                
                
                
                4,045Other
      (expense) income, net
                
                
                (545
                )
                
                
                759
                
                
                
                (158
                )(Loss)
      income before income tax (benefit) expense
                
                
                (22,052
                )
                
                
                27,890
                
                
                
                14,385Income
      tax (benefit) expense
                
                
                (5,357
                )
                
                
                7,330
                
                
                
                5,449Net
      (loss) income
                
                $
                (16,695
                )
                
                $
                20,560
                
                
                $
                8,936Basic
      (loss) earnings per share
                
                $
                (0.54
                )
                
                $
                0.66
                
                
                $
                0.28Diluted
      (loss) earnings per share
                
                $
                (0.54
                )
                
                $
                0.65
                
                
                $
                0.27




See
Accompanying Notes to Consolidated Financial Statements.


F-4


ALBANY
MOLECULAR RESEARCH, INC.




CONSOLIDATED
BALANCE SHEETS




December 31,
2009 and 2008




(In
thousands, except per share amounts)




December 31,2009
                
                
                2008AssetsCurrent
      assets:Cash
      and cash equivalents
                
                $
                80,953
                
                
                $
                60,400Investment
      securities
                
                
                30,105
                
                
                
                27,070Accounts
      receivable (net of allowance for doubtful accounts of $425 at
      December 31, 2009 and $621 at December 31, 2008)
                
                
                23,616
                
                
                
                38,529Royalty
      income receivable
                
                
                7,101
                
                
                
                6,670Inventory
                
                
                25,143
                
                
                
                28,670Unbilled
      services
                
                
                58
                
                
                
                159Prepaid
      expenses and other current assets
                
                
                8,780
                
                
                
                8,944Deferred
      income taxes
                
                
                4,708
                
                
                
                4,073Total
      current assets
                
                
                180,464
                
                
                
                174,515Property
      and equipment, net
                
                
                166,746
                
                
                
                167,502Goodwill
                
                
                17,551
                
                
                
                40,272Intangible
      assets and patents, net
                
                
                2,461
                
                
                
                2,018Equity
      investment in unconsolidated affiliates
                
                
                956
                
                
                
                956Deferred
      income taxes
                
                
                1,166
                
                
                
                —Other
      assets
                
                
                4,348
                
                
                
                5,421Total
      assets
                
                $
                373,692
                
                
                $
                390,684Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Accounts
      payable and accrued expenses
                
                $
                15,277
                
                
                $
                16,480Deferred
      revenue and licensing fees
                
                
                10,777
                
                
                
                7,300Accrued
      compensation
                
                
                3,091
                
                
                
                6,084Accrued
      pension benefits
                
                
                218
                
                
                
                500Income
      taxes payable
                
                
                1,101
                
                
                
                3,198Current
      installments of long-term debt
                
                
                270
                
                
                
                260Total
      current liabilities
                
                
                30,734
                
                
                
                33,822Long-term
      liabilities:Long-term
      debt, excluding current installments
                
                
                13,212
                
                
                
                13,482Deferred
      rent
                
                
                1,354
                
                
                
                1,156Deferred
      licensing fees
                
                
                7,143
                
                
                
                —Deferred
      income taxes
                
                
                —
                
                
                
                9,142Pension
      and postretirement benefits
                
                
                6,445
                
                
                
                6,211Environmental
      liabilities
                
                
                191
                
                
                
                191Total
      liabilities
                
                
                59,079
                
                
                
                64,004Commitments
      and contingencies (notes 12 and 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, 35,467 shares
      issued in 2009 and 35,278 shares issued in 2008
                
                
                355
                
                
                
                353Additional
      paid-in capital
                
                
                201,667
                
                
                
                199,020Retained
      earnings
                
                
                174,121
                
                
                
                190,816Accumulated
      other comprehensive loss, net
                
                
                (4,642
                )
                
                
                (6,621
                )371,501
                
                
                
                383,568Less,
      treasury shares at cost, 3,825 shares in 2009 and
      2008
                
                
                (56,888
                )
                
                
                (56,888
                )Total
      stockholders’ equity
                
                
                314,613
                
                
                
                326,680Total
      liabilities and stockholders’ equity
                
                $
                373,692
                
                
                $
                390,684




See
Accompanying Notes to Consolidated Financial Statements.


F-5


ALBANY
MOLECULAR RESEARCH, INC.




CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE (LOSS) INCOME




Years
Ended December 31, 2009, 2008 and 2007




(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
                                                              
                                                              
                                                              (Loss) IncomeBalances
      at January 1, 2007
                                                              
                                                              $
                                                              —
                                                              
                                                              
                                                              
                                                              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 loss, 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 loss, 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
                                                              )
                                                              
                                                              $
                                                              326,680Net
      loss
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (16,695
                                                              )
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (16,695
                                                              )
                                                              
                                                              $
                                                              (16,695
                                                              )Unrealized
      loss on investment securities, available-for-sale, net of
      taxes
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (10
                                                              )
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (10
                                                              )
                                                              
                                                              
                                                              (10
                                                              )Pension
      and other postretirement benefits:Amortization
      of actuarial loss, net of taxes
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              29
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              29
                                                              
                                                              
                                                              
                                                              29Current
      year actuarial gain, net of taxes
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              16
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              16
                                                              
                                                              
                                                              
                                                              16Foreign
      currency translation gain
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              1,944
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              1,944
                                                              
                                                              
                                                              
                                                              1,944Total
      other comprehensive income
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              1,979Total
      comprehensive loss
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              $
                                                              (14,716
                                                              )Tax
      benefit from exercise of stock options
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              5
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              5Share-based
      payment expense
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              765
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              765Issuance
      of restricted stock
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              165
                                                              
                                                              
                                                              
                                                              2
                                                              
                                                              
                                                              
                                                              (2
                                                              )
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              —Amortization
      of unearned compensation - restricted stock
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              1,369
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              1,369Forfeiture
      of unearned compensation - restricted stock
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (41
                                                              )
                                                              
                                                              
                                                              (1
                                                              )
                                                              
                                                              
                                                              1
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              —Issuance
      of common stock in connection with stock option  plan and
      ESPP
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              65
                                                              
                                                              
                                                              
                                                              1
                                                              
                                                              
                                                              
                                                              509
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              510Balances
      at December 31, 2009
                                                              
                                                              $
                                                              —
                                                              
                                                              
                                                              
                                                              35,467
                                                              
                                                              
                                                              
                                                              355
                                                              
                                                              
                                                              
                                                              201,667
                                                              
                                                              
                                                              
                                                              174,121
                                                              
                                                              
                                                              
                                                              (4,642
                                                              )
                                                              
                                                              
                                                              (3,825
                                                              )
                                                              
                                                              $
                                                              (56,888
                                                              )
                                                              
                                                              
                                                              314,613





See
Accompanying Notes to Consolidated Financial Statements.


F-6


ALBANY
MOLECULAR RESEARCH, INC.
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
  Years
Ended December 31, 2009, 2008 and 2007
  (In
thousands)




Year ended December 31,2009
                        
                        
                        2008
                        
                        
                        2007Operating
      ActivitiesNet
      (loss) income
                        
                        $
                        (16,695
                        )
                        
                        $
                        20,560
                        
                        
                        $
                        8,936Adjustments
      to reconcile net (loss) income to net cash provided by operating
      activities:Depreciation
      and amortization
                        
                        
                        16,824
                        
                        
                        
                        17,784
                        
                        
                        
                        16,816Net
      amortization of premiums on securities
                        
                        
                        305
                        
                        
                        
                        238
                        
                        
                        
                        174Write
      down for obsolete inventories
                        
                        
                        4,586
                        
                        
                        
                        3,975
                        
                        
                        
                        2,891Property,
      plant and equipment impairment
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (31
                        )(Recovery)
      provision for doubtful accounts
                        
                        
                        (166
                        )
                        
                        
                        480
                        
                        
                        
                        27Forgiven
      principal on notes receivable
                        
                        
                        125
                        
                        
                        
                        69
                        
                        
                        
                        89Deferred
      income tax (benefit) expense
                        
                        
                        (10,980
                        )
                        
                        
                        1,535
                        
                        
                        
                        1,350Impairment
      of goodwill
                        
                        
                        22,900
                        
                        
                        
                        —
                        
                        
                        
                        —Loss
      on disposal of property, plant and equipment
                        
                        
                        753
                        
                        
                        
                        274
                        
                        
                        
                        —Stock-based
      compensation expense
                        
                        
                        2,134
                        
                        
                        
                        1,696
                        
                        
                        
                        1,304Decrease
      (increase) in operating assets, net of business
    combinations:Accounts
      receivable
                        
                        
                        15,079
                        
                        
                        
                        (10,961
                        )
                        
                        
                        6,727Royalty
      income receivable
                        
                        
                        (431
                        )
                        
                        
                        (584
                        )
                        
                        
                        139Unbilled
      services
                        
                        
                        101
                        
                        
                        
                        100
                        
                        
                        
                        (259
                        )Inventory
                        
                        
                        (1,059
                        )
                        
                        
                        (10,024
                        )
                        
                        
                        (2,105
                        )Prepaid
      expenses and other assets
                        
                        
                        1,057
                        
                        
                        
                        (5,804
                        )
                        
                        
                        (2,392
                        )(Decrease)
      increase in operating liabilities, net of business
      combinations:Accounts
      payable, accrued compensation and accrued expenses
                        
                        
                        (4,196
                        )
                        
                        
                        4,735
                        
                        
                        
                        (197
                        )Income
      taxes payable
                        
                        
                        (2,097
                        )
                        
                        
                        1,409
                        
                        
                        
                        356Deferred
      revenue and licensing fees
                        
                        
                        10,620
                        
                        
                        
                        378
                        
                        
                        
                        (1,363
                        )Pension
      and postretirement benefits
                        
                        
                        28
                        
                        
                        
                        (476
                        )
                        
                        
                        (750
                        )Deferred
      rent
                        
                        
                        198
                        
                        
                        
                        1,156
                        
                        
                        
                        —Environmental
      liability
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (45
                        )Net
      cash provided by operating activities
                        
                        
                        39,086
                        
                        
                        
                        26,540
                        
                        
                        
                        31,667Investing
      ActivitiesPurchases
      of investment securities
                        
                        
                        (19,549
                        )
                        
                        
                        (25,265
                        )
                        
                        
                        (67,665
                        )Proceeds
      from sales and maturities of investment securities
                        
                        
                        16,191
                        
                        
                        
                        60,262
                        
                        
                        
                        86,476Purchase
      of business, net of cash acquired
                        
                        
                        (12
                        )
                        
                        
                        (1,729
                        )
                        
                        
                        (11,898
                        )Purchases
      of property, plant and equipment
                        
                        
                        (15,172
                        )
                        
                        
                        (23,938
                        )
                        
                        
                        (17,747
                        )Payments
      for patent applications and other costs
                        
                        
                        (693
                        )
                        
                        
                        (423
                        )
                        
                        
                        (516
                        )Proceeds
      from disposal of property, plant and equipment
                        
                        
                        143
                        
                        
                        
                        71
                        
                        
                        
                        1,565Net
      cash (used in) provided by investing activities
                        
                        
                        (19,092
                        )
                        
                        
                        8,978
                        
                        
                        
                        (9,785
                        )Financing
      ActivitiesPurchases
      of treasury stock
                        
                        
                        —
                        
                        
                        
                        (19,717
                        )
                        
                        
                        —Principal
      payments on long-term debt
                        
                        
                        (260
                        )
                        
                        
                        (9,643
                        )
                        
                        
                        (4,554
                        )Borrowings
      on long-term debt
                        
                        
                        —
                        
                        
                        
                        9,405
                        
                        
                        
                        —Tax
      benefit of stock option exercises
                        
                        
                        5
                        
                        
                        
                        56
                        
                        
                        
                        121Proceeds
      from exercise of options and Employee Stock Purchase Plan
                        
                        
                        510
                        
                        
                        
                        1,285
                        
                        
                        
                        1,437Net
      cash provided by (used in) financing activities
                        
                        
                        255
                        
                        
                        
                        (18,614
                        )
                        
                        
                        (2,996
                        )Effect
      of exchange rate changes on cash flows
                        
                        
                        304
                        
                        
                        
                        (2,010
                        )
                        
                        
                        496Increase
      in cash and cash equivalents
                        
                        
                        20,553
                        
                        
                        
                        14,894
                        
                        
                        
                        19,382Cash
      and cash equivalents at beginning of period
                        
                        
                        60,400
                        
                        
                        
                        45,506
                        
                        
                        
                        26,124Cash
      and cash equivalents at end of period
                        
                        $
                        80,953
                        
                        
                        $
                        60,400
                        
                        
                        $
                        45,506Supplemental
      disclosure of non-cash investing and financing activities:Unrealized
      (loss) gain on securities available-for-sale, net of tax
                        
                        $
                        (10
                        )
                        
                        $
                        67
                        
                        
                        $
                        83Unrealized
      loss on swap contract, net of tax
                        
                        $
                        —
                        
                        
                        $
                        (5
                        )
                        
                        $
                        (92
                        )Actuarial
      loss (gain) on pension and other postretirement liability, net of
      tax
                        
                        $
                        45
                        
                        
                        $
                        (4,502
                        )
                        
                        $
                        417Issuance
      of restricted stock
                        
                        $
                        1,384
                        
                        
                        $
                        2,041
                        
                        
                        $
                        2,035Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                        
                        $
                        270
                        
                        
                        $
                        493
                        
                        
                        $
                        856Income
      taxes
                        
                        $
                        7,792
                        
                        
                        $
                        2,906
                        
                        
                        $
                        5,828




F-7




ALBANY
MOLECULAR RESEARCH, INC.




CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)




Years
Ended December 31, 2009, 2008 and 2007




(In
thousands)


In 2008,
the Company, through a wholly-owned subsidiary, completed the purchase of
FineKem, which is now a part of AMRI India, a manufacturing facility located in
Aurangabad, India for an aggregate purchase price of $1,713.  In
conjunction with the acquisition, assets were acquired and liabilities were
assumed as follows:




Fair
      value of assets acquired
                
                $
                1,917Cash
      paid for net assets
                
                
                (204
                )Liabilities
      assumed
                
                $
                1,713





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,
2009 and 2008




(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
operations 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, 2009 and 2008 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 terms and/or 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 FASB’s
Accounting Standards Codification (“ASC”) 605-25, “Revenue Arrangements with
Multiple Deliverables,” and ASC Topic 13 (formerly Staff Accounting Bulletin
(“SAB”) 104), “Revenue Recognition”. Allocation of revenue to individual
elements that qualify for separate accounting is based on the 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,
2009 and 2008
  (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 reasons.  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 Royalties 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, with the exception of Allegra D-12 which has a fixed royalty
amount through July 2010.




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,
2009 and 2008





(In
thousands, except per share amounts)





Investment
Securities:




Investment
securities are classified as available-for-sale and 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, 2009 and 2008, the Company’s Investments in Securities in the
current assets section of the consolidated balance sheets include $2,300 and
$2,400, 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.  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 an equity investment in a company that has operations in areas
within its strategic focus.  This investment is in a leveraged
start-up company and was 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:




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:




·
            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




F-11


ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)





·
            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:




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, 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




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.




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.


F-12


ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)





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.




Additionally,
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.




Stock-Based
Compensation:




The
Company records compensation expense associated with stock options and other
equity based compensation in accordance with ASC 718 “Compensation – Stock
Compensation”.  The Company 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 and
recognizes expense over the applicable vesting period.




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:




2009
                  
                  
                  2008
                  
                  
                  2007Expected
      life in years:
                  
                  
                  5
                  
                  
                  
                  5
                  
                  
                  
                  5Interest
      rate
                  
                  
                  1.98
                  %
                  
                  
                  2.63
                  %
                  
                  
                  4.24
                  %Volatility
                  
                  
                  48
                  %
                  
                  
                  43
                  %
                  
                  
                  39
                  %Dividend
      yield
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —




Earnings
Per Share:




The
Company computes net (loss) earnings per share in accordance with ASC 260-20
“Earnings per share”.  Basic (loss) earnings per share is computed by
dividing net (loss) 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).


F-13


ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)





The
following table provides basic and diluted earnings per share
calculations:




Year Ended December 31, 2009
                                          
                                          Year Ended December 31, 2008
                                          
                                          Year Ended December 31, 2007Net
                                            Income
                                          
                                          Weighted
                                            Average
                                            Shares
                                          
                                          Per Share
                                            Amount
                                          
                                          Net
                                            Income
                                          
                                          Weighted
                                            Average
                                            Shares
                                          
                                          Per Share
                                            Amount
                                          
                                          Net
                                            Income
                                          
                                          Weighted
                                            Average
                                            Shares
                                          
                                          Per Share
                                            AmountBasic
      (loss) earnings per share
                                          
                                          $
                                          (16,695
                                          )
                                          
                                          31,062
                                          
                                          $
                                          (0.54
                                          )
                                          $
                                          20,560
                                          
                                          
                                          31,389
                                          
                                          $
                                          0.66
                                          
                                          $
                                          8,936
                                          
                                          
                                          32,351
                                          
                                          $
                                          0.28Dilutive
      effect of stock options
                                          
                                          
                                          —
                                          
                                          
                                          —
                                          
                                          
                                          —
                                          
                                          
                                          —
                                          
                                          
                                          40
                                          
                                          
                                          —
                                          
                                          
                                          —
                                          
                                          
                                          85
                                          
                                          
                                          —Dilutive
      effect of restricted stock
                                          
                                          
                                          —
                                          
                                          
                                          —
                                          
                                          
                                          —
                                          
                                          
                                          —
                                          
                                          
                                          183
                                          
                                          
                                          (0.01
                                          )
                                          
                                          —
                                          
                                          
                                          190
                                          
                                          
                                          (0.01
                                          )Diluted
      (loss) earnings per share
                                          
                                          $
                                          (16,695
                                          )
                                          
                                          31,062
                                          
                                          $
                                          (0.54
                                          )
                                          $
                                          20,560
                                          
                                          
                                          31,612
                                          
                                          $
                                          0.65
                                          
                                          $
                                          8,936
                                          
                                          
                                          32,626
                                          
                                          $
                                          0.27





The
weighted average number of anti-dilutive options outstanding were 2,049, 1,573
and 1,895 for the years ended December 31, 2009, 2008 and 2007,
respectively, and were excluded from the calculation of diluted earnings per
share.




Restructuring
Charges:




The
Company accounts for its restructuring costs as required by ASC 420-10
“Accounting for Costs Associated with Exit or Disposal Activities” which
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.




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 $1,713 included cash payments
totaling $1,665 and capitalized costs related to the acquisition, primarily
professional fees, of $48.




The
following table summarizes the final 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
                  
                  
                  1,154Total
      assets acquired
                  
                  $
                  1,917Liabilities
      AssumedAccounts
      payable and accrued expenses
                  
                  $
                  204Total
      liabilities assumed
                  
                  $
                  204Net
      assets acquired
                  
                  $
                  1,713




F-14


ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)





3.      
Restructuring




AMRI
India




In
December 2009, the Company initiated a restructuring of its AMRI India locations
which consisted of closing and consolidating its Mumbai administrative office
into its Hyderabad location as part of the Company’s goal to streamline
operations and eliminate duplicate administrative functions.  The
Company recorded a restructuring charge of approximately $364 in the fourth
quarter of 2009, including lease termination charges of $215, leasehold
improvement abandonment charges of $107 and administrative costs of
$42.




The
restructuring costs are included under the caption “Restructuring charge” in the
consolidated statement of operations during 2009 and the restructuring
liabilities are included in “Accounts payable and accrued expenses” on the
consolidated balance sheet at December 31, 2009.




The AMRI
India restructuring activity was recorded in the Company’s Large Scale
Manufacturing (“LSM”) operating segment.  The following table displays
AMRI India’s restructuring activity and liability balances within our LSM
operating segment:





Balance at
                        January 1,
                        2009
                      
                      
                      Charges
                      
                      
                      Paid
                        Amounts
                      
                      
                      Foreign
                        Currency
                        Translation
                        Adjustments
                      
                      
                      Balance at
                        December 31,
                        2009Lease
      termination charges
                      
                      $
                      —
                      
                      
                      $
                      215
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      215Leasehold
      improvement abandonment charges
                      
                      
                      —
                      
                      
                      
                      107
                      
                      
                      
                      (107
                      )
                      
                      
                      —
                      
                      
                      
                      —Administrative
      costs associated with restructuring
                      
                      
                      —
                      
                      
                      
                      42
                      
                      
                      
                      (31
                      )
                      
                      
                      —
                      
                      
                      
                      11Total
                      
                      $
                      —
                      
                      
                      $
                      364
                      
                      
                      $
                      (138
                      )
                      
                      $
                      —
                      
                      
                      $
                      226





Lease
termination charges and leasehold improvement abandonment charges relate to
costs associated with exiting the current facility.


The net
cash outflow related to the AMRI India restructuring for the year ended December
31, 2009 was $31.  Anticipated cash outflows related to the AMRI India
restructuring for 2010 is approximately $226, which primarily consists of lease
termination charges.





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
termination charges of approximately $463 and administrative costs associated
with the restructuring plan of $80.





During
August 2009, the Company closed and consolidated its Balaton, Hungary facility
into the new facility in Budapest, Hungary as part of the Company’s goal to
streamline operations and to consolidate locations, equipment and operating
costs.  As a result of this restructuring, the Company recorded a
restructuring charge of approximately $327 in the second quarter of 2009,
including termination benefits and personnel realignment costs of approximately
$134, lease termination charges of $182 and administrative costs associated with
the restructuring plan of $11.




The
restructuring costs are included under the caption “Restructuring charge” in the
consolidated statement of operations during 2009 and 2008 and the restructuring
liabilities are included in “Accounts payable and accrued expenses” on the
consolidated balance sheet at December 31, 2009 and 2008.


F-15


ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)





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 atJanuary
                                    1, 2009
                                  
                                  Charges
                                  
                                  Paid
                                    Amounts
                                  
                                  Reversals
                                  
                                  Foreign
                                    Currency
                                    Translation
                                    Adjustments
                                  
                                  Balance at
                                    December 31,
                                    2009Termination
      benefits and personnel realignment
                                  
                                  $
                                  325
                                  
                                  $
                                  134
                                  
                                  $
                                  (89
                                  )
                                  
                                  (305
                                  )
                                  $
                                  (10
                                  )
                                  $
                                  55Losses
      on grant contracts
                                  
                                  
                                  266
                                  
                                  
                                  —
                                  
                                  
                                  (19
                                  )
                                  
                                  —
                                  
                                  
                                  (1
                                  )
                                  
                                  246Lease
      termination charges
                                  
                                  
                                  262
                                  
                                  
                                  182
                                  
                                  
                                  (150
                                  )
                                  
                                  (20
                                  )
                                  
                                  1
                                  
                                  
                                  275Administrative
      costs associated with restructuring
                                  
                                  
                                  40
                                  
                                  
                                  11
                                  
                                  
                                  —
                                  
                                  
                                  (37
                                  )
                                  
                                  (2
                                  )
                                  
                                  12Total
                                  
                                  $
                                  893
                                  
                                  $
                                  327
                                  
                                  $
                                  (258
                                  )
                                  
                                  (362
                                  )
                                  $
                                  (12
                                  )
                                  $
                                  588





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 termination charges relate to
costs associated with exiting the current facility.  The reversals in
2009 were primarily due to actual termination benefit and personnel realignment
costs being lower than initially anticipated at the time of the
restructuring.





The net
cash outflow related to the Hungary restructuring for the year ended December
31, 2009 was $258.  Anticipated cash outflows related to the Hungary
restructuring for 2010 is approximately $588, which primarily consists of lease
abandonment charges and incurring losses on grant contracts.




4.      
Inventory




Inventory
consisted of the following at December 31, 2009 and 2008:




December 31,2009
                    
                    
                    2008Raw
      materials
                    
                    $
                    7,415
                    
                    
                    $
                    8,996Work
      in process
                    
                    
                    2,213
                    
                    
                    
                    3,396Finished
      goods
                    
                    
                    15,515
                    
                    
                    
                    16,278Total
      inventories, at cost
                    
                    $
                    25,143
                    
                    
                    $
                    28,670







F-16


ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)




5.      
Investment Securities,




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, 2009Amortized
                        Cost
                      
                      
                      Gross
                        Unrealized
                        Gains
                      
                      
                      Gross
                        Unrealized
                        Losses
                      
                      
                      Fair
                        ValueObligations
      of states and political subdivisions
                      
                      $
                      26,077
                      
                      
                      $
                      118
                      
                      
                      $
                      (9
                      )
                      
                      $
                      26,186U.S.
      Governmental and Agency Obligations
                      
                      
                      1,613
                      
                      
                      
                      6
                      
                      
                      
                      
                      
                      
                      
                      1,619Auction
      rate securities
                      
                      
                      2,300
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      2,300$
                      29,990
                      
                      
                      $
                      124
                      
                      
                      $
                      (9
                      )
                      
                      $
                      30,105




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




Auction
rate securities are structured to be tendered at par, at the option of the
investor, at auctions usually occurring every 30–35 days. Disruption in the
financial and capital markets has resulted in reduced liquidity of these auction
rate securities as auctions that have been attempted throughout 2008 and 2009
have not been successful.  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.  However, the
Company does not expect to be forced to sell before maturity or market
recovery.




Contractual
maturities of securities classified as available-for-sale at December 31,
2009 and 2008 were as follows:




December 31, 2009
                      
                      
                      December 31, 2008Amortized
                        Cost
                      
                      
                      Fair
                        Value
                      
                      
                      Amortized
                        Cost
                      
                      
                      Fair
                        ValueDue
      less than one year
                      
                      $
                      10,484
                      
                      
                      $
                      10,531
                      
                      
                      $
                      17,606
                      
                      
                      $
                      17,668Due
      after one year through five years
                      
                      
                      11,726
                      
                      
                      
                      11,794
                      
                      
                      
                      6,931
                      
                      
                      
                      7,002Due
      after five years through ten years
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Due
      after ten years
                      
                      
                      7,780
                      
                      
                      
                      7,780
                      
                      
                      
                      2,400
                      
                      
                      
                      2,400$
                      29,990
                      
                      
                      $
                      30,105
                      
                      
                      $
                      26,937
                      
                      
                      $
                      27,070





Information
on temporarily impaired securities at December 31, 2009, 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
                      
                      $
                      2,392
                      
                      
                      $
                      (9
                      )
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      2,392
                      
                      
                      $
                      (9
                      )$
                      2,392
                      
                      
                      $
                      (9
                      )
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      2,392
                      
                      
                      $
                      (9
                      )


F-17


ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(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
                      )




The above
tables represent 5 securities at both December 31, 2009 and 2008 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 does not
have the intent to sell these securities, nor does it expect to be required to
sell before maturity or market recovery.




The
Company received proceeds from sales and maturities of $16,191 and $60,262 for
the years ended December 31, 2009 and 2008, respectively. Additionally, the
Company recorded realized gains/(losses) of $0 from maturities and sales of
available-for-sale securities during the years ended December 31, 2009,
2008 and 2007.




6.   
   Property and Equipment




Property
and equipment consists of the following:




December 31,2009
                    
                    
                    2008Laboratory
      equipment and fixtures
                    
                    $
                    127,321
                    
                    
                    $
                    120,518Office
      equipment
                    
                    
                    28,221
                    
                    
                    
                    25,801Leasehold
      improvements
                    
                    
                    49,872
                    
                    
                    
                    41,526Buildings
                    
                    
                    61,299
                    
                    
                    
                    60,695Land
                    
                    
                    1,678
                    
                    
                    
                    1,227268,391
                    
                    
                    
                    249,767Less
      accumulated depreciation and amortization
                    
                    
                    (110,942
                    )
                    
                    
                    (95,102
                    )157,449
                    
                    
                    
                    154,665Construction-in-progress
                    
                    
                    9,297
                    
                    
                    
                    12,837$
                    166,746
                    
                    
                    $
                    167,502




Depreciation
and amortization expense of property and equipment was approximately $16,507,
$17,082 and $16,100 for the years ended December 31, 2009, 2008 and 2007,
respectively.




7.      
Equity Investments




The
Company has entered into an equity investment with an entity in the Company’s
area of strategic focus. The Company accounts for this investment using the cost
method of accounting as the Company’s ownership interest in the investee is
below 20% and the Company does not have the ability to exercise significant
influence over the investee.




The
carrying value of equity investments at December 31, 2009 and 2008 was
$956.


F-18


ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)





8.      
Long-Term Debt and Swap Contracts




Long-Term
Debt




In June
2008, the Company refinanced a $30,000 term loan with a balance of $9,662 and a
$35,000 line of credit.  The refinancing converted 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 extended 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, 2009,
the balance outstanding on the line of credit was $9,662, bearing interest at a
rate of 1.31%.  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, 2009, the
Company was 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 0.29% at December 31, 2009.




The
following table summarizes long-term debt:




December 31,
                              2009
                            
                            
                            December 31,
                              2008Revolving
      line of credit
                            
                            $
                            9,662
                            
                            
                            $
                            9,662Industrial
      development authority bonds
                            
                            
                            3,820
                            
                            
                            
                            4,08013,482
                            
                            
                            
                            13,742Less
      current portion
                            
                            
                            (270
                            )
                            
                            
                            (260
                            )Total
      long-term debt
                            
                            $
                            13,212
                            
                            
                            $
                            13,482




The
aggregate maturities of long-term debt at December 31, 2009 are as
follows:




2010
                  
                  $
                  2702011
                  
                  
                  2752012
                  
                  
                  2852013
                  
                  
                  9,9572014
                  
                  
                  305Thereafter
                  
                  
                  2,390Total
                  
                  $
                  13,482




Interest
Rate Swap Contracts




The
Company entered into two interest rate 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 and did not have any during 2009.


F-19


ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)





9.      
Income Taxes




The
components of income before taxes and income tax (benefit) expense are as
follows:




Year Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007(Loss)
      income before taxes:U.S.
                  
                  $
                  (14,384
                  )
                  
                  $
                  31,852
                  
                  
                  $
                  18,457Foreign
                  
                  
                  (7,668
                  )
                  
                  
                  (3,962
                  )
                  
                  
                  (4,072
                  )$
                  (22,052
                  )
                  
                  $
                  27,890
                  
                  
                  $
                  14,385Income
      tax (benefit) expense:Current:Federal
                  
                  $
                  5,173
                  
                  
                  $
                  6,791
                  
                  
                  $
                  3,928State
                  
                  
                  72
                  
                  
                  
                  (1,951
                  )
                  
                  
                  2Foreign
                  
                  
                  378
                  
                  
                  
                  955
                  
                  
                  
                  1695,623
                  
                  
                  
                  5,795
                  
                  
                  
                  4,099Deferred:Federal
                  
                  
                  (12,062
                  )
                  
                  
                  2,108
                  
                  
                  
                  1,683State
                  
                  
                  (14
                  )
                  
                  
                  18
                  
                  
                  
                  160Foreign
                  
                  
                  1,096
                  
                  
                  
                  (591
                  )
                  
                  
                  (493
                  )(10,980
                  )
                  
                  
                  1,535
                  
                  
                  
                  1,350$
                  (5,357
                  )
                  
                  $
                  7,330
                  
                  
                  $
                  5,449





The
differences between income tax (benefit) expense and income taxes computed using
a federal statutory rate of 35% for the years ended December 31, 2009, 2008
and 2007, were as follows:




Year Ended December 31,2009
                
                
                2008
                
                
                2007Pre-tax
      (loss) income at statutory rate
                
                $
                (7,719
                )
                
                $
                9,765
                
                
                $
                5,035Increase
      (reduction) in taxes resulting from:Tax-exempt
      interest income
                
                
                (149
                )
                
                
                (421
                )
                
                
                (890
                )State
      taxes, net of federal benefit and valued credits
                
                
                (108
                )
                
                
                (1,210
                )
                
                
                105Rate
      differential on foreign operations
                
                
                834
                
                
                
                589
                
                
                
                1,126Domestic
      production deduction
                
                
                (95
                )
                
                
                (159
                )
                
                
                (140
                )Change
      in valuation allowance
                
                
                3,022
                
                
                
                833
                
                
                
                —Research
      and development credits
                
                
                (439
                )
                
                
                (2,232
                )
                
                
                —Stock
      compensation expense
                
                
                60
                
                
                
                (14
                )
                
                
                76Reduction
      in uncertain tax position reserves
                
                
                (751
                )
                
                
                —
                
                
                
                —Other,
      net
                
                
                (12
                )
                
                
                179
                
                
                
                137$
                (5,357
                )
                
                $
                7,330
                
                
                $
                5,449


F-20


ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(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 31,2009
                
                
                2008Deferred
      tax assets:Nondeductible
      accrued expenses
                
                $
                144
                
                
                $
                281Allowance
      for doubtful accounts
                
                
                136
                
                
                
                218Library
      amortization and impairment charges
                
                
                2,506
                
                
                
                2,532Inventory
      reserves
                
                
                4,617
                
                
                
                3,783Warrants
                
                
                145
                
                
                
                155Environmental
      reserves
                
                
                67
                
                
                
                67Pension
      and postretirement costs
                
                
                231
                
                
                
                322Research
      and experimentation credit carry forwards
                
                
                —
                
                
                
                193State
      tax credit carry forward
                
                
                6,263
                
                
                
                6,181Investment
      write-downs and losses
                
                
                875
                
                
                
                869Capital
      loss on sale of fixed assets
                
                
                79
                
                
                
                77Deferred
      revenue
                
                
                2,981
                
                
                
                —Deferred
      rent
                
                
                512
                
                
                
                —Stock
      based compensation
                
                
                1,230
                
                
                
                900Goodwill
      and intangibles
                
                
                7,469
                
                
                
                —Net
      operating loss carry forwards
                
                
                5,019
                
                
                
                2,85632,274
                
                
                
                18,434Less
      valuation allowance
                
                
                (11,707
                )
                
                
                (8,685
                )Deferred
      tax assets, net
                
                
                20,567
                
                
                
                9,749Deferred
      tax liabilities:Property
      and equipment depreciation differences
                
                
                (16,824
                )
                
                
                (16,184
                )Prepaid
      real estate taxes
                
                
                (191
                )
                
                
                (195
                )Foreign
      deferred tax
                
                
                (10
                )
                
                
                (239
                )Deferred
      revenue
                
                
                —
                
                
                
                (50
                )Goodwill
      and intangibles
                
                
                —
                
                
                
                (519
                )Net
      deferred tax asset (liability)
                
                $
                3,542
                
                
                $
                (7,438
                )





The
preceding table does not include deferred tax (liabilities) assets of $(46) and
$(54) at December 31, 2009 and 2008, respectively, associated with the
Company’s net unrealized losses/gains on investment securities discussed in
Note 5 and deferred tax asset/(liability) of $2,376 and $2,406 at
December 31, 2009 and 2008, respectively, associated the Company’s pension
liability as discussed in Note 11.  Deferred tax assets representing
net operating loss carry forwards of $3,040 at December 31, 2009 begin to expire
in 2015; $5 at December 31, 2009 begin to expire in 2018; $1,974 at December 31,
2009 may be carried forward indefinitely. New York State investment tax credit
carry forwards begin to expire in 2018.




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. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, carry back opportunities and tax planning strategies in making
this assessment.




F-21





ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)








December 31,
                        2009
                      
                      
                      December 31,
                        2008Federal
                      
                      $
                      945
                      
                      
                      $
                      945State
      credits
                      
                      
                      6,263
                      
                      
                      
                      6,181Foreign
                      
                      
                      4,499
                      
                      
                      
                      1,559Total
      valuation allowance
                      
                      $
                      11,707
                      
                      
                      $
                      8,685




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 2009 is directly related to
the generation of additional state investment tax credit carry forwards, net
operating loss carry forwards for AMRI Hungary and net operating loss carry
forwards for AMRI India. 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.




A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:





2009Balance
      at January 1, 2009
                    
                    $
                    1,280Decreases
      related to prior year tax positions
                    
                    
                    (428
                    )Lapse
      of statute
                    
                    
                    (323
                    )Balance
      at December 31, 2009
                    
                    $
                    529





The
reserve for the year ended December 31, 2009 represents 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.  As of December 31,
2009, 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 $15 at December 31, 2009, all
of which was recognized in 2009.




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 2005. Tax examinations that commenced during 2009 are in
process.  Management of the Company believes that the reserves
associated with these 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.




10.      
Share-based Compensation




During
the years ended December 31, 2009, 2008 and 2007, the Company recognized
total share based compensation cost of $2,134, $1,696 and $1,304,
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.


F-22


ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)





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.




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, 2009, 2008 and 2007, 49, 29 and 37 shares,
respectively, were issued under the Purchase Plan. During the years ended
December 31, 2009 and 2008, cash received from stock option exercises and
employee stock purchase plan purchases was $510 and $1,285,
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-23


ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)





Following
is a summary of the status of stock option programs during 2009, 2008 and
2007:




Weighted AverageWeighted
                                                    
                                                    Remaining
                                                    
                                                    AggregateNumber of
                                                    
                                                    
                                                    Exercise
                                                    
                                                    Contractual Term
                                                    
                                                    IntrinsicShares
                                                    
                                                    
                                                    Price
                                                    
                                                    (Years)
                                                    
                                                    ValueOutstanding,
      January 1, 2007
                                                    
                                                    
                                                    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
                                                    
                                                    
                                                    
                                                    20.34Granted
                                                    
                                                    
                                                    129
                                                    
                                                    
                                                    
                                                    8.54Exercised
                                                    
                                                    
                                                    (4
                                                    )
                                                    
                                                    
                                                    10.00Forfeited
                                                    
                                                    
                                                    (89
                                                    )
                                                    
                                                    
                                                    22.35Expired
                                                    
                                                    
                                                    (40
                                                    )
                                                    
                                                    
                                                    11.48Outstanding,
      December 31, 2009
                                                    
                                                    
                                                    1,864
                                                    
                                                    
                                                    $
                                                    19.66
                                                    
                                                    
                                                    3.9
                                                    
                                                    $
                                                    69Options
      exercisable, December 31, 2009
                                                    
                                                    
                                                    1,488
                                                    
                                                    
                                                    $
                                                    21.86
                                                    
                                                    
                                                    2.8
                                                    
                                                    $
                                                    —





The
weighted average fair value per share of stock options granted during the years
ended December 31, 2009, 2008 and 2007 was $3.74, $4.72 and $5.46,
respectively. The total intrinsic value of stock options exercised during the
years ended December 31, 2009, 2008 and 2007 was $5, $37 and $1,465,
respectively.  The actual tax benefit realized for the tax deductions
from stock option exercises was $5 and $56 during the years ended
December 31, 2009 and 2008.




As of
December 31, 2009, there was $1,059 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, 2009, 2008 and 2007 was approximately
$326, $3,184 and $300, respectively.




The
following are the shares of common stock reserved for issuance at
December 31, 2009:




Number of
                        SharesEmployee
      Stock Option Plans
                      
                      
                      3,939Employee
      Stock Purchase Plan
                      
                      
                      243Shares
      reserved for issuance
                      
                      
                      4,182




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.  Restricted stock is valued based on the fair 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.


F-24


ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)





Following
is a summary of the restricted stock activity during 2009, 2008 and
2007:




Number of
                            Shares
                          
                          
                          Weighted
                            Average Grant Date
                            Fair ValueOutstanding,
      January 1, 2007
                          
                          
                          419
                          
                          
                          $
                          9.40Granted
                          
                          
                          197
                          
                          
                          
                          10.33Vested
                          
                          
                          —
                          
                          
                          
                          —Forfeited
                          
                          
                          (98
                          )
                          
                          
                          9.23Outstanding,
      December 31, 2007
                          
                          
                          518
                          
                          
                          $
                          9.79Granted
                          
                          
                          175
                          
                          
                          
                          11.66Vested
                          
                          
                          (115
                          )
                          
                          
                          8.83Forfeited
                          
                          
                          (69
                          )
                          
                          
                          10.10Outstanding,
      December 31, 2008
                          
                          
                          509
                          
                          
                          $
                          10.61Granted
                          
                          
                          165
                          
                          
                          
                          8.42Vested
                          
                          
                          (117
                          )
                          
                          
                          9.97Forfeited
                          
                          
                          (41
                          )
                          
                          
                          10.27Outstanding,
      December 31, 2009
                          
                          
                          516
                          
                          
                          $
                          10.08





For the
years ended December 31, 2009 and 2008, the fair value of restricted stock
was $1,384 and $2,040, respectively, was based on the fair value of the shares
on the grant date and amortized over the applicable vesting period. During the
years ended December 31, 2009 and 2008, a total of 41 and 69 shares,
respectively, with an unrecognized compensation expense of $418 and $691,
respectively, were forfeited.  The amount amortized to expense during
years ended December 31, 2009, 2008 and 2007, net of the impact of
forfeitures, was approximately $1,369, $1,031 and $720,
respectively.  As of December 31, 2009, there was $3,329 of total
unrecognized compensation cost related to non-vested restricted shares. That
cost is expected to be recognized over a weighted-average period of 3.3 years.
During the years ended December 31, 2009 and 2008, 117 and 115 shares
vested, respectively.




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.


F-25


ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)




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 $19,717.  No additional shares were repurchased
during 2009.





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’ wages. 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 $1,927, $1,696 and $1,576 for the years ended
December 31, 2009, 2008 and 2007, 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 there is no age
requirement as of the plan’s entry dates. Participants may contribute up 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. 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, however the employer match under this plan does not begin until the
employee completes one year of service. Employer matching contributions were
$138, $139 and $158 for the years ended December 31, 2009, 2008 and 2007,
respectively.




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 the accumulation of additional future
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 and effective March 1, 2004, the
Company curtailed the hourly defined benefit pension plan.




The
Company recognizes the overfunded or underfunded status of its postretirement
plans in the statement of financial position and recognizes changes in that
funded status in the year in which the changes occur. Additionally, the Company
is required to measure the funded status of a plan as of the end of its fiscal
year.


F-26


ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)





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, 2009 and 2008, 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
                    Benefits2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Change
      in benefit obligation:Benefit
      obligation at January 1
                  
                  $
                  20,706
                  
                  
                  $
                  20,746
                  
                  
                  $
                  1,173
                  
                  
                  $
                  745Service
      cost
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  76
                  
                  
                  
                  55Interest
      cost
                  
                  
                  1,287
                  
                  
                  
                  1,256
                  
                  
                  
                  62
                  
                  
                  
                  51Actuarial
      loss (gain)
                  
                  
                  1,982
                  
                  
                  
                  128
                  
                  
                  
                  (244
                  )
                  
                  
                  322Benefits
      paid
                  
                  
                  (1,487
                  )
                  
                  
                  (1,424
                  )
                  
                  
                  —
                  
                  
                  
                  —Benefit
      obligation at December 31
                  
                  
                  22,488
                  
                  
                  
                  20,706
                  
                  
                  
                  1,067
                  
                  
                  
                  1,173Change
      in plan assets:Fair
      value of plan assets at January 1
                  
                  
                  15,168
                  
                  
                  
                  21,812
                  
                  
                  
                  —
                  
                  
                  
                  —Actual
      return on plan assets
                  
                  
                  3,211
                  
                  
                  
                  (5,511
                  )
                  
                  
                  —
                  
                  
                  
                  —Employer
      contributions
                  
                  
                  —
                  
                  
                  
                  291
                  
                  
                  
                  —
                  
                  
                  
                  —Benefits
      paid
                  
                  
                  (1,487
                  )
                  
                  
                  (1,424
                  )
                  
                  
                  —
                  
                  
                  
                  —Fair
      value of plan assets at December 31
                  
                  
                  16,892
                  
                  
                  
                  15,168
                  
                  
                  
                  —
                  
                  
                  
                  —Funded
      status
                  
                  $
                  (5,596
                  )
                  
                  $
                  (5,538
                  )
                  
                  $
                  (1,067
                  )
                  
                  $
                  (1,173
                  )





The
Company included ($45) and $4,502 in other comprehensive (gain) loss for the
years ended December 31, 2009 and 2008, respectively, which represent the
respective fluctuations in the unrecognized actuarial gains and losses, net of
related tax benefits.




At
December 31, 2009 and 2008, 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 $22,488 and $20,706, respectively.




The
following table provides the components of net periodic benefit (income) cost
for the years ended December 31:




Pension Benefits
                              
                              
                              Postretirement
                                Benefits2009
                              
                              
                              2008
                              
                              
                              2007
                              
                              
                              2009
                              
                              
                              2008
                              
                              
                              2007Service
      cost
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              76
                              
                              
                              $
                              55
                              
                              
                              $
                              46Interest
      cost
                              
                              
                              1,287
                              
                              
                              
                              1,256
                              
                              
                              
                              1,220
                              
                              
                              
                              62
                              
                              
                              
                              51
                              
                              
                              
                              36Expected
      return on plan assets
                              
                              
                              (1,447
                              )
                              
                              
                              (1,558
                              )
                              
                              
                              (1,486
                              )
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Amortization
      of net loss
                              
                              
                              24
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              26
                              
                              
                              
                              11
                              
                              
                              
                              7Net
      periodic benefit (income) cost
                              
                              $
                              (136
                              )
                              
                              $
                              (302
                              )
                              
                              $
                              (266
                              )
                              
                              $
                              164
                              
                              
                              $
                              117
                              
                              
                              $
                              89Recognized
      in AOCI (pre-tax):Prior
      service cost
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              4
                              
                              
                              $
                              5
                              
                              
                              $
                              5Net
      actuarial loss (gain)
                              
                              
                              5,610
                              
                              
                              
                              5,415
                              
                              
                              
                              (1,781
                              )
                              
                              
                              244
                              
                              
                              
                              513
                              
                              
                              
                              201Total
      recognized in AOCI (pre-tax)
                              
                              $
                              5,610
                              
                              
                              $
                              5,415
                              
                              
                              $
                              (1,781
                              )
                              
                              $
                              248
                              
                              
                              $
                              518
                              
                              
                              $
                              206Total
      recognized in consolidated statement of operations and
AOCI
                              
                              $
                              5,474
                              
                              
                              $
                              5,113
                              
                              
                              $
                              2,047
                              
                              
                              $
                              412
                              
                              
                              $
                              635
                              
                              
                              $
                              295


F-27


ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)





In 2010,
the Company expects to amortize $1 of prior service cost and $248 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:




2009
                  
                  
                  2008
                  
                  
                  2007Discount
      rate
                  
                  
                  5.65
                  %
                  
                  
                  6.25
                  %
                  
                  
                  6.25
                  %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 was 5.65% at December 31,
2009 and 6.25% at 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:




2009
                  
                  
                  2008
                  
                  
                  2007Health
      care cost trend rate assumed for next year
                  
                  
                  10.0
                  %
                  
                  
                  10.0
                  %
                  
                  
                  10.0
                  %Rate
      to which the cost trend rate is assumed to decline (the ultimate trend
      rate)
                  
                  
                  5.0
                  %
                  
                  
                  5.0
                  %
                  
                  
                  5.0
                  %Year
      that the rate reaches the ultimate trend rate
                  
                  2015
                  
                  
                  2014
                  
                  
                  2013




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
                  
                  $
                  39
                  
                  
                  $
                  (30
                  )Effect
      on accumulated postretirement benefit obligation for the year ended
      December 31, 2009
                  
                  $
                  269
                  
                  
                  $
                  (207
                  )




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




2009
                  
                  
                  2008Market
      Value
                  
                  
                  %
                  
                  
                  Market
      Value
                  
                  
                  %Equity
      securities
                  
                  $
                  9,922
                  
                  
                  
                  59
                  %
                  
                  $
                  9,010
                  
                  
                  
                  59
                  %Debt
      securities
                  
                  
                  5,778
                  
                  
                  
                  34
                  
                  
                  
                  5,088
                  
                  
                  
                  34Real
      Estate
                  
                  
                  829
                  
                  
                  
                  5
                  
                  
                  
                  766
                  
                  
                  
                  5Other
                  
                  
                  363
                  
                  
                  
                  2
                  
                  
                  
                  304
                  
                  
                  
                  2Total
                  
                  $
                  16,892
                  
                  
                  
                  100
                  %
                  
                  $
                  15,168
                  
                  
                  
                  100
                  %


Based on
the three-tiered fair value hierarchy, all pension plan assets’ fair value can
be determined by their quoted market price and therefore have been determined to
be Level 1 as of December 31, 2009.


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.


F-28


ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)





Defined
benefit plan assets are invested so as to achieve a competitive risk adjusted
rate-of-return on portfolio assets, based on levels of liquidity and investment
risk that is prudent and reasonable under circumstances which exist from time to
time.




While the
Company’s primary objective is 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 Plan
policies of preservation of capital, return expectations and investment
diversification are all measured during these reviews to aid in the
determination of asset class and risk allocation.




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.




To
determine the expected long-term rate of return on pension plan assets, the
Company considers current and expected asset allocations, as well as historical
and expected returns on various categories of plan assets. In developing future
return expectations for the Company’s pension plan’s assets, we evaluate general
market trends as well as key elements of asset class returns such as expected
earnings growth, yields and spreads across a number of potential
scenarios.




The 2009
target allocation was as follows:




Equity
      securities
                      
                      
                      59
                      %Debt
      securities
                      
                      
                      34Real
      Estate
                      
                      
                      5Other
                      
                      
                      2Total
                      
                      
                      100
                      %




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:




Pension
                    Benefits
                  
                  
                  Postretirement
                    Benefits2010
                  
                  $
                  1,565
                  
                  
                  $
                  —2011
                  
                  
                  1,578
                  
                  
                  
                  —2012
                  
                  
                  1,600
                  
                  
                  
                  —2013
                  
                  
                  1,595
                  
                  
                  
                  —2014
                  
                  
                  1,620
                  
                  
                  
                  342015
      - 2019
                  
                  
                  8,258
                  
                  
                  
                  163





Based on
current actuarial assumptions, the Company expects to contribute $218 to its
pension plans in 2010.


F-29


ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)




12.      
Lease Commitments




The
Company leases both facilities and equipment used in its operations and
classifies those leases as operating 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 2011 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, 2009 are as
follows:




Year
      ending December 31,2010
                    
                    $
                    4,0272011
                    
                    
                    3,9402012
                    
                    
                    3,9582013
                    
                    
                    3,4802014
                    
                    
                    3,246Thereafter
                    
                    
                    11,246




Rental
expense amounted to approximately $3,659, $3,751 and $3,502 during the years
ended December 31, 2009, 2008 and 2007, respectively.




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 developments by our
employees. To be eligible to participate, the employee 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 2009,
2008 and 2007, 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.  Additionally in 2009, 2008 and 2007, the
Company granted awards to employees in relation to milestone payments for its
proprietary amine neurotransmitter reuptake inhibitors as a result of successful
licensing of this technology to Bristol-Myers Squibb (“BMS”).  The
amounts awarded and included in the consolidated statements of operations for
the years ended December 31, 2009, 2008 and 2007 are $3,594, $2,901 and
$2,784, respectively.  Included in accrued compensation in the
accompanying consolidated balance sheets at both December 31, 2009 and 2008
are unpaid Technology Development Incentive Compensation awards
of  $761 and $667.




(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 $242, $221 and $228 for
services rendered to the Company in 2009, 2008 and 2007,
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
regard to litigation relating to Allegra, the Company is not currently a party
to any such claims or proceedings which, if decided adversely to the Company,
would either individually or in the aggregate have a material adverse effect on
the Company’s business, financial condition, results of operations or cash
flows.


F-30





ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)




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., has been 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 Food and
Drug Administration (“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,
Wockhardt, and Sun Pharma Global, Inc.  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
U.S. Patent Nos. 5,581,011 and 5,750,703 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.  On September 9, 2009, the Company
filed patent infringement lawsuits in the U.S. District Court in New Jersey
against Dr. Reddy’s Laboratories, Ltd, Dr. Reddy’s Laboratories, Inc., and
Sandoz, Inc. asserting infringement of U.S. Patent No. 7,390,906, seeking
statutory damages.




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 the Company, 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 the Company’s arrangements
with Aventis Pharmaceuticals, the Company 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.





F-31





ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)




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.  Subsequently, Teva Pharmaceuticals acquired Barr
Laboratories.  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 through 2015, along with additional
consideration.  As provided in the settlement, Teva Pharmaceuticals
launched a generic version of Allegra D-12 in November 2009.  The
Company will receive quarterly royalties through July 2010 for the branded
Allegra D-12 equal to the royalties paid for the quarter ended June 30,
2009.  Thereafter, the royalty rate will revert to the rate in effect
prior to the signing of the sub-license amendment and the Company will also
receive a royalty on Teva’s sales of the generic D-12.  The Company
and Aventis Pharmaceuticals have also dismissed their claims against Ranbaxy
Laboratories Ltd./Ranbaxy Pharmaceuticals Inc. and Sandoz, Inc. without
prejudice.  The Company has also dismissed its claims against DiPharma
S.P.A. and DiPharma s.r.l. in Canada without
prejudice.




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
single-entity products.




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, 2009, 2008 and 2007, 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, 2009 and 2008, $191 was recorded for future environmental
liabilities in the consolidated balance sheets.




16.
                Concentrationof
      Business




For the
year ended December 31, 2009, contract revenue from the Company’s three
largest customers respectively represented 14%, 12% and 8% of its contract
revenue.  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. The Company’s largest
customer, GE Healthcare, represented 14% of total contract revenue for the year
ended December 31, 2009.  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.





F-32





ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)




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 31,2009
                    
                    2008
                    
                    2007United
      States
                    
                    
                    60
                    %
                    
                    
                    69
                    %
                    
                    
                    69
                    %Europe
                    
                    
                    23
                    %
                    
                    
                    20
                    %
                    
                    
                    26
                    %Asia
                    
                    
                    14
                    %
                    
                    
                    8
                    %
                    
                    
                    3
                    %Other
      countries
                    
                    
                    3
                    %
                    
                    
                    3
                    %
                    
                    
                    2
                    %Total
                    
                    
                    100
                    %
                    
                    
                    100
                    %
                    
                    
                    100
                    %




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 ASC 280, “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, of which our U.S. location is in
compliance with the 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, 2009:




DDS
                  
                  
                  LSM
                  
                  
                  TotalContract
      revenue
                  
                  $
                  85,793
                  
                  
                  $
                  71,007
                  
                  
                  $
                  156,800Milestone
      revenue
                  
                  
                  4,750
                  
                  
                  
                  —
                  
                  
                  
                  4,750Recurring
      royalties
                  
                  
                  34,867
                  
                  
                  
                  —
                  
                  
                  
                  34,867Total
      revenue
                  
                  $
                  125,410
                  
                  
                  $
                  71,007
                  
                  
                  $
                  196,417Operating
      income (loss) before unallocated expenses
                  
                  $
                  48,984
                  
                  
                  $
                  (18,129
                  )
                  
                  $
                  30,855Unallocated
      expenses:Research
      and development
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  14,547Selling,
      general and administrative
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  38,191Total
      unallocated expenses
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  52,738Operating
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (21,883
                  )Reconciling
      items:Interest
      income, net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  376Other
      loss, net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (545
                  )Loss
      before income tax benefit
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (22,052
                  )Supplemental
      information:Depreciation
      and intangible amortization
                  
                  $
                  9,930
                  
                  
                  $
                  6,820
                  
                  
                  $
                  16,750Goodwill
      impairment charge
                  
                  $
                  —
                  
                  
                  $
                  22,900
                  
                  
                  $
                  22,900




F-33





ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)




The
following table summarizes other information by segment as of December 31,
2009:




DDS
                        
                        
                        LSM
                        
                        
                        TotalTotal
      assets
                        
                        $
                        236,314
                        
                        
                        $
                        137,378
                        
                        
                        $
                        373,692Goodwill
      included in total assets
                        
                        
                        13,199
                        
                        
                        
                        4,352
                        
                        
                        
                        17,551Investments
      in unconsolidated affiliates
                        
                        
                        956
                        
                        
                        
                        —
                        
                        
                        
                        956Capital
      expenditures
                        
                        
                        11,392
                        
                        
                        
                        3,780
                        
                        
                        
                        15,172




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 intangible amortization
                  
                  $
                  10,757
                  
                  
                  $
                  6,965
                  
                  
                  $
                  17,722




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




18.
              Fair
      Value of Financial
Instruments




The
Company follows ASC 820-10 “Fair Value Measurements” which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements.  A three-tiered fair value hierarchy has been
established, 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.




F-34





ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)





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, 2009:





Fair Value Measurements as of December 31,
      2009Marketable Securities
                  
                  Total
                  
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3Obligations
      of states and political subdivisions
                  
                  $
                  26,186
                  
                  
                  $
                  —
                  
                  
                  $
                  26,186
                  
                  
                  $
                  —U.S.
      Government and Agency Obligations
                  
                  
                  1,619
                  
                  
                  
                  —
                  
                  
                  
                  1,619
                  
                  
                  
                  —Auction
      rate securities
                  
                  
                  2,300
                  
                  
                  
                  —
                  
                  
                  
                  2,300
                  
                  
                  
                  —Total
                  
                  $
                  30,105
                  
                  
                  $
                  —
                  
                  
                  $
                  30,105
                  
                  
                  $
                  —





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:





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
Company determines its fair value of 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: 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, 2009
and 2008 due to the resetting dates of the variable interest rates.




Nonrecurring
Measurements:




The
majority of the Company’s non-financial instruments, which include goodwill,
intangible assets, property and equipment, and equity method investments, are
not required to be carried at fair value on a recurring basis but are subject to
fair value adjustments only in certain circumstances. If certain triggering
events occur such that a non-financial instrument is required to be evaluated
for impairment, a resulting asset impairment would require that the
non-financial instrument be recorded at the lower of historical cost or its fair
value.





The fair
values of these assets were determined by the application of a discounted cash
flow model which used Level 3 inputs. Cash flows were determined based on
Company estimates of future operating results, and we used estimates of market
participant weighted average costs of capital (“WACC”) as a basis for
determining the discount rates to apply to our reporting units’ future expected
cash flows, adjusted for the risks and uncertainty inherent in our industry
generally and in our internally developed forecasts.  Additional
information regarding the fair value measurements is disclosed in Note
19.





F-35





ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)





Although
the 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.





19.
              Goodwill
      and Intangible Assets





Goodwill




In
accordance with ASC 350-20-35, the Company assesses goodwill for impairment at
the reporting unit level, which is defined as an operating segment or one level
below an operating segment, referred to as a component.  The Company
determines its reporting units by first identifying its operating segments, and
then assesses whether any components of these segments constitute a business for
which discrete financial information is available and where segment management
regularly reviews the operating results of that component.  The
Company aggregates components within an operating segment that have similar
economic characteristics. For the Company’s annual impairment assessment, it has
identified its reporting units to be two operating segments, the DDS
segment and the LSM segment.





In performing the current
year annual impairment test, the fair value of the Company’s operating segments
was determined using the income approach.For purposes
of the income approach, fair value was determined based on the present value of
estimated future cash flows, discounted at an appropriate risk-adjusted rate
(“DCF analysis”).  The Company made assumptions about the amount and
timing of future expected cash flows, terminal value growth rates and
appropriate discount rates.  The amount and timing of future cash
flows within the Company’s DCF analysis is based on its most recent operational
budgets, long range strategic plans and other estimates.  The terminal
value growth rate is used to calculate the value of cash flows beyond the last
projected period in the Company’s DCF analysis and reflects its best estimates
for stable, perpetual growth of its reporting units.  Actual results
may differ from those assumed in the Company’s forecasts.  The Company
uses estimates of market participant WACC as a basis for determining the
discount rates to apply to its reporting units’ future expected cash flows,
adjusted for the risks and uncertainty inherent in its industry generally and in
its internally developed forecasts.





The
selection of a valuation methodology is based on the facts and circumstances
surrounding the valuation, including the Company being valued and the timing of
the valuation.  The Company concluded that the income approach as
calculated in the DCF analysis was the best indicator of value.  The
Company calculated, but did not rely on other valuation techniques, such as
evaluating the
valuation metrics of comparable publicly traded companies and evaluating
enterprise values derived from recent arms-length transactions involving
comparable companies, for several reasons, including:





§
            The
      significant volatility in revenue and earnings over recent historical time
      periods and expected growth in future time periods made comparisons to
      publicly traded companies and comparable transactions difficult. 
      Adjustments to market multiples were considered to be highly subjective
      and difficult to support.  Further, market based indications provided
      extremely wide ranges of value indications, again due to fluctuations in
      earnings.





§
            Earnings
      growth beyond 2010 is significant and difficult to capture in market based
      approaches since it focuses on historical time periods as well as current
      and next fiscal year.





§
            Application
      of a revenue multiple is not preferred due to the lack of consideration of
      current and future earnings.





§
            Company
      specific factors such as customer concentrations, India expansion, and
      expanded global nature of the Company’s business make comparison to market
      transactions difficult.





F-36





ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)





§
            Most
      of the recent comparable transactions observed are from foreign markets
      where growth rates and multiples can be much higher and do not reflect
      conditions in the current domestic mergers and acquisitions market. 
      Multiples from previous years do not reflect current market
      conditions.





§
            Publicly
      traded guideline companies are of moderate comparability to the reporting
      unit level.





§
            Use
      of an exit multiple in a DCF is no longer a preferred method given the
      fluctuations in market multiples over the past 2
  years.





§
            Significant
      volatility in stock prices





Based
upon the results of the valuation procedures performed at October 1, 2009, the fair value of the DDS
segment exceeded its carrying value by 43%, and as suchthere was no
indication of impairment.  There was an indication of impairment of
the LSM segment, as the carrying value of the LSM segment exceeded its fair
value.  In order to assess the estimated amount of impairment the
Company performed the second step of the goodwill impairment
test.  The second step involved an analysis reflecting the allocation
of the fair value of the LSM segment as calculated in the first step to its
assets and liabilities, including an assessment of whether there were any
previously unidentified intangible assets in connection with
LSM.  Based on the results of these procedures, the Company recorded a
goodwill impairment charge of $22,900 for the year ended December 31, 2009 in
the LSM segment.  The results of these procedures did not result in
the identification and allocation of fair value to previously unidentified
intangible assets, and there were no other asset impairment charges
taken.





In the
fourth quarter of 2009, several events occurred in the LSM segment that
significantly impacted the Company’s long-term forecast for this
segment.  Two phase III customers’ products that were expected to
receive FDA approval were delayed, one by the FDA requiring more information and
one by the customer in an effort to proactively collect more data before
submitting to the FDA.  It was expected throughout 2009 that
commercial manufacturing would commence on both these products at the Rensselaer
LSM facility beginning in 2010.  This has now been delayed to 2011 and
beyond.  In addition, the Company was notified of additional
unexpected reductions in demand for product with its largest customer, GE
Healthcare.  These additional unplanned demand reductions in the
fourth quarter of 2009 added an element of increased risk related to the
Company’s ability to achieve the revenue forecasts that are reflected in the
long-term projections for the segment.  The impacts on cash flow from
the current revenue, expense and capital expenditure forecasts, combined with an
increase in discount rates used in the DCF analysis due to increases in
observedmarket
participant WACC and the Company-specific risk premium included in the
discount rate , results in a calculated fair value of the LSM segment being less
than its carrying value.





The
carrying amount of goodwill, by segment, as of December 31, 2009 and 2008
are as follows:




DDS
                  
                  
                  LSM
                  
                  
                  TotalDecember 31,
      2009Goodwill
                  
                  $
                  13,199
                  
                  
                  $
                  4,352
                  
                  
                  $
                  17,551December 31,
      2008Goodwill
                  
                  $
                  13,208
                  
                  
                  $
                  27,064
                  
                  
                  $
                  40,272




The
slight decrease in goodwill within the DDS segment from December 31, 2008
to December 31, 2009 is related to the impact of foreign currency
translation.





F-37





ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(In
thousands, except per share amounts)




The
decrease in goodwill within the LSM segment from December 31, 2008 to December
31, 2009 is primarily due to the goodwill impairment charge recorded in the
fourth quarter of 2009 as discussed above, offset in part by the impact of
foreign currency translations.




Intangible
Assets




The
components of intangible assets are as follows:




Cost
                        
                        
                        Accumulated
                          Amortization
                        
                        
                        Net
                        
                        Amortization
                          PeriodDecember 31,
      2009Patents
      and Licensing Rights
                        
                        $
                        3,897
                        
                        
                        $
                        (1,436
                        )
                        
                        $
                        2,461
                        
                        2-16
      yearsTotal
                        
                        $
                        3,897
                        
                        
                        $
                        (1,436
                        )
                        
                        $
                        2,461December 31,
      2008Patents
      and Licensing Rights
                        
                        $
                        3,181
                        
                        
                        $
                        (1,163
                        )
                        
                        $
                        2,018
                        
                        2-16
      yearsTotal
                        
                        $
                        3,181
                        
                        
                        $
                        (1,163
                        )
                        
                        $
                        2,018




Amortization
expense related to intangible assets for the years ended December 31, 2009,
2008 and 2007 was $243, $640 and $697, respectively.




The
following chart represents estimated future annual amortization expense related
to intangible assets:




Year
      ending December 31,2010
                          
                          $
                          2392011
                          
                          
                          2192012
                          
                          
                          2192013
                          
                          
                          2072014
                          
                          
                          202Thereafter
                          
                          
                          1,375Total
                          
                          
                          2,461





F-38





ALBANY
MOLECULAR RESEARCH, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





December 31,
2009 and 2008





(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 2009 and 2008:




First
                      Quarter
                    
                    
                    Second
                      Quarter
                    
                    
                    Third
                      Quarter
                    
                    
                    Fourth
                      Quarter2009Contract
      revenue
                    
                    $
                    43,244
                    
                    
                    $
                    38,782
                    
                    
                    $
                    39,737
                    
                    
                    $
                    35,037Recurring
      royalties and milestones
                    
                    
                    10,786
                    
                    
                    
                    12,524
                    
                    
                    
                    7,929
                    
                    
                    
                    8,378Total
      revenue
                    
                    
                    54,030
                    
                    
                    
                    51,306
                    
                    
                    
                    47,666
                    
                    
                    
                    43,415Income
      (loss) from operations
                    
                    
                    2,595
                    
                    
                    
                    385
                    
                    
                    
                    (106
                    )
                    
                    
                    (24,757
                    )Net
      income (loss)
                    
                    
                    1,942
                    
                    
                    
                    179
                    
                    
                    
                    365
                    
                    
                    
                    (19,181
                    )Net
      income (loss) per share:Basic
                    
                    $
                    0.06
                    
                    
                    $
                    0.01
                    
                    
                    $
                    0.01
                    
                    
                    $
                    (0.62
                    )Diluted
                    
                    $
                    0.06
                    
                    
                    $
                    0.01
                    
                    
                    $
                    0.01
                    
                    
                    $
                    (0.62.
                    )2008Contract
      revenue
                    
                    $
                    45,337
                    
                    
                    $
                    46,362
                    
                    
                    $
                    54,142
                    
                    
                    $
                    49,614Recurring
      royalties and milestones
                    
                    
                    8,233
                    
                    
                    
                    11,573
                    
                    
                    
                    7,223
                    
                    
                    
                    6,776Total
      revenue
                    
                    
                    53,570
                    
                    
                    
                    57,935
                    
                    
                    
                    61,365
                    
                    
                    
                    56,390Income
      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
                    
                    
                    $
                    0.10




21.
            Subsequent
      Events (unaudited)




In
February 2010, the Company entered into an agreement with the shareholders of
Excelsyn Limited (the “Sellers”) for the sale and purchase of all of the issued
and outstanding shares of Excelsyn Limited (“Excelsyn”), a privately held
pharmaceutical manufacturing company located in Holywell, United Kingdom, and
its subsidiary (the “Subsidiary”), Excelsyn Molecular Development Limited (the
“Agreement”)Under
the terms of the agreement, AMRI has purchased all of the outstanding shares of
Excelsyn for approximately $19 million in cash.  The terms of the
Agreement also prevent solicitation of employees and competition in the
pharmaceutical manufacturing industry against the Company by the selling
shareholders of Excelsyn for a period of two years from the transaction closing
date.  Other than the Agreement and the related agreements, there are no
material relationships between the Company on the one hand, and Excelsyn, the
Sellers, or the Subsidiary on the other hand.




Excelsyn
provides development and large scale manufacturing services to large
pharmaceutical, specialty pharmaceutical and biotechnology customers throughout
Europe, Asia and North America. Manufacturing services include pre-clinical and
Phase I – III product development as well as commercial manufacturing services
for approved products.  The acquisition of Excelsyn expands AMRI’s
portfolio of development and large scale manufacturing facilities as well as its
customer portfolio, with little overlap of customers between the two
companies.





F-39





ALBANY
MOLECULAR RESEARCH, INC.




SCHEDULE
II—VALUATION AND QUALIFYING ACCOUNTS




Years
Ended December 31, 2009, 2008 and 2007




Description
                                
                                Balance at
                                  Beginning of
                                  Period
                                
                                (Reversal of)/
                                  Charge to Cost
                                  and Expenses
                                
                                Deductions
                                  Charged to
                                  Reserves
                                
                                Balanceat
                                  End of
                                  PeriodAllowance
      for doubtful accounts receivable2009
                                
                                $
                                621,468
                                
                                
                                $
                                (93,076
                                )
                                
                                $
                                (103,689
                                )
                                
                                $
                                424,7032008
                                
                                $
                                252,232
                                
                                
                                $
                                480,000
                                
                                
                                $
                                (110,764
                                )
                                
                                $
                                621,4682007
                                
                                $
                                293,224
                                
                                
                                $
                                26,851
                                
                                
                                $
                                (67,843
                                )
                                
                                $
                                252,232Deferred
      tax asset valuation allowance2009
                                
                                $
                                8,685,138
                                
                                
                                $
                                3,021,828
                                
                                
                                
                                —
                                
                                
                                $
                                11,706,9662008
                                
                                $
                                6,028,231
                                
                                
                                $
                                2,656,907
                                
                                
                                
                                —
                                
                                
                                $
                                8,685,1382007
                                
                                $
                                3,189,895
                                
                                
                                $
                                2,838,336
                                
                                
                                
                                —
                                
                                
                                $
                                6,028,231




F-40