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 June
30, 2012



| |  ̈ | 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. Employer   
|incorporation or organization)  |  | Identification No.)



21 Corporate Circle

PO Box 15098

Albany, New York 12212-5098

(Address of principal executive offices)



(518) 512-2000

(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.



|Yes   x |  | No    ̈
|------- |  | ------



Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).



|Yes   x |  | No    ̈
|------- |  | ------



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 filer  ̈ |  | Accelerated filer x         | 
|------------------------- |  | --------------------------- | 
|Non-accelerated filer  ̈   |  | Smaller reporting company  ̈ | 



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



|Yes   o |  | No   x
|------- |  | ------



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 July 31, 2012                      | 
|---------------------------- |  | ------------------------------------------------- | 
|Common Stock, $.01 par value |  | 30,805,968 excluding treasury shares of 5,411,372 | 




















ALBANY MOLECULAR RESEARCH, INC.



INDEX

|Part I.       |  | Financial Information |  | 3                                                                                    
|------------- |  | --------------------- |  | -------------------------------------------------------------------------------------
|              |  |                       |  |                                                                                      
|              |  | Item 1.               |  | Condensed Consolidated Financial Statements (Unaudited)                              
|              |  |                       |  |                                                                                      
|              |  |                       |  | Condensed Consolidated Statements of Operations                                      
|              |  |                       |  | Condensed Consolidated Statements of Comprehensive Income (Loss)                     
|              |  |                       |  | Condensed Consolidated Balance Sheets                                                
|              |  |                       |  | Condensed Consolidated Statements of Cash Flows                                      
|              |  |                       |  | Notes to Condensed Consolidated Financial Statements                                 
|              |  |                       |  |                                                                                      
|              |  | Item 2.               |  | Management’s Discussion and Analysis of Financial Condition and Results of Operations
|              |  |                       |  |                                                                                      
|              |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                           
|              |  |                       |  |                                                                                      
|              |  | Item 4.               |  | Controls and Procedures                                                              
|              |  |                       |  |                                                                                      
|Part II.      |  | Other Information     |  | 26                                                                                   
|              |  |                       |  |                                                                                      
|              |  | Item 1.               |  | Legal Proceedings                                                                    
|              |  |                       |  |                                                                                      
|              |  | Item 1A.              |  | Risk Factors                                                                         
|              |  |                       |  |                                                                                      
|              |  | Item 6.               |  | Exhibits                                                                             
|              |  |                       |  |                                                                                      
|Signatures    |  |                       |  | 26                                                                                   
|              |  |                       |  |                                                                                      
|Exhibit 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 |        |   | Six Months Ended |  
|------------------------------------------------- |  | ------------------ | ------ | - | ---------------- | -
|(Dollars in thousands, except for per share data) |  | June 30, 2012      |        |   | June 30, 2011    |  
|                                                  |  |                    |        |   |                  |  
|Contract revenue                                  |  | $                  | 42,390 |   |                  | $
|Recurring royalties                               |  |                    | 7,529  |   |                  |  
|Milestone revenue                                 |  |                    | 90     |   |                  |  
|Total revenue                                     |  |                    | 50,009 |   |                  |  
|                                                  |  |                    |        |   |                  |  
|Cost of contract revenue                          |  |                    | 36,251 |   |                  |  
|Technology incentive award                        |  |                    | 753    |   |                  |  
|Research and development                          |  |                    | 231    |   |                  |  
|Selling, general and administrative               |  |                    | 9,841  |   |                  |  
|Restructuring charges                             |  |                    | 1,439  |   |                  |  
|Impairment charges                                |  |                    | —      |   |                  |  
|Arbitration charge                                |  |                    | —      |   |                  |  
|Total operating expenses                          |  |                    | 48,515 |   |                  |  
|                                                  |  |                    |        |   |                  |  
|Income (loss) from operations                     |  |                    | 1,494  |   |                  |  
|                                                  |  |                    |        |   |                  |  
|Interest expense, net                             |  |                    | (113   | ) |                  |  
|Other income (expense), net                       |  |                    | 136    |   |                  |  
|                                                  |  |                    |        |   |                  |  
|Income (loss) before income taxes                 |  |                    | 1,517  |   |                  |  
|                                                  |  |                    |        |   |                  |  
|Income tax expense                                |  |                    | 1,260  |   |                  |  
|                                                  |  |                    |        |   |                  |  
|Net income (loss)                                 |  | $                  | 257    |   |                  | $
|                                                  |  |                    |        |   |                  |  
|Basic income (loss) per share                     |  | $                  | 0.01   |   |                  | $
|                                                  |  |                    |        |   |                  |  
|Diluted income (loss) per share                   |  | $                  | 0.01   |   |                  | $



See notes to unaudited condensed consolidated
financial statements.



3







Albany Molecular Research, Inc.

Condensed Consolidated Statements of
Comprehensive Income (Loss)

(unaudited)



|                                                          |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|--------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | -
|                                                          |  | 2012                        |        |   | 2011                      |  
|Net income (loss)                                         |  | $                           | 257    |   |                           | $
|Unrealized loss on marketable securities, net of taxes    |  |                             | -      |   |                           |  
|Foreign currency translation (loss) gain                  |  |                             | (1,294 | ) |                           |  
|Net actuarial gain of pension and postretirement benefits |  |                             | 113    |   |                           |  
|Total comprehensive (loss) income                         |  | $                           | (924   | ) |                           | $



See notes to unaudited condensed consolidated
financial statements.



4







Albany Molecular Research, Inc.

Condensed Consolidated Balance Sheets

(unaudited)



|(Dollars and shares in thousands, except for per share data)                                                                                         |  | June 30,  2012 |         |   | December 31, 2011 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ----------------- | -
|Assets                                                                                                                                               |  |                |         |   |                   |  
|Current assets:                                                                                                                                      |  |                |         |   |                   |  
|Cash and cash equivalents — unrestricted                                                                                                             |  | $              | 13,395  |   |                   | $
|Accounts receivable, net                                                                                                                             |  |                | 35,258  |   |                   |  
|Royalty income receivable                                                                                                                            |  |                | 7,005   |   |                   |  
|Income taxes receivable                                                                                                                              |  |                | 3,556   |   |                   |  
|Inventory                                                                                                                                            |  |                | 35,879  |   |                   |  
|Prepaid expenses and other current assets                                                                                                            |  |                | 10,849  |   |                   |  
|Deferred income taxes                                                                                                                                |  |                | 3,319   |   |                   |  
|Total current assets                                                                                                                                 |  |                | 109,261 |   |                   |  
|                                                                                                                                                     |  |                |         |   |                   |  
|Property and equipment, net                                                                                                                          |  |                | 142,187 |   |                   |  
|                                                                                                                                                     |  |                |         |   |                   |  
|Restricted cash                                                                                                                                      |  |                | 5,000   |   |                   |  
|Intangible assets and patents, net                                                                                                                   |  |                | 3,062   |   |                   |  
|Equity investment in unconsolidated affiliates                                                                                                       |  |                | 956     |   |                   |  
|Deferred income taxes                                                                                                                                |  |                | 5,563   |   |                   |  
|Other assets                                                                                                                                         |  |                | 1,350   |   |                   |  
|Total assets                                                                                                                                         |  | $              | 267,379 |   |                   | $
|                                                                                                                                                     |  |                |         |   |                   |  
|Liabilities and Stockholders’ Equity                                                                                                                 |  |                |         |   |                   |  
|Current liabilities:                                                                                                                                 |  |                |         |   |                   |  
|Accounts payable and accrued expenses                                                                                                                |  | $              | 27,979  |   |                   | $
|Arbitration reserve                                                                                                                                  |  |                | 3,400   |   |                   |  
|Deferred revenue and licensing fees                                                                                                                  |  |                | 7,170   |   |                   |  
|Accrued pension benefits                                                                                                                             |  |                | 871     |   |                   |  
|Current installments of long-term debt                                                                                                               |  |                | 418     |   |                   |  
|Total current liabilities                                                                                                                            |  |                | 39,838  |   |                   |  
|                                                                                                                                                     |  |                |         |   |                   |  
|Long-term liabilities:                                                                                                                               |  |                |         |   |                   |  
|Long-term debt, excluding current installments                                                                                                       |  |                | 7,587   |   |                   |  
|Deferred licensing fees                                                                                                                              |  |                | 3,571   |   |                   |  
|Deferred income taxes                                                                                                                                |  |                | 829     |   |                   |  
|Pension and postretirement benefits                                                                                                                  |  |                | 9,168   |   |                   |  
|Other long-term liabilities                                                                                                                          |  |                | 1,385   |   |                   |  
|Total liabilities                                                                                                                                    |  |                | 62,378  |   |                   |  
|                                                                                                                                                     |  |                |         |   |                   |  
|Commitments and contingencies                                                                                                                        |  |                |         |   |                   |  
|                                                                                                                                                     |  |                |         |   |                   |  
|Stockholders’ equity:                                                                                                                                |  |                |         |   |                   |  
|Common stock, $0.01 par value, 50,000 shares authorized, 36,223 shares issued as of  June 30, 2012, and 36,016 shares issued as of December 31, 2011 |  |                | 362     |   |                   |  
|Additional paid-in capital                                                                                                                           |  |                | 207,219 |   |                   |  
|Retained earnings                                                                                                                                    |  |                | 75,404  |   |                   |  
|Accumulated other comprehensive loss, net                                                                                                            |  |                | (11,096 | ) |                   |  
|                                                                                                                                                     |  |                | 271,889 |   |                   |  
|Less, treasury shares at cost, 5,411 shares as of June 30, 2012 and December 31, 2011                                                                |  |                | (66,888 | ) |                   |  
|Total stockholders’ equity                                                                                                                           |  |                | 205,001 |   |                   |  
|Total liabilities and stockholders’ equity                                                                                                           |  | $              | 267,379 |   |                   | $



See notes to unaudited condensed consolidated
financial statements.



5







Albany Molecular
Research, Inc.

Condensed Consolidated Statements of
Cash Flows

(unaudited)



|                                                                            |  | Six Months Ended |       
|--------------------------------------------------------------------------- |  | ---------------- | ------
|(Dollars in thousands)                                                      |  | June 30, 2012    |       
|                                                                            |  |                  |       
|Operating activities                                                        |  |                  |       
|Net loss                                                                    |  | $                | (3,550
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                  |       
|Depreciation and amortization                                               |  |                  | 8,900 
|Deferred income taxes                                                       |  |                  | 1,961 
|Impairment and loss on disposal of property, plant and equipment            |  |                  | 3,967 
|Stock-based compensation expense                                            |  |                  | 1,066 
|Provision for (recoveries of) bad debt                                      |  |                  | 148   
|Loss on disposal of property, plant and equipment                           |  |                  | 102   
|(Recoveries of) provision for inventory reserves                            |  |                  | (214  
|Changes in assets and liabilities:                                          |  |                  |       
|Accounts receivable                                                         |  |                  | (4,969
|Royalty income receivable                                                   |  |                  | (186  
|Inventory                                                                   |  |                  | (9,661
|Prepaid expenses and other assets                                           |  |                  | (1,391
|Income taxes receivable                                                     |  |                  | (149  
|Accounts payable and accrued expenses                                       |  |                  | 4,011 
|Deferred revenue and licensing fees                                         |  |                  | (9    
|Pension and postretirement benefits                                         |  |                  | (41   
|Other long-term liabilities                                                 |  |                  | (92   
|Net cash used in operating activities                                       |  |                  | (107  
|                                                                            |  |                  |       
|Investing activities                                                        |  |                  |       
|Purchases of investment securities                                          |  |                  | —     
|Proceeds from sales and maturities of investment securities                 |  |                  | 213   
|Purchase of property, plant and equipment                                   |  |                  | (4,397
|Payments for patent applications and other costs                            |  |                  | (317  
|Proceeds from disposal of property, plant and equipment                     |  |                  | 50    
|Net cash (used in) provided by investing activities                         |  |                  | (4,451
|                                                                            |  |                  |       
|Financing activities                                                        |  |                  |       
|Change in restricted cash                                                   |  |                  | (5,000
|Borrowings on long-term debt                                                |  |                  | 5,000 
|Principal payments on long-term debt                                        |  |                  | (2,837
|Proceeds from sale of common stock                                          |  |                  | 341   
|Tax benefit of stock based compensation                                     |  |                  | —     
|Net cash used in financing activities                                       |  |                  | (2,496
|                                                                            |  |                  |       
|Effect of exchange rate changes on cash flows                               |  |                  | 465   
|                                                                            |  |                  |       
|Decrease in cash and cash equivalents                                       |  |                  | (6,589
|                                                                            |  |                  |       
|Cash and cash equivalents at beginning of period                            |  |                  | 19,984
|                                                                            |  |                  |       
|Cash and cash equivalents at end of period                                  |  | $                | 13,395



See notes to unaudited condensed consolidated
financial statements.



6







(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. With
locations in the U.S., Europe, and Asia, the Company provides customers with a range of services and cost models. The Company’s
core business consists of a fee-for-service contract services platform encompassing drug discovery, development and manufacturing.
The Company also owns a portfolio of proprietary technologies which have resulted from its internal programs, including drug discovery
and niche generic products and manufacturing process efficiencies, some of which are licensed to third parties, and some of which
benefit the Company’s operations.



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 six
months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31,
2012. 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 year ended December 31, 2011.



The accompanying unaudited condensed consolidated
financial statements include the accounts of the Company 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 loss,
net 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. The most significant
estimates included in the accompanying consolidated financial statements include assumptions regarding the collectibility of receivables,
the valuation of inventory, the fair value of intangible assets and long-lived assets, and the amount and realizabilty of deferred
tax assets. Other significant estimates include assumptions utilized in determining actuarial obligations in conjunction with
the Company’s pension and postretirement health plans, the estimation of restructuring charges, assumptions utilized in
determining stock-based compensation, and assumptions associated with legal contingencies. 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 the FASB’s Accounting Standards Codification (“ASC”) 605-25, “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 fair value of the respective
elements.



7







The Company generates
contract revenue on the following basis:



Full-time Equivalent (“FTE”).An FTE agreement establishes the number of Company employees contracted for a project or a series of projects, the duration
of the contract period, the price per FTE, plus an allowance for chemicals and other project specific costs, which may or may
not be incorporated in the FTE rate. FTE contracts can run in one month increments, but typically have terms of six months or
longer. FTE contracts typically provide for annual adjustments in billing rates for the scientists assigned to the contract.



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 collection
is reasonably assured.



Up-Front License Fees, Milestone,
and Royalty Revenue.The Company recognizes revenue from up-front non-refundable licensing fees on a straight-line basis
over the period of the underlying project. The Company will recognize revenue arising from a substantive milestone payment upon
the successful achievement of the event, and the resolution of any uncertainties or contingencies regarding potential collection
of the related payment, or, if appropriate, over the remaining term of the agreement.



Recurring Royalties Revenue Recognition



Recurring royalties consist of royalties
under a license agreement with Sanofi based on the worldwide sales of fexofenadine HCl, marketed as Allegra in the Americas and
Telfast elsewhere, as well as on sales of Sanofi’s authorized generics. The Company records royalty revenue in the period
in which the sales of Allegra/Telfast occur, because it can reasonably estimate such royalties. Royalty payments from Sanofi are
due within 45 days after each calendar quarter and are determined based on sales of Allegra/Telfast and Teva Pharmaceuticals’
sales of generic D-12 in that quarter.



Long-Lived Assets



The Company assesses the impairment of
long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors
the Company considers important that could trigger an impairment review include, among others, the following:



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



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



| | · | 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 to the extent
that the carrying amount of the asset group exceeds its fair value and will reduce only the carrying amount of the long-lived
assets.



8







Note 2 — Earnings Per Share



Both basic and diluted weighted average
shares outstanding were 30,266 and 30,202 for the three and six months ended June 30, 2012 and 29,941 and 29,888 for the three
and six months ended June 30, 2011.



The Company has excluded all outstanding
stock options and non-vested restricted shares from the calculation of diluted earnings per share for the six months ended June
30, 2012 and the three and six months ended June 30, 2011 because the net loss causes these outstanding stock options and non-vested
restricted shares to be anti-dilutive. The weighted average number of anti-dilutive options and restricted shares outstanding
(before the effects of the treasury stock method) was 2,823 and 1,601 for the three months ended June 30, 2012 and 2011, respectively
and 2,906 and 1,677 for the six months ended June 30, 2012 and 2011, respectively.



Note 3 — Inventory



Inventory consisted of the following at June 30, 2012 and December
31, 2011:



|                |  | June 30,  2012 |        |  | December 31, 2011 |  
|--------------- |  | -------------- | ------ |  | ----------------- | -
|Raw materials   |  | $              | 9,435  |  |                   | $
|Work in process |  |                | 5,220  |  |                   |  
|Finished goods  |  |                | 21,224 |  |                   |  
|Total.          |  | $              | 35,879 |  |                   | $



Note 4 –Debt and restricted cash

Debt

In April 2012, the Company entered into
a $20,000 credit facility consisting of a 4-year, $5,000 term loan and a $15,000 revolving line of credit. The Company used a
portion of the initial proceeds to repay all amounts due under its prior credit agreement. As of June 30, 2012, the Company had
$9,200 of outstanding letters of credit secured by the new line of credit.



Borrowings under this new April 2012 agreement will bear interest
at a fluctuating rate equal to (i) in the case of the term loan, the sum of (a) an interest rate equal to daily three month LIBOR,
plus (b) 3.25%; and (ii) in the case of advances under the revolving line of credit, the sum of (a) an interest rate equal to
daily three month LIBOR, plus (b) 2.75%. As of June 30, 2012, the interest rate on the outstanding term loan was 3.75%.



The credit facility contains financial
covenants, including certain net cash flow requirements for 2012, a minimum fixed charge coverage ratio commencing in 2013 and
extending for the remaining term of the agreement, maximum quarterly year-to-date capital expenditures, minimum monthly domestic
unrestricted cash and maximum average monthly cash reserves held at international locations. As of June 30, 2012, the Company
was in compliance with its current financial covenants.



The Company maintains variable interest
rate industrial development authority (“IDA”) bonds due in increasing annual installments through 2021. Interest payments
are due monthly with a current interest rate of 0.28% at June 30, 2012. The amount outstanding as of June 30, 2012 was $2,990.



The following table summarizes long-term
debt:



|                                       |  | June 30,
2012 |       |   | December 31, 2011 |  
|-------------------------------------- |  | ------------- | ----- | - | ----------------- | -
|Term loan                              |  | $             | 5,000 |   |                   | $
|Industrial development authority bonds |  |               | 2,990 |   |                   |  
|Miscellaneous loan                     |  |               | 15    |   |                   |  
|                                       |  |               | 8,005 |   |                   |  
|Less current portion                   |  |               | (418  | ) |                   |  
|Total long-term debt                   |  | $             | 7,587 |   |                   | $



9







The aggregate maturities of long-term debt
at June 30, 2012 are as follows:



|2012 (remainder) |  | $ | 2     | 
|---------------- |  | - | ----- | 
|2013             |  |   | 775   | 
|2014             |  |   | 1,024 | 
|2015             |  |   | 1,029 | 
|2016             |  |   | 1,034 | 
|Thereafter       |  |   | 4,141 | 
|Total            |  | $ | 8,005 | 



Restricted cash



Upon entering into a new credit agreement
in April 2012, the Company was required to maintain a $5,000 restricted cash balance to partially collateralize the revolving
line of credit.



Note 5 — Restructuring
and Impairment



In March 2012, the Company approved a
restructuring plan that ceased all operations at its Budapest, Hungary facility effective March 30, 2012. The goal of the restructuring
plan is to advance the Company’s continued strategy of increasing global competitiveness and remaining diligent in managing
costs by improving efficiency and customer service and by realigning resources to meet shifting customer demand and market preferences.
In connection with this closure, the Company recorded a restructuring charge in its DDS operating segment of $672 in the first
quarter of 2012 and $1,255 in the second quarter of 2012.  These amounts included $1,337 for termination benefits and $590
for preparing the facility for closure and other administrative costs.  Restructuring charges for the six months ended June
30, 2012 did not include costs associated with terminating the Budapest facility lease.  The Company is currently preparing
the Budapest facility for closure and is negotiating the termination of the lease agreement.  The Company currently anticipates
completing these lease termination activities in the second half of 2012, at which point additional restructuring charges will
be recognized.  The Company currently estimates that lease termination charges associated with its Budapest facility will
range between $1,000 and $2,000.



In conjunction with
the decision to cease operations at the Company’s Budapest, Hungary facility as discussed above, the Company also recorded
property and equipment impairment charges of $3,967 in our DDS segment in the first quarter of 2012. These charges are included
under the caption “Property and equipment impairment charges” on the consolidated statement of operations for the
six months ended June 30, 2012.



In March 2011, the Company reduced its
workforce to right-size its U.S. operations, primarily focused on discovery chemistry services due to the shift in demand for
these types of services to the Company’s lower cost operations in Asia. In connection with this reduction, the Company recorded
a restructuring charge of $951 for termination benefits. These restructuring activities were recorded within the Company’s
DDS operating segment.



In December 2011, the Company initiated
a restructuring plan at one of its U.S. locations which included actions to further reduce the Company's workforce, right size
capacity, and reduce operating costs. These actions were implemented to better align the business to current and expected market
conditions and are expected to improve the Company's overall cost competitiveness and increase cash flow generation. The workforce
reduction primarily affected certain positions associated with the Company’s elimination of internal R&D activities.  As
a result of the workforce reduction, the Company will be terminating the lease of one of its U.S. facilities which will result
in a reduction in annual operating expenses related to this facility.  As a result of this restructuring, the Company
recorded restructuring charges in the DDS operating segment of $200 in the first half of 2012 and $320 in the fourth quarter of
2011.



The following table displays the restructuring
activity and liability balances for the six months ended June 30, 2012:



|                                               |  | Balance at
December 31, 2011 |       |  | Charges/
(reversals) |  |       | Paid Amounts |  |  | Foreign
Currency
Translation
Adjustments |   |  | Balance at June 30, 2012 |   
|---------------------------------------------- |  | ---------------------------- | ----- |  | -------------------- |  | ----- | ------------ |  |  | ---------------------------------------- | - |  | ------------------------ | --
|Termination benefits and personnel realignment |  | $                            | 456   |  |                      |  | 950   |              |  |  | (758                                     | ) |  |                          | (2
|Lease termination and relocation charges       |  |                              | 1,128 |  |                      |  | 924   |              |  |  | (1,280                                   | ) |  |                          | - 
|Other                                          |  |                              | 354   |  |                      |  | 253   |              |  |  | (521                                     | ) |  |                          | 4 
|Total                                          |  | $                            | 1,938 |  |                      |  | 2,127 |              |  |  | (2,559                                   | ) |  |                          | 2 



10







Termination benefits
and personnel realignment costs relate to severance packages, outplacement services, and career counseling for employees affected
by the restructuring. Lease termination charges relate to costs associated with exiting a facility, net of estimated sublease
income.



Restructuring charges are included under
the caption “Restructuring charges” in the consolidated statement of operations for the three and six months ended
June 30, 2012 and 2011 and the restructuring liabilities are included in “Accounts payable and accrued expenses” and
“other long-term liabilities” on the consolidated balance sheet at June 30, 2012 and December 31, 2011.



Anticipated cash outflow
related to the restructurings for the remainder of 2012 is approximately $1,289, plus any cash consideration of the Hungary lease
term settlement.



Note 6 —Intangible Assets



The components of intangible assets are as follows:



|                             |  | Cost |       |  | Accumulated Amortization |   |        | Net |  |   | Amortization Period | 
|---------------------------- |  | ---- | ----- |  | ------------------------ | - | ------ | --- |  | - | ------------------- | 
|June 30, 2012                |  |      |       |  |                          |   |        |     |  |   |                     | 
|Patents and Licensing Rights |  | $    | 4,099 |  |                          | $ | (1,520 | )   |  | $ | 2,579               | 
|Customer Relationships       |  |      | 815   |  |                          |   | (332   | )   |  |   | 483                 | 
|                             |  | $    | 4,914 |  |                          | $ | (1,852 | )   |  | $ | 3,062               | 
|                             |  |      |       |  |                          |   |        |     |  |   |                     | 
|December 31, 2011            |  |      |       |  |                          |   |        |     |  |   |                     | 
|Patents and Licensing Rights |  | $    | 3,756 |  |                          | $ | (1,343 | )   |  | $ | 2,413               | 
|Customer Relationships       |  |      | 815   |  |                          |   | (252   | )   |  |   | 563                 | 
|Total                        |  | $    | 4,571 |  |                          | $ | (1,595 | )   |  | $ | 2,976               | 



Amortization expense related to intangible
assets was $108 and $135 for the three months ended June 30, 2012 and 2011, respectively, and $225 and $254 for the six months
ended June 30, 2012 and 2011, respectively.



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



|Year ending December 31, |  |   |      
|------------------------ |  | - | -----
|2012 (remaining)         |  | $ | 297  
|2013                     |  |   | 405  
|2014                     |  |   | 399  
|2015                     |  |   | 242  
|2016                     |  |   | 211  
|Thereafter               |  |   | 1,508
|Total                    |  | $ | 3,062



Note 7 — Share-Based Compensation



During the three and six months ended
June 30, 2012, the Company recognized total share based compensation cost of $527 and $1,066, respectively, as compared to total
share based compensation cost for the three and six months ended June 30, 2011 of $386 and $745, respectively.



The Company grants share-based compensation,
including restricted shares, under its 2008 Stock Option and Incentive Plan, as well as its 1998 Employee Stock Purchase Plan.



11







Restricted Stock



A summary of unvested restricted stock activity as of June
30, 2012 and changes during the six months then ended is presented below:



|                             |  | Number of Shares |      |   | Weighted Average Grant Date Fair Value Per Share |  
|---------------------------- |  | ---------------- | ---- | - | ------------------------------------------------ | -
|Outstanding, January 1, 2012 |  |                  | 561  |   |                                                  | $
|Granted                      |  |                  | 85   |   |                                                  | $
|Vested                       |  |                  | (100 | ) |                                                  | $
|Forfeited                    |  |                  | (15  | ) |                                                  | $
|Outstanding, June 30, 2012   |  |                  | 531  |   |                                                  | $



The weighted average fair value of restricted
shares per share granted during the six months ended June 30, 2012 and 2011 was $2.93 and $5.22, respectively. As of June 30,
2012, there was $2,318 of total unrecognized compensation cost related to unvested restricted shares. That cost is expected to
be recognized over a weighted-average period of 2.4 years.



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 Six Months Ended |     
|----------------------- |  | ------------------------ | ----
|                        |  | June 30, 2012            |     
|Expected life in years  |  |                          | 5   
|Risk free interest rate |  |                          | 0.88
|Volatility              |  |                          | 57  
|Dividend yield          |  |                          | —   



A summary of stock option activity under
the Company’s Stock Option and Incentive Plans as of June 30, 2012 and changes during the six month period then ended is
presented below:



|                                   |  | Number of Shares |       |   | Weighted Average Exercise Price Per Share |   |       | Weighted Average Remaining Contractual Term (Years) |  |  | Aggregate Intrinsic Value | 
|---------------------------------- |  | ---------------- | ----- | - | ----------------------------------------- | - | ----- | --------------------------------------------------- |  |  | ------------------------- | 
|Outstanding, January 1, 2012       |  |                  | 2,762 |   |                                           | $ | 7.58  |                                                     |  |  |                           | 
|Granted                            |  |                  | 330   |   |                                           |   | 2.86  |                                                     |  |  |                           | 
|Exercised                          |  |                  | —     |   |                                           |   | —     |                                                     |  |  |                           | 
|Forfeited                          |  |                  | (113  | ) |                                           |   | 10.70 |                                                     |  |  |                           | 
|Expired                            |  |                  | (131  | ) |                                           |   | 25.13 |                                                     |  |  |                           | 
|Outstanding, June 30, 2012         |  |                  | 2,848 |   |                                           | $ | 6.11  |                                                     |  |  | 7.4                       | 
|Options exercisable, June 30, 2012 |  |                  | 994   |   |                                           | $ | 11.63 |                                                     |  |  | 3.9                       | 



The weighted average fair value of stock
options granted for the six months ended June 30, 2012 and 2011 was $1.40 and $2.54, respectively. As of June 30, 2012, there
was $2,379 of total unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized
over a weighted-average period of 2.4 years.



Employee Stock Purchase Plan



During the six months ended June 30, 2012
and 2011, 93 and 67 shares, respectively, were issued under the Company’s 1998 Employee Stock Purchase Plan.



During the six months ended June 30, 2012
and 2011, cash received from stock option exercises and employee stock purchases was $341 and $383, respectively. The actual tax
benefit realized for the tax deductions from share based compensation was $0 and $147 for the six months ended June 30, 2012 and
2011.



Note 8 — 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 ASC 280, “Disclosures about Segments
of an Enterprise and Related Information”. The Company’s management relies on an internal management accounting system
to report results of the segments. The system includes revenue and cost information by segment. The Company’s management
makes financial decisions and allocates resources based on the information it receives from this internal system.



DDS includes activities such as drug lead
discovery, optimization, drug development and small scale commercial manufacturing. LSM includes pilot to commercial scale manufacturing
of active pharmaceutical ingredients and intermediates and high potency and controlled substance manufacturing. 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:



12







|                                         |  | Contract Revenue |        |  | Milestone & Recurring Royalty Revenue |   |        | Income (Loss)  from Operations |  |   | Depreciation and Amortization |  
|---------------------------------------- |  | ---------------- | ------ |  | ------------------------------------- | - | ------ | ------------------------------ |  | - | ----------------------------- | -
|For the three months ended June 30, 2012 |  |                  |        |  |                                       |   |        |                                |  |   |                               |  
|DDS                                      |  | $                | 16,657 |  |                                       | $ | 7,529  |                                |  | $ | 5,528                         |  
|LSM                                      |  |                  | 25,733 |  |                                       |   | 90     |                                |  |   | 5,807                         |  
|Corporate                                |  |                  | —      |  |                                       |   | —      |                                |  |   | (9,841                        | )
|Total                                    |  | $                | 42,390 |  |                                       | $ | 7,619  |                                |  | $ | 1,494                         |  
|                                         |  |                  |        |  |                                       |   |        |                                |  |   |                               |  
|For the three months ended June 30, 2011 |  |                  |        |  |                                       |   |        |                                |  |   |                               |  
|DDS                                      |  | $                | 18,029 |  |                                       | $ | 10,380 |                                |  | $ | 7,961                         |  
|LSM                                      |  |                  | 25,468 |  |                                       |   | —      |                                |  |   | 2,029                         |  
|Corporate                                |  |                  | —      |  |                                       |   | —      |                                |  |   | (9,786                        | )
|Total                                    |  | $                | 43,497 |  |                                       | $ | 10,380 |                                |  | $ | 204                           |  



|                                       |  | Contract Revenue |        |  | Milestone & Recurring Royalty Revenue |   |        | Income (Loss)  from Operations |  |   | Depreciation and Amortization |  
|-------------------------------------- |  | ---------------- | ------ |  | ------------------------------------- | - | ------ | ------------------------------ |  | - | ----------------------------- | -
|For the six months ended June 30, 2012 |  |                  |        |  |                                       |   |        |                                |  |   |                               |  
|DDS                                    |  | $                | 36,117 |  |                                       | $ | 18,514 |                                |  | $ | 11,009                        |  
|LSM                                    |  |                  | 48,983 |  |                                       |   | 90     |                                |  |   | 8,224                         |  
|Corporate                              |  |                  | —      |  |                                       |   | —      |                                |  |   | (19,687                       | )
|Total                                  |  | $                | 85,100 |  |                                       | $ | 18,604 |                                |  | $ | (454                          | )
|                                       |  |                  |        |  |                                       |   |        |                                |  |   |                               |  
|For the six months ended June 30, 2011 |  |                  |        |  |                                       |   |        |                                |  |   |                               |  
|DDS                                    |  | $                | 39,144 |  |                                       | $ | 24,396 |                                |  | $ | 18,660                        |  
|LSM                                    |  |                  | 47,284 |  |                                       |   | —      |                                |  |   | 1,651                         |  
|Corporate                              |  |                  | —      |  |                                       |   | —      |                                |  |   | (21,198                       | )
|Total                                  |  | $                | 86,428 |  |                                       | $ | 24,396 |                                |  | $ | (887                          | )



The following table summarizes other information by segment
as of and for the six month period ended June 30, 2012:



|                                         |  | DDS |         |  | LSM |   |         | Total | 
|---------------------------------------- |  | --- | ------- |  | --- | - | ------- | ----- | 
|Total assets                             |  | $   | 139,605 |  |     | $ | 127,774 |       | 
|Investments in unconsolidated affiliates |  |     | 956     |  |     |   | —       |       | 
|Capital expenditures                     |  |     | 1,523   |  |     |   | 2,874   |       | 



The following table summarizes other information by segment
as of and for the year ended December 31, 2011:



|                                         |  | DDS |         |  | LSM |   |         | Total | 
|---------------------------------------- |  | --- | ------- |  | --- | - | ------- | ----- | 
|Total assets                             |  | $   | 146,017 |  |     | $ | 117,050 |       | 
|Investments in unconsolidated affiliates |  |     | 956     |  |     |   | —       |       | 
|Capital expenditures                     |  |     | 6,578   |  |     |   | 4,198   |       | 



Note 9 — Financial Information by Customer Concentration
and Geographic Area



Total contract revenue from DDS’s
three largest customers represented approximately 9%, 8% and 6% of DDS’s total contract revenue for the three months ended
June 30, 2012, and 11%, 9% and 8% of DDS’s total contract revenue for the three months ended June 30, 2011. Total contract
revenue from DDS’s three largest customers represented approximately 10%, 7% and 5% of DDS’s total contract revenue
for the six months ended June 30, 2012 and 11%, 8% and 7% for the six months ended June 30, 2011. Total contract revenue from
LSM’s largest customer, GE Healthcare (“GE”), represented 23% and 20% of LSM’s total contract revenue
for the three months ended June 30, 2012 and 2011, respectively. Total contract revenue from GE represented 25% and 28% of LSM’s
total contract revenue for the six months ended June 30, 2012 and 2011, respectively. GE accounted for approximately 15% of the
Company’s total contract revenue for both the six months ended June 30, 2012 and 2011.



13







The Company’s total contract revenue
for the three and six months ended June 30, 2012 and 2011 was recognized from customers in the following geographic regions:



|              |  | Three Months Ended June 30, |     |   | Six Months Ended June 30, | 
|------------- |  | --------------------------- | --- | - | ------------------------- | 
|              |  | 2012                        |     |   | 2011                      | 
|              |  |                             |     |   |                           | 
|United States |  |                             | 57  | % |                           | 
|Europe        |  |                             | 20  |   |                           | 
|Asia          |  |                             | 21  |   |                           | 
|Other         |  |                             | 2   |   |                           | 
|              |  |                             |     |   |                           | 
|Total         |  |                             | 100 | % |                           | 



Long-lived assets by
geographic region are as follows:



|                        |  | June 30,  2012 |         |  | December  31, 2011 |  
|----------------------- |  | -------------- | ------- |  | ------------------ | -
|United States           |  | $              | 119,723 |  |                    | $
|Asia                    |  |                | 19,008  |  |                    |  
|Europe                  |  |                | 6,518   |  |                    |  
|Total long-lived assets |  | $              | 145,249 |  |                    | $



Note 10 — 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, 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.



Allegra



The Company, along with
Aventis Pharmaceuticals Inc., the U.S. pharmaceutical business of Sanofi, has been involved in legal proceedings with several
companies seeking to market or which are currently marketing generic versions of Allegra and Allegra-D. In accordance with the
Company’s agreements with Sanofi, Sanofi bears the external legal fees and expenses for these legal proceedings, but in
general, the Company must consent to any settlement or other arrangement with any third party. Under those same agreements, the
Company will receive royalties from Sanofi on U.S. Patent No. 5,578,610 until its expiration in 2013 and royalties on U.S. Patent
No. 5,750,703 until its expiration in 2015, unless those patents are earlier determined to be invalid. Similarly, the Company
is entitled to receive royalties from Sanofi on certain foreign patents through 2015, unless those patents are earlier determined
to be invalid. The Company is also entitled to receive certain royalties from Sanofi in certain foreign countries through mid
2015, unless certain patents are earlier determined to be invalid.



United States Litigations



Beginning in 2001, Barr Laboratories,
Inc., Impax Laboratories, Inc., Mylan Pharmaceuticals, Inc., Teva Pharmaceuticals USA, Dr. Reddy’s Laboratories, Ltd./Dr.
Reddy’s Laboratories, Inc., Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc., Sandoz Inc., Sun Pharma Global, Inc.,
Wockhardt and Actavis Mid Atlantic LLC, and AurolifePharma LLC and AurobindoPharma Ltd. filed Abbreviated New Drug Applications
(“ANDAs”) with the Food and Drug Administration (“FDA”) to produce and market generic versions of Allegra
products.



In response to the filings described above,
beginning in 2001, Aventis Pharmaceuticals (now Sanofi) filed patent infringement lawsuits against each of the above referenced
companies.  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, Sanofi filed two patent infringement suits
against Teva Pharmaceuticals USA, Barr Laboratories, Inc. and Barr Pharmaceuticals, Inc. in the Eastern District of Texas based
on patents owned by Aventis.  Those lawsuits were transferred to the U.S. District Court in New Jersey.



Further, beginning on March 5, 2004, the
Company, along with Aventis Pharmaceuticals, filed suit in the U.S. District Court in New Jersey against a number of defendants
asserting infringement of U.S. Patent Nos. 5,581,011 and 5,750,703, which are exclusively licensed to Aventis Pharmaceuticals
and relate to Allegra and Allegra-D products.  On September 9, 2009, the Company filed patent infringement lawsuits in the
U.S. District Court in New Jersey against Dr. Reddy’s Laboratories, Ltd, Dr. Reddy’s Laboratories, Inc., and Sandoz,
Inc. asserting infringement of U.S. Patent No. 7,390,906. That patent is licensed to Sanofi U.S. LLC and Sanofi U.S. LLC joined
that lawsuit as a co-plaintiff with the Company.



14







On November 18, 2008, the Company, Aventis
Pharmaceuticals, Sanofi, Teva Pharmaceuticals, and Barr Laboratories reached a settlement regarding the above-described patent
infringement litigations relating to Teva Pharmaceuticals and Barr Laboratories (the “Teva Settlement”).  As
part of the Teva Settlement, the Company entered into an amendment to its licensing agreement with Sanofi to allow Sanofi to sublicense
patents related to ALLEGRA®and ALLEGRA®D-12 to Teva Pharmaceuticals and Barr Laboratories in the
United States.  Subsequently, Teva Pharmaceuticals acquired Barr Laboratories.  The Company received an upfront
sublicense fee from Sanofi of $10 million, and Sanofi will pay royalties to the Company on the sale of products in the United
States containing fexofenadine hydrochloride (the generic name for the active ingredient in ALLEGRA®) and products
containing fexofenadine hydrochloride and pseudoephedrine hydrochloride (generic ALLEGRA®D-12) by Teva Pharmaceuticals
through 2015, along with additional consideration.   The Company received quarterly royalties through July 2010 for
the branded Allegra D-12 equal to the royalties paid for the quarter ended June 30, 2009.  Thereafter, the royalty rate has
reverted to the rate in effect prior to the signing of the sub-license amendment and the Company will also receive a royalty on
Teva’s sales of the generic Allegra D-12.  The Company and Aventis Pharmaceuticals have also dismissed their claims
against Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc. and Sandoz, Inc. without prejudice.



On March 19, 2010, the Company and Sanofi
filed a motion for a preliminary injunction in the U.S. District Court in New Jersey seeking to enjoin Dr. Reddy’s Laboratories,
Ltd. and Dr. Reddy’s Laboratories, Inc. from commercial distribution of a Allegra D-24 product based in that product infringing
U.S. Patent No. 7,390,906.   On June 14, 2010, the Company and Sanofi were granted a preliminary injunction restraining
Dr. Reddy’s Laboratories, Ltd. and Dr. Reddy’s Laboratories, Inc. from commercial distribution of a D-24 product. 
On January 13, 2011, the same court issued a decision interpreting the scope of the claims of U.S. Patent No. 7,390,906. 
Based on the court’s January 13, 2011 interpretation of the scope of a claim term in U.S. Patent No. 7,390,906, the Company
does not presently have evidence sufficient to obtain a favorable outcome on its infringement claim against Dr. Reddy’s
Laboratories, Ltd. and Dr. Reddy’s Laboratories, Inc.   As a result, the Company, along with Sanofi, Dr. Reddy’s
Laboratories, Ltd., and Dr. Reddy’s Laboratories, Inc., agreed to the court’s entry of an order on January 28, 2011,
finding that there was no infringement of U.S. Patent No. 7,390,906 based on the Court’s January 13, 2011 claim interpretation.
The court’s January 28, 2011 order also dissolved the preliminary injunction that was entered on June 14, 2010.  The
Company and Sanofi U.S. LLC have proceeded directly to the U.S. Court of Appeals for the Federal Circuit to appeal the January
13, 2011 decision.



The January 13, 2011, decision also included
an interpretation of the scope of the claims of U.S. Patent No. 5,750,703, and based on that interpretation, the Company does
not presently have evidence sufficient to obtain a favorable outcome on its infringement claim against Dr. Reddy’s Laboratories,
Ltd., Dr. Reddy’s Laboratories, Inc., Amino Chemicals Ltd., Dipharma S.P.A., and Dipharma Francis Sr.l As a result, the
Company, along with Sanofi, Dr. Reddy’s Laboratories, Ltd., Dr. Reddy’s Laboratories, Inc. Amino Chemicals Ltd., Dipharma
S.P.A., and Dipharma Francis Sr.l agreed to the court’s entry of an order on March 28, 2011, finding that there was no infringement
of U.S. Patent No. 5,750,703 based on the Court’s January 13, 2011 claim interpretation. The Company and Sanofi U.S. LLC
have proceeded directly to the U.S. Court of Appeals for the Federal Circuit to appeal the January 13, 2011 decision.



In June 2011, the Company, Sanofi and
Impax Laboratories, Inc. reached a settlement agreement for the above patent infringement litigation relating to Impax (“Impax
Settlement”). In conjunction with the Impax Settlement, the Company and Sanofi agreed to amend their license agreement to
allow Sanofi to sublicense patents related to ALLEGRA®and ALLEGRA®D-12 to Impax Laboratories, Inc.
in the United States.  Additionally, the Company, Sanofi, Mylan Pharmaceuticals, Inc., and Alphapharm reached a settlement
agreement of the above patent infringement litigation relating to Mylan and the below noted litigation in Australia against Mylan
affiliate Alphapharm (“Mylan Settlement”). In conjunction with the Mylan Settlement, the Company and Sanofi agreed
to amend their license agreement to allow Sanofi to sublicense patents related to ALLEGRA®and ALLEGRA®D-12
to Mylan Pharmaceuticals, Inc. in the United States.



International Litigations



In 2007, the Company filed patent infringement
lawsuits in Australia against Alphapharm Pty Ltd., Arrow Pharmaceuticals Pty Ltd, Chemists’ Own Pty Ltd, and Sigma Pharmaceuticals
Limited based on Australian Patent No. 699,799.  These matters were heard in a consolidated trial in November and December
2010. On February 17, 2011, the Court ruled that the defendants are not liable for infringement because the asserted claims of
the Australian Patent No. 699,799 are invalid for lack of novelty and false suggestion. An appeal has been filed with regard to
the ruling in the case against Arrow. The action against Alphapharm was settled as part of the Mylan Settlement, with Alphapharm
receiving a sublicense to sell its products in Australia and New Zealand. The Company has also settled its suit against Arrow
Pharmaceuticals Pty Ltd, Chemists’ Own Pty Ltd, and Sigma Pharmaceuticals Limited, with those parties receiving a sublicense
to sell their products in Australia. Notwithstanding the court’s ruling of non-infringement, the Company continues to receive
royalties on sales of the Allegra products in Australia.



15















At Risk Launches



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



Note 11 – Fair Value



The Company uses a framework for measuring
fair value in generally accepted accounting principles and making disclosures about fair value measurements.  A three-tiered
fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value.



These tiers include:

Level 1 – defined as quoted prices
in active markets for identical instruments;

Level 2 – defined as inputs other than quoted prices in
active markets that are either directly or indirectly observable; and Level 3 – defined as unobservable inputs in which little
or no market data exists, therefore requiring an entity to develop its own assumptions.



The Company did not use any level 3 inputs in measuring the
fair value of any of its financial instruments in the six months ended June 30, 2012.



The Company determines
its fair value of financial instruments using the following methods and assumptions:



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



Debt:The
carrying value of long-term debt was approximately equal to fair value at June 30, 2012 and December 31, 2011 due to the resetting
dates of the variable interest rates.



16







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 its largest customers, the
Company’s collaboration with Bristol-Myers Squibb (“BMS”), future acquisitions, earnings, contract revenues,
costs and margins, royalty revenues, patent protection and the ongoing Allegra® patent infringement litigation, Allegra®
royalty revenue, government regulation, retention and recruitment of employees, customer spending and business trends, foreign
operations, including 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, revenue and expense expectations for future periods, long-lived asset
impairment, competition and tax rates. Readers are cautioned that these forward-looking statements are only predictions and are
subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially
and adversely from those expressed in any forward-looking statements. 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 year ended December 31, 2011, as filed with the Securities and Exchange Commission on March 15, 2012, as updated
by Part II Item 1A, “Risk Factors,” in subsequent Forms 10-Q. 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 “AMRI”, the “Company,” “we,” “us,” and “our,” refer
to Albany Molecular Research, Inc. and its subsidiaries, taken as a whole.



Strategy and Overview



We are a global
contract research and manufacturing organization that provides customers fully integrated drug discovery, development, and manufacturing
services. We supply a broad range of services and technologies that support the discovery and development of pharmaceutical products
and the manufacturing of active pharmaceutical ingredients (“API”) and drug product for existing and experimental new
drugs. With locations in the United States, Europe, and Asia, we maintain geographic proximity and flexible cost models. We have
also historically leveraged our drug-discovery expertise to execute on several internal drug discovery programs, which have progressed
to the development candidate stage and in some cases into Phase I clinical development. We have successfully partnered certain
programs and are actively seeking to out-license our remaining programs to strategic partners for further development.



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. 
Our service offerings range from early stage discovery through manufacturing and formulation across U.S., Europe and Asia. We believe
that the ability to partner with a single provider is of significant benefit to our customers as we are able to provide them 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. Compounds discovered and/or developed in our contract 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.



Additionally, we offer our customers a
fully integrated manufacturing process for sterile injectable drugs. This includes the development and manufacture of the API,
the design of the criteria to formulate the API into an injectable drug product, and the manufacture of the final drug product.
We continue to make investments to build and recover our formulation business, as we believe this type of business has significant
potential in the drug product world driven by the growth in biologically based compounds which are formulated/manufactured on an
aseptic basis.



In addition to providing our customers
our hybrid services model for outsourcing, we now offer the option of insourcing. With our world class expertise in managing high
performing groups of scientists, this option allows us to embed our scientists into the customer’s facility allowing the
customer to cost effectively leverage their unused laboratory space.



17







As our customers continue to seek innovative
new strategies for R&D efficiency and productivity, we are aggressively realigning our business and resources to address their
needs. To that end, we have launched AMRI SMARTSOURCINGTM, a cross functional approach that maximizes the strengths of both
insourcing and outsourcing, by leveraging AMRI’s people, know-how, facilities, expertise and global project management to
provide exactly what is needed across the discovery or development process. We have also streamlined our sales and marketing organization
to optimize cross-selling opportunities and, enhanced our commitment to quality with the appointment of key personnel at our Burlington
aseptic services facility, both underscoring our dedication to client service. Our improved organizational structure, combined
with more focused marketing efforts should enable us to continue to drive long term growth and profitability.”



In 2011, we made a decision
to cease activities related to our internal proprietary compound discovery R&D programs. Although we halted our proprietary
R&D activities, we continue to believe there are additional opportunities to partner our proprietary compounds or programs
to create value, as we have seen a renewed commitment by pharmaceutical companies for innovation both internally and through licensing.
Our goal is to partner these compounds or programs in return for a combination of up-front license fees, milestone payments and
recurring royalty payments if any compound based on our intellectual property is successfully developed into new drugs and reach
the market.



In March 2012, we approved
a restructuring plan that ceased all operations at our Budapest, Hungary facility effective March 30, 2012. The goal of the restructuring
plan is to advance our continued strategy of increasing global competitiveness and remaining diligent in managing costs by improving
efficiency and customer service and by realigning resources to meet shifting customer demand and market preferences.



Our total revenue for
the quarter ended June 30, 2012 was $50.0 million, as compared to $53.9 million for the quarter ended June 30, 2011.



Contract services revenue
for the second quarter of 2012 was $42.4 million, compared to $43.5 million for the same quarter in 2011. 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’s over-the-counter product, authorized generics and estimates of sales of Teva’s authorized generics,
increased 2% in the second quarter of 2012 from the same period in 2011. Consolidated gross margin was 14.5% for the quarter ended
June 30, 2012 as compared to 5.3% for the quarter ended June 30, 2011.



During the six months ended June 30, 2012,
cash used in operations was $0.1 million compared to cash used in operations of $3.8 million for the same period of 2011. This
change from the six months ended June 30, 2011 resulted primarily from a payment of $4.8 million in the first quarter of 2011 associated
with the Company’s arbitration settlement with a supplier. During the six months ended June 30, 2012, we spent $4.4 million
in capital expenditures, primarily related to domestic modernization of our lab and production equipment. As of June 30, 2012,
we had $13.4 million in unrestricted cash and cash equivalents and $8.0 million in bank and other related debt.



Results of Operations – Three
and Six Months ended June 30, 2012 Compared to Three and Six Months Ended June 30, 2011



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
Discovery/Development/Small Scale Manufacturing (“DDS”) and Large-Scale Manufacturing
(“LSM”) segments were as follows:



|               |  | Three Months Ended June 30, |        |  | Six Months Ended June 30, |  
|-------------- |  | --------------------------- | ------ |  | ------------------------- | -
|(in thousands) |  | 2012                        |        |  | 2011                      |  
|               |  |                             |        |  |                           |  
|DDS            |  | $                           | 16,657 |  |                           | $
|LSM            |  |                             | 25,733 |  |                           |  
|Total          |  | $                           | 42,390 |  |                           | $



The decrease in DDS contract revenue for
the three and six months ended June 30, 2012 from the same periods in 2011 is primarily due to lower contract revenue for our development
and small-scale manufacturing services of $1.0 million and $1.7 million, respectively, as a result of lower demand for our U.S.
chemistry development services. Additionally, contract revenue for our discovery services in the three and six months ended June
30, 2012 decreased $0.4 million and $1.3 million, respectively, from the same period in 2011 primarily caused by lower demand for
our U.S. biology services, along with decreased revenues due to the closure of our Hungarian operations. These decreases were offset
in part by higher demand for our U.S. chemistry discovery services.



18







We currently expect DDS contract revenue for full year 2012
to approximate amounts recognized in 2011.



LSM contract revenue remained flat for
the three months ended June 30, 2012 and increased for the six months ended June 30, 2012 from the same periods in 2011. The increase
for the six months ended June 30, 2012 was primarily due to an increase in clinical supplymanufacturing services at our
Rensselaer, NY facility of $1.1 million, as well as continued improvement in clinical manufacturing services revenue at our Burlington,
MA facility. These increases were offset, in part, by a decrease in contract revenue from our intermediate manufacturing in our
Aurangabad, India facility as compared to the same period in 2011.



We currently expect LSM contract revenue
for full year 2012 to significantly increase from amounts recognized in 2011 driven by robust U.S. commercial API demand, an increase
in our Phase III portfolio, and improved revenues from our Burlington, MA and UK facilities.





Recurring royalty revenue



We earn royalties under our licensing agreement with Sanofi
for the active ingredient in Allegra. Royalties were as follows:



|Three Months Ended June 30, |       |  | Six Months Ended June 30, |  
|--------------------------- | ----- |  | ------------------------- | -
|2012                        |       |  | 2011                      |  
|(in thousands)              |      
|                            |      
|$                           | 7,529 |  |                           | $



Recurring royalties are
based on the worldwide sales of Allegra®/Telfast, as well as on sales of Sanofi over-the-counter (“OTC”) product
and authorized generics. Recurring royalties increased slightly during the quarter ended June 30, 2012 from the same period in
2011.



Recurring royalties decreased
for the six months ended June 30, 2012 from the same period in 2011 primarily due to a decrease in royalties recognized from the
sales of prescription Allegra® in Japan in the first quarter of 2012 as a result of a less severe allergy season.



We currently expect full
year 2012 recurring royalties to decrease from amounts recognized in 2011. We are anticipating recurring royalties to increase
in the second half of 2012 from amounts recognized in the same period of 2011 as amounts in 2011 were impacted by prescription
inventory reductions and marketing incentives associated with the OTC launch.



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. 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.



Milestone revenue



|Three Months Ended June 30, |    |  | Six Months Ended June 30, |  
|--------------------------- | -- |  | ------------------------- | -
|2012                        |    |  | 2011                      |  
|(in thousands)              |   
|                            |   
|$                           | 90 |  |                           | $



Milestone revenue for the three and six
months ended June 30, 2012 was recognized in conjunction with a development and supply agreement at the Company’s Rensselaer,
NY manufacturing facility.



Milestone revenue of $3.0 million received
during the three months ended June 30, 2011 was recognized in conjunction with the Company’s license and research agreement
with BMS for initiating a Phase II clinical trial of an AMRI compound licensed exclusively to BMS.



19







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 June 30, |        |   | Six Months Ended June 30, |  
|------------------ |  | --------------------------- | ------ | - | ------------------------- | -
|(in thousands)     |  | 2012                        |        |   | 2011                      |  
|                   |  |                             |        |   |                           |  
|DDS                |  | $                           | 16,308 |   |                           | $
|LSM                |  |                             | 19,943 |   |                           |  
|Total              |  | $                           | 36,251 |   |                           | $
|                   |  |                             |        |   |                           |  
|DDS Gross Margin   |  |                             | 2.1    | % |                           |  
|LSM Gross Margin   |  |                             | 22.5   | % |                           |  
|Total Gross Margin |  |                             | 14.5   | % |                           |  



DDS contract revenue gross margin percentage
increased for the three months ended June 30, 3012 compared to the same period in 2011 as a result of cost savings initiatives
taken in our U.S chemistry operations in 2011, as well as the impact of the closure of our Hungarian operations in 2012.



DDS contract revenue gross margin percentage
decreased for the six months ended June 30, 2012 compared to contract gross margin percentage for the same period in 2011 as a
result of lower demand for our U.S. biology and development services in relation to our fixed costs, partially offset by cost savings
initiatives taken in our U.S. chemistry operations and the closure of our Hungarian operations.



We currently expect DDS
contract margins for 2012 to improve over amounts recognized in 2011 due to cost reduction actions implemented in the U.S. in 2011
along with the impact of the closure of our Hungarian operations as well as an increase in U.S. chemistry services revenue in the
second half of 2012.



LSM’s contract
revenue gross margin percentages improved for the three and six months ended June 30, 2012 compared to the same period in 2011
primarily due to an increase in sales of higher margin products for our U.S. manufacturing services, as well as an increase in
capacity utilization at our large-scale manufacturing facilities worldwide as we progress toward fulfilling customer orders that
we expect to complete in the second half of 2012.



We currently expect LSM
contract margins for 2012 to significantly improve from amounts recognized in 2011 driven by improved capacity utilization, along
with shift in revenues to higher margin commercial products.



Technology incentive
award



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



|Three Months Ended June 30, |     |  | Six Months Ended June 30, |  
|--------------------------- | --- |  | ------------------------- | -
|2012                        |     |  | 2011                      |  
|(in thousands)              |    
|                            |    
|$                           | 753 |  |                           | $



Technology incentive
award expense for the three months ended June 30, 2012 remained consistent with expense recognized for the same period in 2011.
The decrease in technology incentive award expense for the six months ended June 30, 2012 as compared to the same period in 2011
is associated with the decrease in Allegra recurring royalty revenue as discussed above.



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



20







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, materials, outsourced activities and other out of pocket costs and overhead costs.



During the fourth quarter
of 2011, the Company’s Board of Directors made a decision to cease activities related to its internal discovery research
and development programs, excluding its generic program. Although we ceased our proprietary R&D activities, we continue to
believe there are additional opportunities to partner our proprietary compounds in return for a combination of up-front license
fees, milestone payments and recurring royalty payments if these compounds are successfully developed into new drugs and reach
the market. In addition, R&D activities continue 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 June 30, |     |  | Six Months Ended June 30, |  
|--------------------------- | --- |  | ------------------------- | -
|2012                        |     |  | 2011                      |  
|(in thousands)              |    
|                            |    
|$                           | 231 |  |                           | $



R&D expense for the
three and six months ended June 30, 2012 decreased from the same periods in 2011 as a result of our strategic decision during the
fourth quarter of 2011 to cease R&D operations related to our internal discovery research and development programs, excluding
our generics program. R&D expenditures incurred in the first half of 2012 related primarily to developing new niche generic
products and improving process efficiencies in our manufacturing plants.



We currently expect full
year 2012 R&D expense to reduce to approximately $1.0 million, with costs primarily related to developing new niche generic
products and improving process efficiencies in our manufacturing plants.



Selling, general and administrative



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



SG&A expenses were as follows:



|Three Months Ended June 30, |       |  | Six Months Ended June 30, |  
|--------------------------- | ----- |  | ------------------------- | -
|2012                        |       |  | 2011                      |  
|(in thousands)              |      
|                            |      
|$                           | 9,841 |  |                           | $



SG&A expenses remained
flat for the three months ended June 30, 2012 when compared to the same period in 2011. The decrease in SG&A expenses for the
six months ended June 30, 2012 from the comparable prior year period is primarily attributable to cost savings actions implemented
in the U.S. in 2011. Additionally, in the first half of 2011 we incurred charges attributable to AMRI Burlington’s remediation
efforts to remediate certain issues identified during an inspection by the FDA in 2010.



We currently expect SG&A
expenses for 2012 to decrease due to the closure of our Hungarian operations, as well as other cost saving actions implemented
in the U.S. in 2011.



Restructuring



|Three Months Ended June 30, |       |  | Six Months Ended June 30, |  
|--------------------------- | ----- |  | ------------------------- | -
|2012                        |       |  | 2011                      |  
|(in thousands)              |      
|                            |      
|$                           | 1,439 |  |                           | $



21







In March 2012, we approved
a restructuring plan that ceased all operations at our Budapest, Hungary facility effective March 30, 2012. The goal of the restructuring
plan is to advance our continued strategy of increasing global competitiveness and remaining diligent in managing costs by improving
efficiency and customer service and by realigning resources to meet shifting customer demand and market preferences. In connection
with this closure, the Company recorded a restructuring charge of $1.9 million in its DDS operating segment in the first half of
2012.  This amount included $1.3 million for termination benefits and $0.6 million for preparing the facility for closure
and other administrative costs.  Restructuring charges for the six months ended June 30, 2012 did not include costs associated
with terminating the Budapest facility lease.  The Company is currently preparing the Budapest facility for closure and is
negotiating the termination of the lease agreement.  The Company currently anticipates completing these lease termination
activities in the second half of 2012, at which point additional restructuring charges will be recognized.  The Company currently
estimates that lease termination charges associated with its Budapest facility will range between $1.0 million and $2.0 million.



In December 2011, we initiated a restructuring
plan at one of our U.S. locations which included actions to further reduce our workforce, right size capacity, and reduce operating
costs. These actions were implemented to better align the business to current and expected market conditions and are expected to
improve our overall cost competitiveness and increase cash flow generation. The workforce reduction primarily affected certain
positions associated with our elimination of internal R&D activities.  As a result of the workforce reduction, we
will be terminating the lease of one of our U.S. facilities which will result in a reduction in annual operating expenses related
to this facility.  As a result of this restructuring, we recorded a restructuring charge in the DDS operating segment
of $0.3 million in the fourth quarter of 2011 and $0.2 million in the second quarter of 2012.



Anticipated cash outflow
related to the restructurings for the remainder of 2012 is approximately $1.3 million, plus any cash consideration of the Hungary
lease term settlement.



Property and Equipment
Impairment



|Three Months Ended June 30, |   |  | Six Months Ended June 30, |  
|--------------------------- | - |  | ------------------------- | -
|2012                        |   |  | 2011                      |  
|(in thousands)              |  
|                            |  
|$                           | — |  |                           | $



In the first quarter
of 2012, we recorded property and equipment impairment charges of $4.0 million in our DDS segment associated with the Company’s
decision to cease operations at our Budapest, Hungary facility, as discussed above.



Interest expense, net



|                      |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|--------------------- |  | --------------------------- | ---- | - | ------------------------- | -
|(in thousands)        |  | 2012                        |      |   | 2011                      |  
|                      |  |                             |      |   |                           |  
|Interest expense      |  | $                           | (116 | ) |                           | $
|Interest income       |  |                             | 3    |   |                           |  
|Interest expense, net |  | $                           | (113 | ) |                           | $



Net interest expense
increased for the three and six months ended June 30, 2012 from the same period in 2011 due to increased interest rates on our
interest bearing liabilities and a decrease in balances of interest bearing assets.



Other income (expense),
net



|Three Months Ended June 30, |     |  | Six Months Ended June 30, |  
|--------------------------- | --- |  | ------------------------- | -
|2012                        |     |  | 2011                      |  
|(in thousands)              |    
|                            |    
|$                           | 136 |  |                           | $



22







Other income for the
three months ended June 30, 2012 was primarily due to income related to the fluctuation in exchange rates associated with foreign
currency transactions. Other expense for the six months ended June 30, 2012 was primarily due to deferred financing amortization
expense related to our prior credit agreement that was amended in June 2011 with a one year term.



Other expense for the
three and six months ended June 30, 2011 was primarily due to changes in rates associated with foreign currency transactions. Other
expense for the six months ended June 30, 2011 was offset in part by income from purchase accounting adjustments in the first quarter
of $0.3 million related to the 2010 AMRI UK and AMRI Burlington acquisitions.



Income tax expense



|Three Months Ended June 30, |       |  | Six Months Ended June 30, |  
|--------------------------- | ----- |  | ------------------------- | -
|2012                        |       |  | 2011                      |  
|(in thousands)              |      
|                            |      
|$                           | 1,260 |  |                           | $



Income tax expense increased
for the three and six months ended June 30, 2012 due primarily to the composition of pre-tax losses in relation to the applicable
tax rates at our various locations worldwide.



23







Liquidity and Capital Resources



We have historically funded our business
through operating cash flows and proceeds from borrowings. During the first six months of 2012, we used cash of $0.1 million in
operating activities. The use of cash from operating activities includes an increase in inventory of $9.9 million. The
Company currently expects to sell this inventory during the second half of 2012 and collect the accounts receivable associated
with the sale of this inventory thereafter.



During the first six months of 2012, cash
used in investing activities was $4.5 million, resulting primarily from the acquisition of property and equipment. During the first
six months of 2012, we used $2.5 million in financing activities, relating primarily to pledging $5.0 million of cash to collateralize
our revolving line of credit issued in conjunction with our credit facility executed in April 2012, partially offset by net proceeds
from the term loan issued under this agreement.



Working capital was $69.4 million at June
30, 2012 as compared to $62.6 million as of December 31, 2011.



In April 2012, we entered into a $20.0
million credit facility consisting of a 4-year, $5.0 million term loan and a $15.0 million revolving line of credit. As of June
30, 2012, the Company had $9.2 million of outstanding letters of credit secured by the new line of credit.



Borrowings under this agreement bear interest at a fluctuating
rate equal to (i) in the case of the term loan, the sum of (a) an interest rate equal to daily three month LIBOR, plus (b) 3.25%;
and (ii) in the case of advances under the revolving line of credit, the sum of (a) an interest rate equal to daily three month
LIBOR, plus (b) 2.75%. As of June 30, 2012, the interest rate on the outstanding term loan was 3.75%.



The credit facility contains financial
covenants, including certain net cash flow requirements for 2012, a minimum fixed charge coverage ratio commencing in 2013 and
extending for the remaining term of the agreement, maximum quarterly year-to-date capital expenditures, minimum monthly domestic
unrestricted cash and maximum average monthly cash reserves held at international locations. As of June 30, 2012, the Company was
in compliance with its current financial covenants.



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, 2011. There have been no material changes to our contractual obligations since December
31, 2011, except for long term debt repayments and the April 2012 credit facility as discussed above and in Note 4 to the condensed
consolidated financial statements. As of June 30, 2012, 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 additional
expansion activities will be funded from existing cash and cash equivalents, cash flow from operations and/or the issuance of debt
or equity securities and borrowings. Future acquisitions, if any, could be funded with cash on hand, cash from operations, 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.



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 inventories,
goodwill, long-lived assets, pension and postretirement benefit plans, income taxes and contingencies. We base our estimates on
historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or conditions.



24







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, 2011. There have
been no material changes or modifications to the policies since December 31, 2011.



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, 2011.



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 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.



Changes in Internal Control Over Financial Reporting



There were no changes in the Company’s
internal control over financial reporting identified in connection with the evaluation 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.



25







PART II - OTHER INFORMATION



Item 1. Legal Proceedings



Please refer to Part 1 – Note 10
to the condensed consolidated financial statements for further details and history on the Company’s material litigation.



Item 1A. Risk Factors

In addition to the other information set
forth in this report, the risks and uncertainties that we believe are most important for you to consider are discussed in Part
II, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011, which could materially
affect our business, financial condition or future results.



Item 6.	Exhibits



| | Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 10.1    |  | Amended and Restated Employment Agreement, dated as of April 5, 2012, by and between the Company and Thomas E. D’Ambra, Ph.D. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 5, 2012)***                                                                                                                                                                              
| |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 10.2    |  | Amended and Restated Employment Agreement, dated as of April 5, 2012, by and between the Company and Mark T. Frost (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 5, 2012)***                                                                                                                                                                                         
| |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 10.3    |  | Amended and Restated Employment Agreement, dated as of April 5, 2012, by and between the Company and Steven R. Hagen, Ph.D. (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 5, 2012)***                                                                                                                                                                                
| |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 10.4    |  | Amended and Restated Employment Agreement, dated as of April 5, 2012, by and between the Company and Bruce J. Sargent, Ph.D. (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 5, 2012)***                                                                                                                                                                               
| |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 10,5    |  | Amended and Restated Employment Agreement, dated as of April 5, 2012, by and between the Company and Lori M. Henderson (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 5, 2012)***                                                                                                                                                                                     
| |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 10.6    |  | Credit and Security Agreement dated April 11, 2012, by and among Albany Molecular Research, Inc., AMRI Rensselaer, Inc., AMRI Burlington, Inc., AMRI Bothell Research Center, Inc. and Wells Fargo Bank, National Association. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 12, 2012)                                                                               
| |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 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.*                                                                                                                                                                                                                                                                                                                          
| |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 101     |  | XBRL (eXtensible Business Reporting Language).  The following materials from Albany
    Molecular Research, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL: (i)
    the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Equity and
    Comprehensive Income, (iv) the Consolidated Statements of Cash Flows and (v) notes to consolidated financial
    statements.**



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* This certification is not “filed” for purposes
of Section 18 of the Exchange Act or incorporated by reference into any filing under the Securities Act or the Securities Exchange
Act.



** XBRL (Extensible Business Reporting
Language) information is furnished and not deemed filed or a part of a registration

statement or prospectus for purposes of
sections 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the

Securities Exchange Act of 1934, as amended,
and otherwise is not subject to liability under these sections.



*** Denotes management contract of compensation
plan or arrangement.



27







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: August 9, 2012 | By:                            
|                     |                                
|                     |                                



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