Commonwealth

Biotechnologies, Inc.

2006 ANNUAL

REPORT



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Commonwealth Biotechnologies, Inc.

Table of Contents



|                                                                                    |  |   
|----------------------------------------------------------------------------------- |  | --
|Memo to Shareholders                                                                |  | 1 
|                                                                                    | 
|Stockholder Matters                                                                 |  | 6 
|                                                                                    | 
|Selected Financial Data                                                             |  | 7 
|                                                                                    | 
|Management Discussion and Analysis of Financial Condition and Results of Operations |  | 8 
|                                                                                    | 
|Report of Independent Registered Public Accounting Firm                             |  | 16
|                                                                                    | 
|Financial Statements                                                                |  |   
|                                                                                    | 
|Balance Sheets                                                                      |  | 17
|                                                                                    | 
|Statements of Operations                                                            |  | 19
|                                                                                    | 
|Statements of Changes in Stockholders Equity                                       |  | 20
|                                                                                    | 
|Statements of Cash Flows                                                            |  | 21
|                                                                                    | 
|Summary of Significant Accounting Policies                                          |  | 22
|                                                                                    | 
|Notes to Financial Statements                                                       |  | 29



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To Our Shareholders:

2006 was an exciting year for Commonwealth Biotechnologies, Inc (CBI). Without a doubt the most significant event for the Company during the year was its announced intention to acquire Mimotopes Pty Ltd, in a stock transaction with
PharmAust Ltd (Australian Stock Exchange: PAA). Mimotopes is a global leader in high quality research-grade peptide products and applications with a suite of patented synthesis technologies, state-of-the-art facilities and a team of highly
experienced staff. Upon completion of the transaction in February 2007, former Mimotopes Managing Director Dr Paul DSylva, was appointed to the Board of Directors of CBI and also assumed the duties of Chief Executive Officer. Dr DSylva
brings an exceptional skill set in business and finance to CBI that compliments the skills of CBIs senior management. Under Dr. DSylvas leadership, the Company is well positioned to increase shareholder value in 2007 through
increased revenues, expanded international operations and additional strategic acquisitions.

The Mimotopes transaction brings an immediate boost to
CBIs top line revenues as well as a seasoned sales team well versed in selling services to the pharmaceutical and biotech industries. CBI-Mimotopes now has sales offices in San Diego, Raleigh, and Minneapolis, as well as in the UK and
Australia. Mimotopes also brings key partnerships with major life science companies Invitrogen and Genzyme Pharmaceuticals. These relationships have strong potential to open new doors for our products and services and add significant momentum to
CBIs growth in 2007 and beyond. Underlining the strength of the relationship with Genzyme, Mr. Dan Hayden, Senior VP and General Manager of Genzyme Pharmaceuticals, has accepted a position on the Board of CBI.

CBIs top line revenues in 2006 showed a decrease of 16 percent over 2005, primarily due to a downturn in government sector contract revenues. In 2006, government
contracting became very tenuous as dollars were shifted from bio-defense into other areas of priority, including on-going defense efforts, pandemic flu and other health concerns, and natural disaster relief. This information has been confirmed from
various on-site meetings with government agencies. While the 2006 year-end results were disappointing, several actions are now underway to leverage the companys strengths and concentrate resources on core competencies. A strategic review of
operations has been initiated, which among other things, will assist the company to understand better the cost drivers in its business and price its services more competitively in the market. The acquisition of Mimotopes and its broad private sector
client base will also assist CBI to offset intermittent downturns in contract volume from the Government Sector. Nonetheless, government contracting in bio-defense and vaccine development remains a funding objective of the Company, but the lack of
stability in the government sector also points to the importance of gaining market strength in the private and commercial sectors.

In this regard,
CBIs efforts in identifying contract revenues in the private sector are beginning to pay-off. Our web page has been re-vamped once again to more closely align our technology offerings with the expectations and requirements of pharma, bio-tech
and related industries. Revised advertising and marketing materials have also been created and distributed which align CBIs technology offerings with the drug discovery and bio-processing pipelines. As a result of this concerted marketing
push, contract dollars with commercial sector clients in 2006 were up compared to 2005 and CBI continues to gain market share for work outsourced from the private sector. Revenues from the DNA reference lab, under the auspices of Fairfax Identity
Labs (FIL), were softer in 2006 compared to 2005. However, FIL won several new large contracts in late 2006, primarily in the area of forensic analysis. These contracts represent a shift away from paternity testing contracts to higher margin areas
of analysis.



1



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CBI enters 2007 with a number of key contracts across its operating divisions, CBI Services, FIL, and Mimotopes. The
company continues to be a well-recognized key player in bio-defense, vaccine development, clinical trial support, genetic identity work, and now, peptide libraries and peptide synthesis. We continue to meet the needs of our clients with superior
service and have added new clients in 2006 who are industry leaders in our core focus areas. In 2007, CBI will be implementing a number of initiatives aimed at increasing revenues, increasing margins, managing costs and most importantly, increasing
market awareness and market value. Building on its strong reputation, these initiatives have the potential to build CBI into a true world-leader in contract drug-discovery.

Thank You for Your Continued Support

We look forward to a successful and exciting 2007. Thank you for your
continued support.

Finally, we acknowledge the valuable input provided by outgoing Board member, Mr. Joseph Slay, who helped design CBIs
revamped marketing campaign. Mr. Slay is replaced by Mr. Dan Hayden, Senior Vice President and General Manager of Genzyme Pharmaceuticals. We look forward to Mr. Haydens valuable input in helping to establish CBIs
interactions with the global pharmaceutical and biotechnology industries.

You are cordially invited to attend CBIs 2006 Annual Meeting of
Shareholders on May 18, 2007 at 11:00 a.m. at the Companys facility.

With best regards,



|                                     |  |  |  |                                     
|------------------------------------ |  |  |  | ------------------------------------
|LOGO                                 |  |  |  | LOGO                                
|Richard J. Freer, Ph.D.              |  |  |  | Paul DSylva, Ph.D.                 
|Chairman of the Board, COO           |  |  |  | Chief Executive Officer             
|                                     |  | 
|LOGO                                 |  |  |  | LOGO                                
|Robert B. Harris, Ph.D.              |  |  |  | Thomas R. Reynolds,                 
|President, CBI Richmond Operations   |  |  |  | Executive VP, Science and Technology
|                                     |  | 
|LOGO                                 |  |  |  |                                     
|James H. Brennan, MBA                |  |  |  |                                     
|Vice President, Financial Operations |  |  |  |                                     



2



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CBI is a Premiere Solutions Provider:



|     |  |      |  |      |  |     
|---- |  | ---- |  | ---- |  | ----
|LOGO |  | LOGO |  | LOGO |  | LOGO

CBI Facilitates Research and Development:



| | · |  | Innovative approaches and Optimized technologies
| | - |  | ------------------------------------------------



| | · |  | Depth and breath of expertise
| | - |  | -----------------------------



| | · |  | Exceptional Problem-Solving Abilities
| | - |  | -------------------------------------



| | · |  | Wide range of options for complex questions
| | - |  | -------------------------------------------



| | · |  | Faster, cheaper, and innovative solutions and tools
| | - |  | ---------------------------------------------------



| | · |  | Accredited by the CDC, the AABB, the USDA, the NFSTC
| | - |  | ----------------------------------------------------



| | · |  | CLIA accredited laboratories
| | - |  | ----------------------------



| | · |  | Experienced and cooperative program management.
| | - |  | -----------------------------------------------

LOGO

Drug Development Services



| | · |  | Rational design
| | - |  | ---------------



| | · |  | Therapeutic peptides
| | - |  | --------------------



| | · |  | MAbs
| | - |  | ----



| | · |  | Vaccines and Gene Therapies
| | - |  | ---------------------------



| | · |  | Large molecule production  Biologics and drug gargets
| | - |  | ------------------------------------------------------



| | · |  | Recombinant viruses and vaccines, challenge material, BSL-3
| | - |  | -----------------------------------------------------------



| | · |  | Recombinant proteins
| | - |  | --------------------



| | · |  | Custom antibodies
| | - |  | -----------------



| | · |  | Custom peptides
| | - |  | ---------------



| | · |  | Bio-Analytics  custom assay development
| | - |  | ----------------------------------------



| | · |  | Protein chemistry: protein analysis, characterization, peptides, binding studies, proteomics
| | - |  | --------------------------------------------------------------------------------------------



| | · |  | Molecular biology: gene analysis, expression, cloning and sequencing
| | - |  | --------------------------------------------------------------------



| | · |  | Microbiology / Virology detection and ID, select agents, BSL-3
| | - |  | --------------------------------------------------------------



| | · |  | Immunology, functional assays, immunogenicity and immune system function, ELISA
| | - |  | -------------------------------------------------------------------------------



3



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PreClinical Services



| | · |  | GLP production and technology transfer to 3rd party GMP
| | - |  | -------------------------------------------------------



| | · |  | Therapeutic peptides
| | - |  | --------------------



| | · |  | Therapeutic antibodies
| | - |  | ----------------------



| | · |  | Vaccines and challenge material (BSL-3)
| | - |  | ---------------------------------------



| | · |  | Recombinant proteins
| | - |  | --------------------



| | · |  | Bio-Manufacturing support
| | - |  | -------------------------



| | · |  | Cell bank characterization
| | - |  | --------------------------



| | · |  | Protein characterization and stability
| | - |  | --------------------------------------



| | · |  | Bio-pharmaceutical potency assay development
| | - |  | --------------------------------------------



| | · |  | Bio-safety testing
| | - |  | ------------------



| | · |  | Lot release for safety, purity, potency
| | - |  | ---------------------------------------



| | · |  | Custom Bio-Analytics for preclinical studies (GLP)
| | - |  | --------------------------------------------------



| | · |  | Assay development for assessing biologics safety and efficacy in animal studies
| | - |  | -------------------------------------------------------------------------------



| | · |  | Assay development for assessing immunogenicity and immune system function
| | - |  | -------------------------------------------------------------------------



| | · |  | Ligand binding studies for protein / peptide therapies and targets
| | - |  | ------------------------------------------------------------------



| | · |  | Specialty molecular-biology assay development, GLP sequencing
| | - |  | -------------------------------------------------------------



| | · |  | Microbiology / Virology BSL-3 assay development
| | - |  | -----------------------------------------------



| | · |  | Assay of specimens requiring BSL-3
| | - |  | ----------------------------------

LOGO

Clinical Lab Services



| | · |  | Safety, efficacy and potency of biologics
| | - |  | -----------------------------------------



| | · |  | Primary endpoints
| | - |  | -----------------



| | · |  | Esoteric safety assays
| | - |  | ----------------------



| | · |  | Biomarkers
| | - |  | ----------



| | · |  | Immunogenic response
| | - |  | --------------------



| | · |  | Biologics characterization
| | - |  | --------------------------



| | · |  | Support Central Lab testing by Sponsors and 3rd party Central Labs
| | - |  | ------------------------------------------------------------------



| | · |  | CLIA, GCP Lab
| | - |  | -------------



| | · |  | Vaccines including BSL-3
| | - |  | ------------------------



| | · |  | Gene therapies
| | - |  | --------------



| | · |  | Therapeutic antibodies and peptides
| | - |  | -----------------------------------



| | · |  | Recombinant proteins
| | - |  | --------------------

Bio-Manufacturing Services



| | · |  | GLP grade biopharmaceuticals
| | - |  | ----------------------------



| | · |  | Therapeutic peptides
| | - |  | --------------------



| | · |  | Recombinant proteins
| | - |  | --------------------



| | · |  | Therapeutic MAbs
| | - |  | ----------------



| | · |  | Vaccines and gene therapies including (BSL-3)
| | - |  | ---------------------------------------------



| | · |  | Custom potency development and testing
| | - |  | --------------------------------------



| | · |  | Cell bank characterization
| | - |  | --------------------------



| | · |  | Protein characterization and stability
| | - |  | --------------------------------------



| | · |  | Endotoxin analysis and residual organics
| | - |  | ----------------------------------------



| | · |  | Genetic characterization, molecular biology assays and residual DNA
| | - |  | -------------------------------------------------------------------



4



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| | · |  | Virology, detection of adventitious agents, retroviruses, viral clearance, PCR assays
| | - |  | -------------------------------------------------------------------------------------



| | · |  | Detection of replication competent viruses for vaccines and gene therapies
| | - |  | --------------------------------------------------------------------------



| | · |  | Mycoplasma
| | - |  | ----------



| | · |  | Lot release for safety, purity, and potency
| | - |  | -------------------------------------------

Fairfax Identity Laboratory (FIL), a Division of CBI

LOGO

Paternity Testing



| | · |  | Accredited by the American Association of Blood Banks
| | - |  | -----------------------------------------------------



| | · |  | Paternity testing is done using PCR-based technologies in a state-of-the-art facility using cutting edge equipment.
| | - |  | -------------------------------------------------------------------------------------------------------------------



| | · |  | Contract and private paternity cases.
| | - |  | -------------------------------------



| | · |  | Immigration Paternity Testing
| | - |  | -----------------------------

CODIS and
Forensics Services



| | · |  | NFSTC accreditation,
| | - |  | --------------------



| | · |  | DNA analysis on convicted offender samples, active forensic cases, criminal paternity cases, post-conviction cases and backlogged cases.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Screening of evidentiary forensic samples to confirm presence of semen or human blood prior to DNA analysis.
| | - |  | ------------------------------------------------------------------------------------------------------------



| | · |  | Mitochondrial DNA typing analysis
| | - |  | ---------------------------------



| | · |  | Y-chromosome STR Analysis
| | - |  | -------------------------



| | · |  | Genetic and CODIS Identity Analyses
| | - |  | -----------------------------------



| | · |  | Specimen Matching
| | - |  | -----------------

LOGO



5



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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 Capital Market (NASDAQ). The following table sets forth the range of high and low sales price per share of common stock for 2006 and 2005. These market quotations reflect inter-dealer
prices, without retail mark-up, markdown, or commission and may not necessarily represent actual transactions.



|                 |  |                  |      |                 |   |     
|---------------- |  | ---------------- | ---- | --------------- | - | ----
|Period           |  | High Stock Price |      | Low Stock Price
|1stQuarter, 2006 |  | $                | 4.99 |                 | $ | 3.54
|2ndQuarter, 2006 |  | $                | 3.63 |                 | $ | 2.48
|3rdQuarter, 2006 |  | $                | 2.99 |                 | $ | 2.13
|4thQuarter, 2006 |  | $                | 2.95 |                 | $ | 1.98
|                 |  |                 
|1stQuarter, 2005 |  | $                | 6.26 |                 | $ | 3.59
|2ndQuarter, 2005 |  | $                | 4.78 |                 | $ | 3.69
|3rdQuarter, 2005 |  | $                | 5.79 |                 | $ | 4.05
|4thQuarter, 2005 |  | $                | 5.14 |                 | $ | 3.80

On March 21, 2007, the last reported sales price for a share of the Companys Common Stock on NASDAQ was
$1.96. As of March 21, 2007 there were 33 holders of record of the Companys Common stock and 943 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.



6



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Selected Financial Data

Set forth below is selected financial data with respect to the Company for the years ended December 31, 2006, December 31, 2005, and December 31, 2004, 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.

For the Years Ended December 31,



|                                                     |  |      |            |   |      |   |            |  |   |            |  
|---------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- |  | - | ---------- | -
|                                                     |  | 2006 |            |   | 2005 |   | 2004       | 
|Operational Data                                     |  |      |            |   |      |   |            |  |   |            |  
|Revenues                                             |  | $    | 6,532,482  |   |      | $ | 7,802,891  |  | $ | 5,748,704  |  
|Net Income (loss)                                    |  | $    | (1,152,649 | ) |      | $ | 79,123     |  | $ | (367,549   | )
|Net income (loss) per common share basic and diluted |  | $    | (0.35      | ) |      | $ | 0.02       |  | $ | (0.12      | )
|Weighted average common shares outstanding           |  |      | 3,281,360  |   |      |   | 3,229,243  |  |   | 3,001,682  |  
|                                                     |  |      |           
|Balance Sheet Data:                                  |  |      |            |   |      |   |            |  |   |            |  
|Total Current Assets                                 |  | $    | 3,297,861  |   |      | $ | 4,276,348  |  | $ | 4,139,195  |  
|Total Assets                                         |  | $    | 9,501,958  |   |      | $ | 11,143,632 |  | $ | 11,003,008 |  
|Total Current Liabilities                            |  | $    | 586,967    |   |      | $ | 1,120,522  |  | $ | 959,747    |  
|Total Liabilities                                    |  | $    | 4,373,036  |   |      | $ | 5,127,032  |  | $ | 5041,200   |  
|Total Stockholders equity                           |  | $    | 5,128,922  |   |      | $ | 6,016,600  |  | $ | 5,961,808  |  



7



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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.

Overview

CBI (The Company) is a solutions
provider to the global biotechnology industry, academic institutions, government agencies, and pharmaceutical companies. It offers broad ranging expertise and a complete array of the most current analytical and synthetic chemistries and biophysical
analysis technologies, many of which are not available from other commercial sources. The Company has crafted a stimulating, open environment where scientists collaborate among themselves and with our clients, take on interesting challenges and
develop creative solutions. Through Fairfax Identity Labs (FIL), CBI offers comprehensive genetic identity testing, including paternity, forensic, and Convicted Offender DNA Index System (CODIS) analyses. Through its Mimotopes
subsidiary, CBI offers peptide libraries and research grade peptides and peptide therapeutics custom peptide synthesis.

CBI is a preferred provider of
early development contract research. We facilitate strategic decisions to both short term and long term clients. CBI offers both Good Laboratory Practices (GLP and non-GLP) rated services, and accommodates all levels of service, from bench to
production scale processes. The Company prides itself on its high throughput and fully integrated platform technologies, and over the years, has put in place numerous specialty labs, including Biosafety level 3 labs for bacteriology and virology, a
DNA reference Lab, calorimetry and mass spectrometry labs, cell culture and fermentation labs, high throughput DNA sequence labs, and peptide synthesis labs.

CBI has the experience and expertise usually found in much larger contract research organizations (CROs). CBI has extensive experience in contract and program management work in both the government and private sectors and is
well recognized for expertise in molecular genetics, mass spectrometry, peptide synthesis, DNA sequence analysis and reference lab work.

We are vigorously
pursuing revenue opportunities in four principal focus areas: government contracts in bio-defense and vaccine development; laboratory support services for on-going clinical trials; comprehensive contract projects in the private sector; DNA reference
lab activities; and now, custom peptide synthesis and peptide libraries.

The Company views commercial and government contracts as its most important
sources of revenue. For this reason, CBI has moved away from the concept of piece work for individual investigators. Further, the Company emphasizes its creative solutions approach, rather than touting its large litany of individual
technology offerings. CBI has entirely re-vamped its web page (www.cbi-biotech.com) and marketing materials to help clarify its potential role in solving its customers problems and to better align its service offerings with industry
expectations. With all its contracts, revenues are generally recognized as services are rendered or as products are delivered. In some instances, revenue is also recognized with performance-based installments payable over the contract as milestones
are achieved.



8



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Results of Operations

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005.

Revenues

Gross revenues decreased by $1,270,409 or 16.3% from $7,802,891 during the year ended December 31, 2005 (2005) to $6,532,482 during the year ended
December 31 2006 (2006).

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 various government contracts decreased by $1,191,841 or 28.2%, from $4,223,554 during 2005 to $3,031,713 during 2006.
The decrease in government contract activities was primarily due to budget reversions which have pushed back the start dates of new contract work and to re-allocation of existing budget funds away from bio-defense into other areas.

Revenues realized from genetic identity decreased by $425,961 or 21.6%, from $1,968,090 during 2005 to $1,542,129 during 2006. This decrease is a result of one of the
Companys clients down sizing of the clients forensic contract work and the elimination of a one time non renewable project.

Revenues
realized from various commercial contracts increased by $283,245 or 47.8%, from $593,053 during 2005 to $876,298 during 2006. This increase is primarily due to (1) additional work from existing clients and (2) the addition of fifteen new
clients that contributed approximately $238,000.

Revenues realized from various clinical services increased by $252,007 or 76.8%, from $328,272 during
2005 to $580,279 during 2006. This increase was primarily due to the ramp-up of clinical testing for one of the Companys principal clients. Unfortunately, in the second quarter of 2006 the Company was notified by one of its principal clients
that two of their on-going clinical trials for which the Company provides the laboratory support activities were put on clinical hold pending issues to be resolved with the FDA. One of the trials re-commenced in December, 2006, but the second has
been terminated.

Revenues realized from lab services decreased by $158,775 or 25.5%, from $623,473 during 2005 to $464,698 during 2006. This decrease is
primarily due to the decrease in one-time piece work received from our clients.



9



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Cost of Services

Cost of services consists primarily of materials, labor, subcontractor costs and overhead. The cost of services decreased by $122,632 or 0.02%, from $5,561,338 during 2005 to $5,438,706 during 2006. The cost of services as a percentage of
revenue was 83.3% and 71.3% during 2006 and 2005, respectively.

Direct labor costs decreased by $114,142, or 6.1%, from $1,868,806 during 2005 to
$1,754,664 during 2006. This decrease is primarily due to a decrease in work load during the period. The difference in labor is reflected in the overhead. The cost of direct labor as a percentage of revenue was 26.9% and 23.9% during 2006 and 2005,
respectively.

The costs for direct materials decreased by $168,097, or 13.0%, from $1,292,943 during 2005, to $1,124,846 during 2006. Reduction in
materials costs resulted from the decrease in revenues in 2006. This decrease is the direct result from negotiations with one of our major suppliers to establish an inventory system thus reducing excess costs in the ordering of reagents and
materials. The cost of direct materials as a percentage of revenue was 17.2% and 16.6% during 2006 and 2005, respectively.

Overhead cost consists of
indirect labor, amortization costs associated with the acquisition of Fairfax Identity Labs, depreciation, freight charges, repairs, travel and miscellaneous supplies not directly related to a particular project. Total overhead costs increased by
$169,146 or 7.1%, from $2,390,050 during 2005 to $2,559,196 during 2006. Increases in overhead are due to additional costs in salaries and benefits charged to indirect labor and fringe benefits, recruitment fees, subcontract costs, maintenance and
repairs and waste disposal and equipment purchases not falling under the capitalization policy of the Company.

Sales, General and Administrative

Sales, general and administrative expenses (SGA) consist primarily of compensation and related costs for administrative, facility expenditures,
professional fees, consulting, taxes, and depreciation and marketing. Total SGA costs increased by $64,661 or 3.3%, from $1,988,515 during 2005 to $2,053,176 during 2006. As a percentage of revenue, these costs were 31.4% and 25.5% during 2006 and
2005, respectively.

Total compensation and benefits increased by $26,973 or 5.0% from $564,098 during 2005 to $537,125 during 2006. This increase is
attributable to the accrual for the restricted stock compensation package for senior management as well as accrual for the issuance of incentive stock options which are now expensed by the Company. Facilities expense increased by $19,438 or 25.4%,
from $76,495 during 2005 to $95,933 during 2006. This increase is primarily due to across the board increases in all categories associated with the operations of the facility. Professional fees increased by $9,232, or 3.4%, from $268,475 during 2005
to $277,707 during 2006. This increase is due to expenditures associated with additional legal requirements under Sarbanes-Oxly. Additional costs were due to rate increases in our general liability insurance. Taxes increased by $7,449 or 8.6% from
$86,235 during 2005 to $93,684 during 2005. This is primarily due to additional rate increases in real estate taxes. Office expenses decreased by $32,217 or 20.5%, from $157,420 during 2005 to $125,203 during 2006. This decrease is primarily due to
limited travel and reduction of equipment purchased associated with the Companys capitalization policy. Other costs decreased by $31,477, or 34.7% from $90,825 during 2005 to $59,348 during 2006 primarily due to a successful negotiation with
the Companys bank to limit the cost of its fees charged to the Company, and a one-time corporate donation for the relief efforts related to hurricane Katrina made by the Company in 2005.



10



---

Marketing costs increased by $66,309 or 9.3%, from $716,347 during 2005 to $782,656 during 2006. With the exception of
compensation expenses associated with the hiring of the new senior executive Vice President for Business Development, marketing costs remained relatively flat from the 2005 to 2006.

Other Income (Expenses)

Other income during the 2005 Period compared to the 2006 Period increased by $36,220 or
52.9% from $68,404 during 2005 to $104,624 during 2006. This increase represents interest earned from the Companys investments.

Other expenses
increased by $55,554 or 22.9% from $242,319 during 2005 to $297,873 during 2006. Other expenses include interest expense paid in 2006 for the refinancing of the facility.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004.

Revenues

Gross revenues increased by $2,054,187 or 35.7% from $5,748,704 during the year ended December 31, 2004 (2004) to $7,802,891 during the year ended
December 31, 2005 (2005).

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 various government contracts increased by $140,290 or 3.4%, from $4,083,264 during 2004 to $4,223,554 during 2005.
This increase was primarily due to the startup of additional work and continuation of additional contracts with the DynPort Company and various government entities during the year.

Revenues realized from genetic identity increased by $1,894,109 or 2,560.3%, from $73,981 during 2004 to $1,968,090 during 2005. This increase was primarily due to the Company acquiring Fairfax Identity Labs in
December 2004.

Revenues realized from various commercial contracts decreased by $304,384 or 33.9%, from $897,437 during 2004 to $593,053 during 2005. This
decrease is primarily due to (1) work being completed with two major clients and (2) increased focus in government contracts awarded to the Company. Of the $593,053 in commercial contracts, three major clients represented 15.6%, 14.7% and
14.2% respectively of the revenue earned during 2005. The Company will continue to work with these clients in 2006.



11



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Revenues realized from various clinical services increased by $133,799 or 66.8%, from $194,473 during 2004 to $328,272
during 2005. This increase is a direct result of the startup of two major contracts in performing genetic identity analysis.

Cost of Services

Cost of services consists primarily of materials, labor, subcontractor costs and overhead. The cost of services increased by $1,793,060 or 47.6%, from
$3,768,278 during 2004 to $5,561,338 during 2005. The cost of services as a percentage of revenue was 71.3% and 65.5% during 2005 and 2004, respectively.

Direct labor costs increased by $651,420, or 53.5%, from $1,217,386 during 2004 to $1,868,806 during 2005. This increase is a direct result of additional projects initialized during 2005 compared to 2004 as well as the hiring of additional
lab support personnel and additional employees retained from the acquisition of FIL.

The costs for direct materials increased by $353,155, or 37.5%, from
$939,788 during 2004, to $1,292,943 during 2005. This increase is directly attributable to additional projects in 2005 compared to 2004.

Overhead cost
consists of indirect labor, amortization costs associated with the acquisition of Fairfax Identity Labs, depreciation, freight charges, repairs, travel and miscellaneous supplies not directly related to a particular project. Total overhead costs
increased by $799,554 or 50.3%, from $1,590,496 during 2004 to $2,390,377 during 2005. Increased costs directly associated with the acquisition of FIL were amortization costs ($297,889), and postage ($98,450). Other increases included maintenance
and repairs ($24,099), depreciation ($66,019), and utilities ($94,732).

Sales, General and Administrative

Sales, general and administrative expenses (SGA) consist primarily of compensation and related costs for administrative, facility expenditures, professional
fees, consulting, taxes, and depreciation and marketing. Total SGA costs increased by $269,641, or 15.0%, from $1,718,874 during 2004 to $1,988,515 during 2005. As a percentage of revenue, these costs were 25.5% and 29.9% during 2005 and 2004,
respectively.

Total compensation and benefits decreased by $18,962 or 3.5% from $546,525 during 2004 to $527,563 during 2005. This decrease is primarily
due to the allocation of corporate compensation charged to marketing. Depreciation expense increased by $13,467 or 14.4%, from $93,859 during 2004 to $107,326 during 2005. This increase is primarily due to additional administrative equipment needed
to support the acquisition of FIL. Equipment repairs and leases increased by $12,282 or 16.6% from $73,953 during 2004 to $86,235 during 2005. This increase is a result of the additional leased equipment used to support the administrative staff.
Professional fees decreased by $98,581, or 26.9%, from $367,056 during 2004 to $268,475 during 2005. This decrease is due to a reduction in consulting fees, which is primarily a result of one-time costs associated with the elimination of the
Industrial Revenue Bonds that were charged in 2004. Taxes increased by $12,282 or 16.6% from $73,953 during 2004 to $86,235 during 2005. This increase is due to additional sales tax paid for materials purchased. Office expenses increased by $24,227
or 18.2%, from $133,193 during 2004 to



12



---

$157,420 during 2005. This increase is primarily due to additional costs associated with travel expenses for employees attending meetings with potential
clients. Other costs decreased by $18,086, or 16.6% from $108,921 during 2004 to $90,825 during 2005. Decreases in this category were from expenses associated with the relocation of employees from the acquisition of Fairfax Identity Labs as well as
increasing the allowance for potential write-offs in bad debt in 2004 that did not occur in 2005.

Marketing costs increased by $422,000 or 143.4%, from
$294,347 during 2004 to $716,347 during 2005. This increase was primarily due to staff brought on by the FIL acquisition and the allocation of salaries and benefit costs to marketing ($371,657). Additional increases included consulting costs
($13,008), advertising ($11,108), public relations ($11,224) and trade shows ($16,612).

Other Income (Expenses)

Other income during the 2004 Period compared to the 2005 Period increased by $45,441 or 197.8% from $22,963 during 2004 to $68,404 during 2005. This increase represents
interest earned from the Companys investments.

Other expenses decreased by $409,745 or 62.8% from $652,064 during 2004 to $242,319 during 2005.
Other expenses include (1) interest expense paid in 2005 for the refinance of the facility with Branch Banking and Trust, and in 2004 (1) interest paid for the Companys IRBs; (2) prepayment penalty for the refinancing of the
industrial revenue bonds to a variable rate mortgage and (3) write-off of remaining unamortized bond issuance costs.

Liquidity and Capital
Resources

The 2006 Period reflected cash provided by operating activities of $77,074, as compared to cash provided by operating activities of
$1,007,735 during the 2005 Period. This decrease was the result of the Companys net loss of $1,152,649 during 2006 and cash flow changes in the working capital accounts including a positive change in accounts receivable of $380,243. The 2006
Period reflected a use of cash from investing activities of $493,938, as compared to $479,658 during the 2005 Period. The increase reflects the timing of equipment purchased between periods, coupled with the acquisition costs associated with the
purchase of Mimotopes Pty LTD that was completed in 2007. The 2006 Period reflected net cash used in financing activities of $489,895, as compared to net cash used in financing activities of $459,005 during the 2005 Period. This was due to the final
payment for the purchase of Fairfax Identity Labs.

Net working capital as of December 31, 2006 and December 31, 2005 was $2,710,894 and
$3,155,826 respectively. The current ratio for the 2006 Period is 5.62 as compared to 3.81 during the 2005 Period.



13



---

Critical Accounting Policies

A summary of the Companys accounting policies follows:

Estimates: The preparation of the financial statements 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 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. 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 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.

Accounts receivable: Accounts receivable are carried at original
invoice amount less an estimate for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and
considering a customers financial condition, credit history, and current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received.

CBI has met the SEC and NASDAQ Corporate Governance Rules.

As a consequence of the Sarbanes-Oxley Act, the NASDAQ imposed certain changes in the rules of corporate governance which are aimed at strengthening its listing standards. The Securities and Exchange Commission (SEC) approved the rules
imposed by NASDAQ which include:



| | · |  | Independent Directors. CBIs Board is composed of 5 independent and 3 employee directors.
| | - |  | -----------------------------------------------------------------------------------------



| | · |  | The Independent Directors serve on the three principal committees; Audit, Compensation, and Nominations.
| | - |  | --------------------------------------------------------------------------------------------------------



| | · |  | The Independent Directors meet in executive session at each quarterly Board meeting.
| | - |  | ------------------------------------------------------------------------------------



| | · |  | At least one Independent Director, Mr. Sam Sears, who serves on the Audit Committee, meets all of the requirements as defined by the SEC for being a
financial expert.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | The Audit Committee reviews and approves all related-party transactions. CBI has adapted a formal Corporate Code of Conduct. Copies are available on request from
Dr. Paul DSylva, Chief Executive Officer, and on the Companys website at www.cbi-biotech.com.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



14



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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,
| | - |  | -------------------------------------------------



| | · |  | lack of demand for the Companys services,
| | - |  | ------------------------------------------



| | · |  | the ability of the Companys customers to perform services similar to those offered by the Company in-house,
| | - |  | --------------------------------------------------------------------------------------------------------------



| | · |  | 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,
| | - |  | ------------------------------------------------------------------



| | · |  | the Companys ability to integrate the acquisition of Mimotopes Pty LTD.
| | - |  | ------------------------------------------------------------------------

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

Controls and Procedures

The Companys Chief Executive Officer and Vice President for Financial Operations have concluded that the Companys controls and other procedures designed to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods as specified in the Commissions rules and forms are
effective, based upon their evaluation of these controls and procedures as of December 31, 2006.

There were no significant changes in the
Companys internal controls or in other factors that could significantly affect those controls subsequent to the date of this evaluation, including any corrective actions with regard to significant deficiencies and weaknesses.



15



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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Commonwealth Biotechnologies

Richmond, Virginia

We have audited the accompanying balance
sheets of Commonwealth Biotechnologies, Inc. as of December 31, 2006 and 2005 and the related statements of operations, 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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. at December 31, 2006 and 2005, 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

BDO Seidman, LLP

Richmond, Virginia

March 22, 2007



16



---

Commonwealth Biotechnologies, Inc.

Balance Sheets



|                                                                                                          |  |      |           |      |   |           
|--------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | ----------
|December 31,                                                                                              |  | 2006 |           | 2005
|Assets                                                                                                    |  |      |           |      |   |           
|                                                                                                          |  |     
|Current assets (Note 2)                                                                                   |  |      |           |      |   |           
|Cash and cash equivalents                                                                                 |  | $    | 1,904,370 |      | $ | 2,811,129 
|Accounts receivable, net of allowance for doubtful accounts of approximately $54,678 and $89,913 (Note 5) |  |      | 962,049   |      |   | 1,342,292 
|Prepaid expenses and other assets                                                                         |  |      | 431,442   |      |   | 122,927   
|                                                                                                          |  |      |           |      |   |           
|Total current assets                                                                                      |  |      | 3,297,861 |      |   | 4,276,348 
|                                                                                                          |  |      |           |      |   |           
|Property and equipment, net (Note 1)                                                                      |  |      | 5,612,145 |      |   | 5,971,730 
|                                                                                                          |  |      |           |      |   |           
|                                                                                                          |  |     
|Other assets                                                                                              |  |      |           |      |   |           
|Mortgage costs (Note 2)                                                                                   |  |      | 65,285    |      |   | 87,675    
|Intangible assets (Note 8)                                                                                |  |      | 36,667    |      |   | 317,879   
|Goodwill (Note 8)                                                                                         |  |      | 490,000   |      |   | 490,000   
|                                                                                                          |  |      |           |      |   |           
|Total other assets                                                                                        |  |      | 591,952   |      |   | 895,554   
|                                                                                                          |  |      |           |      |   |           
|                                                                                                          |  | $    | 9,501,958 |      | $ | 11,143,632
|                                                                                                          |  |      |           |      |   |           

See accompanying summary of accounting policies and notes to financial statements.



17



---

Commonwealth Biotechnologies, Inc.

Balance Sheets

(continued)



|                                                                                                                                     |  |      |             |   |      |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ----------- | - | ---- | - | ---------- | -
|December 31,                                                                                                                         |  | 2006 |             |   | 2005 |  
|Liabilities and Stockholders Equity                                                                                                 |  |      |             |   |      |   |            |  
|                                                                                                                                     |  |     
|Current liabilities                                                                                                                  |  |      |             |   |      |   |            |  
|Current maturities of long-term debt (Note 2)                                                                                        |  | $    | 228,545     |   |      | $ | 512,729    |  
|Accounts payable and other current liabilities                                                                                       |  |      | 307,884     |   |      |   | 406,370    |  
|Deferred compensation                                                                                                                |  |      | 18,922      |   |      |   | 126,830    |  
|Interest payable                                                                                                                     |  |      | 16,689      |   |      |   | 16,689     |  
|Deferred revenue                                                                                                                     |  |      | 14,927      |   |      |   | 57,904     |  
|                                                                                                                                     |  |      |             |   |      |   |            |  
|Total current liabilities                                                                                                            |  |      | 586,967     |   |      |   | 1,120,522  |  
|                                                                                                                                     |  |     
|Long-term debt, less current maturities (Notes 2)                                                                                    |  |      | 3,786,069   |   |      |   | 4,006,510  |  
|                                                                                                                                     |  |      |             |   |      |   |            |  
|Total liabilities                                                                                                                    |  |      | 4,373,036   |   |      |   | 5,127,032  |  
|                                                                                                                                     |  |      |             |   |      |   |            |  
|                                                                                                                                     |  |     
|Commitments and contingencies (Notes 3 and 4)                                                                                        |  |      |             |   |      |   |            |  
|                                                                                                                                     |  |     
|Stockholders equity                                                                                                                 |  |      |             |   |      |   |            |  
|Common stock, no par value, 10,000,000 shares authorized, 2006  3,322,769; 2005  3,253,556, shares issued and outstanding (Note
7) |  |      |            |   |      |   |           |  
|Additional paid-in capital                                                                                                           |  |      | 15,823,614  |   |      |   | 15,489,370 |  
|Restricted stock                                                                                                                     |  |      | (301,000    | ) |      |   | (191,556   | )
|Other comprehensive loss                                                                                                             |  |      | (8,104      | ) |      |   | (48,275    | )
|Accumulated deficit                                                                                                                  |  |      | (10,385,588 | ) |      |   | (9,232,939 | )
|                                                                                                                                     |  |      |             |   |      |   |            |  
|Total stockholders equity                                                                                                           |  |      | 5,128,922   |   |      |   | 6,016,600  |  
|                                                                                                                                     |  |      |             |   |      |   |            |  
|                                                                                                                                     |  | $    | 9,501,958   |   |      | $ | 11,143,632 |  
|                                                                                                                                     |  |      |             |   |      |   |            |  

See accompanying summary of accounting policies and notes to financial statements.



18



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Commonwealth Biotechnologies, Inc.

Statements of Operations



|                                                  |  |      |            |   |      |   |           |  
|------------------------------------------------- |  | ---- | ---------- | - | ---- | - | --------- | -
|Year Ended December 31,                           |  | 2006 |            |   | 2005 |  
|Revenues(Note 5)                                  |  |      |            |   |      |   |           |  
|Government contracts                              |  | $    | 3,031,713  |   |      | $ | 4,223,554 |  
|Genetic identity                                  |  |      | 1,542,129  |   |      |   | 1,968,090 |  
|Commercial contracts                              |  |      | 876,298    |   |      |   | 593,053   |  
|Clinical services                                 |  |      | 580,279    |   |      |   | 328,272   |  
|Laboratory services                               |  |      | 464,698    |   |      |   | 623,473   |  
|Other revenue                                     |  |      | 37,365     |   |      |   | 66,449    |  
|                                                  |  |      |            |   |      |   |           |  
|Total revenues                                    |  |      | 6,532,482  |   |      |   | 7,802,891 |  
|                                                  |  |      |            |   |      |   |           |  
|                                                  |  |     
|Cost of services                                  |  |      |            |   |      |   |           |  
|Overhead                                          |  |      | 2,559,196  |   |      |   | 2,390,050 |  
|Direct labor                                      |  |      | 1,754,664  |   |      |   | 1,868,806 |  
|Direct materials                                  |  |      | 1,124,846  |   |      |   | 1,292,943 |  
|Other direct costs                                |  |      |           |   |      |   | 9,539     |  
|                                                  |  |      |            |   |      |   |           |  
|Total cost of services                            |  |      | 5,438,706  |   |      |   | 5,561,338 |  
|                                                  |  |      |            |   |      |   |           |  
|Gross profit                                      |  |      | 1,093,776  |   |      |   | 2,241,553 |  
|                                                  |  |     
|Selling, general and administrative               |  |      | 2,053,176  |   |      |   | 1,988,515 |  
|                                                  |  |      |            |   |      |   |           |  
|Operating (loss) income                           |  |      | (959,400   | ) |      |   | 253,038   |  
|                                                  |  |      |            |   |      |   |           |  
|                                                  |  |     
|Other income (expense)                            |  |      |            |   |      |   |           |  
|Interest expense and financing costs              |  |      | (297,873   | ) |      |   | (242,319  | )
|Other income                                      |  |      | 104,624    |   |      |   | 68,404    |  
|                                                  |  |      |            |   |      |   |           |  
|Total other income (expense)                      |  |      | (193,249   | ) |      |   | (173,915  | )
|                                                  |  |      |            |   |      |   |           |  
|Net Income/(loss)                                 |  | $    | (1,152,649 | ) |      | $ | 79,123    |  
|                                                  |  |      |            |   |      |   |           |  
|Income/(loss) per common share, basic and diluted |  | $    | (0.35      | ) |      | $ | 0.02      |  
|                                                  |  |      |            |   |      |   |           |  

See accompanying summary of accounting policies and notes to financial statements.



19



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Commonwealth Biotechnologies, Inc.

Statements of Stockholders Equity



|                                                       |  |                             |  |                            |            |                  |   |          |                                   |  |   |                     |   |  |       |             |   |  |   |            |  
|------------------------------------------------------ |  | --------------------------- |  | -------------------------- | ---------- | ---------------- | - | -------- | --------------------------------- |  | - | ------------------- | - |  | ----- | ----------- | - |  | - | ---------- | -
|                                                       |  | Number of SharesOutstanding |  | Additional Paid-in Capital |            | Restricted Stock |   |          | Other Comprehensive (Income)/Loss |  |   | Accumulated Deficit |   |  | Total |            
|Balance, December 31, 2004                             |  | 3,203,556                   |  | $                          | 15,273,870 |                  | $ |         |                                   |  | $ |                    |   |  | $     | (9,312,062  | ) |  | $ | 5,961,808  |  
|Restricted stock                                       |  | 50,000                      |  |                            | 215,500    |                  |   | (191,556 | )                                 |  |   |                    |   |  |       |            |   |  |   | 23,944     |  
|Net income                                             |  |                            |  |                            |           |                  |   |         |                                   |  |   |                    |   |  |       | 79,123      |   |  |   | 79,123     |  
|Change in unrealized gain (loss) on interest rate swap |  |                            |  |                            |           |                  |   |         |                                   |  |   | (48,275             | ) |  |       |            |   |  |   | (48,275    | )
|                                                       |  |                             |  |                            |            |                  |   |          |                                   |  |   |                     |   |  |       |             |   |  |   |            |  
|Total comprehensive income                             |  |                            |  |                            |           |                  |   |         |                                   |  |   |                    |   |  |       |            |   |  |   | 30,848     |  
|                                                       |  |                             |  |                            |            |                  |   |          |                                   |  |   |                     |   |  |       |             |   |  |   |            |  
|                                                       |  |                             |  |                            |            |                 
|Balance, December 31, 2005                             |  | 3,253,556                   |  |                            | 15,489,370 |                  |   | (191,556 | )                                 |  |   | (48,275             | ) |  |       | (9,232,939  | ) |  |   | 6,016,600  |  
|Issuance of common stock and stock options exercised   |  | 16,585                      |  |                            | 22,834     |                  |   |         |                                   |  |   |                    |   |  |       |            |   |  |   | 22,834     |  
|Restricted stock                                       |  | 52,628                      |  |                            | 248,614    |                  |   | (109,444 | )                                 |  |   |                     |   |  |       |            |   |  |   | 139,170    |  
|Stock option expense                                   |  |                            |  |                            | 62,796     |                  |   |         |                                   |  |   |                    |   |  |       |            |   |  |   | 62,796     |  
|Net loss                                               |  |                            |  |                            |           |                  |   |         |                                   |  |   |                    |   |  |       | (1,152,649  | ) |  |   | (1,152,649 | )
|Change in unrealized gain (loss) on interest rate swap |  |                            |  |                            |           |                  |   |         |                                   |  |   | 40,171              |   |  |       |            |   |  |   | 40,171     |  
|                                                       |  |                             |  |                            |            |                  |   |          |                                   |  |   |                     |   |  |       |             |   |  |   |            |  
|Total comprehensive loss                               |  |                            |  |                            |           |                  |   |         |                                   |  |   |                    |   |  |       |            |   |  |   | (1,112,478 | )
|                                                       |  |                             |  |                            |            |                  |   |          |                                   |  |   |                     |   |  |       |             |   |  |   |            |  
|Balance, December 31, 2006                             |  | 3,322,769                   |  | $                          | 15,823,614 |                  | $ | (301,000 | )                                 |  | $ | (8,104              | ) |  | $     | (10,385,588 | ) |  | $ | 5,128,922  |  
|                                                       |  |                             |  |                            |            |                  |   |          |                                   |  |   |                     |   |  |       |             |   |  |   |            |  

See accompanying summary of accounting policies and notes to financial statements.



20



---

Commonwealth Biotechnologies, Inc.

Statements of Cash Flows



|                                                                                               |  |      |            |   |      |   |           |  
|---------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | --------- | -
|Year Ended December 31,                                                                        |  | 2006 |            |   | 2005 |  
|Operating activities                                                                           |  |      |            |   |      |   |           |  
|Net income/(loss)                                                                              |  | $    | (1,152,649 | ) |      | $ | 79,123    |  
|Adjustments to reconcile net (loss)/income to cash provided by operating activities            |  |      |            |   |      |   |           |  
|Depreciation and amortization                                                                  |  |      | 899,891    |   |      |   | 963,526   |  
|Stock based compensation                                                                       |  |      | 101,634    |   |      |   |          |  
|Changes in assets and liabilities                                                              |  |      |            |   |      |   |           |  
|Accounts receivable                                                                            |  |      | 380,243    |   |      |   | (10,353   | )
|Prepaid expenses and inventory                                                                 |  |      | (51,281    | ) |      |   | (57,706   | )
|Accounts payable and accrued expenses                                                          |  |      | (57,788    | ) |      |   | 136,865   |  
|Deferred revenue                                                                               |  |      | (42,976    | ) |      |   | (103,698  | )
|                                                                                               |  |      |            |   |      |   |           |  
|Cash provided by operating activities                                                          |  |      | 77,074     |   |      |   | 1,007,757 |  
|                                                                                               |  |      |            |   |      |   |           |  
|                                                                                               |  |     
|Investing activities                                                                           |  |      |            |   |      |   |           |  
|Purchase of Mimotopes                                                                          |  |      | (257,235   | ) |      |   |          |  
|Purchases of property and equipment                                                            |  |      | (236,703   | ) |      |   | (450,711  | )
|Purchase of FIL, net                                                                           |  |      |           |   |      |   | (28,947   | )
|                                                                                               |  |      |            |   |      |   |           |  
|Cash used in investing activities                                                              |  |      | (493,938   | ) |      |   | (479,658  | )
|                                                                                               |  |      |            |   |      |   |           |  
|                                                                                               |  |     
|Financing activities                                                                           |  |      |            |   |      |   |           |  
|Principal payments of debt obligations, FIL                                                    |  |      | (300,000   | ) |      |   | (300,000  | )
|Principal payments on debt obligations, including capital lease obligations                    |  |      | (212,729   | ) |      |   | (157,634  | )
|Increase in loan costs, net                                                                    |  |      |           |   |      |   | (1,371    | )
|Proceeds from issuance of common stock                                                         |  |      | 22,834     |   |      |   |          |  
|                                                                                               |  |      |            |   |      |   |           |  
|Cash used in financing activities                                                              |  |      | (489,895   | ) |      |   | (459,005  | )
|                                                                                               |  |      |            |   |      |   |           |  
|Net increase (decrease) in cash and cash equivalents                                           |  |      | (906,759   | ) |      |   | 69,094    |  
|Cash and cash equivalents, beginning of year                                                   |  |      | 2,811,129  |   |      |   | 2,742,035 |  
|                                                                                               |  |      |            |   |      |   |           |  
|Cash and cash equivalents, end of year                                                         |  | $    | 1,904,370  |   |      | $ | 2,811,129 |  
|                                                                                               |  |      |            |   |      |   |           |  
|                                                                                               |  |     
|Supplemental Disclosure of Cash Flow Information                                               |  |      |            |   |      |   |           |  
|Cash payments for interest                                                                     |  | $    | 297,873    |   |      | $ | 248,175   |  
|                                                                                               |  |      |            |   |      |   |           |  
|Non cash investing and financing activities, purchase of equipment through a capitalized lease |  |      |           |   |      | $ | 485,968   |  
|                                                                                               |  |      |            |   |      |   |           |  

See accompanying summary of accounting policies and notes to financial statements.



21



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Commonwealth Biotechnologies, Inc.

Summary of 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. As the Company matured, it re-focused its core business activities and now provides integrated contract research support in four principal areas; bio-defense; laboratory support services for on-going clinical trials;
comprehensive contract projects in the private sector; and through it FIL division, for paternity testing, forensic case-work analysis and CODIS work. In each of these areas, the Company provides sophisticated macromolecular synthetic and analytical
services, integrating individual platform technologies so as to provide a comprehensive approach to solving complex problems in life science research.

Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of
assets 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 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.

Long-Lived Assets

Long-lived assets, such as property, plant, and equipment, are evaluated for impairment when
events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable through the estimated undiscounted future cash flows from the use of those assets. When any such impairment exists, the related assets will be
written down to fair value. No impairment losses have been recorded through December 31, 2006.

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. As of December 31, 2006, the excess over the FDIC amount was approximately $1,800,000.



22



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Commonwealth Biotechnologies, Inc.

Summary of Significant Accounting Policies

(continued)



Accounts Receivable

Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by
regularly evaluating individual customer receivable and considering a customers financial condition, credit history, and current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts
receivable previously written off are recorded when received.

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 the assets are as follows:



|                                            |  |       
|------------------------------------------- |  | ------
|                                            |  | Years 
|Buildings                                   |  | 39.5  
|Laboratory and computer equipment           |  | 3  10
|Furniture and fixtures and office equipment |  | 7     

Intangible assets

Intangible assets consist of a covenant not to compete, commercial contracts, listing of draw sites, listing of providers to assist in paternity testing and other related intangibles acquired in the purchase of Fairfax Identity Labs which
are being amortized over 2 to 3 years.

Loan Costs

Loan costs are being amortized on a straight-line basis over the expected term of the mortgage.

Goodwill

Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is evaluated at least annually for impairment by comparing its fair value
with its recorded amount and is written down when appropriate. Projected net operating cash flows are compared to the carrying amount of the goodwill recorded and if the estimated net operating cash flows are less than the carrying amount, a loss is
recognized to reduce the carrying amount to fair value. The goodwill as of December 31, 2006 is a result of the acquisition by the Company of Fairfax Identity Labs during 2004. There was no impairment of goodwill at December 31, 2006.



23



---

Commonwealth Biotechnologies, Inc.

Summary of Significant Accounting Policies

(continued)



Income Taxes

Deferred taxes are provided on the asset and 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.

Income/(Loss) Per Common Share

Basic income/(loss) per share has been computed on the basis of the weighted-average
number of common shares outstanding. Common shares which can be issued upon exercise of stock options and warrants have not been included in the computation at December 31, 2006 and 2005 because their inclusion would have been antidilutive.
Weighted average shares outstanding for basic and diluted loss per common share were 3,281,360 and 3,229,243 for the years ended December 31, 2006 and 2005, respectively.

Employee Stock Plans

The Company adopted a Stock Incentive Plan on June 24, 1997. The Plan provides for
granting to employees, officers, directors, consultants and certain other non-employees of the Company 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 140,000 are reserved for incentive awards to be granted to others.

A 2000 Stock Incentive Plan was adopted by the Board of Directors and approved by the shareholders. 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-qualified options to employees, directors and consultants of the Company.

A 2002 Stock Incentive Plan was adopted by the Board of Directors and approved by the shareholders. The Plan makes up to 600,000 shares of common stock available for grants of restricted stock awards and stock options
in the form of incentive stock options and non-qualified options to employees, directors and consultants of the Company.

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 Plans 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.



24



---

Commonwealth Biotechnologies, Inc.

Summary of Significant Accounting Policies

(continued)



Stock Based Compensation Plans

Beginning January 1, 2006, the Company adopted SFAS 123R, which recognizes share-based compensation expense for stock option grants. Prior to 2006, the Company applied Accounting Principles Bulletin (APB) Opinion
25, Accounting for Stock Issued to Employees, and related Interpretations to account for employee stock compensation plans, and accordingly did not recognize compensation expense for stock options granted when the option price is greater than or
equal to the underlying stock price at the date of grant. The following table illustrates the effect of net income if the fair value based method per 123R had been applied to all outstanding grants for the year ended December 2005.



|                                                                                    |  |      |          |  
|----------------------------------------------------------------------------------- |  | ---- | -------- | -
|                                                                                    |  | 2005 |         
|Net income                                                                          |  | $    | 79,123   |  
|As reported                                                                         |  |      |          |  
|Proforma effect of recognizing stock-based compensation in accordance with FASB 123 |  |      | (670,927 | )
|                                                                                    |  |      |          |  
|Proforma net loss                                                                   |  | $    | (591,804 | )
|                                                                                    |  |      |          |  
|Basic and diluted income (loss) per common share                                    |  |      |          |  
|As reported                                                                         |  |      | 0.02     |  
|Proforma effect of recognizing stock-based compensation in accordance with FASB 123 |  |      | (0.18    | )
|                                                                                    |  |      |          |  
|Proforma                                                                            |  | $    | (0.16    | )
|                                                                                    |  |      |          |  

Under FASB No. 123, the fair value of each 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 2005: no dividend yield, expected volatility of 42%, risk-free interest rate of 4.39% and expected lives of 10 years. In 2005, the Company
vested all outstanding options of employees, excluding certain members of senior management.

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 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.



25



---

Commonwealth Biotechnologies, Inc.

Summary of Significant Accounting Policies

(continued)



Derivative Instruments and Hedging Activities

The Company uses interest rate swap agreements to manage variable interest rate exposure on the majority of its long-term debt. The Companys objective for holding these derivatives is to decrease the volatility
of future cash flows associated with interest payments on its variable rate debt. The Company does not issue derivative instruments for trading purposes. The Company accounts for its interest rate swap agreements as cash flow hedges. For derivatives
designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in accumulated other comprehensive income or loss on the consolidated balance sheets and subsequently reclassified
to interest expense when the hedged exposure affects income (i.e. as interest expense accrues on the related outstanding debt). Differences between the amounts paid and amounts received under the swap agreements are recognized in interest expense.

Changes in the ineffective portion of the fair value of the derivative are accounted for through interest expense. The notional principal value of the
Companys swap agreement outstanding as of December 31, 2006 is equal to the outstanding principal balance of the corresponding debt instrument.

New Accounting Pronouncements

In September 2006, the Securities and Exchange Commission (the SEC) released Staff Accounting
Bulletin No. 108 (SAB 108), which provides detail in the quantification and correction of financial statement misstatements. SAB 108 specifies that companies should apply a combination of the rollover and iron
curtain methodologies when making determinations of materiality. The rollover method quantifies a misstatement based on the amount of the error originating in the current year income statement. The iron curtain approach quantifies
misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, regardless of the year(s) of origination. SAB 108 instructs companies to quantify the misstatement under both
methodologies and, if either method results in the determination of a material error, the Company must adjust its financial statements to correct the error. SAB 108 also reminds preparers that a change from an accounting principle that is not
generally accepted to a principle that is generally accepted is a correction of an error. The Bulletin is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. The adoption of this Bulletin did
not have a material effect on the Companys financial condition or results of operations.

In February 2006, The FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140. This statement amends Statements No. 133 and 140 by: permitting fair value remeasurement for any hybrid financial
instrument with an embedded derivative that otherwise would require bifurcation; clarifying which interest-only strips and principal-only strips are not subject to the requirements of Statement No. 133; establishing a requirement to evaluate
interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifying that concentrations of credit risk in
the form of subordination are not embedded derivatives; and amending Statement No. 140 to eliminate the prohibition on a qualifying special-purpose entity from



26



---

Commonwealth Biotechnologies, Inc.

Summary of Significant Accounting Policies

(continued)



holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The statement is
effective for fiscal years beginning after September 15, 2006. The adoption of this standard is not anticipated to have a material impact on financial condition, results of operations or cash flows.

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement
109, which provides guidance on the measurement, recognition, and disclosure of tax positions taken or expected to be taken in a tax return. The interpretation also provides guidance on de-recognition, classification, interest and penalties,
and disclosure. FIN 48 prescribes that a tax position should only be recognized if it is more-likely-than-not that the position will be sustained upon examination by the appropriate taxing authority. A tax position that meets this threshold is
measured as the largest amount of benefit that is more likely than not (greater than 50 percent) realized upon ultimate settlement. The cumulative effect of applying FIN 48 is to be reported as an adjustment to the beginning balance of retained
earnings in the period of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of this standard is not anticipated to have a material impact on financial condition, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS 157 establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. While the Statement applies under other accounting pronouncements that require or permit fair value measurements, it does not require
any new fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
In addition, the Statement establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Lastly, SFAS No. 157 requires additional disclosures for each interim and
annual period separately for each major category of assets and liabilities. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management
does not expect the adoption of this Statement to have a material impact on the Companys financial statements.

In September 2006, the FASB issued
SFAS No. 158 Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R). This Statement improves financial reporting by requiring an employer
to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year
in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded
status of a plan as of the date of its year-end statement of financial position, with limited exceptions. This statement is effective as of the end of the fiscal year ending after December 15, 2006. The adoption of this standard did not have an
impact on the Companys financial statements.



27



---

Commonwealth Biotechnologies, Inc.

Summary of Significant Accounting Policies

(continued)



In February 2007, the FASB issued SFAS 159 The Fair Value Option for Financial Assets and Financial
Liabilitiesincluding an amendment of FASB Statement No. 115. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the
use of fair value measurement, which is consistent with the Boards long-term measurement objectives for accounting for financial instruments. This Statement is effective as of the beginning of an entitys first fiscal year that begins
after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, Fair Value
Measurements. The Company does not believe the adoption of this statement to have a material effect on the Companys financial statements.



28



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Commonwealth Biotechnologies, Inc.

Notes to Financial Statements

1. Property and Equipment

Property and equipment consisted of the following:



|                                                      |  |      |            |      |   |           
|----------------------------------------------------- |  | ---- | ---------- | ---- | - | ----------
|December 31,                                          |  | 2006 |            | 2005
|Land                                                  |  | $    | 403,919    |      | $ | 403,919   
|Building                                              |  |      | 5,206,637  |      |   | 5,107,006 
|Laboratory equipment                                  |  |      | 5,136,424  |      |   | 5,043,837 
|Furniture, fixtures and office and computer equipment |  |      | 663,123    |      |   | 618,638   
|                                                      |  |      |            |      |   |           
|                                                      |  |      | 11,410,103 |      |   | 11,173,400
|Less accumulated depreciation                         |  |      | 5,797,958  |      |   | 5,201,670 
|                                                      |  |      |            |      |   |           
|                                                      |  | $    | 5,612,145  |      | $ | 5,971,730 
|                                                      |  |      |            |      |   |           

Depreciation expense was $595,289 and $666,106 for the years ended December 31, 2006 and 2005 respectively.



29



---

Commonwealth Biotechnologies, Inc.

Notes to Financial Statements

(continued)



2. Long-Term Debt

Long-term debt consists of:



|                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |      |           |      |   |          
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|December 31,                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 2006 |           | 2005
|Effective December 5, 2005, the Company renegotiated its mortgage rate on the mortgage loan from prime +0% to prime minus 0.25%. The loan will mature in November 2009; with estimated
monthly payments of principal and interest of $32,351; collateralized by building and other assets of the Company. The Company also entered into a swap transfer agreement essentially locking the interest rate paid by the Company to
7.725%. |  | $    | 3,740,890 |      | $ | 3,825,432
|                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |     
|Note payable to Genetics & IVF Institute due in two installments of $300,000 on December 15, 2005 and December 15, 2006.                                                                                                                                                                                                                                                                                                               |  |      |          |      |   | 300,000  
|                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |     
|On January 20, 2005, the Company entered into a leasing agreement with Technology Leasing Concepts for leasing of two pieces of laboratory equipment. The monthly principal and interest
payments are $11,378. Both leases are for a forty-eight month period.                                                                                                                                                                         |  |      | 273,724   |      |   | 393,807  
|                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |      |           |      |   |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |      | 4,014,614 |      |   | 4,519,239
|Less current maturities                                                                                                                                                                                                                                                                                                                                                                                                                |  |      | 228,545   |      |   | 512,729  
|                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |      |           |      |   |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | $    | 3,786,069 |      | $ | 4,006,510
|                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |      |           |      |   |          

Scheduled maturities of long-term debt are as follows:



|     |  |   |          
|---- |  | - | ---------
|2007 |  | $ | 228,545  
|2008 |  |   | 238,979  
|2009 |  |   | 3,547,090
|     |  |   |          
|     |  | $ | 4,014,614
|     |  |   |          

The mortgage includes certain restrictive covenants, which require the Company to maintain minimum levels of the
current ratio, debt to net worth and cash flow ratios. At December 31, 2006, the Company was in violation of covenants related to cash flows, however, the Company was granted a waiver of the covenants by the bank.



30



---

Commonwealth Biotechnologies, Inc.

Notes to Financial Statements

(continued)



3. Leasing Commitments

The Company leases equipment under non-cancelable operating leases. Total expense for the years ended December 31, 2006 and 2005 was $42,394 and $28,636, respectively. Both leases are secured by a forty-eight month period and secured
by the equipment. Future minimum rental commitments under operating leases as of December 31, 2006 are as follows:



|     |  |   |       
|---- |  | - | ------
|2007 |  | $ | 43,237
|2008 |  |   | 41,735
|2009 |  |   | 12,608
|2010 |  |   | 21    
|     |  |   |       
|     |  | $ | 97,601
|     |  |   |       

4. 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 can elect to
match the contribution up to 1% of the employees contribution. Company contributions in 2006 and 2005 were $22,285 and $18,367 respectively.

5.
Major Customers

Revenues for the years ended December 31, 2006 and 2005 include revenues from five major customers in 2006 of approximately
$2,634,177 or 40% and 2005 of approximately $3,534,004 or 45% of total revenues. Trade receivables due from these customers as of December 31, 2005 and 2004 were $399,698 and $775,079, respectively.



31



---

Commonwealth Biotechnologies, Inc.

Notes to Financial Statements

(continued)



6. Income Taxes

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



|                                                      |  |      |          |   |      |   |         |  
|----------------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | -
|Year Ended December 31,                               |  | 2006 |          |   | 2005 |  
|Income taxes (benefit) computed at 34% statutory rate |  | $    | (391,800 | ) |      | $ | 26,900  |  
|State income tax benefit, net                         |  |      | (58,000  | ) |      |   | 4,000   |  
|Change in valuation allowance                         |  |      | 464,000  |   |      |   | 7,500   |  
|Other                                                 |  |      | (14,200  | ) |      |   | (38,400 | )
|                                                      |  |      |          |   |      |   |         |  
|                                                      |  | $    |         |   |      | $ |        |  
|                                                      |  |      |          |   |      |   |         |  

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



|                                                  |  |      |           |      |   |          
|------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|December 31,                                      |  | 2006 |           | 2005
|Deferred tax assets                               |  |      |           |      |   |          
|Net operating loss carryforward                   |  | $    | 3,948,000 |      | $ | 3,626,000
|Research and development credit carryforward      |  |      | 52,600    |      |   | 52,600   
|Deferred compensation                             |  |      |          |      |   |         
|Intangibles                                       |  |      | 179,000   |      |   | 102,700  
|Interest rate swap                                |  |      | 8,100     |      |   | 48,200   
|Allowance for doubtful accounts                   |  |      | 20,800    |      |   | 34,200   
|Stock based compensation                          |  |      | 38,600    |      |   |         
|Other                                             |  |      | 8,300     |      |   | 11,600   
|                                                  |  |      |           |      |   |          
|                                                  |  |      | 4,255,400 |      |   | 3,875,300
|Deferred tax liabilities                          |  |      |           |      |   |          
|Tax depreciation in excess of book depreciation   |  |      | 218,400   |      |   | 302,300  
|                                                  |  |      |           |      |   |          
|Net deferred tax asset before valuation allowance |  |      | 4,037,000 |      |   | 3,573,000
|Less valuation allowance                          |  |      | 4,037,000 |      |   | 3,573,000
|                                                  |  |      |           |      |   |          
|                                                  |  | $    |          |      | $ |         
|                                                  |  |      |           |      |   |          

Operating loss carryforwards at December 31, 2006 of approximately $10,390,000 may be used to offset future
taxable income and expire in various years through 2023. The Company also has research and development credit carryforwards at December 31, 2006 of approximately $53,000 that expire in various years through 2020.



32



---

Commonwealth Biotechnologies, Inc.

Notes to Financial Statements

(continued)



7. Stock Compensation

In addition to employee stock option awards, the Company has reserved an aggregate of 57,811 shares of common stock for issuance upon exercise, management warrants (71,053), warrants issued in connection with the 2002 private placement
(34,445) and in 2004 the private investment in a public entity (124,000).

Stock option transactions are summarized as follows:



|                                                                                                     |  |         |   |  |                                 |      |      |          |   |                                 |   |     
|---------------------------------------------------------------------------------------------------- |  | ------- | - |  | ------------------------------- | ---- | ---- | -------- | - | ------------------------------- | - | ----
|                                                                                                     |  | 2006    |   |  | Weighted Average Exercise Price |      | 2005 |          |   | Weighted Average Exercise Price
|Options and warrants outstanding, beginning of year                                                  |  | 987,419 |   |  | $                               | 5.93 |      | 889,598  |   |                                 | $ | 5.01
|Granted                                                                                              |  |        |   |  |                                 |     |      | 286,521  |   |                                 |   | 6.47
|Exercised                                                                                            |  | (16,585 | ) |  |                                 | 1.53 |      |         |   |                                 |   |    
|Expired                                                                                              |  | (39,109 | ) |  |                                 | 4.41 |      | (188,700 | ) |                                 |   | 6.45
|                                                                                                     |  |         |   |  |                                 |      |      |          |   |                                 |   |     
|Options and warrants outstanding, end of year                                                        |  | 931,725 |   |  | $                               | 6.07 |      | 987,419  |   |                                 | $ | 5.60
|                                                                                                     |  |         |   |  |                                 |      |      |          |   |                                 |   |     
|Options and warrants exercisable, end of year                                                        |  | 888,584 |   |  | $                               | 6.13 |      | 916,331  |   |                                 | $ | 6.01
|                                                                                                     |  |         |   |  |                                 |      |      |          |   |                                 |   |     
|Weighted-average fair value per option and warrants for options and warrants granted during the year |  |         |   |  |                                 |     |      |          |   |                                 | $ | 2.35
|                                                                                                     |  |         |   |  |                                 |      |      |          |   |                                 |   |     

Weighted average fair value of options expired during 2006 was $3.12, and the fair value of options outstanding at
December 31, 2006 was $2.51.

The following table summarizes information about stock options and warrants outstanding at December 31, 2006:



|                          |  |                    |  |                                                    |  |                                           |      |                    |         |                                           |   |     
|------------------------- |  | ------------------ |  | -------------------------------------------------- |  | ----------------------------------------- | ---- | ------------------ | ------- | ----------------------------------------- | - | ----
|                          |  | Outstanding        |  | Exercisable                                       
|Exercise Prices Per Share |  | Number Outstanding |  | WeightedAverage Remaining Contractual
Life (Years) |  | Weighted Average Exercise Price Per Share |      | Number Exercisable |         | Weighted Average Exercise Price Per Share
|$0.90  2.00              |  | 65,186             |  | 8                                                  |  | $                                         | 1.14 |                    | 65,186  |                                           | $ | 1.14
|$2.01  5.49              |  | 389,967            |  | 7                                                  |  |                                           | 4.23 |                    | 356,826 |                                           |   | 4.20
|$5.50  7.00              |  | 120,213            |  | 3                                                  |  |                                           | 5.98 |                    | 110,213 |                                           |   | 5.97
|$7.01  9.49              |  | 139,000            |  | 6                                                  |  |                                           | 7.56 |                    | 139,000 |                                           |   | 7.56
|$9.50  12.50             |  | 217,359            |  | 4                                                  |  |                                           | 9.95 |                    | 217,359 |                                           |   | 9.95
|                          |  |                    |  |                                                    |  |                                           |      |                    |         |                                           |   |     
|$0.90  12.50             |  | 931,725            |  |                                                    |  | $                                         | 6.07 |                    | 888,584 |                                           | $ | 6.13
|                          |  |                    |  |                                                    |  |                                           |      |                    |         |                                           |   |     



33



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Commonwealth Biotechnologies, Inc.

Notes to Financial Statements

(continued)



8. Purchase of Mimotopes

In February 2007, the Company acquired all outstanding shares of Mimotopes Pty Ltd, an Australian limited company by issuing 2,150,000 shares of its common stock to PharmAust Chemistry Ltd, an Australian limited company. The issuance of the
shares amounts to approximately 39.5% of the Companys outstanding shares. The Company incurred approximately $257,000 of acquisition costs through December 31, 2006 which are included in the assets on the accompanying balance sheets.

Mimotopes, established in 1989 and headquartered in Melbourne, Australia, is a global leader in the development of research-grade peptides for biological
and pharmaceutical applications. Mimotopes extensive experience and in depth know-how of its highly trained staff, as well as numerous patented and proprietary technologies in solid phase synthesis have made it one of the global leaders in its
field. At present, Mimotopes is focused on the fast-growing market for research grade peptides and peptide therapeutics. The entire administration and laboratory operations for Mimotopes are in Clayton, Australia, located about 40km from Melbourne.
Mimotopes has sales offices in the United States (Raleigh, NC, Minneapolis, MN, and San Diego, CA), the UK (Wirral), and Australia (Melbourne). It also has distribution channels in Europe and Japan.



34



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Corporate Information

Corporate Office

Commonwealth Biotechnologies, Inc.

601 Biotech Drive

Richmond, VA 23235

Telephone: 800-735-9224;

Telephone: 804-648-3820

Fax: 804-648-2641

E-mail: info@cbi-biotech.com

Web site: www.cbi-biotech.com

Mimotopes Pty, Ltd.

11 Duerdin St

Clayton, Victoria 3168 Australia

General Counsel

Kaufman and Canoles, PC

1051 E. Cary St

3 James Center

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

BDO Seidman, LLP

300 Arboretum Place

Suite 520

Richmond, VA 23236



35



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|                                       |  |                                         |  | 
|-------------------------------------- |  | --------------------------------------- |  | 
|Executive Officers                     |  |                                         |  | 
|                                       |  |                                        
|Richard J. Freer, Ph.D.                |  | Paul DSylva, Ph.D.                     |  | 
|Chairman of the Board; COO             |  | Chief Executive Officer                 |  | 
|                                       |  |                                        
|Robert B. Harris, Ph.D.                |  | Thomas R. Reynolds                      |  | 
|President                              |  | Executive Vice President,               |  | 
|                                       |  | Science and Technology; Secretary       |  | 
|                                       |  |                                        
|James H. Brennan, MBA                  |  |                                         |  | 
|Vice President, Financial Operations   |  |                                         |  | 
|                                       |  |                                        
|Directors of the Company               |  |                                         |  | 
|                                       |  |                                        
|Richard J. Freer, Ph.D.                |  | Paul DSylva, Ph.D.                     |  | 
|Chairman of the Board; COO             |  | Chief Executive Officer                 |  | 
|                                       |  |                                        
|Robert B. Harris, Ph.D.                |  | Thomas R. Reynolds                      |  | 
|President                              |  | Executive Vice President                |  | 
|                                       |  | Science and Technology; Secretary       |  | 
|                                       |  |                                        
|Samuel P. Sears, Jr., Esq.             |  | Daniel O. Hayden                        |  | 
|Attorney at Law                        |  | Senior VP & General Mgr,                |  | 
|                                       |  | Genzyme Corp., Pharmaceuticals Division |  | 
|                                       |  |                                        
|James Causey                           |  | Donald A. McAfee, Ph.D.                 |  | 
|VP, Consumer Industry Magazines        |  | VP New Product Development              |  | 
|Trader Publications                    |  | Cardiome Pharma Corp                    |  | 
|                                       |  |                                        
|Gerald P. Krueger, Ph.D., CPE          |  |                                         |  | 
|Director, Human Factors and Ergonomics |  |                                         |  | 
|The Wexford Group International        |  |                                         |  | 



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