Overview

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

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

Strategy

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

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

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

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

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

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

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

Results of Operations

Operating Segment Data

We have organized our sales, marketing and production activities into the Discovery/Development/Small Scale Manufacturing ("DDS") and Large Scale Manufacturing ("LSM") segments based on the criteria set forth in Statement of Financial Accounting Standards ("SFAS") No. 131 ("SFAS 131"), ''Disclosures about Segments of an Enterprise and Related Information.'' We rely on an internal management accounting system to report results of these segments. The accounting system includes revenue and cost information by segment. We make financial decisions and allocate resources based on the information we receive from this internal system. The DDS segment includes activities such as drug lead discovery, optimization, drug development and small scale commercial manufacturing. The LSM segment includes pilot to commercial scale manufacturing of active pharmaceutical ingredients and intermediates and high potency and controlled substance manufacturing. API manufacturing is performed at our Rensselaer facility and is in compliance with cGMP.

Contract Revenue

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

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

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

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

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

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

Recurring Royalties

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

Year Ended December 31, 2008 2007 2006

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

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

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

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

Milestone revenue

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

Year Ended December 31, 2008 2007 2006

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

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

Cost of Contract Revenue

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

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

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

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

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

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

Technology Incentive Award

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

Year Ended December 31, 2008 2007 2006

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

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

Research and Development

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

Year Ended December 31, 2008 2007 2006

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

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

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

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

Selling, General and Administrative

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

Year Ended December 31, 2008 2007 2006

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

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

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

Restructuring Charges

AMRI Hungary

In May 2008, we initiated a restructuring of our Hungary location. The goal of the restructuring was to realign the business model for these operations to better support the Company's long-term strategy for providing Discovery Services in the European marketplace. The Company has estimated that total AMRI Hungary . . .