Table of Contents

Exhibit 13.1

Commonwealth Biotechnologies, Inc.

2008

ANNUAL REPORT

Table of Contents

Commonwealth Biotechnologies, Inc.

Table of Contents

Table of Contents

Commonwealth Biotechnologies, Inc.

Dear Shareholders,

For CBI, 2008 has been a year of both opportunities and retrenchment. 2009 looks to be a year of challenges and, hopefully, with those challenges met, a year in which CBI emerges stronger. However, make no mistake, the challenges are and will continue to be significant. Cash is tight, capital markets are even tighter, and not only does CBI feel that pressure, so do our clients. As in most industries, external services are the first expenditure scrutinized in tough economic times. So, while there are positive signs in the industry such as a shift towards outsourcing of high tech services, CBI’s future is by no means certain.

That being said, there have been some significant highlights for CBI in 2008.

Most notable is the signing of a joint venture agreement with a Beijing based CRO, Venturepharm Laboratories, Ltd. in March. This relationship was put in place to benefit both companies by merging our western presence with an eastern, high throughput, low cost center. The ultimate benefit to CBI would be to more effectively compete in the global market on the basis of scope, scale, and price. While we had hoped this joint venture would be a revenue source in the latter part of 2008 that, unfortunately, did not occur. The principal reason is construction and fit out of the China based facilities fell significantly behind schedule.

For CBI Services, it has been a year of flat revenues but one where we continue to diversify our revenue stream between government and commercial revenue sources. Most importantly, we are growing a very substantial revenue stream in clinical trial support. That, in addition to more contract work in support of some cGMP projects should provide some longer term projects with better margins going forward.

After nearly 8 years of intense and highly classified work on the FBI’s Amerithrax investigation, CBI has recently been acknowledged as a major contributor to solving that horrendous crime where 5 people died as a result of anthrax being sent through the US mail. While not solely a 2008 project, the technologies developed by CBI scientists are just now being disclosed for peer review and are being lauded as groundbreaking in the area of microbial forensics. We are very pleased that what we knew to be the case – that is that the scientists here at CBI are un-parallel in their insights and capabilities – is now being acknowledged publicly.

Fairfax Identity Labs (FIL) has had a solid year showing a modest but steady growth. More importantly, it has been growing its higher margin forensics business by adding several new law enforcement clients, including multi-year contracts from the New York State Police, Los Angeles County Police Department, and the City of Albuquerque, to name a few. In addition, FIL has won a multi-year contract from the State of Tennessee for their DNA sample analysis in support of the FBI’s national registry of convicted offenders database (CODIS). Private paternity and immigration services were strong in 2008 as well.

FIL has also begun offering clinical genetics services and has several new clients in this area as well.

Mimotopes Pty Ltd, our Australian subsidiary, has also had some notable successes in 2008. Principally, there has been a significant resurgence of interest in their proprietary SynPhase technology for small molecule library production. There has also been an up tick in contracts for peptide libraries for both pharmaceuticals and vaccines. On the other hand, revenue from custom peptides has declined but that is being somewhat offset by a very strong relationship with a low cost, Shanghai-based peptide supplier, GL Biochem.

1

Table of Contents

Commonwealth Biotechnologies, Inc.

Exelgen Ltd, our UK based small molecule drug discovery facility, unfortunately, fell victim to a declining revenue base for its western based chemistry services. With a cost base too high for the current market and an unmanageable equipment lease debt, we were forced to close this facility in September of 2008. A wonderful facility and an outstanding staff, unfortunately, lost.

As noted, 2009 will have challenges and the management and staff will work tirelessly to overcome those challenges. Although the global economic situation has few positives, there may be some benefit to companies such as ours. More specifically, and as discussed elsewhere in this report, the indications are that pharma and biotech will be outsourcing more in an effort to control internal expenses and leverage their drug discovery resources. This should mean more opportunities for CBI. We intend to identify and seize those opportunities.

Finally, as we do every year, we thank you our shareholders for your support, patience, and, yes, for your criticisms. We value them all but are especially appreciative this year given the circumstances of 2008.

Sincerely,

Richard J. Freer, PhD.

Chief Operating Officer

2

Table of Contents

Commonwealth Biotechnologies, Inc.

Stockholder Matters

The Company’s common stock trades on the NASDAQ Capital Market (“NASDAQ”) under the symbol “CBTE”. The following table sets forth the range of high and low sales price per share of common stock for the years ended December 31, 2008 and December 31, 2007, respectively. These market quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission and may not necessarily represent actual transactions.

On March 27, 2009, the last reported sales price for a share of the Company’s Common Stock on NASDAQ was $0.27. As of March 27, 2009, there were 37 holders of record of the Company’s Common stock and 1,053 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.

3

Table of Contents

Commonwealth Biotechnologies, Inc.

Selected Financial Data

Set forth below is selected financial data with respect to the years ended December 31, 2008, December 31, 2007, and December 31, 2006, which have 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.”

4

Table of Contents

Commonwealth Biotechnologies, Inc.

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 within.

Overview

Commonwealth Biotechnologies, Inc. (the “Company” or “CBI”) is a specialized life sciences outsourcing business that offers cutting-edge expertise and a complete array of discovery chemistry and biology products and services through its subsidiary companies: CBI Services, Fairfax Identity Labs (“FIL”) and Mimotopes Pty Limited (“Mimotopes”). In March 2008, the company entered into a Joint Venture with Beijing-based, Venturepharm Laboratories, Ltd. in order to offer high throughput, low cost drug discovery services through new facilities in China. As of September 30, 2008 Exelgen Limited (“Exelgen”) (formerly Tripos Discovery Research Ltd) was closed and is recorded on the annual statements as a discontinued operation.

Business Units

Revenues from all business units 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. This arrangement distinguishes CBI from many other biotechnology companies in that revenues are derived from services rather than from the successful commercialization of a new biotechnology product. CBI believes that Mimotopes, CBI Services and FIL have all developed a strong reputation as leading providers in their respective markets. Finally, in 2008 CBI entered into a Joint Venture with Beijing based Venturepharm Laboratories, Inc. in anticipation of being able to provide scale and scope to its current offerings. The areas of expertise and value propositions are outlined below:

At its Richmond location, CBI Services’ core competencies are in the area of genomics and proteomics, principally serving the early stage research and development needs of its clients. These support true drug discovery at the most fundamental stage but also support many of the pre-clinical needs of our clients and, most recently, several clinical trials are being supported. We provide these services under the FDA’s Good Laboratory Practices (GLP) Guidelines (21CFR Part 58). CBI is also able to provide clinical trial support under Good Clinical Practices (GCP) Guidelines by virtue of its Clinical Laboratory Improvement Act (CLIA) certification. Finally, CBI is increasing its capability to provide Good Manufacturing Practices (GMP) support for drug product release and drug product testing criteria.

A unique feature of the Richmond location is its Bio-Safety Level 3 (BSL-3) laboratory and it’s CDC Registration for Select Agents. The company has capabilities in the area of bacterial and viral organisms and a very strong program in bio-threat toxin analysis. This capability has been at the core of the company’s government-based contracts.

5

Table of Contents

Commonwealth Biotechnologies, Inc.

Also at the Richmond location is Fairfax Identity Laboratories (FIL). FIL has been at the forefront of DNA technology of profiling for identity since it opened its doors in 1990. FIL’s rigorous standards are designed to provide credible evidence that affects decisions regarding criminal trials, paternity, immigration, estate settlement, adoption, and other issues of identity. FIL provides Forensics, Paternity and Convicted Offender DNA Index System (“CODIS”) services to government and private concerns. FIL is accredited by the American Association of Blood Banks, the National Forensic Science Technology Center, and the Department of Health, State of New York. All testing is done under CLIA guidelines. Its employees have extensive laboratory and courtroom experience.

The Melbourne-based Mimotopes Pty Ltd was acquired by CBI in 2007. It provides world class research grade peptide synthesis and analysis. They also have several proprietary technologies for the preparation of peptide and small molecule libraries for drug discovery and for epitope analysis in support of its clients’ vaccine development programs. They also have a formal peptide alliance with Genzyme Pharmaceuticals, a world class provider of GMP pharmaceutical grade peptides and also enjoys a strong relationship with GL Biochem, a Shanghai-based peptide synthesis and reagent company.

CBI’s China based Joint Venture (JV) with Venturepharm Laboratories, Ltd was signed in March, 2008. Its development has been very disappointing to date with no revenues generated and no clear indication that the China based facilities, which were to be the flagship of the JV, will come on line anytime soon.

All business units cater to the outsourcing requirements of pharmaceutical and biotechnology companies for reagents (such as peptides, proteins and small molecules), as well as drug research and development. The adoption of outsourcing by the pharmaceutical and biotechnology industries is driven by three major deliverables:

(1) Speed. Faster discovery results accelerate the time to fail or advance a drug through the development pipeline. Eliminating bad leads early or shaving weeks or months from the time it takes to get a drug to market can mean millions of dollars in cost savings.

(2) Quality. All the advantages of an accelerated drug discovery program can be jeopardized if the results do not meet the strict quality standards of the pharmaceutical industry. High quality results depend on quality control, quality equipment and quality people.

(3) Cost. Speed and quality are necessary but insufficient conditions for success. The economic scarcity problem of unlimited wants and needs and limited resources applies to drug discovery outsourcing as well. The more suppliers can offer for less, the more successful they will be.

The Outsourcing Opportunity:

According to Frost & Sullivan, in 2007, pharma and biotech companies outsourced $57 billion to contract research ($17 billion) and contract manufacturing ($40 billion) companies. That is expected to grow at 13% through 2011 to $80 billion. The industry estimates on how much goes to research and development outsourcing are somewhat disparate but generally fall in the $15-20 billion range. By any measure, the market is large and growing rapidly. It is being driven heavily by the industry’s need to contain costs internally and to enhance pipeline product opportunities by entering into co-development relationships with partners. In many cases, the partners are service providers providing in kind support, access to proprietary technologies, IP enhancement, and the like.

6

Table of Contents

Commonwealth Biotechnologies, Inc.

For CBI, the opportunity is without limit. For example, the results of a recent survey are very clearly pointing to an increasing reliance on drug development outsourcing within the industry. Some key findings.

Interestingly, the principal “complaints” about providers in this sector were heavily weighted in intangibles rather than the deliverables of quality, timeliness, and cost. Comments regarding inflexibility, failure to take ownership, lack of commitment, poor customer service, and lack of communication were common.

So, while CBI will still welcome tactical relationships, becoming a strategic partner to our clients has to be our long term strategy. Management believes CBI will be able to compete effectively in this new business environment. CBI has huge intellectual capital to bring to its clients and, in fact, the principal conclusion from an independent Branding/Customer satisfaction survey of CBI’s clients was that CBI’s intellectual input to a project was the main differentiator between it and its competitors. Further, in the areas where the industry leaders found deficiencies (i.e., flexibility, taking ownership, commitment, customer service, communication), CBI was found to excel.

The opportunities are there and management believes CBI can thrive under this new business paradigm.

Going Concern

The accompanying financial statements have been prepared on a going concern basis which contemplates realization of assets and satisfaction of liabilities in the normal course of business. If the Company is unable to improve operating results and meet its debt obligations, it may have to cease operations. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Total losses for the Company were $9,862,746 and $2,758,101 for the years ended December 31, 2008 and 2007 respectively. Recent operating losses may continue into future periods and there can be no assurance by management that the Company’s financial outlook will improve. For the year ended December 31, 2008 and 2007, losses from continuing operations were $8,570,723 and $2,979,800 respectively. Losses resulting from the goodwill impairment amounted to $3,152,739 in 2008. Losses resulting from the extinguishment of debt were $1,202,419 in 2008. Losses resulting from the discontinued operation in 2008 and 2007 were $1,292,023 and $561,134 respectively. In 2007, the Company reported a gain from the purchase of Exelgen in the amount of $782,833.

The Company generated negative cash flows of $2,290,159 in 2008, compared to an increase in cash of $1,129,540 in 2007. Net working capital as of December 31, 2008 and December 31, 2007 was ($5,256,055) and $1,421,602 respectively. The negative working capital is primarily due to continuing losses and increased debt obligations in 2008.

7

Table of Contents

Commonwealth Biotechnologies, Inc.

As of December 31, 2008, the Company had $243,751 in cash and cash equivalents, which was an 89.9% decrease over the cash balance at December 31, 2007. This decrease is primarily due to cash utilized by Exelgen prior to the decision to discontinue the operation. Management believes the discontinuation of the Exelgen operations should improve cash flows going forward.

Cash used by operating activities was $1,366,425 in 2008 as compared to cash used by operating activities of $867,728 in 2007. The increase resulted from additional operating losses sustained by the Company.

Cash provided by investing activities for 2008 was $52,258 in comparison to cash provided by investing activities of $2,211,069 in 2007. The net change relates primarily to net cash acquired in the acquisition of Exelgen offset by the cost of acquiring Mimotopes. In addition, the 2008 activities reflect management’s decision to reduce the purchase of capital expenditures.

Cash provided by financing activities for 2008 was $185,865 as compared to cash used of $508,849 in the 2007 Period. During 2008, the Company entered into multiple debt agreements providing $1,000,000 of proceeds to offset current losses and debt payments. The Company reduced the principal amount on the mortgage through a one-time payment of $400,000 as required by the lender. Elimination of capital lease payments associated with the discontinued operation is estimated to reduce the cash outflow of the Company by over $1 million over the next twelve months.

The elimination of the Exelgen operation should benefit the Company’s overall cash position. Additional cash resources will no longer be needed for the payments of the capital leases. The Company estimates a savings of $1.1 million over the remaining life of the Exelgen leases which were due to expire in December 2009.

During 2009, the Company expects to re-negotiate the terms of its outstanding mortgage debt which becomes due in November 2009, including any non compliance covenants which causes the Company to be in default. The Company also believes that it will be able to satisfy its current debt obligations with LH Financial and Fornova through the issuance of common stock in lieu of cash payment. Subject to compliance with NASDAQ listing standards, the Company believes it will be able to satisfy its debt obligations.

Management has taken steps to improve the cash flow and liquidity of the Company. The Company has discontinued Exelgen operations, which entered into administration (See Note 14) as well as reduced personnel levels and marketing expenditures, curtailed costs, deferred directors’ fees and a portion of employees’ salaries. The Company has also reduced or delayed expenditures on items deemed non-critical to operations. In addition, the Company evaluates consolidated activities for each operation and takes advantage of opportunities where synergies exist. During 2008, the Company implemented a Profit Recovery Plan which outlines clear objectives related to the following:

The cash position of the Company will again remain uncertain in 2009. However, the Company will continue to address the immediate needs for cash and liquidity through an aggressive approach on a number of fronts. As indicated previously, when confronted with static revenues and declining cash

8

Table of Contents

Commonwealth Biotechnologies, Inc.

reserves, management reduced staffing through layoffs and attrition and reduced or eliminated non-production related expenditures. Fiscal practices have been strictly enforced which restrict all material purchases to service on-going work only and serve to minimize all material inventories. Management will continue adhering to these policies for the foreseeable future.

The lack of adequate cash resulting from the inability to generate cash flow from operations or to raise capital from external sources would force the Company to substantially curtail or cease operations and would, therefore, have a material adverse effect on its business. The Company is actively exploring the availability of varying financial and strategic transactions, which, if consummated, would address the Company’s need to improve its financial condition and/or its operations.

There can be no assurance that any funds required during the next twelve months or thereafter can be generated from operations, that if such required funds are not internally generated that funds will be available from external sources, such as debt or equity financing or other potential sources or that any funds received would suffice to improve the Company’s financial condition.

During the last year, the Company’s business has undergone substantial change in relation to size, scale and scope of activities. The Company has developed significant capacity in peptide chemistry through the acquisition of Mimotopes. This strategic transaction complements the core capabilities in genomics and proteomics at CBI Services and FIL. In addition, resources have been invested in the establishment of VenturePharm Asia. The Company views this relationship as a key strategy in expanding production capabilities and services which will further the Company’s ability to compete in the global market.

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

The Company’s independent auditors have included a paragraph emphasizing “going concern” in their report on the 2008 financial statements. These financial statements do not include any adjustments relating to the recoverability or classification of asset carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.

Results of Operations

Year Ended December 31, 2008 Compared with Year Ended December 31, 2007

All financial comparisons are for continuing operations unless otherwise noted for discontinued operations or extraordinary item.

Revenues

During the course of the year, the Company had experienced 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 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.

9

Table of Contents

Commonwealth Biotechnologies, Inc.

Total revenues increased by $410,185 or 4.5% from $9,025,309 during 2007 to $9,435,494 during 2008.

Revenues realized from commercial contracts decreased by $358,315 or 5.6%, from $5,535,987 during 2007 to $5,177,672 during 2008. Growth in both peptide and synphase revenues provided an increase of $177,344 in commercial revenue for Mimotopes. CBI Services experienced a decrease in commercial revenues of $493,606. The decrease reflects the re-allocation of budget funds shifted towards the private sector where higher profit margins can be achieved.

Revenues realized from various government contracts increased by $222,750 or 14.7%, from $1,518,363 during 2007 to $1,741,113 during 2008. The addition of bio-security based government contracts awarded in the current year led to this increase.

Genetic identity increased by $514,458 or 36.5%, from $1,409,989 during 2007 to $1,924,447 during 2008. The genetic identify sector has grown both organically and through the expansion of service into the global market in both paternity and forensics related services.

Clinical testing decreased by $38,432 or 9.6%, from $399,765 during 2007 to $361,333 during 2008. The decrease resulted from the completion of a clinical trial during the first quarter of 2008 year.

Cost of Services

Cost of services consists primarily of costs associated with direct materials, direct labor and overhead. Cost of services decreased slightly by $224,477 or 3.03%, from $7,448,265 in 2007 to $7,223,788 in 2008. Cost of services as a percentage of revenue decreased from 82.5% in 2007 to 76.6% in 2008. This decrease is reflective of management’s continued effort to reduce expenses, monitor costs and capitalize on cost synergies that exist across the Company.

Direct labor decreased by $126,459 from $2,211,355 in 2007 to $2,084,896 in 2008. In addition, the cost of direct labor as a percentage of revenue decreased from 24.5% in 2007 to 22.1% in 2008. The decrease as a percentage of revenue primarily relates to the shift in revenues that are less labor intensive in nature.

Direct materials increased by $241,334 or 12.0%, from $2,009,838 in 2007 to $2,251,172 in 2008. Costs of materials as a percentage of revenue increased slightly, from 22.3% to 23.9% in 2007 and 2008, respectively. This increase, as a percentage of revenue, correlates to the shift in revenues which are less labor intensive and rely on a greater usage of materials.

Overhead represents costs such as indirect labor, depreciation, freight charges, repairs, facility maintenance and utilities. Overhead decreased by $339,352 or 10.5%, from $3,227,072 in 2007 to $2,887,720 in 2008. The cost of overhead as a percentage of revenue decreased from 35.8% in 2007 to 30.6% in 2008. Cost reduction strategies implemented by management have benefited the Company in its ability to offset overall company costs including overhead.

Sales, General and Administrative

Sales, general and administrative expenses (“SGA”) consist primarily of compensation and related costs for administrative, marketing and sales personnel, facility expenditures, professional fees, consulting, taxes, and depreciation. Total SGA costs increased $591,308 or 12.5%, from $4,137,410 in 2007 to $4,728,718 in 2008. As a percentage of revenue, these costs increased from 45.8% in 2007 to 50.1% in 2008.

10

Table of Contents

Commonwealth Biotechnologies, Inc.

Total general and administrative expenses increased by $742,902 or 24.6%, from $3,034,723 in 2007 to $3,777,625 in the 2008 Period. As a percentage of revenue, these costs increased from 33.6% in 2007 to 40.0% in 2008. Of significance, the Company incurred higher costs associated with professional and consulting fees in the 2008 Period. Increased fees are representative of additional services rendered in connection with the prior year acquisitions and current year activities pertaining to VenturePharm Laboratories Limited.

Total sales and marketing costs decreased by $151,594 or 13.7 %, from $1,102,687 in 2007 to $951,093 in 2008. This decrease was primarily due to the elimination of sales and marketing staff which led to the reorganization of territories for the remainder of the staff.

Other Income (Expenses)

Interest income decreased by $63,864 or 82.3%, from $77,589 in 2007 to $13,725 in 2008 resulting from a decrease in interest earning investments.

Other expenses incurred by the Company include interest, amortization and exchange gains and losses and the write off of goodwill. Interest and amortization increased by $5,634,277 or 1,343.8%, from $497,023 in 2007 to $6,067,435 in 2008. The increase is mainly attributable to approximately $2,259,229 of interest costs on the December 2007 issuance of convertible debt in a subscription agreement between the Company and LH Financial. At December 31, 2008, the Company had $3,152,739 in goodwill related to the acquisitions of Fairfax Identity Labs in 2004 and Mimotopes in 2007. The Company has evaluated goodwill and has determined that it was fully impaired as of December 31, 2008. On September 18, 2008, the Company entered into a modification, waiver and acknowledgement agreement with LH Financial. The Company reported a loss of $1,202,419 for the extinguishment of debt relative to the modification of the original agreement in September 2008 (See Note 15).

Discontinued Operations

On September 23, 2008, the Company’s wholly owned subsidiary, Exelgen Limited (“Exelgen”) entered into administration under the jurisdiction of the High Court of Justice, Bristol District Registry, Chancery Division, in the United Kingdom (the “High Court”). Exelgen filed a Notice of appointment of an administrator effective September 23, 2008.

Administration is the United Kingdom’s insolvency process, which is governed by the Enterprise Act of 2002. A company must be insolvent as defined in the Insolvency Act of 1986 in order to qualify for administration. Administration is designed to enable a business to be held together while plans are formed either to put in place a financial restructuring to rescue the company, or to sell the business and assets to produce a better result for creditors than would be achieved at liquidation. Exelgen is subject to the protection of the High Court and creditors’ enforcement actions and will be automatically stayed while the administrators formulate plans to the sell the business and assets.

The Company’s decision and approval by the Board of Directors to enter Administration for the Exelgen operation was based upon various profitability analyses and projections. The subsidiary’s inability to support existing operational costs despite restructuring, combined with the lack of securing new contracts,

11

Table of Contents

Commonwealth Biotechnologies, Inc.

were key factors supporting this action. In the coming period, the appointed administrator will actively pursue the sale of these assets on an individual basis. The Company reported a loss from discontinued operations of $1,292,023 and $561,134 in 2008 and 2007, respectively.

Extraordinary Gain

The Company reported an extraordinary gain from the purchase of Exelgen during the 2007 Period. The purchase price of Exelgen was $1,475,000 (including acquisition costs). Total assets acquired amounted to $8,249,000 and the Company assumed liabilities of $5,991,000 resulting in negative goodwill of $783,000 which is recorded as an extraordinary gain on the statement of operations.

Liquidity and Capital Resources

The accompanying financial statements have been prepared on a going concern basis which contemplates realization of assets and satisfaction of liabilities in the normal course of business. If the Company is unable to improve operating results and meet its debt obligations, it may have to cease operations. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Total losses for the Company were $9,862,746 and $2,758,101 for the year ended December 31, 2008 and 2007 respectively. Recent operating losses may continue into future periods and there can be no assurance by management that the Company’s financial outlook will improve. For the year ended December 31, 2008 and 2007, losses from continuing operations were $8,570,723 and $2,979,800 respectively. Losses resulting from the goodwill impairment amounted to $3,152,739. Losses resulting from the extinguishment of debt were $1,202,419 in 2008. Losses resulting from the discontinued operation were $1,292,023 and $561,134 respectively. In 2007, the Company reported a gain from the purchase of Exelgen in the amount of $782,833.

The Company generated negative cash flows of $2,290,159 in 2008 compared to an increase in cash of $1,129,540 in 2007. Net working capital as of December 31, 2008 and December 31, 2007 was ($5,256,055) and $1,421,602 respectively. The negative working capital in the current period is primarily due to continuing losses and increased debt obligations in 2008.

As of December 31, 2008, the Company had $243,751 in cash and cash equivalents which represented an 89.9% decrease from the cash balance at December 31, 2007. This decrease is primarily due to cash utilized by Exelgen prior to the decision to discontinue the operation which should improve cash flows going forward.

The 2008 Period reflects cash used by operating activities of $1,366,425 as compared to cash used by operating activities of $867,728 during the 2007 Period. The increase over the prior period resulted from additional operating losses sustained by the Company.

Cash provided by investing activities for the 2008 Period was $52,258 in comparison to cash provided by investing activities of $2,211,069 in the 2007 Period. The net change relates primarily to net cash acquired in the acquisition of Exelgen offset by the cost of acquiring Mimotopes. In addition, current year activities reflect management’s decision to reduce the purchase of capital expenditures in 2008.

12

Table of Contents

Commonwealth Biotechnologies, Inc.

Cash provided by financing activities for 2008 was $185,865 as compared to cash used of $508,849 in the 2007 Period. During the 2008 year, the Company entered into multiple debt agreements providing $1,000,000 of proceeds to offset current losses and debt payments. The Company reduced the principal amount on the mortgage through a one-time payment of $400,000 as required by the lender. Elimination of capital lease payments associated with the discontinued operation is estimated to reduce the cash outflow of the Company by over $1 million during the next twelve months.

The elimination of the Exelgen operation should benefit the Company’s overall cash position. Additional cash resources will no longer be needed for the payments of the capital leases. The Company estimates a savings of $1.1 million over the remaining life of the Exelgen leases which were due to expire in December 2009.

During 2009, the Company expects to re-negotiate the terms of its outstanding mortgage debt which becomes due in November 2009, including any non compliance with covenants which causes the Company to be in default. The Company also believes that it will be able to satisfy its current debt obligations with LH Financial and Fornova through the issuance of common stock in lieu of cash payment. Subject to compliance with NASDAQ listing standards, the Company believes it will be able to satisfy its debt obligations.

Management has taken steps to improve the cash flow and liquidity of the Company. The Company has discontinued Exelgen operations, which entered into administration (See Note 14) as well as reduced personnel levels and marketing expenditures, curtailed costs, deferred directors’ fees and a portion of employees’ salaries. The company has also reduced or delayed expenditures on items deemed non-critical to operations. In addition, the Company evaluates consolidated activities for each operation and takes advantages of opportunities where synergies exist. During 2008, the Company implemented a Profit Recovery Plan which outlines clear objectives related to the following:

In October 2008, NASDAQ Marketplace placed a temporary hold on Rule 4310(C4), which requires a listed business’ shares to close above $1 at least once in a 30 day period. The temporary hold is to remain in place till January 16, 2009. Due to the extent that the Company does not apply to Rule 4310 (C4) after January 16, 2009, Nasdaq will require that the Company needs to obtain compliance in this issue or be subject to delisting. On March 23, 2009, NASDAQ Marketplace announced its decision to extend the suspension of the ruling until Monday July 20, 2009.

The Company’s business has undergone substantial change in relation to size, scale and scope of activities. During this time, the Company has developed significant capacity in peptide chemistry through the acquisition of Mimotopes. This strategic transaction compliments the core capabilities in genomics and proteomics at CBI Services and FIL. In addition, significant resources have been invested in the establishment of Venturepharm Asia. The Company views this relationship as a key strategy in expanding production capabilities and services which will further the Company’s ability to compete in the global market.

13

Table of Contents

Commonwealth Biotechnologies, Inc.

If operational results do not continue to improve, the Company will seek to obtain additional funding from VenturePharm Laboratories Limited. The Company has a $3 million call option from VPL to CBI (see Note 17).

New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. The Statement does not require any new fair value measurements and was initially effective for the Company beginning January 1, 2008. In February 2008, the FASB approved the issuance of FASB Staff Position (FSP) FAS 157-2. FSP FAS 157-2 defers the effective date of SFAS No. 157 until January 1, 2009 for nonfinancial assets and nonfinancial liabilities except those items recognized or disclosed at fair value on an annual or more frequently recurring basis. Adoption of SFAS No. 157 for financial assets and liabilities did not have a material effect on the Company’s results of operations or financial position.

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141(R), Business Combinations, to further enhance the accounting and financial reporting related to business combinations. SFAS No. 141(R) establishes principles and requirements for how the acquirer in a business combination (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non controlling interest in the acquire, (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Therefore, the effects of the Company’s adoption of SFAS No. 141(R) will depend upon the extent and magnitude of acquisitions after December 31, 2008.

In April 2008, the FASB issued Staff Position 142-3 (“FSP FAS 142-3), “Determination of the Useful Life of Intangible Assets”, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under FASB No. 142 “Goodwill and Other Intangible Assets”. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of the expected cash flows used to measure the fair value of the asset under FASB No. 141, “Business Combinations” and other U.S. generally accepted accounting principles. The Company has determined there is no material impact to the consolidated financial statements upon the recent adoption of FSP FAS No. 142-3.

In December 2007, the FASB issued SFAS No. 160, Non controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51, to create accounting and reporting standards for the non controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 establishes accounting and reporting standards that require (1) the ownership interest in subsidiaries held by parties other than the parent to be clearly identified and presented in the consolidated balance sheet within equity, but separate from the parent’s equity, (2) the amount of consolidated net income attributable to the parent and the non controlling interest to be clearly identified and presented on the face of the consolidated statement of income, (3) changes in a parent’s ownership interest while the parent retains its controlling

14

Table of Contents

Commonwealth Biotechnologies, Inc.

financial interest in its subsidiary to be accounted for consistently, (4) when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary to be initially measured at fair value, and (5) entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 applies to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, and prohibits early adoption. Management has completed its review of the new guidance and determined there to be no material impact to the Company’s results of operations or financial position.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure eligible items at fair value at specified election dates. For items for which the fair value option has been elected, unrealized gains and losses are to be reported in earnings at each subsequent reporting date. The fair value option is irrevocable unless a new election date occurs, may be applied instrument by instrument, with a few exceptions, and applies only to entire instruments and not to portions of instruments. SFAS No. 159 provides an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting. Management has adopted SFAS No. 159, the effect of implementation is not material to the Company’s results of operations or financial position as no such elections have been made.

In March, 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities—an Amendment of FASB Statement 133. Statement 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities; and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Specifically, Statement 161 requires:

In June 2008, the FASB ratified the consensus reached on Emerging Issues Task Force (“EITF”) Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF No. 07-05). EITF No. 07-05 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which would qualify as a scope exception under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, EITF No. 07-05 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption for an existing instrument is not permitted. The Company has determined EITF No. 07-05 does not apply at December 31, 2008, but will evaluate at March 31, 2009.

In May 2008, the FASB issued Financial Accounting Standards Board Staff Position Accounting Principles Board 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“APB 14-1”). APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash, or other assets, on conversion to separately account for the debt and equity components in a manner that reflects the issuer’s non-convertible debt

15

Table of Contents

Commonwealth Biotechnologies, Inc.

borrowing rate. APB 14-1 is effective for fiscal years beginning after December 15, 2008 and is applied retrospectively to all periods presented with a cumulative effect adjustment to the beginning retained earnings. We believe that the impact of adopting APB 14-1 could have a material effect on the consolidated financial statements, but are currently evaluating.

In May 2008, the FASB issued FASB Statement No. 163, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Management does not expect the adoption of the provision of SFAS No. 162 to have a material impact on the consolidated financial statements.

In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP 157-3 clarifies the application of SFAS No. 157 in determining the fair value of a financial asset during periods of inactive markets. FSP 157-3 was effective as of September 30, 2008 and did not have a material impact on the Company’s consolidated financial statements.

In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosure by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities. FSP FAS 140-4 and FIN 46(R)-8 requires enhanced disclosures about transfers of financial assets and interests in variable interest entities. The FSP requires only additional disclosures concerning transfers of financial assets and interests in variable interest entities and adoption of the FSP will not affect the Company’s financial condition, results of operations or cash flows.

Corporate Guidance

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:

The Audit Committee reviews and approves all related-party transactions. CBI has adopted a formal Corporate Code of Conduct. Copies are available on request from Dr. Richard Freer, Chief Operating Officer, and on the Company’s website at
www.cbi-biotech.com

16

Table of Contents

Commonwealth Biotechnologies, Inc.

Critical Accounting Policies

A summary of the Company’s critical accounting policies follows:

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 assets 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 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. Product sales are recognized when shipped. Amounts received in advance of the performance of services or acceptance of a milestone, are recorded as deferred revenue and recognized when completed.

Goodwill

Goodwill is recognized for the excess of purchase price over the fair value of tangible and identifiable intangible net assets of businesses acquired, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. The Company reviews and accounts for the impairment of goodwill in accordance with SFAS No. 142. Goodwill that has an indefinite useful life is not amortized, but instead is tested for impairment at least annually or whenever circumstances indicate potential impairment by comparing the carrying value of the reporting unit to its estimated fair value. The Company bases its estimates of fair value on projected cash flows. At December 31, 2008, the Company had $3,152,739 in goodwill related to the acquisitions of Fairfax Identity Labs in 2004 and Mimotopes in 2007. The Company has evaluated goodwill and has determined that impairment exists as of December 31, 2008.

Impairment of Long-Lived Assets

The Company reviews and accounts for the impairment of long-lived assets other than goodwill, including property and equipment and certain other non current assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Long-lived assets besides goodwill are reviewed for impairment when events or changes in circumstances indicate the carrying value of an asset may not be recoverable. For long-lived assets other than goodwill that are to be held and used in operations, an impairment is indicated when the estimated total undiscounted cash flow associated with the asset or group of assets is less than carrying value. If impairment exists, an adjustment is made to write off the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value.

17

Table of Contents

Commonwealth Biotechnologies, Inc.

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:

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.

18

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

  Stockholders of Commonwealth Biotechnologies, Inc.

Richmond, Virginia

We have audited the accompanying consolidated balance sheet of Commonwealth Biotechnologies, Inc. and Subsidiaries as of December 31, 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit 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 audit 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 audit provides a reasonable basis for our opinion.

In our opinion, consolidated the financial statements referred to above present fairly, in all material respects, the financial position of Commonwealth Biotechnologies, Inc. and Subsidiaries as of December 31, 2008, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s recurring losses from operations and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Witt Mares, PLC

Richmond, Virginia

March 27, 2009

Table of Contents

Report of Independent Registered Public Accounting Firm

Board of Directors

Commonwealth Biotechnologies, Inc.

Richmond, Virginia

We have audited the accompanying balance sheet of Commonwealth Biotechnologies, Inc and subsidiaries. as of December 31, 2007 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year 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 audit.

We conducted our audit 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 audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, financial position of Commonwealth Biotechnologies, Inc. and subsidiaries as of December 31, 2007 and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Richmond, Virginia

April 8, 2008 except for Note 14 which is as of March 31, 2009

Table of Contents

Commonwealth Biotechnologies, Inc.

Financial Statements

Consolidated Balance Sheets

See accompanying summary of accounting policies and notes to financial statements

21

Table of Contents

Commonwealth Biotechnologies, Inc.

Consolidated Balance Sheets (continued)

See accompanying summary of accounting policies and notes to financial statements

22

Table of Contents

Commonwealth Biotechnologies, Inc.

Consolidated Statements of Operations

See accompanying summary of accounting policies and notes to financial statements

23

Table of Contents

Commonwealth Biotechnologies, Inc.

Consolidated Statements of Stockholders’ Equity

See accompanying summary of accounting policies and notes to financial statements

24

Table of Contents

Commonwealth Biotechnologies, Inc.

Consolidated Statements of Cash Flows

See Notes to Financial Statements

25

Table of Contents

Commonwealth Biotechnologies, Inc.

Summary of Significant Accounting Policies

Nature of the Business

Commonwealth Biotechnologies, Inc., (the “Company” or “CBI”), was formed on September 30, 1992, for the purpose of providing specialized analytical laboratory services for the life scientist. 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’s Fairfax Identity Labs (FIL) division, for paternity testing, forensic case-work analysis and Convicted Offender Data Base Index System CODIS work. During 2007, the Company acquired Mimotopes Pty, Ltd. which has developed a number of proprietary and patented technologies and is an industry leader in the synthesis of research grade peptides. Exelgen, formally known as Tripos Discovery Research Ltd was acquired June 2007 and was a leading drug discovery services business that provided pharmaceutical and biotechnology companies with novel approaches to drug discovery. However, in September 2008, the decision was made to discontinue the operation. (see Note 14).

Consolidation Policy

The consolidated financial statements include the accounts of Commonwealth Biotechnologies, Inc. and its wholly owned subsidiaries’ Mimotopes Pty, Ltd, Australia and Exelgen, England, until Exelgen was deconsolidated on September 23, 2008 (see Note 14). All inter-company accounts and transactions have been eliminated in consolidation.

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 assets 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 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. Product sales are recognized when shipped. Amounts received in advance of the performance of services or acceptance of a milestone, are recorded as deferred revenue and recognized when completed.

26

Table of Contents

Commonwealth Biotechnologies, Inc.

Foreign Currency Translation

The Company’s consolidated financial statements are reported in U.S. dollars. Assets and liabilities of foreign subsidiaries are translated using rates of exchange as of the balance sheet dates, and related revenues and expenses are translated at average rates of exchange in effect during the periods. Cumulative translation adjustments have been recorded as a separate component within accumulated other comprehensive income (loss) of stockholders’ equity. Realized gains and losses from foreign currency translations are included in other income (expense).

Fair Value Measurements

On January 1, 2008, the Company adopted the provisions of SFAS No. 157 “Fair Value Measurements”. Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.

In February 2008, the FASB issued FSP No. FAS No. 157-2, Partial Deferral of the Effective Date of Statement 157, (“FSP No. 157-2”). FSP No. 157-2 delays the effective date of SFAS No. 157, Fair Value Measurements (“SFAS No. 157”) for all non financial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact of SFAS No. 157 on nonfinancial liabilities, but does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.

Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are categorized based upon the level of judgment associated with the inputs used to measure the fair value. Hierarchical levels, defined by SFAS 157 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

Level 1- Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets and liabilities carried at Level 1 fair value generally are listed in active markets.

Level 2 – Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instruments anticipated life. Fair value assets and liabilities that are generally included in this category are certain corporate debt securities, and certain financial instruments classified as derivatives where fair value is based on observable market inputs.

Level 3- Unobservable Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the inputs to the model.

27

Table of Contents

Commonwealth Biotechnologies, Inc.

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.

Restricted Cash

Restricted cash in Mimotopes represents the amount that is held by a third party in escrow as required under the terms of the Company’s land lease agreement. The total amount held in escrow as of December 31, 2008 is $72,469. Interest income earned on restricted cash is recorded in other interest income.

Investments

The Company classifies its investments in securities as available-for-sale. These investments are carried at the estimated fair value, with unrealized gains and losses reported in other comprehensive income (loss). Upon the sale of a security, the realized net gain or loss is reported in results from operations.

Accounts Receivable

The majority of our accounts receivable are due from trade customers. Credit is extended based on evaluation of our customers’ financial condition and collateral is not required. Accounts receivable payment terms vary and are stated in the financial statements at amounts due from customers net of an allowance for doubtful accounts. Accounts that are outstanding longer than the payment terms are considered past due. We determine our allowance by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, customers’ current ability to pay their obligations to us, the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

Inventory

Inventories are stated at the lower of FIFO cost (first-in, first-out method) or market. The Company reviews its recorded inventory periodically and estimates an allowance for obsolete, excess, or slow moving items as necessary.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is computed principally by the straight-line method over their 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:

28

Table of Contents

Commonwealth Biotechnologies, Inc.

Assets under capital lease obligations are recorded at the lesser of the present value of the minimum lease payments or the fair market value of the leased asset, at inception of the lease.

Deferred Financing Fees

Loan costs are being amortized on a straight-line basis, which approximates the interest method, over the expected term of the related obligations.

Goodwill

Goodwill is recognized for the excess of purchase price over the fair value of tangible and identifiable intangible net assets of businesses acquired, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. The Company reviews and accounts for the impairment of goodwill in accordance with SFAS No. 142. Goodwill that has an indefinite useful life is not amortized, but instead is tested for impairment at least annually or whenever circumstances indicate potential impairment by comparing the carrying value of the reporting unit to its estimated fair value. The Company bases its estimates of fair value on projected cash flows. At December 31, 2008, the Company had $3,152,739 in goodwill related to the acquisitions of Fairfax Identity Labs in 2004 and Mimotopes in 2007. An analysis was performed, due to the current conditions of the Company and it was determined goodwill was fully impaired as of December 31, 2008.

Impairment of Long-Lived Assets

The Company reviews and accounts for the impairment of long-lived assets other than goodwill, including property and equipment and certain other noncurrent assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Long-lived assets besides goodwill are reviewed for impairment when events or changes in circumstances indicate the carrying value of an asset may not be recoverable. For long-lived assets other than goodwill that are to be held and used in operations, an impairment is indicated when the estimated total undiscounted cash flow associated with the asset or group of assets is less than carrying value. If impairment exists, an adjustment is made to write off the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value.

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. 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 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, 2008 is equal to the outstanding principal balance of the corresponding debt instrument.

29

Table of Contents

Commonwealth Biotechnologies, Inc.

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 because their inclusion would have been anti-dilutive. Weighted average shares outstanding for basic and diluted loss per common share were 5,864,149 and 5,131,951 for the twelve months ended December 31, 2008 and 2007, respectively (see Note 16).

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.

A 2007 Stock Incentive Plan was adopted by the Board of Directors and approved by the shareholders. The Plan makes up to 1,000,000 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.

30

Table of Contents

Commonwealth Biotechnologies, Inc.

New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. The Statement does not require any new fair value measurements and was initially effective for the Company beginning January 1, 2008. In February 2008, the FASB approved the issuance of FASB Staff Position (FSP) FAS 157-2. FSP FAS 157-2 defers the effective date of SFAS No. 157 until January 1, 2009 for nonfinancial assets and nonfinancial liabilities except those items recognized or disclosed at fair value on an annual or more frequently recurring basis. Adoption of SFAS No. 157 for financial assets and liabilities did not have a material effect on the Company’s results of operations or financial position.

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141(R), Business Combinations, to further enhance the accounting and financial reporting related to business combinations. SFAS No. 141(R) establishes principles and requirements for how the acquirer in a business combination (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non controlling interest in the acquire, (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Therefore, the effects of the Company’s adoption of SFAS No. 141(R) will depend upon the extent and magnitude of acquisitions after December 31, 2008.

In April 2008, the FASB issued Staff Position 142-3 (“FSP FAS 142-3), “Determination of the Useful Life of Intangible Assets”, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under FASB No. 142 “Goodwill and Other Intangible Assets”. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of the expected cash flows used to measure the fair value of the asset under FASB No. 141, “Business Combinations” and other U.S. generally accepted accounting principles. The Company has determined there to be no material impact to the consolidated financial statements upon the recent adoption of FSP FAS No. 142-3.

In December 2007, the FASB issued SFAS No. 160, Non controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51, to create accounting and reporting standards for the non controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 establishes accounting and reporting standards that require (1) the ownership interest in subsidiaries held by parties other than the parent to be clearly identified and presented in the consolidated balance sheet within equity, but separate from the parent’s equity, (2) the amount of consolidated net income attributable to the parent and the non controlling interest to be clearly identified and presented on the face of the consolidated statement of income, (3) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently, (4) when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary to be initially

31

Table of Contents

Commonwealth Biotechnologies, Inc.

measured at fair value, and (5) entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 applies to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, and prohibits early adoption. Management has completed its review of the new guidance and determined there to be no material impact to the Company’s results of operations or financial position.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure eligible items at fair value at specified election dates. For items for which the fair value option has been elected, unrealized gains and losses are to be reported in earnings at each subsequent reporting date. The fair value option is irrevocable unless a new election date occurs, may be applied instrument by instrument, with a few exceptions, and applies only to entire instruments and not to portions of instruments. SFAS No. 159 provides an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting. Management has adopted SFAS No. 159, the effect of implementation is not material to the Company’s results of operations or financial position as no such elections have been made.

In March, 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities—an Amendment of FASB Statement 133. Statement 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities; and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Specifically, Statement 161 requires:

In June 2008, the FASB ratified the consensus reached on Emerging Issues Task Force (“EITF”) Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF No. 07-05). EITF No. 07-05 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which would qualify as a scope exception under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, EITF No. 07-05 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption for an existing instrument is not permitted. The Company has determined EITF No. 07-05 does not apply at December 31, 2008, but will evaluate at March 31, 2009.

In May 2008, the FASB issued Financial Accounting Standards Board Staff Position Accounting Principles Board 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“APB 14-1”). APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash, or other assets, on conversion to separately account for the debt and equity components in a manner that reflects the issuer’s non-convertible debt borrowing rate. APB 14-1 is effective for fiscal years beginning after December 15, 2008 and is applied

32

Table of Contents

Commonwealth Biotechnologies, Inc.

retrospectively to all periods presented with a cumulative effect adjustment to the beginning retained earnings. We believe that the impact of adopting APB 14-1 could have a material effect on the consolidated financial statements, but are currently evaluating.

In May 2008, the FASB issued FASB Statement No. 163, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Management does not expect the adoption of the provision of SFAS No. 162 to have a material impact on the consolidated financial statements.

In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”. FSP 157-3 clarifies the application of SFAS No. 157 in determining the fair value of a financial asset during periods of inactive markets. FSP 157-3 was effective as of September 30, 2008 and did not have a material impact on the Company’s consolidated financial statements.

In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosure by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities. FSP FAS 140-4 and FIN 46(R)-8 requires enhanced disclosures about transfers of financial assets and interests in variable interest entities. The FSP requires only additional disclosures concerning transfers of financial assets and interests in variable interest entities and adoption of the FSP will not affect the Company’s financial condition, results of operations or cash flows.

33

Table of Contents

Commonwealth Biotechnologies, Inc.

Notes to Consolidated Financial Statements

The accompanying financial statements have been prepared on a going concern basis which contemplates realization of assets and satisfaction of liabilities in the normal course of business. If the Company is unable to improve operating results and meet its debt obligations, it may have to cease operations. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Total losses for the Company were $9,862,746 and $2,758,101 for the year ended December 31, 2008 and 2007 respectively. Recent operating losses may continue into future periods and there can be no assurance by management that the Company’s financial outlook will improve. For the year ended December 31, 2008 and 2007, losses from continuing operations were $8,570,723 and $2,979,800 respectively. Losses resulting from the goodwill impairment amounted to $3,152,739 in 2008. Losses resulting from the extinguishment of debt were $1,202,419 in 2008. Losses resulting from the discontinued operation were $1,292,023 and $561,134 respectively. In 2007, the Company reported a gain from the purchase of Exelgen in the amount of $782,833.

The Company generated negative cash flows of $2,290,159 in 2008 compared to an increase in cash of $1,129,540 in 2007. Net working capital as of December 31, 2008 and December 31, 2007 was ($5,256,055) and $1,421,602 respectively. The negative working capital in the current period is primarily due to continuing losses and increased debt obligations in 2008.

As of December 31, 2008, the Company had $243,751 in cash and cash equivalents which resulted in a 89.9% decrease over the cash balance at December 31, 2007. This decrease is primarily due to cash utilized by Exelgen prior to the decision to discontinue the operation which should improve cash flows going forward.

The 2008 Period reflects cash used by operating activities of $1,366,425 as compared to cash used by operating activities of $867,728 during the 2007 Period. The increase over the prior period resulted from additional operating losses sustained by the Company.

Cash provided by investing activities for the 2008 Period was $52,258 in comparison to cash provided by investing activities of $2,211,069 in the 2007 Period. The net change relates primarily to net cash acquired in the acquisition of Exelgen offset by the cost of acquiring Mimotopes. In addition, current year activities reflect management’s decision to reduce the purchase of capital expenditures in 2008.

Cash provided by financing activities for 2008 was $185,865 as compared to cash used of $508,849 in the 2007 Period. During the 2008 year, the Company entered into multiple debt agreements providing $1,000,000 of proceeds to offset current losses and debt payments. The Company reduced the principal amount on the mortgage through a one-time payment of $400,000 as required by the lender. Elimination of capital lease payments associated with the discontinued operation is estimated to reduce the cash outflow of the Company by over $1 million over the next twelve months.

34

Table of Contents

Commonwealth Biotechnologies, Inc.

Notes to Consolidated Financial Statements

(continued)

The elimination of the Exelgen operation should benefit the Company’s overall cash position. Additional cash resources will no longer be needed for the payments of the capital leases. The Company estimates a savings of $1.1 million over the remaining life of the Exelgen leases which were due to expire in December 2009.

During 2009, the Company expects to re-negotiate the terms of its outstanding mortgage debt which becomes due in November 2009, including any non compliance with covenants which causes the Company to be in default. The Company also believes that it will be able to satisfy its current debt obligations with LH Financial and Fornova through the issuance of common stock in lieu of cash payment. Subject to compliance with NASDAQ listing standards, the Company believes it will be able to satisfy its debt obligations.

Management has taken steps to improve the cash flow and liquidity of the Company. The Company has discontinued Exelgen operations, which entered into administration (See Note 14) as well as reduced personnel levels and marketing expenditures, curtailed costs, deferred directors’ fees and a portion of employees’ salaries. The company has also reduced or delayed expenditures on items deemed non-critical to operations. In addition, the Company evaluates consolidated activities for each operation and takes advantages of opportunities where synergies exist. During 2008, the Company implemented a Profit Recovery Plan which outlines clear objectives related to the following:

The cash position of the Company will again remain uncertain in 2009. However, the Company will continue to address the immediate needs for cash and liquidity through an aggressive approach on a number of fronts. As indicated previously, when confronted with static revenues and declining cash reserves, management reduced staffing through layoffs and attrition and reduced or eliminated non-production related expenditures. Fiscal practices have been strictly enforced which restricts all material purchases to service on-going work only and serve to minimize all material inventories. Management will continue adhering to these policies for the foreseeable future.

The lack of adequate cash resulting from the inability to generate cash flow from operations or to raise capital from external sources would force the Company to substantially curtail or cease operations and would, therefore, have a material adverse effect on its business. The Company is actively exploring the availability of varying financial and strategic transactions, which, if consummated, would address the Company’s need to improve its financial condition and/or its operations.

There can be no assurance that any funds required during the next twelve months or thereafter can be generated from operations or that if such required funds are not internally generated that funds will be available from external sources, such as debt or equity financing or other potential sources.

During the last year, the Company’s business has undergone substantial change in relation to size, scale and scope of activities. The Company has developed significant capacity in peptide chemistry through the acquisition of Mimotopes. This strategic transaction compliments the core capabilities in genomics and proteomics at CBI Services and FIL. In addition, resources have been invested in the establishment of

35

Table of Contents

Commonwealth Biotechnologies, Inc.

Notes to Consolidated Financial Statements

(continued)

VenturePharm Asia. The Company views this relationship as a key strategy in expanding production capabilities and services which will further the Company’s ability to compete in the global market.

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

The Company’s independent auditors have included a paragraph emphasizing “going concern” in their report on the 2008 financial statements. These financial statements do not include any adjustments relating to the recoverability or classification of asset carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.

Property and equipment consisted of the following:

Depreciation expense was $695,730 and $829,121 for the years ended December 31, 2008 and 2007, respectively. The Mimotopes facility is subject to a land lease. Lease payments associated with this land lease amounted to $86,925 in 2008.

36

Table of Contents

Commonwealth Biotechnologies, Inc.

Notes to Consolidated Financial Statements

(continued)

37

Table of Contents

Commonwealth Biotechnologies, Inc.

Notes to Consolidated Financial Statements

(continued)

38

Table of Contents

Commonwealth Biotechnologies, Inc.

Notes to Consolidated Financial Statements

(continued)

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 ratio’s. At December 31, 2008, the Company was in violation of covenants, however, the Company was granted a waiver of the covenants by the bank for a period of three months to March 31, 2009.

The Company leases equipment and facilities under non-cancelable operating leases. Total expense for the years ended December 31, 2008, and 2007 was $110,889 and $67,305 respectively. Leases are secured by the equipment. Future minimum lease payments and the present value thereof under capitalized leases and future minimum rentals under all non-cancelable operating leases with remaining terms in excess of one year as of December 31, 2008 are as follows:

CBI and FIL maintain 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 were $23,997 and $20,348 for the years ended December 31, 2008 and 2007, respectively.

Mimotopes is required by law to make contributions to a retirement plan covering all of its eligible employees at a rate of 9% of their base earnings. Company contributions were $76,949 and $157,693 for the years ended December 31, 2008 and 2007, respectively.

Under the terms of the Company’s mortgage, $400,000 was held in escrow at December 31, 2007 by BB&T. At the discretion of BB&T, these funds were released in March 2008 to pay down the principal balance of the mortgage.

Under the terms of the Company’s land lease in Australia, $72,469 is being held in escrow at December 31, 2008. This amount is equivalent to one year of lease payments.

39

Table of Contents

Commonwealth Biotechnologies, Inc.

Notes to Consolidated Financial Statements

(continued)

The components of comprehensive loss, net of tax, for the twelve months ended December 31, 2008 and 2007 were as follows:

The following table summarizes the Company’s investment in VPL stock which was obtained in July 2008 and is classified as securities available-for-sale as of December 31, 2008 and are carried at estimated fair value. Unrealized losses are considered temporary and will be monitored for other than temporary impairment going forward.

40

Table of Contents

Commonwealth Biotechnologies, Inc.

Notes to Consolidated Financial Statements

(continued)

The following table presents information about the Company’s assets and liabilities which are measured at fair value, on a recurring basis as of December 31, 2008, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

Level 1- Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets and liabilities carried at Level 1 fair value generally are listed in active markets.

Level 2 – Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instruments anticipated life. Fair value assets and liabilities that are generally included in this category are certain corporate debt securities, and certain financial instruments classified as derivatives where fair value is based on observable market inputs.

Level 3- Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the inputs to the model.

41

Table of Contents

Commonwealth Biotechnologies, Inc.

Notes to Consolidated Financial Statements

(continued)

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