<PAGE>


To the Shareholders of
Commonwealth Biotechnologies, Inc.

CBI failed to meet its primary objective of profitability in 2001. In order to
conserve cash in the face of a slowing economy, many of CBI's anticipated
contractual clients reversed their decisions to out-source their work and simply
deferred their research projects to a later, as yet undefined, point in time.
Our budget projections for 2001, upon which CBI's profitability was predicted,
were thus unattainable; much of the new anticipated revenue in the first and
second quarters failed to materialize while still other early-year anticipated
projects were delayed until the third and fourth quarters of 2001, which are now
continuing into 2002.

In looking at potentially static revenues and declining cash reserves, CBI
Management acted to reduce staffing through layoffs and attrition and to reduce
or eliminate all non-production related expenditures. Fiscal practices were
strictly enforced which restrict all material purchases to service on-going work
only and serve to minimize all material inventories. While reductions in
advertising and marketing negatively impacted CBI's ability to attract new work
through the print media, expanded development and use of CBI's web page (done
with internal resources) combined with favorable word-of-mouth and limited print
advertising, continue to enhance CBI's exposure to life sciences investigators
throughout the world.

CBI continues to re-define its client population and actively seeks clients with
long-term project goals, rather than individual orders for selected
technologies. Concept-to-Clinic defines the approach taken with all clients -
design, development, implementation and testing. Whether the client is a
start-up company with research and development needs, or an established firm
wishing to move a product through the regulatory process, CBI stands ready as
partner of choice to provide the required services that ensures success. CBI's
long-term contract revenues increased nearly 50% in 2001 as compared to 2000.

CBI underwent an internal strategic review of its platform technologies to
identify those, which were not contributing to the overhead, and profit margin
of the Company. As a result, several technology platforms have been re-priced
and some have been eliminated all together. CBI also underwent an extensive
independent review of its fiscal practices and strategic direction. The results
of the review indicate that Management has implemented measures to hold down
expenses while protecting the various revenue streams. CBI Management is keenly
aware of the need to continuously streamline its operations while maintaining
its competitive edge. This straightforward Annual Report that you are reading is
an example of where costs can be minimized by the Company while still meeting
our obligations to our shareholders and clients.

All Was Not Bad News

CBI lost nearly 30% of its workforce in 2001 due to layoffs and attrition. In
spite of this fact, CBI's employees have re-committed themselves to our success
and productivity has been maintained.

CBI licensed two of its intellectual properties over the past year. AccutracTM,
CBI's DNA sequencing reagent, was licensed to Applied Biosystems, Inc., Foster
City, CA, under terms of a non-exclusive license agreement

CBI also licensed HepArrest(TM) to MediRox AB, Linkoping, Sweden for use as an
in vitro reagent for reversal of heparin-induced anticoagulation in blood
samples collected at the point of care from patients. MediRox found HepArrest to
be the "only agent, which caused sustained and immediate reversal of heparin in
whole blood samples without seriously affecting the integrity blood borne
cells." MediRox paid a one-time license fee and is buying HepArrest exclusively
from CBI. Depending on how quickly MediRox can grow its in vitro diagnostic
market, sales of HepArrest can become a contributing revenue source for the
Company.

                                     Page 1

<PAGE>

CBI expanded its molecular diagnostics platform to detection and quantitation of
the various human Herpes viruses. Particular Herpes family members have been
linked to chronic fatigue syndrome, organ rejection, multiple sclerosis, and
Karposi's syndrome. CBI's platform offers rapid analysis combined with single
copy sensitivities. CBI developed the platform under contract from Vigen, Inc.,
Wilmette, IL, and while CBI is the named inventor on patents protecting this
platform filed with the US and PCT patent authorities, the patent is assigned to
Vigen. CBI performs the assays relative to this platform under a non-exclusive
license from Vigen. In the period May through December, CBI analyzed the blood
serum from more than 350 patients for the presence of DNA attributable to Herpes
viruses 4,5,6, 7 and 8. CBI's platform is also being used in support of a
clinical trial for new anti-Herpes medications. Even without a formal marketing
effort, gross revenues from Herpes viral assays were $185,000 over this
eight-month period.

CBI continues to grow its defense contract business. CBI's subcontract from the
Illinois Institute of Research Institute on behalf of a government sponsor was
renewed in 2001 for proprietary protocol development work in the general area of
bio-defense. CBI is the prime contractor for a second government sponsor. Under
this latter agreement, research is aimed at identifying novel molecules
associated with nefarious bio agents. A third contract with another government
Sponsor, awarded in September, 2001, for which CBI is the prime contractor
charges CBI with delineating strain identity by DNA sequence analysis of
particular human pathogenic bacteria. Management believes that these contracts
demonstrate the high regard with which the various governmental agencies view
CBI and are acknowledgement of its expertise in this complex area of detection
and identification of agents, which may be used in bio-warfare. Together, these
contracts are expected to bring nearly $ 2 million in gross revenue to the
Company during the course of one contractual year period.

2002

The horrific events of September 11th and the subsequent anthrax related events
heightened the awareness of every US citizen to the global threats of terrorism
and bioterrorism. This heightened awareness has translated into new monies
designated by Congress for the specific purpose of combating and preventing
bioterrorism. CBI expects to benefit from these new monies because it is
uniquely equipped to address these problems on a multi-disciplinary front and is
already recognized for its ability to solve problems in a timely and
cost-efficient manner. CBI is competing for these monies in the form of new
grant and research program applications, which are targeted for entities, which
can meet absolute criteria of capabilities, confidentiality, security,
compliance and certification. CBI has also instituted its own pathogenic
organism analysis service in which suspect materials are analyzed for the
possible presence of hazardous biological agents, including anthrax. CBI's
clients for this work include various governmental agencies, first responders to
acts of bioterrorism, and private contractors and businesses.

In addition to its own applications for new contract monies, CBI was invited to
team with two different major bio-defense contract providers for significant
dollar contracts. The outcome of these applications is not yet known.

Strategies for improving CBI's contract business. CBI will re-organize in 2002
------------------------------------------------
and assign some of the current duties and responsibilities of senior Management
to various senior scientific staff members. This move will allow Dr. Harris, Dr.
Freer and Mr. Reynolds to have more time to become more actively involved in the
early interaction with potential clients and development of new business. Dr.
Harris will assume the responsibilities of Chief Scientific Officer (CSO) in
addition to his duties as President. This is in keeping with his strengths in
interacting very positively with potential clients and should give those
potential clients some additional comfort when developing scientific
relationships. Dr. Freer will assume the responsibilities of Chief Operating
Officer (COO) in addition to his duties as Chairman of the Board of Directors.
This move will consolidate his current oversight of marketing, sales,
compliance, safety, and drug development services under one organizational
entity. The DNA laboratories were re-organized at the end of 2001 to allow Mr.
Reynolds more time to fully participate

                                     Page 2

<PAGE>

in strategic marketing and business development activities. The focus of these
marketing efforts will be to develop new, long-term contracts and business
relationships with pharmaceutical, biotech, and research companies.

And finally, in 2002, the Company will once again focus its energies on becoming
profitable. By holding the line on expenses and increasing revenues, CBI will
position itself to turn the corner and become a sustainable, profitable
business.

Thank You for Your Continued Support

CBI's Management recognizes that 2001 was a difficult year for CBI stockholders,
and we thank you for seeing us through this tough period. To all its
hard-working employees who have also faced a very tough year, CBI again owes its
thanks and gratitude. The Company's current Board of Directors has taken an
active role in helping to formulate CBI's future path, and Management thanks
them for their advice and insight.


With best regards,


--------------------------                ---------------------------
Richard J. Freer, Ph.D.                   Robert B. Harris, Ph.D.
Chairman of the Board                     President



--------------------------                ----------------------------
Thomas R. Reynolds                        James H. Brennan
Senior Vice-President,                    Controller
Secretary


CBI welcomes your calls and inquiries.

Phone:      800-735-9224
Fax:        804-648-2642
E-Mail:     info@cbi-biotech.com
            --------------------
Web:        www.cbi-biotech.com
            -------------------
Address:    601 Biotech Drive
            Richmond, VA 23235


You are cordially invited to attend CBI's 2002 Annual Meeting of Shareholders on
May 23, 2002 at 11:00 a.m. at the Company's facility.

                                     Page 3

<PAGE>

Stockholder Matters

Market for Common Equity

The company completed its initial public offering on October 28, 1997 at a price
per share of $6.00. Since that time, the common stock has traded on the NASDAQ
Small Cap Market ("NASDAQ"). The following table sets forth the range of high
and low sales price per share of common stock for 2001.

     Period               High Stock Price   Low Stock Price
------------------------------------------------------------

1st Quarter, 2001             $  4.625          $  3.375
2nd Quarter, 2001             $  7.060          $  3.110
3rd Quarter, 2001             $  4.850          $  3.850
4th Quarter, 2001             $  7.080          $  2.550

On March 15, 2002, the last reported sales price for a share of the Company's
Common Stock on NASDAQ was $ 1.85 . As of March 31, 2002, there were 39 holders
of record of the Company's Common stock and 1067 beneficial holders.

The Company has not paid any cash dividends on its Common Stock. The Company
intends to retain its earnings to finance the growth and development of its
business and does not expect to declare or pay dividends in the foreseeable
future. The declaration of dividends is within the discretion of the Company.
However, the Company's ability to pay dividends may be constrained by certain
provisions of its industrial revenue bond financing.

Selected Financial Data
-----------------------

Set forth below is selected financial data with respect to the Company for the
years ended December 31, 2001 and December 31, 2000, which has been derived from
the audited financial statements of the Company. The selected financial data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Conditions and Results of Operation."

<TABLE>
<CAPTION>
                                                   For the years Ended
                                  December 31,         December 31,       December 31,
                                      2001                2000               1999
                                                                             ----
Operational Data:

Revenues:                         $ 4,786,087         $  4,366,959        $2,565,132
-------------------------------------------------------------------------------------
<S>                               <C>                 <C>                 <C>
Net Loss                          $<1,673,031>        $ <2,091,194>       $ <921,916>
Loss per common and
common equivalent share              $ <0.81>             $<0.51>            $ <1.27>
Weighted average common
shares outstanding                  2,076,164           2,076,164           1,641,738

Balance Sheet Data:
Total Current Assets              $   817,046         $ 2,469,882         $   560,576
Total Assets                      $ 8,348,718         $10,343,694         $ 8,250,369
Total Current Liabilities         $   803,638         $   916,743         $   967,866
Total Liabilities                 $ 4,693,949         $ 4,994,129         $ 4,967,866
Total Stockholders equity         $ 3,654,769         $ 5,349,565         $ 3,282,503
</TABLE>

                                     Page 4

<PAGE>

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

The following should be read in conjunction with "Selected Financial Data" and
the Company's Audited Financial Statements and Notes thereto included herein.

Going Concern
-------------

Since 1997 and through 2001, the Company incurred recurring operating losses due
to increased operating costs without corresponding increases in revenues.
Through 2001, these deficits were substantially funded through use of funds
obtained from a private placement and the IPO. The Company has also used
proceeds from its offerings for capital acquisitions, which were primarily
funded through its issuance of Industrial Revenue Development Bonds. At December
31, 2001, the Company had used virtually all of the funds received in connection
with its offerings.

The financial statements have been prepared assuming the Company will continue
as a going concern. The Company incurred losses of $1,673,031 during the year
2001 as compared to $921,916 during the year 2000 and has a history of losses
that have resulted in an accumulated deficit of $8,238,186 as of December 31,
2001. In addition, the Company has had negative cash flows in three of the past
five years. The years in which the Company reached positive cash flows were
years in which equity offerings were completed.

At the outset of 2002, the Company is in an uncertain cash position. However,
management believes that the Company has the capacity to address the immediate
needs for cash and liquidity through an aggressive approach on a number of
fronts. In 2001, when confronted with potentially static revenues and declining
cash reserves, management reduced staffing through layoffs and attrition and
reduced or eliminated non-production related expenditures. Fiscal practices have
been strictly enforced which restricted all material purchases to service
on-going work only and serve to minimize all material inventories.

There can be no assurance that any funds required during the next twelve months
or thereafter can be generated from operations or that if such required funds
are not internally generated that funds will be available from external sources,
such as debt or equity financing or other potential sources. The lack of
adequate cash reserves resulting from the inability to generate cash flow from
operations or to raise capital from external sources would force the Company to
substantially curtail or cease operations and would, therefore, have a material
adverse effect on its business. The Company is actively exploring the
availability of varying financial and strategic transactions, which, if
consummated, would address the Company's need to improve its financial condition
and/or its operations.

There can be no assurance, however, that any such required funds, if presented,
will be available on attractive terms or that they will not have a significantly
dilutive effect on the Company's existing shareholders.

The Company's independent auditors have included a paragraph emphasizing "going
concern" in their report on our 2001 financial statements. These financial
statements do not include any adjustments relating to the recoverability or
classification of asset carrying amounts or the amounts and classifications of
liabilities that may result should the Company be unable to continue as a going
concern.

Overview
--------

The Company's revenues are derived principally from providing macromolecular
synthetic and analytical services to researchers in the biotechnology industry
or who are engaged in life sciences research in government

                                     Page 5

<PAGE>

or academic labs throughout the world. Development of innovative technologies
for biotechnology requires sophisticated laboratory techniques and the Company
provides these services to customers on a contract basis. The Company's
customers consist of private companies, academic institutions and government
agencies, all of which use biological processes to develop products for health
care, agricultural, and other purposes.

The Company generally derives revenue from two types of customers: those who
require a discrete set of services ("lab services"), and those who contract with
the Company on an extended basis for performance of a variety of integrated
services (commercial contracts, drug development contracts, and government
contracts). More often than not, the Company's customers provide repeat business
to the Company. The Company views commercial, drug development, and government
contracts as the more important source of revenue. The Company has continued to
focus its efforts on identifying these customers. These contracts generally
range from a few months to more than a year. Revenues are generally recognized
as services are rendered or as products are delivered. In addition, revenue is
also recognized with performance-based installments payable over the contract
duration as milestones are achieved.

The Company also derives revenues from genetic identity and clinical services.
There has been a dramatic and constant increase in the number of private
paternity cases implemented at the Company and in the number of molecular
diagnostic assays performed. The Company designed and implemented molecular
diagnostic assays for the presence of DNA attributable to the various human
herpes viruses. This platform technology is being used to serve individual
patients across the country and in support of an on-going clinical study with a
new anti-viral therapeutic. The Company has grown its molecular diagnostic
platform in several other critical areas and its services are being used in
support of still other on-going clinical trials and in support of fundamental
research and development programs for its various clients.

In 2001, the Company expanded its microbiology test services in the area of food
safety, general microbiology, and assessment of biological pathogens in test
samples. The Company is currently being used to determine the presence of
bacterial organisms in suspicious powders and other test samples.

The Company continues to grow its defense contract business and is now actively
engaged in pursuit of three different defense related contracts in the general
area of bio-defense. The Company acts as both prime and subcontractor for bio
defense related work.

Results of Operations
---------------------

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000.

Revenues
--------

Gross revenues increased by $419,128 or 9.6% from $ 4,366,959 during ended
December 31, 2000 ("2000") to $4,786,087 during the year ended December 31,2001
("2001").

The Company experiences fluctuations in all revenue categories. Continuation of
existing projects, or engagement for future projects is usually dependent upon
the customer's satisfaction with the scientific results provided in initial
phases of the scientific program. Continuation of existing projects or
engagement of future projects also often depends upon factors beyond the
Company's control, such as the timing of product development and
commercialization programs of the Company's customers. The Company is unable to
predict for more than a few months in advance the volume and dollar amount of
future projects. The combined impact of commencement and termination of research
contracts from several large customers and unpredictable fluctuations in revenue
for laboratory services can result in very large fluctuations in financial
performance.

                                     Page 6

<PAGE>

Revenues realized from lab services decreased by $204,004 or 23.6% from $863,737
during 2000 to $659,733 during 2001. As mentioned in the overview section above,
the Company continues to view lab services as a potential revenue source.
However, the Company views commercial and government projects as the more
important source of revenue and has continued to focus its efforts on
identifying long-term contractual customers.

Revenues realized from various commercial contracts increased by $588,581 or
49.2%, from $1,197,149 during 2000 to $1,785,730 during 2001. Of the $1,785,730
in commercial contracts, two major clients represented 10.3% and 9.6%
respectively, of the revenue earned during 2001. During 2001, the Company
performed work on ninety-five commercial customers compared to forty-five during
2000.

Revenues realized from various government contracts decreased by $439,075 or
21.9%, from $2,007,190 during 2000 to $1,568,115 during 2001. This decrease was
primarily due to delay in the release of funds necessary to perform work for the
Illinois Institute of Technology Research Institute (IITRI) program during the
fourth quarter. The hold-status placed by IITRI is due to a delay in release of
monies to IITRI by the Sponsor of the research program which in turn, was due to
a delay in release of monies to the Sponsor by Congress. However, subsequent to
year-end, some of the funds that were delayed have been released to the Company
and the remainder of the funds that were delayed is expected to be released
during the remainder of the first quarter of 2002. As funds are released, work
is re-commenced on the program objectives.

At present, revenues from Government contracts primarily consist of two major
projects. Work on a third Government project, awarded in September 2001, is just
now beginning, due to delays caused by the events of September 11th. This latter
contract is for $550,000 for the period September 2001 through August 2006. The
Sponsor has the option to increase this contract by $225,000. Revenues realized
as of December 31, 2001 are $6,700.

Revenues recognized from the IITRI subcontract were $1,024,030 during 2001. Of
these monies, $125,784 represents revenue from the third year of the contract,
which was awarded in September 2001. Additional revenues to be recognized for
the remainder of the third year of the contract in 2002 are $473,314. It is
anticipated that revenues for the fourth year of the contract, to be awarded in
September 2002 and continuing into 2003, will be $1,129,680.

Revenues recognized from the second Government Sponsor for the period August
2001 through December 2001 are $384,543. These monies represent the first
portion of the second year of this contract. Additional revenues to be
recognized for the remainder of the second year of this contract during 2002 are
$545,667.

Revenues realized from various genetic testing decreased by $71,635 or 25.1%,
from $284,847 during 2000 to $213,212 during 2001. This overall decrease is a
direct result of the cancellation of a major contract by a customer who chose to
continue the work internally. Revenues from individual paternity testing
increased by $97,705 or 121.1% from $80,727 during 2000 to $178,432 during 2001.
This is due to a dramatic and constant increase in the number of private
paternity cases during 2001.

In 2001, under license from a third party, the Company implemented rapid and
novel techniques for analysis of patient samples for the presence of residual
DNA attributable to the various human herpes viruses. Gross revenues for the
period May 2001 through December 2001 for performance of these assays was
$187,366. However, in order to attract new patient work, the Company offers
discounts to large clinical practices. In addition, the Company must pay
royalties on the technology used. Hence, total net revenue derived from this
particular clinical technology platform amounted to $125,046 during 2001. There
were no revenues derived from herpes virus testing in 2000.

                                     Page 7

<PAGE>

On April 30, 2001 the Company signed a patent license agreement (U.S. Patent No.
6,110,683 entitled "Automated DNA Sequencer Loading Dye Which Contains A Lane
Tracking Aid issued August 29, 2000) with Applied Biosystems Group, an Applera
Corporation, Foster City, CA. The Company received licensing fees of $400,000 of
which $200,000 was received in cash in the second quarter and the remaining
$200,000 in product and service credits. These credits were utilized in June and
the equipment is fully operational.

In November 2001, the Company signed a license agreement for the in vitro use of
HepArrest(TM) with MediRox AB, Linkoping, Sweden. This non-exclusive license
limits MediRox to the use of HepArrest in its own proprietary diagnostic
instruments and obligates MediRox to purchase HepArrest from the Company.
MediRox will pay the Company a $50,000 license fee and is buying HepArrest
exclusively from CBI. Depending on how fast MediRox can grow its in vitro
diagnostic market, sales of HepArrest can become a contributing revenue source
for the Company.

Cost of Services
----------------

Cost of services consists primarily of materials, labor, subcontractor costs and
overhead. The cost of services increased by $701,496 or 22.0%, from $3,182,758
during 2000 to $3,884,254 during 2001. The cost of services as a percentage of
revenue was 81.2% and 72.9% during 2001 and 2000, respectively. This percentage
increase was primarily due to additional expenditures in subcontractor costs
(see below.)

Labor costs increased by $233,859, or 25.8%, from $906,012 during 2000 to
$1,139,871 during 2001. This increase reflects additional hours being directly
charged to projects in lieu of overhead.

The costs for direct materials increased by $74,441, or 13.8%, from $538,143
during 2000, to $612,584 during 2001. These increased costs are directly
attributable to the increase of revenue generated by the Company.

Subcontractor costs as of 2001 were $102,907. These costs incurred were from
subcontractors in the new drug development activity that was placed in operation
in 2001. There were no subcontract costs in 2000.

Overhead cost consists of indirect labor, depreciation, freight charges, repairs
and miscellaneous supplies not directly related to a particular project. Total
overhead costs increased by $397,322 or 25.0%, from $1,589,061 during 2000 to
$1,986,383 during 2001. Increased costs were seen primarily in the following
major categories: i. indirect labor, $87,394; ii. fringe benefits from increased
costs and additional personnel, $77,448; and iii. amortization costs of $183,047
from the acquisition of the Drug Development contracts in January 2001.

Research and Development.
-------------------------

Research and development costs within the Company fall into two general
categories: grant-related research and development and in-house research and
development. These categories are distinguished by those performed in support of
government grant-sponsored programs, and those performed in the absence of such
grants which are funded from working capital. Total expenditures for these two
categories decreased by $135,194, or 90.4%, from $149,542 during 2000 to $14,348
during 2001.

Expenditures to perform grant-related research activities decreased by $70,821
or 100.0%, from $70,821 during 2000 to $0 during 2001. This decrease is
primarily due to the Company redirecting its focus on long-term commercial
contracts.

Expenditures made by the Company for in-house research activities decreased by
$64,373 or 81.8%, from

                                     Page 8

<PAGE>

$78,721 during 2000 to $14,348 during 2001. This decrease is primarily
attributable to the reallocation of personnel from internal R&D efforts to focus
on its core business in contract research.

Sales, General and Administrative
---------------------------------

Sales, general and administrative expenses ("SGA") consist primarily of
compensation and related costs for administrative, marketing and sales
personnel, facility expenditures, professional fees, consulting, taxes, and
depreciation. Total SGA costs increased by $411,838, or 22.7%, from $1,817,466
during 2000 to $2,229,304 during 2001. As a percentage of revenue, these costs
were 46.6% and 41.6% during 2001 and 2000, respectively.

Increases in SGA expenses were seen in the following categories. Total
compensation and benefits increased by $279,058 or 40.9% from $394,348 during
2000 to $673,406 during 2001. These increases are attributable to new employees
who assist in the administrative support of the Company (who have since been
laid off or put on part-time status as of the third quarter, 2001), to increased
vacation time used by staff who accrued an additional vacation week because of
their length of tenure with the Company, and increased benefits costs associated
with The Company's major medical and dental plans.

Professional fees increased by $70,652, or 22.9%, from $309,013 during 2000 to
$379,665 during 2001. This increase is primarily due to fees paid to consultants
who were initially used by the Company in pursuit of its Drug Development
contracts. In addition, the Company opted to increase its coverage in personal
liability for both the corporate and drug development offices.

Office Expenses decreased by $54,412, or 35.8% from $151,772 during 2000 to
$97,360 during 2001. This reduction is a direct result of eliminating various
items previously purchased in prior periods which are no longer needed by the
Company and to a severe curtailment in office supply inventories.

Marketing Expenses increased by $185,522, or 124.5% from $148,983 during 2000 to
$334,505 during 2001. In the early part of the 2001 Period, the Company opted to
increase its marketing exposure with major increases in advertising and public
relations. This marketing effort has since been dramatically downscaled.

Other Income (Expenses)
-----------------------

Interest income increased by $33,631, or 53.1% from $63,348 during 2000 to
$96,979 during 2001. Interest income has been derived from investing the unused
portion of the restricted cash realized by the Company from the successful sale
(March, 1998) of Industrial Revenue Bonds (IRBs) for construction of the
Company's new facility. Interest income also increased due to the investing of
the proceeds received from the private placement

                                     Page 9

<PAGE>

on September 27, 2000.

Interest costs incurred by the Company during the 2000 and 2001 included: i.
interest paid to financial institutions for loans made to the Company; ii.
interest paid for the Company's IRBs; and iii.amortization of costs incurred as
a consequence of the completion of the Company's IRB financing. Interest costs
decreased by $70,181 or 19.9% from $353,305 during 2000 to $283,124 during 2001.
This decrease is the result of payments on the principal balance of long-term
debt.

In addition, the Company elected to write off costs for a private placement that
did not materialize during the year. This one-time write off amounted to
$110,598. The Company also elected to take a complete inventory on all lab
equipment. It was determined that certain items could no longer be used or
repaired. The one-time write off for these obsolete equipment items amounted to
$48,417.

Results of Operations
---------------------

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Revenues
--------

Gross revenues increased by $1,801,827 or 70.2% from $2,565,132 during ended
December 31, 1999 ("1999 ") to $4,366,959 during the year ended December 31,2000
("2000 ").

The Company experiences fluctuations in all revenue categories. Continuation of
existing projects, or engagement for future projects is usually dependent upon
the customer's satisfaction with the scientific results provided in initial
phases of the scientific program. Continuation of existing projects or
engagement of future projects also often depends upon factors beyond the
Company's control, such as the timing of product development and
commercialization programs of the Company's customers. The Company is unable to
predict for more than a few months in advance the volume and dollar amount of
future projects. The combined impact of commencement and termination of research
contracts from several large customers and unpredictable fluctuations in revenue
for laboratory services can result in very large fluctuations in financial
performance.

Revenues realized from lab services remained relatively flat. Revenue increased
by $28,939 or .03% from $834,797 during 1999 to $863,736 during 2000.
Historically, a majority of the Company's net revenues have been earned under
lab services. However, the Company stills views commercial and government
contracts as the more important source of revenue, (as mentioned below) and has
continued to focus its efforts on identifying long-term customers.

Revenues realized from commercial contracts decreased by $15,548 or .01% from
$1,212,697 during 1999 to $1,197,149 during 2000. This slight decrease was due
to the delay in the startup of certain projects that were anticipated to begin
in the fourth quarter of 2000. However as mentioned below, the Company entered
into the area of government contracts and was awarded from the Illinois
Institute of Technology Research Institute the second year of this contract
which was expected to provide revenues of $1.2 million.

Revenues realized from various government contracts increased by $1,588,827 or
3,797.7%, from $418,363 during 1999 to $2,007,190 during 2001. This increase was
primarily due to the awarding of one project form the Illinois Institute of
Technology Research Institute. During the third quarter of 2000, the second year
of this contract was awarded to the Company and provided revenues of $1.2
million.

Revenues realized from genetic identity are primarily due to the startup of
Paternity testing. Revenues realized from this activity have amounted to
$284,847 during 2000 compared to $30,410 in 1999.

                                    Page 10

<PAGE>

The Company experienced a decrease in revenue realized from AccuTrac in the
amount of $28,506, or 68.8%, from $ 41,420 during 1999 to $12,914 during 2000.
This decrease is primarily due to purchases in 1999 after the initiation of the
product into the market, which was not continued in 2000.

Expenses
--------

Cost of Services. Cost of services consists primarily of materials, labor,
----------------
subcontractor costs and overhead. The cost of services increased by $728,826 or
29.7%, from $2,453,932 during 1999 to $3,182,758 during 2000. The cost of
services as a percentage of revenue was 95.6% and 72.9% during 1999 and 2000,
respectively.

Labor costs increased by $454,096 or 100.5% from $451,916 during 1999 to
$906,012 during 2000. Illinois This increase is primarily attributable to the
reallocation of personnel in the administrative area to work on the subcontract
from the Illinois Institute of Technology Research Institute.

The costs for direct materials increased by $58,121, or 12.1%, from $480,022
during 1999 to $538,143 during 2000. These increased costs are directly
attributable to the increase of revenue generated by the Company.

Overhead cost consists of indirect labor, depreciation, freight charges, repairs
and miscellaneous supplies not directly related to a particular project. Total
overhead costs increased by $446,820 or 39.1%, from $1,142,241 during 1999 to
$1,589,061 during 2000. Increased costs were seen primarily in the following
major categories: i. indirect labor, $206,826; ii. fringe benefits from
increased costs and additional personnel, $113,917: iii. increased depreciation
expenses, $40,224; and iv. general supplies not directly associated with any
particular project, $59,603 and v. maintenance and repair of equipment $63,576.

Research and Development. Research and development costs within the Company fall
------------------------
into two general categories: grant-related research and development and in-house
research and development. Those performed in support of government
grant-sponsored programs distinguish these categories, and those performed in
the absence of such grants, which are funded from working capital. Total
expenditures for these two categories decreased by $230,211, or 60.6%, from
$379,753 during 1999 to $149,542 during 2000. Total grant-related research and
in-house research as a percentage of revenue were 3.4% and 14.8% during 2000 and
1999, respectively.

Expenditures to perform grant-related research activities decreased by $113,472
or 61.6%, from $184,293 during 1999 to $70,821 during 2000. This decrease is
primarily due to the completion of all of the grants in house.

Expenditures made by the Company for in-house research activities decreased by
$116,740 or 57.3%, from $ 195,461 during 1999 to $78,721 during 2000 Period.
This decrease is primarily attributable to the reallocation of personnel in the
research and development area to work on the subcontract from the Illinois
Institute of Technology Research Institute.

Selling, General and Administrative. Sales, general and administrative expenses
-----------------------------------
("SGA") consist primarily of compensation and related costs for administrative,
marketing and sales personnel, facility expenditures, professional fees,
consulting, taxes, and depreciation. Total SGA costs decreased by $155,640 or
7.9%, from $1,973,106 during 1999 to $1,817,466 during 2000. As a percentage of
revenue, these costs were 76.9% and 41.6% during 1999 and 2000 respectively.

Total Compensation and Benefits decreased by $243,531 or 38.2% from $637,879
during 1999 to $394,348 during 2000. This decrease is primarily attributable to
the reallocation of personnel in the administrative area to work on the
subcontract from the Illinois Institute of Technology Research Institute.
Professional and consulting fees increased by $65,585, or 26.9%, from $243,428
during 1999 to $309,013 during 2000. This increase is

                                     Page 11

<PAGE>

primarily due to the additional expenditures in business and D&O insurance. In
addition, increased legal fees associated with Management's proposed acquisition
of SRA Life Sciences, Inc. and the defending of its AccuTrac patent also
contributed to this increase. Office expenses increased by $28,552, or 23.2%,
from $123,220 during 1999 to $151,772 during 2000. This increase is primarily
due to additional operating and office supplies needed to support the operations
of the Company.

Other costs increased by $121,518 or 121.4%, from $100,109 during 1999 to
$221,627 during 2000. This increase is primarily due to the bad debt written-off
from one customer in the amount of $122,553.

Marketing costs decreased by $ 166,025 or 52.7%, from $315,008 during 1999 to
$148,983 during 2000. Reductions in advertising, public relations and payments
for consulting services contributed to the decrease in marketing costs. Sales
costs decreased by $47,982 or 62.4%, from $76,860 during 1999 to $28,878 during
2000 Period. Elimination of the sales department contributed to the decrease in
costs.

Other Income (Expenses)
-----------------------

Interest income to the Company decreased by $15,645, or 19.8% from $78,993
during 1999 to $63,348 during 2000. Interest income has been derived from
investing the unused portion of the funds realized by the Company from the
successful sale (March 1998) of Industrial Revenue Bonds (IRBs) for construction
of the Company's new facility.

Interest costs incurred by the Company during the 1999 and 2000 Period's
included (1) interest paid to financial institutions for loans made to the
Company; 2) interest paid for the Company's IRBs; and 3) amortization of costs
incurred as a consequence of the completion of the Company's IRB financing and
4) interest costs associated with the line of credit from a significant
stockholder of the Company, which included the valuation of the options issued
in connection therewith. Interest expense increased by $45,024 or 14.6% from
$308,281 during 1999 to $353,305 during 2000.

Liquidity and Capital Resources
-------------------------------

For a discussion of the Company's current financial condition, please see the
section entitled "Going Concern". 2001 reflected a decrease in cash of $819,811
from operating activities, as compared to a decrease of $558,229 from operating
activities during the 2000. The significant cash outflow for 2001 was primarily
due to substantial investments made by the Company in facility costs, personnel,
equipment, and marketing efforts. The cost outlays in 2001 were made possible by
capital realized from the Company's private placement on September 27, 2000.

Net working capital as of December 31, 2001 and December 31, 2000 was $13,408
(see Notes to Financial Statements #13) and $1,553,139 respectively. This
decrease is the primary result of the significant loss in 2001 of $1,673,031.
Cash flows from new and existing contracts that were expected to occur either
were postponed to subsequent periods or did not materialize. As a result
Management is seeking sources of new capital which it believes will be necessary
to fund future operations.

The Company underwent an internal strategic review of its platform technologies
and an extensive independent examination of its fiscal policies and procedures.
The latter review confirmed that Management acted appropriately to reduce
staffing through lay-offs and attrition and to reduce or eliminate all
non-production related expenditures. Fiscal practices were strictly enforced
which restrict all material purchases to service on-going work only and serve to
minimize all material inventories. While reductions in advertising and marketing
negatively impact CBI's ability to attract new work through the print media,
expanded development and use of the Company's web page (done with internal
resources) combined with favorable word-of-mouth and limited

                                    Page 12

<PAGE>

print advertising, continue to enhance CBI's exposure to life sciences
investigators throughout the world.

As a further result of the internal review, several technology platforms, which
were not contributing to the overhead and profitability of the Company, were
eliminated while still others were re-priced. Management is keenly aware of the
need to continuously streamline its operations while maintaining its competitive
edge.

The Company's efforts continue to focus on long-term contractual projects
because they are more the important source of revenues. Long-term projects
generally range in duration from a few months to several years. In the fourth
quarter of 1999, the Company was awarded a five-year subcontract with the
Illinois Institute of Technology Research Institute. The contract is valued at
approximately $8.5 million. During the third Quarter of 2001, the third year of
this contract was awarded to the Company and provided revenues of approximately
$668,000 of which $473,000 will be recognized during the 2002 Period. The
Company expects that the fourth year of the project will be awarded in 2002 with
expected revenues of $1,130,000. In addition, the Company received an additional
project in late September 2001 valued at $887,000 of which $546,000 will be
recognized during the 2002 Period. Work on a third Government project, awarded
in September, 2002, is just now beginning, due to delays caused by the events of
September 11th. This latter contract is for $550,000 for September 2001 through
August, 2006. The Sponsor has the option to increase this contract by $25,000.

On February 28, 2002, the Company received $139,000 in advance for work to be
completed over a twenty-four months period. At present, the work scope for this
client will provide $556,000 in additional revenues to the Company. However,
management believes that the work scope will be expanded by the client as data
is collected and that the magnitude of the contract will be increased.


Management has in the past and will continue to seek additional equity and or
debt financing in the future to further the Company's development.


Forward Looking Statements

Management has included herein certain 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. When used, statements
that are not historical in nature, including the words "anticipated",
"estimate", "should", "expect", "believe", "intend", and similar expressions are
intended to identify forward-looking statements. Such statements are, by their
nature, subject to certain risks and uncertainties.

Among the factors that could cause the actual results to differ materially from
those projected are the following:

     .    business conditions and the general economy,
     .    the development and implementation of the Company's long-term business
          goals,
     .    federal, state, and local regulatory environment, o lack of demand for
          the Company's services, o the ability of the Company's customers to
          perform services "in-house" similar to those offered by the Company.
     .    potential cost containment by the Company's customers resulting in
          fewer research and development projects,
     .    the Company's ability to receive accreditation to provide various
          services, including, but not limited to paternity testing, and
     .    the Company's ability to hire and retain highly skilled employees,

Other risks, uncertainties, and factors that could cause actual results to
differ materially from those projected are

                                    Page 13

<PAGE>

detailed from time to time in reports filed by the company with the Securities
and Exchange Commission, including Forms 8-K, 10-QSB, and 10-KSB.



                                    Page 14

<PAGE>
                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors and Stockholders
Commonwealth Biotechnologies, Inc.
Richmond, Virginia

We have audited the accompanying balance sheets of Commonwealth Biotechnologies,
Inc. as of December 31, 2001 and 2000 and the related statements of operations,
changes in stockholders' equity, and cash flows for the years then ended. 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 of America. 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 Commonwealth Biotechnologies,
Inc. as of December 31, 2001 and 2000, and the results of its operations and its
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company's significant operating losses and negative
cash flows raise substantial doubt about its ability to continue as a going
concern. Management's plans regarding those matters are also described in Note
13. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.


Richmond, Virginia
February 8, 2002

                                    Page 15

<PAGE>

COMMONWEALTH BIOTECHNOLOGIES, INC.

<TABLE>
<CAPTION>
BALANCE SHEETS
December 31, 2001 and 2000


ASSETS                                                        2001             2000
--------------------------------------------------------------------------------------
<S>                                                    <C>              <C>
Current Assets
  Cash and cash equivalents                            $      116,151   $      587,156
  Accounts receivable (Notes 4 and 8)                         631,289          792,071
  Investments (Note 2)                                              -          995,789
  Prepaid expenses and other current assets                    69,606           94,866
                                                       -------------------------------

          Total current assets                                817,046        2,469,882
                                                       -------------------------------

Property and Equipment, net (Notes 3, 4 and 5)              6,788,190        7,153,852
                                                       -------------------------------

Other Assets
  Bond issuance costs, less accumulated amortization
  2001 $40,649; 2000 $29,905                                  227,949          238,693
  Restricted cash (Note 5)                                    515,533          445,020
  Contract acquisition costs (Note 13)                              -           33,047
  Deposits and other                                                -            3,200
                                                       -------------------------------
         Total other assets                                   743,482          719,960
                                                       -------------------------------

                                                       $    8,348,718   $   10,343,694
                                                       ===============================
</TABLE>
See Notes to Financial Statements.


                                     Page 16

<PAGE>

<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY                                  2001           2000
----------------------------------------------------------------------------------------------
<S>                                                               <C>             <C>
Current Liabilities
  Demand note payable (Note 4)                                    $     79,680    $    134,680
  Current maturities of long-term debt (Note 5)                        187,019         207,431
  Accounts payable and other current liabilities                       500,674         548,914
  Deferred revenue                                                      36,265          25,718
                                                                  ------------    ------------
      Total current liabilities                                        803,638         916,743

Long-term debt, less current maturities (Note 5)                     3,890,311       4,077,386
                                                                  ------------    ------------

      Total liabilities                                              4,693,949       4,994,129

Commitments and contingencies (Notes 6 and 7)

Stockholders' Equity
  Common stock, no par value, 10,000,000 shares authorized,
  2001 2,076,164; 2000 2,076,164, shares issued and outstanding              -               -
  Additional paid-in capital                                        11,892,955      11,905,864
  Accumulated deficit                                               (8,238,186)     (6,565,155)
  Accumulated other comprehensive income (Note 2)                            -           8,856
                                                                  ------------    ------------
      Total stockholders' equity                                     3,654,769       5,349,565
                                                                  ------------    ------------
                                                                  $  8,348,718    $ 10,343,694
                                                                  ============    ============
</TABLE>

                                     Page 17

<PAGE>

COMMONWEALTH BIOTECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS
Years Ended December 31, 2001 and 2000



                                                      2001         2000
---------------------------------------------------------------------------
Revenue (Note 8):
  Laboratory services                            $   659,733    $   863,737
  Commercial contracts                             1,785,730      1,197,149
  Government contracts                             1,568,115      2,007,190
  Food                                                13,364              -
  Genetic Identity                                   213,212        284,847
  Clinical services                                  125,046              -
  Product sales                                       13,033         12,914
  License fees                                       402,000              -
  Other revenue                                        5,854          1,122
                                                 --------------------------
          Total revenue                            4,786,087      4,366,959
                                                 --------------------------
  Costs of Goods
  Direct labor                                     1,139,871        906,012
  Direct materials                                   612,584        538,143
  Subcontractor                                      102,907              -
  Other direct costs                                  28,161              -
  Overhead                                         1,986,383      1,589,061
  Research and development                            14,348        149,542
                                                 --------------------------
          Total costs of goods                     3,884,254      3,182,758
                                                 --------------------------

          Gross profit                               901,833      1,184,201
                                                 --------------------------

  Selling, general and administrative              2,229,304      1,817,466
                                                 --------------------------

          Operating loss                          (1,327,471)      (633,265)
                                                 --------------------------
Other income (expense):
  Interest expense (Note 4)                         (283,124)      (353,305)
  Interest income                                     76,414         63,348
  Realized gains from sale of investments             20,565          1,306
  Costs incurred in contemplation of a private
   placement                                        (110,598)             -
  Loss from disposal of fixed assets                 (48,817)             -
                                                 --------------------------
          Total other income (expense)              (345,560)      (288,651)
                                                 --------------------------

          Net loss                               $(1,673,031)   $  (921,916)
                                                 ==========================

Loss per common share, basic and diluted         $     (0.81)   $     (0.51)
                                                 ==========================

See Notes to Financial



                                    Page 18

<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.


<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2001 and 2000


                                   Number         Additional                          Other
                                   of Shares       Paid-In         Accumulated    Comprehensive
                                   Outstanding     Capital          Deficit           Income         Total
-------------------------------------------------------------------------------------------------------------
<S>                               <C>            <C>             <C>             <C>             <C>
Balance, January 1, 2000             1,643,727   $  8,925,742    $ (5,643,239)   $          -    $  3,282,503
  Issuance of common stock, net
    of shares surrendered              432,437      2,953,122               -               -       2,953,122
  Fair value of options issued
    in connection with
    line of credit (Note 4)                  -         27,000               -               -          27,000
  Unrealized gain (loss) on
    Investments                              -              -               -           8,856           8,856
Net loss                                     -              -        (921,916)              -        (921,916)
                                  ---------------------------------------------------------------------------
Balance, December 31, 2000           2,076,164     11,905,864      (6,565,155)          8,856       5,349,565
  Reclassification of unrealized
   gain (loss) on investments due
   to sale of investments                    -              -               -          (8,856)         (8,856)
  Issuance costs                             -        (12,909)              -               -         (12,909)
  Net loss                                   -              -      (1,673,031)              -      (1,673,031)
                                  ---------------------------------------------------------------------------
Balance, December 31, 2001           2,076,164   $ 11,892,955    $ (8,238,186)   $          -    $  3,654,769
                                  ===========================================================================
</TABLE>

See Notes to Financial Statements.


                                     Page 19

<PAGE>
<TABLE>
<CAPTION>
COMMONWEALTH BIOTECHNOLOGIES, INC.

STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001 and 2000
                                                                              2001           2000
-------------------------------------------------------------------------------------------------
<S>                                                                    <C>            <C>
Cash Flows From Operating Activities
  Net loss                                                             $(1,673,031)   $  (921,916)
  Adjustments to reconcile net loss to net cash
    used in operating activities:
    Depreciation and amortization                                          673,419        634,539
    Realized gains on sale of Investments                                  (20,565)        (1,306)
    Loss on disposal of fixed assets                                        48,817              -
    Changes in assets and liabilities:
      Accounts receivable                                                  160,782       (333,394)
      Prepaid expenses                                                      25,260        (91,288)
      Deposits                                                               3,200              -
      Accounts payable                                                     (48,240)       134,878
      Deferred revenue                                                      10,547         20,258
                                                                       --------------------------
          Net cash used in operating activities                           (819,811)      (558,229)
                                                                       --------------------------
Cash Flows From Investing Activities
  Contract acquisition costs                                                33,047        (33,047)
  Purchases of debt securities, available-for-sale                        (299,684)    (1,354,960)
  Sales of debt securities, available-for-sale                           1,305,205        367,510
  Purchases of property and equipment                                     (343,853)      (332,889)
                                                                       --------------------------
          Net cash provided by (used in) investing activities              694,715     (1,353,386)
                                                                       --------------------------
Cash Flows From Financing Activities
  Restricted cash                                                          (70,513)       (26,973)
  Principal payments on long-term debt,
    including capital lease obligations                                   (262,487)      (159,008)
  Principal payments on line of credit                                           -       (300,000)
  Proceeds (costs) from issuance of common stock                           (12,909)     2,953,122
                                                                       --------------------------
          Net cash provided by (used in) financing activities             (345,909)     2,467,141
                                                                       --------------------------

          Net increase (decrease) in cash and cash equivalents            (471,005)       555,526
Cash and cash equivalents:
  Beginning                                                                587,156         31,630
                                                                       --------------------------
  Ending                                                               $   116,151    $   587,156
                                                                       ==========================

Supplemental Disclosures of Cash Flow Information
  Cash payments for interest                                           $   272,380    $   297,489
                                                                       ==========================

Supplemental Schedule of Non-Cash Investing and Financing Activities
  Capital lease obligations incurred for use of equipment              $         -    $   378,825
                                                                       ==========================
</TABLE>

See Notes to Financial Statements.


                                    Page 20

<PAGE>

COMMONWEALTH BIOTECHNOLOGIES, INC.


NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note 1.     Nature of Business and Significant Accounting Policies

Nature of business: Commonwealth Biotechnologies, Inc., (the "Company"), was
------------------
formed on September 30, 1992, for the purpose of providing specialized
analytical laboratory services for the life scientist. The Company provides
basic research services in the general areas of protein/peptide and DNA/RNA
chemistries. Such services include synthesis, sequence analysis, composition
analysis, protein purification and biophysical characterization of biologically
relevant materials. The Company also pursues its own research and development
leading to intellectual properties.

A summary of the Company's significant accounting policies follows:

  Estimates: The preparation of financial statements in conformity with
  ---------
  accounting principles generally accepted in the United States of America
  requires management to make estimates and assumptions that affect the
  reported amounts of asset and liabilities and disclosure of contingent asset
  and liabilities at the date of the financial statements and the reported
  amounts of revenues and expenses during the period. Actual results could
  differ from those estimates.

  Revenue recognition: The Company recognizes revenue and related profit upon
  -------------------
  the completion of laboratory service projects, or upon the delivery and
  acceptance of biologically relevant materials that have been synthesized in
  accordance with project terms. Laboratory service projects are generally
  administered under fee-for-service contracts or purchase orders. Any revenues
  from research and development arrangements, including corporate contracts and
  research grants, are recognized pursuant to the terms of the related
  agreements as work is performed, or as scientific milestones, if any, are
  achieved. Amounts received in advance of the performance of services or
  acceptance of a milestone, are recorded as deferred revenue.

  Cash and cash equivalents: The Company considers all highly liquid debt
  -------------------------
  instruments purchased with an original maturity of three months or less to be
  cash equivalents. At times, the Company maintains cash balances in excess of
  FDIC insured amounts.

  Investment in debt securities: Management determines the appropriate
  -----------------------------
  classification of securities at the date individual investment securities are
  acquired, and the appropriateness of such classification is reassessed at each
  statement of financial condition date. The Company currently has no securities
  which are classified as held-to-maturity or trading.

  Available-for-sale securities consist of debt securities not classified as
  trading or held-to-maturity. Available-for-sale securities are stated at fair
  value, and unrealized holding gains and losses, net of the related deferred
  tax effect, are reported as a separate component of stockholders' equity.

  Premiums and discounts on investments in debt securities are amortized over
  the contractual lives of those securities, except for mortgage-backed
  securities for which prepayments are probable and predictable which are
  amortized over the estimated expected lives of those securities. The method of
  amortization results in a constant effective yield on those securities (the
  interest method). Interest on debt securities is recognized in income as
  earned, and dividends on marketable equity securities are recognized in income
  when declared. Realized gains and losses, including losses from declines in
  value of specific securities determined by management to be
  other-than-temporary, are included in income. Realized gains and losses are
  determined on the basis of the average cost of the securities sold.

                                    Page 21

<PAGE>

COMMONWEALTH BIOTECHNOLOGIES, INC.


NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note 1.     Nature of Business and Significant Accounting Policies (Continued)

  Property and equipment: Property and equipment are recorded at cost.
  ----------------------
  Depreciation is computed principally by the straight-line method over the
  following estimated useful lives providing depreciation and amortization for
  financial reporting purposes. The cost of repairs and maintenance is expensed
  as incurred. The estimated useful lives of assets are as follows:

                                                                      Years
--------------------------------------------------------------------------------
Buildings                                                                 39.5
Laboratory and computer equipment                                       7 - 10
Furniture and fixtures and office equipment                                  7
Automobile                                                                   5

  Other assets: Bond issuance costs consist of origination cost associated with
  ------------
  the 2000 bond issue and are being amortized over twenty-five years using the
  straight-line method which does not differ materially from the effective
  interest method. Amortization expense was $10,743 for the years ended
  December 31, 2001 and 2000.

  Income taxes: Deferred taxes are provided on a liability method whereby
  ------------
  deferred tax assets are recognized for deductible temporary differences and
  deferred tax liabilities are recognized for taxable temporary differences.
  Temporary differences are the differences between the reported amounts of
  assets and liabilities and their tax bases. Deferred tax assets are reduced by
  a valuation allowance when, in the opinion of management, it is more likely
  than not that some portion or all of the deferred tax assets will not be
  realized. Deferred tax assets and liabilities are adjusted for the effects of
  changes in tax laws and rates on the date of enactment.

  Research and development: Costs incurred in connection with research and
  ------------------------
  development activities are expensed as incurred. These consist of direct and
  indirect costs associated with specific research and development projects.
  Internal research and development cost, which are included in research and
  development cost in the statement of operations, were $14,348 and $78,721 for
  the years ended December 31, 2001 and 2000, respectively.

  Loss per common share: Basic loss per share has been computed on the basis of
  ---------------------
  the weighted-average number of common shares outstanding. Common shares
  issuable upon exercise of the employee stock options (see Note 12) have not
  been included in the computation because their inclusion would have had an
  antidilutive effect applicable to the net loss. Following is information
  regarding the computation of loss per share data for the years ended December
  31, 2001 and 2000, respectively.


<TABLE>
<CAPTION>
                                                      2001                             2000
                                          --------------------------------------------------------------
                                          Numerator          Denominator    Numerator        Denominator
                                          --------------------------------------------------------------
<S>                                       <C>                <C>            <C>             <C>
Basic loss per share:
Loss available to stockholders            $(1,673,031)                      $ (921,916)
Average shares outstanding                                   2,076,164                       1,807,142
Effect of dilutive shares                           -                -                   -           -
</TABLE>


  Fair value of financial instruments: The Company has determined, based on
  -----------------------------------
  available market information and appropriate valuation methodologies, that the
  fair value of its financial instruments approximates carrying value. The
  carrying amounts of cash and cash equivalents, accounts receivable and
  accounts payable

                                    Page 22

<PAGE>

COMMONWEALTH BIOTECHNOLOGIES, INC.


NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note 1.     Nature of Business and Significant Accounting Policies (Continued)

  approximate fair value due to the short-term maturity of the instruments. The
  carrying amount of debt approximates fair value because the interest rates
  under the credit agreement are predominantly variable, based on current market
  conditions.

  Reclassifications: Certain amounts in the 2000 financial statements have been
  -----------------
  reclassified to conform to the 2001 financial statement presentation. The
  reclassifications had no effect on either net income or retained earnings for
  the year ended December 31, 2000.

Note 2.     Investment in Debt Securities

As of December 31, 2001, the Company did not have any investments in debt
securities. The following is a summary of the Company's investment in
available-for-sale securities as of December 31, 2000:


<TABLE>
<CAPTION>
                                                                  Gross             Gross
                                            Amortized           Unrealized        Unrealized           Fair
December 31, 2000                           Cost                  Gains             Losses            Value
---------------------------------------------------------------------------------------------------------------
<S>                                  <C>                     <C>                    <C>             <C>
U.S. government securities           $      986,933          $    8,856           $       -        $   995,789
                                     ==========================================================================
</TABLE>


Note 3.     Property and Equipment

Property and equipment consisted of the following:


<TABLE>
<CAPTION>
Property and equipment consisted of the following:

                                                               2001           2000
                                                        -------------------------------
<S>                                                     <C>              <C>
Land                                                    $      403,919   $      403,919
Building                                                     4,904,666        4,904,666
Laboratory equipment                                         3,329,611        3,185,797
Furniture, fixtures and office and computer equipment          396,126          339,886
Automobile                                                      24,637           24,637
                                                        -------------------------------
                                                             9,058,959        8,858,905
Less accumulated depreciation                                2,270,769        1,705,053
                                                        -------------------------------
                                                        $    6,788,190   $    7,153,852
                                                        ===============================
</TABLE>


Depreciation expense was $660,697 and $576,972 for the years ended December 31,
2001 and 2000, respectively.


Note 4.     Demand Notes Payable and Line of Credit

The Company has a demand note payable with a bank, which bears interest at the
bank's prime rate plus 1% (totaling 5.75% at December 31, 2001). The note has no
stated maturity and is collateralized by a security interest in the Company's
accounts receivable, equipment and intangibles.


                                    Page 23

<PAGE>

COMMONWEALTH BIOTECHNOLOGIES, INC.


NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note 4.  Demand Notes Payable and Line of Credit  (Continued)

In September 1999, the Company obtained an unsecured line of credit in the
amount of $400,000 from a corporation solely owned by a significant stockholder
of the Company. Interest was payable in cash monthly at a rate of 6%. The line
of credit was due on September 30, 2000, and was repaid from the proceeds of a
private placement of the Company's common stock (see Note 11).

In 1999, and as part of the financing agreement related to the line of credit,
the Company issued an option to purchase 10,000 shares of common stock to the
stockholder. These options were credited to additional paid-in capital at their
fair value at date of issuance with a corresponding reduction in the recorded
amount of the outstanding borrowing. The resulting discount was amortized as an
increase to interest expense over the life of the line of credit. In addition,
as part of the consideration given to this stockholder for the letter of credit,
in 2000 the Company issued options to purchase 21,250 shares of common stock.
The additional options were valued at an amount representing interest expense of
9% per annum beyond the interest payable in cash. The fair value of these
options has been credited to additional paid-in capital with a corresponding
charge to interest expense.

Total interest expense related to the line of credit, including the value of the
options awarded, amounted to $58,315 for the year ended December 31, 2000. The
line-of-credit was paid in full during 2000, therefore, there were no payments
of interest for the year ended December 31, 2001.


Note 5.     Long-term Debt and Pledged Assets

Long-term debt consist of:


                                    Page 24

<PAGE>

COMMONWEALTH BIOTECHNOLOGIES, INC.


NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

Long-term debt consist of:
                                                                 2001        2000
                                                             -----------------------
<S>                                                          <C>          <C>
Industrial Revenue Development Bonds Series
  1998A (5.2%- 7%), payable in monthly
  installments of interest only through
  March 15, 2000, annual installments of
  principal and interest from March 15, 2001
  through March 15, 2023, secured by a
  first deed of trust on land and building
  with a carrying value of $4,851,865                        $3,585,000   $3,670,000
Industrial Revenue Development Bonds Series
  1998B, (8%), payable in monthly installments
  of interest only through March 15, 2023 and a
  final payment of $330,000 due March 15, 2023,
  secured by a second deed of trust on land and
  building with a carrying value of $4,851,865                  330,000      330,000
Capital lease obligation due in monthly installments
  of $8,502 to August, 2003, discounted at a rate of 10.9%      154,812      235,145
Capital lease obligation due in monthly installments of
  $3,814 to February, 2002, discounted at a rate of 11.75%        7,518       49,672
                                                             -----------------------
                                                              4,077,330    4,284,817
Less current maturities                                         187,019      207,431
                                                             -----------------------
                                                             $3,890,311   $4,077,386
                                                             =======================
</TABLE>


Note 5.     Long Term Debt and Pledged Assets (Continued)

The bond agreements require the Company to maintain debt service reserve funds,
which are held by a trustee. Debt service reserve funds are included in the
balance sheets as restricted cash.

Maturities of long-term debt are as follows:


     Year                                                         Amount
     -------------------------------------------------------------------
     2002                                                      $  39,875
     2003                                                         36,297
     2004                                                         34,174
     2005                                                         28,384
     2006                                                          4,731
                                                               ---------
                                                               $ 143,461
                                                               =========


Note 6.     Commitments, Contingencies and Subsequent Events

Leases: The Company leases office space and equipment under noncancelable
------
operating leases. Total operating rental expense for the years ended December
31, 2001 and 2000, was $94,533 and $19,943, respectively. Future minimum rental
commitments under operating leases as of December 31, 2001 are as follows:

                                    Page 25

<PAGE>

COMMONWEALTH BIOTECHNOLOGIES, INC.


NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Employment agreements: On June 24, 1997, the company entered into employment
---------------------
agreements with its founders. Each of the agreements has a term of five years
with specified base salaries and provide for successive one-year terms. In
addition, except for 1997, the employment agreements provide the Company's
executive officers with annual bonuses equal to, in the aggregate, 15% of the
Company's pretax net income for the preceding fiscal year. For the years ended
December 31, 2001 and 2000, there were no bonuses for the Company's executive
officers.

Contract purchase: On January 1, 2001, the Company purchased contracts and
-----------------
rights to pending contracts held by the drug-development group of SRA Life
Sciences, Inc. of Falls Church, Virginia for $150,000. In connection with this
purchase, the Company incurred acquisition costs, during 2000, totaling $33,047.
These costs were capitalized and fully amortized during 2001.

Stock incentive plan: Subsequent to year-end, a 2002 Stock Incentive Plan was
--------------------
adopted by the Board of Directors, subject to shareholder approval. As adopted,
the plan makes up to 300,000 shares of common stock available for grants of
restricted stock awards and stock options in the form of incentive stock options
and non-statutory options to employees, directors and consultants of the
Company. Shareholder approval will be voted upon at the Company's annual meeting
on May 23, 2002.

Blank check preferred stock: Subsequent to year-end, the Board of Directors
---------------------------
adopted a resolution approving an amendment to the Company's Amended and
Restated Articles of Incorporation to provide for the creation of a new class of
2,000,000 shares of "blank check" preferred stock, subject to shareholder
approval. "Blank check" preferred stock refers to stock for which the
designations, preferences, conversion rights, and cumulative, relative,
participating, optional or other rights, including voting rights,
qualifications, limitations or restrictions thereof, are determined by the Board
of Directors of a company. This proposal will also be voted upon at the annual
meeting on May 23, 2002.


Note 7.     Retirement Plan

The Company maintains a 401(k) Plan (the "Plan") which covers substantially all
employees. Under the Plan, employees may elect to defer a portion of their
salary, up to the maximum allowed by law, and the Company will match the
contribution up to 1% of the employee's salary. The Company made contributions
of $17,680 and $3,363 to the Plan in 2001 and 2000, respectively.


     Year                                                         Amount
     -------------------------------------------------------------------
     2002                                                     $  187,019
     2003                                                        160,311
     2004                                                        100,000
     2005                                                        105,000
     2006                                                        110,000
     Thereafter                                                3,415,000
                                                              ----------
                                                              $4,077,330
                                                              ==========

Note 8.     Major Customer

                                    Page 26

<PAGE>

COMMONWEALTH BIOTECHNOLOGIES, INC.


NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Revenues for the years ending December 31, 2001 and 2000 include revenues from
one major customer of $1,024,030 and $1,637,903, respectively. Trade receivables
due from this customer as of December 31, 2001 and 2000 were $136,258 and
$389,439, respectively.


Note 9.     Compensation and Benefit Costs

Compensation and benefit costs are included in the statements of operations as
follows:


                                                   2001        2000
                                               -----------------------
Cost of services                               $1,139,871   $  906,012
Overhead                                          693,753      309,331
Selling, general and administrative expenses      673,407      712,173
Research and development                           14,348      126,903
                                               -----------------------
                                               $2,521,379   $2,054,419
                                               =======================


Note 10.    Income Taxes

The difference between expected income tax benefits and income tax benefits
recorded in the financial statements is explained below:







Note 10.    Income Taxes (Continued)


<TABLE>
<CAPTION>

                                                            2001           2000
                                                        --------------------------
<S>                                <C>                  <C>            <C>
Income taxes (credits) computed at 34% statutory rate   $  (568,831)   $  (313,451)
Change in valuation allowance                               653,982        347,296
Other, primarily state income tax benefit                   (85,151)       (33,845)
                                                        --------------------------
                                                        $         -    $         -
                                                        ==========================
</TABLE>


The significant components of deferred income tax assets and liabilities as of
December 31 consist of the following:


<TABLE>
<CAPTION>
                                                            2001           2000
                                                        --------------------------
<S>                                                     <C>            <C>
Deferred tax assets:
  Effect of net operating loss                          $ 3,323,032    $ 2,666,236
  Other                                                     124,256         75,953
                                                        --------------------------
                                                          3,447,288      2,742,189
Deferred tax liabilities:
  Tax depreciation in excess of book depreciation           410,568        359,451
                                                        --------------------------
Net deferred tax asset before valuation allowance         3,036,720      2,382,738
Less valuation allowance                                  3,036,720      2,382,738
                                                        --------------------------
Net deferred tax asset                                  $         -    $         -
                                                        ==========================
</TABLE>

                                    Page 27

<PAGE>

COMMONWEALTH BIOTECHNOLOGIES, INC.


NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Operating loss carryforwards of approximately $8,956,000 may be used to offset
future taxable income and expire in various years through 2021. The Company also
has research and development credit carryforwards of approximately $50,000 that
expire in various years through 2020.

Note 11.    Private Placement Offering

On September 27, 2000, the Company completed a private placement of 348,000
shares of common stock at a purchase price of $7.471 per share and warrants to
purchase an additional 348,000 shares of common stock. The warrants are divided
into two equal portions, with one-half having the right to purchase one share of
common stock at a price of $6.50 per share for period of eighteen months, the
other half having the right to purchase one share of common stock at a purchase
price of $6.50 per share for a period of five years. The warrants are callable
at the option of the Company at a price of $10.40 per share. . In addition, the
101,500 warrants previously issued to the Underwriters (see Note 12) in
connection with the Company's initial public offering was adjusted in terms of
maturities, exercise prices and call provisions, but not number, to the same
structure as the warrants above. As a result of the change in the exercise
price, the difference between the new exercise price of $6.50 per share and
future changes in the market value of the stock will be treated pursuant to the
rules for variable plan accounting, whereby fluctuations in the market value
above the exercise price will be recognized as an expense. As of December 31,
2001, no warrants have been exercised. Proceeds, net of issuance costs, totaled
$2,350,397.



Note 12.     Stock Compensation


The Company adopted its Stock Incentive Plan (the "Plan") on June 24, 1997. The
Plan provides for the granting to employees, officers, directors, consultants
and certain other nonemployees of the Company of options to purchase shares of
common stock. A maximum of 410,000 shares of common stock may be issued pursuant
to the Plan. Of the maximum number of shares to be issued under the Plan,
270,000 have been reserved for incentive awards to be granted to the founders of
the Company, and 61,000 shares are reserved for incentive awards to be granted
to others. Additionally, the Company has reserved an aggregate of 201,500 shares
of common stock for issuance upon exercise of the Underwriter's Warrants
(101,500) (see Note 11) and the Management warrants (100,000).

Incentive awards may be in the form of stock options, restricted stock,
incentive stock or tax offset rights. In the case of incentive stock options
(within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended), the exercise price will not be less than 100% of the fair market value
of shares covered at the time of the grant, or 110% for incentive stock options
granted to persons who own more than 10% of the Company's voting stock.

Options granted under the Plan generally vest over a five-year period from the
date of grant and are exercisable for ten years, except that the term may not
exceed five years for incentive stock options granted to persons who own more
than 10% of the Company's outstanding common stock.

The Company applies Accounting Principles Board Opinion No. 25 and related
accounting interpretations in accounting for its plan and for management
warrants and, accordingly, no compensation cost has been recognized. Had
compensation cost for the Company's plan been determined based on the fair value
at the grant dates for awards under the plan consistent with the method
prescribed by FASB No. 123, Accounting for Stock-

                                    Page 28

<PAGE>

COMMONWEALTH BIOTECHNOLOGIES, INC.


NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Based Compensation, the Company's net loss and loss per share would have
increased to the proforma amounts indicated below:


                                                   2001                  2000
                                             -----------------------------------
Net loss:
  As reported, historically                  $  (1,673,031)       $    (921,916)
  Proforma                                      (1,862,576)          (1,026,620)
Loss per common share:
  As reported, historically                          (0.81)               (0.51)
  Proforma                                           (0.90)               (0.57)



Under FASB No. 123, the fair value of each management stock option and warrant
is estimated on the date of grant using the Black-Scholes option pricing model.
The following weighted-average assumptions were used for grants in 2001 and
2000, respectively: No dividend yield, expected volatility of 100% and 122%,
risk-free interest rate of 4.2% and 5.1%, and expected lives of 4 and 5 years.





Note 12.     Stock Compensation (Continued)


Stock option transactions are summarized as follows:


<TABLE>
<CAPTION>

                                                                     Weighted                     Weighted
                                                                      Average                      Average
                                                                     Exercise                     Exercise
                                                     2001             Price         2000           Price
                                                  ----------------------------------------------------------
<S>                                                 <C>            <C>             <C>          <C>
Options and warrants outstanding,
  beginning of year                                 515,713        $    7.93       527,287      $   8.83
Granted                                             278,759             3.95        86,344          5.64
Exercised                                                -                -        (92,318)         8.48
Lapsed                                              (10,425)            8.49        (5,600)         8.25
                                                  ----------------------------------------------------------
Options and warrants outstanding,
  end of year                                       784,047        $    6.49       515,713      $   7.93
                                                  ==========================================================
Options and warrants exercisable,
  end of year                                       571,845        $    7.88       446,560      $   8.69
                                                  ==========================================================
Weighted-average fair value per option
  and warrant for options and warrants
  granted during the year                                          $    2.91                    $   4.85
                                                                   =========                    ========
</TABLE>

                                    Page 29

<PAGE>

COMMONWEALTH BIOTECHNOLOGIES, INC.


NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

The following table summarizes information about stock options and warrants
outstanding at December 31, 2001:


<TABLE>
<CAPTION>
                                                   Outstanding                               Exercisable
                            ------------------------------------------------------------------------------------------------
                                                    Weighted
                                                     Average               Weighted                                Weighted
                                                    Remaining              Average                                 Average
                                                   Contractual             Exercise                                Exercise
Exercise Prices               Number                  Life                  Price             Number                Price
Per Share                   Outstanding             (Years)               Per Share         Exercisable           Per Share
----------------------------------------------------------------------------------------------------------------------------
<S>                         <C>                      <C>                <C>                    <C>              <C>
$3.75 - 5.25                345,728                  4                  $    4.02              152,776          $    6.02
$5.50 - 7.00                154,763                  4                       6.29              145,163               6.34
$7.50 - 9.00                 25,500                  4                       6.42               21,150               7.68
$9.25 - 10.00               257,356                  2                       9.89              252,356               9.89
$19.00 - 20.00                  700                  3                      20.00                  400              20.00
----------------------------------------------------------------------------------------------------------------------------
$3.75 - 20.00               784,047                                     $    6.49              571,845          $    7.88
</TABLE>

                                    Page 30

<PAGE>

COMMONWEALTH BIOTECHNOLOGIES, INC.


NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note 13. Going Concern and Management Plan


The financial statements have been prepared assuming the Company will continue
as a going concern. The Company incurred losses totaling $1,673,031 during the
year ended December 31, 2001 and has a history of losses that have resulted in
an accumulated deficit of $8,238,186 at December 31, 2001. In addition, the
Company has had negative cash flows in three out of the past five years. The
years in which the Company reached positive cash flows were years in which
equity offerings were completed.

Management has taken a number of steps to improve cash flow and liquidity.
Beginning in the summer of 2001, the Company reduced personnel levels, curtailed
research and development expenses, reduced marketing expenditures, deferred
directors' fees and a portion of officers' compensation. The company has also
reduced or delayed expenditures on items that are not critical to operations.
The Company is in active negotiations with a number of parties with respect to
strategic transactions which, if consummated, would favorably impact the
Company's financial condition. There can be no assurances, however, that any
such transactions will be consummated.

There can be no assurance that any funds required during the next twelve months
or thereafter can be generated from operations or that if such required funds
are not internally generated that funds will be available from external sources
such as debt or equity financings or other potential sources. The lack of
additional capital resulting from the inability to generate cash flow from
operations or to raise capital from external sources would force the Company to
substantially curtail or cease operations and would, therefore, have a material
adverse effect on its business. Further, there can be no assurance that any such
required funds, if available, will be available on attractive terms or that they
will not have a significantly dilutive effect on the Company's existing
shareholders.

There is substantial doubt about the Company's ability to continue as a going
concern. These financial statements do not include any adjustments relating to
the recoverability or classification of asset carrying amounts or the amounts
and classification of liabilities that may result should the Company be unable
to continue as a going concern.

                                    Page 31

<PAGE>

The Executive Officers and Board of Directors

Executive Officers

Richard J. Freer, Ph.D.                 Robert B. Harris, Ph.D.
Chairman of the Board, COO              President, CSO

Thomas R. Reynolds                      James H. Brennan, MBA
Senior Vice President and Secretary     Controller

Directors

Richard J. Freer, Ph.D.                 Robert B. Harris, Ph.D.
Chairman of the Board, COO              President, CSO

Thomas R. Reynolds                      Dr. Raymond H. Cypess
Vice President and Secretary            President and CEO
                                        American Type Culture Collection

L. McCarthy Downs III                   Dr. Donald A. McAfee
Chairman of the Board                   Chief Technical Officer
Anderson & Strudwick, Inc.              Aderis Pharmaceuticals, Inc.

Samuel P. Sears, Jr.                    Mr. Everette G. Allen, Jr.
Attorney at Law                                 Chairman, Senior Partner
                                        Allen & Allen, PC


                                    Page 32

<PAGE>

Corporate Information


Corporate Office

Commonwealth Biotechnologies, Inc.
601 Biotech Drive
Richmond, VA 23235
Telephone: 800-735-9224; 804-648-3820
Fax: 804-648-2641
E-mail: info@cbi-biotech.com
Web site: www.cbi-biotech.com


General Counsel

Reed Smith LLP
Riverfront Plaza-West Tower
901 E. Byrd Street, Suite 1700
Richmond, VA 23219


Patent Counsel

Burns Doan Swecker and Mathis, LLP
1737 King Street
Alexandria, VA 22314


Transfer Agent and Registrar

Computershare Trust Co.
350 Indiana St.
Golden, CO 80401


Independent Auditors

McGladrey and Pullen, LLP
1051 East Cary Street
Richmond, VA 23219

                                    Page 33