**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-Q**




**x**
            
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934****For
                the Quarterly Period Ended September 30, 2008****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
            
            (I.R.S.
                Employerincorporation
                or organization)
            
            Identification
                No.)




**21
      Corporate Circle**


**PO
      Box 15098**


**Albany,
      New York 12212-5098**


(Address
      of principal executive offices)




**(518)
      464-0279**


(Registrant’s
      telephone number, including area code)




**N/A**


(Former
      name, former address and former fiscal year, if changed since last
      report)




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.




Yesx
            
            Noo




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 “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act.




Large
                accelerated filero
            
            Accelerated
                filerxNon-accelerated
                filero
            
            Smaller
                reporting companyo




Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act).




Yeso
            
            Nox




Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date.




**Class**
            
            **Outstanding at October
                31, 2008**Common
                Stock, $.01 par value
            
            31,470,917,
                excluding treasury shares of 3,787,366










ALBANY
      MOLECULAR RESEARCH, INC.


INDEX




Part I.
            
            Financial
                Information
            
            3Item
                1.
            
            Condensed
                Consolidated Financial Statements (Unaudited)
            
            3Condensed
                Consolidated Statements of Operations
            
            3Condensed
                Consolidated Balance Sheets
            
            4Condensed
                Consolidated Statements of Cash Flows
            
            5Notes
                to Condensed Consolidated Financial Statements
            
            6Item
                2.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            19Item
                3.
            
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            28Item
                4.
            
            Controls
                and Procedures
            
            28Part II.
            
            Other
                Information
            
            29Item
                1.
            
            Legal
                Proceedings
            
            29Item
                1A.
            
            Risk
                Factors
            
            30Item
                2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            30Item
                6.
            
            Exhibits
            
            31Signatures
            
            
            
            32Exhibit Index




2


PART I
      — FINANCIAL INFORMATION




Item
      1.  Condensed
      Consolidated Financial Statements (Unaudited)




**Albany
      Molecular Research, Inc.**


**Condensed
      Consolidated Statements of Operations**


**(unaudited)**


**Three Months Ended**
              
              **Nine Months Ended****(Dollars
                  in thousands, except for per share data)**
              
              **September 30,**
                **2008**
              
              **September 30,**
                **2007**
              
              **September 30,**
                **2008**
              
              **September 30,**
                **2007**Contract
                  revenue
              
              $
              54,142
              
              $
              41,571
              
              $
              145,841
              
              $
              122,738Recurring
                  royalties
              
              
              5,723
              
              
              5,986
              
              
              21,529
              
              
              20,970Milestone
                  revenue
              
              
              1,500
              
              
              —
              
              
              5,500
              
              
              1,580Total
                  revenue
              
              
              61,365
              
              
              47,557
              
              
              172,870
              
              
              145,288Cost
                  of contract revenue
              
              
              38,759
              
              
              33,404
              
              
              108,518
              
              
              96,094Technology
                  incentive award
              
              
              568
              
              
              599
              
              
              2,224
              
              
              2,126Research
                  and development
              
              
              3,610
              
              
              3,107
              
              
              9,454
              
              
              9,225Selling,
                  general and administrative
              
              
              9,681
              
              
              8,310
              
              
              28,790
              
              
              24,957Restructuring
              
              
              —
              
              
              —
              
              
              1,833
              
              
              285Total
                  costs and expenses
              
              
              52,618
              
              
              45,420
              
              
              150,819
              
              
              132,687Income
                  from operations
              
              
              8,747
              
              
              2,137
              
              
              22,051
              
              
              12,601Interest
                  income, net
              
              
              212
              
              
              818
              
              
              990
              
              
              2,352Other
                  income (expense), net
              
              
              536
              
              
              (125
              )
              
              685
              
              
              (105
              )Income
                  before income taxes
              
              
              9,495
              
              
              2,830
              
              
              23,726
              
              
              14,848Income
                  taxes
              
              
              2,492
              
              
              850
              
              
              6,307
              
              
              5,068Net
                  income
              
              $
              7,003
              
              $
              1,980
              
              $
              17,419
              
              $
              9,780Basic
                  earnings per share
              
              $
              0.22
              
              $
              0.06
              
              $
              0.55
              
              $
              0.30Diluted
                  earnings per share
              
              $
              0.22
              
              $
              0.06
              
              $
              0.55
              
              $
              0.30




*See
      notes to unaudited condensed consolidated financial
      statements.*


3


**Albany
      Molecular Research, Inc.**


**Condensed
      Consolidated Balance Sheets**


**(unaudited)**




**(Dollars
                and
                shares in thousands, except for per share data)**
            
            **September 30,**
              **2008**
            
            **December 31,**
              **2007****Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            60,014
            
            $
            45,506Marketable
                securities, available-for-sale
            
            
            31,264
            
            
            62,193Accounts
                receivable, net
            
            
            41,765
            
            
            28,006Royalty
                income receivable
            
            
            5,696
            
            
            6,086Inventory
            
            
            28,015
            
            
            22,581Unbilled
                services
            
            
            485
            
            
            259Prepaid
                expenses and other current assets
            
            
            8,136
            
            
            5,698Deferred
                income taxes
            
            
            3,369
            
            
            4,931Total
                current assets
            
            
            178,744
            
            
            175,260Property
                and equipment, net
            
            
            163,423
            
            
            158,028Goodwill
            
            
            41,623
            
            
            46,575Intangible
                assets and patents, net
            
            
            2,026
            
            
            2,232Equity
                investment in unconsolidated affiliates
            
            
            956
            
            
            956Pension
                and postretirement benefits
            
            
            1,073
            
            
            624Other
                assets
            
            
            4,120
            
            
            2,979Total
                assets
            
            $
            391,965
            
            $
            386,654**Liabilities
                and Stockholders’ Equity**Current
                liabilities:Accounts
                payable and accrued expenses
            
            $
            23,715
            
            $
            17,455Deferred
                revenue
            
            
            5,264
            
            
            6,922Accrued
                pension benefits
            
            
            303
            
            
            303Income
                taxes payable
            
            
            3,873
            
            
            1,789Current
                installments of long-term debt
            
            
            260
            
            
            9,900Total
                current liabilities
            
            
            33,415
            
            
            36,369Long-term
                liabilities:Long-term
                debt, excluding current installments
            
            
            13,482
            
            
            4,080Deferred
                income taxes
            
            
            11,292
            
            
            11,446Environmental
                liabilities
            
            
            191
            
            
            191Total
                liabilities
            
            
            58,380
            
            
            52,086Commitments
                and contingenciesStockholders’
                equity:Common
                stock, $0.01 par value, 100,000 shares authorized, 35,261 shares
                issued as of September 30, 2008 and 35,075 shares issued as of December
                31, 2007
            
            
            353
            
            
            351Additional
                paid-in capital
            
            
            198,621
            
            
            195,985Retained
                earnings
            
            
            187,675
            
            
            170,256Accumulated
                other comprehensive income, net
            
            
            324
            
            
            5,147Treasury
                shares at cost, 3,526 shares as of September 30, 2008 and
                2,077 shares as of December 31, 2007
            
            
            (53,388
            )
            
            (37,171
            )Total
                stockholders’ equity
            
            
            333,585
            
            
            334,568Total
                liabilities and stockholders’ equity
            
            $
            391,965
            
            $
            386,654




*See
      notes to unaudited condensed consolidated financial
      statements.*




4


**Albany
      Molecular Research, Inc.**


**Condensed
      Consolidated Statements of Cash Flows**


**(unaudited)**




**Nine
                Months Ended****(Dollars in thousands)**
            
            **September 30, 2008**
            
            **September 30, 2007****Operating
                activities**Net
                income
            
            $
            17,419
            
            $
            9,780Adjustments
                to reconcile net income to net cash provided by operating
                activities:
              Depreciation
                and amortization
            
            
            13,471
            
            
            12,657Deferred
                income tax expense
            
            
            1,428
            
            
            1,065Gain
                on disposal of property and equipment
            
            
            (7
            )
            
            (12
            )Provision
                for bad debts
            
            
            140
            
            
            27Stock-based
                compensation expense
            
            
            1,323
            
            
            994Provision
                for obsolete inventories
            
            
            1,308
            
            
            1,169(Increase)
                decrease in:Accounts
                receivable
            
            
            (13,857
            )
            
            2,994Royalty
                income receivable
            
            
            390
            
            
            259Inventory,
                unbilled services, prepaid expenses and other assets
            
            
            (10,521
            )
            
            (4,802
            )Increase
                (decrease) in:Accounts
                payable and accrued expenses
            
            
            5,826
            
            
            (4,325
            )Income
                tax payable
            
            
            2,139
            
            
            5,811Deferred
                revenue
            
            
            (1,658
            )
            
            (1,491
            )Pension
                and postretirement benefits
            
            
            (449
            )
            
            (690
            )Other
                long-term liabilities
            
            
            —
            
            
            (45
            )Net
                cash provided by operating activities
            
            
            16,952
            
            
            23,391**Investing
                activities**Purchases
                of marketable securities
            
            
            (25,757
            )
            
            (60,465
            )Proceeds
                from sales of marketable securities
            
            
            56,499
            
            
            72,884Purchase
                of businesses, net of cash acquired
            
            
            (1,729
            )
            
            (11,893
            )Purchase
                of property and equipment
            
            
            (14,417
            )
            
            (12,000
            )Proceeds
                from disposal of property and equipment
            
            
            71
            
            
            1,535Payments
                for patent applications and other costs
            
            
            (353
            )
            
            (330
            )Net
                cash provided by (used in) investing activities
            
            
            14,314
            
            
            (10,269
            )**Financing
                activities**Purchases
                of treasury stock
            
            
            (16,217
            )
            
            —Principal
                payments on long-term debt
            
            
            (9,643
            )
            
            (3,479
            )Borrowings
                on line of credit
            
            
            9,405
            
            
            —Proceeds
                from sale of common stock
            
            
            1,258
            
            
            1,052Tax
                benefit of stock option exercises
            
            
            56
            
            
            104Net
                cash used in financing activities
            
            
            (15,141
            )
            
            (2,323
            )Effect
                of exchange rate changes on cash flows
            
            
            (1,617
            )
            
            427Increase
                in cash and cash equivalents
            
            
            14,508
            
            
            11,226Cash
                and cash equivalents at beginning of period
            
            
            45,506
            
            
            26,124Cash
                and cash equivalents at end of period
            
            $
            60,014
            
            $
            37,350




*See
      notes to unaudited condensed consolidated financial
      statements.*




5


**Notes
      to Condensed Consolidated Financial Statements**




(All
      amounts in thousands, except per share amounts, unless otherwise
      noted)




**Note
      1 — Summary of Operations and Significant Accounting
      Policies**




**Nature
      of Business and Operations**




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
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with U.S. generally accepted accounting principles for
      interim financial information and with the instructions to Form 10-Q and Rule
      10-01 of Regulation S-X. In accordance with Rule 10-01, the unaudited condensed
      consolidated financial statements do not include all of the information and
      footnotes required by U.S. generally accepted accounting principles for complete
      consolidated financial statements. The year-end condensed consolidated balance
      sheet data was derived from audited financial statements but does not include
      all disclosures required by U.S. generally accepted accounting principles.
      In
      the opinion of management, all adjustments (consisting of normal recurring
      accruals and adjustments) considered necessary for a fair statement of the
      results for the interim period have been included. Operating results for the
      three and nine months ended September 30, 2008 are not necessarily indicative
      of
      the results that may be expected for the year ending December 31, 2008. The
      accompanying unaudited condensed consolidated financial statements should be
      read in conjunction with the audited consolidated financial statements and
      notes
      thereto included in our Annual Report on Form 10-K for the fiscal year ended
      December 31, 2007.




The
      accompanying unaudited condensed consolidated financial statements include
      the
      accounts of Albany Molecular Research, Inc. and its wholly-owned subsidiaries.
      All intercompany balances and transactions have been eliminated during
      consolidation. 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. Unrealized gains or losses
      resulting from translating non-U.S. currency financial statements are recorded
      in accumulated other comprehensive income in the accompanying unaudited
      condensed 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.
      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 Emerging
      Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple
      Deliverables,” and Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition”.
      Allocation of revenue to individual elements that qualify for separate
      accounting is based on the estimated fair value of the respective
      elements.




The
      Company generates contract revenue on the following basis:


6




*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.




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




**Long-lived
      Assets**




In
      accordance with the provisions of Statement of Financial Accounting Standards
      (“SFAS”) No. 144, **“** Accounting
      for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), the
      Company assesses the impairment of long-lived assets whenever events or changes
      in circumstances indicate that their carrying value may not be recoverable.
      Factors the Company considers important which could trigger an impairment review
      include, among others, the following:




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




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




·
            a
                significant decrease in the market value of
                assets.




If
      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.


7




**Goodwill**




In
      accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible
      Assets” (“SFAS No. 142”), the Company performs an annual **** assessment
      of the carrying value of goodwill for potential impairment (or on an interim
      basis if certain triggering events occur). A determination of impairment is
      made
      based upon the fair value of the related reporting unit. If goodwill is
      determined to be impaired in the future the Company would be required to record
      a charge to its results of operations. Factors the Company considers important
      which could result in an impairment include the following:




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




·  significant
      negative industry or economic trends; and




·  market
      capitalization relative to net book value.




The
      Company performs its annual goodwill assessment of its reporting units as of
      the
      end of the third quarter. Total
      goodwill recorded on the Company’s unaudited condensed consolidated balance
      sheet at September 30, 2008 was $41,623 primarily comprised of $23,060 of
      goodwill associated with the Company’s acquisition of AMRI Rensselaer, Inc.
      (“AMRI Rensselaer”), formerly known as Organichem, Inc., $11,689 of goodwill
      attributable to ComGenex Kutato-Fejleszto Rt (“AMRI Hungary”), $3,226 of
      goodwill associated with the Company’s acquisition of certain assets of Ariane
      Orgachem Pvt. Ltd. in Aurangabad, India, and Ferico Laboratories Ltd. located
      in
      Navi Mumbai, India, collectively known as India Pvt. Limited (“AMRI India”), and
      $962 of goodwill associated with the Company’s acquisition of FineKem
      Laboratories Pvt. Limited (“FineKem”).




**Stock
      Compensation**




Effective
      January 1, 2006, the Company adopted SFAS No. 123 (Revised 2004), “Share-Based
      Payment” (“SFAS No. 123 (R)”), which amended SFAS No. 123 and superseded
      Accounting Principals Board (“APB”) No. 25 ** in
      establishing standards for the accounting for transactions in which an entity
      exchanges its equity instruments for goods or services, as well as transactions
      in which an entity incurs liabilities in exchange for goods or services that
      are
      based on the fair value of the entity’s equity instruments or that may be
      settled by the issuance of those equity instruments. This Statement requires
      that the cost resulting from all share-based payment transactions be recognized
      in the financial statements based on the fair value of the share-based payment.
      This Statement establishes fair value as the measurement objective in accounting
      for share-based payment transactions with employees, except for equity
      instruments held by employee share ownership plans. As allowed under SFAS No.
      123 (R), the Company elected the modified prospective method of adoption, under
      which compensation cost is recognized in the financial statements beginning
      with
      the effective date of SFAS No. 123 (R) for all share-based payments granted
      after that date, and for all unvested awards granted prior to the effective
      date
      of SFAS No. 123 (R). Accordingly, prior period amounts were not
      restated.




**Note
      2 — Business Combination**




**Acquisition
      of FineKem**




On
      January 17, 2008, the Company, through a wholly-owned subsidiary, completed
      the
      purchase of FineKem, a manufacturing facility located in Aurangabad, India.
      The
      aggregate purchase price of $1,701 included cash payments totaling $1,665 and
      capitalized costs related to the acquisition, primarily professional fees,
      of
      $36.




The
      following table summarizes the preliminary allocation of the purchase price
      to
      the estimated fair value of the net assets acquired. The allocation will be
      adjusted upon the final determination of the purchase price and the completion
      of the Company’s valuation of the acquired assets and liabilities of
      FineKem.


8




**January 17, 2008****Assets
                Acquired**Accounts
                receivable
            
            $
            42Inventory
            
            
            139Prepaid
                expenses and other current assets
            
            
            26Property
                and equipment
            
            
            556Goodwill
            
            
            1,142Total
                assets acquired
            
            $
            1,905**Liabilities
                Assumed**Accounts
                payable and accrued expenses
            
            $
            204Total
                liabilities assumed
            
            $
            204Net
                assets acquired
            
            $
            1,701




Pro
      forma
      financial information for the three and nine months ended September 30, 2008
      and
      2007, as if the FineKem acquisition had been completed as of January 1, 2007,
      has been excluded due to the immateriality of the operating results of FineKem
      in relation to the Company’s consolidated operating results as a
      whole.




**Acquisition
      of AMRI India**




On
      June
      29, 2007, the Company, through a wholly-owned subsidiary, acquired certain
      assets of AMRI India. The aggregate purchase price of $11,926 included cash
      payments totaling $11,073 and capitalized costs related to the acquisition,
      primarily professional fees, of $853.




The
      following table summarizes the final allocation of the purchase price to the
      estimated fair value of the net assets acquired. The allocation was adjusted
      during the second quarter 2008 upon the final determination of the purchase
      price and the completion of the Company’s valuation of the acquired assets and
      liabilities of AMRI India.




**June 29, 2007****Assets
                Acquired**Accounts
                receivable
            
            $
            13Inventory
            
            
            624Prepaid
                expenses and other current assets
            
            
            229Property
                and equipment
            
            
            7,787Goodwill
            
            
            3,693Total
                assets acquired
            
            $
            12,346**Liabilities
                Assumed**Accounts
                payable and accrued expenses
            
            $
            420Total
                liabilities assumed
            
            $
            420Net
                assets acquired
            
            $
            11,926


9


**Note
      3 — Earnings Per Share**




The
      shares used in the computation of the Company’s basic and diluted earnings per
      share are as follows:




**Three Months Ended September 30,**
            
            **Nine Months Ended September 30,****(in thousands)**
            
            **2008**
            
            **2007**
            
            **2008**
            
            **2007**Weighted
                average basic common shares outstanding
            
            
            31,176
            
            
            32,369
            
            
            31,517
            
            
            32,318Dilutive
                effect of stock options
            
            
            135
            
            
            116
            
            
            53
            
            
            96Dilutive
                effect of restricted stock
            
            
            211
            
            
            228
            
            
            189
            
            
            175Weighted
                average dilutive common shares outstanding
            
            
            31,522
            
            
            32,713
            
            
            31,759
            
            
            32,589





The
      Company has excluded certain outstanding stock options from the calculation
      of
      diluted earnings per share for the three and nine months ended September 30,
      2008 and 2007 because the exercise price was greater than the average market
      price of the Company’s common shares during that period, and as such, these
      options would be anti-dilutive. The weighted average number of anti-dilutive
      options and restricted shares outstanding (before the effects of the treasury
      stock method) was 972 and 1,604 for the three months ended September 30, 2008
      and 2007, respectively and 1,593 and 1,915 for the nine months ended September
      30, 2008 and 2007, respectively. These amounts are not included in the
      calculation of weighted average common shares outstanding.




**Note
      4 — Inventory**




Inventory
      consisted of the following at September 30, 2008 and December 31,
      2007:




**September 30,**
              **2008**
            
            **December 31,**
              **2007**Raw
                materials
            
            $
            10,287
            
            $
            6,865Work
                in process
            
            
            4,366
            
            
            2,064Finished
                goods
            
            
            13,331
            
            
            13,535Libraries,
                net of accumulated amortization
            
            
            31
            
            
            117Total
            
            $
            28,015
            
            $
            22,581




**Note
      5 — Restructuring**




**AMRI
      Hungary**




In
      May
      2008, the Company initiated a restructuring of its Hungary location. The goal
      of
      the restructuring was to realign the business model for these operations to
      better support the Company’s long-term strategy for providing Discovery Services
      in the European marketplace. The Company recorded a restructuring charge of
      approximately $1,833 in the second quarter of 2008, including termination
      benefits and personnel realignment costs of approximately $901, losses on grant
      contracts of approximately $389, lease abandonment charges of approximately
      $463
      and administrative costs associated with the restructuring plan of
      $80.




The
      restructuring costs are included under the caption “Restructuring” in the
      consolidated financial statement of operations during 2008 and the restructuring
      liabilities are included in “Accounts payable and accrued expenses” on the
      consolidated balance sheet at September 30, 2008.




The
      Hungary restructuring activity was recorded in the Company’s
      Discovery/Development/Small Scale Manufacturing (“DDS”) operating
      segment.  The
      following table displays AMRI Hungary’s restructuring activity and liability
      balances within our DDS operating segment:


10


**Balance
                  at**
                **January
                  1,**
                **2008**
              
              **Charges**
              
              **Incurred**
                **Amounts**
              
              **Foreign**
                **Currency
                  Translation Adjustments**
              
              **Balance
                  at**
                **September
                  30,**
                **2008**Termination
                  benefits and personnel realignment
              
              $
              —
              
              
              901
              
              
              (526
              )
              
              (14
              )
              $
              361Losses
                  on grant contracts
              
              
              —
              
              
              389
              
              
              (61
              )
              
              (19
              )
              
              309Lease
                  abandonment charges
              
              
              —
              
              
              463
              
              
              (13
              )
              
              (28
              )
              
              422Administrative
                  costs associated with restructuring
              
              
              —
              
              
              80
              
              
              (33
              )
              
              (2
              )
              
              45Total
              
              $
              —
              
              $
              1,833
              
              $
              (633
              )
              $
              (63
              )
              $
              1,137





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





The
      net
      cash outflow related to the Hungary restructuring for the nine months ended
      September 30, 2008 was $633. Anticipated cash outflows related to the Hungary
      restructuring for the remainder of 2008 is approximately $303, which primarily
      consists of the payment of termination benefits and personnel realignment and
      incurring losses on grant contracts.





**Large
      Scale Manufacturing Facility**




On
      November 9, 2006, the Company announced plans to initiate a restructuring of
      the
      Company’s Large Scale Manufacturing (“LSM”) business segment. The Company
      recorded a restructuring charge of approximately $2,400 in the fourth quarter
      of
      2006, including a non-cash asset disposal charge of approximately $1,600, and
      other charges of approximately $800, consisting primarily of termination
      benefits, and additional restructuring charges of $273 in 2007, consisting
      of
      termination benefits. There were no LSM restructuring charges taken during
      the
      first nine months of 2008.




The
      restructuring costs are included under the caption “Restructuring” in the
      consolidated statements of operations during 2007, and the restructuring
      liabilities are included in “Accounts payable and accrued expenses” on the
      consolidated balance sheets at September 30, 2008 and December 31,
      2007.




Termination
      benefits relate to severance packages, outplacement services and career
      counseling for employees affected by the restructuring. Asset disposal costs
      relate primarily to the carrying value of underutilized assets that were
      identified for disposal in conjunction with the restructuring plan.




The
      large
      scale manufacturing restructuring activity was recorded in the LSM operating
      segment. The net cash outflow related to the large scale manufacturing
      restructuring for the nine months ended September 30, 2008 and 2007 were $140
      and $684, respectively. Anticipated cash outflows related to the large scale
      manufacturing restructuring for the remainder of 2008 are $0.




**Note
      6 — Goodwill and Intangible Assets**




The
      carrying amounts of goodwill, by the Company’s DDS and LSM operating segments,
      as of September 30, 2008 and December 31, 2007 are as follows:




**DDS**
            
            **LSM**
            
            **Total****September
                30, 2008**
            
            $
            14,375
            
            $
            27,248
            
            $
            41,623**December 31,
                2007**
            
            $
            14,141
            
            $
            32,434
            
            $
            46,575




The
      increase in goodwill within the DDS segment from December 31, 2007 to September
      30, 2008 is related to the impact of foreign currency translation. The decrease
      in goodwill within the LSM segment is related primarily to the valuation
      adjustments on AMRI India, as well as the impact of foreign currency
      translation, offset by adjustments of beginning goodwill associated with the
      acquisition of FineKem.




The
      components of intangible assets are as follows:


11




**Cost**
            
            **Accumulated**
              **Amortization**
            
            **Net**
            
            **Amortization**
              **Period****September
                30, 2008**Patents
                and Licensing Rights
            
            $
            3,208
            
            $
            (1,182
            )
            $
            2,026
            
            
            2-16
                yearsOther
            
            
            992
            
            
            (992
            )
            
            —
            
            
            18-24
                monthsTotal
            
            $
            4,200
            
            $
            (2,174
            )
            $
            2,026**December 31,
                2007**Patents
                and Licensing Rights
            
            $
            2,976
            
            $
            (1,075
            )
            $
            1,901
            
            
            2-16
                yearsOther
            
            
            973
            
            
            (642
            )
            
            331
            
            
            18-24
                monthsTotal
            
            $
            3,949
            
            $
            (1,717
            )
            $
            2,232




Amortization
      expense related to intangible assets was $75 and $156 for the three months
      ended
      September 30, 2008 and 2007, respectively and $576 and $479 for the nine months
      ended September 30, 2008 and 2007, respectively.




Following
      is the estimated future annual amortization expense related to intangible
      assets:





**Year
                ending December 31,**2008
                (remaining)
            
            $
            572009
            
            
            2042010
            
            
            1842011
            
            
            1762012
            
            
            176Thereafter
            
            
            1,229




**Note
      7 - Defined Benefit and Postretirement Welfare Plan**




AMRI
      Rensselaer previously provided retirement benefits under two non-contributory
      defined benefit plans and a non-contributory, unfunded post-retirement welfare
      plan. Future benefits under the defined benefit plans and for salaried
      participants in the post-retirement welfare plan have been frozen.




***Components
      of Net Periodic Benefit Cost***




**Pension**
              **Benefits**
            
            **Postretirement**
              **Benefits**
            
            **Pension**
              **Benefits**
            
            **Postretirement**
              **Benefits****Three Months**
              **Ended September 30,**
            
            **Three Months**
              **Ended September 30,**
            
            **Nine Months**
              **Ended September 30,**
            
            **Nine Months**
              **Ended September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**
            
            **2008**
            
            **2007**
            
            **2008**
            
            **2007**Service
                cost
            
            $
            —
            
            $
            —
            
            
            17
            
            $
            11
            
            $
            —
            
            $
            —
            
            $
            41
            
            $
            34Interest
                cost
            
            
            332
            
            
            305
            
            
            18
            
            
            9
            
            
            942
            
            
            915
            
            
            38
            
            
            27Expected
                return on plan assets
            
            
            (397
            )
            
            (371
            )
            
            —
            
            
            —
            
            
            (1,169
            )
            
            (1,114
            )
            
            —
            
            
            —Amortization
                of prior service cost
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1Recognized
                net loss
            
            
            —
            
            
            —
            
            
            4
            
            
            2
            
            
            —
            
            
            —
            
            
            8
            
            
            5Net
                periodic benefit (income) cost
            
            $
            (65
            )
            $
            (66
            )
            $
            39
            
            $
            22
            
            $
            (227
            )
            $
            (199
            )
            $
            87
            
            $
            67**Recognized
                in Accumulated Other Comprehensive Income
                (“AOCI”):**Net
                actuarial loss
            
            
            —
            
            
            —
            
            
            4
            
            
            2
            
            
            —
            
            
            —
            
            
            8
            
            
            3Total
                recognized in AOCI, pre-tax
            
            $
            —
            
            $
            —
            
            $
            4
            
            $
            2
            
            $
            —
            
            $
            —
            
            $
            8
            
            $
            3




***Employer
      Contributions***




The
      Company previously disclosed in its consolidated financial statements for the
      year ended December 31, 2007 that it expected to contribute $303 to its
      pension plan in 2008.  Based on revised actuarial assumptions, the Company
      expects total contributions for 2008 to be $291. As of September 30, 2008,
      $291
      in contributions had been made; therefore the Company does not anticipate making
      any additional contributions during 2008.


12


**Note
      8 — Share-based Compensation**




During
      the three months ended September 30, 2008 and 2007, the Company recognized
      total
      share based compensation cost, net of tax, of $328 and $270, respectively.
      During the nine months ended September 30, 2008 and 2007, the Company recognized
      total share based compensation cost, net of tax, of $912 and $749, respectively.
      During the nine months ended September 30, 2008 and 2007, cash received from
      stock option exercises and employee stock purchases was $1,258 and $1,052,
      respectively. The actual tax benefit realized for the tax deductions from stock
      option exercises and plan purchases was $56 and $104 during the nine months
      ended September 30, 2008 and 2007, respectively.




The
      Company historically granted share-based payments, including restricted shares,
      under its 1998 Stock Option and Incentive Plan, as well as its 1998 Employee
      Stock Purchase Plan. The 1998 Stock Option and Incentive Plan was terminated
      as
      of June 4, 2008 and replaced by the 2008 Stock Option and Incentive Plan, which
      was approved at the Annual Meeting of Stockholders in June 2008.




**Restricted
      Stock**




A
      summary
      of unvested restricted stock activity as of September 30, 2008 and changes
      during the nine months then ended is presented below:




**Number of**
              **Shares**
            
            **Weighted**
              **Average Grant Date**
              **Fair Value Per Share**Outstanding,
                December 31, 2007
            
            
            518
            
            $
            9.79Granted
            
            
            156
            
            $
            11.47Vested
            
            
            (103
            )
            $
            8.45Forfeited
            
            
            (42
            )
            $
            10.14Outstanding,
                September 30, 2008
            
            
            529
            
            $
            10.52




The
      weighted average fair value of restricted shares per share granted during the
      nine months ended September 30, 2008 and 2007 was $11.47 and $9.90,
      respectively. As of September 30, 2008, there was $3,986 of total unrecognized
      compensation cost related to non-vested restricted shares. That cost is expected
      to be recognized over a weighted-average period of 3.0 years. During the nine
      months ended September 30, 2008, 103 restricted shares vested.




**Stock
      Options**




The
      fair
      value of each stock option award is estimated at the date of grant using the
      Black-Scholes valuation model based on the following assumptions:




**For the Nine Months Ended****September 30, 2008**
            
            **September 30, 2007**Expected
                life in years
            
            
            5
            
            
            5Interest
                rate
            
            
            2.90
            %
            
            4.69
            %Volatility
            
            
            41
            %
            
            38
            %Dividend
                yield
            
            
            —
            
            
            —




A
      summary
      of stock option activity as of September 30, 2008 and changes during the nine
      month period then ended is presented below:




**Number of**
              **Shares**
            
            **Weighted**
              **Exercise**
              **Price Per
                Share**
            
            **Weighted Average**
              **Remaining**
              **Contractual Term**
              **(Years)**
            
            **Aggregate**
              **Intrinsic**
              **Value**Outstanding, December
                31, 2007
            
            
            1,963
            
            $
            20.95Granted
            
            
            91
            
            
            12.11Exercised
            
            
            (54
            )
            
            14.70Forfeited
            
            
            (136
            )
            
            23.52Expired
            
            
            —
            
            
            —Outstanding,
                September 30, 2008
            
            
            1,864
            
            
            20.51
            
            
            4.5
            
            $
            4,785Options
                exercisable, September 30, 2008
            
            
            1,558
            
            $
            22.06
            
            
            3.6
            
            $
            3,103




The
      weighted average fair value of stock options granted for the nine months ended
      September 30, 2008 and 2007 was $4.85 and $4.56, respectively. As of September
      30, 2008 there was $1,243 of total unrecognized compensation cost related to
      non-vested stock options. That cost is expected to be recognized over a
      weighted-average period of 2.3 years.


13




***Employee
      Stock Purchase Plan***




During
      the nine months ended September 30, 2008 and 2007, 29 and 37 shares,
      respectively, were issued under the Company’s 1998 Employee Stock Purchase Plan.




**Note
      9 — Operating Segment Data**




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




DDS
      includes activities such as drug lead discovery, optimization, drug development
      and small scale commercial manufacturing. LSM includes pilot to commercial
      scale
      manufacturing of active pharmaceutical ingredients and intermediates and high
      potency and controlled substance manufacturing, all of which are in compliance
      with the Food and Drug Administration’s (“FDA”) current Good Manufacturing
      Practices. Corporate activities include business development and administrative
      functions, as well as research and development costs that have not been
      allocated to the operating segments.




The
      following table contains earnings data by operating segment, reconciled to
      totals included in the unaudited condensed consolidated financial
      statements:




**Contract**
              **Revenue**
            
            **Milestone &**
              **Recurring**
              **Royalty**
              **Revenue**
            
            **Operating**
              **(loss) income**
            
            **Depreciation**
              **and**
              **Amortization****For
                the three months ended September 30,
                2008**DDS
            
            $
            30,985
            
            $
            7,223
            
            $
            18,082
            
            $
            2,673LSM
            
            
            23,157
            
            
            —
            
            
            3,956
            
            
            1,675Corporate
            
            
            —
            
            
            —
            
            
            (13,291
            )
            
            —Total
            
            $
            54,142
            
            $
            7,223
            
            $
            8,747
            
            $
            4,348**For
                the three months ended September 30,
                2007**DDS
            
            $
            23,633
            
            $
            5,986
            
            $
            12,420
            
            $
            2,556LSM
            
            
            17,938
            
            
            —
            
            
            1,134
            
            
            1,753Corporate
            
            
            —
            
            
            —
            
            
            (11,417
            )
            
            —Total
            
            $
            41,571
            
            $
            5,986
            
            $
            2,137
            
            $
            4,309**For
                the nine months ended September 30, 2008**DDS
            
            $
            87,642
            
            $
            27,029
            
            $
            53,708
            
            $
            8,247LSM
            
            
            58,199
            
            
            —
            
            
            6,587
            
            
            5,224Corporate
            
            
            —
            
            
            —
            
            
            (38,244
            )
            
            —Total
            
            $
            145,841
            
            $
            27,029
            
            $
            22,051
            
            $
            13,471**For
                the nine months ended September 30, 2007**DDS
            
            $
            64,138
            
            $
            22,470
            
            $
            38,107
            
            $
            7,669LSM
            
            
            58,600
            
            
            80
            
            
            8,670
            
            
            4,988Corporate
            
            
            —
            
            
            —
            
            
            (34,176
            )
            
            —Total
            
            $
            122,738
            
            $
            22,550
            
            $
            12,601
            
            $
            12,657


14




The
      following table summarizes other information by segment as of September 30,
      2008:




**As of September
                30, 2008****DDS**
            
            **LSM**
            
            **Total**Total
                assets
            
            $
            227,482
            
            $
            164,483
            
            $
            391,965Goodwill
                included in total assets
            
            
            14,375
            
            
            27,248
            
            
            41,623




The
      following table summarizes other information by segment as of December 31,
      2007:




**As of December
                31, 2007****DDS**
            
            **LSM**
            
            **Total**Total
                assets
            
            $
            235,603
            
            $
            151,051
            
            $
            386,654Goodwill
                included in total assets
            
            
            14,141
            
            
            32,434
            
            
            46,575




**Note
      10 — Financial Information by Customer Concentration and Geographic
      Area**




Total
      contract revenue from DDS’s three largest customers represented approximately
      11%, 8% and 8% of DDS’s total contract revenue for the three months ended
      September 30, 2008, and 9%, 8% and 4% of DDS’s total contract revenue for the
      three months ended September 30, 2007. Total contract revenue from DDS’s three
      largest customers represented approximately 11%, 10% and 7% of DDS’s total
      contract revenue for the nine months ended September 30, 2008 and 9%, 9% and
      5%
      for the nine months ended September 30, 2007. Total contract revenue from LSM’s
      largest customer, GE Healthcare (“GE”), represented 42% and 35% of LSM’s total
      contract revenue for the three months ended September 30, 2008 and 2007,
      respectively. Total contract revenue from GE represented 44% and 40% of LSM’s
      total contract revenue for the nine months ended September 30, 2008 and 2007,
      respectively. GE accounted for approximately 18% and 19% of the Company’s total
      contract revenue for the nine months ended September 30, 2008 and 2007,
      respectively.




The
      Company’s total contract revenue for the three and nine months ended September
      30, 2008 and 2007 was recognized from customers in the following geographic
      regions:




**Three Months Ended September 30,**
            
            **Nine Months Ended September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**United
                States
            
            
            68
            %
            
            70
            %
            
            68
            %
            
            69
            %Europe
            
            
            23
            
            
            25
            
            
            22
            
            
            26Other
            
            
            9
            
            
            5
            
            
            10
            
            
            5Total
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            100
            %




**Note
      11 — Comprehensive Income**




The
      following table presents the components of the Company’s comprehensive income
      for the three and nine months ended September 30, 2008 and 2007:




**Three Months Ended September 30,**
            
            **Nine Months Ended September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Net
                income
            
            $
            7,003
            
            $
            1,980
            
            $
            17,419
            
            $
            9,780Other
                comprehensive loss:Change
                in unrealized (loss) gain on available-for-sale securities, net of
                taxes
            
            
            (35
            )
            
            37
            
            
            (17
            )
            
            66Change
                in unrealized loss on interest rate swap, net of taxes
            
            
            —
            
            
            (26
            )
            
            (5
            )
            
            (71
            )Foreign
                currency translation (loss) gain
            
            
            (4,784
            )
            
            2,660
            
            
            (4,809
            )
            
            3,238Net
                actuarial loss (gain) of pension and postretirement benefits, net
                of
                taxes
            
            
            4
            
            
            2
            
            
            8
            
            
            5Total
                comprehensive income
            
            $
            2,188
            
            $
            4,653
            
            $
            12,596
            
            $
            13,018


15




**Note
      12 — Legal Proceedings**




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




AMR
      Technology, a subsidiary of the Company, along with Aventis Pharmaceuticals
      Inc., the U.S. pharmaceutical business of Sanofi-Aventis S.A., are 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., and Sandoz Inc.
      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., and
      Sandoz. 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 have now been transferred to the U.S.
      District Court in New Jersey.




Further,
      beginning on March 5, 2004, AMR Technology, along with Aventis Pharmaceuticals,
      filed suit in the U.S. District Court in New Jersey against Barr Laboratories,
      Impax Laboratories, Mylan Pharmaceuticals, Teva Pharmaceuticals, Dr. Reddy’s
      Laboratories, Amino Chemicals, Ltd., Ranbaxy Laboratories Ltd./Ranbaxy
      Pharmaceuticals Inc., DiPharma S.P.A., DiPharma Francis s.r.l., and Sandoz,
      asserting infringement of two of our U.S. patents that are exclusively licensed
      to Aventis Pharmaceuticals relating to Allegra and Allegra-D products. On
      December 11, 2006, 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 AMR Technology and licensed to
      Sanofi-Aventis U.S. LLC. In addition, on December 22, 2006, 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,
      AMR Technology filed a patent infringement lawsuit in Australia against
      Alphapharm Pty Ltd based on Australian Patent No. 699,799. On September 28,
      2007, AMR Technology filed a patent infringement lawsuit in Australia against
      Arrow Pharmaceuticals Pty Ltd, Chemists’ Own Pty Ltd, and Sigma Pharmaceuticals
      Limited based on Australian Patent No. 699,799.




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




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.




On
      September 6, 2005, Barr Pharmaceuticals, Inc. and Teva Pharmaceuticals
      Industries Ltd. announced that they have entered into an agreement for the
      launch of Fexofenadine Hydrochloride 30 mg, 60 mg and 180 mg tablets, the
      generic version of Allegra tablets in the United States. The launch of the
      generic product is considered an “at-risk” launch due to the on-going
      litigation. This generic launch has had a material adverse impact on U.S. sales
      of Allegra by Sanofi-Aventis since the fourth quarter of 2005 and in turn,
      the
      royalties earned by the Company on those sales. The launch has not had a
      material impact on non-U.S. sales of Allegra to date.




On
      September 20, 2005, AMR Technology, along with Aventis Pharmaceuticals, filed
      a
      Motion for Preliminary Injunction in the U.S. District Court in New Jersey
      seeking to enjoin Barr Pharmaceuticals, Inc., Teva Pharmaceuticals Ltd., Ranbaxy
      Laboratories, Ltd. and Amino Chemicals, Ltd. from the sale of generic versions
      of Allegra in the United States. On January 30, 2006, the U.S. District Court
      denied the request by AMR Technology and Aventis Pharmaceuticals for a
      preliminary injunction. An appeal of that decision was taken to the U.S. Court
      of Appeals for the Federal Circuit and, on November 8, 2006, the appellate
      court affirmed the District Court’s denial of a preliminary injunction. The
      Federal Circuit’s decisions on the preliminary injunction application is not
      dispositive of the merits of the claims being asserted as described
      above.


16




Subsequent
      to the preliminary injunction proceeding in the District Court, Dr. Reddy’s
      Laboratories and Mylan Pharmaceuticals have engaged in at-risk launches of
      generic fexofenadine products.




Should
      the Company be unsuccessful in defending these patents, the Company would
      continue to experience a material decrease in operating cash flows and a
      material adverse effect on our results of operations and financial
      condition.




**Note
      13 — Income Taxes.**




Effective
      January 1, 2007, the Company adopted Financial Accounting Standards Board
      Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN
      48”). FIN 48 provides guidance on the accounting for uncertainty in income tax
      reporting, and prescribes a methodology for recognizing, reversing, and
      measuring the tax benefits of a tax position taken, or expected to be taken,
      in
      a tax return. The adoption of this standard did not have a material impact
      on
      the Company’s financial statements.




The
      total
      amount of unrecognized tax benefits that, if recognized, would affect the
      effective tax rate (net
      of
      the federal benefit on state issues) was
      $1,170 and $3,000 as of September 30, 2008 and December 31, 2007,
      respectively. The
      Company classifies interest expense and penalties related to unrecognized tax
      benefits as a component of income tax expense. This policy did not change with
      adoption of FIN 48. As of September 30, 2008 and December 31, 2007,
      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 $74 and $1,000 at September 30, 2008 and
      December 31, 2007, respectively. These
      unrecognized tax benefits are classified as income taxes payable in the
      condensed consolidated balance sheet at September 30, 2008 and December 31,
      2007, respectively.




During
      the first quarter of 2008, the Company reached a settlement in the examination
      of certain state tax returns.  As a result of this settlement, the
      Company’s unrecognized tax benefits decreased by $3,500 through payments of
      $1,400 and the recognition of $2,100 of previously unrecognized tax benefits
      related to these matters.  In addition, the Company recognized an
      additional $307 in previously unrecognized tax benefits during the first quarter
      of 2008 as a result of a lapse of an applicable statute of limitations. 
The recognition of previously unrecognized tax benefits reduced the effective
      tax rate (net of the federal benefit on state issues) by $1,600 during the
      first
      quarter of 2008.  As of September 30, 2008, the Company accrued an
      additional $596 of reserves based on current year tax positions and an
      additional $33 of interest related to its uncertain tax positions.




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.  There are state tax examinations that are currently
      underway.  The Company cannot anticipate the completion date of these
      examinations. Based on the current status of these examinations, management
      of
      the Company believes that the reserves associated with uncertain tax positions
      are adequate.  However, the Company does not believe that it is reasonably
      possible to estimate the potential change in its unrecognized tax benefit that
      will result from the completion of these examinations.




**Note
      14 – Fair Value**




In
      September 2006, SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157), was
      issued. This statement defines fair value, establishes a framework for measuring
      fair value in generally accepted accounting principles and expands disclosures
      about fair value measurements.  This statement applies under other
      accounting pronouncements that require or permit fair value
      measurements.  FASB Staff Position (“FSP”) 157-2 amended SFAS No. 157
      to delay the effective date of SFAS No. 157 for all nonfinancial assets and
      nonfinancial liabilities to fiscal years beginning after November 15,
      2008.





The
      adoption of SFAS No. 157 for financial assets and financial liabilities,
      effective January 1, 2008, did not have a material impact on the Company’s
      consolidated financial position, results of operations or cash
      flows.  The Company is evaluating the effect the adoption of SFAS No.
      157 for nonfinancial assets and nonfinancial liabilities will have on its
      consolidated financial position, results of operations and cash
      flows.


17





SFAS
      No.
      157 establishes a three-tiered fair value hierarchy, which prioritizes the
      inputs used in measuring fair value.  These tiers
      include:  Level 1 – defined as quoted prices in active markets
      for identical instruments; Level 2 – defined as inputs other than quoted
      prices in active markets that are either directly or indirectly observable;
      and
      Level 3 – defined as unobservable inputs in which little or no market data
      exists, therefore requiring an entity to develop its own
      assumptions.





The
      following table presents the fair value of marketable securities by type and
      their determined level based on the three-tiered fair value hierarchy as of
      September 30, 2008:




**Fair
                Value Measurements as of September 30, 2008****Marketable
                Securities**
            
            **Total**
            
            **Level
                1**
            
            **Level
                2**
            
            **Level
                3**Obligations
                of states and political subdivisions
            
            $
            28,864
            
            $
            —
            
            $
            28,864
            
            $
            —Auction
                rate securities
            
            
            2,400
            
            $
            —
            
            
            2,400
            
            
            —Total
            
            $
            31,264
            
            $
            —
            
            $
            31,264
            
            $
            —




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.


18


Item
      2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations




**Forward-Looking
      Statements**




The
      following discussion of our results of operations and financial condition should
      be read in conjunction with the accompanying Condensed Consolidated Financial
      Statements and the Notes thereto included within this report. This quarterly
      report on Form 10-Q contains “forward-looking statements” within the meaning of
      Section 27A of the Securities Act of 1933, as amended, and Section 21E
      of the Securities Exchange Act of 1934, as amended. These statements may be
      identified by forward-looking words such as “may,” “could,” “should,” “would,”
“will,” “intend,” “expect,” “anticipate,” “believe,” and “continue” or similar
      words and include, but are not limited to, statements concerning pension and
      postretirement benefit costs, the Company’s relationship with GE Healthcare, the
      Company’s collaboration with Bristol-Myers Squibb (“BMS”), the expected results
      of the Company’s restructuring of AMRI Hungary, the acquisition of FineKem
      Laboratories Pvt. Limited (“FineKem”), future acquisitions, earnings, contract
      revenues, costs and margins, royalty revenues, patent protection and the ongoing
      Allegra patent infringement litigation, Allegra royalty revenue, government
      regulation, retention and recruitment of employees, customer spending and
      business trends, foreign operations (including Singapore, India and Hungary),
      the effect of the purchase of assets from Ariane Orgachem Private Limited and
      Ferico Laboratories Limited, collectively known as AMRI India Pvt. Ltd. (“AMRI
      India”), including increasing options and solutions for customers, business
      growth and the expansion of the Company’s global market, clinical supply
      manufacturing, management’s strategic plans, drug discovery, product
      commercialization, license arrangements, research and development projects
      and
      expenses, selling, general and administrative expenses, goodwill impairment,
      competition and tax rates. The Company’s actual results may differ materially
      from such forward-looking statements as a result of numerous factors, some
      of
      which the Company may not be able to predict and may not be within the Company’s
      control. Factors that could cause such differences include, but are not limited
      to, those discussed in Part I, Item 1A, “Risk Factors” of the Company’s Annual
      Report on Form 10-K for the fiscal year ended December 31, 2007 as filed
      with the Securities and Exchange Commission on March 17, 2008 and in Part
      II Item 1A, “Risk Factors” in this Form 10-Q and among other things, the
      global economic uncertainty and tightening of the credit and capital markets.
      All forward-looking statements are made as of the date of this report, and
      we do
      not undertake to update any such forward-looking statements in the future,
      except as required by law. References to the “Company,” “we,” “us,” and “our,”
refer to Albany Molecular Research, Inc. and its subsidiaries, taken as a
      whole.




**Strategy
      and Overview**




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




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




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


19


We
      conduct proprietary research and development to discover new therapeutically
      active lead compounds with commercial potential. We anticipate that we would
      then license these compounds to third parties in return for up-front and service
      fees and milestone payments, as well as recurring royalty payments if these
      compounds are developed into new commercial drugs. In addition, research and
      development is performed at our large-scale manufacturing facility related
      to
      the potential manufacture of new products, the development of processes for
      the
      manufacture of generic products with commercial potential, and the development
      of alternative manufacturing processes.




Our
      total
      revenue for the quarter ended September 30, 2008 was $61.4 million, as compared
      to $47.6 million for the quarter ended September 30, 2007.




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




Recurring
      royalty revenues, which are based on the worldwide sales of fexofenadine HCl,
      marketed as Allegra in the Americas and Telfast elsewhere, as well as on sales
      of Sanofi-Aventis’ authorized generics, were lower than in the quarter ended
      September 30, 2007.




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




During
      the nine months ended September 30, 2008, cash provided by operations was $17.0
      million. The decrease of $6.4 million in cash flow from operations from the
      nine
      months ended September 30, 2007 resulted primarily from an increase in accounts
      receivable resulting from increased revenue and timing of cash collections
      in
      the first nine months of 2008, offset in part by an increase in accounts payable
      primarily due to the timing of inventory purchases. We spent $14.4 million
      in capital expenditures, primarily on the construction of a new research center
      in Singapore and on upgrading and maintaining our facilities and equipment
      in
      our large-scale manufacturing suites and for additions to our new research
      center in India and $1.7 million on our acquisition of FineKem. In addition,
      during the nine months ended September 30, 2008, we spent $16.2 million in
      purchases of treasury stock in conjunction with our treasury share purchase
      plan
      approved by the Board of Directors in February 2008. As of September 30, 2008,
      we had $91.3 million in cash, cash equivalents and marketable securities and
      $13.7 million in bank and other related debt.




**Results
      of Operations – Three Months and Nine Months ended September 30, 2008
      Compared to Three Months and Nine Months Ended September 30,
      2007**




***Revenues***




*Total
      contract revenue*




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




**Three Months Ended September 30,**
            
            **Nine months Ended September 30,****(in thousands)**
            
            **2008**
            
            **2007**
            
            **2008**
            
            **2007**DDS
            
            $
            30,985
            
            $
            23,633
            
            $
            87,642
            
            $
            64,138LSM
            
            
            23,157
            
            
            17,938
            
            
            58,199
            
            
            58,600Total
            
            $
            54,142
            
            $
            41,571
            
            $
            145,841
            
            $
            122,738




20






DDS
      contract revenues for the quarter ended September 30, 2008, increased $7.3
      million to $31.0 million as compared to $23.6 million for the same quarter
      in
      the prior year. Additionally, DDS contract revenues for the nine months ended
      September 30, 2008 increased $23.5 million to $87.6 million from the same period
      in 2007. The increases are due primarily to an increase in contract revenue
      from
      discovery services of $5.9 million for the three months ended September 30,
      2008
      and an increase of $14.5 million for the nine months ended September 30, 2008
      due to increased demand for these services, as our ability to offer various
      combinations of services and cost structures at our U.S. and international
      locations continues to gain acceptance in the worldwide marketplace. Discovery
      services revenue also increased by approximately $2.0 million during the third
      quarter of 2008 due to the completion of the preliminary screening phase of
      an
      on-going natural products collaboration project at our Bothell Research
      facility. In addition, development and small-scale manufacturing services
      increased $1.4 million for the three months ended September 30, 2008 and $9.0
      million for the nine months ended September 30, 2008 as customers continue
      to
      focus on development-stage projects. We currently expect the overall growth
      trends in both discovery services and development and small-scale manufacturing
      services to continue throughout 2008; however, this growth will be moderated
      due
      to the completion of the preliminary screening phase of an on-going natural
      products collaboration noted above, as well as the completion of the funded
      research component of our on-going collaboration with BMS.




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




*Recurring
      royalty revenue*




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




**Three Months Ended September 30,**
            
            **Nine Months Ended September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****(in thousands)**$
            5,723
            
            $
            5,986
            
            $
            21,529
            
            $
            20,970




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




The
      recurring royalties we receive on the sales of Allegra/Telfast have historically
      provided a material portion of our revenues, earnings, and operating cash flows.
      During 2006 and 2007, we experienced a decrease in revenues, earnings, and
      operating cash flows from historical levels due to the impact of the “at-risk”
launch of generic fexofenadine by Barr Pharmaceuticals, Inc. and Teva
      Pharmaceuticals Industries Ltd. on U.S. sales of Allegra by Sanofi-Aventis.
      We
      currently expect full year royalty revenues for 2008 to decrease slightly from
      amounts recognized in 2007.




We
      continue to develop our business in an effort to supplement the revenues,
      earnings and operating cash flows that have historically been provided by
      Allegra/Telfast royalties. We continue to forcefully and vigorously defend
      our
      intellectual property related to Allegra, and we continue to pursue our
      intellectual property rights as patent infringement litigation progresses.
      However, should we or Aventis be unsuccessful in defending these patents we
      would continue to experience a material decrease from historic royalty revenues
      and operating cash flows. Furthermore, an at-risk launch of a generic version
      of
      Allegra-D by a generic competitor could result in further material decreases
      in
      royalty revenues.




21




*Milestone
      revenue*





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





**Three Months Ended September 30,**
            
            **Nine Months Ended September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****(in thousands)**$
            1,500
            
            $
            —
            
            $
            5,500
            
            $
            1,580





During
      the three months ended September 30, 2008, milestone revenue of $1.5 million
      was
      recognized for advancing a second compound into pre-clinical development in
      conjunction with the Company’s licensing and research agreement with BMS. During
      the nine months ended September 30, 2008, in addition to the $1.5 million
      recognized in the third quarter of 2008, $4.0 million of milestone revenue
      was
      recognized for reaching the second milestone under the same BMS licensing and
      research agreement. The $4.0 million milestone payment was triggered by BMS’s
      submission of an application to the Health Products and Food Branch (“HPFB”),
      Health Canada to initiate Phase 1 clinical studies on a compound. During the
      nine months ended September 30, 2007, the Company recognized $1.5 million of
      milestone revenue under the same agreement with BMS for reaching the first
      milestone, which was advancing the compound into pre-clinical
      development.





***Costs
      and Expenses***




*Cost
      of contract revenue*




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




**Segment**
            
            **Three Months Ended September 30,**
            
            **Nine Months Ended September 30,****(in thousands)**
            
            **2008**
            
            **2007**
            
            **2008**
            
            **2007**DDS
            
            $
            19,558
            
            $
            16,600
            
            $
            56,905
            
            $
            46,375LSM
            
            
            19,201
            
            
            16,804
            
            
            51,613
            
            
            49,719Total
            
            $
            38,759
            
            $
            33,404
            
            $
            108,518
            
            $
            96,094DDS
                Gross Margin
            
            
            36.9
            %
            
            29.8
            %
            
            35.1
            %
            
            27.7
            %LSM
                Gross Margin
            
            
            17.1
            %
            
            6.3
            %
            
            11.3
            %
            
            15.2
            %Total
                Gross Margin
            
            
            28.4
            %
            
            19.6
            %
            
            25.6
            %
            
            21.7
            %




DDS
      had a
      contract revenue gross margin of 36.9% for the three months ended September 30, 2008
      compared to contract revenue gross margin of 29.8% for the same period in 2007
      and 35.1% for the nine months ended September 30, 2008 as compared to 27.7%
      for
      the same period in 2007. The increase in gross margin resulted from an increase
      in contract revenues in relation to the fixed cost components of the DDS segment
      during the three and nine months ended September 30, 2008. We currently expect
      full year DDS contract margins to slightly decrease from the percentage realized
      in the first nine months of 2008 due to the completion of the preliminary
      screening phase of an on-going natural products collaboration, as well as the
      completion of the funded research component of our on-going collaboration with
      BMS.




LSM’s
      contract revenue gross margin increased to 17.1% for the three months ended
      September 30, 2008 compared to 6.3% for the same period in 2007. This increase
      in gross margin is primarily due to increases in commercial sales, which
      historically have generated higher margins, along with an increase in sales
      volume from our largest customer, GE Healthcare. This increase is partially
      offset by price concessions on sales to GE Healthcare in 2008. Although these
      price concessions are expected to decrease our gross margin, we believe this
      strengthens our ability to retain this customer for future business beyond
      the
      current contract terms ending in 2010. LSM had contract revenue gross margin
      of
      11.3% for the nine months ended September 30, 2008 as compared with 15.2% for
      the same period in 2007. This decrease from the nine months ended September
      30,
      2007 is primarily due to a decrease in commercial sales and start up costs
      associated with our acquisition of AMRI India and FineKem. We expect fourth
      quarter 2008 gross margins in the LSM segment to remain consistent with the
      percentage realized in the third quarter of 2008. Additionally, we expect full
      year 2008 gross margin to increase from the percentage realized in the first
      nine months of 2008 from increased demand for commercial services and our
      continued implementation of cost savings and process efficiencies in our
      Rensselaer facilities. This improvement will be offset, in part, by a decrease
      in margins in relation to the above mentioned price concessions to GE
      Healthcare.




22




*Technology
      incentive award*




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




**Three Months Ended September 30,**
            
            **Nine Months Ended September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****(in thousands)**$
            568
            
            $
            599
            
            $
            2,224
            
            $
            2,126




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




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




*Research
      and development*




Research
      and development (“R&D”) expense consists of compensation and benefits for
      scientific personnel for work performed on proprietary technology R&D
      projects, costs of chemicals and other out of pocket costs, and overhead costs.
      We utilize our expertise in small molecule chemistry, biocatalysis and natural
      product technologies to perform our internal R&D projects. The goal of these
      programs is to discover new compounds with commercial potential. We would then
      seek to license these compounds to a third party in return for a combination
      of
      up-front license fees, milestone payments and recurring royalty payments if
      these compounds are successfully developed into new drugs and reach the market.
      On October 30, 2006, we announced the selection of a compound from our
      proprietary oncology research program for advanced preclinical testing. We
      submitted an Investigational New Drug (“IND”) application to the U.S. Food and
      Drug Administration (“FDA”) during the third quarter of 2008. In addition,
      research and development is performed at our large-scale manufacturing facility
      related to the potential manufacture of new products, the development of
      processes for the manufacture of generic products with commercial potential,
      and
      the development of alternative manufacturing processes. Research and development
      expenses were as follows:




**Three Months Ended September 30,**
            
            **Nine Months Ended September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****(in thousands)**$
            3,610
            
            $
            3,107
            
            $
            9,454
            
            $
            9,225




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




We
      currently expect research and development expenses to increase in 2008 from
      amounts recognized in 2007, as we continue to advance our oncology compound
      through clinical trials, as well as the reallocation of research scientists
      from
      providing contract services under the funded research component of the on-going
      BMS collaboration to internal proprietary research programs. Additionally,
      we
      expect increased costs associated with the continued development of specialty
      generics, as well as researching and developing processes to manufacture
      intermediates at our AMRI India facility. These intermediates have historically
      been purchased from third parties to be used at our domestic
      locations.




23




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




We
      budget
      and monitor our R&D costs by type or category, rather than by project on a
      comprehensive or fully allocated basis. In addition, our R&D expenses are
      not tracked by project as they benefit multiple projects or our overall
      technology platform. Consequently, fully loaded R&D cost summaries by
      project are not available.




*Selling,
      general and administrative*




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




**Three Months Ended September 30,**
            
            **Nine Months Ended September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****(in thousands)**$
            9,681
            
            $
            8,310
            
            $
            28,790
            
            $
            24,957




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




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




*Impairment
      and restructuring charges*




AMRI
      Hungary




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




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




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




24


**Balance at**
                **January 1,**
                **2008**
              
              **Charges**
              
              **Incurred**
                **Amounts**
              
              **Foreign**
                **Currency**
                **Translation**
                **Adjustments**
              
              **Balance at**
                **September 30,**
                **2008**Termination
                  benefits and personnel realignment
              
              $
              —
              
              
              901
              
              
              (526
              )
              
              (14
              )
              $
              361Losses
                  on grant contracts
              
              
              —
              
              
              389
              
              
              (61
              )
              
              (19
              )
              
              309Lease
                  abandonment charges
              
              
              —
              
              
              463
              
              
              (13
              )
              
              (28
              )
              
              422Administrative
                  costs associated with restructuring
              
              
              —
              
              
              80
              
              
              (33
              )
              
              (2
              )
              
              45Total
              
              $
              —
              
              $
              1,833
              
              $
              (633
              )
              $
              (63
              )
              $
              1,137





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





The
      net
      cash outflow related to the Hungary restructuring for the nine months ended
      September 30, 2008 was $0.6 million. Anticipated cash outflows related to the
      Hungary restructuring for the remainder of 2008 is approximately $0.3 million,
      which primarily consists of the payment of termination benefits and personnel
      realignment and incurring losses on acquired contracts.





Large
      Scale Manufacturing Facility





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




*Interest
      income, net*




**Three Months Ended September 30,**
            
            **Nine Months Ended September 30,****(in thousands)**
            
            **2008**
            
            **2007**
            
            **2008**
            
            **2007**Interest
                expense
            
            $
            (139
            )
            $
            (169
            )
            $
            (372
            )
            $
            (595
            )Interest
                income
            
            
            351
            
            
            987
            
            
            1,362
            
            
            2,947Interest
                income, net
            
            $
            212
            
            $
            818
            
            $
            990
            
            $
            2,352







Interest
      expense decreased for the quarter ended September 30, 2008 from $0.2
      million for the same period in 2007 and decreased $0.2 million for the nine
      months ended September 30, 2008 from the same period in 2007. These decreases
      were primarily due to the reduction of outstanding interest-bearing debt
      balances throughout 2007 and 2008.




Interest
      income decreased by $0.6 million for the quarter ended September 30, 2008
      and by $1.6 million for the nine months ended September 30, 2008 as compared
      to
      the same period in 2007. These decreases were due to decreases in average
      balances of interest-bearing cash and investments held by the Company and
      decreases in the interest rates earned on these balances.




25


*Income
      tax expense*




**Three Months Ended September  30,**
            
            **Nine Months Ended September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****(in thousands)**$
            2,492
            
            $
            850
            
            $
            6,307
            
            $
            5,068




Income
      tax expense increased for the quarter ended September 30, 2008 due primarily
      to
      an increase in pre-tax income, as well as the composition of taxable income
      in
      relation to the applicable tax rates at our various international locations.
      These increases were partially offset by $1.2 million primarily consisting
      of
      the recapture of accumulated tax credits derived from certain of the Company’s
      R&D expenditures. Income tax expense increased for the nine months ended
      September 30, 2008 due to an increase in pre-tax income and changes in the
      composition of taxable income in relation to the applicable tax rates at our
      various international locations in 2008, partially offset by the reversal of
      reserves for an uncertain tax position upon resolution of this matter in 2008
      and the recapture of accumulated tax credits derived from certain of the
      Company’s R&D expenditures.




26


**Liquidity
      and Capital Resources**




We
      have
      historically funded our business through operating cash flows, proceeds from
      borrowings and the issuance of equity securities. During the first nine months
      of 2008, we generated cash of $17.0 million from operating activities. The
      primary drivers of the generation of operating cash flows is an increase in
      contract and milestone revenues, along with an increase in accounts payable
      due
      to timing of payments, offset by increases in accounts receivable due to timing
      of cash collections and additionally by increases in inventory
      purchases.




During
      the first nine months of 2008, we generated $14.3 million in investing
      activities, resulting from the net proceeds from sale of investment securities
      of $30.7 million, offset by $14.4 million for the acquisition of property and
      equipment and $1.7 million related to the acquisition of FineKem. During the
      first nine months of 2008, we used $15.1 million for financing activities,
      consisting primarily of $16.2 million for the purchase of treasury stock, offset
      in part by cash provided by the proceeds from the sale of common
      stock.




Although
      we did not repurchase any treasury stock during the quarter ended September
      30,
      2008, we resumed repurchasing shares during the fourth quarter. As of October
      31, 2008, we have repurchased a total of 1,710,434 shares at a cost of $19.2
      million.




Working
      capital was $145.3 million at September 30, 2008 as compared to $138.9 million
      as of December 31, 2007.




During
      2003, we entered into a credit facility consisting of a $30.0 million term
      loan
      and a $35.0 million line of credit to fund the acquisition of AMRI Rensselaer,
      Inc. (“AMRI Rensselaer”) (formerly known as Organichem). The term loan matured
      in February 2008. In June 2008, we refinanced this debt, which included
      converting the balance of the term loan into a revolving line of credit,
      increasing the amount available under the line of credit to $45.0 million,
      and
      extending the maturity date on the line of credit to June 2013. The line of
      credit bears interest at a variable rate based on the Company’s leverage ratio.
      As of September 30, 2008, the balance outstanding on the line of credit was
      $9.7
      million, bearing interest at a rate of 3.54%. The credit facility contains
      certain financial covenants, including a maximum leverage ratio, a minimum
      required operating cash flow coverage ratio, a minimum earnings before interest
      and taxes to interest ratio and a minimum current ratio. Other covenants include
      limits on asset disposals and the payment of dividends. As of September 30,
      2008, we were in compliance with all covenants under the credit
      facility.




Other
      than the refinancing of the term loan discussed above, there have been no
      significant changes in future maturities on our long-term debt since
      December 31, 2007.




The
      disclosure of payments we have committed to make under our contractual
      obligations is set forth under the heading “Management’s Discussion and Analysis
      of Financial Condition and Results of Operations—Liquidity and Capital
      Resources” under Item 7 of our Annual Report on Form 10-K for the fiscal
      year ended December 31, 2007. Other than the refinancing of the term loan
      discussed above, there have been no material changes to our contractual
      obligations since December 31, 2007. As of September 30, 2008, we had no
      off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities
      and Exchange Commission’s Regulation S-K.




We
      continue to pursue the expansion of our operations through internal growth
      and
      strategic acquisitions. We expect that such activities will be funded from
      existing cash and cash equivalents, cash flow from operations, 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. Furthermore,
      a
      continued decrease in royalties from Allegra would negatively affect our cash
      flow from operations and financial condition in future periods.


27


The
      recurring royalties we receive on the sales of Allegra/Telfast have historically
      provided a material portion of our operating cash flows. As discussed in Part
      II, Item 1 of this Form 10-Q, several generic manufacturers have filed ANDA
      applications with the FDA seeking authorization to produce and market a generic
      version of Allegra. We and Aventis Pharmaceuticals have filed several patent
      infringement suits against these generic companies alleging infringement of
      certain U.S. patents. However, should we or Aventis be unsuccessful in defending
      these patents we would continue to experience a material decrease in royalty
      revenues and operating cash flows. Furthermore, an at-risk launch of a generic
      version of Allegra-D by a generic competitor could result in further material
      decreases in royalty revenues and operating cash flows.




**Critical
      Accounting Policies and Estimates**




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




We
      refer
      to the policies and estimates set forth in the section “Management’s Discussion
      and Analysis of Financial Condition and Results of Operations — Critical
      Accounting Estimates” of our Annual Report on Form 10-K for the fiscal year
      ended December 31, 2007. There have been no material changes or
      modifications to the policies since December 31, 2007.




Item
      3.
      Quantitative and Qualitative Disclosures about Market Risk




There
      have been no material changes with respect to the information on Quantitative
      and Qualitative Disclosures about Market Risk appearing in Part II,
      Item 7A to the Company’s Annual Report on Form 10-K for the fiscal year
      ended December 31, 2007.




Item
      4.
      Controls and Procedures




*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 Company’s last fiscal quarter our
      management conducted an evaluation with the participation of our Chief Executive
      Officer and Chief Financial Officer regarding the effectiveness of our
      disclosure controls and procedures. In designing and evaluating our disclosure
      controls and procedures, we recognize that any controls and procedures, no
      matter how well designed and operated, can provide only reasonable assurance
      of
      achieving the desired control objectives, and our management necessarily was
      required to apply its judgment in evaluating and implementing possible controls
      and procedures. Based upon that evaluation, our Chief Executive Officer and
      Chief Financial Officer have concluded that, as of the end of the Company’s last
      fiscal quarter, our disclosure controls and procedures were effective in that
      they provide reasonable assurance that information required to be disclosed
      by
      us in the reports we file or submit under the Exchange Act is recorded,
      processed, summarized and reported within the time periods specified in the
      Securities and Exchange Commission’s rules and forms, including ensuring that
      such information is accumulated and communicated to our management, including
      our Chief Executive Officer and Chief Financial Officer as appropriate to allow
      timely decisions regarding required disclosure. We intend to review and document
      our disclosure controls and procedures, including our internal controls and
      procedures for financial reporting, on an ongoing basis, and may from time
      to
      time make changes aimed at enhancing their effectiveness and to ensure that
      our
      systems evolve with our business.




*Internal
      Control Over Financial Reporting*




There
      were no changes in the Company’s internal control over financial reporting
      identified in connection with the evaluation of such internal control that
      occurred during the Company’s last fiscal quarter that have materially affected,
      or are reasonably likely to materially affect, the Company’s internal control
      over financial reporting.


28


PART II
      - OTHER INFORMATION




Item
      1.  Legal
      Proceedings




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




AMR
      Technology, a subsidiary of the Company, along with Aventis Pharmaceuticals
      Inc., the U.S. pharmaceutical business of Sanofi-Aventis S.A., are 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, Inc., Dr. Reddy’s Laboratories, Ltd./Dr. Reddy’s
      Laboratories, Inc., Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc.,
      and
      Sandoz Inc. 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., and
      Sandoz. 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 have now been transferred to the U.S.
      District Court in New Jersey.




Further,
      beginning on March 5, 2004, AMR Technology, along with Aventis Pharmaceuticals,
      filed suit in the U.S. District Court in New Jersey against Barr Laboratories,
      Impax Laboratories, Mylan Pharmaceuticals, Teva Pharmaceuticals, Dr. Reddy’s
      Laboratories, Amino Chemicals, Ltd., Ranbaxy Laboratories Ltd./Ranbaxy
      Pharmaceuticals Inc., DiPharma S.P.A., DiPharma Francis s.r.l., and Sandoz,
      asserting infringement of two of our U.S. patents that are exclusively licensed
      to Aventis Pharmaceuticals relating to Allegra and Allegra-D products. On
      December 11, 2006, 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 AMR Technology and licensed to
      Sanofi-Aventis U.S. LLC. In addition, on December 22, 2006, 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,
      AMR Technology filed a patent infringement lawsuit in Australia against
      Alphapharm Pty Ltd based on Australian Patent No. 699,799. On September 28,
      2007, AMR Technology filed a patent infringement lawsuit in Australia against
      Arrow Pharmaceuticals Pty Ltd, Chemists’ Own Pty Ltd, and Sigma Pharmaceuticals
      Limited based on Australian Patent No. 699,799.




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




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.




On
      September 6, 2005, Barr Pharmaceuticals, Inc. and Teva Pharmaceuticals
      Industries Ltd. announced that they have entered into an agreement for the
      launch of Fexofenadine Hydrochloride 30 mg, 60 mg and 180 mg tablets, the
      generic version of Allegra tablets in the United States. The launch of the
      generic product is considered an “at-risk” launch due to the on-going
      litigation. This generic launch has had a material adverse impact on U.S. sales
      of Allegra by Sanofi-Aventis since the fourth quarter of 2005 and, in turn,
      the
      royalties earned by the Company on those sales. The launch has not had a
      material impact on non-U.S. sales of Allegra to date.


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On
      September 20, 2005, AMR Technology, along with Aventis Pharmaceuticals, filed
      a
      Motion for Preliminary Injunction in the U.S. District Court in New Jersey
      seeking to enjoin Barr Pharmaceuticals, Inc., Teva Pharmaceuticals Ltd., Ranbaxy
      Laboratories, Ltd. and Amino Chemicals, Ltd. from the sale of generic versions
      of Allegra in the United States. On January 30, 2006, the U.S. District Court
      denied the request by AMR Technology and Aventis Pharmaceuticals for a
      preliminary injunction. An appeal of that decision was taken to the U.S. Court
      of Appeals for the Federal Circuit and, on November 8, 2006, the appellate
      court affirmed the District Court’s denial of a preliminary injunction. The
      Federal Circuit’s decisions on the preliminary injunction application is not
      dispositive of the merits of the claims being asserted as described
      above.




Subsequent
      to the preliminary injunction proceeding in the District Court, Dr. Reddy’s
      Laboratories and Mylan Pharmaceuticals have engaged in at-risk launches of
      generic fexofenadine products.




Should
      the Company be unsuccessful in defending these patents, the Company would
      continue to experience a material decrease in operating cash flows and a
      material adverse effect on our results of operations and financial
      condition.




Item
      1A.
      Risk Factors




In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual
      Report on Form 10-K for the fiscal year ended December 31, 2007, which could
      materially affect our business, financial condition or future results. The
      risks
      described below and in our Annual Report on Form 10-K are not the only risks
      facing our Company. In addition to these risks, additional risks and
      uncertainties not currently known to us or that we currently deem to be
      immaterial also may materially adversely affect our business, financial
      condition and/or operating results.




***The
      restructuring of our AMRI Hungary location may not have the desired impact
      on
      the results of our operations.***




During
      May 2008 we announced a restructuring plan for our Hungary operations. The
      goal
      of the restructuring is 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 key elements of the restructuring plan include
      workforce reductions as well as non-workforce-related actions such as disposal
      of underutilized assets and elimination of non-essential operating expenses.
      Most of these initiatives will be implemented by the end of 2008. We expect
      to
      realize annual operating costs savings of approximately $1.1 million from the
      restructuring plan; however, the plan as currently constituted may not be
      sufficient to achieve the desired level of cost savings. Additional activities
      may be required to attain the intended impact on operating margins within our
      Discovery/Development/Small Scale Manufacturing (“DDS”) segment. Furthermore,
      the implementation of the restructuring plan could cause interruptions within
      our operations that could have an adverse impact on the results of our
      operations.




Item
      2.  Unregistered
      Sales of Equity Securities and Use of Proceeds




On
      February 7, 2008, the Company’s Board of Directors approved a stock repurchase
      program, which authorized the Company to purchase up to $20.0 million of the
      issued and outstanding shares of the Company’s Common Stock in the open market
      or in private transactions for the twelve months following the approval of
      the
      program. Shares may be repurchased from time to time and in such amounts as
      market conditions warrant, subject to price ranges set by management and
      regulatory conditions. No shares were purchased in the third quarter of
      2008.  The maximum dollar value of shares of Common Stock that may yet be
      purchased under the program as of September 30, 2008 is $3.9 million.


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Item
      6.  Exhibits




(a)
            Exhibits.




10.1 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
      quarter ended June 30, 2008 filed with the Securities and Exchange Commission
      on
      August 7, 2008, File No. 000-25323).




10.2 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 quarter
      ended June 30, 2008 filed with the Securities and Exchange Commission on August
      7, 2008, File No. 000-25323).




10.3 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
      quarter ended June 30, 2008 filed with the Securities and Exchange Commission
      on
      August 7, 2008, File No. 000-25323).




10.4 Amended
      and Restated Employment Agreement, dated August 5, 2008, between Albany
      Molecular Research, Inc. and Jonathan D. Evans (incorporated herein by reference
      to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter
      ended June 30, 2008 filed with the Securities and Exchange Commission on August
      7, 2008, File No. 000-25323).




31.1 Certification
      of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of
      the Securities Exchange Act of 1934.




31.2 Certification
      of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of
      the Securities Exchange Act of 1934.




32.1 Certification
      of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.




32.2 Certification
      of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


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SIGNATURES


Pursuant
      to the requirements 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.




ALBANY MOLECULAR RESEARCH, INC.Date: November 7, 2008
            By:
            /s/ Mark T. FrostMark T. FrostChief Financial Officer and Treasurer
              (Authorized Officer and Principal Financial Officer)




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