Commonwealth

Biotechnologies, Inc.

2009

ANNUAL REPORT

Commonwealth Biotechnologies, Inc.

Table of Contents

Commonwealth Biotechnologies, Inc.

Dear Shareholders,

As was predicted in last year’s report to you, 2009 was indeed a year of challenges. We believe, for the most part, those challenges have been met and CBI is now poised to move ahead with a more focused and viable business model.

Most notable of our challenges was to divest the two business units that comprised the core government and genetic testing capabilities of CBI. Those units, CBI Services and Fairfax Identity Laboratories, were sold to Bostwick Laboratories, Inc. in November. Bostwick also signed a 5 year lease to occupy the entire CBI facility in Richmond. This was a very good outcome for CBI since these businesses as standalone entities were struggling and losing ground against their competitors. They were, quite frankly, a cash drain which could not be supported. The sale to Bostwick, we believe, was also a good outcome for those businesses in that they are now a part of a more substantial entity with both compatibility and capability, especially in the sales and marketing area.

At the same time we were working towards the divestment, we were looking to position the Company to re-focus its efforts under a business model that is both growth oriented and, most importantly, sustainable over the long term. More specifically, to take advantage of the remaining business unit, Mimotopes, Pty Ltd to build on the increasing focus of the pharmaceutical and biologicals industry on small molecular weight peptides as the basis for new drugs, vaccines, and other biologicals. To that end, the Company looked at a number of options, including partnerships, mergers, and acquisitions. As we have documented over the last several months, to implement that plan, we are moving towards the acquisition of GL Biochem (Shanghai) Ltd (GL). The principal driver for this choice is that GL is a company with a global presence and a complete portfolio of products and services in support of the peptide therapeutics area. This acquisition, when consummated, will complement and extend the capabilities of Mimotopes to form a “New CBI” with the most complete offering in the discovery area for peptide therapeutics.

So, 2009 has been challenging and while the global economic situation has few positives, we believe that by focusing in the emerging peptide therapeutics growth area in the drug development sector one can be more optimistic about the future of CBI.

To be clear, there will be more obstacles to overcome. To think otherwise is unrealistic. However, the management and staff of CBI will continue to work tirelessly to see that the outcomes are positive and bring value to you as shareholders and more opportunities for CBI.

Finally, as we do every year, we thank you our shareholders for your support, patience, and, yes, for your criticisms. We value them all.

Sincerely,

Richard J. Freer, PhD.

Chief Operating Officer

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Stockholder Matters

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Selected Financial Data

Set forth below is selected financial data with respect to the years ended December 31, 2009, December 31, 2008, and December 31, 2007, 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.”

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following should be read in conjunction with “Selected Financial Data” and the Company’s Audited Financial Statements and Notes thereto included 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 Mimotopes Pty Limited (“Mimotopes”), a wholly-owned subsidiary of CBI. 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. Through November 2, 2009, CBI also provided services through CBI Services and Fairfax Identity Laboratories (“FIL”), two divisions that were sold to Bostwick Laboratories, Inc. (“Bostwick”) effective November 2, 2009. The remainder of this section discusses these divisions because they were part of CBI during the period covered by this report. The Company’s current structure and business strategies are discussed separately.

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 $2,360,372 and $9,862,746 for the years ended December 31, 2009 and 2008, 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 years ended December 31, 2009 and 2008, losses from continuing operations were $2,768,056 and $9,107,607, 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. Income (Loss) resulting from the discontinued operations in 2009 and 2008 were $407,684 and $(755,139), respectively.

The Company generated positive cash flows of $448,341 in 2009, compared to a decrease in cash of $2,290,159 in 2008. Net working capital as of December 31, 2009 and December 31, 2008 was ($2,650,756) and ($4,416,054), respectively. The negative working capital is primarily due to continuing losses and debt obligations due within one year.

As of December 31, 2009, the Company had $692,092 in cash and cash equivalents, which was a 184.0% increase over the cash balance at December 31, 2008. This increase was primarily due to net cash received on the sale of CBI Services and FIL in November 2009.

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Cash provided by operating activities was $214,553 in 2009 as compared to cash used by operating activities of $1,366,425 in 2008. The increase resulted from the reduced loss for the year which resulted primarily from discontinuing operations of Exelgen in 2008.

Cash provided by investing activities for 2009 was $574,165 in comparison to cash provided by investing activities of $52,258 in 2008. The increase was primarily the result of cash received on the sale of CBI Services and FIL in 2009.

Cash used by financing activities for 2009 was $371,276 as compared to cash provided of $185,865 in the 2008 Period. During 2008, the Company entered into multiple debt agreements providing $1,000,000 of proceeds to offset current losses and debt payments. No new borrowings, other than the refinancing of the mortgage loan with BB&T, occurred in 2009.

On November 10, 2009, the Company re-negotiated the terms of its outstanding mortgage debt with BB&T which now becomes due in November 2012, including any non compliance with upcoming covenants which could cause the Company to be in default. The Company also believes that it will be able to satisfy its current debt obligations with its PIPE investors and Fornova Pharmaworld (“Fornova”) through the issuance of common stock in lieu of cash payment.

The Company continued to address its immediate need for cash and liquidity through a number of strategic initiatives in 2009. When confronted with static revenues and declining cash reserves, management reduced staffing through layoffs and attrition and reduced or eliminated non-production related expenditures. Conservative fiscal practices have been strictly enforced. More significantly, the company completed the sale of its Richmond-based businesses, CBI Services and FIL to Bostwick. Both of these business units represented ongoing cash drains. With proceeds from this transaction, the Company was able to reduce a significant portion of payables and clear a backlog of employee entitlements under Virginia law. In addition, the Company negotiated favorable terms on a 5 year lease with Bostwick for its facility at 601 Biotech Dr., Richmond, VA. The sale to Bostwick was completed on November 2, 2009 resulting in net proceeds to the Company of $343,780.

A continued lack of adequate cash resulting from the Company’s 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 a strategic transaction, which, if consummated, will 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. Nor can there be any assurance that funds will be available from external sources, such as debt or equity financing or other potential sources, if they cannot be generated internally. Lastly, there can be no assurance that any funds received would suffice to improve the Company’s financial condition.

During the last year, the Company’s business has undergone substantial changes in relation to size, scale and scope of activities. As previously discussed, the Company has sold two major business assets and entered into a 5 year lease agreement with Bostwick for its Richmond, VA facility, The Company continues to have significant capacity in peptide chemistry through its Melbourne, Australia based, wholly owned subsidiary, Mimotopes. In addition, some resources were invested in the establishment of VenturePharm Asia, a joint venture of China based companies which support the pharmaceutical industry.

As a result of the foregoing circumstances, there is substantial doubt about the Company’s ability to continue as a going concern. The financial statements included herein 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.

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The Company’s independent auditors have included a paragraph emphasizing “going concern” in their report on the 2009 financial statements. The financial statements included herein 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.

Business Units: Through November 2, 2009

Through November 2, 2009, revenues from all business units were 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 were 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 VPL 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, Virginia 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. Through CBI Services, the Company provided these services under the FDA’s Good Laboratory Practices (GLP) Guidelines (21CFR Part 58). CBI Services is also able to provide clinical trial support under Good Clinical Practices (GCP) Guidelines by virtue of its Clinical Laboratory Improvement Act (CLIA) certification. A unique feature of the Richmond location is its Bio-Safety Level 3 (BSL-3) laboratory and its CDC Registration for Select Agents. The Company had capabilities in the area of bacterial and viral organisms and a very strong program in bio-threat toxin analysis. This capability had been at the core of the Company’s government-based contracts.

Also at the Richmond location is 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 sale of assets relating to CBI Services and FIL was approved at the 2009 Annual Meeting of Shareholders. This transaction was completed effective November 2, 2009 resulting in net proceeds to the Company of $343,780.

Melbourne-based Mimotopes was acquired by CBI in 2007. It provides world class research grade peptide synthesis and analysis. Mimotopes also has 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. Mimotopes also has 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 VPL was signed in March, 2008. As of December 31, 2009, no revenues have been generated.

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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.

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Target Markets

Each of CBI’s business units has its own distinct capabilities and market focus, although significant overlap exists between the customer bases. The markets served by each of the business units are shown below:

Growth Strategy

Business Units: Current and Strategy Going Forward

Subsequent to the divestment of CBI Services and FIL, CBI is comprised of CBI corporate located in Richmond, VA and a small business development function at the same location and Mimotopes, its peptide based discovery company in Melbourne, Australia. With that focus in mind, CBI has been moving towards a more strategic business model to improve the Company’s competitive position in the biotech industry. Specifically, the Company has focused its energies and limited resources on the growing peptide therapeutics sector.

Concurrently with the divestment of CBI Services and FIL, the Company had been in discussion with GL Biochem (Shanghai) (“GL”) regarding an acquisition of GL and its wholly owned subsidiaries (the “GL Group”). The GL Group is privately held and based in Shanghai, China. It is well established in the industry as a global supplier of high quality, affordable, research-grade peptides and reagents. They have a long standing business relationship with CBI’s subsidiary, Mimotopes, having supplied Mimotopes and its customers with products and reagents since 2005.

On December 28, 2009, the Company signed a binding Share Purchase Agreement (“SPA”) to acquire all the outstanding shares of the GL Group. This transaction has been approved by the Board of Directors of CBI and is expected to be submitted to shareholders for ratification in early Q2. If approved the transaction is expected to close in second quarter of 2010. This acquisition will take advantage of CBI’s and Mimotopes’ presence and brands in the western markets and GL’s already extensive penetration into the research peptide and reagents market and its low cost center in China. The synergies are significant.

Operations

CBI operates on a fee-for-service basis and has integrated a number of foundation technologies to provide a broad range of capabilities to customers who otherwise must go to several different sources for their needs. The remaining business units have a strong reputation for:

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Mimotopes in particular has technical capabilities and proprietary technology platforms that differentiate them from other providers. For example, its patented SynPhase Technology provides CBI with a competitive advantage to rapidly, efficiently and cost-effectively produce large libraries of research grade peptides.

Results of Operations

Year Ended December 31, 2009 Compared with Year Ended December 31, 2008

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.

Total revenues decreased by $443,397 or 11.9% from $3,716,181 during 2008 to $3,272,784 during 2009.

Revenues realized from commercial contracts decreased by $856,136 or 24.1%, from $3,550,245 during 2008 to $2,694,109 during 2009. This decrease was primarily the result of decreases in Protein Chemistry revenues of $300,796, Petide Revenues of $330,678 and Anti Sera revenues of $263,480 for Mimotopes.

Cost of Services

Cost of services consists primarily of costs associated with direct materials, direct labor and overhead. Cost of services decreased $597,236 or 20.9%, from $2,859,091 in 2008 to $2,261,855 in 2009. Cost of services as a percentage of revenue decreased from 76.9% in 2008 to 69.1% in 2009. This decrease is reflective of management’s continued effort to reduce expenses, monitor costs and capitalize on cost synergies that exist across the Company.

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Direct labor decreased by $79,621 from $797,147 in 2008 to $717,526 in 2009. In addition, the cost of direct labor as a percentage of revenue decreased from 21.5% in 2008 to 21.9% in 2009. The decrease as a percentage of revenue primarily relates to the shift in revenues that are less labor intensive in nature.

Direct materials decreased $430,764, or 38.7%, from $1,114,481 in 2008 to $683,717 in 2009. Costs of materials as a percentage of revenue decreased from 30.0% in 2008 to 20.9% in 2009. This decrease is primarily the result of management’s continued efforts to improve operating efficiencies.

Overhead represents costs such as indirect labor, depreciation, freight charges, repairs, facility maintenance and utilities. Overhead decreased by $86,851, or 9.2%, from $947,463 in 2008 to $860,612 in 2009. The cost of overhead as a percentage of revenue was 26.3% in 2009 compared to 25.5% in 2008.

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 decreased $1,211,613, or 28.2%, from $4,290,479 in 2008 to $3,078,866 in 2009. As a percentage of revenue, these costs decreased from 115.5% in 2008 to 94.1% in 2009.

Total general and administrative expenses decreased by $465,681, or 14.2%, from $3,277,693 in 2008 to $2,812,012 in the 2009. As a percentage of revenue, these costs decreased from 88.2% in 2008 to 85.9% in 2009. Of significance, compensation and benefits decreased $303,280, or 18.8%, from $1,616,414 in 2008 to $1,313,134 in 2009.

Total sales and marketing costs decreased by $745,932, or 73.7 %, from $1,012,786 in 2008 to $266,854 in 2009. This decrease was primarily due to the elimination of sales and marketing staff.

Other Income (Expenses)

Realized losses increased $146,656, or 178.3%, from $82,257 in 2008 to $228,913 in 2009. This increase was primarily the result of losses on the sale of investment securities for liquidity purposes in 2009.

Interest expense decreased $774,869, or 62.0%, from $1,250,527 in 2008 to $475,658 in 2009. This decrease was primarily the result of decreased discount amortization relating to convertible debt in 2009.

Rental Income increased $221,009, or 169.9%, from $130,336 during 2008 to $351,345 during 2009. This increase is primarily the result of the lease of the Richmond, VA building and laboratory space to Bostwick Laboratories for $48,291 per month beginning in November 2009. In addition, Mimotopes began leasing excess laboratory space in January 2009 for $17,000 per month.

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

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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, 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.

At the 2009 Annual Meeting of Shareholders, approval was made to sell the assets of CBI’s FIL and CBI Services Divisions. The sale of these assets to Bostwick was completed in November 2009. As of November 2, 2009, the Company has deconsolidated the operations of these divisions and recorded a loss related to the remaining net investment as a discontinued operation.

Income (loss) from discontinued operations was $407,684 in 2009 and $(755,139) in 2008. The amount for 2009 consists of the operations of CBI Services and FIL and the gain on disposal of the assets. The 2008 amount is comprised of CBI Services and FIL’s income from discontinued operations of $536,884 and Exelgen’s loss from discontinued operations of $(1,292,023).

Liquidity and Capital Resources

Total losses for the Company were $2,360,372 and $9,862,746 for the years ended December 31, 2009 and 2008, 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 years ended December 31, 2009 and 2008, losses from continuing operations were $2,768,056 and $9,107,607, 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. Income (Loss) resulting from the discontinued operation in 2009 and 2008 were $407,684 and $(755,139), respectively.

The Company generated positive cash flows of $448,341 in 2009, compared to a decrease in cash of $2,290,159 in 2008. Net working capital (deficit) as of December 31, 2009 and December 31, 2008 was ($2,650,756) and ($4,416,054), respectively. The negative working capital is primarily due to continuing losses and debt obligations due within one year.

As of December 31, 2009, the Company had $692,092 in cash and cash equivalents, which was a 183.9% increase over the cash balance at December 31, 2008. This increase was primarily due to net cash received on the sale of CBI Services and Fairfax Identity Labs in November 2009.

Cash provided by operating activities was $214,553 in 2009 as compared to cash used by operating activities of $1,366,425 in 2008. The increase resulted from the reduced loss for the year which resulted primarily from discontinuing operations of Exelgen in 2008.

Cash used by investing activities for 2009 was $574,165 in comparison to cash provided by investing activities of $52,258 in 2008. The increase was primarily the result of cash received on the sale of CBI Services and FIL in 2009.

Cash used by financing activities for 2009 was $371,276 as compared to cash provided of $185,865 in the 2008 Period. During 2008, the Company entered into multiple debt agreements providing $1,000,000 of proceeds to offset current losses and debt payments. No new borrowings, other than the refinancing of the mortgage loan with BB&T, occurred in 2009.

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On November 10, 2009, the Company re-negotiated the terms of its outstanding mortgage debt which now becomes due in November 2012, including any non compliance with upcoming covenants which could cause the Company to be in default. The Company also believes that it will be able to satisfy its current debt obligations with its PIPE investors and Fornova Pharmaworld (“Fornova”) through the issuance of common stock in lieu of cash payment.

The Company continued to address the immediate needs for cash and liquidity 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. More significantly, the Company completed the divestment of its Richmond-based businesses, CBI Services and FIL to Bostwick. Both of these business units represented ongoing cash drains. With proceeds from this transaction, the Company was able to reduce a significant portion of payables and clear a backlog of employee entitlements under Virginia law. In addition, the Company negotiated, on terms favorable to CBI, a 5 year lease with Bostwick for its facility at 601 Biotech Dr., Richmond, VA. The sale to Bostwick was completed on November 2, 2009 resulting in net proceeds to the Company of $343,780.

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 a strategic transaction, 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.

Recent Accounting Pronouncements

On July 1, 2009, the Accounting Standards Codification became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles applicable to all public and non-public non-governmental entities, superseding existing FASB, AICPA, EITF and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies.

In June 2009, the FASB issued a standard regarding the FASB Accounting Standards Codification and the hierarchy of generally accepted accounting principles, which replaces the standard previously issued by the FASB regarding the hierarchy of generally accepted accounting principles. This standard identifies the source of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in conformity with generally accepted

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accounting principles (“GAAP”) in the United States (the “GAAP hierarchy”). In addition, this standard establishes the FASB Accounting Standard Codification (the “Codification”) as the source of authoritative GAAP recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP. All guidance contained in the Codification carries an equal level of authority. The initial date of the adoption of this standard was effective for financial statements issued for interim and annual periods ending after June 15, 2009. On June 3, 2009, FASB decided that this standard is effective for interim and annual periods ending after September 15, 2009. The Company adopted this standard during the third quarter of 2009. Its adoption did not have a significant impact on the Company’s results of operations or consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”, which was primarily codified into FASB ASC Topic 810, “Consolidation”. This standard establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. This standard also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. This guidance will be effective January 1, 2010. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.

In May 2009, the Financial Accounting Standards Board issued ASC 855-10, formerly SFAS No. 165, “Subsequent Events” (“SFAS 165”). ASC 855-10 establishes principles and requirements for the reporting of events or transactions that occur after the balance sheet date, but before financial statements are issued or are available to be issued. ASC 855-10 is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009. As such, the Company adopted these provisions at the beginning of the interim period ended June 30, 2009. Adoption of ASC 855-10 did not have a material effect on the Company’s consolidated financial statements.

In June 2009, the FASB issued revisions to ASC 860-10, ASC 860-40, ASC 860-50 which enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and the company’s continuing involvement in transferred assets. This statement removes the concept of qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires enhanced disclosures to provide financial statement users with greater transparency about transfers of financial assets and a transferor’s continuing involvement with transfers of financial assets accounted for as sales. This update is effective for annual reporting periods beginning after November 15, 2009, for interim periods within the first annual reporting period and for interim and annual reporting periods thereafter (effective January 1, 2010 for the Company). Management does not anticipate it will have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“ASC Topic 320-10-65-1”). ASC Topic 320-10-65-1 establishes a new method of recognizing and reporting other-than-temporary impairments of debt securities. It also contains additional disclosure requirements related to debt and equity securities and changes existing impairment guidance under Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“ASC Topic 320-10”). For debt securities, the “ability and intent to hold” provision is eliminated, and impairment is considered to be other-than-temporary if an entity (i) intends to sell the security, (ii) more likely than not will be required to sell the security before recovering its cost, or (iii) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). This new framework does not apply to equity securities (i.e., impaired equity securities will continue to be evaluated under previously existing guidance).The “probability” standard relating to the collectability of cash flows is eliminated, and

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impairment is now considered to be other-than-temporary if the present value of cash flows expected to be collected from the debt security is less than the amortized cost basis of the security. ASC Topic 320-10-65-1 also provides that for debt securities which (i) an entity does not intend to sell and (ii) it is not more likely than not that the entity will be required to sell before the anticipated recovery of its remaining amortized cost basis, the impairment is separated into the amount related to estimated credit losses and the amount related to all other factors. The amount of the total impairment related to all other factors is recorded in other comprehensive loss and the amount related to estimated credit loss is recognized as a charge against current period earnings. ASC Topic 320-10-65-1 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“ASC Topic 825-10-65-1”). This FSP relates to fair value disclosures in public entity financial statements for financial instruments that are within the scope of Statement of Financial Accounting Standards No. 107 (ASC Topic 825-10), “Disclosures about Fair Value of Financial Instruments”. This guidance increases the frequency of those disclosures, requiring public entities to provide the disclosures on a quarterly basis, rather than annually. FSP 107-1 is effective for interim and annual periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

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. Thus:

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.

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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. Under current accounting standards, 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

Under current accounting standards, 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 the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value.

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:

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Commonwealth Biotechnologies, Inc.

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.

16

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 sheets of Commonwealth Biotechnologies, Inc. and Subsidiaries as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years 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 audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our 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 audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commonwealth Biotechnologies, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming 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 29, 2010

Commonwealth Biotechnologies, Inc.

Financial Statements

Consolidated Balance Sheets

See accompanying summary of accounting policies and notes to financial statements

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Commonwealth Biotechnologies, Inc.

Consolidated Balance Sheets (continued)

See accompanying summary of accounting policies and notes to financial statements

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Consolidated Statements of Operations

See accompanying summary of accounting policies and notes to financial statements

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Commonwealth Biotechnologies, Inc.

See accompanying summary of accounting policies and notes to financial statements

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Consolidated Statements of Cash Flows

See accompanying summary of accounting policies and notes to financial statements

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Commonwealth Biotechnologies, Inc.

Summary of Significant Accounting Policies

The Company 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 FIL division, for paternity testing, forensic case-work analysis and Convicted Offender Data Base Index System work. During 2007, the Company acquired Mimotopes 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. In September 2008, the decision was made to discontinue the operation. (See Note 13)

The sale of the assets of CBI’s FIL and CBI Services divisions were approved at the 2009 Annual Meeting of Shareholders. These operations were discontinued in November 2009. (See Note 13)

Consolidation Policy

The consolidated financial statements include the accounts of CBI and its wholly owned subsidiaries’ Mimotopes and Exelgen, until Exelgen was deconsolidated on September 23, 2008 (see Note 13). 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.

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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 ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”). 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 ASC 820 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 ASC 820 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 ASC 820 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.

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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 CBI represents amounts held in escrow as required under the terms of the Convertible Note due to the PIPE Investors. This money will be used to pay down the debt or, if the note is converted to Common Stock, returned to the Company. The total amount held in escrow at December 31, 2009 was $200,000. Interest income earned on restricted cash is recorded in other interest income.

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, 2009 is $98,359. 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 of 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.

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:

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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 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 ASC 350, “Goodwill and Other Intangible Assets”. The Company reviews and accounts for the impairment of goodwill in accordance with ASC 350. 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 FIL 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 ASC 360-35, “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 the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value.

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 7,549,845 and 5,864,149 for the twelve months ended December 31, 2009 and 2008, respectively (see Note 15).

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Commonwealth Biotechnologies, Inc.

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.

A 2009 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.

New Accounting Pronouncements

On July 1, 2009, the Accounting Standards Codification became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles applicable to all public and non-public non-governmental entities, superseding existing FASB, AICPA, EITF and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies.

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Commonwealth Biotechnologies, Inc.

The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies.

In June 2009, the FASB issued a standard regarding the FASB Accounting Standards Codification and the hierarchy of generally accepted accounting principles, which replaces the standard previously issued by the FASB regarding the hierarchy of generally accepted accounting principles. This standard identifies the source of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States (the “GAAP hierarchy”). In addition, this standard establishes the FASB Accounting Standard Codification (the “Codification”) as the source of authoritative GAAP recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP. All guidance contained in the Codification carries an equal level of authority. The initial date of the adoption of this standard was effective for financial statements issued for interim and annual periods ending after June 15, 2009. On June 3, 2009, FASB decided that this standard is effective for interim and annual periods ending after September 15, 2009. The Company adopted this standard during the third quarter of 2009. Its adoption did not have a significant impact on the Company’s results of operations or consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”, which was primarily codified into FASB ASC Topic 810, “Consolidation”. This standard establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. This standard also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. This guidance will be effective January 1, 2010. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.

In May 2009, the Financial Accounting Standards Board issued ASC 855-10, formerly SFAS No. 165, “Subsequent Events” (“SFAS 165”). ASC 855-10 establishes principles and requirements for the reporting of events or transactions that occur after the balance sheet date, but before financial statements are issued or are available to be issued. ASC 855-10 is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009. As such, the Company adopted these provisions at the beginning of the interim period ended June 30, 2009. Adoption of ASC 855-10 did not have a material effect on the Company’s consolidated financial statements.

In June 2009, the FASB issued revisions to ASC 860-10, ASC 860-40, ASC 860-50 which enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and the company’s continuing involvement in transferred assets. This statement removes the concept of qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires enhanced disclosures to provide financial statement users with greater transparency about transfers of financial assets and a transferor’s continuing involvement with transfers of financial assets accounted for as sales. This update is effective for annual reporting periods beginning after November 15, 2009, for interim periods within the first annual reporting period and for interim and annual reporting periods thereafter (effective January 1, 2010 for the Company). Management does not anticipate it will have a material impact on the Company’s consolidated financial statements.

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Commonwealth Biotechnologies, Inc.

In April 2009, the FASB issued FASB Staff Position FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“ASC Topic 320-10-65-1”). ASC Topic 320-10-65-1 establishes a new method of recognizing and reporting other-than-temporary impairments of debt securities. It also contains additional disclosure requirements related to debt and equity securities and changes existing impairment guidance under Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“ASC Topic 320-10”). For debt securities, the “ability and intent to hold” provision is eliminated, and impairment is considered to be other-than-temporary if an entity (i) intends to sell the security, (ii) more likely than not will be required to sell the security before recovering its cost, or (iii) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). This new framework does not apply to equity securities (i.e., impaired equity securities will continue to be evaluated under previously existing guidance).The “probability” standard relating to the collectability of cash flows is eliminated, and impairment is now considered to be other-than-temporary if the present value of cash flows expected to be collected from the debt security is less than the amortized cost basis of the security. ASC Topic 320-10-65-1 also provides that for debt securities which (i) an entity does not intend to sell and (ii) it is not more likely than not that the entity will be required to sell before the anticipated recovery of its remaining amortized cost basis, the impairment is separated into the amount related to estimated credit losses and the amount related to all other factors. The amount of the total impairment related to all other factors is recorded in other comprehensive loss and the amount related to estimated credit loss is recognized as a charge against current period earnings. ASC Topic 320-10-65-1 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“ASC Topic 825-10-65-1”). This FSP relates to fair value disclosures in public entity financial statements for financial instruments that are within the scope of Statement of Financial Accounting Standards No. 107 (ASC Topic 825-10), “Disclosures about Fair Value of Financial Instruments”. This guidance increases the frequency of those disclosures, requiring public entities to provide the disclosures on a quarterly basis, rather than annually. FSP 107-1 is effective for interim and annual periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

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Commonwealth Biotechnologies, Inc.

Notes to Consolidated Financial Statements

1. 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 $2,360,372 and $9,862,746 for the years ended December 31, 2009 and 2008, 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 years ended December 31, 2009 and 2008, losses from continuing operations were $2,768,056 and $9,107,607, 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. Income (Loss) resulting from the discontinued operation in 2009 and 2008 were $407,684 and $(755,139), respectively.

The Company generated positive cash flows of $448,341 in 2009, compared to a decrease in cash of $2,290,159 in 2008. Net working capital (deficit) as of December 31, 2009 and December 31, 2008 was ($2,650,756) and ($4,416,054), respectively. The negative working capital is primarily due to continuing losses and debt obligations due within one year.

As of December 31, 2009, the Company had $692,092 in cash and cash equivalents, which was a 184.0% increase over the cash balance at December 31, 2008. This increase was primarily due to net cash received on the sale of CBI Services and Fairfax Identity Labs in November 2009.

Cash provided by operating activities was $214,553 in 2009 as compared to cash used by operating activities of $1,366,425 in 2008. The increase resulted from the reduced loss for the year which resulted primarily from discontinuing operations of Exelgen in 2008.

Cash provided by investing activities for 2009 was $574,165 in comparison to cash provided by investing activities of $52,258 in 2008. The increase was primarily the result of cash received on the sale of CBI Services and FIL in 2009.

Cash used by financing activities for 2009 was $371,276 as compared to cash provided of $185,865 in 2008. During 2008, the Company entered into multiple debt agreements providing $1,000,000 of proceeds to offset current losses and debt payments. No new borrowings, other than the refinancing of the mortgage loan with BB&T, occurred in 2009.

On November 10, 2009, the Company re-negotiated the terms of its outstanding mortgage debt which now becomes due in November 2012, including any non compliance with upcoming covenants which could cause the Company to be in default. The Company also believes that it will be able to satisfy its current debt obligations with its PIPE investors and Fornova through the issuance of common stock in lieu of cash payment.

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Commonwealth Biotechnologies, Inc.

The Company continued to address the immediate needs for cash and liquidity 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. More significantly, the Company completed the divestment of its Richmond-based businesses, CBI Services and FIL to Bostwick. Both of these business units represented ongoing cash drains. With proceeds from this transaction, the Company was able to reduce a significant portion of payables and clear a backlog of employee entitlements under Virginia law. In addition, the Company negotiated, on terms favorable to CBI, a 5 year lease with Bostwick for its facility at 601 Biotech Dr., Richmond, VA. The sale to Bostwick was completed on November 2, 2009 resulting in net proceeds to the Company of $343,780.

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. Specifically, the Company has sold two major business assets and entered into a 5 year lease agreement to Bostwick for its Richmond, VA facility, The Company continues to have significant capacity in peptide chemistry through its wholly owned subsidiary, Mimotopes. In addition, some resources were invested in the establishment of VenturePharm Asia, a joint venture of China based companies which support the pharmaceutical industry.

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 2009 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.

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Commonwealth Biotechnologies, Inc.

Depreciation expense was $689,218 and $695,730 for the years ended December 31, 2009 and 2008, respectively. The Mimotopes facility is subject to a land lease. Lease payments associated with this land lease amounted to $117,900 in 2009.

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Commonwealth Biotechnologies, Inc.

The mortgage includes certain restrictive covenants, which require the Company to maintain minimum levels of the current ratio, debt to net worth and debt service ratio’s. At December 31, 2009, the Company was in violation of covenants, however, the Company was granted a six-month waiver of the covenants by the bank.

Future payments due under the terms of the mortgage are as follows:

4. Leasing Commitments

The Company leases equipment and facilities under non-cancelable operating leases. Total expense for the years ended December 31, 2009, and 2008 was $75,088 and $110,889 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:

5. Retirement Plan

CBI maintains a 401(k) Plan (the “Plan”) which covers substantially all employees. Under the Plan, employees may elect to defer a portion of their salary, up to the maximum allowed by law, and the Company can elect to match the contribution up to 3% of the employee’s contribution. Company contributions were $13,489 and $23,997 for the years ended December 31, 2009 and 2008, 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 $103,446 and $76,949 for the years ended December 31, 2009 and 2008, respectively.

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Commonwealth Biotechnologies, Inc.

6. Restricted Cash

Under the terms of the Company’s Convertible Note due to the PIPE Investors, $200,000 was held in escrow at December 31, 2009. These funds will be used to pay down the note at maturity or, if the note is converted into Common Stock, be returned to the Company.

Under the terms of the Company’s land lease in Australia, $98,359 is being held in escrow at December 31, 2009. This amount is equivalent to one year of lease payments.

7. Comprehensive Income (Loss)

The components of comprehensive loss, net of tax, for the years ended December 31, 2009 and 2008 were as follows:

8. Investments Available for Sale

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, 2009 and 2008. These investments are carried at estimated fair value and are summarized as follows:

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Commonwealth Biotechnologies, Inc.

9. Fair Value Disclosure

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, 2009 and 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.

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Commonwealth Biotechnologies, Inc.

10. Income Taxes

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

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

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Commonwealth Biotechnologies, Inc.

10. Income Taxes (continued)

Operating loss carryforwards at December 31, 2009 relating to US operations of approximately $20,000,000 may be used to offset future taxable income and expire through 2027. The Company also has research and development credit carryforwards at December 31, 2009 of approximately $53,000 that expire through 2022. A valuation allowance has been established for deferred tax assets at December 31, 2009 as realization is dependent upon generating future taxable income.

11. Stock Compensation

Stock-Based Compensation Plans - Stock-based compensation expense recognized during a period is based on the value of the portion of stock-based awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized for the year ended December 31, 2009 included compensation expense for stock-based awards granted prior to, but not yet vested as of December 31, 2009, based on the fair value on the grant date.

Stock-based compensation expense related to employee stock options recognized under ASC 718 for the years ended December 31, 2009 and 2008 was approximately $38,400 and $184,290, respectfully, and is included in selling, general and administrative. As of December 31, 2009, total unamortized stock-based compensation cost related to non-vested stock awards was $90,000, net of expected forfeitures.

The total intrinsic value of stock awards (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) exercised during the year ended December 31, 2009 was $ 0. During the year ended December 31, 2009, the Company did not receive cash from the exercise of stock awards.

The following table sets forth fair value per share information, including related weighted-average assumptions, used to determine compensation cost for stock options consistent with the requirements of ASC 718.

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11. Stock Compensation (continued)