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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

[ x ]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

Commission File Number: 0-22879

BIORELIANCE CORPORATION

(Registrant’s Telephone Number, Including Area Code): (301) 738-1000

Securities registered pursuant to Section 12(b) of the Act: None

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

Common Stock, $0.01 par value

     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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

     Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b- of the Exchange Act).   Yes      [X]      No      [  ]

     The aggregate market value of the voting stock held by nonaffiliates of the registrant (based on the closing price of $24.80 as reported on June 28, 2002 on the Nasdaq Stock Market) was approximately $88,279,766. There were 8,442,268 shares of common stock, $ 0.01 par value per share, outstanding as of June 28, 2002. There were 8,503,712 shares of common stock, $0.01 par value per share, outstanding as of March 3, 2003.

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DOCUMENTS INCORPORATED BY REFERENCE:

     Portions of the registrant’s definitive proxy statement, which the Corporation expects to file with the Securities and Exchange Commission within 120 days after the end of its fiscal year, are incorporated by reference into Part III, Items 10, 11, 12 and 13 of this Report.

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PART I

ITEM 1. BUSINESS

Overview

     BioReliance Corporation (BioReliance or the Corporation) is a leading contract service organization (CSO) that provides testing and development, and manufacturing services for biologics and other biomedical products to biotechnology and pharmaceutical companies worldwide. Through its testing and development business segment, the Corporation evaluates products to ensure that they are free of disease-causing agents or do not cause adverse effects, characterizes products’ chemical structures, develops formulations for long-term stability and validates purification processes under regulatory guidelines. The Corporation has more than 135 families of testing assays. In its manufacturing business segment, BioReliance develops unique production processes and manufactures biologics on behalf of clients both for use in clinical trials and for the worldwide commercial market.

     The Corporation was founded in 1947 as Microbiological Associates, Inc. It reincorporated in Delaware and changed its name to BioReliance in connection with the initial public offering of its stock in 1997.

Available Information

     BioReliance makes available free of charge on its website at www.bioreliance.com, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K (including exhibits and supplementary schedules) and amendments to those reports, filed or furnished under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.

CSO Industry Overview

     The CSO industry provides outsourced product development and licensed product support services on a contract basis to pharmaceutical and biotechnology companies. The CSO industry has evolved from providing primarily preclinical services in the 1970s to being a full service industry today consisting of many small, limited-service providers and a small number of larger companies in four broad service sectors: (i) nonclinical laboratory testing focused on product characterization and identification of potential contaminants; (ii) in vitro (test tube) and in vivo (animal-based) toxicology studies; (iii) contract manufacturing for clinical trials and commercial purposes; and (iv) human clinical trials management. BioReliance provides services in the first three of these categories, primarily for biologics and other biomedical products.

Biologics Development Process

     Under the regulatory system of the United States, the product cycle for new pharmaceuticals is divided into three distinct stages: preclinical development, clinical development and licensed product. The preclinical development stage involves the discovery, characterization, appropriate toxicity studies, product formulation and biological trials necessary to prepare an Investigational New Drug (IND) exemption application for submission to the FDA. The IND must be acceptable to the FDA before either a biologic or chemical drug can be tested in humans. The second, or clinical stage, of development follows a successful IND submission and involves the activities necessary to demonstrate the safety, tolerability, efficacy and dosage of the active substance in humans, as well as the ability to manufacture the substance in accordance

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with the FDA’s Good Manufacturing Practices (GMP) regulations. For biologics, data from these activities are compiled in a Product License Application or, if for a specified biologic, in a Biologic License Application, and submitted to the FDA requesting approval to market the product. The third stage, or licensed product (approved product or commercial product) stage, follows FDA approval of the Product License Application or Biologics License Application, and involves the manufacture, distribution and clinical monitoring of the product. The licensed product stage, during which the biologic can be marketed as a product, also involves the development and regulatory approval of product modifications and line extensions of the original product. Until recently, all Biologics were regulated by the Center for Biologics Evaluation and Research (CBER) of the FDA. However, FDA recently announced that the Center for Drug Evaluation and Research (CDER) will assume responsibility for the regulation of Biologics commencing June 30, 2003. Blood and plasma derived products and Vaccines will remain within CBER.

Services

     BioReliance provides two broad types of contract services: testing and development services and manufacturing services, each of which spans the product cycle from early preclinical development through licensed production. The only significant CSO services not provided by BioReliance are chronic toxicology studies and human clinical trials management.

     Compared to CSOs specializing in human clinical trials management, BioReliance’s involvement with clients begins at a much earlier stage of product development, most often well before any clinical trials are initiated. In the Corporation’s experience, preclinical services lead to increased business for later stage services, including lot release testing and manufacturing, by providing an entry at the earliest stage of product development. The Corporation provides these services to clients at every stage of product development and manufacture, including in-process testing and final testing of licensed biologics.

Testing and Development Services

     BioReliance provides a broad range of testing and development services. Testing services represent the more mature parts of its business, while development services are a more recent outgrowth of the core testing business.

Testing Services. The Corporation’s testing services include virus and microbial safety assessments of cell banks used to manufacture biologics, validation of purification processes for clearance of adventitious agents such as viruses, and testing of in-process and final products. The Corporation pioneered biologics testing during the development of the first biologic products, including Genentech’s Activase^® and Ortho Pharmaceutical’s Orthoclone OKT^®3, in the early 1980s. The Corporation believes that it has a significant share of the current outsourced international market for these services and seeks to increase its market share in this rapidly expanding field.

Cell Bank Characterization. The starting point for manufacture of a biologic is a cell bank, consisting of a large number of vials of cryopreserved cells. Each bank must be free of any detectable biologic contaminants. BioReliance performs all the FDA-required tests to characterize cell banks with respect to the presence of biologic agents such as viruses, mycoplasma and bacteria. The Corporation also confirms the species and identity of cell lines. A biologic may not proceed to human clinical trials without satisfactory results from these tests.

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In-Process and Final Product Testing. The Corporation tests the biologic during intermediate states of manufacture (i.e., before purification) and as a final purified product. Each production lot must be tested for the presence of specified biological agents both before and after the purification process. In addition, the Corporation tests the final purified (and vialed) product on a lot-by-lot basis to detect the presence of microbial and other agents. This FDA-required testing currently must be compliant with Good Laboratory Practices (GLPs). The Corporation, however, as a leader in ensuring the quality of biologics, holds itself to the more stringent GMP requirements in its lot release testing, which are the same requirements that must be met in manufacturing processes. Tests are performed on each lot of a manufactured product throughout its clinical development and commercial marketing phases.

     For over twenty years, BioReliance has provided both in vitro and in vivo testing services to assess the genetic safety of pharmaceutical and chemical products. With the advent of biotechnology, BioReliance has developed specialized assays to assess the safety of a variety of biologic products, from genetically engineered proteins to DNA plasmids used in gene therapy clinical trials. The Corporation believes that the greatest future growth in in vivo services will come from the application of molecular biological techniques.

In Vitro Studies. BioReliance conducts a wide array of preclinical biological tests employing primarily in vitro (test tube) approaches to assess toxicological effects of candidate pharmaceuticals. These studies include genetic toxicology assays for the detection of gene mutations, chromosome damage, primary DNA damage and cell transformation. The Corporation is well positioned to provide these services with its experienced scientific staff and state-of-the-art laboratory facilities. BioReliance custom designs its testing batteries and GLP compliant protocols to comply with international guidelines. An additional in vitro service provided by the Corporation is the detection of infectious agents, primarily viral, in laboratory animals used for research purposes by clients worldwide.

In Vivo and Molecular Studies. BioReliance currently offers several types of in vivo (animal-based) studies, primarily designed to assess product safety during the preclinical stage of product development. A particular area of interest involves the use of transgenic mice to assess potential carcinogenicity of a drug or chemical.

     BioReliance is engaged in a contract sponsored by the National Institute of Environmental Health Sciences (NIEHS) to determine whether tumor formation can be induced by known carcinogens in certain strains of transgenic mice. The advantage of such an approach is to shorten the “in life” portion of long-term carcinogenicity studies from two years to six months.

     Employing its molecular biology expertise from the emerging gene therapy sector, the Corporation has developed a unique assay system in which specialized small animal models are coupled with advanced polymerase chain reaction (PCR) techniques to detect the presence of therapeutic DNA distributed in tissues and organs throughout the body. This specialized biodistribution study is important for gene therapy and other DNA-based products because the “active ingredient” is a genetic element that may have side effects if delivered to sites outside the target area within the body. For developers of DNA-based products, these studies now are required by the FDA prior to the first administration to humans in clinical trials.

Development Services. In 1995, the Corporation expanded its capabilities to better characterize biologics in anticipation of new FDA regulations and guidelines. These regulations, published in 1996, permit the development and manufacturing processes for specified biologics to be streamlined. This expansion into development services was an outgrowth of the Corporation’s testing business and includes the analytical services and validation services described below.

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Product Testing and Methods Validation. These services focus on protein product testing to show that a product meets predefined criteria for identity, purity, strength and quality. The Corporation routinely uses methods based on SDS PAGE, isoelectric focusing, N-terminal sequencing, high performance liquid chromatography (HPLC), peptide mapping, amino acid analysis, LC-electrospray mass spectrometry (LC-MS), and matrix assisted laser desorption/ionization time-of-flight (MALDI-TOF) mass spectrometry for clients in a GMP environment.

     Each biologic product presents a unique set of analytical challenges. The size, shape and internal structure of the molecule determine the methods employed to fully characterize it in a manner suitable for regulatory submission. Generally, several different methods are required to fully characterize a biologic molecule. For a product license submission, it also is necessary to develop and rigorously validate each analytical method.

Formulation Development, Product Stability and Consistency Testing. The Corporation’s development services include the full spectrum of formulation development, stability testing and consistency testing services. Biologics are extremely sensitive to their immediate environment, and a suitable, stable formulation must be developed so that the product can be administered in active form to patients. The structural uniqueness of each product demands its own formulation — a poor formulation can reduce therapeutic effect during clinical trials. The formulation also plays a key role in the stability of the product. Typically, several candidate formulations are developed and the relative product stability is compared for each formulation over an extended period of time (usually months to years) under a variety of conditions (temperature and humidity, for example). The product’s stability is measured by the same validated analytical techniques that are used to assess the product’s structural integrity on a lot-by-lot basis. The goal is a formulation in which the product remains active through final packaging, inventory storage, distribution to clinical or pharmaceutical sites and administration to patients. One of the major impacts of a successful formulation will be to extend the shelf-life of a biologic — an extended shelf-life can have a significantly positive economic impact for the client. Finally, the FDA requires that the product maintain its structural identity and activity from lot-to-lot throughout the product’s commercial lifetime.

Purification Process Validation. BioReliance validates client purification processes to determine the capability of the process for clearance (removal or inactivation) of certain biological agents and impurities such as viruses, mycoplasma, DNA and TSE agents such as BSE. The client typically conducts a small-scale version of its purification process at the Corporation’s facilities. A biologic product will not be licensed if these studies are not performed. BioReliance has the capacity to perform large studies (for example, studies involving multiple purification steps and simultaneous testing with multiple biological agents), and the Corporation has dedicated laboratory suites for the performance of these studies in the United States and Europe.

BioRepository: The BioRepository program at BioReliance is an ultra low temperature storage facility. Approximately 80% of revenues derive from a single cost-plus-fixed-fee contract with the National Cancer Institute, a branch of the federal government. Under this 5-year, contract, BioReliance receives, stores and distributes biological samples used in bioepidemiological studies related primarily to cancer causation and prevention.

Manufacturing Services

     BioReliance’s manufacturing services currently include both viral production and microbial fermentation. The Corporation has been providing services in viral production since 1993 when it formed its Phase I/II manufacturing department in the United States. The rapid progress of gene therapy products into Phase I/II human clinical trials, the emergence of viral cancer therapies and a need for viral vaccines

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have fueled the growth of manufacturing revenue for the Corporation from viral production services from 1993 to the present. The Corporation began manufacturing microbial products in 1996 with its acquisition of BIOMEVA GmbH (BIOMEVA, now known as BioReliance Manufacturing GmbH), a contract manufacturer of microbial products located in Heidelberg, Germany.

Cell Banking. A cell bank is a collection of cryopreserved vials, usually several hundred in number, which is held in a frozen state (at liquid nitrogen temperatures). Each vial contains genetically altered cells that are used for production of the biologic product. Typically, each biologic product will have both a Master Cell Bank (MCB) and a Working Cell Bank (WCB). As the name implies, the WCB is the bank from which frozen vials are withdrawn, the cryopreserved cells are thawed, and the resulting live cells are used to seed a bioreactor vessel for culture and production of the biologic product. The MCB is the bank from which additional WCBs are manufactured, if needed. The MCB and WCB must be created in compliance with GMPs. BioReliance offers this capability in both the United States and Europe. A long-term storage facility for such vials is called a biorepository, which also must be maintained under strict GMP guidelines.

Production and Production Development. Generally, biologics are manufactured either by genetically altered mammalian cells (if the molecular structure is complex) or genetically altered microbial cells (if the molecular structure is relatively less complex). BioReliance offers mammalian cell culture services to developers of viral-based products, particularly viral vaccines, gene therapies and cancer oncolytics. In 1988, the Corporation began pioneering assays to support the development of gene therapy products. Building on this early testing capability, in 1993 the Corporation established an independent contract manufacturing service for companies and research institutes developing gene therapies, which it believes was the first of its kind. This expanded manufacturing service drew upon the Corporation’s many years of experience in viral testing and small scale manufacturing. BioReliance now has GMP-compliant manufacturing laboratories in Rockville, Maryland and Stirling, Scotland (U.K.). Combined, these facilities have manufactured more than 140 lots of human clinical trial material for clinical investigation in the United States, Europe and Japan. The Corporation has specific experience in manufacturing adenoviruses, adeno-associated viruses, herpes viruses, other viruses and cells as tumor vaccines and, to a lesser extent, retroviruses. The early-stage nature of these therapies demands that specific production techniques are developed for each product, much the same as with other biologic products. BioReliance offers these production development services individually or as part of its manufacturing “package” to clients.

     In late 2000, the Corporation began operations its large-scale manufacturing facility located in Rockville, Maryland in the same life science park as its other U.S. operations. The operation of this facility supports the development and manufacture of products derived from mammalian cell culture. The facility is staffed by qualified scientific and management employees involved in process development, manufacturing and quality oversight. The facility contains qualified biopharmaceutical systems and equipment used to support large-scale manufacture of biologics for clinical trials. These systems include those designed to supply high purity steam, water and air for product manufacture.

     Currently, the Corporation’s manufacturing clients in the most advanced stage of clinical development are engaged in Phase II clinical trials. However, the Corporation’s manufacturing capacities are at the 100 liter per lot size — more than sufficient for many Phase II or III viral therapy trials. As more gene therapy and other viral products reach Phase III and the market, and their manufacturing requires scales beyond 100 liters, the Corporation may expand its internal capabilities according to market demand.

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     The Corporation has a manufacturing operation in Heidelberg, Germany. The Corporation acquired this operation in 1996, and it offers GMP-compliant contract fermentation services for recombinant and natural microorganisms, with bioreactor working volumes up to 1,000 liters. These microbial fermentation capabilities allow BioReliance to provide manufacturing services to companies developing therapeutic protein or protein fragments expressed in non-pathogenic bacterial systems. Besides manufacturing, this division offers scale-up and development for production processes and provides analytical testing of proteins and other biologics.

Purification and Purification Development. Both U.S. and German operations provide purification services for production clients. Similar to production services, purification techniques must be developed on a product-by-product basis. BioReliance has developed GMP-compliant chromatographic-based techniques for the large-scale purification of viruses that will be necessary as emerging gene therapy and other viral products progress to Phase III clinical trials.

Final Formulation and Filling. BioReliance offers aseptic final formulation and filling services for its viral production clients and others. Filling involves dispensing the final purified product into individual containers suitable for shipment to the client for further processing or into formulated, individual dosage forms suitable for administration to individual patients in a human clinical trial. For its microbial-based production clients, the Corporation does not currently offer final filling services.

Backlog

     The Corporation’s backlog was approximately $19.8 million as of December 31, 2002, of which approximately $13.0 million related to the testing and development segment and $6.8 million related to the manufacturing segment. Backlog consists of anticipated revenue from signed agreements for orders with a readily ascertainable price that are not anticipated to be performed immediately upon receipt. Orders can be cancelled, reduced in scope or delayed at any time by the client before any revenue is recorded due to changes in the client’s development and regulatory plans. Delayed contracts remain in our backlog until the client decides whether to continue, modify or cancel the project. Moreover, the scope of a contract can change over the course of a project. In addition, some orders are for work to be performed weeks or months in the future and revenue from such orders may not be recorded until a year or more after the order is received, particularly orders for manufacturing services. Conversely, due to the nature of some of our biologic testing contracts, a substantial portion of the Corporation’s revenue is derived from work performed immediately upon receipt of the order and the related test articles and, therefore, is not included in backlog. For these reasons, management believes that backlog is not a meaningful indicator of the Corporation’s future results. We cannot provide assurance that we will be able to realize all or any part of the revenue included in the Corporation’s backlog.

Customers

     The Corporation’s customers are primarily large biotechnology and pharmaceutical companies and agencies, principally of the United States government. The Corporation has derived its revenues from commercial and government customers as follows:

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     During 2002, no one customer (other than the U.S. government) accounted for more than 10% of the Corporation’s total revenues. One customer, a government contractor, accounted for 18% of the revenue of the Corporation’s manufacturing segment during 2002. The work performed for this customer was under a government subcontract. No one customer accounted for more than 10% of the revenue of the Corporation’s testing and development segment during 2002. Before 2002, the Corporation derived a significant portion of its government contracts revenue from contracts that had been set aside for award to small businesses as defined under government regulations. The Corporation is no longer eligible for small business set-aside contracts and grants.

Government Regulation

     During 1996, the FDA introduced new approaches to the regulation of biologics that benefit BioReliance and many of its clients. The FDA has published a list of “specified” biologic products that are eligible for new guidelines reducing the complexity of the licensing process. The list of specified products includes most of the biologics now under development by pharmaceutical and biotechnology companies; namely, therapeutic monoclonal antibodies, therapeutic recombinant DNA (protein) products, synthetic therapeutic peptides of 40 or fewer amino acids, and synthetic plasmid nucleic acid therapeutics. The FDA recognizes that reliable bioanalytical techniques now are available that enable accurate characterization of these structurally complex products. Specified biologics for which bioanalytical techniques have been developed, validated and accepted by the FDA are often termed “well-characterized” products.

     Since 1996, biologics developers have had more flexibility to engage independent contract suppliers for each portion of the manufacturing process, so long as they ensure that each contract manufacturer employed meets manufacturing compliance requirements. In addition, the FDA no longer requires an “Establishment License” for a facility designated for the production of a specified product. Under prior regulations, the large-scale facility necessary for licensed production was needed prior to product approval. The current approach enables the use of a smaller, pilot-scale facility owned by the developer or a contract manufacturer for the production of clinical trials materials, including those for pivotal Phase III trials and for licensed products. BioReliance believes that developers of biologics will pursue CSOs that understand these new guidelines and can provide the full range of services to support the proper characterization and documentation for biologics.

     The services performed by BioReliance are subject to various regulatory requirements designed to ensure the safety, effectiveness, quality and integrity of pharmaceutical products, primarily under the Federal Food, Drug and Cosmetic Act and associated GLP and GMP regulations which are administered by the FDA in accordance with current industry standards. These regulations apply to all phases of drug development, testing, manufacturing and record keeping, including personnel, facilities, equipment, control of materials, processes and laboratories, packaging, labeling, storage and distribution. Noncompliance with GLPs or GMPs by the Corporation in a project could result in disqualification of data collected by the Corporation in the project. Material violation of GLP or GMP requirements could result in additional regulatory sanctions, imposition of fines, and in severe cases could result in a mandated closing of the Corporation’s facilities, which could have a material adverse effect on the Corporation’s business, financial condition and results of operations.

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     To help assure compliance with applicable regulations, BioReliance has established quality assurance units at its facilities that monitor ongoing compliance by auditing test data and regularly inspecting facilities, procedures and other GLP and GMP compliance parameters. In addition, FDA regulations and guidelines, serve as a basis for the Corporation’s standard operating procedures. Despite these efforts, the nature and extensive scope of the applicable regulatory requirements mean that the risk of regulatory citation or action by the FDA cannot be eliminated. In addition, the Corporation’s facilities are inspected from time to time by the FDA or other governmental agencies, and operations at these facilities could be interrupted or halted for lengthy periods of time if such inspections prove unsatisfactory.

     Certain of the Corporation’s development and testing activities are subject to the Controlled Substances Act, administered by the Drug Enforcement Agency (DEA), which regulates strictly all narcotic and habit-forming substances. The Corporation maintains restricted-access facilities and heightened control procedures for projects involving such substances due to the level of security and other controls required by the DEA.

     Additionally, the Corporation’s business involves the controlled storage, use and disposal of hazardous chemicals, radioactive materials, and biological hazards, and is therefore subject to numerous federal, state, local and foreign environmental regulations governing the use, storage, handling and disposal of these materials. Although the Corporation believes that its safety procedures for handling and disposing of these hazardous materials comply in all material respects with the standards prescribed by law and regulation, the risk of accidental contamination or injury from hazardous materials cannot be eliminated. BioReliance maintains liability insurance for some environmental risks that management believes to be appropriate and in accordance with industry practice. However, the Corporation may not be able to maintain this insurance in the future on acceptable terms. In the event of an accident, the Corporation could be held liable for damages that are in excess or outside of the scope of our insurance coverage.

     The BioReliance laboratory animal program and testing facilities comply with existing government and industry standards for the care and use of laboratory animals. We are registered with the United States Department of Agriculture as a Research Facility (Registration No. 51-R-0003), meeting requirements of the USDA Animal Welfare Act, as determined by the March 13, 2003, site visit during which there were no non-compliant findings. This business is accredited by the Association for the Assessment and Accreditation of Laboratory Animal Care International (AAALAC), which is considered to be the industry standard. Our program was most recently granted full continued accreditation by the AAALAC on March 5, 2003. Additionally, BioReliance holds Public Health Service Animal Welfare Assurance No. A3144-01, most recently granted by the NIH Office for Laboratory Animal Welfare (OLAW), on June 4, 2001.

     The use of controlled substances in testing for drugs with a potential for abuse is regulated in the United States by the U.S. Drug Enforcement Administration. All BioReliance laboratories using controlled substances for testing purposes are licensed by the U.S. Drug Enforcement Administration.

Competition

     The CSO industry is highly fragmented, with many providers ranging in size from one person consulting firms to full-service global drug development corporations. BioReliance primarily competes with in-house research and development departments of biopharmaceutical companies, universities and medical centers, in addition to other CSOs. Some of these organizations possess substantially greater

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capital and technical resources than the Corporation. The Corporation’s primary service competitors are different in each of its service areas. For testing and development services its primary competitors are aaiPharma Inc., Charles River Laboratories, Inc., Covance Inc., Inveresk Research International Ltd., Q-One Biotech Ltd. and SRI International; and, for manufacturing services, its primary competitors are DSM Biologics Holding Inc., Molecular Medicine, Inc., Charles River Laboratories, Inc. and Excel BioTech.

     The industry has been consolidating as a result of competitive pressures. This trend is likely to produce increased competition among the larger competitors for both clients and acquisition candidates. In addition, the service industry has attracted the attention of the investment community, which could lead to heightened competition by increasing the availability of financial resources. Increased consolidation may lead to price and other forms of competition, which may affect the Corporation’s margins. The Corporation believes the principal competitive factors in its business are scientific expertise, technological advancements, reputation, regulatory experience, international presence and the ability to offer a comprehensive range of biologics testing, development and manufacturing services.

Information Systems

     Digital information systems are an important component of the Corporation’s technological leadership. The Corporation believes that superior information systems are essential to expanding its operations and to providing innovative services to clients, for timely, accurate reporting and project monitoring.

     BioReliance has made significant investments in its information systems and personnel, in both the United States and Europe, to maximize its relationships with its clients. Those investments have included state-of-the-art hardware and software that maximize compatibility and integration internally and with the Corporation’s clients, and an Oracle enterprise application suite of modules as the software foundation for its business.

     The FDA has become increasingly sophisticated with respect to information systems and the integrity of all forms of data incorporated into regulatory submissions. Correspondingly, BioReliance strives to be at the forefront of nonclinical testing laboratories in validation of hardware and software systems.

Insurance

     BioReliance maintains product liability and professional errors and omissions liability insurance, providing $15 million in coverage on a claims-made basis. There are significant limitations and exclusions to these coverages. In addition, in certain circumstances the Corporation seeks to manage its liability risk through contractual provisions with clients requiring the Corporation to be indemnified by the client or covered by clients’ product liability insurance. In addition, in certain types of engagements, the Corporation seeks to limit contractual liability to its clients, most commonly to the amount of fees received by the Corporation. The contractual arrangements are subject to negotiation with clients and the terms and scope of such indemnification, liability limitation and insurance coverage vary from client to client and from project to project. Although many of the Corporation’s clients are large, well-capitalized companies, the financial performance of their indemnities, if any, is not secured. Therefore, BioReliance bears the risk that the indemnifying party may not have the financial ability to fulfill its indemnification obligations or that liability would exceed the amount of applicable insurance. In addition, the Corporation could be held liable for errors and omissions in connection with the services it performs.

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Employees

     At December 31, 2002 the Corporation had 638 full-time equivalent employees, of whom 356 were employed in testing and development services and 90 were employed in manufacturing services, with the remainder employed in general and administrative roles. The Corporation believes that its relations with its employees are good. None of the Corporation’s employees is represented by a collective bargaining agreement.

ITEM 2. PROPERTIES

     BioReliance’s corporate headquarters are located in Rockville, Maryland. In addition to its headquarters building, the Corporation occupies six other facilities in Rockville, Maryland, providing approximately 215,000 square feet of operational, manufacturing and administrative space. BioReliance uses its headquarters facility and five of its other buildings for testing, development, certain small scale manufacturing, warehousing, archives and administrative space. The seventh facility, which became operational during 2000, is a Phase III and commercial manufacturing services facility with approximately 58,000 square feet of production and administrative space. To date, 35,000 square feet of this facility are completed and in service. Of the Corporation’s six facilities, one facility is owned, four are leased under operating leases, and the sixth facility is leased under a capital lease.

     The Corporation also leases approximately 28,000 square feet of laboratory, manufacturing and administrative space in Stirling, Scotland (U.K.), and approximately 18,000 square feet of administrative and manufacturing space in Heidelberg, Germany. See Notes 4 and 9 of Notes to Consolidated Financial Statements for information concerning lease obligations.

     The Corporation believes that its existing facilities are adequate to meet its current requirements and that suitable space will be available as needed.

ITEM 3. LEGAL PROCEEDINGS

     The Corporation from time to time may be involved in various claims and legal proceedings arising in the ordinary course of business. The Corporation does not believe that any such claims or proceedings, individually or in the aggregate, would have a material adverse effect on the Corporation’s financial condition or results of operations.

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

     There were no matters submitted to a vote of the stockholders of the Corporation during the quarter ended December 31, 2002.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Price

     The Corporation’s common stock is traded on the Nasdaq Stock Market under the symbol “BREL”. The following table presents, for the periods indicated, the high and low sale prices per share of common stock as reported by the Nasdaq Stock Market.

Number of Stockholders

     As of March 3, 2003, there were approximately 241 holders of record of the Corporation’s common stock. Based on a review of its nominee account listings, the Corporation estimates that there are approximately 2,650 beneficial owners of the Corporation’s common stock.

Dividends

     The Corporation has never declared or paid any cash dividends on its common stock, and the Corporation’s existing credit facility prohibits the payment of dividends without the prior consent of the lender. The Corporation does not anticipate paying any cash dividends in the foreseeable future and intends to retain future earnings for the development and expansion of its business.

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Use of Proceeds – Initial Public Offering

     During 1997, the Corporation received $32.2 million net proceeds from the initial public offering. The common stock sold in the initial public offering was registered on registration statement no. 333-25071, which became effective on July 28, 1997. As of December 31, 2002, the Corporation had used approximately $21.3 million of the net proceeds from the Corporation’s initial public offering toward planning and construction for manufacturing expansion, purchases of laboratory equipment and information systems hardware and software, and debt repayment.

     At December 31, 2002, $10.9 million of the net proceeds from the initial public offering was invested in money market funds.

ITEM 6. SELECTED FINANCIAL DATA

     The selected consolidated financial data set forth below for the five years ended December 31, 2002 have been derived from the Corporation’s consolidated financial statements audited by PricewaterhouseCoopers LLP, independent accountants. The selected consolidated financial data set forth below should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Corporation’s audited consolidated financial statements and related notes appearing elsewhere in this Report on Form 10-K.

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

     Certain statements made in this Annual Report on Form 10-K are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, which generally are not historical in nature, and may contain the words “believe”, “anticipate”, “expect”, “estimate”, “project”, “will be”, “will continue”, “will likely result”, or similar words or phrases. Forward-looking statements in this Annual Report on Form 10-K include, among others, statements regarding:

	•		the anticipated growth of revenue and improvement in profit margins,
	•		the Corporation’s ability to use additional capacity in its manufacturing facility, or to expand its manufacturing capacity,
	•		the anticipated increase in selling, general and administrative expenses and hiring of new employees,
	•		the Corporation’s ability to maintain selling, general and administrative expenses as a percentage of revenue relatively constant,
	•		the Corporation’s ability to maintain research and development expenses and tax rates at constant levels,
	•		the Corporation’s ability to fund its operations, capital expenditures, planned stock repurchase and interest and principal payments on debt for 2003 with existing cash and cash equivalents, cash flows from operations and its line of credit, and
	•		the Corporation’s expansion plans.

     Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by BioReliance with the Securities and Exchange Commission, including in its previously-filed Forms 10-K and 10-Q, and include, but are not limited to, those included in the section entitled “Risk Factors”, which begins below at page 36.

     As and when made, management believes that these forward-looking statements are reasonable. The Corporation undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. Therefore, readers are cautioned not to place undue reliance on these forward-looking statements since new risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Corporation’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

     The following discussion and analysis of the Corporation’s financial condition and results of operations should be read in conjunction with the Corporation’s consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.

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Overview

     The Corporation is a leading contract service organization (CSO) that provides testing and development, and manufacturing services for biologics and other biomedical products to biotechnology and pharmaceutical companies worldwide.

     BioReliance Corporation is a leading contract service organization providing, testing, development and manufacturing services for biologics and other biomedical products to pharmaceutical companies worldwide. The Corporation believes that it is the largest provider of outsourcing services focused on the expanding biologics sector of the pharmaceutical industry. During 2002, the Corporation believes it realized a significant return on investments in capacity and client service programs which were designed to meet higher goals for timeliness and quality. During 2002, the Corporation focused a concerted effort to hold discussions with major biopharmaceutical companies with the goal of entering into expanded corporate relationships such as those announced in 2002. The Corporation also continued to contribute to bioterrorism defense through the work performed in both operating segments on the smallpox vaccine contracts. The Corporation believes that the services provided under some of its key relationships, the benefits that have been provided by what the Corporation believes is a growing market, and the increasing recognition of BioReliance as a service provider of choice have had a positive effect on the Corporation’s results of operations.

     The Corporation follows Statement of Financial Accounting Standards No. 131 (SFAS 131), “Disclosures About Segments of an Enterprise and Related Information”. Under SFAS 131, the Corporation reports the results of two operating segments: (1) testing and development services and (2) manufacturing services. The Corporation evaluates the performance of these operating segments based on revenue and gross profit. The Corporation also reports separately the results of its U.S. operations and European operations.

     BioReliance enters into several different types of contractual relationships with its clients. Contracts in the testing and development business can be: (1) quotations, based upon established price lists for individual services, (2) work proposals, most often for larger studies composed of a variety of services, and (3) long-term master agreements between the parties. A majority of testing and development contracts range in length from a few weeks to several months; however, some master agreements involving largely stability testing and lot release testing contracts may be one to three years in length. Manufacturing contracts tend to be relatively long because of the length of time required to create and characterize cell banks, perform pilot production runs, and produce and test the products. These contracts require a formal statement of work and range in length from six months to over two years. Government contracts, usually multi-year, are consistent with the requirements of the particular granting agencies.

     Clients generally are invoiced as work is completed. For contracts in excess of $70,000, clients are often invoiced at the commencement of the services and for progress payments based on defined milestones. Contracts may be terminated for a variety of reasons, including the client’s decision to forego a particular study or to cancel or delay a particular product development program, the failure of a clinical trial or unexpected or undesired results of product testing, or by the government for convenience. Generally, service contracts may be canceled by the client upon notice, with a partial charge commensurate with the percentage of work completed at the time of cancellation.

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     For both testing and development services and manufacturing services, the major components of cost of sales are labor and related fringe benefits; facilities, primarily rent or depreciation, utilities and maintenance; direct materials; overhead costs, such as travel, office expenses and employee-related expenses; consulting costs and subcontracted costs. Cost of sales includes these expenses for laboratories directly providing the services and for supporting services departments, principally purchasing, quality assurance and quality control. In relative proportion to the total cost of sales, labor and materials costs are greater and facilities costs are less for testing and development services than for manufacturing services.

     Selling, general and administrative expense consists primarily of labor and related fringe benefits; administrative materials, travel, legal, accounting and consulting services, costs related to managing investor relations, and bad debt expense. In addition, a portion of facilities and information systems costs are allocated to general and administrative departments. Research and development expense consists primarily of labor and related fringe benefits, materials, travel, and a portion of facilities cost.

Critical Accounting Policies

     The Corporation’s critical accounting policies are listed below. These policies are particularly important to the portrayal of the Corporation’s financial position and its results of operations and require management’s significant judgment. As a result, they are subject to an inherent degree of uncertainty.

		Revenue Recognition
		We recognize revenue from commercial contracts, which are principally fixed-price or fixed-rate, and record it predominantly using a percentage-of-completion method, except for services that are generally completed within three days which are accounted for using the completed-contract method. We determine percentage-of-completion over time using estimated total project costs as a cost input measure. The percentage of completion may be affected by future events, including delays caused by laboratory interruptions, client-mandated changes and the unpredictability of biological processes. Accordingly, for each reporting period the Corporation undertakes a review process to determine that recorded revenue represents the actual percentage of completion in all material respects.
		Revenue recorded under the percentage of completion method for projects in process is not intended to and does not necessarily represent the amount of revenue that could be recovered from the client if any project were cancelled or failed. The Corporation undertakes a review of unbilled accounts receivable from customers to determine that such amounts are expected to become billable and collectible in all material respects.
		Revenue recognized from government contracts, which are principally cost-plus-fixed-fee, is recognized in an amount equal to reimbursable costs plus a pro-rata portion of the earned fee. Losses are provided for at the time at which they become known.
		In estimating revenue, we make assumptions about the completion of projects and client mandated changes in the scope of timing of the project. If any of these uncertainties occur, then our estimates surrounding the percentage of completion method may prove to be incorrect. The unexpected termination of a large study or the termination of several studies over a relatively short period of

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		time could cause periods of excess capacity which could negatively impact revenue and the results of operations. For government contracts, we make assumptions about the provisional indirect rates which are applied in calculating the cost-plus-fixed-fee revenue for these contracts. If the assumptions underlying the indirect rates changes or the estimates are adjusted at year-end, the revenue recorded for these contracts may have to be adjusted. A change in our revenue recognition estimates may affect the Corporation’s results of operations and financial condition.
		Allowance for Doubtful Accounts
		We record an allowance for doubtful accounts that we believe is adequate to cover anticipated losses on the collection of all outstanding billed and unbilled accounts receivable balances. The adequacy of the allowance for doubtful accounts is based on historical information, a review of major customer accounts receivable balances, negotiations related to certain specific client situations, and management’s assessment of current economic conditions. We reassess the allowance for doubtful accounts each period.
		In establishing the allowance for doubtful accounts, we make assumptions about the percentage of accounts receivable that will be collected based on the length of time they have been outstanding and the ability and willingness of clients to pay. A change in our allowance estimates or assumptions could affect the amount and timing of adjustments to the allowance for doubtful accounts and the related bad debt expense.
		Income Taxes
		We follow Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (SFAS 109). Under the asset and liability method of SFAS 109, deferred income taxes are recognized for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities by applying enacted statutory tax rates in effect for the year in which the differences are expected to reverse. We provide valuation allowances if it is anticipated that some or all of a deferred tax asset may not be realized.
		When determining the proper valuation allowances, we must assess the likelihood that we will recover our deferred tax assets from future taxable income and, therefore, make assumptions about the nature and amount of future taxable income and the effective income tax rates in the future. Various other factors may also impact our future effective tax rate. These factors include, but are not limited to, changes in tax laws, regulations, and/or rates, changes in interpretations of existing tax laws or regulations and changes in the distribution of our pre-tax earnings between tax jurisdictions, include the foreign countries in which we operate. In the event that actual results differ from our estimates or we adjust these estimates in future periods, our operating results and financial condition may be affected.

         The Corporation’s accounting policies are described in Note 1 of Notes to Consolidated Financial Statements.

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Results of Operations
(Dollars in tables are in thousands, except earnings per share data)

     For the year ended December 31, 2002, the Corporation had gross revenue of $82.4 million, an increase of 18% over gross revenue of $69.7 million for the year ended December 31, 2001. Earnings per share (diluted) for the year ended December 31, 2002 were $1.21 compared with $0.68 for the year ended December 31, 2001.

     Revenue increased in all of the Corporation’s segments and geographic regions as a result of continuing increases in orders. Gross margin improved in all segments and geographic regions. U.S. manufacturing continues to generate a loss as the Corporation continues to ramp-up operations in its U.S. manufacturing facility. Additionally, project delays continue to impact U.S. manufacturing revenue and margins. Selling, general and administrative expenses increased for the year, however, the Corporation reported that, as a percentage of revenue, these expenses decreased to 21% as a result of continuing successful programs to control expenses. The Corporation also reported an increase in its tax expense and effective income tax rate. The increase in the income tax expense directly results from an increase in net income and from an increase in the effective income tax rate to 36%, compared to 26% in 2001 which percentage was reduced by the utilization of tax credits and carry forwards in 2001.

Year ended December 31, 2001 compared with year ended December 31, 2002

Gross Revenue by Operating Segment

     The following table shows a comparison of revenue by operational segment for the years ended December 31, 2001 and 2002:

     The increase in testing and development revenue for the year ended December 31, 2002 is primarily due to the continued increases in the rates of new orders in both the U.S. and Europe. The increase in U.S. testing and development revenue results from increases in both biologics testing services and toxicology services. Additionally, U.S. testing and development revenue for the year ended December 31, 2002 includes an upward adjustment of approximately $150,000 relating to some of the Corporation’s long-term government contracts. The increase in European testing and development revenue was driven by increases in revenue generated in all major service areas.

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     The increase in manufacturing revenue in 2002 results from increases in both U.S. and European manufacturing revenue. In 2002, the Corporation experienced increases in almost all manufacturing services as a result of the continued ramp-up of the U.S. manufacturing facility. Manufacturing revenue growth in 2002 continued to be impacted by project delays resulting from client requests for additional process development and client regulatory issues. Approximately 21% of the Corporation’s manufacturing revenue for 2002 resulted from work performed under smallpox vaccine contracts.

Gross Revenue by Geographic Region

     The following table shows a comparison of revenue by geographic region for the years ended December 31, 2001 and 2002:

     The increase in revenue generated in the United States for the year ended December 31, 2002 resulted from increases in orders, which fueled increased revenue from both the testing and development and manufacturing segments. Revenue generated in the United States for the year ended December 31, 2002 includes an adjustment of approximately $150,000 relating to long-term government contracts.

     The increase in revenue generated in Europe for the year ended December 31, 2002 reflects increases in revenue generated both in the Corporation’s U.K. facilities and German facilities. As the German facility continues to run near capacity, revenue fluctuations in that facility are primarily attributable to incremental improvement in throughput efficiencies and different pricing structures among contracts. Revenue growth, if any, will likely be modest in 2003.

     The Corporation expects that testing and development revenue will continue to increase in both the U.S. and Europe in the foreseeable future, and that U.S. manufacturing revenue will increase with the Corporation’s smallpox vaccine and commercial contracts in the U.S. manufacturing facility. There can be no assurance that such expectations will prove to be correct. The Corporation expects European revenue to grow more rapidly than revenue in the U.S. to the extent that the European markets continue to outpace U.S. markets. The Corporation is planning for laboratory expansions that would become available to meet anticipated growth in the U.S. and Europe over a two-to-three year period.

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Gross Profit by Operating Segment

     The following table compares gross profit and gross margin by operational segment for the years ended December 31, 2001 and 2002:

     The increase in testing and development gross margins for the year ended December 31, 2002 was driven by increased gross profit generated in both the U.S. and the U.K. The increased gross profit was a result of increased revenue, combined with lower expenses related to decreased consulting fees, and operating tax credits that pertained largely to prior periods. These decreased costs were only partially offset by increases in variable costs relating to labor, direct materials, and subcontracted work.

     The improvement in manufacturing gross margins for the year ended December 31, 2002 is related to an increase in the gross profit generated from European manufacturing operations, combined with a slight decrease in losses generated in the U.S. The losses generated in the U.S. decreased due to increased revenue, only partially offset by increased expenses related to labor, direct materials, and capacity costs related to the U.S. manufacturing facility. As discussed above, project delays resulting from client requests for additional process development, regulatory difficulties and budget constraints continued to impact U.S. manufacturing gross margins in 2002.

     The Corporation expects future revenue growth to exceed cost increases related to its U.S. manufacturing facility, thereby improving gross margins. The build-out and validation of this facility has demanded and will continue to demand considerable time and resources, and there are high fixed costs related to the facility. The Corporation continues to utilize substantially less than full capacity in this facility. This facility will likely constrain earnings for the Corporation at least for the foreseeable future. Management cannot predict when, if ever, the facility will generate profits.

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Gross Profit by Geographic Region

     The following table compares gross profit and gross margin by geographic region for the years ended December 31, 2001 and 2002:

     The increase in U.S. gross margins for the year ended December 31, 2002 resulted from improved gross profits in the testing and development segment and slightly reduced losses in the manufacturing segment. The increased gross profit is a result of increased revenue, combined with lower expenses related to decreased consulting fees and operating tax credits. These decreased costs were only partially offset by increases in variable costs relating to labor, direct materials, and subcontracted work.

     The improvement in European gross margins for the year ended December 31, 2002 is attributable to increased profits, in both the testing and development and manufacturing segments, which resulted from continued efficient utilization of capacity, higher revenue and a more favorable product mix. European gross margins exceeded U.S. gross margins for the twelve months ended December 31, 2002 largely because U.S. margins are affected by fixed costs associated with the U.S. manufacturing facility. The U.S. testing and development segment also includes several units with relatively low margins, which are not part of the U.K. testing and development business.

     The Corporation expects margins in the testing and development segment, both in the U.S. and Europe, to improve incrementally with economies of scale in the foreseeable future. The rate of improvement is expected to be impacted by expenditures related to planned additions to capacity for testing and development in the U.S. beginning in 2003 in Europe and the U.S.

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Operating Expenses

     The following table shows a comparison of operating expenses, other than cost of sales, for the years ended December 31, 2001 and 2002:

     Selling, general and administrative (SG&A) expenses increased for the year ended December 31, 2002 primarily due to increases in professional fees associated with special projects and increases in labor and fringe costs. These increases were partially offset by a decrease in the Corporation’s bad debt expense. SG&A expenses are expected to continue to increase as the Corporation hires additional administrative staff, implements additional applications for its information systems and makes additional investments for technical sales support and marketing infrastructure.

     As a percentage of revenue, (SG&A) expenses decreased to 21% for the year ended December 31, 2002 from 23% for the year ended December 31, 2001. This decrease is attributed principally to increased revenues, continued programs to control expenses, and the successful integration of past enhancements and expansion in sales, marketing and information systems. SG&A expenses include all information systems expenses throughout the Corporation. The Corporation believes it can maintain SG&A as a percentage of revenue relatively constant or below 20% for the foreseeable future.

     Research and development expenses represent the investment of internal resources to develop new methods and tests to support the Corporation’s services. The decrease in these expenses is related to a shift in the Corporation’s priorities from undertaking long-term research projects to the development of tests that can be delivered to clients in a relatively shorter period. The Corporation expects these expenses to remain relatively constant for the foreseeable future.

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Income Taxes and Other Expenses

     The following table shows a comparison of non-operating expenses for the years ended December 31, 2001 and 2002:

N.M. = Not meaningful

     The improvement in net other expense (income) for the year ended December 31, 2002 is primarily due to foreign currency transaction gains and business tax refunds, partially offset by increased losses on the disposal of fixed assets and increased net interest expense due to lower interest rates on the Corporation’s money market investments and fixed interest rate on debt.

     The increase in the effective tax rate for the year ended December 31, 2002 is a result of the Corporation’s reversion in 2002 to a tax rate more in line with the its historical rates. The Corporation expects tax rates in 2003 to remain at current rates into the foreseeable future. Since the Corporation has international operations, its effective tax rate may vary from year to year due to changes in the international distribution of its pre-tax earnings, among other factors.

Year ended December 31, 2000 compared with year ended December 31, 2001

Gross Revenue by Segment

     The following table shows a comparison of revenue by operational segment for the years ended December 31, 2000 and 2001:

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     The increase in testing and development revenue for the year ended December 31, 2001 is primarily due to the continued increase in the rate of new orders in both the U.S. and Europe. The increase in U.S. testing and development revenue resulted from increases in biosafety testing services and toxicology services, partially offset by a decrease in revenue in analytical services. The increase in European testing and development revenue was driven by increases in revenue generated in all major service areas.

     The increase in manufacturing revenue in 2001 is attributable to increases in both U.S. and European manufacturing revenue. The U.S. increase is primarily attributable to an increase in orders for Phase III (large scale) manufacturing services, and strong performance under existing contracts for Phase I/II (small scale) manufacturing services. Project delays resulting from client requests for additional process development and regulatory issues offset some of the increase in U.S. manufacturing revenue in 2001.

     Price increases did not provide a significant portion of the revenue increases in either of the Corporation’s business segments.

     Approximately 36.7% of U.S. manufacturing revenue for 2001 resulted from work performed under the Corporation’s major smallpox vaccine contracts. Work under these contracts is subject to government and prime contractor-issued task orders, contract amendments and potential expansion and acceleration; thus, the related revenues cannot be predicted with certainty. As with all government contracts, these contracts are subject to termination by the government at any time.

Gross Revenue by Geographic Region

     The following table shows a comparison of revenue by geographic region for the years ended December 31, 2000 and 2001:

     The increase in revenue generated in the United States for the year ended December 31, 2001 resulted from increases in orders, which fueled increased revenue for both the testing and development and manufacturing segments.

     The increase in revenue generated in Europe for the year ended December 31, 2001 reflects ratable increases in revenue generated from all sectors: U.K. testing and development services, U.K. manufacturing services and German manufacturing services.

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Gross Profit by Operating Segment

     The following table compares gross profit and gross margin by operational segment for the years ended December 31, 2000 and 2001:

     The increase in testing and development gross margins for the year ended December 31, 2001 was driven by increased gross profit generated in both the U.S. and the U.K. Increased revenue was only partially offset by an increase in variable costs relating to labor and direct materials.

     The improvement in manufacturing gross margins for the year ended December 31, 2001 is related to an increase in the gross profit generated in Europe, partially offset by an increase in losses generated in the U.S. The losses generated in the U.S. increased due to increased costs for labor, direct materials and capacity costs related to the U.S. manufacturing facility, only partially offset by an increase in revenue. Future revenue growth is expected to exceed cost increases related to the U.S. manufacturing facility, thereby improving gross margins. However, the build-out and validation of the U.S. manufacturing facility has demanded and will continue to demand considerable time and resources, and there are high fixed costs related to the facility. The Corporation is utilizing substantially less than full capacity in this facility. Management cannot predict when, if ever, the facility will generate positive cash flow.

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Gross Profit by Geographic Region

     The following table compares gross profit and gross margin by geographic region for the years ended December 31, 2000 and 2001:

     The increase in U.S. gross margins for the year ended December 31, 2001 resulted from increased revenue in both the testing and development and manufacturing segments, only partially offset by increased cost of sales related to the U.S. manufacturing facility, discussed above, and the increased cost of sales resulting from the cost of labor and materials for the testing and development segment.

     The improvement in European gross margins for the year ended December 31, 2001 is primarily attributable to increased profit generated by both the testing and development and manufacturing segments, resulting from continued efficient utilization of capacity and higher revenue.

     Operating Expenses

     The following table shows a comparison of operating expenses, other than cost of sales, for the years ended December 31, 2000 and 2001:

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     The increase in selling, general and administrative expenses for the year ended December 31, 2001 is due primarily to an increase in labor and selling expenses, partially offset by a decrease in the provision for bad debt expense. Labor costs increased as we added new employees to fill administrative positions and as we recorded a higher expense for compensation programs based on corporate and divisional unit performances. The increases in labor costs were largely offset by favorable adjustments, which are not expected to recur. The increase in selling, general and administrative expense in 2001 over 2000 would have been greater, but for several non-recurring items included in selling, general and administrative expenses for 2000. These non-recurring items were restructuring charges related to the Corporation’s German manufacturing facility and consulting fees paid to two members of the Corporation’s Board of Directors during 2000.

     As a percentage of revenue, selling, general and administrative expenses decreased to 23% for the year ended December 31, 2001 from 27% for the year ended December 31, 2000. The decrease is attributable to the success of the Corporation’s continuing cost management and efficiency programs and the increases in total revenue.

     Research and development expenses represent the investment of internal resources to develop new methods and tests to support the Corporation’s services. The decrease in these expenses is related to a shift in the corporate priorities from undertaking longer-term research projects to the development of tests that can be delivered to clients in a relatively shorter period.

Income Taxes and Other Expenses

     The following table shows a comparison of non-operating expenses for the years ended December 31, 2000 and 2001:

     The increase in net interest and other expense for the year ended December 31, 2001 reflects a decrease in interest income, only partially offset by a decrease in other expense. Interest expense remained relatively constant. The decrease in interest income is a result of the decrease in interest rates. Interest expense was affected by a decrease in the Corporation’s capital lease obligations and a decrease in the interest rates, partially offset by increased interest expense resulting from the discontinuation of the capitalization of interest related to the U.S. manufacturing facility in 2000. The decrease in other expense is primarily attributable to other income derived from two State of Maryland grants.

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     The decrease in the effective tax rate for the year ended December 31, 2001 is a result of tax credits and carryforwards, which the Corporation utilized in 2001.

     On October 1, 2001, the Corporation effected a tax-free plan of reorganization. In the reorganization, BioReliance Testing and Development, Inc., a subsidiary of BioReliance Corporation, merged into BioReliance Manufacturing, Inc., also a subsidiary of BioReliance Corporation. After the merger, BioReliance Manufacturing, Inc. contributed a portion of its assets and liabilities to a newly-formed limited liability company (LLC), BioReliance Testing and Development, LLC. BioReliance Manufacturing, Inc. then merged into BioReliance Viral Manufacturing, Inc., also a subsidiary of BioReliance Corporation. After the merger, BioReliance Viral Manufacturing contributed a portion of its assets and liabilities (formerly the assets and liabilities of BioReliance Manufacturing, Inc.) to another newly-formed company, BioReliance Manufacturing, LLC. The reorganization was undertaken to streamline the Corporation’s tax structure and will result in reduced administrative filings and reporting responsibilities.

Liquidity and Capital Resources

     The Corporation has funded its business through existing cash, cash flows from operations, long-term bank loans, and capital leases. At December 31, 2002, the Corporation had cash, cash equivalents and marketable securities of $37.7 million, compared to $27.5 million at December 31, 2001.

     In 2000, 2001, and 2002, the Corporation generated net cash flow from operating activities of $6.1 million, $14.9 million, and $15.8 million, respectively. Changes in other assets and liabilities used cash of $0.8 million in 2002, as a result of increases in accounts receivable and other current assets and a decrease in accrued employee compensation and benefits and customer advances, partially offset by increases in accounts payable and other accrued liabilities and a decrease in deposits and other assets. Changes in other assets and liabilities provided cash of $2.6 million in 2001, as a result of increases in customer advances, accrued employee compensation and benefits, and accounts payable, partially offset by increases in accounts receivable, deposits and other assets, and a decrease in other accrued liabilities. Changes in other assets and liabilities provided cash of $1.1 million in 2000, primarily due to an increase in other accrued liabilities and customer advances, partially offset by an increase in accounts receivable and a decrease in accounts payable.

     Foreign currency exchange fluctuations accounted for increases in cash and cash equivalents of $0.9 million in 2002, as a result of the euro and the pound sterling both strengthening against the dollar. In 2001 and 2000, foreign currency fluctuations accounted for decreases in cash and cash equivalents of $0.1 million and $0.4 million, respectively.

     Working capital increased to $42.2 million at December 31, 2002, from $31.4 million at December 31, 2001. This increase was due to an increase in cash and cash equivalents and an increase in accounts receivable and other current assets, partially offset by net increases in current liabilities.

     The Corporation believes that its existing cash and cash equivalents of $37.7 million at December 31, 2002, forecasted operating cash flows for 2003, and available borrowings of $2.0 million under its revolving loan agreement will provide sufficient liquidity to meet the Corporation’s operating plan, planned capital expenditures, its planned stock repurchase, and interest and principal payments on the Corporation’s debt for 2003.

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     A decrease in demand for the Corporation’s services could reduce operating cash flows, but would also decrease the need for any capacity expansion. The key factors that could affect the Corporation’s sources of cash include the following:

	•		the Corporation’s ability to generate orders for new contracts;
	•		the ability of the Corporation to fully utilize its facilities, particularly the U.S. manufacturing facility;
	•		the size and growth of the overall markets for biopharmaceuticals; and,
	•		the economy in the U.S. and Europe.

     These and other factors are more fully described in “Risk Factors,” beginning on page 37. Additionally, a deterioration in the Corporation’s financial ratios could accelerate the maturity of principal outstanding under the Corporation’s loans.

Operating Leases

     The Corporation leases facilities and equipment under operating leases that expire at various dates through 2024. The Corporation is required to make noncancelable lease payments totaling approximately $28.1 million under these leases.

Capital Leases

     The Corporation’s U.S. manufacturing facility in Rockville, Maryland has been operational since late 2000. The Corporation leases this facility under three capital leases that require it to make net noncancelable lease payments totaling approximately $10.0 million through 2034. The Corporation has also guaranteed indebtedness related to the construction of this facility of approximately $4.2 million at December 31, 2002. A portion of the lease payments is equivalent to the interest and principal due on the indebtedness.

     Under an interest rate swap with respect to one of these capital leases, the variable interest rate portion of the indebtedness was effectively converted into debt with a fixed rate of 6.14% per annum. This swap expires on November 1, 2009. Amounts paid or received under the interest rate swap are recognized as interest income or expense in the periods in which they accrued and are recorded in the same category as that arising from the indebtedness. As a result of a decrease in the variable interest rate, for the years ended December 31, 2002 and 2001, the Corporation recorded $191,000 and $79,000, respectively of additional interest expense related to this interest rate swap. In accordance with the Statement of Financial Accounting Standard (FAS) 133, the Corporation adjusted the liability for the change in the fair value of this swap from $232,000 at December 31, 2001 to $653,000 at December 31, 2002. The corresponding amount is reflected in other comprehensive expense within shareholder’s equity, as the Corporation has met the criteria of FAS 133 to record the contract as a cash flow hedge. This hedge will be extinguished with the lease obligation to which it pertains.

     The Corporation accounts for the leases and subleases of its U.S. manufacturing facility as capital leases. The assets underlying the capital leases are included with the Corporation’s owned property and equipment as of December 31, 2002. Property and equipment, net of accumulated depreciation and amortization at December 31, 2002 included approximately $7.0 million related to these capital leases. The related lease obligation of $6.4 million is included in the Corporation’s liabilities at December 31, 2002.

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     The Corporation also leases land for one of its facilities and certain office equipment under terms that require the leases to be accounted for as capital leases. At December 31, 2002, property and equipment, net of accumulated depreciation and amortization, included $2.0 million related to these capital leases. The related lease obligation of $0.4 million is included in the Corporation’s liabilities at December 31, 2002.

Borrowings and Credit Facilities

     The Corporation has a mortgage loan of $4.3 million from Bank of America with a maturity date of November 30, 2009, that was used to finance the construction of one of its facilities in Rockville, Maryland. In addition to a monthly principal payment of $10,576 per month, the mortgage loan bears interest at the London Inter-Bank Offering Rate (LIBOR) plus the applicable LIBOR Rate Additional Percentage (LIBOR Rate Option). The LIBOR Rate Option ranges from 1.00% to 2.15% depending on the Corporation achieving funded debt to EBITDA ratios. At December 31, 2002, the applicable interest rate on the mortgage loan was 1.42% and the LIBOR Rate Option was 1.40%. Approximately $2.2 million was outstanding on the mortgage loan at December 31, 2002.

     Under an interest rate swap, the variable interest rate portion of the mortgage loan was effectively converted into debt with a fixed rate of 6.14% per annum. This swap expires November 1, 2009. Amounts paid or received under the interest rate swap are recognized as interest income or expenses in the periods in which they accrued and are recorded in the same category as that arising from the mortgage loan. As a result of a decrease in the variable interest rate, for the years ended December 31, 2002 and 2001, the Corporation recorded $96,000 and $41,000, respectively additional interest expense related to the interest rate swap. In accordance with FAS 133, the Corporation adjusted the liability for the change in the fair value of this swap from $116,000 at December 31, 2001 to $306,000 at December 31, 2002. The corresponding amount is reflected in other comprehensive expense, as the Corporation has met the criteria of FAS 133 to record the contract as a cash flow hedge. This hedge will be extinguished with the mortgage loan to which it pertains.

     The Corporation has available borrowings up to $2.0 million under the terms of a revolving loan agreement with Bank of America. The revolving loan agreement requires monthly interest payments on the unpaid principal. The unpaid principal and all unpaid accrued interest is payable in full on May 31, 2003, and the line of credit expires at that time. Amounts borrowed under the revolving loan agreement bear interest at the LIBOR rate plus the applicable LIBOR Rate Option which ranges from 0.85% to 2.00% depending on the Corporation achieving funded debt to EBITDA ratios. There were no borrowings under this agreement in 2001 or 2002.

     All of the Corporation’s agreements with Bank of America are cross collateralized and are secured by a deed of trust on one of the Corporation’s laboratory facilities in Rockville, Maryland. The agreements require the Corporation to comply with financial and restrictive covenants, including fixed charge coverage and funded debt to EBITDA ratios. Specifically:

	•		Maintain a ratio of total funded indebtedness to EBITDA not greater than 3.50 to 1.00 as of the end of each fiscal quarter, calculated on the preceding four quarter period. EBITDA is defined as earnings before interest, taxes, depreciation, and amortization.
	•		Maintain a fixed charge coverage ratio as of the end of each quarter of at least 1.25 to 1.00, calculated on the preceding four-quarter period. This ratio is determined by dividing EBITDA by the sum of interest expense and current-maturities of long-term debt and capital leases.

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     At December 31, 2002, the Corporation was in compliance with all covenants under its loan agreements.

     The Corporation has a $3.0 million loan from the Department of Business and Economic Development, a department of the State of Maryland. The Corporation is required to use the proceeds to expand and relocate its activities in Rockville, Maryland. The loan requires quarterly principal payments of $107,143 plus accrued interest and matures on June 30, 2006. The loan bears interest at rates ranging from 0.0% to 7.5% based on the Corporation’s achieving specific employment levels through 2005. The current interest rate is 0.0%. The terms of the loan contain annual reporting requirements, including the reporting of employment data. At December 31, 2002, approximately $1.5 million remained outstanding on the loan.

Capital Expenditures

     During 2002, the Corporation invested approximately $6.6 million in capital expenditures. These expenditures were primarily related to leasehold improvements and investments in new equipment. The Corporation invested $7.1 million and $4.1 million in capital expenditures during 2000 and 2001, respectively.

     Estimated capital expenditures in 2003 include capacity expansions in U.S. testing and development operations, and manufacturing operations, and in the U.K. manufacturing operations. The Corporation’s plans also include additional investments in information systems, as well as in normal equipment replacements.

     The Corporation expects to fund its growth and planned capital expenditures from existing cash and cash flows from operations, but may also enter into arrangements for bank borrowings and leases or other financing from third-party sources to the extent that funds are available on favorable terms and conditions. While the Corporation remains confident that expansion of its capacity will contribute to growth, there can be no assurance that such expansion will be fully utilized or that funding for the plans will meet with the Corporation’s expectations.

     Although the Corporation has no agreements or arrangements in place with respect to any future acquisition, there may be acquisition or other growth opportunities that require additional external financing, and the Corporation may, from time to time, seek to obtain funds from public or private issuances of equity or debt securities on a strategic basis. There can be no assurances that such financing will be available on terms acceptable to the Corporation. See Notes 4 and 9 of Notes to the Consolidated Financial Statements.

Repurchase of Common Stock

     On March 5, 2003, the Corporation’s Board of Directors authorized the repurchase of up to 500,000 shares of the Corporation’s common stock over the ensuing two years. The repurchase will be funded using the Corporation’s working capital. As of March 28, 2003, the Corporation has repurchased 75,300 shares for $1.2 million.

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Contractual Obligations

     The Corporation’s outstanding contractual obligations relate to its long-term debt, capital lease obligations and its facility leases. These obligations and commitments are more fully described in this Annual Report on Form 10-K under “Borrowing and Credit Facilities” and “Capital Leases” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and in Note 4 and Note 9 to Consolidated Financial Statements which appear beginning on page F-7.

     Below is a table which presents the Corporation’s contractual obligations as of December 31, 2002 (in thousands):

     In connection with the operating lease agreements for two of its facilities, the Corporation is contingently liable under two letters of credit totaling approximately $2.5 million.

Foreign Currency

     The accounts of the Corporation’s international subsidiaries are measured using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated into United States dollars at period-end exchange rates, and revenue and expense accounts are translated at average monthly exchange rates. Net exchange gains and losses resulting from these translations are excluded from net income and are accumulated in a separate component of stockholders’ equity. Transaction gains and losses that arise from some intercompany transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. The Corporation recorded net exchange losses of $0.4 million and $0.1 million for the years ended December 31, 2000 and 2001, respectively, and net exchange gains of $1.2 million for the year ended December 31, 2002.

     Since the revenues and expenses of the Corporation’s international operations generally are denominated in local currencies, exchange rate fluctuations between such local currencies and the United States dollar will subject the Corporation to currency translation risk with respect to the reported results of its international operations as well as to other risks sometimes associated with international operations. The Corporation derived 14.4%, 16.5%, and 19.2% of its revenue for 2000, 2001 and 2002, respectively, from services performed in the United Kingdom and Germany. In addition, the Corporation may be subject to currency risk when the Corporation’s service contracts are denominated in a currency other than the currency in which the Corporation incurs expenses related to such contracts.

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     The Corporation may experience fluctuations in financial results from the Corporation’s operations outside the United States, and the Corporation may not be able, contractually or otherwise, to reduce the currency risks associated with its operations. At the present time, the Corporation does not use derivative financial instruments to manage or control foreign currency risk because most of its revenue and related expenses are in the same functional currencies. While the Corporation may use such financial instruments in the future, these financial instruments may not be successful in managing or controlling foreign currency risk. See “Item 7A – Market Risk”.

     The revenue and identifiable assets attributable to the Corporation’s geographic regions are reported in Note 10 of Notes to Consolidated Financial Statements.

European Monetary Union

     Within Europe, the European Economic and Monetary Union (the EMU) introduced a new currency, the Euro, on January 1, 1999. The new currency is in response to the EMU’s policy of economic convergence to harmonize trade policy, eliminate business costs associated with currency exchange and to promote the free flow of capital, goods, and services.

     On January 1, 1999, the participating countries adopted the Euro as their local currency, initially available for currency trading on currency exchanges and non cash (banking) transactions. As of July 1, 2002, the participating countries withdrew all legacy currency and began to use the Euro exclusively. The introduction of the Euro has not had a material adverse effect on the Corporation, and it does not anticipate any material adverse effects from the phasing out of other currencies. However, unforeseen legislation, changes in commercial cross-border practices or a significant devaluation of the Euro could have an adverse effect on the future results of operations and financial position of the Corporation.

RISK FACTORS

Dependence on Outsourcing for Development of Biologics; Market Acceptance of Biologics

     The Corporation’s revenue is highly dependent on research, development, and manufacturing expenditures by biotechnology and pharmaceutical companies for the development of biologics. The Corporation has benefited to date from the growing tendency of biotechnology and pharmaceutical companies to outsource product development projects to CSOs. A decline in the development of biologics, a general decline in research and development expenditures by these companies, or a delay or reduction in the outsourcing to CSOs of research and development expenditures due to market conditions, pharmaceutical industry consolidation or other factors could have a material adverse effect on the Corporation’s business and results of operations.

     The Corporation’s business strategy is dependent upon market acceptance of biologics. The market for biologics is still emerging, and most biologic products are still in the research and development stage. The extent to which biologics are accepted in commercial markets will affect the Corporation’s business, results of operations, and financial condition.

Significant Capital Expenditures

     During 2002, the Corporation invested $6.6 million in capital expenditures and may spend an equivalent amount or more on capital expenditures during 2003. There will be a minimal return, if any, in 2003 on a majority of the capital expenditures planned for the year. There is a risk that the ultimate return, if any, on these capital expenditures may be less than expected.

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Risks Associated with the Nature of Contracts

     With several exceptions, most of the Corporation’s contracts are short-term in duration. As a result, the Corporation must continually replace its contracts with new contracts to sustain its revenue. The Corporation’s inability to generate new contracts on a timely basis would have a material adverse effect on its business, financial condition, and results of operations.

     In addition, many of the Corporation’s long-term contracts may be cancelled or delayed by clients for any reason upon notice. Contracts may be terminated for a variety of reasons, including termination of product development, failure of products to satisfy safety requirements, unexpected or undesired results from use of the product or the client’s decision to forego a particular study. Such terminations are somewhat common in the CSO industry, and have affected the Corporation’s revenue in the past. They are more prevalent in the manufacturing sector, which is a growing part of the business of the Corporation. The failure to obtain new contracts or the cancellation or delay of existing contracts could have a material adverse effect on the Corporation’s business and results of operations.

Government Contracts May Be Terminated

     During fiscal year 2002, approximately 13% of the Corporation’s revenue was derived from separate contracting units within the U.S. government. A government contract or subcontract may be modified or terminated at any time for the convenience of the government, including for changes in requirements or reductions in budgetary resources. Any termination of our government contracts or subcontracts, particularly our contracts for the manufacture of a smallpox vaccine would have a material adverse effect on our future revenue.

Revenue Difficult to Predict

     The Corporation’s revenue is difficult to predict because it is primarily generated on a contract-by-contract or purchase order basis. Most of the contracts are short-term, and may be canceled at any time. Consequently, the Corporation does not have a significant backlog, nor is backlog a meaningful indicator of future revenue. As a result, the Corporation’s revenue is not recurring from period to period, which contributes to the variability of results from period to period.

Variation in Quarterly Operating Results; High Fixed Costs

     The Corporation’s revenue and operating results have fluctuated, and could continue to fluctuate, on a quarterly basis. The operating results for a particular quarter may be lower than expected as a result of a number of factors, including the timing of contracts; the delay or cancellation of a contract; the mix of services provided; seasonal slowdowns in Europe during the summer months; the timing of start-up expenses for new services and facilities; and changes in regulations related to biologics. Because a high percentage of the Corporation’s costs are relatively fixed (such as the cost of maintaining facilities and compensating employees), any one of these factors could have a significant impact on the Corporation’s quarterly results. In some quarters, the Corporation’s revenue and operating results may fall below the expectations of securities analysts and investors due to any of the factors described above. In such event, the trading price of the Corporation’s common stock would likely decline, even if the decline in revenue did not have any long-term adverse implications for the Corporation’s business.

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Management of Growth

     The Corporation’s operations – both domestic and international – have grown in recent years. This growth has placed a strain on the Corporation’s management, operational, human and financial resources. In order to manage its growth, the Corporation must continue to improve its operating and administrative systems, including its client reporting systems, and continue to attract and retain qualified management and professional, scientific and technical operating personnel. There can be no assurance that the Corporation will be able to manage its growth effectively. Any failure to effectively anticipate, implement, and manage the changes required to sustain its growth could have a material adverse effect on the Corporation’s business and results of operations.

Expansion of Manufacturing Capabilities

     As part of its business strategy, the Corporation expanded its U.S. manufacturing capabilities to allow for large-scale production of biologics. The Corporation has not yet utilized the full capacity of its U.S. manufacturing facility, which became operational in late 2000. There can be no assurance that the Corporation will be able to generate sufficient revenue from this facility and its expanded capabilities to cover the related costs. Nor is there any assurance that the Corporation will find clients for its current manufacturing capacity or any manufacturing capacity it may further develop, or that the Corporation will operate its manufacturing facilities on a profitable basis.

     The Corporation also plans to expand its manufacturing facilities in Europe. There can be no assurance that the Corporation will be able to expand these facilities as planned. Nor is there any assurance that the Corporation will be able to generate sufficient revenue from these facilities to cover the costs related to expansion.

Competition; Industry Consolidation

     The Corporation operates in a highly competitive industry. The CSO industry is highly fragmented, with many CSO providers ranging in size from one person consulting firms to full-service global drug development corporations. The Corporation primarily competes with in-house research departments of biotechnology and pharmaceutical companies, universities and medical centers, and other CSOs.

     As a result of competitive pressures, the industry has been consolidating. Mergers and acquisitions have resulted in the emergence of several large, full-service CSOs that have greater capital, technical, and financial resources than BioReliance. As pharmaceutical and biotechnology companies increasingly outsource development, they may increasingly turn to larger CSOs that provide a full range of services. This trend is likely to produce increased competition among the larger CSOs for both clients and acquisition candidates and increased competitive pressures on smaller providers. In addition, the CSO industry has attracted the attention of the investment community, which could lead to heightened competition by increasing the availability of financial resources for CSOs. Increased competition may lead to price and other forms of competition that may have a material adverse effect on the Corporation’s business and results of operations.

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Dependence on Personnel

     The Corporation depends on a number of key executives, including Capers W. McDonald, its President and Chief Executive Officer. The loss of the services of any of the Corporation’s key executives could have a material adverse effect on the Corporation’s business. The Corporation also depends on its ability to attract and retain qualified scientific and technical employees. There is a significant shortage of, and intense competition for, qualified scientific and technical employees. There can be no assurance the Corporation will be able to retain its existing scientific and technical employees, or to attract and retain additional qualified employees. The Corporation’s inability to attract and retain qualified scientific and technical employees would have a material adverse effect on the Corporation’s business and results of operations.

Potential Liability

     The Corporation formulates, tests, and manufactures products intended for use by the public. In addition, the Corporation’s services include the manufacture of biologic products to be tested in human clinical trials. These activities could expose the Corporation to risk of liability for personal injury or death to persons using such products, although the Corporation does not commercially market or sell the products to end users. The Corporation seeks to reduce its potential liability through measures such as contractual indemnification provisions with clients (the scope of which may vary from client-to-client, and the performances of which are not secured), exclusion of services requiring diagnostic or other medical services, and insurance maintained by clients. The Corporation could be materially and adversely affected if it were required to pay damages or incur defense costs in connection with a claim that is outside the scope of the indemnification agreements, if the indemnity, although applicable, is not performed in accordance with its terms or if the Corporation’s liability exceeds the amount of applicable insurance or indemnity. In addition, the Corporation could be held liable for errors and omissions in connection with the services it performs. The Corporation currently maintains product liability and errors and omissions insurance with respect to these risks. There can be no assurance that the Corporation’s insurance coverage will be adequate or that insurance coverage will continue to be available on terms acceptable to the Corporation.

Hazardous Materials

     The Corporation’s activities involve the controlled use of etiologic agents, hazardous chemicals, and various radioactive materials. The Corporation is subject to foreign, federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. The risk of accidental contamination or injury from these materials cannot be eliminated. In the event of any contamination or injury from these materials, the Corporation could be held liable for any damages that result, including joint and several liabilities under certain statutes such as CERCLA, and any such liability could exceed the resources of the Corporation. Furthermore, the failure to comply with current or future regulations could result in the imposition of substantial fines against the Corporation, suspension of production, alteration of its manufacturing processes or cessation of operations. There can be no assurance that the Corporation will not be required to incur significant costs to comply with any such laws and regulations in the future, or that such laws or regulations or liability thereunder will not have a material adverse effect on the Corporation’s business and results of operations.

Dependence on and Effect of Government Regulation

     The design, development, testing, manufacturing and marketing of biotechnology and pharmaceutical products are subject to regulation by governmental authorities, including the FDA and

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comparable regulatory authorities in other countries. The Corporation’s business depends in part on strict government regulation of the drug development process, especially in the United States. Legislation may be introduced and enacted from time to time to modify regulations administered by the FDA governing the drug approval process. Any significant reduction in the scope of regulatory requirements or the introduction of simplified drug approval procedures could have a material adverse effect on the Corporation’s business and results of operations.

     Almost all of the Corporation’s testing assays are performed in conformity with either GLP regulations or current GMP regulations. GLPs and GMPs are parts of the FDA regulations and guidelines governing the development and production of biologic and pharmaceutical products. Failure by the Corporation to comply with applicable requirements could result in the disqualification of data for client submissions to regulatory authorities and could have a material adverse effect on the Corporation’s business and results of operations.

     All facilities and manufacturing techniques used for manufacturing of products for clinical use or for sale in the United States must be operated in conformity with current GMP regulations. The Corporation’s facilities are subject to scheduled periodic regulatory inspections to ensure compliance with GMP requirements. A finding that the Corporation had materially violated GMP requirements could result in regulatory sanctions, the disqualification of data for client submissions to regulatory authorities and a mandated closing of the Corporation’s facilities. Any such sanctions would have a material adverse effect on the Corporation’s business and results of operations. See “Business — Government Regulation”.

Control by Existing Stockholders

     As of March 3, 2003, Sidney R. Knafel, Chairman of the Board of Directors of the Corporation, and related persons beneficially owned an aggregate of approximately 37.9% of the outstanding common stock. The Corporation’s executive officers, directors and related persons (including Sidney R. Knafel) beneficially own an aggregate of approximately 40.6% of the outstanding common stock (excluding shares issuable upon the exercise of options). As a result, the Corporation’s directors and executive officers and related persons may exercise a controlling influence over the outcome of matters submitted to the Corporation’s stockholders for approval and may have the power to delay, defer or prevent a change in control of the Corporation.

Potential Volatility of Stock Price

     The market price of the Corporation’s common stock has experienced a high degree of volatility. The market price of the common stock could be subject to wide fluctuations in response to variations in operating results from quarter to quarter, changes in earnings estimates by analysts, market conditions in the industry and general economic conditions. Furthermore, the stock market has experienced significant price and volume fluctuations unrelated to the operating performance of particular companies. These market fluctuations may have an adverse effect on the market price of the Corporation’s common stock.

Economic Recession

     The Corporation has not identified a significant relationship between the economic conditions and customer demand; nevertheless, a continued economic slowdown worldwide, or in any of our key markets, could reduce demand for our products or services. A decrease in demand could have the effect of reducing our ability to obtain new contracts and orders or cause the cancellation or delay of existing contracts, which could have a material adverse effect on the Corporation’s business and results of operations.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

     The Corporation is exposed to market risk from adverse changes in interest rates and foreign currency exchange rates.

Interest Rate Risks

     The Corporation is exposed to interest rate risk primarily through its investments in cash equivalents. The Corporation’s investment policy stipulates investment in short-term, low-risk instruments. At December 31, 2002, the Corporation had $37.7 million in cash and cash equivalents. If interest rates fall, floating rate securities will generate less interest income. The Corporation does not believe that it is exposed to any material interest rate risk as a result of its investments in cash equivalents.

     At December 31, 2002, the Corporation had total debt of $11.5 million, most of which bears interest at a fixed interest rate. Thus, the Corporation does not believe that it is exposed to any material interest rate risk as a result of borrowing activities.

Foreign Currency Exchange Risk

     The Corporation’s international operations are subject to foreign exchange rate fluctuations. The Corporation derived 19.2% of its revenue for 2002 from services performed in the United Kingdom and Germany. The Corporation does not hedge its foreign currency exposure. Management does not believe that the Corporation’s exposure to foreign currency rate fluctuations is material. See “Foreign Currency” in Management’s Discussion and Analysis for a more detailed discussion of our foreign currency risks and exposures.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements and supplementary data of the Corporation are listed in the Index to Financial Statements and Financial Statement Schedule appearing on page F-1 of this Report.

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

     Not applicable.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by Item 10 is incorporated by reference to the information to be set forth under the caption “Directors and Executive Officers of the Registrant” in the Corporation’s definitive proxy statement, which is expected to be filed with the Securities and Exchange Commission within 120 days after the close of the Corporation’s fiscal year.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by Item 11 is incorporated by reference to the information to be set forth under the caption “Executive Compensation” in the Corporation’s definitive proxy statement, which is expected to be filed with the Securities and Exchange Commission within 120 days after the close of the Corporation’s fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Except for information regarding equity compensation plans, which is incorporated by reference to the information to be set forth under the caption “Equity Compensation Plan Information” in the Corporation’s definitive proxy statement, the information required by Item 12 is incorporated by reference to the information to be set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Corporation’s definitive proxy statement, which is expected to be filed with the Securities and Exchange Commission within 120 days after the close of the Corporation’s fiscal year.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by Item 13 is incorporated herein by reference to the information to be set forth under the caption “Certain Relationships and Related Transactions” in the Corporation’s definitive proxy statement, which is expected to be filed with the Securities and Exchange Commission within 120 days after the close of the Corporation’s fiscal year.

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PART IV

ITEM 14. CONTROLS AND PROCEDURES

     Within 90 days before the filing date of this Annual Report on Form 10-K, the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Corporation’s design and operation of its disclosure controls and procedures pursuant to Rule 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934. Based upon that evaluation, such officers concluded that the Corporation’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation, required to be included in this Annual Report on Form 10-K.

     The Corporation’s management has also evaluated the Corporation’s internal controls and there have been no significant changes in the Corporation’s internal controls or in other factors, which could significantly affect internal controls subsequent to the date that the Corporation carried out its evaluation.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

Financial Statements and Financial Statement Schedule

     The financial statements and financial statement schedule required to be filed as part of this Report are listed in the Index to Consolidated Financial Statements elsewhere in this Report, which list is incorporated herein by reference.

Exhibits

     The documents required to be filed as exhibits to this Report under Item 601 of Regulation S-K are listed in the Exhibit Index included elsewhere in this Report, which list is incorporated herein by reference.

Reports on Form 8-K Filed During the Last Quarter

     The Corporation did not file any reports on Form 8-K during the quarter ended December 31, 2002.

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in Rockville, Maryland, on this 31st day of March, 2003.

BIORELIANCE CORPORATION
(Registrant)

POWER OF ATTORNEY

     KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below constitutes and appoints Capers W. McDonald and John L. Coker, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities to sign any and all amendments to this Report, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

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     Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.