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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K

For Annual and Transition Reports Pursuant to Sections 13 or 15(d)
of the Securities Exchange Act of 1934

(Mark One)

|/x/ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|--- | ------------------------------------------------------------------------------------

For the fiscal year ended March 31, 2000

or

|/ / | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|--- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number:1-12748

CHESAPEAKE BIOLOGICAL LABORATORIES, INC.(Exact name of registrant as specified in its charter)

Maryland(State or other jurisdiction of incorporation or organization)

52-1176514(IRS Employer Identification Number)


|                                                                                 |  |                 |  |          
|-------------------------------------------------------------------------------- |  | --------------- |  | ---------
|1111 S. Paca Street, Baltimore, Maryland(Address of principal executive offices) |  | 21230(zip code) |  | 2834(SIC)

(410) 843-5000(Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class: Class A Common Stock, $0.01 par value per share.

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./x/

As
of June 30, 2000 the aggregate market value of the outstanding shares of the Registrant's Class A Common Stock, par value $0.01 per share, held by non-affiliates of the
Registrant was approximately $26,985,000 based on the closing sale price of the Class A Common Stock on June 30, 2000.

The
number of shares outstanding of each of the Registrant's classes of common stock, as of June 30, 2000:
Class A Common Stock, $0.01 per share - 5,681,156 shares

DOCUMENTS
INCORPORATED BY REFERENCE

List
hereunder the following documents incorporated by reference and the part of the Form 10-K into which the document is
incorporated.None

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CHESAPEAKE BIOLOGICAL LABORATORIES, INC.

Annual Report on Form 10-K
Fiscal Year Ended March 31, 2000
Table of Contents

|           |  |                                                                                       |  | Page Reference to
Form 10-K
|---------- |  | ------------------------------------------------------------------------------------- |  | ---------------------------
|Part I     |  |                                                                                       |  |                            
|Item 1.    |  | Business                                                                              |  | 3                          
|Item 2.    |  | Properties                                                                            |  | 8                          
|Item 3.    |  | Legal Proceedings                                                                     |  | 8                          
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 8                          
|Part II    |  |                                                                                       |  |                            
|Item 5.    |  | Market for the Registrant's Common Equity and elated Stockholder Matters              |  | 9                          
|Item 6.    |  | Selected Consolidated Financial Data                                                  |  | 9                          
|Item 7.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 10                         
|Item 7A.   |  | Quantitative and Qualitative Disclosure About Market Risk                             |  | 15                         
|Item 8.    |  | Financial Statements and Supplementary Data                                           |  | 15                         
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 15                         
|Part III   |  |                                                                                       |  |                            
|Item 10.   |  | Directors and Executive Officers of the Registrant                                    |  | 16                         
|Item 11.   |  | Executive Compensation and Related Information                                        |  | 18                         
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 22                         
|Item 13.   |  | Certain Relationships and Related Transactions                                        |  | 23                         
|Part IV    |  |                                                                                       |  |                            
|Item 14.   |  | Exhibits, Financial Statement Schedule and Reports on Form 8-K                        |  | 23                         
|Signatures |  | 26                                                                                   

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PART I

ITEM 1. BUSINESS

General Overview

Chesapeake Biological Laboratories, Inc. (the "Company" or "CBL") is an established contract service provider of pharmaceutical and biopharmaceutical
product development and production services for parenteral (injectable) and other sterile products. The Company serves a broad range of customers, from major international pharmaceutical firms to
emerging biotechnology companies. Since 1990, the Company has provided services on a contract basis to more than 100 pharmaceutical and biotechnology companies and has contributed to the development
and production of more than 125 therapeutic products. Customers contract with the Company to produce development stage products for use in U.S. Food and Drug Administration ("FDA") required toxicology
studies, clinical trials and to provide manufacturing services for FDA approved products for commercial sale. In fiscal year 2000, the Company provided services to over 60 customers.

The
Company has particular experience and expertise in providing product development services and producing sterile, process-sensitive biopharmaceutical parenteral products. Biopharmaceutical products
are derived from biological materials and typically involve larger, more complex molecules than traditional pharmaceutical products, which generally are based upon smaller, more stable, synthetic
organic molecules. The complexity, inherent instability and process-sensitivity of biopharmaceutical products require the application of specialized technology and expertise in their development,
production and analysis.

The
specialized development services provided by the Company include research and development on sterile product formulations; test method development and validation; process design and manufacturing
validations; regulatory and compliance consulting; preparation of clinical trial and toxicology materials; container-closure system design; and, accelerated and ongoing stability studies.

In
June 1996, the Company received ISO (International Organization for Standardization) 9001 certification, demonstrating CBL's conformance with the established international
quality management standards for product design, development, production, inspection and testing. CBL believes that ISO 9001 certification has been a positive factor in attracting domestic and
international customers.

The
Company's objective is to expand the parenteral product development and production services CBL provides to the pharmaceutical and biotechnology industries. The Company renovated a 70,000 square
foot building purchased in November 1996 into a sterile pharmaceutical production facility. The pharmaceutical production operation was mechanically completed in December 1997. The FDA
initial general facility inspection was completed in July 1998 and all developmental and production services were being performed in the new facility by March 31, 2000.

CBL
believes its established experience and expertise, ISO 9001 certification, plus the increase in capacity provided by the new facility and ability to offer a broad range of drug development and
production services, will enable it to provide competitive, cost-effective contract services to the pharmaceutical and biopharmaceutical industries. The increased utilization of the new
facility during fiscal year 2000 enabled the Company to return to profitability.

The
acquisition, renovation, validation and start-up of the Company's new Camden laboratory and production facility has significantly increased CBL's capacity. The Company's
production capacity should enable the CBL to continue to meet current and future customers' increasing volume requirements and pursue larger scale, long-term commercial contracts. While
the Company has increased its capacity to include larger scale production, the equipment originally acquired for the Camden facility was designed to meet the needs of biotechnology firms whose
production lot sizes are in the range of 30 to 50 thousand units per run. The Company is currently acquiring specific manufacturing equipment that can provide

3

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larger production runs for vial and syringe filling in order to produce product for customers who are seeking more efficient, larger production lots.

The
Company has expanded its capabilities to better meet the increasing preference of pharmaceutical and biotechnology companies to outsource development and production functions. As part of this
effort, the Company continues to expand its scientific staff to meet the challenges of developing and producing increasingly complex biologically-derived drug products. In addition, the Company hired
two sales representatives in fiscal year 1999. These sales representatives have increased CBL's presence in the market with direct sales calls on new and existing customers and have
been in attendance at industry trade shows and exhibits. The Company also reorganized its internal staff to provide support to the sales representatives and expanded the project management group. The
Company's sales strategy is to match the Company's capabilities with the needs of prospective customers. At present, the Company has a limited range of types and size of production equipment, which
may affect the Company's ability to meet its sales objectives.

The
Company believes that many pharmaceutical and biotechnology companies prefer to outsource development services to companies that do not manufacture, market and distribute potentially competitive
proprietary products. CBL focuses substantially all of its resources on product development and production services for others and does not pursue its own research or product development in direct
competition with its customers.

Contracts and Customers

A substantial portion of the Company's current customers are engaged in the early phase of clinical development. Accordingly, only a limited but an increasing amount of the
Company's fiscal year 2000 revenue is from the manufacture of commercial products. The Company's product mix is anticipated to continue to change in fiscal year 2001 to more commercial product
production. However, the Company expects a majority of its revenue in fiscal 2001 to be generated from clinical development clients. Generally, all non-commercial, early phase clinical
work is performed under purchase orders provided by its customers. Customers provide purchase orders within 30-60 days of commencement of work. Therefore, the Company's backlog
represents approximately three months of future revenues. The Company is currently negotiating longer term commercial agreements with several customers. The Company's backlog for commercial
manufacturing services began to grow at the end of fiscal year 2000 with the commercial approval of two products and a third that is anticipated to be approved.

Competition

The Company directly competes with several pharmaceutical product development organizations, contract manufacturers of biopharmaceutical products and university research
laboratories. Although many
of these pharmaceutical product development organizations, contract manufacturers and university research laboratories do not offer the full range of services offered by the Company, they can and do
compete effectively against certain segments of the Company's business, including its pharmaceutical production capabilities. The Company also competes with in-house research, development
and support service departments of pharmaceutical and biotechnology companies. Certain of these competitors, particularly the larger, established pharmaceutical and biotechnology companies, have
significantly greater resources and better name recognition than the Company.

Competitive
factors include reliability, turnaround time, reputation for innovation and quality performance, capacity to perform numerous required services, financial and regulatory strength and
price. The Company believes that it can compete favorably in these areas. In addition, the Company's strategy is to complement its customers by not pursuing its own research and development or
production of products. The Company believes that many customers prefer CBL to other contract manufacturing companies that also produce and sell their own products in direct competition with those of
the customer.

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Employees

At March 31, 2000, the Company had 92 full-time equivalent employees, six of which hold Ph.D. degrees, 13 hold master's degrees and six hold professional
certifications. Fifty of CBL's employees perform scientific, regulatory or engineering functions. The Company believes that its relations with its employees are good.

Governmental Regulation

The services performed by the Company are subject to extensive regulatory requirements designed to ensure the quality and integrity of pharmaceutical products, primarily under
the U.S. Federal Food, Drug and Cosmetic Act and FDA administered Current Good Manufacturing Practices ("cGMP") regulations. Although the Company has successfully operated in this stringent regulatory
environment since the early 1980's and believes its experience is an advantage over some of its competitors, compliance with these regulations is a continuous process. These regulations apply to all
phases of drug manufacturing, testing and record keeping, including personnel, facilities, equipment, control of materials, processes and laboratories, packaging, labeling and distribution.
Noncompliance with cGMP by the Company could result in disqualification of data collected by the Company. Material violation of cGMP
requirements could result in regulatory sanctions, and in severe cases, could result in a mandated closing of the Company's facilities. Any of these sanctions would materially and adversely affect the
Company's business and prospects. From time to time, the FDA revises its existing regulations or implements new regulations. The Company cannot predict when the FDA might take any such action. Revised
or new FDA regulations are likely to increase the Company's operating costs and could require capital expenditure.

To
help assure compliance with applicable regulations, the Company has established quality assurance controls at its facilities that monitor on-going compliance by auditing test data and
regularly inspecting facilities, procedures and other cGMP compliance parameters. In addition, FDA regulations and guidelines serve as a basis for the Company's standard operating procedures.

Additional Information

No portion of the Company's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the United States Government.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements contained in this Form 10-K or in documents incorporated herein by reference, including without limitation, statements including the word "believes," "anticipates," "intends," "expects,
"or words of similar import, constitute"forward-looking
statements"within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
following summary of business risks describe forward-looking information. The business risks that are described are not all inclusive, particularly with respect to possible future events. Other parts
of this Annual Report on Form 10-K may also describe forward-looking information. There maybe events over which the Company has no control that may cause actual results to be very
different from what the Company expects. The Company also makes no promise to update any of its forward-looking statements, or to publicly release the results if the Company revises any of them.
Factors which may cause actual results of operations in future periods to differ materially from intended or expected results include, but are not limited to:

If CBL cannot expand its production equipment, CBL may not be able to grow its business.

The equipment CBL currently uses has limited production capacity. CBL's existing equipment allows it to conduct only limited production runs. CBL will need to
acquire manufacturing equipment capable of larger production runs if CBL is to increase its customer base. This equipment is very expensive. CBL does

5

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not currently have a source of funding to acquire this equipment. If CBL cannot acquire this equipment, CBL will not be able to produce products in larger runs. Therefore, CBL may not be able to grow
its business substantially without more equipment.

Because CBL currently operates under short-term agreements, CBL needs to maintain or increase the numbers of agreements CBL has to grow its business.

CBL receives most of its business under individual purchase orders and short-term agreements with its customers. Therefore, CBL has no guaranteed or
long-term revenues. CBL needs to continue to successfully negotiate an increased number of purchase orders and contracts with a larger number of clients to increase its revenues. If CBL
fails to maintain its current rate of incoming orders, its revenues and profits will decline. If CBL fails to obtain more purchase orders or contracts, CBL cannot grow its business.

CBL faces significant competition from pharmaceutical companies and others, which may cause it to lower prices or lose business.

CBL competes directly with several pharmaceutical product development organizations, contract manufacturers of biopharmaceutical products and university research laboratories.
Most companies who produce biopharmaceutical products do not engage in product development. Most companies who provide product development services do not have the equipment or expertise to
manufacture products. However, many of CBL's competitors, particularly large established pharmaceutical and biotechnology companies, have many more resources than CBL does. If any of
these competitors, or new ones, decide to provide the same services that CBL provides at lower prices, CBL may be forced to lower its prices or lose business. If this happens, CBL's revenues and
profitability will decrease. Because many of CBL's competitors have greater financial resources, they would be able to sustain these pricing pressures
better than CBL could. CBL is a small company with limited financial resources. Therefore, CBL might be forced to go out of business if CBL faces prolonged price competition.

If CBL fails to meet governmental regulations, CBL may not be able to sell its services.

CBL must ensure that its products and services continuously comply with strict requirements designed to ensure the quality and integrity of pharmaceutical products. These
requirements include the U.S. Federal Food, Drug and Cosmetic Act and FDA-administered Current Good Manufacturing Practices (known as cGMP) regulations. These regulations apply to all
phases CBL's business, including the following:



To
date, CBL has been able to comply with these governmental regulations. However, Congress or the FDA could impose stricter regulations in the future. CBL has a small staff of persons with FDA
expertise. Therefore, CBL could have difficulty in quickly changing its methods to comply with stricter regulations. If CBL fails to comply with the FDA's regulations, the FDA can disqualify any data
CBL collects in its product development process and terminate its ongoing research. If CBL violates the FDA's regulations, CBL could face additional regulatory sanctions. In severe cases, the FDA
could
close CBL's facilities. If the FDA disqualified CBL's data or closed its facilities, even for a short period of time, CBL's reputation could be severely
damaged. This would probably make it difficult for CBL to obtain new purchase orders and contracts. If CBL could not obtain new purchase orders and contracts, CBL could go out of business.

6

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The public uses some of the products CBL produces even though CBL does not market or sell products directly to the public. Therefore, CBL faces liability for personal injury or death to people who use
these products. CBL may have to pay substantial damages or incur substantial defense costs in connection with a claim of personal injury or death. CBL believes it has adequate insurance coverage to
cover potential risk.

If CBL's operating results and financial performance fluctuate, the market price of CBL's common stock may fluctuate.

CBL's revenues and operating results have varied substantially from quarter to quarter during the past several years. For example, CBL incurred net losses during all of its
fiscal year 1999 and realized net income of only $111,777 in the first quarter of its fiscal year 2000. CBL expects continued quarterly fluctuations based on such factors as:



For
these reasons, CBL believes that you should not rely on quarterly comparisons of its financial results to predict its future performance. Also, fluctuations in CBL's quarterly
results may affect the market price of its common stock for reasons unrelated to its longer term potential.

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ITEM 2. PROPERTIES

Since 1986, the Company has leased 15,000 square feet at the Seton Business Park in Baltimore, Maryland, which the Company operated as a multi-customer pharmaceutical
production facility in accordance with cGMP regulations. In April 1998, the lease term for this facility was extended to December 31, 2000, with one, two-year renewal option
thereafter. As of March 31, 2000, the Company had consolidated virtually all the functions of the Seton facility into the new Camden facility. The Company does not plan to renew the Seton
facility lease after December 31, 2000.

In
November 1996, the Company acquired a 70,000 square foot building, located on 3.48 acres of land in the Camden Industrial Park in Baltimore, Maryland. The Company has completed the
renovation, which included office, warehouse and several laboratories, in addition to the production area build-out and installation of production support and processing equipment. In
July 1998, the FDA completed its initial general facility inspection, which made the facility operational for customer use. During fiscal year 2000, manufacturing services previously provided
at the Seton facility were transferred to the Camden site.

In
October 1998, the Company entered into a lease for a 7,700 square foot building at 730 W. West Street and related vacant lot at 1200 South Paca Street. The West Street building is adjacent
to the Company's Camden facility. The Company expects to utilize the office portion of the building for the quality assurance function and may seek to locate a future customer who would best be
serviced with a separate dedicated facility, in the remaining space. There are no plans to develop the related vacant lot at 1200 South Paca Street at this time.

ITEM 3. LEGAL PROCEEDINGS

None.

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

None.

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PART II

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

a) As of March 31, 2000, the Company's Class A Common Stock traded on the Nasdaq Stock Market's National Market under the symbol CBLI. The
following table sets forth, for the periods indicated, the high and low sales prices for the Company's Class A Common Stock, as reported on Nasdaq National Market for each fiscal quarter during
2000 and 1999.

Fiscal Year Ended March 31,2000

1999High

Low

High

LowFirst fiscal quarter

$
3.500

$
1.750

$
7.625

$
6.625Second fiscal quarter


3.875


2.500


8.500


5.500Third fiscal quarter


3.500


2.250


5.625


3.625Fourth fiscal quarter


6.500


2.688


4.500


1.750


As
of June 30, 2000, there were approximately 225 holders of record of the Company's Class A Common Stock. The Company has never declared or paid a cash dividend on its
Class A Common Stock. Earnings, if any, are expected to be retained to finance the development of the Company's business. In connection with the listing by the Company of its Class A
Common Stock on the Nasdaq National Market, the Company filed on May 22, 1997, a Registration Statement on Form 8-A with the United States Securities and Exchange Commission
in order to register the Class A Common Stock pursuant to
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Registration Statement on Form 8-A was declared effective on May 27, 1997.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following data has been derived from the audited consolidated financial statements of the Company and should be read in conjunction with those statements, which for fiscal
years 2000, 1999, and 1998 are included in this report.

|Summary of Operations                              |  | Fiscal year ended March 31,
|-------------------------------------------------- |  | ---------------------------
|
|
|Revenues                                           |  | $                          
|Gross profit (loss)                                |  |                            
|Operating expenses                                 |  |                            
|Restructuring charge                               |  |                            
|Income (loss) from operations                      |  |                            
|Extraordinary loss on refinancing                  |  |                            
|Net income (loss)                                  |  |                            
|Earnings per share:                                |  |                            
|Net income (loss) per share                        |  | $                          
|Net income (loss) available to common shareholders |  | $                          

|Consolidated Balance Sheet Data |  | As of March 31,
|------------------------------- |  | ---------------
|
|
|Working capital                 |  | $              
|Total assets                    |  |                
|Long term obligations           |  |                
|Stockholders' equity            |  |                

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

Overview

The Company's revenues are derived from two sourcesproduct development services and commercial production services. The Company provides its customers in the
pharmaceutical and biotechnology industries with product development services, experimental products for use in clinical trials and manufacturing services for FDA approved commercial drugs and medical
devices. The Company has particular experience and expertise in the development and production of sterile, process-sensitive biopharmaceutical products. The Company is ISO 9001 certified.

The
Company's scientific, regulatory and engineering staff perform multiple product development functions for CBL's customers, including regulatory research and development of sterile
product formulations, test method development and validation, container-closure system design, accelerated and on-going product stability studies, process design and manufacturing
validations, and regulatory and compliance consulting. Following final development of a stable formulation of the pharmaceutical product and validation of the manufacturing process, the Company's
production expertise is typically called upon to provide services for filling the development product for use in clinical trials or investigations as part of the FDA approval process.

The
Company had completed the build-out and validation and initial FDA inspection by July 1998 of its 70,000 square foot commercial production facility in Camden, which had been
purchased in November 1996. As of March 31, 2000, the Company had transferred production services from the Seton facility to the new Camden facility.

In
May 1999, the Company raised a total of $2.0 million, before expenses, from the sale of Convertible Preferred Stock to an investment banking and management firm and Class A
Common Stock to a group led by Company Officers and Directors.

The
Company reached record levels in terms of customers serviced (64) and revenue of $10.8 million for the fiscal year ended March 31, 2000 as a result of its newly instituted
sales and marketing program and the organization and transfer of production to the new Camden facility.

RESULTS OF OPERATIONS

Fiscal Year Ended March 31, 2000 Compared to Fiscal Year Ended March 31, 1999

Revenues for the year ended March 31, 2000 increased 60% to $10.8 million, from $6.8 million for fiscal year 1999. In fiscal year 2000, sales were made to
64 customers compared to 47 customers in the prior fiscal year. No customer accounted for more than 7% of fiscal year 2000 revenues.

Revenues
and earnings in fiscal year 2000 do not reflect a service agreement CBL entered into to fill vials in anticipation of a customer's commercial launch of a product upon FDA approval. The
agreement had two elements, filling of vials and labeling, packaging and shipping the vials for an additional fee after FDA approval was obtained. CBL filled the vials and invoiced the client $632,000
for the filling service during fiscal year 2000, which the client subsequently paid within terms, during fiscal year 2000 and in the first quarter of fiscal year 2001. The filled but unlabeled vials
were stored in the Company's warehouse at the client's request pending FDA approval. FDA approval is required before the customer could provide CBL with the label text to allow CBL to proceed with
labeling and packaging services. The FDA approved the client's product in May 2000 and CBL is now providing labeling services. The client's product will be shipped in the first half of fiscal
year 2001 and the $632,000 in revenue and the related gross margin will be recognized upon shipment.

During
fiscal year 2000, manufacturing operations were transferred from the Seton facility to the new Camden facility, and virtually all of the Company's products were manufactured at the Camden
facility

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during the fourth quarter of fiscal 2000. Costs in several areas increased for the current fiscal year as compared to the prior fiscal year, including the full 12 months of costs associated
with the Camden facility compared to the eight months of these costs in fiscal 1999. Despite these increased expenses, the throughput of products in the new Camden facility, as well as the inherent
operating leverage through increased sales, enabled the Company's gross profit margin to improve from a negative 12% of sales in fiscal year 1999 to 29% of sales in fiscal year 2000.

The
revenue increase in fiscal year 2000 was achieved with an average employee roster of 93 people, compared to an average of 91 employees the previous year. This was the result of a management
reorganization and work force reduction implemented in the fourth quarter of fiscal year 1999.

Selling,
general and administrative expenses decreased from $2,786,000 in fiscal year 1999, or 41% of revenues, to $2,070,000 in fiscal year 2000, or 19% of revenues. This lower expense level was due
to approximately $750,000 of expenses relating to the management reorganization and reduction of personnel as well as other non-recurring items in fiscal year 1999. These decreases were
offset in part in fiscal year 2000 by expenses relating to the full year cost associated with the outside sales force as well as additional consulting fees to modify and upgrade quality systems to
ensure compliance levels necessary to support the commercial manufacturing facility.

As
a result of the above, earnings before interest and taxes increased to $1,092,000, or 10.1% of sales, as compared to a loss of $3.6 million (before restructuring) in fiscal year 1999. In
fiscal year 2000, interest income, interest expense and other expense was a net expense of $500,000, versus $304,000 of net expense in fiscal year 1999. The principal reason for this increase was
$145,000 of interest payments in fiscal year 1999 that were capitalized (rather than expensed) as part of the refurbishing of the Camden facility prior to FDA inspection.

In
fiscal year 2000, the Company utilized its net operating loss carryforward ("NOL") and paid no income tax. As of March 31, 2000, the Company had a remaining NOL for federal
income tax purposes of approximately $4.4 million.

In
fiscal year 1999, the Company established a tax valuation reserve for the tax benefit related to the fiscal year loss. Based on the revenue increase and profitable results of fiscal year 2000
operations and the expectation of continued operating profits management believes, it is now more likely than not that the Company will use the net operating loss carryforward. As a result, the
valuation reserve has been eliminated and a net tax benefit of $1,826,000 was recorded in fiscal year 2000.

Reported
net income available to common shareholders was affected in fiscal year 2000 by the issuance of Convertible Preferred Stock, which was issued in May 1999 at a conversion rate of $1.50
versus the market price of $2.00, this represented a beneficial conversion feature that was valued separately at issuance. The intrinsic value of the beneficial conversion feature was calculated at
the commitment date as the difference between the conversion price and the fair value of the Company's common stock into which the Preferred Stock was convertible, multiplied by the number of shares
into which the Preferred Stock was convertible. This represents a beneficial conversion feature of $517,000, which was accounted for as a reduction of retained earnings and an increase in additional
paid-in capital. This conversion
feature was recorded on the date of issuance of the Preferred Stock as the stock is convertible at any time by the holders. This beneficial conversion is analogous to a dividend to the preferred
shareholders. Correspondingly, the reported net income of $2,418,119 or $0.43 per share was reduced by this $517,000 beneficial conversion, thus the net income available to common shareholders was
$1,901,119 or $0.34 per share.

Fiscal Year Ended March 31, 1999 Compared to Fiscal Year Ended March 31, 1998

Revenues for the year ended March 31, 1999 were $6.7 million, down $300,000 or 4% from fiscal year 1998. Due to the expiration of the Allergan contract in fiscal
year 1998, there were no sales to Allergan in fiscal year 1999 compared to sales of $984,000 in fiscal year 1998. Allergan, as a percentage of total sales for

11

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fiscal years 1999, 1998 and 1997 was 0%, 14% and 47%, respectively. The Company had 47 active customers in fiscal year 1999 as compared to 40 in fiscal year 1998. CBL received FDA approval of its new
facility in August 1998 and initiated a sales promotion program subsequent to the facility's approval. While a portion of the revenues were generated at the Camden facility, approximately 85%
of revenues were generated at CBL's original Seton facility during fiscal year 1999.

Although
revenues were primarily associated with the Seton facility, the fiscal year includes $2.2 million of operating costs associated with the Camden facility. This resulted in a loss at the
gross margin line as compared to a 24% gross margin on fiscal year 1998 sales. These costs primarily include the trained personnel needed to validate, start-up, maintain and operate the
facility, as well as fixed cost associated with the facility during a period of limited revenues.

Operating
expenses increased $654,000 to $2,930,000 for the fiscal year 1999. Primary factors for the expense increase include costs related to a sales and marketing program initiated after the FDA
approval of the Camden facility. The program included the addition of two sales representatives and an increase in CBL's advertising expenditures. Another factor in the increase was the
management reorganization costs, which were not considered restructuring charges.

In
January 1999, Mr. Thomas P. Rice was appointed President and Chief Executive Officer. During the fourth quarter of the current fiscal year, CBL initiated a workforce reduction program
and made a decision to close the Seton facility and consolidate all of its operations at the new Camden facility. The
Company recorded a provision of $1.2 million for restructuring costs associated with these actions. On his appointment as President and CEO, Mr. Rice was granted 200,000
non-qualified options to purchase CBL common stock at $1.00 per share, which was below the then current market price of $2.50 per share. The Company recorded the expense of $150,000 for
the vested portion of 100,000 options in general and administrative expense.

In
summary, the fiscal year 1999 operating loss from operations of $4.8 million compared to the $619,000 loss in fiscal year 1998 primarily resulted from the cost to operate, validate and
maintain the new Camden facility during the current fiscal year against limited revenues, restructuring costs, implementation of a sales and marketing program for the new facility and other costs
related to the management realignment.

Interest
income and other, net decreased during fiscal year 1999 compared to fiscal year 1998 as the Company used the remaining bond funds received in November 1996 and the proceeds of the
June 1997 follow-on public offering for the validation, start-up and transitional costs of the new facility and general corporate purposes. Interest expense increased in
fiscal year 1999 compared to fiscal year 1998 as the Company began recording the full interest expense, following the FDA approval in August 1998, which allowed the new facility to be
operational. During the facility renovation, the Company capitalized a portion of the interest related to the bond funds.

Due
to the recent operating results and uncertainties related to the timing of significant commercial production at the new Camden facility, the Company established a valuation reserve for the tax
benefit associated with the 1999 fiscal year loss. The valuation reserve associated with the tax benefit at March 31, 1999 approximates $2.0 million. The Company's effective income tax
rate in fiscal years 1999 and 1998 was 0% and 37%, respectively. As of March 31, 1999, the Company had generated a net operating loss carry forwards available for federal income tax purposes of
$3.9 million.

Net
loss for fiscal year 1999 was $5.4 million compared to a net loss of $379,000 for fiscal year 1998. Earnings per share reflect a net loss of $1.02 per share for fiscal year 1999, compared
to net loss of $0.08 per share in fiscal year 1998.

Liquidity and Capital Resources

In November 1996, the Company acquired its Camden facility in Baltimore, Maryland, to renovate and equip as a pharmaceutical manufacturing facility and to house its
administrative offices and warehouse

12

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operations. The Company paid $2,150,000 in cash and 125,000 shares of Class A Common Stock for the land and existing improvements. Renovations to convert the building to a commercial
pharmaceutical production facility were completed in December 1997 and an FDA general facility inspection was completed in July 1998.

The
cash portion of the purchase price for the land and existing building, as well as the cost of the renovations and a portion of the pharmaceutical manufacturing equipment and related pharmaceutical
facility build-out, was financed through the issuance of $7,000,000 variable rate economic development demand revenue bonds by the Maryland Industrial Development Financing Authority
("MIDFA"), and a $1,500,000 loan from the Mayor and City Council of Baltimore, acting through the Department of Housing and Community Development and the City of Baltimore Development Corporation. In
addition, approximately $3,400,000 of pharmaceutical manufacturing equipment was financed through equipment operating leases from companies affiliated with NationsBank (now Bank of America), American
Equipment Leasing, BancBoston Leasing (now Fleet Capital Leasing) and CoreStates (now First Union National Bank).

The
loan from the City of Baltimore Development Corporation accrues interest at a fixed rate of 6.5% per annum, for a term of 20 years. Monthly interest only payments were due through
November 1998 and monthly payments of principal and interest are due thereafter through November 2016.

The
bonds issued in November 1996 by MIDFA were variable rate, tax-exempt, and issued pursuant to a Trust Indenture. The maximum annual interest rate provided for under the terms of
the bonds was 12% and, subject to certain conditions, the bonds could be converted to fixed-rate at the option of the Company. The Company entered into an interest rate swap agreement and,
as a result, the interest rate applicable to the bonds through November 2003 was capped at 5.51%. The principal portion of the bonds, and the accrued interest thereon, is payable from monies
drawn under a direct pay Letter of Credit issued by First Union National Bank of North Carolina (the "Bank"), in amounts up to $7,280,000. Interest was payable quarterly, as of February 1,
1997, and principal portions of the bonds were subject to redemption, commencing November 1998, in accordance with a schedule set forth in the bonds. The maturity date is August 1, 2018.
The letter of credit is issued pursuant to a Letter of Credit and Reimbursement Agreement containing various terms and covenants applicable to the Company. The Company's obligations with respect to
the letter of credit and bonds are secured by substantially all of the assets of the Company, including the new facility. MIDFA has also provided the Bank with additional credit support for the letter
of credit in the form of a $1,800,000 deficiency guaranty.

Due
to capital expenditure restrictions on the tax-exempt bonds, the Company converted the bonds to a taxable status in November 1998. These restrictions could have hindered
CBL's ability to effectively satisfy the needs of new customers who would require additional capital expenditures for product manufacturing purposes. In conjunction with the conversion,
CBL entered into a variable interest rate swap agreement on the taxable bonds with a maximum rate of 6.99% through November 1, 2005. As of March 31, 2000, the interest rate was 6.59%.

Under
the documentation applicable to the bond financing, the Company is obligated to maintain certain financial ratios and balances, including a minimum tangible net worth, a liability to net worth
ratio, an EBITDA ratio and a current ratio, all as defined in the applicable documents. As of March 31, 2000, the Company was in compliance with the required covenants.

On
March 31, 2000, CBL had cash and cash equivalents of $595,000 compared to $411,000 at March 31, 1999. These balances do not include $350,000 held as collateral for the Company's
obligations under the Letter of Credit and Reimbursement Agreement with the Bank, pursuant to which a letter of credit was issued as credit enhancement for the bonds issued by the MIDFA. The proceeds
of these bonds were used by the Company to finance a portion of the purchase price, plus the renovation and equipping of the Camden Industrial Park facility. The Company continues to maintain a
$750,000 Revolving Line of Credit from the First Union National Bank of North Carolina, under which there was no outstanding balance at

13

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March 31, 2000. The Revolving Line of Credit has the same ratio and balance requirements as the Letter of Credit Facility associated with the MIDFA bonds.

In
May 1999, the Company completed two private placements of equity securities grossing $2,001,000, less financing costs of $193,000. The equity included 225,000 shares of Class A Common
Stock with proceeds of $450,000 purchased by a group led by Company officers and directors. Various investors led by an investment banking and management firm purchased 15,510 shares of Convertible
Preferred Stock for $1,551,000. The shares of Convertible Preferred Stock are convertible at any time by the holders into 1,034,000 shares of Class A Common Stock. In connection with the
placement of Convertible Preferred Stock, warrants to purchase 51,700 shares of the Company's Common Stock were issued. As of March 31, 2000, the Company had secured lease commitments of
approximately $1.7 million for capital expansion needs.

The
$185,000 increase in cash and cash equivalents was attributable primarily to operating profit, which resulted in $304,000 cash provided from operations plus the $1.8 million, net of related
costs, raised
with the private placement of convertible preferred shares and common stock. These increases in cash were offset in part by capital expenditures, the payments of long-term debt, and
accrued restructuring costs and the elimination of debt related to the revolving line of credit with First Union National Bank, which reduced the total increase in cash to $185,000. The positive cash
flow in fiscal year 2000 compares favorably to the negative cash flow generated in the prior two fiscal years. Management believes its plans will generate sufficient cash resources to meet its
covenants and cash needs through at least April 2001. However, there can be no assurances this will occur.

Year 2000 Issue

The Year 2000 issue ("Y2K") arose as a result of computers and devices containing microprocessors having been programmed using only the last two digits to refer to a year
rather than all four digits. There was the potential for the incorrect calculation of dates (1900 instead of 2000) that could result in incorrect results and disrupt operations.

The
Company addressed the Y2K issue during the construction of the Camden facility and the use of an independent consultant to upgrade computer hardware and software. The upgrades were important to
resolve Y2K issues and to support the Company's expansion plans. As a result, Y2K issues did not pose any operation problems. Because the Company experienced no major year 2000-related
issues internally or externally over the year 2000 transition, it does not currently believe that it will incur material costs or expense material disruptions in its business associated with Y2K.
However, there can be no assurance that the Company or the Company's vendors' current systems and product offerings do not contain undetected defects associated with year 2000 date functions.

14

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has limited exposure to market risk from changes in interest rates. CBL does not enter into derivative instruments for speculative trading purposes.

The
Company in conjunction with the conversion of the MIDFA bonds from tax-exempt to taxable entered into a variable interest rate swap agreement on the taxable bonds with a maximum rate
of 6.99% through November 1, 2005. As of March 31, 2000 the interest rate was 6.59%.

The
Company's interest rate on the revolving Line of Credit Facility is 3.00% over the LIBOR Market Index Rate. Based on the $52,000 average outstanding balance in fiscal year 2000 there was no
significant risk.

In
addition, the Company has obtained a loan from the City of Baltimore Development Corporation. This loan accrues interest at a fixed rate of 6.5% per annum, for a term of 20 years. Monthly
interest only payments were due through November 1998 and monthly payments of principal and interest are due thereafter through November 2016.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements are contained on pages 26 through 38 of this report.

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

None.

15

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The directors and executive officers of the Company as of March 31, 2000, are as follows:

|Name                        |  | Age |  | Position(s) with the Company                         
|--------------------------- |  | --- |  | -----------------------------------------------------
|Thomas P. Rice              |  | 50  |  | President, Chief Executive Officer and Director      
|John T. Botek               |  | 43  |  | Vice President, Chief Operating Officer              
|Narlin B. Beaty, Ph.D       |  | 50  |  | Vice President, Chief Technical Officer and Director 
|John T. Janssen             |  | 61  |  | Vice President, Chief Financial Officer and Treasurer
|Charles M. Proby(5)         |  | 54  |  | Vice President, Sales and Marketing                  
|Regis F. Burke(1)(2)        |  | 52  |  | Director                                             
|Harvey L. Miller(1)(3)      |  | 60  |  | Director                                             
|Elliot F. Hahn, Ph.D.(1)(4) |  | 56  |  | Director                                             

---

Thomas P. Rice, age 50, was elected a director in 1997 and was appointed President and Chief Executive Officer as of January 11, 1999.
Mr. Rice is a Certified Public Accountant. In 1996, Mr. Rice co-founded Columbia Investments, LLC, which made selective investments, primarily in the health care industry.
From 1993 to 1996, Mr. Rice was Executive Vice President, Chief Operating and Financial Officer and a member of the Board of Directors of Circa Pharmaceuticals, Inc., a publicly-traded
pharmaceutical firm. From 1991 to 1993, Mr. Rice was a principal of Competitive Advantage, a Baltimore-based management consulting firm. From 1985 to 1990, Mr. Rice was Vice President of
Administration and Finance of PharmaKinetics Laboratories, Inc.

John T. Botek, age 43, joined the Company as Vice President and Chief Operating Officer in April 1999. In 1996, Mr. Botek was also a
co-founder of Columbia Investments, LLC. From 1993 to 1996, he was Senior Vice President of Operations of Circa Pharmaceuticals, Inc.

Narlin B. Beaty, Ph.D.,age 50, joined the Company in 1983 and currently serves as Vice President and Chief Technical Officer.
He served as President of the Company from 1991 until May 1996 and has been a director of the Company since 1989. Dr. Beaty also served as Acting President of the Company from 1989 to
1991 and as Director of Development for the Company from 1985 to 1988.

John T. Janssen, age 61, joined the Company in 1993 as CFO. He is a Certified Public Accountant with over 35 years of diversified financial
management experience. During the 12 years prior to joining the Company, he was a member of the Board of Directors and Chief Financial Officer of Barre-National, Inc. of Baltimore,
Maryland, for 3 years, and Genessee Brewing Co. of Rochester, New York, for 9 years, respectively.

Charles M. Proby,age 54, joined the Company in 1998 as Director of Sales,and was promoted to Vice
President Sales and Marketing in March 2000. From 1996 to 1998, he served as Business Development Manager with BioScience Contract Production Corporation. Prior to that Mr. Proby was
Vice PresidentSales and Marketing for Asepco, Inc., a manufacturer of aseptic processing equipment and General Manager at L.H. Fermentation, a bioprocessing equipment company.

Regis F. Burke, age 52, was elected a director of the Company in 1995. Mr. Burke is a Certified Public Accountant in private practice, since
1988. Mr. Burke specializes in corporate transaction consulting,

16

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business planning, business valuation and litigation support services. Mr. Burke currently serves as an outside director to several privately held companies located in Maryland and
Pennsylvania. Prior to 1988, Mr. Burke was a partner with Touche Ross & Co., an international accounting firm.

Harvey L. Miller, age 60, was elected a director in 1996. Since 1980, Mr. Miller has been Chairman of GSI Corporation, a manufacturer of
high-tech wire assemblies. Since 1986, Mr. Miller has been president of DM Realty Corporation, a developer of commercial real estate sites. Mr. Miller has served as a
director of Maryland Midland Railway, Inc. since 1997.

Elliot F. Hahn, Ph.D., age 56, was elected a director in September 1999. He is President and a director of Andrx Corporation, a publicly traded
pharmaceutical company. He is also a director of two privately held corporations. Since 1988, he has been an Adjunct Associate Professor at the University of Miami School of Medicine.

Board Committees and Meetings

The Board of Directors has three standing committees: a Compensation Committee, an Audit Committee and a Stock Option Committee. The current members of each committee are
Messrs. Burke, Miller and Dr. Hahn. The Compensation Committee makes recommendations concerning salaries and incentive compensation for employees of and consultants to the Company. The
Audit Committee reviews the results and scope of the audit and other services provided by the Company's independent public accountants. The Stock Option Committee administers and grants stock options
and awards pursuant to the Company's Incentive Stock Option Plans.

The
Audit Committee, which includes the outside directors, met with the Company's independent public accountants, both before and after the year-end audit. During fiscal year 2000, the
Audit Committee met once to review the final results of the fiscal year 1999 audit and once to review the fiscal year 2000 audit.

During
the fiscal year ended March 31, 2000, the Board of Directors held eight formal meetings. All directors attended at least 80% of the meetings.

17

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ITEM 11. EXECUTIVE COMPENSATION AND RELATED INFORMATION

Summary of Compensation

The following table sets forth the compensation earned by the Company's Chief Executive Officer, the Company's four other highest compensated executive officers and the former
Chairman for services rendered in all capacities to the Company for the Fiscal Years ended March 31, 2000, 1999 and 1998.

|                                                                      |  | Summary Compensation | 
|--------------------------------------------------------------------- |  | -------------------- | 
|
|
|
|
|Thomas P. Rice President and Chief Executive Officer                  |  | 2000
1999
1998       | 
|John T. Botek Vice President and Chief Operating Officer              |  | 2000
1999
1998       | 
|Narlin B. Beaty Vice President and Chief Technical Officer            |  | 2000
1999
1998       | 
|John T. Janssen Vice President, Chief Financial Officer and Treasurer |  | 2000
1999
1998       | 
|Robert J. Mello(A) Secretary and Vice President                       |  | 2000
1999
1998       | 
|William P. Tew(B) Former Chairman                                     |  | 2000
1999
1998       | 

---

18

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Employment Agreement

Mr. Rice entered into an agreement with the Company on January 11, 1999. Upon joining the Company as President and Chief Executive Officer, Mr. Rice
received an annual salary of $150,000 of which $75,000 was deferred until January 2000. The agreement was scheduled to continue through December 31, 2000 and be automatically renewed for
one year periods unless Mr. Rice or the Company gave 90 day written notice of non-renewal. Mr. Rice was granted qualified stock options for 50,000 shares of which 50%
will vest on December 2, 2000 and are 100% vested January 2, 2001 and had an exercise price of $3.75 per share, which was the market at the day of the grant. Mr. Rice also
received non-qualified stock options for 200,000 shares at $1.00 per share, which was below the then $2.50 market price. 100,000 of these shares vested upon grant. The vesting of the
remaining shares vest at 20,000 shares per year over the next five years or based upon the achievement of certain milestones, which if achieved would result in accelerated vesting.

Mr. Botek
entered into an employment agreement in March 1999 and joined the Company as Vice President and Chief Operating Officer in April 1999. The initial term of the employment
agreement was scheduled to continue through December 31, 2000 and be automatically renewed annually each January 1, unless Mr. Botek or the Company gave 90 days written
notice of non-renewal. Mr. Botek receives an annual salary of $130,000. During 1999, 50% of his salary was deferred until January 3, 2000. Mr. Botek is also entitled
to periodic bonuses at the discretion of the Compensation Committee. Mr. Botek was granted qualified stock options for 25,000 shares of Class A Common Stock, one-half of
which vest on June 30, 2000, and the remainder of which will vest on December 31, 2001. The exercise price of these options is $2.125 per share, the market price on the date of grant.
Mr. Botek also received non-qualified stock options for 125,000 shares of Class A Common Stock at an exercise price of $1.00 per share, one-half of which vested
on the date of grant and the remainder of which vest 20% per year over the next five years or earlier upon the Company's achievement of certain milestones.

Effective
June 1, 2000, Messrs. Rice and Botek extended the terms of their employment agreements with the Company through May 31, 2002. The new employment agreements may be
renewed for one additional year, at the option of Mr. Rice or Mr. Botek, respectively, with at least 90 day written notice. Both Messrs. Rice and Botek received salary
increases to $200,000 and $160,000, respectively, and remain entitled to annual bonuses at the discretion of the Compensation Committee. Under each new employment agreement, the executive is entitled
to two times his most recent annual compensation if (i) his employment is terminated upon a change of control or (ii) he terminates his employment within six months after a change in
control. In connection with these new employment agreements, Messrs. Rice and Botek purchased 100,000 restricted shares and 75,000 restricted shares, respectively, subject to forfeiture, under
the Company's Fifth Stock Incentive Plan, for $2.50 per share, the fair market value on the date of purchase. Messrs. Rice and Botek each signed a promissory note to the Company for the
purchase price for the shares.

The
Company has also entered into employment agreements with Dr. Beaty and Mr. Janssen. These agreements generally provide for payment of a base salary, together with incentive
compensation in an amount to be determined by the Board of Directors or Compensation Committee from time to time. Base salaries established in the employment agreements for Dr. Beaty and
Mr. Janssen are $131,200 and $129,300, respectively. The base salary applicable to any executive officer may be changed through action of the Compensation Committee or Board of Directors.

The
employment agreements provide, in the case of Dr. Beaty, for an initial term of three years, with successive three-year renewal terms; and, in the case of Mr. Janssen,
for an initial term of two years, with successive two-year renewal terms. The initial term of each employment agreement commenced July 1, 1995. Pursuant to the employment
agreements, each of the executive officers is required to devote substantially all of his business time to Company related matters and has agreed not to solicit clients or customers of the Company for
a period following termination of employment.

19

---

The employment agreements also provide for severance payments to the executive officers of the Company in certain circumstances. Dr. Beaty and Mr. Janssen are each entitled to receipt of
severance payments in the amount equal to approximately one-half of their respective annual compensation upon termination of their employment following a breach by the Company of their
respective employment agreements or for good reason by the employee.

William
P. Tew, Ph.D., resigned as Chairman June 30, 1999. From July 1, 1999 through June 30, 2000, Dr. Tew served as a consultant to the Company at a monthly retainer of
$10,208.

Stock Option Grants

Stock options were granted during the fiscal year to the officers listed below:

|                   |  |                       |        |                 |  |     |                   |  |                           | Potential Realizable Value at Assumed Annual Appreciation For Option Term(3)
|------------------ |  | --------------------- | ------ | --------------- |  | --- | ----------------- |  | ------------------------- | ----------------------------------------------------------------------------
|
|
|
|Thomas P Rice      |  | 75,000                |        | 11.3%           |  | $   | 2.438             |  | 12/13/09                  |                                                                             
|John T. Botek      |  | 125,000
25,000
50,000 | (2)(1) | 18.9%
3.8%
7.5% |  | $$$ | 1.000
2.125
2.438 |  | 12/21/08
4/13/09
12/13/09 |                                                                             
|Narlin B. Beaty    |  | 50,000
25,000         |        | 7.5%
3.8%       |  | $$  | 2.438
2.313       |  | 12/13/09
4/8/09           |                                                                             
|John T. Janssen    |  | 7,500                 |        | 1.1%            |  | $   | 2.313             |  | 4/8/09                    |                                                                             
|Robert J. Mello(a) |  | 10,000                |        | 1.5%            |  | $   | 2.313             |  | 4/8/09                    |                                                                             

---

Stock Option Exercises and Holdings

The table below sets forth information concerning the exercise of options during the 2000 fiscal year and unexercised options held at the end of the fiscal year by the
Company's Chief Executive Officer and the Company's four other most highly compensated executive officers.

20

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AGGREGATED OPTION EXERCISES IN THE 2000 FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES

|                   |  | Shares
Acquired
on Exercise
(#) |  | Value
Realized
($) |        | Number of Unexercised
Options at Fiscal
Year-End(#)
Exercisable(E)/
Unexercisable(U) |                 | Value of Unexercised
In-the-Money
Options at Fiscal
Year-End(#)(1)
Exercisable(E)/
Unexercisable(U) |   
|------------------ |  | ------------------------------- |  | ------------------ | ------ | ------------------------------------------------------------------------------------ | --------------- | --------------------------------------------------------------------------------------------------- | --
|Thomas P. Rice     |  | 0                               |  |                    | 0      |                                                                                      | 187,000
152,000 | (E)(U)                                                                                              | $$
|John T. Botek      |  | 0                               |  |                    | 0      |                                                                                      | 112,500
87,500  | (E)(U)                                                                                              | $$
|Narlin B. Beaty    |  | 0                               |  |                    | 0      |                                                                                      | 93,786
45,000   | (E)(U)                                                                                              | $$
|John T. Janssen    |  | 0                               |  |                    | 0      |                                                                                      | 33,786
22,500   | (E)(U)                                                                                              | $$
|Robert J. Mello(A) |  | 15,000                          |  | $                  | 73,750 |                                                                                      | 53,768          | (E)                                                                                                 | $ 

---

Compensation of Board of Directors

Executive Officers of the Company who also serve on the Board of Directors receive no additional compensation for their service as such. Members of the Board of Directors who
are not also employed by the Company receive annual compensation of $9,600 per year for their service on the Board of Directors. In addition, the Company grants to each director, upon that
individual's initial appointment or election to the Board of Directors, an option to purchase 8,000 shares of Common Stock at the then current market price. Accordingly, Mr. Burke was granted
an option to purchase 8,000 shares of Common Stock at $1.50 per share in November 1995, Mr. Miller was granted an option to purchase 8,000 shares of Common Stock at $3.125 per share in
November 1996, Mr. Rice was granted an option to purchase 8,000 shares of Common Stock at an exercise price of $5.1875 per share in March 1997 and Dr. Hahn was granted an
option to purchase 8,000 shares of Common Stock at an exercise price of $3.00 on September 14, 1999. Each of these respective options is evidenced by a Director's Agreement and a related Option
Agreement by and between the Company and the director and becomes exercisable based on a vesting schedule over a four-year period measured from the date of grant.

In
addition, in March 1997, the Board of Directors approved the 1997 Directors' Stock Option Plan (the "Directors" Plan). The Directors' Plan provides for the issuance of a qualified stock
option to purchase 3,000 shares of Common Stock to each director of the Company who is not an officer and who is serving as chairperson of any standing committee of the Board of Directors at the date
of grant.
Options under the Directors' Plan are automatically granted annually at the first meeting of the Board of Directors following the Annual Meeting of the Stockholders at an exercise price equal to the
then current market price of the Common Stock. Accordingly, on October 14, 1999, options to purchase 3,000 shares each were granted to

21

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Messrs. Burke, Miller and Dr. Hahn, exercisable at the then current market price of $3.375 per share. These options were vested on the date of grant.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of June 1, 2000, with respect to the number of shares owned by each person who is known by the Company to own beneficially
5% or more of its Class A Common Stock, each director of the Company and all directors and officers of the Company as a group.

|Name and Address of Beneficial Owner                                                      |  | Shares Beneficially
Owned(1) |     | Percentage Beneficially
Owned |  
|----------------------------------------------------------------------------------------- |  | ---------------------------- | --- | ----------------------------- | -
|Regis F. Burke
6 Kincaid Court
Baldwin, MD 21013                                          |  | 78,200                       | (2) | 1.1                           | %
|Elliot F. Hahn, Ph.D.
Andrx Corporation
4001 SW 47th Avenue
Ft. Lauderdale, FL 33314      |  | 3,000                        | (3) | *                             |  
|Harvey L. Miller
200 Village Square
Cross Keys
Baltimore, MD 21210                        |  | 107,500                      | (4) | 1.5                           | %
|Thomas P. Rice
4209 Buckskin Wood Drive
Ellicott City, MD 21042                           |  | 239,500                      | (5) | 3.3                           | %
|Narlin B. Beaty, Ph.D.
13406 Blythenia Road
Phoenix, MD 21131                             |  | 237,791                      | (6) | 3.3                           | %
|William P. Tew, Ph.D.
412 Stablers Church Road
Parkton, MD 21220                          |  | 524,568                      |     | 7.3                           | %
|Corporate Opportunities Fund (Institutional) L.P.
126 East 56th Street
New York, NY 10022 |  | 798,458                      | (8) | 11.1                          | %
|Corporate Opportunities Fund L.P.
126 East 56th Street
New York, NY 10022                 |  | 147,427                      | (9) | 2.0                           | %
|All directors and officers as a group (8 persons)                                         |  | 897,452                      | (7) | 12.5                          | %

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22

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

A partnership of which Lillian Hahn is managing partner purchased 999 shares of Series A-1 Convertible Preferred Stock from the Company in its private
placement in May 1999 for $99,900. Lillian Hahn is the wife of Elliott F. Hahn, Ph.D., a member of CBL's Board of Directors. Dr. Hahn disclaims beneficial ownership of
these shares.

Also
in May 1999, the Company completed a private placement of 225,000 shares of its Class A Common Stock for $2.00 per share, the then fair market price. Investors included
Messrs. Beaty, Burke, Miller and Rice, who purchased 12,500, 42,500, 42,500 and 42,500 shares, respectively.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1). Financial Statements

Page NumberReport of Independent Public Accountants

27Consolidated Balance SheetsMarch 31, 2000 and 1999

28Consolidated Statements of OperationsYears Ended March 31, 2000, 1999 and 1998

29Consolidated Statements of Changes in Stockholders' EquityYears Ended March 31, 2000, 1999 and 1998

30Consolidated Statements of Cash FlowsYears Ended March 31, 2000, 1999 and 1998.

31Notes to Consolidated Financial Statements

3242




Schedule Number

Description

Page NumberII

Valuation and Qualifying Accounts

43


Exhibit

Description

Page Number23.1

Consent of Independent Public Accountants

77


23

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|**3.01     |  | Articles of Restatement.                                                                                                                                                                             
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|****3.02   |  | Amended and Restated By-Laws of the Registrant.                                                                                                                                                      
|*10.01     |  | Second Incentive Stock Option plan of the Registrant.                                                                                                                                                
|*10.02     |  | Third Incentive Stock Option Plan of the Registrant.                                                                                                                                                 
|*10.03     |  | Lease, dated December 26, 1986, between Centennial/Warren Technology Associates Limited Partnership, as predecessor of Jiffy Lube International of Maryland, Inc., and the Registrant.               
|***10.04   |  | Loan and Security Agreement, dated September 2, 1994, by and between the Registrant and the Bank of Baltimore Bancorp Leasing and Financial Inc., now known as First Union National Bank of Maryland.
|*****10.05 |  | Employment Agreement dated July 1, 1995 by and between the Registrant and William P. Tew, Ph.D.                                                                                                      
|*****10.06 |  | Employment Agreement dated as of July 1, 1995 by and between the Registrant and Narlin B. Beaty, Ph.D.                                                                                               
|*****10.07 |  | Employment Agreement dated as of July 1, 1995 by and between the Registrant and John T. Janssen.                                                                                                     
|*****10.08 |  | Employment Agreement dated as of July 1, 1995 by and between the Registrant and Robert J. Mello, Ph.D.                                                                                               
|+10.09     |  | Loan Agreement dated as of November 1, 1996, by and between the Registrant and Maryland Industrial Development Financing Authority.                                                                  
|+10.10     |  | Letter of Credit and Reimbursement Agreement dated as of November 1, 1996, by and between the Registrant and First Union National Bank of North Carolina.                                            
|+10.11     |  | Collateral Pledge Agreement dated as of November 1, 1996, by and between the Registrant and First Union National Bank of North Carolina.                                                             
|+10.12     |  | Promissory Note dated as of November 21, 1996 from the Registrant to the Mayor and City Council of Baltimore, in the original principal sum of $1,500,000.                                           
|+10.13     |  | Promissory Note dated as of November 21, 1996 from the Registrant to the Maryland Industrial Financing Authority, in the original principal sum of $7,000,000.                                       
|*****10.14 |  | Fourth Incentive Stock Option Plan of the Registrant.                                                                                                                                                
|**10.15    |  | Letter Agreement dated November 21, 1996, by and between Registrant and William P. Tew, Ph.D.                                                                                                        
|**10.16    |  | Letter Agreement dated November 21, 1996, by and between Registrant and Narlin B. Beaty, Ph.D.                                                                                                       
|**10.17    |  | Letter Agreement dated November 21, 1996, by and between Registrant and John T. Janssen.                                                                                                             
|**10.18    |  | Letter Agreement dated November 21, 1996, by and between Registrant and Robert J. Mello, Ph.D.                                                                                                       
|**10.19    |  | 1997 Directors' Stock Option Plan of the Registrant.                                                                                                                                                 
|++10.20    |  | Letter Agreement dated February 10, 1999, by and between Registrant and William P. Tew, Ph.D.                                                                                                        
|+++10.21   |  | Employment Agreement dated January 11, 1999 by and between the Registrant and Thomas P. Rice.                                                                                                        
|++++10.22  |  | Employment Agreement dated March 22, 1999 by and between the Registrant and John T. Botek.                                                                                                           

24

---

|++++10.23 |  | Letter Agreement dated June 22, 1999, by and between Registrant and William P. Tew, Ph.D.                
|--------- |  | ---------------------------------------------------------------------------------------------------------
|10.24     |  | Letter Agreement dated March 14, 2000 by and between Registrant and Robert J. Mello, Ph.D                
|10.25     |  | Employment Agreement dated May 31, 2000 by and between the Registrant and Thomas P. Rice.                
|10.26     |  | Employment Agreement dated May 31, 2000 by and between the Registrant and John T. Botek.                 
|10.27     |  | Restricted Stock Purchase Agreement dated June 16, 2000 by and between the Registrant and Thomas P. Rice.
|10.28     |  | Restricted Stock Purchase Agreement dated June 16, 2000 by and between the Registrant and John T. Botek. 
|22.0      |  | Subsidiary of the Registrant.                                                                            
|23.1      |  | Consent of Independent Public Accountants                                                                
|27.0      |  | Financial Data Schedule                                                                                  

|*     |  | Incorporated by reference to Exhibits to Company's Registration Statement on Form S-1 (No. 333-17655).                                                         
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|**    |  | Incorporated by reference to Exhibits to the Company's Registration Statement on Form S-2 (No. 333-25903).                                                     
|***   |  | Incorporated by reference to Exhibits to the Company's Annual Report on Form 10-K for Fiscal Year Ended March 31, 1994.                                        
|****  |  | Incorporated by reference to the Company's Quarterly Report on Form 10-Q for fiscal quarter ended September 30, 1994.                                          
|***** |  | Incorporated by reference to the Company's Quarterly Report on Form 10-Q for fiscal quarter ended June 30, 1995.                                               
|+     |  | Incorporated by reference to the Company's Quarterly Report on Form 10-Q for fiscal quarter ended December 31, 1996.                                           
|++    |  | Incorporated by reference to the Company's Quarterly Report on Form 10-Q for fiscal quarter ended December 31, 1998.                                           
|+++   |  | Incorporated by reference to Exhibits to Company's Annual Report on Form 10-K for Fiscal Year Ended March 31, 1999.                                            
|++++  |  | Incorporated by reference to the Company's Quarterly Report on Form 10-Q for fiscal quarter ended June 30, 1999.                                               
|(b)   |  | Reports on Form 8-K                                                                                                                                            
|      |  | The Registrant filed a current Report on Form 8-K on May 24, 1999, reporting an Item 5 event (the private placements of Convertible Preferred and Common Stock)
|      |  | The Registrant filed a current Report on Form 8-K on September 17, 1999, reporting an Item 5 event (exchange of Convertible Preferred Stock)                   
|      |  |                                                                                                                                                                

25

---

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.

|CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
|----------------------------------------
|By:                                     

Pursuant
to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

|Signature                                       |  | Title                                           |  | Date         
|----------------------------------------------- |  | ----------------------------------------------- |  | -------------
|                                                |  |                                                 |  |              
|/s/THOMAS P. RICEThomas P. Rice                 |  | President, Chief Executive Officer and Director |  | July 12, 2000
|/s/NARLIN B. BEATY, PH.D.Narlin B. Beaty, Ph.D. |  | Chief Technical Officer and Director            |  | July 12, 2000
|/s/REGIS F. BURKERegis F. Burke                 |  | Director                                        |  | July 12, 2000
|Elliot F. Hahn, PH.D.                           |  | Director                                        |  |              
|/s/HARVEY L. MILLERHarvey L. Miller             |  | Director                                        |  | July 12, 2000
|                                                |  |                                                 |  |              

26

---

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To
the Board of Directors of
Chesapeake Biological Laboratories, Inc.:

We
have audited the accompanying consolidated balance sheets of Chesapeake Biological Laboratories, Inc. (a Maryland corporation) and subsidiary as of March 31, 2000 and 1999, and the
related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended March 31, 2000, 1999 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Chesapeake Biological Laboratories, Inc. and subsidiary as of
March 31, 2000 and 1999, and the results of their operations and their cash flows for the years ended March 31, 2000, 1999, and 1998, in conformity with accounting principles generally
accepted in the United States.

Our
audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. Schedule II is presented for purposes of complying with the
Securities and
Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic consolidated
financial statements, and, in our opinion, fairly states, in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken
as a whole.

/s/
ARTHUR ANDERSEN LLP
Baltimore, Maryland,
June 27, 2000

27

---

CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

As of March 31,

|                                                                                                                                                                                                                                         |  | 2000 |            | 1999 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | -
|ASSETS                                                                                                                                                                                                                                   |  |      |            |      |  
|Current Assets                                                                                                                                                                                                                           |  |      |            |      |  
|Cash and cash equivalents                                                                                                                                                                                                                |  | $    | 595,140    |      | $
|Restricted cash                                                                                                                                                                                                                          |  |      | 350,000    |      |  
|Accounts receivable, net                                                                                                                                                                                                                 |  |      | 1,832,047  |      |  
|Inventories                                                                                                                                                                                                                              |  |      | 1,636,598  |      |  
|Prepaid expenses                                                                                                                                                                                                                         |  |      | 360,579    |      |  
|Deferred tax asset                                                                                                                                                                                                                       |  |      | 668,748    |      |  
|                                                                                                                                                                                                                                         |  |      |            |      |  
|Total current assets                                                                                                                                                                                                                     |  |      | 5,443,112  |      |  
|Property, plant and equipment, net                                                                                                                                                                                                       |  |      | 10,179,913 |      |  
|Deferred tax asset                                                                                                                                                                                                                       |  |      | 1,233,965  |      |  
|Deferred financing costs and other assets                                                                                                                                                                                                |  |      | 353,827    |      |  
|                                                                                                                                                                                                                                         |  |      |            |      |  
|Total assets                                                                                                                                                                                                                             |  | $    | 17,210,817 |      | $
|                                                                                                                                                                                                                                         |  |      |            |      |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                     |  |      |            |      |  
|Current Liabilities                                                                                                                                                                                                                      |  |      |            |      |  
|Accounts payable and accrued expenses                                                                                                                                                                                                    |  | $    | 1,232,133  |      | $
|Line of credit                                                                                                                                                                                                                           |  |      |           |      |  
|Current portion of long term debt                                                                                                                                                                                                        |  |      | 725,018    |      |  
|Current portion of capital lease obligations                                                                                                                                                                                             |  |      | 17,072     |      |  
|Current portion of accrued restructuring costs                                                                                                                                                                                           |  |      | 591,644    |      |  
|Deferred revenue                                                                                                                                                                                                                         |  |      | 1,179,736  |      |  
|                                                                                                                                                                                                                                         |  |      |            |      |  
|Total current liabilities                                                                                                                                                                                                                |  |      | 3,745,603  |      |  
|Long Term Liabilities                                                                                                                                                                                                                    |  |      |            |      |  
|Long term debt, net of current portion                                                                                                                                                                                                   |  |      | 6,839,257  |      |  
|Capital lease obligations, net of current portion                                                                                                                                                                                        |  |      | 64,529     |      |  
|Accrued restructuring costs, net of current portion                                                                                                                                                                                      |  |      | 37,479     |      |  
|Other liabilities                                                                                                                                                                                                                        |  |      |           |      |  
|Deferred tax liability                                                                                                                                                                                                                   |  |      |           |      |  
|                                                                                                                                                                                                                                         |  |      |            |      |  
|Total liabilities                                                                                                                                                                                                                        |  |      | 10,686,868 |      |  
|                                                                                                                                                                                                                                         |  |      |            |      |  
|Commitments and Contingencies                                                                                                                                                                                                            |  |      |            |      |  
|Stockholders' Equity                                                                                                                                                                                                                     |  |      |            |      |  
|Series A-1 convertible preferred stock, par value $.01 per share; liquidation preference $1,451,100 6% cumulative dividends, accruing beginning May 31, 2000, 15,510 and 0 shares authorized, 14,511 and 0 shares
issued and outstanding |  |      | 145        |      |  
|Class A common stock, par value $.01 per share; 14,984,490 shares authorized; 5,677,781 and 5,365,101 shares issued and outstanding                                                                                                      |  |      | 56,778     |      |  
|Additional paid-in capital                                                                                                                                                                                                               |  |      | 10,338,049 |      |  
|Accumulated deficit                                                                                                                                                                                                                      |  |      | (3,871,023 | )    |  
|                                                                                                                                                                                                                                         |  |      |            |      |  
|Total stockholders' equity                                                                                                                                                                                                               |  |      | 6,523,949  |      |  
|                                                                                                                                                                                                                                         |  |      |            |      |  
|Total liabilities and stockholders' equity                                                                                                                                                                                               |  | $    | 17,210,817 |      | $
|                                                                                                                                                                                                                                         |  |      |            |      |  

The
accompanying notes are an integral part of the consolidated balance sheets.

28

---

CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended March 31,

|                                                                                           |  | 2000 |            | 1999 |   | 1998       |  
|------------------------------------------------------------------------------------------ |  | ---- | ---------- | ---- | - | ---------- | -
|Revenues                                                                                   |  | $    | 10,781,302 |      | $ | 6,747,045  |  
|Cost of sales                                                                              |  |      | 7,619,304  |      |   | 7,567,073  |  
|                                                                                           |  |      |            |      |   |            |  
|Gross profit (loss)                                                                        |  |      | 3,161,998  |      |   | (820,028   | )
|Operating Expenses:                                                                        |  |      |            |      |   |            |  
|General and administrative                                                                 |  |      | 1,470,158  |      |   | 1,889,185  |  
|Selling                                                                                    |  |      | 600,172    |      |   | 896,708    |  
|Restructuring charge                                                                       |  |      |           |      |   | 1,239,577  |  
|                                                                                           |  |      |            |      |   |            |  
|Income (loss) from operations                                                              |  |      | 1,091,668  |      |   | (4,845,498 | )
|Interest expense                                                                           |  |      | (606,112   | )    |   | (453,108   | )
|Interest and other income                                                                  |  |      | 106,144    |      |   | 149,031    |  
|                                                                                           |  |      |            |      |   |            |  
|Income (loss) from operations before taxes and
extraordinary item                          |  |      | 591,700    |      |   | (5,149,575 | )
|Benefit from income taxes                                                                  |  |      | 1,826,419  |      |   |           |  
|                                                                                           |  |      |            |      |   |            |  
|Income (loss) before extraordinary item                                                    |  |      | 2,418,119  |      |   | (5,149,575 | )
|Extraordinary loss on refinancing                                                          |  |      |           |      |   | 264,684    |  
|                                                                                           |  |      |            |      |   |            |  
|Net income (loss)                                                                          |  | $    | 2,418,119  |      | $ | (5,414,259 | )
|                                                                                           |  |      |            |      |   |            |  
|Net income (loss) available to common stockholders                                         |  | $    | 1,901,119  |      | $ | (5,414,259 | )
|                                                                                           |  |      |            |      |   |            |  
|Income (loss) per common share:                                                            |  |      |            |      |   |            |  
|Basic                                                                                      |  |      |            |      |   |            |  
|Income (loss) before extraordinary item, available to common stockholders (see footnote 9) |  | $    | 0.34       |      | $ | (0.97      | )
|                                                                                           |  |      |            |      |   |            |  
|Net income (loss) available to common stockholders                                         |  | $    | 0.34       |      | $ | (1.02      | )
|                                                                                           |  |      |            |      |   |            |  
|Diluted                                                                                    |  |      |            |      |   |            |  
|Income (loss) before extraordinary item, available to common stockholders (see footnote 9) |  | $    | 0.30       |      | $ | (0.97      | )
|                                                                                           |  |      |            |      |   |            |  
|Net income (loss) available to common stockholders                                         |  | $    | 0.30       |      | $ | (1.02      | )
|                                                                                           |  |      |            |      |   |            |  
|Weighted average common shares outstanding:                                                |  |      |            |      |   |            |  
|Basic                                                                                      |  |      | 5,589,582  |      |   | 5,323,806  |  
|                                                                                           |  |      |            |      |   |            |  
|Diluted                                                                                    |  |      | 6,347,191  |      |   | 5,323,806  |  
|                                                                                           |  |      |            |      |   |            |  

The
accompanying notes are an integral part of the consolidated statements.

29

---

CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

|                                                             |  | Preferred Stock |   | Common Stock |     |   |           |  |   |        | 
|------------------------------------------------------------ |  | --------------- | - | ------------ | --- | - | --------- |  | - | ------ | 
|
|
|Balance, March 31, 1997                                      |  |                |   | $            |    |   | 4,114,558 |  | $ | 41,145 | 
|Issuance of shares pursuant to follow-on public offering     |  |                |   |              |    |   | 1,034,793 |  |   | 10,348 | 
|Issuance of shares pursuant to exercise of stock options     |  |                |   |              |    |   | 126,844   |  |   | 1,269  | 
|Net loss                                                     |  |                |   |              |    |   |          |  |   |       | 
|                                                             |  |                 |   |              |     |   |           |  |   |        | 
|Balance, March 31, 1998                                      |  |                |   |              |    |   | 5,276,195 |  |   | 52,762 | 
|Issuance of shares pursuant to exercise of stock options     |  |                |   |              |    |   | 88,906    |  |   | 889    | 
|Vesting of below market stock options grants                 |  |                |   |              |    |   |          |  |   |       | 
|Net loss                                                     |  |                |   |              |    |   |          |  |   |       | 
|                                                             |  |                 |   |              |     |   |           |  |   |        | 
|Balance, March 31, 1999                                      |  |                |   |              |    |   | 5,365,101 |  |   | 53,651 | 
|Issuance of shares pursuant to private placement             |  |                |   |              |    |   | 225,000   |  |   | 2,250  | 
|Issuance of convertible preferred stock and related warrants |  | 15,510          |   |              | 155 |   |          |  |   |       | 
|Conversion of preferred stock                                |  | (999            | ) |              | (10 | ) | 66,603    |  |   | 666    | 
|Exercise of common stock warrants                            |  |                |   |              |    |   | 2,355     |  |   | 24     | 
|Vesting of below market stock options grants                 |  |                |   |              |    |   |          |  |   |       | 
|Issuance of warrants related to debt agreement               |  |                |   |              |    |   |          |  |   |       | 
|Issuance of shares pursuant to exercise of stock options     |  |                |   |              |    |   | 18,722    |  |   | 187    | 
|Tax benefit realized from stock option grant                 |  |                |   |              |    |   |          |  |   |       | 
|Net income                                                   |  |                |   |              |    |   |          |  |   |       | 
|                                                             |  |                 |   |              |     |   |           |  |   |        | 
|Balance, March 31, 2000                                      |  | 14,511          |   | $            | 145 |   | 5,677,781 |  | $ | 56,778 | 
|                                                             |  |                 |   |              |     |   |           |  |   |        | 

The
accompanying notes are an integral part of the consolidated statements.

30

---

CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended March 31,

|                                                                                                   |  | 2000 |            | 1999 |   | 1998       |  
|-------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|Cash Flows From Operating Activities:                                                              |  |      |            |      |   |            |  
|Net income (loss)                                                                                  |  | $    | 2,418,119  |      | $ | (5,414,259 | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |      |            |      |   |            |  
|Extraordinary item                                                                                 |  |      |           |      |   | 264,684    |  
|Depreciation and amortization                                                                      |  |      | 651,018    |      |   | 509,548    |  
|Amortization of deferred financing costs                                                           |  |      | 16,500     |      |   |           |  
|Non-cash compensation expense                                                                      |  |      | 45,625     |      |   | 228,125    |  
|Deferred income taxes                                                                              |  |      | (1,826,419 | )    |   |           |  
|(Increase) decrease in accounts receivable                                                         |  |      | (717,373   | )    |   | 144,886    |  
|(Increase) decrease in inventories                                                                 |  |      | (1,145,421 | )    |   | 33,819     |  
|Decrease (increase) in prepaid expenses and other assets                                           |  |      | 116,740    |      |   | 147,631    |  
|Increase (decrease) in accounts payable and accrued expenses                                       |  |      | 433,044    |      |   | 395,717    |  
|(Decrease) increase in accrued restructuring costs                                                 |  |      | (455,186   | )    |   | 1,084,309  |  
|Increase in deferred revenue                                                                       |  |      | 797,528    |      |   | 204,615    |  
|(Decrease) increase in other non-current liabilities                                               |  |      | (30,000    | )    |   | 7,477      |  
|                                                                                                   |  |      |            |      |   |            |  
|Net cash provided by (used in) operating activities                                                |  |      | 304,175    |      |   | (2,393,448 | )
|                                                                                                   |  |      |            |      |   |            |  
|Cash Flows From Investing Activities:                                                              |  |      |            |      |   |            |  
|Purchase of property, plant and equipment                                                          |  |      | (563,025   | )    |   | (1,252,649 | )
|Decrease in bond funds held by trustee                                                             |  |      |           |      |   | 778,454    |  
|                                                                                                   |  |      |            |      |   |            |  
|Net cash used in investing activities                                                              |  |      | (563,025   | )    |   | (474,195   | )
|                                                                                                   |  |      |            |      |   |            |  
|Cash Flows From Financing Activities:                                                              |  |      |            |      |   |            |  
|(Repayments of) proceeds from short term borrowings, net                                           |  |      | (644,445   | )    |   | 644,445    |  
|Repayments of long term debt                                                                       |  |      | (717,370   | )    |   | (391,004   | )
|Payments of capital lease obligations                                                              |  |      | (15,225    | )    |   | (28,099    | )
|Net proceeds from sales of stock                                                                   |  |      | 1,820,435  |      |   | 16,739     |  
|Payment of debt issuance costs                                                                     |  |      |           |      |   | (5,548     | )
|                                                                                                   |  |      |            |      |   |            |  
|Net cash provided by financing activities                                                          |  |      | 443,395    |      |   | 236,533    |  
|                                                                                                   |  |      |            |      |   |            |  
|Increase (decrease) in cash and cash equivalents                                                   |  |      | 184,545    |      |   | (2,631,110 | )
|Cash and cash equivalents, beginning of period                                                     |  |      | 410,595    |      |   | 3,041,705  |  
|                                                                                                   |  |      |            |      |   |            |  
|Cash and cash equivalents, end of period                                                           |  | $    | 595,140    |      | $ | 410,595    |  
|                                                                                                   |  |      |            |      |   |            |  
|Cash paid during the period for:                                                                   |  |      |            |      |   |            |  
|Interest                                                                                           |  | $    | 606,112    |      | $ | 453,108    |  
|                                                                                                   |  |      |            |      |   |            |  
|Income taxes                                                                                       |  | $    |           |      | $ |           |  
|                                                                                                   |  |      |            |      |   |            |  
|Non-cash Transactions                                                                              |  |      |            |      |   |            |  
|Deferred financing costswarrants                                                                  |  | $    | 268,952    |      | $ |           |  
|                                                                                                   |  |      |            |      |   |            |  
|Capital lease obligations                                                                          |  | $    | 95,973     |      | $ |           |  
|                                                                                                   |  |      |            |      |   |            |  
|Tax benefit related to stock options                                                               |  | $    | 76,295     |      | $ |           |  
|                                                                                                   |  |      |            |      |   |            |  
|Note payable                                                                                       |  | $    |           |      | $ |           |  
|                                                                                                   |  |      |            |      |   |            |  

The
accompanying notes are an integral part of the consolidated statements.

31

---

CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000, 1999 and 1998





32

---





33

---





2000

1999Raw materials

$
718,338

$
273,506Work-in-process


440,980


217,671Finished Goods


477,280


$
1,636,598

$
491,177




2000

1999Land

$
253,763

$
253,763Building


9,075,034


9,075,034Construction in progress


423,350


Laboratory equipment


2,634,794


2,478,034Furniture and fixtures


634,584


555,695Leasehold improvements


446,992


446,99213,468,517


12,809,518Less: Accumulated depreciation and amortization


(3,288,604
)

(2,637,586
)$
10,179,913

$
10,171,932






2000

1999Accounts payable, trade

$
883,641

$
449,257Accrued expenses


261,184


286,048Accrued vacation payable


87,308


63,784$
1,232,133

$
799,089




34

---





35

---



Year Ending March 31,2001

$
725,0182002


672,8352003


671,3732004


660,1492005 and thereafter


4,834,900$
7,564,275








36

---



Year Ended March 31

Capital Leases

Operating Leases2001

$
24,497

$
974,2532002


24,497


929,3982003


24,497


685,4982004


24,497


128,2772005


2,041


57,052Total payments


100,029

$
2,774,478Less: interest


(18,428
)Present value of future minimum lease payments

$
81,601






37

---



Year Ended
March 31, 2000

Year Ended
March 31, 1999Net income (loss) available to common shareholders:As reported

$
1,901,119

$
(5,414,259
)Pro forma


1,228,985


(6,654,039
)Basic earnings per share:As reported

$
0.34

$
(1.02
)Pro forma

$
0.22

$
(1.25
)Diluted earnings per share:As reported

$
0.30

$
(1.02
)Pro forma

$
0.19

$
(1.25
)




Year Ended
March 31, 2000

Year Ended
March 31, 1999Expected volatility

99.0
%
119.0
%Risk-free interest rates

5.56.4
%
4.55.4
%Expected lives

5 years

5 years


38

---



2000

1999

1998Shares

Weighted Average
Exercise Price

Shares

Weighted Average
Exercise Price

Shares

Weighted Average
Exercise PriceOutstanding, beginning of year


657,100

$
3.81


610,887

$
3.10


571,900

$
2.37Granted


537,700


2.61


271,889


4.97


202,361


4.22Exercised


(22,375
)

1.61


(165,926
)

2.66


(160,484
)

1.94Expired or returned to plan


(339,505
)

3.85


(59,750
)

5.03


(2,890
)

1.40Outstanding, end of year


832,920

$
3.08


657,100

$
3.81


610,887

$
3.10Shares available for future grant


718,280





129,350





324,239Options exercisable at end of period


384,395





409,450





166,787Weighted average fair value of qualified options granted

$
2.01




$
2.49




$
2.78




Options Outstanding



Options ExercisableRange of
Exercise Prices

Number
Outstanding at
March 31, 2000

Average
Remaining
Contractual Life

Weighted
Average
Exercise Price

Number
Exercisable at
March 31, 2000

Weighted
Average
Exercise Price$
1.50$3.00

500,050

8.9 years

$
2.27

242,400

$
2.24$
3.01$5.00

237,620

8.2 years


3.64

89,620


3.46$
5.01$8.125

95,250

7.9 years


5.90

52,375


6.09832,920

8.6 years

$
3.08

384,395

$
3.05


39

---



2000

1999

1998Federal:Current

$


$


$
(180,325
)Deferred


(1,475,199
)

(1,765,915
)

(24,014
)State:Current








(15,911
)Deferred


(351,220
)

(240,806
)

(2,119
)Benefit from income taxes


(1,826,419
)

(2,006,721
)

(222,369
)Less: valuation allowance





2,006,721


Benefit from income taxes

$
(1,826,419
)
$


$
(222,369
)




2000

1999

1998Income tax at federal statutory rate

$
201,178

$
(1,840,848
)
$
(204,339
)State tax, net of federal benefit


29,585


(240,806
)

(18,030
)Other


(50,461
)

74,933


(Decrease) increase in valuation allowance


(2,006,721
)

2,006,721


Benefit from income taxes

$
(1,826,419
)
$


$
(222,369
)




40

---



March 31, 2000

March 31, 1999Net current deferred tax assets/(deferred tax liabilities):Inventory

$
86,238

$
81,928Accruals and reserves


376,395


399,112Net operating loss-current portion


206,115


Valuation allowance





(356,956
)$
668,748

$
124,084Net long term deferred tax assets/(deferred tax liabilities):Credit carryforwards

$
87,918

$
54,400Property, plant and equipment


(363,755
)

(29,107
)Consulting costs





(7,506
)Net operating loss


1,509,802


1,507,894Valuation allowance





(1,649,765
)$
1,233,965

$
(124,084
)






2000

1999

1998Basic weighted average shares outstanding

5,589,582

5,323,806

4,991,251Effect of dilutive common equivalent shares

757,609



Diluted weighted average shares outstanding

6,347,191

5,323,806

4,991,251




41

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42

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SCHEDULE II
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY

Valuation and Qualifying Accounts

For the years ended March 31,

|                                |  | 2000 |           | 1999 |   | 1998     
|------------------------------- |  | ---- | --------- | ---- | - | ---------
|Allowance for doubtful accounts |  |      |           |      |   |          
|Balance at beginning of period  |  | $    | 55,490    |      | $ | 70,300   
|Provision for bad debts         |  |      | 19,510    |      |   | 40,000   
|Write-offs                      |  |      |          |      |   | (54,810  
|                                |  |      |           |      |   |          
|Balance at end of period        |  | $    | 75,000    |      | $ | 55,490   
|                                |  |      |           |      |   |          
|Restructuring Charges           |  |      |           |      |   |          
|Balance at beginning of period  |  | $    | 1,084,309 |      | $ |         
|New restructuring charge        |  |      |          |      |   | 1,239,577
|Amounts charged against accrual |  |      | (455,186  | )    |   | (155,268 
|                                |  |      |           |      |   |          
|Balance at end of period        |  | $    | 629,123   |      | $ | 1,084,309
|                                |  |      |           |      |   |          

43

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