10KSB: Optional form for annual and transition reports of small business issuers [Section 13 or 15(d), not S-B Item 405]

FORM 10-KSB

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___

Commission file number: 001-13467

COMMONWEALTH BIOTECHNOLOGIES, INC.
(Name of small business issuer in its charter)
VIRGINIA 54-1641133
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

601 BIOTECH DRIVE
RICHMOND, VIRGINIA 23235
(Address of principal executive offices) (Zip Code)

Issuer's telephone number: (804) 648-3820

Securities registered pursuant Securities registered pursuant to Section
to Section 12(b) of the Act: 12(g) of the Act:
NONE COMMON STOCK, WITHOUT PAR
VALUE PER SHARE

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No ___
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ].
The issuer's revenues for the year ended December 31, 1998 were
$1,604,267.
The aggregate market value of the shares of common stock, without par
value ("Common Stock"), of the registrant held by non-affiliates on March 21,
1999 was approximately $10,756,745, based upon the closing sales price of these
shares of $8.281 per share, as reported on the Nasdaq SmallCap Market on
March 21, 1999.
As of March 21, 1999 there were 1,638,464 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement for its Annual
Meeting of Shareholders to be held on April 15, 1999 are incorporated by
reference into Part III of this Form 10-KSB.

Portions of the registrant's 1998 Annual Report to Shareholders are
incorporated by reference into Part II of this Form 10-KSB.

Transitional Small Business Disclosure Format (check one:) Yes ___ No X.



PART I
ITEM 1. DESCRIPTION OF BUSINESS

OVERVIEW

Commonwealth Biotechnologies, Inc (the "Company") was founded in 1992 to
provide sophisticated research and development support services on a contract
basis to the biotechnology industry. The Company's customers consist of private
companies, academic institutions and government agencies, all of which use
biological processes to develop products for health care, agricultural and other
purposes. The Company's revenues are derived principally from providing
macromolecular synthetic and analytical services to researchers in the
biotechnology industry or to researchers who are engaged in life sciences
research in government or academic labs throughout the world.

The Company provides these services to customers on a contract basis and
derives its revenues from these services, and not only from sales of commercial
products resulting from the research. This arrangement distinguishes the Company
from many other biotechnology companies in that the Company's revenues are not
derived from successful commercialization of a new biotechnology product. The
Company has developed a strong reputation as a leading provider of biotechnology
research and development analytical services. The Company is focusing its
expansion efforts on the maintenance and expansion of long term relationships
with customers in the biotechnology industry and in establishing new customer
relationships. The Company has implemented new technologies to provide new
services to its customers, and is continuing to develop new products and
services to meet the changing needs of its customers.

In general terms, the Company serves two types of customers; those who
require a discrete set of analyses ("short-term projects"), and those who
contract with the Company on an extended basis for performance of a variety of
integrated analytical services ("long-term projects"). More often than not,
short-term and long-term project customers send the Company repeat business.

The Company also derives a portion of its revenues from research grants
funded by various Federal agencies. These research grants support the bulk of
the Company's research efforts on its own in-house proprietary technologies. The
Company is developing its own technologies in the general areas of
anti-coagulation, genomic sequence analysis, and development of diagnostic test
kits.

In January, 1999, the Company began sales of a new reagent (AccuTracTM)
which facilitates the process of automated DNA sequence analysis. In this
respect, the Company hopes to broaden its revenue base by direct sales of this
reagent to its clients. AccuTrac was developed within the Company and stems
directly from the Company's in-house R&D programs.

GROWTH STRATEGY

The Company's strategy for growth includes:

EXPANSION OF ITS ANALYTICAL INSTRUMENTATION CAPACITY. The Company
believes there is significant demand for additional services of the type
the Company currently offers. The Company's capacity to service this
demand has been constrained by the limitations of its facilities and
need to make significant capital expenditures on equipment. Having
secured a significantly larger laboratory facility and additional
research equipment, the Company has the capacity to generate
substantially greater revenues from its core services, to offer new
technologies, and to improve profit margins through more efficient
operations.

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EXPANSION OF ITS MARKETING CAPABILITIES. The Company has expanded its
customer base primarily through placement of print-ads in several
periodicals and industry sourcebooks, by attendance at a limited number
of trade shows, seminars and meetings, through its own World Wide Web
Home Page, and by word- of-mouth recommendations. The Company has
increased its print-ad marketing and will continue to utilize these
other strategies to attract customers. However, the Company will also
expand its sales and marketing capabilities in these areas:

The Company hired an Account Executive for the Eastern Region who
worked throughout 1998 to identify new clients and to bring
additional work to the Company. In March, 1999, the Company hired
an Account Executive for the Western Region, who will primarily
serve clients in California. This individual will be primarily
targeting biotechnology companies and government agencies.

The Company has engaged the services of Ballas and Partners,
Richmond, VA, a media relations firm, to assist the Company in
design and implementation of new marketing strategies, to enhance
the Company's visibility, and to aide the Company in identifying
and reaching new customers.

REGULATORY COMPLIANCE. The Company has been registered under the
Clinical Laboratories Improvement Act (CLIA), with pending accreditation
by the Virginia Department of Health. Registration under the CLIA
guidelines enables the Company to accept human samples for analysis and
to perform analysis of human clinical samples for the presence of known
genetic markers.

The Company was accredited in 1998 under the guidelines of the National
Forensic Science Technology Center, (NFSTC), to perform DNA identity
testing for submission of data into the Combined DNA Index System
(CODIS) data base, and is one of only eight commercial facilities
nationwide accredited by the NFSTC to perform criminal (felony) DNA
database testing for submission into the FBI CODIS database.

The Company expects accreditation soon from the American Association of
Blood Banks (AABB) and the Company has participated in a validation
study through the College of American Pathologists (CAP). The Company
operates under GLP (Good Laboratory Practices) and has been accredited
by the United States Department of Agriculture to receive bovine DNA
samples from Europe to perform genetic, lineage, and identity analysis.
The Company participated in an international study to validate bovine
DNA identity testing in conjunction with a study group located in
Denmark, and in addition, is establishing DNA identity testing in
horses.

EXPANSION INTO NEW SERVICE TECHNOLOGIES. The Company continues to
critically examine new technologies with a view towards expanding its
customer base and sources of revenue. Already, the Company has made
inroads in establishing new service technologies and in offering these
services to its customers. In 1999, the Company will increase its
capacity or improve its analytical service offerings in the following
areas:

DNA SEQUENCE ANALYSIS. The Company has positioned itself to be at
the forefront in the development and application of new genome
based technologies. We have expanded our contract DNA sequencing
services and offer sophisticated sequence data analysis. We will
continue to expand these services in 1999.

GENOME SEQUENCING. We have developed comprehensive sequencing
capabilities of human, animal, plant, and microbial pathogen
genomes.

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GENETIC ANALYSIS. The Company has established a Genetic Testing
Group and is now positioned to begin analysis of human samples
for the presence of genetic markers of known human pathologies.
We have already begun analysis for a long-term contract client,
for example, of human samples for the presence of the "p53 gene,"
a marker for cancer.

CBI is also ready to begin analysis of samples for the presence
of many other marker genes. In 1999, we will focus new marketing
efforts on our capabilities in this area, and are striving to
make Genetic Analysis a larger revenue producing technology for
the Company.

IDENTITY TESTING AND PATERNITY TESTING BY GENETIC ANALYSIS. In
our new facility, the Company has established a DNA Reference
Laboratory containing all the necessary work areas required to
provide genetic identity and paternity testing. The Company is
thus ready to begin offering paternity testing and DNA
fingerprinting to the general public and to various state and
federal agencies, and already has submitted bids for performing
DNA fingerprint analysis for the Departments of Criminal Justice
of different States.

In February, 1999, the Company hired a new Director of Human
Genetics and Genetic Analysis. This scientist has many years
experience in growing genetic analysis and paternity testing as a
revenue source for his former employer, and the Company expects
that his presence will bring immediate visibility to the Company
in these important areas.

MOLECULAR BIOLOGY. While not truly a new technology at the
Company, we have made a concerted effort to identify clients who
contract with the Company to pursue comprehensive molecular
biology projects. In the last quarter of 1998, more than 15
individual molecular biology projects were initiated at the
Company and throughout 1999, we intend to expand these services
even more by offering large scale bacterial fermentation to our
clients.

CENTRALIZED COMPUTER FACILITIES. The Company has acquired a more
centralized server for databasing and analysis, and has
established a sophisticated company-wide intranet in our new
facility. New software packages have been installed to upgrade
our accounting capabilities, and to permit more efficient data
handling, storage, backup, and analysis.

EXPANDED DNA SYNTHESIS SERVICES. The Company provides "protein
nucleic acids" (PNAs) to numerous clients under a broad licensing
agreement with Perseptive Biosystems, Inc., Framingham, MA. In
addition, demand for DNA/RNA synthesis continues to increase, and
in particular, the Company is one of the few offering commercial
RNA synthesis.

EXPANDED CELL CULTURE AND BACTERIAL CULTURE SERVICES. The Company
has established a state-of-the-art cell culture facility in its
new facility and offers large scale cell culture services to its
clients. In 1999, the Company will establish large scale
bacterial fermentation capabilities for overexpression of target
proteins.

EXPANDED MASS SPECTRAL ANALYSIS SERVICES. The Company has
installed and now operates a MALDI-TOF mass spectrometer and so
can offer mass spectral analysis of virtually all macromolecules,
including proteins, peptides, DNA, RNA, and PNAs. MALDI-TOF
analysis complements electrospray (ES) mass spec and HPLC-ES-mass
spec analyses also offered by the Company.

ANALYTICAL SUPPORT SERVICES

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In order to analyze and experiment with cell components and
macromolecules, researchers need to analyze, sequence, purify, synthesize, and
characterize those components. Thus, the Company's business is dependent upon
the use of sophisticated, analytical equipment. In light of increasing cost
pressures, many companies, universities, and research institutions seek to avoid
incurring the costs to equip and staff laboratories which can perform these
analytical services. Instead, they choose to contract with the Company for these
services.

The Company is a fee-for-service contractor and typically takes no
ownership position in the intellectual property rights resulting from services
it performs under contract for either short-term or long-term contract
customers. A key to the growth of the Company has been to integrate a number of
foundation technologies and provide a broad range of capabilities to customers
who otherwise must go to several different sources for their needs. Since
commencing operations, the Company has become noted for providing a wide range
of services relating to design, synthesis, purification, and analysis of
peptides, proteins, and oligonucleotides.

Providing a wide range of services is an important element of the
Company's competitive strategy. Virtually all of its closest competitors provide
either DNA level technologies or protein/peptide level technologies. There are
few major competitors which offer integrated DNA/RNA and protein/peptide
technologies and none that offer these technologies combined with sophisticated
biophysical analytical techniques, such as calorimetry, spectroscopy, and mass
spectral analysis. Thus, the Company can provide complete research programs to
its customers. "One stop biotechnology shopping" has proved attractive in
securing long-term contracts with customers ranging from major pharmaceutical
industry researchers to major government sponsors of research, such as the
National Institutes of Health. The Company believes it has earned a reputation
as a leading provider of high quality DNA sequencing - a reputation which has
enabled it to obtain key contracts with universities, major pharmaceutical, and
biotechnology companies throughout the world.

The services offered by the Company are fully detailed in its
promotional brochures, and on its World Wide Web page. A new, one page
promotional brochure has been compiled and is sent to all potential customers.
The Company has instituted "fax-on-demand" for customers who seek technology
descriptions and pricing information.

CUSTOMERS

Our customers are private companies, academic institutions and
government agencies throughout the world. Virtually all our clients are engaged
in life sciences research, and use our technologies to provide data and results
which support their individual research programs. As of December, 1998, the
Company's client lists exceeded 700 customers world-wide.

SHORT-TERM RESEARCH PROJECTS.

On average, in 1998, the Company added 24 new customers per month. Of
its domestic customers, 53.3 % are private companies, and 46.7% are university
or governmental labs. The Company added 31 new foreign clients in 1998, from
such places as Argentina, Australia, Canada, China, Columbia, Denmark, Germany,
Greece, Hong Kong, India, Israel, Italy, Japan, Korea, Mexico, Malaysia, Norway,
Spain, Sweden, Switzerland, the United Kingdom, and Uruguay.

The Company's customers come to us from many sources. The Company
advertises in the professional journals, exhibits at trade shows, and has its
own Web page from which a potential customers may directly download order forms
and place an order, if desired. The Company is also cross listed on several
biotechnology, biochemistry, and molecular biology search services, so that
potential customers may find us using simple key word search terms. Of course,
favorable word-of-mouth advertising is key to our


5

success, and has brought us many new investigators within a single research
based institution. All inquiries to the Company receive immediate and personal
attention.

LONG-TERM RESEARCH PROJECTS

CBI is committed to identifying long-term contractual clients. During
1998, one of our major long-term contractual clients brought much of their work
back "in-house" due to a change in their corporate philosophy. Loss of this
revenue stream affected the bottom line of CBI throughout 1998. However, CBI
signed 9 new long-term contracts or agreements in the last quarter of 1998 and
as of December 1998, the Company had many long-term contract proposals pending
with many different potential customers.

OPERATIONS

Requests for quotes from potential customers are received via phone,
e-mail, from the Company's World Wide Web page, or by hard copy directed to the
Company's business coordinator or laboratory manager. All inquiries are answered
by direct mail of the Company brochure and price lists, with follow up phone
calls, where appropriate. Price quotes for small projects or routine analytical
procedures are generated by scientists who possess the expertise necessary to
respond appropriately. Quotes for more complex projects are developed
collaboratively by the Company personnel having the requisite expertise. Most
quotations are sent back to the inquiring scientist within one working day.

Incoming orders are logged onto the Company's project management system,
assigned a work order number, and delivered to the appropriate scientist
designated to oversee and coordinate all aspects of the particular project. The
work to be done is scheduled on the appropriate instruments, and all necessary
reagents or other supplies needed to complete the project are ordered as needed.
Every customer is required to sign a service agreement prior to the Company
initiating any requested work.

As a long-term project is completed, progress reports are usually sent
to the customer detailing the results found to date, and the conclusions to be
drawn. If the project is relatively straight-forward, such as an amino acid
analysis, spectroscopy, or DNA sequence analysis, the results are faxed or
e-mailed to the customer prior to sending the customer the hard copy of the
results. If the project involves a synthesis of a peptide or oligonucleotide,
for example, the product is sent to the customer by express mail service. Every
product is accompanied by a data sheet, which details the physicochemical
properties of the compound, including the results of all analytical tests
performed which support the claimed purity and composition. The customer is
invoiced upon completion of the work, or at particular points in the work
program. The customer pays for the analytical services provided in accordance
with the Company's standard fee structure and typically retains all rights to
any intellectual property resulting from the analysis.

All data generated at the Company are archived for the customer. Where
appropriate, the data are archived on selected storage media, such as back up
tapes or computer disks. A file is maintained for every customer, and these
files are also archived. The Company employs appropriate security measures to
ensure the confidentiality of customer information.

The Company operates under strict Standard Operating Protocols ("SOPs")
which detail the particular technologies used to complete the work in progress.
SOPs are made available to the customer upon request. In addition, the Company's
technical team follows standard operating procedures which help to produce
consistent, high quality results.

PROPRIETARY RESEARCH AND DEVELOPMENT.

The Company generally does not retain intellectual property rights on
work done for its customers. In contrast, in its proprietary research and
development programs, the Company is developing its own


6

technologies, the intellectual property rights to which the Company will own.
Usually, the goal of these research efforts is to bring a particular technology
to a patentable stage, and then license the technology to another company. If
the technology is commercialized, the Company may realize licensing and/or
royalty fees. However, in some instances, the Company is both the manufacturer
and distributor of its own products.

In 1998, the Company completed a Phase I Small Business Innovative
Research Award ("SBIR") from the United States Department of Agriculture, (USDA)
in the amount of $55,000, and was awarded a new Phase I SBIR grant from the
National Institutes of Health totaling $100,000, and a Phase II SBIR award from
the USDA ($ 200,000). The Company is in the second and final year of its Phase
II Small Business Technology Transfer Award ($500,000) from the National
Institutes of Health and currently has several other grant applications pending
with various Federal and State agencies. Revenues from federally funded
contracts are recognized on a cost reimbursement basis.

INTELLECTUAL PROPERTY

HEPARREST(TM)

US Patent #5,877,153, was issued March 2, 1999 to the Company and a
Continuation in Part to the same patent has been filed and is pending. Both
patents relate to an anti-coagulation technology the Company is developing. A
PCT patent based on the US patent will issue shortly, and national patents on
this technology have also been filed and are pending in Europe, Japan, and
Canada.

The Company's anti-coagulation technology is an experimental new
compound that counteracts the effects of heparin, which is used to prevent blood
clotting during open heart surgery and other surgical procedures involving
significant intervention into the circulatory system. The only drug currently
available to counteract heparin exhibits toxicity and other adverse side
effects, so its use is primarily restricted to open heart surgery and
emergencies. However, the inability to counteract the effects of heparin can
result in bleeding complications. Initial tests indicate that compounds the
Company has developed can neutralize heparin's anticoagulant activity without
displaying the toxicity associated with the existing drug.

The compound has been trademarked as HepArrest(TM). The Company
commissioned an independent consulting firm, the Mattson Jack Group, Mendon, NY,
to assess the market potential of HepArrest, if our compound were to receive
approval from the Food and Drug Administration as a human pharmaceutical.
Mattson Jack determined that there would be a substantial market for a safe and
effective drug with a proven clinical profile of HepArrest.

The Company's strategy will be to license this technology to a
creditable corporate partner(s) who are well positioned to take HepArrest
through all the laboratory and clinical trials necessary to commercialize the
compound. In exchange, the Company expects a licencing fee and subsequent
royalties against sales. To this end, the Company has contracted with the
Mattson Jack Group to help identify and negotiate with likely strategic
corporate partners. In the meantime, the Company will continue to compile
preclinical data on the efficacy and safety of HepArrest.

To yield a commercial product, HepArrest will require extensive
additional testing and government approval. As a result, there can be no
assurance that commercial products will result from these technologies, all of
which should be considered highly speculative.

A REAGENT TO AID AUTOMATED DNA SEQUENCE ANALYSIS, ACCUTRAC(TM)

The Company developed a novel laboratory reagent that markedly improves
the accuracy and reliability of automated DNA sequence analysis protocols. Such
protocols are in-use world-wide, and the Company believes that its reagent will
be adopted for use by many of the facilities that currently perform


7

DNA sequence analysis. The Company filed for US patent protection for its
reagent, termed AccuTrac (TM). The Company announced the implementation of
AccuTrac at the Institute for Genome Research meeting in January 1999, and
presented additional products based on AccuTrac at the Human Genome meeting,
March 1999. The Company is aggressively marketing AccuTrac over the internet and
with print ads in the professional journals. Initially, for a limited time,
AccuTrac was given to qualified investigators at no cost, but the Company has
already begun selling this reagent.

OTHER TECHNOLOGIES

The Company is actively pursuing development of an immunoassay for
equine infections anemia. All equids are at risk for equine infectious anemia
(EIA). All animals must be tested for the virus, and any animal found positive
must be destroyed. Current tests for the presence of the virus are subject to
false positive (and false negative) results. False positive results are
unacceptable because valuable animals (for instance, race horses), may be
put-down. False negative results are potentially devastating because infected
animals could then move freely amongst equine populations. The work is funded by
SBIR awards from the USDA totaling $250,000. The Company has developed a novel
test which should effectively eliminate false positive and false negative
reactions, and at the same time, afford a greater level of testing sensitivity.
The Company is pursuing field trials of this test, and hopes to gain USDA
approval for its use. The Company hopes to enter into negotiations with a
corporate partner interested in commercializing this diagnostic assay.

The Company is developing a rapid assay for detecting the presence of
the botulism bacteria in foodstuffs. Under a Phase I SBIR award from the
National Institutes of Health ($100,000), the Company is developing novel enzyme
substrates to detect the presence of botulinum toxins.

The Company anticipates that its ability to secure and protect patents
and other intellectual property rights will become increasingly important to the
business of the Company in the event its proprietary research programs yield
technologies which can be commercialized. There can be no assurance that the
Company will be successful in securing and protecting intellectual property
rights, or that its activities will not infringe on the intellectual property
rights of others.

The Company takes appropriate steps to protect its intellectual property
rights and those of its customers. The Company's practice is to require its
employees and consultants to execute non-disclosure and proprietary rights
agreements upon commencement of employment or consulting arrangements with the
Company. These agreements acknowledge the Company's exclusive ownership of all
intellectual property developed by the individual during the course of his work
with the Company and require that all proprietary information disclosed to the
individual by the Company or its customers remain confidential.

MARKETING

The Company has expanded its customer base primarily through
word-of-mouth referrals and attendance at a limited number of trade shows,
seminars and meetings. Because of its ability to offer a wide range of
biotechnology research services, the Company enjoys a favorable reputation among
its customers, and many new customers come to the Company by word-of-mouth
recommendation. The Company has constructed its own World Wide Web Home Page
(www.cbi-biotech.com) and is listed with several biotechnical and biomedical
oriented sites on the World Wide Web.

HUMAN RESOURCES

The Company currently has 34 full time and 1 part time employees,
including 10 employees in administration, marketing, sales, and customer
relations, 1 computer network specialist, 11 employees in research and
development, and 24 employees in laboratory operations; some employees in
research and development also participate in laboratory operations. Nine of the
Company's employees hold doctorate


8

degrees, and 7 have Master's degrees. None of the Company's employees are
represented by a labor union. The Company has experienced no work stoppages and
believes its relations with its employees to be good.

COMPETITION

The Company faces several types of competition. The Company believes
there are between 12 and 15 companies concentrating on peptide synthesis and
about 20 other companies offering DNA related services in the United States.
Very few companies offer both DNA/RNA and protein/peptide analysis. Other
competition comes from divisions of larger research oriented companies or
university core facilities. The principal competitive factors are pricing,
expertise, and range of services offered, and that it competes effectively on
all of these factors.

GOVERNMENT REGULATION

The Company does not require government regulatory approvals to provide
its current services. Numerous federal, state and local agencies, such as
environmental, working condition and other similar regulators, have jurisdiction
to take action that could have a material adverse effect upon the Company's
ability to do business. The Company believes that it is in general compliance
with existing federal, state and local laws and regulations and does not
anticipate that continuing compliance will have any material effect upon the
capital expenditures, earnings or competitive position of the Company.

The Company anticipates that its pursuit of its growth strategy will
subject the Company to a heightened level of government regulation of its
operations. For example, in pursuing opportunities to provide analytical
services to customers seeking the approval of the United States Food and Drug
Administration (the "FDA") of products, the Company's operations will become
subject to compliance with standards established by the FDA, including
inspections by the FDA and other federal, state and local agencies regarding
work performed by the Company on specific FDA submission projects. If
significant violations are discovered during an inspection, the Company may be
restricted from undertaking additional work on projects until the violations are
remedied. The Company has a license from the Nuclear Regulatory Commission
("NRC") for the operation of its laboratory facility.

The commercialization of the Company's proprietary technologies would
also be subject to extensive government regulation and approval requirements,
including the need for pre-clinical laboratory and animal tests and human
clinical trials. The Company does not have, and does not anticipate developing,
the facilities and expertise necessary to obtain FDA approval for or to
manufacture any pharmaceutical products that may result from its technologies.
Instead, the Company would license these technologies to third parties having
the necessary facilities and expertise, which would assume responsibility for
and control of regulatory matters.


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ITEM 2. DESCRIPTION OF PROPERTY

FACILITIES

Construction of our new facility was completed in November, 1998 at an
overall cost of about $ 5.1 million dollars financed primarily through the
Virginia Small Business Financing Authority (the "VSBFA") which issued $
4,000,000 in tax exempt Industrial Revenue Bonds ("IRBs") for the benefit of the
Company. The Company's new facility encompasses 32,000 square feet of
state-of-the-art laboratory and administrative space. The building is designed
to facilitate movement of samples throughout each laboratory, and where
necessary, to maintain and ensure custody of samples. The building houses
expansion space which was purposefully left undeveloped to accommodate new
technologies as they come on board.

The Company took possession of its new facility in late November, 1998,
and all labs were fully operational in the new facility by mid December, 1998.

ITEM 3. LEGAL PROCEEDINGS

The Company is not presently involved in any litigation nor, to the
knowledge of the Company's management, is any litigation threatened against the
Company.

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

No matter was submitted to a vote of security holders during the fourth
quarter of 1998.



PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION

The information set forth on page 10 of the Company's 1999 Annual Report
to Shareholders under the caption "Market for Common Equity" is incorporated
herein by reference.

USE OF PROCEEDS OF IPO

From October 1, 1998 through December 31, 1998, the Company spent
approximately $1,605,187 of the net proceeds of the initial public offering as
follows: (1) $1,184,136 on facility expenditures, (2) $227,951 on capital
expenditures, (3) $163,639 on marketing, (4) $22,998 on sales and, (5) $6,463 on
production operating expenditures. Through 1998, the Company spent approximately
$3,429,330 of the net proceeds of the initial public offering. The remaining
proceeds are invested in an interest-bearing account at a commercial bank.


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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

The information set forth on pages 10 through 18 of the Company's 1998
Annual Report to Shareholders under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" is incorporated
herein by reference.


ITEM 7. FINANCIAL STATEMENTS

The Company's financial statements and the related notes thereto,
together with the report of McGladrey & Pullen, LLP, set forth on pages 19
through 29 of the Company's 1998 Annual Report to Shareholders are incorporated
herein by reference.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Goodman & Company, L.L.P. ("Goodman") served as the Company's
independent public accountants for the fiscal years ended December 31, 1995,
December 31, 1996 and December 31, 1997. For various business reasons, the Audit
Committee recommended the dismissal of Goodman to the Company's Board of
Directors, and on February 23, 1998, the Board officially terminated its
business relationship with Goodman. Goodman's reports on the Company's financial
statements for each of the last two fiscal years did not contain an adverse
opinion or disclaimer of opinion. Similarly, Goodman did not modify either such
report as to uncertainty, audit scope or accounting principles. There were no
disagreements between the Company and Goodman regarding any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.

Upon the recommendation of the Audit Committee of the Company's Board of
Directors, the Board of Directors of the Company appointed on February 23, 1998,
subject to the approval of the Company's shareholders, the firm McGladrey &
Pullen, LLP as independent public accountants to audit the Company's
consolidated financial statements for the fiscal year ended December 31,1998. If
the appointment of McGladrey & Pullen, LLP is not approved by the shareholders,
the matter will be referred to the Audit Committee for further review.

11



PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

DIRECTORS

The information relating to the directors of the Company set forth in
the Company's definitive proxy statement relating to the Company's Annual
Meeting of Shareholders to be held on April 15, 1998 (the "Proxy Statement")
under the caption "Proposal 1: Election of Directors" is incorporated herein by
reference.

EXECUTIVE OFFICERS

The information relating to the executive officers of the Company set
forth in the Proxy Statement under the caption "Executive Compensation -
Executive Officers of the Company" is incorporated herein by reference.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

The information relating to compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, is set forth in the Proxy Statement
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" is
incorporated herein by reference.


ITEM 10. EXECUTIVE COMPENSATION.

The information set forth in the Proxy Statement under the caption
"Executive Compensation" is incorporated herein by reference.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information set forth in the Proxy Statement under the caption
"Voting Securities and Principal Holders Thereof" is incorporated herein by
reference.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information set forth in the Proxy Statement under the caption
"Certain Relationships and Related Transactions" is incorporated herein by
reference.


12


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(A) EXHIBITS

EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Underwriter's Warrant, as amended (1)
4.3 Form of Management Warrant, as amended (1)
10.1 Placement Agreement by and between the Company and Anderson &
Strudwick, Incorporated ("A&S") (1)
10.2 Warrant Agreement between the Company and A&S (1)
10.3 Warrant Agreement between the Company and Richard J. Freer,
as amended (1)
10.4 Warrant Agreement between the Company and Thomas R. Reynolds,
as amended (1)
10.5 Warrant Agreement between the Company and Robert B. Harris,
as amended (1)
10.6 Employment Agreement for Richard J. Freer (1)
10.7 Employment Agreement for Thomas R. Reynolds (1)
10.8 Employment Agreement for Robert B. Harris (1)
10.9 Executive Severance Agreement for Richard J. Freer (1)
10.10 Executive Severance Agreement for Thomas R. Reynolds (1)
10.11 Executive Severance Agreement for Robert B. Harris (1)
10.12 1997 Stock Incentive Plan, as amended (1)
10.13 Loan Agreement between the Company and the Virginia Small
Business Financing Authority (2)
13.1 Annual Report to Shareholders for the Fiscal Year Ended
December 31, 1998 incorporated in Form 10-KSB (3)
16.1 Letter on change in certifying accountant (4)
23.1 Letter of Consent from McGladrey & Pullen LLP (3)
23.2 Letter of Consent from Goodman & Company (3)
27.1 Financial Data Schedule (3)
- -----------------------
(1) Incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-31731.
(2) Incorporated by reference to the Company's Current Report on Form 8-K,
dated April 6, 1998, File No. 001-13467.
(3) Filed herewith.
(4) Incorporated by reference to Amendment No. 1 to the Company's Current
Report on Form 8-K, filed on March 12, 1998.

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EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS

The following is a list of all executive compensation plans and
arrangements filed as exhibits to this annual report on Form 10-KSB or
incorporated herein by reference:

1. Warrant Agreement between the Company and Richard J. Freer, as amended (1)
2. Warrant Agreement between the Company and Thomas R. Reynolds, as amended (1)
3. Warrant Agreement between the Company and Robert B. Harris, as amended (1)
4. Employment Agreement between the Company and Richard J. Freer (1)
5. Employment Agreement between the Company and Thomas R. Reynolds (1)
6. Employment Agreement between the Company and Robert B. Harris (1)
7. Executive Severance Agreement between the Company and Richard J. Freer (1)
8. Executive Severance Agreement between the Company and Thomas R. Reynolds (1)
9. Executive Severance Agreement between the Company and Robert B. Harris (1)
10. 1997 Stock Incentive Plan (1)
- ------------------------
(1) Incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-31731.


(B) REPORTS ON FORM 8-K

During the three months ended December 31, 1998, the Company filed the
following report on Form 8-K:

1. Form 8-K, dated November 17, 1998, relating to the receipt of a
report relating to HepArrest, the Company's lead human
pharmaceutical.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

COMMONWEALTH BIOTECHNOLOGIES, INC.



Date: March 31, 1999 By: /s/ Robert B. Harris, Ph.D.
---------------------------
Robert B. Harris, Ph.D
President


In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.

NAME TITLE(S) DATE
---- ------- ----

/s/ Richard J. Freer, Ph.D. Chairman and Director March 31, 1999
- -------------------------- (Principal Executive Officer)
Richard J. Freer, Ph.D.



/s/ Robert B. Harris, Ph.D. President and Director March 31, 1999
- ---------------------------
Robert B. Harris, Ph.D.



/s/ Thomas R. Reynolds, Senior Vice President, March 31, 1999
- ------------------------ Secretary and Director
Thomas R. Reynolds,



s/ James H. Brennan, Controller (Principal March 31, 1999
- --------------------- Financial and Accounting
James H. Brennan Officer)




/s/ Peter C. Einselen Director March 31, 1999
- ---------------------
Peter C. Einselen


/s/ George F. Allen Director March 31, 1999
- -------------------
George F. Allen



15